Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Allow the Mortgage-Backed Securities Division To Provide Guaranteed Settlement and Central Counterparty Services, 77287-77297 [2011-31762]
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Federal Register / Vol. 76, No. 238 / Monday, December 12, 2011 / Notices
All submissions should refer to File
Number SR–EDGA–2011–39. 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 Web site (https://www.sec.gov/
rules/sro.shtml). 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 Web site viewing and
printing in the Commission’s Public
Reference Room on official business
days between the hours of 10 a.m. and
3 p.m. Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–EDGA–2011–39 and should
be submitted on or before January 3,
2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–31763 Filed 12–9–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65899; File No. SR–FICC–
2008–01]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Proposed Rule Change To
Allow the Mortgage-Backed Securities
Division To Provide Guaranteed
Settlement and Central Counterparty
Services
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December 6, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 2 thereunder,
notice is hereby given that on March 12,
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
2008, the Fixed Income Clearing
Corporation (‘‘FICC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), and on November 21,
2011, amended the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared primarily by FICC. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The proposed rule changes consist of
modifications to the rules of FICC’s
MBSD to allow MBSD to provide
guaranteed settlement and central
counterparty (‘‘CCP’’) services.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FICC 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. FICC has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
(a) The purpose of this rule filing is
to introduce CCP and guaranteed
settlement services for the MBSD.
Establishment of these processes for the
MBSD has necessitated the drafting of a
new MBSD rulebook. Therefore, the
existing MBSD clearing rulebook will be
replaced, in its entirety, by a new
rulebook.3 Certain provisions in the
current MBSD rules which reflect
processes that will continue upon the
introduction of the CCP services have
been retained in the proposed MBSD
rulebook, where applicable. In order to
promote uniformity between FICC’s two
Divisions and to create transparency for
common members, the new MBSD
rulebook follows the structure of the
Government Securities Division (the
‘‘GSD’’) rulebook. In addition, where
possible and/or applicable, the new
MBSD provisions mirror the equivalent
GSD provisions. It should be noted that
under the current MBSD Clearing Rules,
6 17
1 15
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3 The MBSD’s Electronic Pool Notification
Service rulebook will remain unchanged.
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77287
member firms are referred to as
‘‘Participants.’’ In the new MBSD CCP
rulebook, which is proposed by this
filing, member firms shall be referred to
as ‘‘Clearing Members.’’
I. Overview
With the introduction of CCP services
and guaranteed settlement for
transactions submitted to the MBSD,
FICC will provide a trade guarantee for
all existing types of trades upon
comparison of trade details submitted
by members.4 Additionally, a new pool
netting system will perform a daily net
of pool allocations for those TBA trades
that according to the MBSD rules and
procedures are eligible for pool netting.5
It should be noted that not all
guaranteed trades will be included in
the pool netting system. A
determination of which trades are
included will be determined by netting
percentages. FICC will become CCP to
those obligations, and settlement will
occur versus FICC. For all other
obligations, settlement will occur
outside of FICC, with original settlement
counterparties.
A. Current Processing
At no time during the current MBSD
processing does FICC guarantee
settlement, or act as a CCP for submitted
transactions. Under the current MBSD
processing model, the majority of the
trading activity submitted to the MBSD
for processing, is submitted as
Settlement Balance Order Destined
(‘‘SBOD’’). SBOD trades are eligible for
comparison, risk management services
and the TBA Netting cycle. Firms can
submit TBA trades as Trade-For-Trade
(‘‘TFTD’’) transactions, which are TBA
trades that are eligible for comparison
and risk management services but
ineligible for the TBA Netting cycle.
SPTs are not considered TBAs because
the actual pool number is part of the
trade terms; SPTs are eligible for
comparison and risk management
services but ineligible for the TBA
Netting cycle.
4 Currently, the MBSD recognizes two types of
trades. Those are ‘‘to be announced’’ (‘‘TBA’’) trades
and specified pool trades (‘‘SPTs’’). TBA trades may
proceed through the Settlement Balance Order
engine for netting or may settle on a trade-for-trade
basis. A TBA is a contract for the purchase or sale
of agency mortgage-backed securities to be
delivered at a future agreed-upon date; however, the
actual pool identities or the number of pools that
will be delivered to fulfill the trade obligation or
terms of the contract are unknown at the time of
the trade. The difference between TBAs and SPTs
is that for an SPT all required pool data, including
the pool number to be delivered on settlement date,
are agreed upon by Clearing Members at the time
of execution.
5 SPTs are not eligible for pool netting under this
proposal.
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Each of the transactions mentioned
above is compared by FICC’s RTTMTM
system. Settlement obligations for SPTs
and TBA TFTD transactions are
generally established when a report
indicating the trade as compared is
made available by the MBSD to the
Participants on both sides of the
transaction.6 Settlement obligations for
TBA SBOD transactions are not
established in this way. Instead, SBOD
transactions proceed to the MBSD’s
settlement balance order (‘‘SBO’’)
engine for TBA netting. The TBA
Netting process establishes the
settlement obligations for the SBOD
transactions.
The SBO netting system produces
settlement obligations between MBSD
Participants. Once Participants’
settlement obligations are established,
Participants use FICC’s electronic pool
notification service (the ‘‘EPN Service’’)
to inform each other with respect to the
specific pools that will be delivered for
settlement purposes. Thereafter,
members transmit notifications of
settlement to FICC when they have
ultimately settled their obligations with
applicable counterparties.
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B. Proposed Processing—Overview
Under the proposed MBSD rules, each
Clearing Member will be required to
submit to the MBSD for processing
transactions with other Clearing
Members in all securities that are
netting-eligible according to MBSD rules
and procedures. Certain MBSD
processes will continue to operate as
they do today. Specifically, eligible
transactions will continue to be
submitted to the RTTMTM system for
matching purposes.7 FICC will provide
output of the trade as compared,
6 Participants use FICC’s Interactive Submission
Method, Multiple Batch Submission Method or
Single Batch Submission Method to submit trade
data to the MBSD. Contemporaneous with
successful compassion of the trade data in FICC’s
RTTM system, FICC generates output indicating
that such trade data is compared, is uncompared
and/or has been deleted. FICC makes available to
the Participants, the RTTM Compare Report, which
establishes the settlement obligation for TBA TFTD
transactions and for SPTs between the
counterparties since these trades do not enter the
TBA netting process.
7 Trade data submitted to the MBSD must include
such identifying information as the MBSD may
require and must be submitted in the form and
manner and in accordance with the time schedules
prescribed by the MBSD rules or otherwise set forth
by FICC from time to time. The symbol
corresponding to the name of a Clearing Member
that is printed, stamped or written on any form,
document or other item issued by the Clearing
Member pursuant to Rule 5 Section 2 shall be
deemed to have been adopted by the Clearing
Member as its signature and shall be valid and
binding upon the Clearing Member in all respects
as though it had manually affixed its signature to
such form document or other item.
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uncompared and/or deleted. The SBO
netting process for TBA trades will also
continue to generate settlement
obligations between Clearing Members.
However, the MBSD will now provide a
trade guarantee at the point of
comparison of all submitted
transactions (i.e., SBOD trades, TFTD
trades, SPT trades and Option Contracts
(collectively, ‘‘MBSD Eligible Trades’’)
will be guaranteed by the MBSD), as is
currently done in the GSD. The timing
of comparison of MBSD Eligible Trades
is the point at which the MBSD will
make available to the Clearing Members
on both sides of the transaction an
output indicating that such trade data
has been compared. In the event of a
member default, FICC will settle the
guaranteed trade.
The MBSD proposes to introduce
‘‘pool comparison’’ and ‘‘pool netting,’’
and interpose itself as settlement
counterparty to certain settlement
obligations. Specifically, after the
netting of TBA trades occurs through
the SBO engine, settlement obligations
will be issued between members and
members will allocate pools for
settlement via the EPN Service (just as
is done today). Additionally, however,
members will be required to submit
pool details for those netted TBA
Settlement obligations via the RTTMTM
system for pool comparison and for
consideration for pool netting. Pools
allocated to obligations associated with
Settlement Balance Order Non-Original
Counterparty trades, Settlement Balance
Order Original Counterparty trades and
with TFTD trades will be eligible for
pool netting which establishes
settlement obligations.8
Compared pools will be evaluated for
eligibility for pool netting. The MBSD’s
system will determine which pools will
receive maximum benefit from pool
netting by considering such factors as
trading velocity and projected netting
factor. It is important to note that not
every compared pool will proceed to the
pool netting system.
Upon FICC’s issuance of pool netting
results to members, those pools that are
eligible for netting will be novated, i.e.,
settlement obligations between the
Clearing Members will be replaced with
obligations to settle with FICC. Certain
outstanding obligations will still require
the Notification of Settlement (‘‘NOS’’)
process. These will include (1) SPTs,
because they are not eligible for pool
netting; (2) transactions for which
Clearing Members chose not to submit
allocation information into pool
8 SPTs will not be considered an eligible
transaction type for pool netting at this time.
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netting 9; and (3) certain transactions
with an incomplete master file on a pool
record or number. When a pool is
matched, in order for it to be considered
for pool netting, FICC must have the
required pool information on its
Security Masterfile. This data for
example would include the pool itself,
factor information and data to map it
back to a TBA.10 With respect to any
obligations that fail to settle, these
obligations will not be re-netted, as they
are in the GSD.11
II. Proposed MBSD Rulebook
As noted above, the current MBSD
rulebook will be replaced in its entirety
by a new proposed rulebook. Set forth
below is an overview of the significant
substantive and structural changes to
the rules.
A. Definitions
The MBSD rules will have a revised
Rule 1, ‘‘Definitions,’’ which will
include terminology applicable to new
MBSD processing and procedures. For
example, terms relevant to pool netting
have been included (such as ‘‘pool
deliver obligation’’ and ‘‘pool receive
obligation’’). Where practical and/or
applicable, the MBSD rulebook uses
terms from the current GSD rules, in
order to harmonize language between
the Divisions.
B. Membership
Rule 2, ‘‘Members’’, Rule 2A, ‘‘Initial
Membership Requirements,’’ Rule 3,
‘‘Ongoing Membership Requirements,’’
and Rule 3A, ‘‘Cash Settling Bank
Members,’’ will govern membership
types, member application requirements
and ongoing reporting requirements.
1. Initial Membership Requirements
The new MBSD rules will provide for
two membership types (as set forth in
Rule 2): Clearing Members and Cash
Settling Bank Members. Those entities
qualifying for clearing membership will
be guaranteed service members of the
MBSD—trades submitted by these
Members will be guaranteed at the point
9 For example, if a Clearing Member has a trade
that was matched with stipulations, the Clearing
Member would not submit it for pool netting. Pool
netting creates delivery obligations based off the net
position of Members without regard to the original
counterparty relationship. With a trade matched
with stipulations, the buyer/seller will want to
ensure receipt/delivery is maintained between
themselves to ensure the stipulated terms are
adhered to.
10 For example, if FICC has not received current
month factor on the pool number.
11 The MBSD will retain the discretion to re-net
fails or to conduct pair-offs if it believes that such
actions are necessary to protect itself and its
Clearing Members due to market conditions or
events.
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of comparison, and eligible, as
applicable, for pool comparison, netting
and settlement. Categories of clearing
membership will include: (i) Registered
brokers or dealers; (ii) other registered
clearing agencies; (iii) registered
investment companies; (iv) banks 12; (v)
government securities issuers/
government sponsored enterprises; (vi)
insurance companies; 13 and (vii)
unregistered investment pools.14 In
addition, the MBSD will have the
discretion to make its services available
to other entity types which it deems
appropriate subject to the approval of
the Commission. Membership
requirements for Cash Settling Bank
Members are set forth in Rule 3A, ‘‘Cash
Settling Bank Members’’. These
requirements remain unchanged from
the current MBSD rulebook and they
mirror the requirements of the GSDequivalent members, known as fundsonly settling banks.
With respect to initial membership
requirements as set forth in Rule 2A,
‘‘Initial Membership Requirements,’’ the
MBSD has mirrored the current
requirements for the GSD netting
membership, where there is an existing
membership type in the GSD rules. The
two membership categories where there
are no GSD equivalents are the
unregistered investment pools (the
‘‘UIPs’’) and the registered investment
companies. In addition to standard
requirements regarding financial and
operational responsibility applicable to
all Clearing Members, registered
investment companies must be
registered under the Investment
Company Act of 1940, and have
minimum net assets of $100 million.
With respect to the UIPs, membership
standards that were adopted for these
entities via a 2006 rule filing 15 will be
revised in the new MBSD rulebook, in
consideration of their new status as
guaranteed service members. Revised
requirements will be as follows:
• The UIP applicant must have an
investment advisor domiciled in the
United States.
• The UIP’s investment advisor must
be registered with the SEC under the
Investment Advisors Act of 1940, the
UIP must have (i) $250 million in net
12 The term ‘‘Banks’’ shall include Federal
Savings Associations.
13 The MBSD does not currently have any
insurance company Clearing Members. Financial
and other membership requirements for this
category will be established in a future rule filing.
14 Currently there are two members who do not
fit the listed membership types. As a result, these
entities will be grandfathered in and subject to
ongoing membership requirements.
15 See Securities Exchange Release Act Release
No. 34–55037 (Jan. 3, 2007), 72 FR 1252 (Jan. 10,
2007) [SR–FICC–2006–10].
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assets, or (ii) have $100 million in net
assets and the UIP’s investment advisor
must advise an existing UIP Clearing
Member that has assets under
management of $1.5 billion.
Additional requirements for UIPs will
appear in Rule 3, ‘‘Ongoing Membership
Requirements,’’ discussed further
below. As is the case with all MBSD
Clearing Member applicants, UIPs must
meet all applicable financial
requirements set forth in the proposed
MBSD rules in order to be admitted into
membership. The required levels must
be maintained as a condition of
membership on an ongoing basis.16
With respect to all MBSD Clearing
Member categories, as is currently the
case under the MBSD rules, applicants
whose financial statements are not
prepared in accordance with U.S.
generally accepted accounting
principles (‘‘GAAP’’) will be subject to
increased minimum financial
requirements.17
The MBSD will continue to require
non-domestic membership applicants to
submit, with their membership
application, legal opinions on the laws
of the applicants’ home jurisdictions.
Updates to such legal opinions will be
required from direct foreign members on
an annual basis. Any additional legal
risk 18 posed by such applicants due to
their home country law may result in
additional risk mitigation measures,
including, for example, the posting of
letters of credit as collateral. Members
that are U.S. branches or agencies of
non-U.S. banks (‘‘U.S. Branches’’) will
be classified as U.S. members, based
particularly on the rationale that such
16 Required membership levels must be
maintained by all members on an ongoing basis as
a condition of membership.
17 These higher GAAP-based requirements remain
unchanged from the current GSD and MBSD rules.
Specifically, firms whose financial statements are
prepared in accordance with International Financial
Reporting Standards, Canadian GAAP or UK GAAP
will have a minimum financial requirement that is
1.5 times the U.S. GAAP requirement, firms whose
financial statements are prepared in accordance
with the GAAP principles of a European Union
country other than the United Kingdom will have
a minimum financial requirement that is 5 times the
U.S. GAAP requirement, and firms whose financial
statements are prepared in accordance with any
other type of GAAP will have a minimum financial
requirement that is 7 times the U.S. GAAP
requirement.
18 ‘‘Legal risk’’ is currently defined in the rules as
the risk that, as a result of a law applicable to a
Clearing Member’s insolvency or bankruptcy, FICC
may be delayed or prohibited from: (i) Accessing
any portion of the Member’s Clearing Fund, (ii)
netting, closing out or liquidating transactions, or
setting off obligations, or taking any other action
contemplated by the rules regarding clearing fund,
cease to act, insolvency of a member or (iii)
otherwise exercising its rights pursuant to the rules.
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U.S. Branches are regulated by the U.S.
and/or state regulators.19
2. Ongoing Membership Requirements
Pursuant to Rule 3, ‘‘Ongoing
Membership Requirements,’’ current
provisions applicable to the GSD netting
membership under the GSD rules have
been carried over to the MBSD rules to
apply to certain member types. For
example, the GSD currently assesses a
premium against any member whose
Clearing Fund requirement exceeds its
specified regulatory capital figure.20 The
MBSD will also apply this premium to
members. Also, bank, broker-dealer and
UIP members of the MBSD will be rated.
Among other things, financial measures
relevant to these types of entities will be
assessed. Any member that receives a
poor rating may be monitored more
closely and/or placed on FICC’s internal
watch list.
As set forth in Rule 3, the MBSD will
take additional risk management
measures with respect to UIP members.
Specifically, the ‘‘value at risk’’ (‘‘VaR’’)
confidence level for UIP members will
be set at 99.5%, half a percentage higher
than the standard assumption set forth
in the procedures of the Corporation
(currently set to 99%).21 As set forth in
Rule 2A, UIP members will also be
required to achieve a qualitative
assessment rating of at least ‘‘medium’’
as part of the initial membership
requirement. Qualitative assessments
will be based on such factors as
19 As in the current version of MBSD rule Article
III Rule 15 ‘‘Special Provisions Applicable to NonDomestic Participants’’, U.S. Branches will not be
required to submit annual updates to their foreign
legal opinions unless FICC deems it necessary to
address legal risk; applicants in this category will,
however, continue to be required to submit an
initial foreign legal opinion on their home country
law with their membership application. See
Securities Exchange Release Act Release No. 34–
62828 (Sep. 2, 2010), 75 FR 54929 (Sep. 9, 2010)
[SR–FICC–2010–02].
20 By way of example, under the current GSD
rules, if a member has a Clearing Fund requirement
of $11.4 million and excess net capital of $10
million, its ‘‘ratio’’ is 1.14 (or 114 percent), and the
applicable collateral premium would be 114
percent of $1.4 million (which is equal to the
amount by which the member’s Clearing Fund
requirement exceeds its excess net capital), or
$1,596,000. The current GSD rules provide that
FICC has the right to: (i) Apply a lesser collateral
premium (including no premium) based on specific
circumstances (such as a member being subject to
an unexpected haircut or capital charge that does
not fundamentally change its risk profile), and (ii)
return all or a portion of the collateral premium
amount if it believes that the member’s risk profile
does not require the maintenance of that amount.
These rights will be carried over to the proposed
MBSD rules.
21 The MBSD rules will provide FICC with the
discretion to increase the confidence level if it
determines that it is appropriate to do so with
respect to a particular Clearing Member or Members
generally. As an initial matter, UIPs will begin the
service with a confidence level of 99.5%.
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management, capital, strategy/risk and
profile, valuation procedures and
internal risk management controls. Any
UIP member rated less than ‘‘medium’’
may be subject to an increased Required
Fund Deposits that may be achieved via
higher confidence levels and may also
become subject to revocation of
membership as set forth in Rule 3,
Section 6. Also, pursuant to Rule 4, the
Clearing Fund requirement of UIPs shall
be no less than $1 million, whereas the
current minimum is $100,000.22
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C. Clearing Fund and Loss Allocation
MBSD Rule 4, ‘‘Clearing Fund and
Loss Allocation’’ will set forth
requirements with respect to Clearing
Fund 23 deposited by Clearing Members.
The MBSD has already standardized
the clearing and settlement processes.
The objective in offering CCP services is
to leverage potential means by which
risks can be curbed, efficiency
increased, and operational risk within
the marketplace can be reduced.
The conversion of the MBSD to a CCP
increases the amount of risk for the
clearing agency. The purpose of a CCP
is to ensure settlement can continue in
the face of a member firm failure, and
to reduce the risk of loss due to that
member failure. A CCP interposes itself
as a legal counterparty to both sides of
a transaction. The CCP assumes the
counterparty credit risk of the other
Clearing Members which primarily
includes (1) The market risk associated
with liquidating the defaulted Member’s
portfolio, and (2) the liquidity risk
associated with maintaining sufficient
liquid resources to finance the defaulted
Member’s scheduled settlement
obligations.
The MBSD has established a robust
risk management framework to manage
the credit risks from its Clearing
Members and the credit risks involved
with its payment, clearing and
settlement process.
The MBSD relies on five different
controls to manage its counterparty risk:
Member standards, initial/variation
margins, back/stress testing, position/
risk monitoring and non-margin
collateral. The first set of controls aims
to prevent the CCP from dealing with or
reducing activity of counterparties that
have unacceptably high probabilities of
default. As noted above in section B,
concurrent with the introduction of CCP
22 The MBSD rules will provide FICC with the
discretion to increase the minimum charge if it
determines that it is appropriate to do so with
respect to a particular member or members
generally. As an initial matter, UIPs will begin the
service with the higher minimum of $1 million.
23 The MBSD is adopting the term ‘‘Clearing
Fund’’ to replace ‘‘Participants Fund.’’
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services the MBSD will increase its
minimum financial standard for clearing
membership eligibility to mirror GSD
eligibility standards and enhance its risk
monitoring for UIPs.
The second line of defense is the
margins collected from counterparties in
the form of cash and highly liquid
government securities in the Clearing
Fund. The dual purpose of the Clearing
Fund is to provide readily accessible
liquidity to facilitate settlement and
reduce loss-related costs which may be
incurred in the event of a Clearing
Member’s insolvency or failure to fulfil
its contractual obligations to the MBSD.
Margins are intended to cover possible
losses between the time of default of a
counterparty, at which point the CCP
would inherit its positions, and the
close-out of these positions through
selling or hedging. For this purpose, the
MBSD marks member portfolios to the
market on a daily basis and charges
variation margins accordingly, and
establishes initial margins to cover a
minimum 99th percentile of expected
possible losses that could arise over a 3day settlement period utilizing a VaRbased approach.24 In order to enhance
the MBSD’s risk framework and
concurrent with the introduction of CCP
services, the MBSD will add two new
components—the margin requirement
differential and the coverage charge—to
the Clearing Fund, as well as additional
MBSD mark-to-market items related to
the new pool netting services. The
MBSD also has the ability to collect
charges above the systemically
generated Clearing Fund charges when
deemed appropriate in order to protect
the corporation and its members. If any
loss were incurred in the liquidation of
a Member that was not covered by the
Member’s Clearing Fund deposit or
amounts available under the cross
guaranty arrangement to which FICC is
a party, the MBSD would invoke its loss
allocation process.
The MBSD uses regular back and
stress testing to monitor the sufficiency
of collected margin levels vis-a-vis the
risk represented by the 99th percentile
of expected possible losses from
member portfolios and to monitor its
tail risk exposure that is beyond the
99th percentile. If a member portfolio
does not pass the back test, additional
margin will be collected via the
coverage charge. Stress tests are also
used to evaluate margin adequacy. The
MBSD’s framework reflects stress events
from the last 10 years as well as special
stress events that were not within the
past 10 years and takes the form of swap
24 An index-based haircut methodology will be
used for securities with insufficient pricing data.
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rate shifts and credit spread shocks that
reflect market conditions for the
instruments that the MBSD clears or
holds as collateral. As described in the
Clearing Fund section below, the MBSD
analyzes and reviews on an intraday
basis certain components of the Clearing
Fund that are recalculated using
updated positions and prices if there is
increased exposure in a member’s
portfolio intraday. In addition, the
MBSD may at its discretion call for
additional collateral on an intraday
basis if exposures are in excess of
predefined thresholds.
Finally, aside from the risk of loss that
could be encountered from a Clearing
Member failure, a central counterparty
could also face liquidity risk, defined as
the risk that the central counterparty has
insufficient financial resources to cover
a default by a Clearing Member to which
it has the largest exposure. To that end,
the MBSD maintains sufficient
resources to meet its observed liquidity
risk. The Clearing Fund would be the
primary source to fulfil the liquidity
need incurred if MBSD had to complete
settlement on behalf of the defaulting
Clearing Member. Other conventional
funding tools such as loans secured via
the MBSD clearing banks and/or triparty repo transactions would also be
used to fulfil the liquidity need, but if
those were unavailable or insufficient,
the MBSD would invoke the ‘‘Capped
Contingency Liquidity Facility,’’
described in section G below to provide
additional financing in the event of a
member default.
Tail risk is one of the risks the MBSD
has to manage. The MBSD addresses
this through a continuous process of (1)
Reviewing margining methodologies
with stakeholders; (2) analysis and
monitoring of margin/collateral
requirements; (3) actively reviewing and
timely/appropriate action on market
conditions and credit events; (4) reviews
of back/stress tests, and (5) identifying,
assessing and managing risks associated
with the products and services provided
by the MBSD and FICC.
1. Clearing Fund
The underlying Clearing Fund
methodology is designed primarily to
account for market risks associated with
a Clearing Member’s unsettled portfolio.
The Clearing Fund model is back tested
on a monthly basis and periodically
validated by outside experts. Additional
charges and premiums may be
considered to address additional risks
(i.e., credit, reputation, legal, etc.) or
non-compliance with MBSD rules. The
Clearing Fund is calculated every
business day for each MBSD Clearing
Member.
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Clearing Fund requirements will be
calculated in accordance with the VaR
model. The Clearing Fund components
will consist of the VaR charge,25 the
coverage charge, the margin requirement
differential charge and the deterministic
components charge (which will include
the mark-to-market charges, cash
obligation items and accrued principal
and interest). The VaR methodology will
utilize the prior 252 days of historical
information for cash positions,
including prices, spreads, and market
variables to simulate the market
environments in the forthcoming three
days. Projected portfolio losses are then
calculated assuming these simulated
environments actually will be realized.
The coverage charge is an additional
charge to bring the Clearing Member’s
coverage to a targeted confidence level.
The margin requirement differential
considers intra-day portfolio variations
and estimates the potential increased
risk intra-day and the risk that the next
margin call will not be satisfied. The
deterministic risk component combines
the mark-to-market of the portfolio, gain
or loss for the difference between the
original contract value and the
internally generated netting price
derived from the TBA netting process,
principal and interest adjustments on
failed positions, and other
miscellaneous cash items. The
deterministic risk component can result
in an increase or decrease to a member’s
total clearing fund requirement.
Requirements as to acceptable forms
of collateral will remain unchanged in
the new MBSD rulebook.
In order to further mitigate risk, and
as part of FICC’s efforts to enhance its
intraday monitoring capabilities, FICC
has determined to expand its intraday
monitoring 26 to recalculate the mark-tomarket elements of the deterministic
risk component. This component of the
risk calculations will be updated at least
hourly using intraday pricing and
position feeds for FICC members and
25 The definition of ‘‘VaR Charge’’ (which is
referred to as ‘‘VaR Component’’ in the current
rules) is being amended to remove the reference to
the application of ‘‘minimum amounts’’ to such
VaR Charge. The MBSD is currently applying a
minimum 5-basis point charge which will not be
applicable when the MBSD CCP becomes a CCP
because of the addition of the other components to
the overall Clearing Fund calculation. Minimum
Clearing Fund deposit amounts per Rule 4 remain
applicable.
26 This proposal is different from the intra-day
margining that was approved by the Commission to
implement the single-pot margining with New York
Portfolio Clearing, LLC (‘‘NYPC’’). See Securities
Exchange Act Release No. 63986 (Feb. 28, 2011), 76
FR 12144 (Mar. 4, 2011). In the FICC–NYPC rule
filing, established second scheduled calls were
approved. In the present proposal, FICC is seeking
the authority to require additional margin outside
of the formal calls.
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compared against the amounts that were
previously collected in the Clearing
Fund. If the exposures increase above
certain defined thresholds Risk
Management staff will be alerted to
consider additional intraday margin
calls, outside of the formal Clearing
Fund collection process. The proposed
rule change provides that such calls
would need to be satisfied by the
affected members within one hour of
FICC’s notice. The initial thresholds
will be based on changes to a Clearing
Member’s position size, composition
and price changes on the constituent
securities. Qualitative factors including,
but not limited to, Watch List status and
internal rating will also be considered in
the application of intraday mark-tomarket.
2. Other Changes—Clearing Fund
Use of Payments and Deposits
FICC is proposing to revise Rule 4
‘‘Clearing Fund and Loss Allocation’’,
Section 5 ‘‘Use of Payments’’ to include
additional disclosure relating to the
Corporation’s use of a Clearing
Member’s deposits and payments for
temporary financing needs. The
proposed revisions also clarify that
whenever the Clearing Fund is charged
for any reason, other than to satisfy a
clearing loss attributable to a Clearing
Member solely from that Clearing
Member’s Clearing Fund deposit, the
Corporation will provide the reasons
therefore to each Clearing Member. This
would apply when the Clearing Fund is
charged, meaning the Corporation has
applied the Clearing Fund for more than
30 days and is allocating the amount as
a loss or for other loss allocation
purposes.
3. Loss Allocation
In this CCP proposal, FICC is also
introducing a new loss allocation
methodology for the MBSD. If a
defaulting Clearing Member’s Clearing
Fund and any amounts of the Defaulting
Member available under a crossguaranty agreement are not sufficient to
cover losses incurred in the liquidation
of the defaulting Clearing Member’s
positions (the ‘‘Remaining Losses’’), the
MBSD’s loss allocation methodology
will be invoked. Under this proposed
loss allocation methodology, Remaining
Losses will first be allocated to the
retained earnings of FICC attributable to
the MBSD, in the amount of up to 25
percent of the retained earnings or such
higher amount as may be approved by
the Board of Directors of FICC. If a loss
still remains, MBSD Clearing Members
are placed into one of two tiers for loss
allocation purposes: Tier One members
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77291
are subject to loss mutualization,
whereas Tier Two members are not
subject to loss mutualization.27 FICC
will divide the Remaining Losses
between the Tier One members and Tier
Two members. The division of
Remaining Losses is based on the
amount each solvent Clearing Member
would have lost or gained if it had
closed out its original outstanding
trades with the defaulting Clearing
Member on a bilateral basis.28 FICC then
will determine the relevant share of
each Tier One member’s bilateral losses
(members with a bilateral liquidation
profit are ignored) in the total of all
members’ bilateral losses and sum these
shares to determine the Tier One
Remaining Loss. Similarly, FICC will
determine the relative share of each Tier
Two member’s bilateral loss in the total
of all members’ bilateral losses and sum
these shares to determine the Tier Two
Remaining Loss.
Tier One Remaining Losses will be
allocated to Tier One members first by
assessing the Required Fund Deposit of
each such Member in the amount of up
to $50,000, equally. If a loss remains,
Tier One members will be assessed
ratably, in accordance with the
respective amounts of their Required
Fund Deposits, based on the average
daily amount of the Clearing Member’s
Required Fund Deposit over the prior
twelve months. Tier Two Remaining
Loss will be allocated to Tier Two
Clearing Members based on each Tier
Two member’s original trading activity
with the Defaulting Member that
resulted in a loss. Tier Two members
will only be subject to loss to the extent
they originally traded with the
Defaulting Member consistent with
regulatory requirements applicable to
the Tier Two members. FICC shall
assess such loss against the Tier Two
members ratably based upon their loss
as a percentage of the entire amount of
the Tier Two Remaining Loss. This
ensures that Tier Two members are not
subject to loss mutualization. Tier Two
counterparties will be liable for losses
related to both direct and brokered
trades 29 including partially-matched
27 Tier Two members are those that are legally
prohibited from participating in loss mutualization.
Currently, only investment companies registered
under the Investment Company Act of 1940, as
amended, qualify as Tier Two members.
28 With respect to brokered trades, in the MBSD
such trades are done on a ‘‘give-up basis,’’ and
brokers are thus not considered parties to fullymatched trades. However, for purposes of loss
allocation, broker members will be subject to loss
allocation for certain partially-matched trades.
Brokers are considered Tier One members, and as
such will be subject to loss mutualization.
29 Brokered trades involve a broker intermediary
between two dealers. Each dealer and broker must
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trades for which the Tier Two member
did not submit a statement to FICC
denying the existence of the trade.30
submit the trade details to the MBSD for trade
comparison. This means that each dealer submits
against the broker and the broker submits against
each dealer. A fully matched trade will be achieved
when both dealers match against the broker (i.e. all
submissions discussed above match). With a fully
matched trade, both dealers assume principle status
which results in the broker having no settlement
obligations with respect to the trade; the broker
cannot be subject to any loss with respect to such
trade. A partially matched trade results when only
one of the two submissions achieves a bilateral
match versus the broker. The dealer who has
matched with the broker will have a settlement
guarantee and is subject to Clearing Fund
requirements with respect to such trade. If the
unmatched dealer submits a statement to FICC
denying the existence of the trade, the broker
becomes the other side of the trade which means
that the broker is responsible for such trade from
a risk management perspective and loss allocation.
If the unmatched dealer does not submit a
statement to FICC denying the existence of the
trade, the dealer becomes responsible for the
settlement and risk management and the broker is
released from these responsibilities.
30 To illustrate the proposed MBSD Tier One
(‘‘T1’’)/Tier 2 (‘‘T2’’) loss allocation rules, consider
an example where the $20 million Clearing Fund
requirement of an insolvent MBSD member X turns
out to be insufficient to cover the $30 million
liquidation loss that the MBSD incurred as a result
of closing out all of X’s open positions. If X doesn’t
have any excess collateral, MBSD would need to
allocate a $10 million remaining loss.
Assume that X has unsettled trades with three
Tier One original counterparties (T1A, T1B and
T1C) and three Tier Two original counterparties
(T2A, T2B and T2C), all executed directly.
Further assume that the bilateral liquidation
results of X’s solvent original counterparties are as
follows:
T1A: $5 million; T1B: ($5 million); T1C: ($15
million); T2A: ($20 million); T2B: ($10 million);
T2C: $15 million; Total: ($30 million).
Also assume that there are no secondary defaults
and no off-the-market trades.
Based on these assumptions, the bilateral Tier
One liquidation losses amount to $20 million ($5
million attributable to T1B and $15 million
attributable to T1C), while the bilateral Tier Two
liquidation losses amount to $30 million ($20
million attributable to T2A and $10 million
attributable to T2B). This means that out of a total
of $50 million bilateral liquidation losses, 40% or
$20 million can be attributed to Tier One
counterparties and 60% or $30 million to Tier Two
counterparties. As a result, the Tier One remaining
loss would be $4 million (i.e., 40% of the MBSD’s
$10 million overall remaining loss) and the Tier
Two remaining loss would be $6 million (i.e., 60%
of the MBSD’s $10 million overall remaining loss).
Given that T2A’s and T2B’s bilateral losses
represent 2⁄3 and 1⁄3 respectively of the Tier Two
Remaining Loss, T2A’s loss allocation will be $4
million and T2B’s loss allocation will be $2 million.
The $4 million Tier One Remaining Loss would
first be assessed equally to each Tier One member’s
clearing fund, up to an amount of $50,000 per Tier
One member. If a loss still remains, the amount is
allocated among Tier One members, pro-rata based
on each Tier One member’s average daily level of
clearing fund over the prior twelve months (or
shorter period if a member did not maintain a
clearing fund deposit over the full twelve month
period).
Note that the loss allocation results are not
impacted by whether the defaulting Clearing
Member is a Tier One or a Tier Two member.
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D. TBA Trade Processing
Rule 5, ‘‘Trade Comparison’’ and Rule
6, ‘‘TBA Netting’’ of the proposed MBSD
rulebook mirror current MBSD rules as
these processes will remain unchanged
from an operational perspective.
Members will continue to submit TBA
transactions and SPTs to the MBSD
through the RTTMTM system to
bilaterally match their trade data with
trade data submitted by their
counterparties. The significant change
to the comparison rule is the
introduction of FICC’s guarantee.
Transactions will be guaranteed for
settlement at the point of comparison.31
SBOD TBA trades will proceed through
the TBA/SBO netting process as they do
today. After netting, members will use
the EPN Service to allocate pools in
satisfaction of open TBA obligations
(both trade-for-trade and SBO
transactions). In addition, members will
now be required to submit pool
allocation information to the MBSD’s
RTTMTM system 32—pool allocation
processing will proceed as described
below.
E. Pool Allocation Processing
Pool allocation processing refers to
the Clearing Member’s submission via a
RTTMTM message of an allocated pool
for matching and pool netting services.
On the allocation date,33 Clearing
Members will also be required to submit
pool allocation information (called
‘‘Pool Instructs’’) via the RTTM system
for pool comparison (which is a prerequisite for pool netting). As with EPN
allocation, Pool Instructs are to be
submitted against all TBA obligations,
whether stemming from Trade-for-Trade
activity or TBA Netting. As noted
previously, allocations are not
performed for SPTs and they are not
eligible for pool netting services and
Clearing Members may choose not to
submit Pool Instructs against trades
matched with stipulations.34
31 While SPTs will be guaranteed at the point of
comparison, they will not be eligible for processing
through the pool comparison or pool netting
systems. All SPTs will settle outside of FICC with
original counterparties.
32 Because Clearing Members will be required to
allocate pools via EPN and RTTMTM in order for
pool allocations to proceed to pool comparison and
netting, all MBSD Clearing Members will be
required to be EPN members.
33 Pool allocation information (also known as
‘‘Pool instructs’’) may be submitted up to the point
that Pool Netting is executed.
34 Trades with stipulations are those where
certain trade terms are agreed to at point of match
(e.g., one pool per million); under the proposal,
Clearing Members will be provided with the option
to hold out stipulation allocations from the pool
netting process so that they can preserve their
ability to obtain the pools that satisfy the
stipulations of the trade.
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Pool data information on Pool
Instructs must be bilaterally compared
(i.e., the mandatory comparison pool
data submitted by the seller must match
the mandatory comparison pool data
submitted by the buyer) in order for the
Pool Instructs to be eligible for
consideration for pool netting. Pool
Instructs must further be ‘‘assigned’’ by
the MBSD to a valid, open TBA
position, meaning that the trade terms
submitted on the Pool Instruct must
match the trade terms of a TBA CUSIP
that has sufficient open position. Only
compared and assigned Pool Instructs
are evaluated for inclusion in pool
netting.
Pool allocation processing will be
governed by Rule 7, ‘‘Pool Comparison,’’
Rule 8, ‘‘Pool Netting,’’ and Rule 9,
‘‘Pool Settlement’’. Once netting eligible
pools are defined by the MBSD, each
allocation will be netted into a single
net position per pool CUSIP. Pool
netting results will be novated, meaning
that open TBA obligations will be
terminated and replaced with resultant
pool receive, deliver and associated
payment obligations which will settle
versus FICC as central counterparty.
F. Settlement
1. Settlement With FICC as
Counterparty
As stated above, obligations generated
by the pool netting system will settle
versus FICC—this settlement process
will be governed by Rule 9, ‘‘Pool
Settlement with the Corporation.’’
Clearing Members will be required to
designate a clearing bank for purposes
of delivering securities to, and receiving
securities from, the MBSD in
satisfaction of settlement obligations.
All deliveries and receipts of securities
in satisfaction of pool deliver
obligations and pool receive obligations
will be required to be made against
simultaneous payment. These securities
settlement procedures mirror the
current GSD securities settlement rule.35
2. Settlement Outside of FICC
For those allocated pools (or pools
matched as trade terms on SPT trades)
which are not processed through the
pool netting system, Clearing Members
will be required to settle such
transactions bilaterally with applicable
settlement counterparties, outside of
FICC. Please refer to ‘‘Processing
Overview’’ referenced above, for a
description of the trades that would be
required to settle outside of FICC. It
should be noted that such trades remain
guaranteed for settlement by FICC; such
35 GSD
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trades were guaranteed at the time of
comparison. Pursuant to Rule 10,
‘‘Notification of Settlement’’, Clearing
Members must continue to submit to
FICC Notifications of Settlement
(‘‘NOS’’). NOS will be required to be
received on the applicable clearance
date for each transaction. When the
MBSD receives NOS from each
counterparty to a transaction, the MBSD
will report clearance of the applicable
transaction back to each Clearing
Member, as is done today. At this point,
the MBSD will stop collecting margin
on the transaction, and will no longer be
responsible for principal and interest
payments.
3. Cash Settlement
Rule 11, ‘‘Cash Settlement with the
Corporation’’ provides that cash
settlement processing will continue to
be done via the Federal Reserve’s
National Settlement Service and
through the use of cash settling banks
appointed by Clearing Members. Several
items have been added to the
calculation of each Clearing Member’s
cash settlement obligation, including:
(a) A ‘‘net pool transaction adjustment
payment’’ (to reflect the difference
between the pool net price 36 and a
settlement price established at the TBA
level); (b) principal and interest
payment amounts related to fails, and
(c) a ‘‘clearance difference amount’’ 37
(to take into account the delivery to
FICC of mispriced securities by a
member).
G. Additional Rule Changes
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1. Capped Contingency Liquidity
Facility
FICC is proposing to add a provision
to the proposed MBSD rules that
introduces a ‘‘Capped Contingency
Liquidity Facility,’’ which is a
procedure designed to ensure that the
MBSD has sufficient liquidity resources
to cover the largest failure of a family of
accounts. This facility will only be
invoked if FICC declares a default or a
cease to act against a Clearing Member,
i.e., a defaulting Clearing Member and
FICC does not have the ability to obtain
sufficient liquidity through its Clearing
Fund cash deposits and its established
repurchase agreement arrangements
36 ‘‘Pool Net Price’’ is defined in the proposed
rules as the uniform price for a pool (expressed in
dollars per unit of par value), not including accrued
interest, established by the Corporation on each
business day, based on current market information
for each eligible security.
37 ‘‘Clearance Difference Amount’’ is defined in
the proposed rules as the absolute value of the
dollar difference between the settlement value of a
pool deliver obligation or a pool receive obligation
and the actual value at which such pool deliver
obligation or pool receive obligation was settled.
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(‘‘CCLF Event’’). FICC believes that the
Capped Contingency Liquidity Facility
provides Clearing Members with finality
of settlement and allows firms to
prepare for and manage their potential
financing requirements in the event of a
Member’s default. Once a CCLF Event
has been declared, FICC will contact
Clearing Members that are due to
deliver obligations to FICC that are
owed to a defaulting Clearing Member.
FICC will either cancel the Clearing
Member’s obligations or instruct the
Clearing Member to hold the obligations
(or a portion thereof) and await
instructions as to when to make these
deliveries. With respect to the
obligations subject to financing (the
‘‘Financing Amount’’) up to the Clearing
Member’s defined liquidity contribution
cap (the ‘‘Defined Capped Liquidity
Amount’’),38 FICC as counterparty, will
enter into repurchase agreements with
the Clearing Member equal to the
Financing Amount pursuant to the
terms of the deemed 1996 SIFMA
38 The ‘‘Defined Capped Liquidity Amount’’ is the
maximum amount that a Clearing Member shall be
required to fund during a CCLF Event. The Defined
Capped Liquidity Amount will be established as
follows:
(a) For those Clearing Members that are eligible
for and that have established borrowing privileges
at the Federal Reserve Discount Window or for
those Clearing Members who have an affiliate that
is eligible for and has established borrowing
privileges at the Federal Reserve Discount Window,
FICC will conduct a study every six months, or
such other time period as FICC shall determine
from time to time as specified in Important Notices
to Clearing Members, to determine each Clearing
Member’s largest liquidity requirement for the
applicable time period based on a Clearing
Member’s sell positions versus other Clearing
Members at the family level on a bilateral net basis
within a TBA CUSIP. Based on the overall study,
FICC will define an adjustable percentage (the
initial percentage will be set at 60%), as determined
by FICC from time to time, and multiply that
percentage amount against the maximum amount to
establish each Clearing Member’s Defined Capped
Liquidity Amount; and
(b) For those Clearing Members that are ineligible
for or have not established borrowing privileges at
the Federal Reserve Discount Window and for those
Clearing Members that do not have an affiliate that
is eligible for or has established borrowing
privileges at the Federal Reserve Discount Window,
FICC will conduct a study every month or such
other time period as FICC shall determine from time
to time as specified in Important Notices to Clearing
Members, to determine each Clearing Member’s
largest liquidity requirement for the applicable time
period based on a Clearing Member’s sell positions
versus other Clearing Members at the family level
on a bilateral net basis within a TBA CUSIP. The
Clearing Member’s largest liquidity requirement for
the past month, adjusted in each case of a CCLF
Event to be no greater than the actual Pool Delivery
Obligation to the defaulting Clearing Member, will
represent the Clearing Member’s Defined Capped
Liquidity Amount. Firms in this category will have
a defined non-adjustable percentage amount set to
100%. Clearing Members in this category will not
be required to finance any Remaining Financing
Amount.
(c)
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77293
Master Repurchase Agreement (without
referenced annexes). If a liquidity need
still exists (the ‘‘Remaining Financing
Amount’’), FICC will inform Clearing
Members that are below the Defined
Capped Liquidity Amount and also
inform Clearing Members that do not
have a delivery obligation to defaulting
Clearing Member.39 After these Clearing
Members have been notified, FICC will
distribute the remaining financing need
to such Clearing Members on a pro rata
basis and enter into repurchase
agreements pursuant to the terms of the
deemed 1996 SIFMA Master Repurchase
Agreement (without referenced
annexes). These transactions would
remain open until FICC completes the
liquidation of the underlying obligations
and a haircut based on market
conditions will be applied to the
transactions.
Once FICC completes the liquidation
of the underlying obligation, FICC will
instruct the Clearing Member to deliver
the securities back to FICC. FICC will
then close the repurchase transaction
and deliver the securities to complete
settlement on the contractual settlement
date of the liquidating trade. Because
FICC would be receiving and delivering
securities on the same day, FICC would
not have a liquidity need resulting from
the transaction of a defaulting Clearing
Member.
The applicable provisions of Rule 17
outline detailed procedures of the
mechanism that will be followed should
FICC declare a Capped Contingency
Liquidity Facility event.
2. Corporation Default
FICC has been approached by some of
its dealer Clearing Members who have
requested that FICC add provisions to
the rules of the MBSD CCP 40 to make
explicit the close-out netting of
obligations running between FICC and
its Clearing Members in the unlikely
event that FICC becomes insolvent or
defaults in its obligations to its Clearing
Members which are included in the
proposed rule change. The firms have
stated that the proposed rule changes
will provide clarity in their application
of balance sheet netting to their
positions with FICC under U.S. GAAP
in accordance with the criteria specified
39 Applicable to those Clearing Members that are
eligible for and that have established borrowing
privileges at the Federal Reserve Discount Window
or to those Clearing Members who have an affiliate
that is eligible for and has established borrowing
privileges at the Federal Reserve Discount Window.
40 The firms have also requested the filing with
respect to the GSD and this change was submitted
as a rule filing and approved by the Commission.
See Securities Exchange Act Release No. 63038
(Oct. 5, 2010), 75 FR 62899 (Oct. 13, 2010) [SR–
FICC–2010–04].
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in the Financial Accounting Standards
Board’s Interpretation No. 39, Offsetting
of Amounts Related to Certain Contracts
(FIN 39). The firms have stated further
that the provisions would allow them to
comply with Basel Accord Standards
relating to netting. Specifically, firms
are able to calculate their capital
requirements on the basis of their net
credit exposure where they have legally
enforceable netting arrangements with
their counterparties, which includes a
close-out netting provision in the event
of the default of the counterparty (in
this case, the division of the clearing
corporation acting as a central
counterparty).
H. Fails Charge
The Treasury Markets Practices Group
(the ‘‘TMPG’’), a group of market
participants active in the Treasury
securities market sponsored by the
Federal Reserve Bank of New York (the
‘‘FRBNY’’), has been addressing the
persistent settlement fails in Agency
debt and mortgage-backed securities
transactions that have arisen, in part,
due to low interest rates.
To encourage market participants to
resolve fails promptly, the TMPG
recommends expanding the
applicability of the fails charge (which
currently applies to Treasury securities
transactions) to the Agency debt and
MBS markets with the objective of
reducing the incidence of delivery
failures and supporting liquidity in
these markets.
The fails charge will apply to certain
trades settled in the MBSD, i.e.,
settlement of pools versus FICC
involving failing agency MBS issued or
guaranteed by Fannie Mae, Freddie Mac
and Ginnie Mae. Pursuant to the TMPG
recommendations, a fails charge will not
apply to TBA and pool level ‘‘round
robins.’’ 41
The proposed charge will be equal to
the greater of (a) 0 percent and (b) 2
percent per annum minus the Federal
funds target rate. The charge accrues
each calendar day a fail is outstanding.
The MBSD will not impose a fails
charge if delivery occurs on either of the
two business days following the
jlentini on DSK4TPTVN1PROD with NOTICES
41 ‘‘Round
robins’’ are a circular series of
transactions between multiple parties where there
is no ultimate long and short position to be settled.
For example, if A sells to B and B sells to C and
C sells to A, this group of transactions would
constitute a ‘‘round robin’’. In a round robin, there
is no settlement of securities, but there is
satisfaction of money across all interested parties.
There can be a fail in a round robin transaction
when a deliver obligation arises because the trade
submission of certain members of the round robin
do not match. The MBSD will not apply the fails
charge to a round robin if each affected Clearing
Member in the round robin provides the MBSD
with the required information to resolve the trade.
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contractual settlement date. The MBSD
will not employ a minimum fail charge
amount, but, instead, will apply the fails
charge to any pool for which delivery
has not occurred within the two
business day grace period.42 Each
business day, the MBSD will provide
reports reflecting fail charge amounts to
Clearing Members and will generate a
consolidated monthly report at month
end. Failing parties with a net debit (i.e.,
the fails charge amounts such party
owes exceed the fails charge amounts it
is owed) will be required to pay such
net amount in respect of those pools
that have settled the previous month
and which are reflected in the previous
month’s consolidated month end report
by the Class ‘‘B’’ payable date (as
established by SIFMA guidelines) of the
month following settlement in
conjunction with other cash
movements. The fails charge funds
received by the MBSD then will be used
to pay Clearing Members with fail net
credits.
The MBSD will implement a rate
change procedure so that if fails accrue
at one rate and the rate changes, the fail
will keep the original accrual and new
fails calculations will be subject to the
new rate. When there is a substitution
of the underlying pool, the fails charge
will be calculated pursuant to the above
formula, using (in the formula) the Fed
funds target rate for each day of the
substitution period beginning on the
contractual settlement date.
In the event that the MBSD is the
failing party because (i) The MBSD
received agency MBS issued or
guaranteed by Fannie Mae, Freddie
Mac, or Ginnie Mae too near the close
of Fedwire for redelivery or for any
other reason or (ii) MBSD received a
substitution of a pool deliver obligation
of agency MBS issued or guaranteed by
Fannie Mae, Freddie Mac or Ginnie Mae
too near the specified time in the
SIFMA 48-hour rule for same day
redelivery of securities or for any other
reason, the fails charge will be
distributed pro-rata to the Clearing
Members based upon usage of the
MBSD’s services.
42 Fails charges are calculated between legal
entities that are counterparties to one another in an
MBS transaction. Because the MBSD is acting as a
counterparty in multiple transactions, the MBSD
may owe a net credit to one counterparty which is
financed by the net debits owed to the MBSD by
multiple counterparties (some of which may be
below the minimum $500 threshold identified in
the TMPG recommendations.) To ensure that the
MBSD will be in a position to deliver the net credits
it owes, the MBSD is proposing to its Clearing
Members that it will not employ a minimum fails
charge for either debits or credits. Current
Participants were informed of this deviation from
the TMPG recommendations via Important Notice
(MBS 119.11) and have not objected.
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The MBSD will not guaranty fails
charge proceeds in the event of a default
(i.e., if a defaulting Clearing Member
does not pay its fail charge, Clearing
Members due to receive fails charge
proceeds will have those proceeds
reduced pro-rata by the defaulting
Clearing Member’s unpaid amount).
Example 1: A delivery is contracted to
occur on settlement date (S), a Tuesday, but
does not occur until the second business day
following contractual settlement, Thursday
(S+2). The Clearing Member would not be
subject to a fails charge because delivery
occurs within the two business days
following the contractual settlement date.
Example 2: A delivery is contracted to
occur on settlement date (S), a Tuesday, but
does not occur until the third business day
following contractual settlement, Friday
(S+3). The Clearing Member would be subject
to a three-day fails charge.
Example 3: A delivery is contracted to
occur on settlement date (S), a Wednesday,
but does not occur until the third business
day following contractual settlement,
Monday (S+3). The Clearing Member would
be subject to a five-day fails charge, as the
charge accrues on each calendar day in the
fail period.
Example 4: A delivery is contracted to
occur on settlement date (S), May 10th, but
does not occur until the month following the
contractual settlement date; it settles on June
8th. The Clearing Member will not be subject
to collection of the fails charge in June (the
month following the contractual settlement
date) because delivery did not occur in May.
The participant will be subject to the
collection of the fails charge in July (on the
Class ‘‘B’’ payable date) because delivery
occurred in June. The charge will be
recalculated for 29 days.
The implementation of a fails charge
trading practice in the mortgage-backed
securities market requires that the
current MBSD rules be amended to add
a new rule (i.e., Rule 12—Fails Charge).
This new rule specifies the charges
levied on any Clearing Member who
does not satisfy a delivery obligation of
securities issued or guaranteed by
Fannie Mae, Freddie Mac or Ginnie Mae
and outlines the exceptions to this rule,
including a two-day grace period.
Revocation of Charges
The proposed rule changes provide
that FICC’s Board of Directors (or
appropriate Committee thereof) will
retain the right to revoke application of
the charges if industry events or
practices warrant such revocation.
Timing of Implementation
Only as it applies to the proposed
fails charge, FICC is proposing that such
fails charges will apply to transactions
in agency debentures and agency MBS
entered into on or after the later of the
approval of this rule proposal or
February 1, 2012, as well as to
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transactions that were entered into, but
remain unsettled as of the later of the
approval of this rule proposal or
February 1, 2012. For transactions
entered into prior to, and unsettled as
of, the later of the approval of this rule
proposal or February 1, 2012, the fails
charge will begin accruing on the latest
of the approval of this rule proposal,
February 1, 2012, or the contractual
settlement date.
I. Suspension of Rules in Emergency
Circumstances
Rule 33, ‘‘Suspension of Rules in
Emergency Circumstances’’ in the
proposed MBSD rules has been revised
from the equivalent rule in the current
MBSD rulebook to specify that (1) In the
title of the Rule, that the rule applies to
emergency circumstances, (2) an
emergency shall exist in the judgement
of the FICC Board or Officer, which
causes the Board or the Officer, as
applicable, to believe that an extension,
waiver or suspension of the MBSD rules
is necessary for the Corporation to
continue to facilitate the prompt and
accurate clearance and settlement of
securities transactions, (3) the
Corporation shall notify the
Commission of such extension, waiver
or suspension of the MBSD rules within
2 hours of such determination,43 (4) the
written report of such extension shall
include the nature of the emergency,
along with the other requirements listed
in the current rules and (5) such written
report shall be submitted to the
Commission no later than three (3)
calendar days after the implementation
of the extension, waiver or suspension
of the MBSD rules.
jlentini on DSK4TPTVN1PROD with NOTICES
J. Ceasing To Act, Wind-Down Members
and Insolvency
Rule 14, ‘‘Restrictions on Access to
Services’’, Rule 15, ‘‘Wind Down of a
Member,’’ Rule 16, ‘‘Insolvency of a
Member,’’ and Rule 17, ‘‘Procedures for
When the Corporation Ceases to Act,’’
mirror the current GSD rules, but have
been conformed to apply to the specifics
of MBSD processing as applicable. For
example, upon the MBSD ceasing to act
for a Clearing Member, Members will be
required to submit immediate NOS so
that the MBSD has all necessary
settlement information with respect to a
defaulting Member to effect a close-out
of such Member. In addition, the MBSD
will have the right, with respect to
43 But no later than one (1) hour before the close
of the Federal Reserve Banks’ Fedwire Funds
Service if such determination relates to the
extension of time for settlement and is made on a
settlement day.
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specified pool trades, to substitute
alternate pools as necessary.44
K. Other 45
a. It should be noted that certain
current MBSD rules will not be
included in the proposed MBSD rules.
These are as follows:
• With respect to Article III
(Participants), in the current MBSD
rules: Rule 1, ‘‘Requirements Applicable
to Participants and Limited Purpose
Participants’’; Section 5, ‘‘Supplemental
Agreement of Participants and Limited
Purpose Participants’’; and Section 14
‘‘Special Provisions Applicable to
Partnerships’’ are not included in the
proposed MBSD rules because each of
these rules is no longer necessary.
Proposed Rule 2A serves to harmonize
the attached proposed MBSD rules with
the GSD rules on this subject. Rule 1,
‘‘Requirements Applicable to
Participants and Limited Purpose
Participants’’ Section 15 ‘‘Special
Provisions Applicable to Non-Domestic
Participants’’ is not included in the
proposed MBSD rules because as with
the GSD, the MBSD will be using the
Netting Agreement for foreign members
and not the master agreement format.
Proposed Rule 2A, ‘‘Initial Membership
Requirements’’, Section 5, ‘‘Member
Agreement’’ covers the provisions of the
membership agreement generally and
thereby serves to harmonize the
proposed MBSD rules with the GSD
rules with respect to this subject.
• Rule 3, ‘‘Corporation Declines to
Act for a Participant or Limited Purpose
Participant’’ Section 2 ‘‘Other Grounds
for Ceasing to Act for a Participant or
Limited Purpose’’ is not included in the
proposed MBSD rules because it is
being replaced by proposed MBSD Rule
14 ‘‘Restrictions on Access to Services’’
and Rule 16 ‘‘Insolvency of a Member’’
which cover the same matters and
harmonize these provisions with those
in the GSD rules.
• In an effort to harmonize with the
GSD rules, Rule 3, ‘‘Corporation
Declines to Act for a Participant or
Limited Purpose Participant’’ Section 3
is not reflected in the proposed MBSD
Rules. We do not believe it is necessary
to state the current MBSD concept in the
proposed MBSD rules because it would
apply regardless of whether it is stated
in the rules. Rule 3, ‘‘Corporation
44 As is the case under Rule 4, ‘‘Clearing Fund
and Loss Allocation’’, in the event of a close out of
a defaulting Member, broker members will be
responsible for partially-matched trades for which
FICC has received a statement denying the
existence of the trade.
45 It should be noted that DTCC has an Audit
Committee and such Committee would not be
dismantled without prior notification to the
Commission.
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77295
Declines to Act for a Participant or
Limited Purpose Participant’’ Sections
5(a) ‘‘Disposition of Open
Commitments’’ is not included in the
proposed MBSD rules because FICC
does not accept Letters of Credit as a
permissible form of Clearing Fund
collateral as a routine matter; however,
FICC reserves the right to accept this
type of collateral, if needed. In addition,
the current MBSD rule addresses the
liquidation of other types of collateral
posted by the defaulting Member. Under
the proposed MBSD rule, close out
processes, in general, are covered by
Rule 17, which has been drafted to be
harmonized with the equivalent GSD
Rule to the extent possible. Section 5(c)
of the current MBSD Rule 3 in Article
III has not been carried into the
proposed rulebook because these
current provisions speak to nondefaulting Members engaging in the
close-out of the defaulting Member’s
positions, which will be undertaken by
the MBSD as CCP under the proposed
rules.
• Under the section titled ‘‘Schedule
of Charges Broker Account Group’’ in
the appendix to the proposed MBSD
rules, FICC no longer provides hardcopy
output from microfiche. As a result, the
reference to this charge is being
removed.
b. The following rules do not appear
in the current MBSD rules and have
been added to the proposed MBSD rules
in connection with this filing:
• Rule 3, Section 6 ‘‘General
Continuance Standard’’ of the proposed
MBSD rules includes additional
language which states that FICC may
require that increased or modified
Required Fund Deposits be deposited by
the Clearing Member on the same
Business Day on which the FICC
requests additional assurances from
such Member. FICC has always
interpreted that the current rules permit
such action, however, this additional
language makes it explicit.
• Rule 5, ‘‘Trade Comparison’’
Section 1 ‘‘General’’ and Section 3
‘‘Trade Submission Communication
Methods’’ includes disclosure relating
to the means by which data may be
entered and submitted to the
Corporation. Section 10 ‘‘Modification
of Trade Data’’ of this rule allows the
Corporation to unilaterally modify trade
data submitted by Clearing Members if
the Corporation becomes aware of any
changes to the transaction which
invalidates the original terms upon
which it was submitted or compared
and Rule 12 ‘‘Obligations’’ of this
Section discusses the point at which
trade data becomes a settlement
obligation.
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• With respect to the computation of
cash balances under Rule 11, ‘‘Cash
Settlement’’, FICC has included a new
process with respect to fail tracking. Fail
tracking is an automated process that
takes place when the actual settlement
date of a transaction is beyond the
contract date. An adjustment is made
when one or more beneficiary dates fall
between the contract date and the
settlement date. The adjustment results
in the payment of funds from the
message originator to the message
receiver through the Federal Reserve’s
National Settlement Service (‘‘NSS’’).
This eliminates a cumbersome manual
process for tracking and clearing
adjustments from securities transaction
counter-parties and it impacts all Fedeligible mortgage-backed securities,
including Freddie Mac, Fannie Mae and
Ginnie Mae.
• With respect to Rule 26, ‘‘Financial
Reports and Internal Accounting
Control Reports’’, Section 1 ‘‘Financial
Reports’’ has been revised to state that
the Corporation will (1) Prepare its
financial statements in accordance with
Generally Accepted Accounting
Principles, (2) make unaudited financial
statements for the fourth quarter
available to its Clearing Members within
60 days following the close the
Corporation’s calendar year, and (3)
provide a certain level of minimum
disclosures in its quarterly financial
statements. This rule has also been
revised to include Section 2 ‘‘Internal
Accounting Control Reports’’, which
requires the Corporation to make
internal accounting control reports
available to its Clearing Members.
• The proposed MBSD rules also
introduce pool netting fees. Below is a
description of each fee:
1. Matched Pool Instruct (‘‘PID’’) (per
side): When a pool instruct is matched
resulting from either an instruct or an
affirmation (with our without pending
status) a matched fee is charged to both
sides.
2. Customer Delivery Request (‘‘CDR’’)
Pool Instruct Fee: When a pool instruct
in a matched status is included in the
net (vs. FICC) a CDR fee is charged at
the instruct PID level to the Clearing
Member that submitted the CDR.
3. Cancel of Matched Pool Instruct:
This fee is assessed to the Clearing
Member submitting a unilateral cancel
on a matched pool instruct.
4. Pool Obligation: This fee is charged
to the net long and short Clearing
Member when a Pool Obligation
(‘‘POID’’) is created vs. FICC.
5. Post Net Subs: Charged to the
Clearing Member that submits a
substitution (the net seller) on a POID
vs. FICC.
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Jkt 226001
6. Clearance of Pool vs. FICC: Fee
associated with clearing a POID vs.
FICC.
7. Financing Charges (Financing costs
are the costs of carrying positions
overnight): For each other Clearing
Member, a pass-through charge
calculated on a percentage of the total
of all such costs incurred by the
Corporation, allocated by agency
product.
c. The provisions listed below are in
the current GSD rules and have been
further revised in the proposed MBSD
rules in an effort to harmonize the two
rulebooks:
• Rule 3 Section 12 (Excess Capital
Premium)
• Rule 5 Section 10 (Modification of
Trade Data by the Corporation)
• Rule 14 (Restrictions on Access to
Services)
• Rule 15 (Wind-Down of a Member)
• Rule 16 (Insolvency of a Member)
• Rule 17 (Procedures For When the
Corporation Ceases to Act)
• Rule 17A (Corporation Default)
• Rule 18 (Charges for Services
Rendered)
• Rule 19 (Bills Rendered)
• Rule 20 (Admission to Premises of the
Corporation, Powers of Attorney, etc.)
• Rule 21 (Forms)
• Rule 22 (Release of Clearing Data)
• Rule 23 (Lists to be Maintained)
• Rule 24 (Signatures)
• Rule 25 (Insurance)
• Rule 26 (Financial Reports and
Internal Accounting Control Reports)
• Rule 27 (Rule Changes)
• Rule 28 (Hearing Procedures)
• Rule 29 (Governing Law and
Captions)
• Rule 30 (Limitations of Liability)
• Rule 31 (General Provisions)
• Rule 32 (Cross-Guaranty Agreements)
• Rule 33 (Suspension of Rules in
Emergency Circumstances)
• Rule 34 (Action by the Corporation)
• Rule 35 (Notices)
• Rule 36 (Interpretation of Terms)
• Rule 37 (Interpretation of Rules)
• Rule 38 (Disciplinary Proceedings)
• Rule 39 (DTCC Shareholders
Agreement)
(b) By establishing guaranteed
settlement and CCP services for the
MBSD, FICC is promoting efficiencies in
the mortgage-backed securities
marketplace, and for its membership.
The MBSD guarantee of settlement upon
comparison of submitted trades will
reduce risks associated with defaults
among counterparties. The introduction
of pool comparison, netting, and
settlement services will reduce, for
MBSD Clearing Members, the number of
pool settlements and the associated
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risks and costs. In addition, providing
CCP services will protect Clearing
Members from undue risks by allowing
FICC to ‘‘step in’’ as settlement
counterparty on eligible trades. The
proposed changes are therefore
consistent with the Securities and
Exchange Act of 1934 and the rules and
regulations promulgated there under, in
that they will further the abilities of
FICC to support the prompt and
accurate clearance and settlement of
securities transactions.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FICC does not believe that the
proposed rule change will have any
impact, or impose any burden, on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments relating to the
proposed change have not yet been
solicited or received. 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 (i)
As the Commission may designate up to
90 days of such date 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.
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
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–FICC–2008–01 on the
subject line.
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Federal Register / Vol. 76, No. 238 / Monday, December 12, 2011 / Notices
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FICC–2008–01. 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 Web site (https://www.sec.gov/
rules/sro.shtml). 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 Web site 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 a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of FICC
and on FICC’s Web site at https://dtcc.
com/downloads/legal/rule_filings/2008/
ficc/2008-01_Amendment_No_1.pdf. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly.
All submissions should refer to File
Number File Number SR–FICC–2008–01
and should be submitted on or before
January 3, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–31762 Filed 12–9–11; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
jlentini on DSK4TPTVN1PROD with NOTICES
Data Collection Available for Public
Comments and Recommendations
Small Business Administration.
60 Day Notice and request for
comments. 8(a) Business Development
Program.
AGENCY:
ACTION:
46 17
CFR 200.30–3(a)(12).
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SUMMARY: In accordance with the
Paperwork Reduction Act of 1995, this
notice announces the Small Business
Administration’s intentions to request
approval on a new and/or currently
approved information collection.
DATES: Submit comments on or before
February 10, 2012.
ADDRESSES: Send all comments
regarding whether these information
collections are necessary for the proper
performance of the function of the
agency, whether the burden estimates
are accurate, and if there are ways to
minimize the estimated burden and
enhance the quality of the collections, to
Joan Elliston, Program Analyst, Office of
Business Development, Small Business
Administration, 409 3rd Street, 8th
Floor, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT: Joan
Elliston, Program Analyst, (202) 205–
7190 joan.elliston@sba.gov Curtis B.
Rich, Management Analyst, (202) 205–
7030 curtis.rich@sba.gov.
SUPPLEMENTARY INFORMATION: In
accordance with Title 13 of the Code of
Federal Regulations, Section 124.403,
each 8(a) participant must annually
review its business plan with its
assigned business development
specialist and modify the plan, as
appropriate within 30 days after the
close of each program year. The
participant must also submit a statement
describing its current contract
performance capabilities as part of its
updated business plan. SBA uses the
information collected to access the
participants financial condition and
continued eligibility.
Title: ‘‘8(a) Annual Update’’.
Description of Respondents: 8(a)
Program Participants.
Form Number: 1450.
Annual Responses: 6,763.
Annual Burden: 13,526.
SUPPLEMENTARY INFORMATION: All 8(a)
participants are required to provide
semiannual information on any agents,
representatives, attorneys, and accounts
receiving compensation to assist in
obtaining a Federal contract for the
participant. The information addresses
the amount of compensation received
and description of the activities
performed in return for such
compensation. The information is used
to ensure that participants do not engage
in any improper or illegal activity in
connection with obtaining a contract.
Title: ‘‘Representatives Used and
Compensation Paid for Services in
Connection with obtaining Federal
Contracts’’.
Description of Respondents: 8(a)
Program Participants.
Form Number: 1790.
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77297
Annual Responses: 15,810.
Annual Burden: 3,953.
ADDRESSES: Send all comments
regarding whether this information
collection is necessary for the proper
performance of the function of the
agency, whether the burden estimates
are accurate, and if there are ways to
minimize the estimated burden and
enhance the quality of the collection, to
Edsel Brown, Assistant Administrator,
Office of Technology, Small Business
Administration, 409 3rd Street, 6th
Floor, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT:
Edsel Brown, Assistant Administrator,
(202) 205–7343 edsel.brown@sba.gov
Curtis B. Rich, Management Analyst,
(202) 205–7030 curtis.rich@sba.gov.
SUPPLEMENTARY INFORMATION: The SBA
needs this data to satisfy program
requirements in the Small Business Act
including new requirements established
in the reauthorization legislation’s,
Public Law 106–554 and Public Law
107–50. This data will be used by SBA
to maintain information about the SBIR
and STTR awards issued through the
two programs. The data will be
provided by each SBIR/STTR
participating agency based on
information collected from program
awardees. The data will be used to
report annually to the Congress on
awards issued. Further, the data will be
used by Congress, GAO, SBA and
participating agencies.
Title: ‘‘Small Business Innovation
Research (SBIR) and Small Business
Technology Transfer (STTR) TechNet
Database’’.
Description of Respondents: All Firms
or Individuals applying for a Phase I or
Phase II award from the SBIR or STTR
programs.
Form Number: N/A.
Annual Responses: 37,000.
Annual Burden: 20,000.
ADDRESSES: Send all comments
regarding whether this information
collection is necessary for the proper
performance of the function of the
agency, whether the burden estimates
are accurate, and if there are ways to
minimize the estimated burden and
enhance the quality of the collection, to
Donald Romek, Division Manager,
Denver Finance Center, Small Business
Administration, 721 19th Street, 3rd
Floor, Denver, CO 80202.
FOR FURTHER INFORMATION CONTACT:
Donald Romek, Division Manager, (303)
844–3603 donald.romek@sba.gov Curtis
B. Rich, Management Analyst, (202)
205–7030 curtis.rich@sba.gov.
SUPPLEMENTARY INFORMATION: SBA Form
172 is used by Lenders to report loan
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Agencies
[Federal Register Volume 76, Number 238 (Monday, December 12, 2011)]
[Notices]
[Pages 77287-77297]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31762]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65899; File No. SR-FICC-2008-01]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Allow the Mortgage-Backed
Securities Division To Provide Guaranteed Settlement and Central
Counterparty Services
December 6, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on March 12, 2008, the Fixed Income Clearing Corporation
(``FICC'') filed with the Securities and Exchange Commission
(``Commission''), and on November 21, 2011, amended the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared primarily by FICC. The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule changes consist of modifications to the rules of
FICC's MBSD to allow MBSD to provide guaranteed settlement and central
counterparty (``CCP'') services.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FICC 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. FICC has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) The purpose of this rule filing is to introduce CCP and
guaranteed settlement services for the MBSD. Establishment of these
processes for the MBSD has necessitated the drafting of a new MBSD
rulebook. Therefore, the existing MBSD clearing rulebook will be
replaced, in its entirety, by a new rulebook.\3\ Certain provisions in
the current MBSD rules which reflect processes that will continue upon
the introduction of the CCP services have been retained in the proposed
MBSD rulebook, where applicable. In order to promote uniformity between
FICC's two Divisions and to create transparency for common members, the
new MBSD rulebook follows the structure of the Government Securities
Division (the ``GSD'') rulebook. In addition, where possible and/or
applicable, the new MBSD provisions mirror the equivalent GSD
provisions. It should be noted that under the current MBSD Clearing
Rules, member firms are referred to as ``Participants.'' In the new
MBSD CCP rulebook, which is proposed by this filing, member firms shall
be referred to as ``Clearing Members.''
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\3\ The MBSD's Electronic Pool Notification Service rulebook
will remain unchanged.
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I. Overview
With the introduction of CCP services and guaranteed settlement for
transactions submitted to the MBSD, FICC will provide a trade guarantee
for all existing types of trades upon comparison of trade details
submitted by members.\4\ Additionally, a new pool netting system will
perform a daily net of pool allocations for those TBA trades that
according to the MBSD rules and procedures are eligible for pool
netting.\5\ It should be noted that not all guaranteed trades will be
included in the pool netting system. A determination of which trades
are included will be determined by netting percentages. FICC will
become CCP to those obligations, and settlement will occur versus FICC.
For all other obligations, settlement will occur outside of FICC, with
original settlement counterparties.
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\4\ Currently, the MBSD recognizes two types of trades. Those
are ``to be announced'' (``TBA'') trades and specified pool trades
(``SPTs''). TBA trades may proceed through the Settlement Balance
Order engine for netting or may settle on a trade-for-trade basis. A
TBA is a contract for the purchase or sale of agency mortgage-backed
securities to be delivered at a future agreed-upon date; however,
the actual pool identities or the number of pools that will be
delivered to fulfill the trade obligation or terms of the contract
are unknown at the time of the trade. The difference between TBAs
and SPTs is that for an SPT all required pool data, including the
pool number to be delivered on settlement date, are agreed upon by
Clearing Members at the time of execution.
\5\ SPTs are not eligible for pool netting under this proposal.
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A. Current Processing
At no time during the current MBSD processing does FICC guarantee
settlement, or act as a CCP for submitted transactions. Under the
current MBSD processing model, the majority of the trading activity
submitted to the MBSD for processing, is submitted as Settlement
Balance Order Destined (``SBOD''). SBOD trades are eligible for
comparison, risk management services and the TBA Netting cycle. Firms
can submit TBA trades as Trade-For-Trade (``TFTD'') transactions, which
are TBA trades that are eligible for comparison and risk management
services but ineligible for the TBA Netting cycle. SPTs are not
considered TBAs because the actual pool number is part of the trade
terms; SPTs are eligible for comparison and risk management services
but ineligible for the TBA Netting cycle.
[[Page 77288]]
Each of the transactions mentioned above is compared by FICC's
RTTMTM system. Settlement obligations for SPTs and TBA TFTD
transactions are generally established when a report indicating the
trade as compared is made available by the MBSD to the Participants on
both sides of the transaction.\6\ Settlement obligations for TBA SBOD
transactions are not established in this way. Instead, SBOD
transactions proceed to the MBSD's settlement balance order (``SBO'')
engine for TBA netting. The TBA Netting process establishes the
settlement obligations for the SBOD transactions.
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\6\ Participants use FICC's Interactive Submission Method,
Multiple Batch Submission Method or Single Batch Submission Method
to submit trade data to the MBSD. Contemporaneous with successful
compassion of the trade data in FICC's RTTM system, FICC generates
output indicating that such trade data is compared, is uncompared
and/or has been deleted. FICC makes available to the Participants,
the RTTM Compare Report, which establishes the settlement obligation
for TBA TFTD transactions and for SPTs between the counterparties
since these trades do not enter the TBA netting process.
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The SBO netting system produces settlement obligations between MBSD
Participants. Once Participants' settlement obligations are
established, Participants use FICC's electronic pool notification
service (the ``EPN Service'') to inform each other with respect to the
specific pools that will be delivered for settlement purposes.
Thereafter, members transmit notifications of settlement to FICC when
they have ultimately settled their obligations with applicable
counterparties.
B. Proposed Processing--Overview
Under the proposed MBSD rules, each Clearing Member will be
required to submit to the MBSD for processing transactions with other
Clearing Members in all securities that are netting-eligible according
to MBSD rules and procedures. Certain MBSD processes will continue to
operate as they do today. Specifically, eligible transactions will
continue to be submitted to the RTTMTM system for matching
purposes.\7\ FICC will provide output of the trade as compared,
uncompared and/or deleted. The SBO netting process for TBA trades will
also continue to generate settlement obligations between Clearing
Members. However, the MBSD will now provide a trade guarantee at the
point of comparison of all submitted transactions (i.e., SBOD trades,
TFTD trades, SPT trades and Option Contracts (collectively, ``MBSD
Eligible Trades'') will be guaranteed by the MBSD), as is currently
done in the GSD. The timing of comparison of MBSD Eligible Trades is
the point at which the MBSD will make available to the Clearing Members
on both sides of the transaction an output indicating that such trade
data has been compared. In the event of a member default, FICC will
settle the guaranteed trade.
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\7\ Trade data submitted to the MBSD must include such
identifying information as the MBSD may require and must be
submitted in the form and manner and in accordance with the time
schedules prescribed by the MBSD rules or otherwise set forth by
FICC from time to time. The symbol corresponding to the name of a
Clearing Member that is printed, stamped or written on any form,
document or other item issued by the Clearing Member pursuant to
Rule 5 Section 2 shall be deemed to have been adopted by the
Clearing Member as its signature and shall be valid and binding upon
the Clearing Member in all respects as though it had manually
affixed its signature to such form document or other item.
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The MBSD proposes to introduce ``pool comparison'' and ``pool
netting,'' and interpose itself as settlement counterparty to certain
settlement obligations. Specifically, after the netting of TBA trades
occurs through the SBO engine, settlement obligations will be issued
between members and members will allocate pools for settlement via the
EPN Service (just as is done today). Additionally, however, members
will be required to submit pool details for those netted TBA Settlement
obligations via the RTTMTM system for pool comparison and
for consideration for pool netting. Pools allocated to obligations
associated with Settlement Balance Order Non-Original Counterparty
trades, Settlement Balance Order Original Counterparty trades and with
TFTD trades will be eligible for pool netting which establishes
settlement obligations.\8\
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\8\ SPTs will not be considered an eligible transaction type for
pool netting at this time.
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Compared pools will be evaluated for eligibility for pool netting.
The MBSD's system will determine which pools will receive maximum
benefit from pool netting by considering such factors as trading
velocity and projected netting factor. It is important to note that not
every compared pool will proceed to the pool netting system.
Upon FICC's issuance of pool netting results to members, those
pools that are eligible for netting will be novated, i.e., settlement
obligations between the Clearing Members will be replaced with
obligations to settle with FICC. Certain outstanding obligations will
still require the Notification of Settlement (``NOS'') process. These
will include (1) SPTs, because they are not eligible for pool netting;
(2) transactions for which Clearing Members chose not to submit
allocation information into pool netting \9\; and (3) certain
transactions with an incomplete master file on a pool record or number.
When a pool is matched, in order for it to be considered for pool
netting, FICC must have the required pool information on its Security
Masterfile. This data for example would include the pool itself, factor
information and data to map it back to a TBA.\10\ With respect to any
obligations that fail to settle, these obligations will not be re-
netted, as they are in the GSD.\11\
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\9\ For example, if a Clearing Member has a trade that was
matched with stipulations, the Clearing Member would not submit it
for pool netting. Pool netting creates delivery obligations based
off the net position of Members without regard to the original
counterparty relationship. With a trade matched with stipulations,
the buyer/seller will want to ensure receipt/delivery is maintained
between themselves to ensure the stipulated terms are adhered to.
\10\ For example, if FICC has not received current month factor
on the pool number.
\11\ The MBSD will retain the discretion to re-net fails or to
conduct pair-offs if it believes that such actions are necessary to
protect itself and its Clearing Members due to market conditions or
events.
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II. Proposed MBSD Rulebook
As noted above, the current MBSD rulebook will be replaced in its
entirety by a new proposed rulebook. Set forth below is an overview of
the significant substantive and structural changes to the rules.
A. Definitions
The MBSD rules will have a revised Rule 1, ``Definitions,'' which
will include terminology applicable to new MBSD processing and
procedures. For example, terms relevant to pool netting have been
included (such as ``pool deliver obligation'' and ``pool receive
obligation''). Where practical and/or applicable, the MBSD rulebook
uses terms from the current GSD rules, in order to harmonize language
between the Divisions.
B. Membership
Rule 2, ``Members'', Rule 2A, ``Initial Membership Requirements,''
Rule 3, ``Ongoing Membership Requirements,'' and Rule 3A, ``Cash
Settling Bank Members,'' will govern membership types, member
application requirements and ongoing reporting requirements.
1. Initial Membership Requirements
The new MBSD rules will provide for two membership types (as set
forth in Rule 2): Clearing Members and Cash Settling Bank Members.
Those entities qualifying for clearing membership will be guaranteed
service members of the MBSD--trades submitted by these Members will be
guaranteed at the point
[[Page 77289]]
of comparison, and eligible, as applicable, for pool comparison,
netting and settlement. Categories of clearing membership will include:
(i) Registered brokers or dealers; (ii) other registered clearing
agencies; (iii) registered investment companies; (iv) banks \12\; (v)
government securities issuers/government sponsored enterprises; (vi)
insurance companies; \13\ and (vii) unregistered investment pools.\14\
In addition, the MBSD will have the discretion to make its services
available to other entity types which it deems appropriate subject to
the approval of the Commission. Membership requirements for Cash
Settling Bank Members are set forth in Rule 3A, ``Cash Settling Bank
Members''. These requirements remain unchanged from the current MBSD
rulebook and they mirror the requirements of the GSD-equivalent
members, known as funds-only settling banks.
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\12\ The term ``Banks'' shall include Federal Savings
Associations.
\13\ The MBSD does not currently have any insurance company
Clearing Members. Financial and other membership requirements for
this category will be established in a future rule filing.
\14\ Currently there are two members who do not fit the listed
membership types. As a result, these entities will be grandfathered
in and subject to ongoing membership requirements.
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With respect to initial membership requirements as set forth in
Rule 2A, ``Initial Membership Requirements,'' the MBSD has mirrored the
current requirements for the GSD netting membership, where there is an
existing membership type in the GSD rules. The two membership
categories where there are no GSD equivalents are the unregistered
investment pools (the ``UIPs'') and the registered investment
companies. In addition to standard requirements regarding financial and
operational responsibility applicable to all Clearing Members,
registered investment companies must be registered under the Investment
Company Act of 1940, and have minimum net assets of $100 million. With
respect to the UIPs, membership standards that were adopted for these
entities via a 2006 rule filing \15\ will be revised in the new MBSD
rulebook, in consideration of their new status as guaranteed service
members. Revised requirements will be as follows:
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\15\ See Securities Exchange Release Act Release No. 34-55037
(Jan. 3, 2007), 72 FR 1252 (Jan. 10, 2007) [SR-FICC-2006-10].
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The UIP applicant must have an investment advisor
domiciled in the United States.
The UIP's investment advisor must be registered with the
SEC under the Investment Advisors Act of 1940, the UIP must have (i)
$250 million in net assets, or (ii) have $100 million in net assets and
the UIP's investment advisor must advise an existing UIP Clearing
Member that has assets under management of $1.5 billion.
Additional requirements for UIPs will appear in Rule 3, ``Ongoing
Membership Requirements,'' discussed further below. As is the case with
all MBSD Clearing Member applicants, UIPs must meet all applicable
financial requirements set forth in the proposed MBSD rules in order to
be admitted into membership. The required levels must be maintained as
a condition of membership on an ongoing basis.\16\ With respect to all
MBSD Clearing Member categories, as is currently the case under the
MBSD rules, applicants whose financial statements are not prepared in
accordance with U.S. generally accepted accounting principles
(``GAAP'') will be subject to increased minimum financial
requirements.\17\
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\16\ Required membership levels must be maintained by all
members on an ongoing basis as a condition of membership.
\17\ These higher GAAP-based requirements remain unchanged from
the current GSD and MBSD rules. Specifically, firms whose financial
statements are prepared in accordance with International Financial
Reporting Standards, Canadian GAAP or UK GAAP will have a minimum
financial requirement that is 1.5 times the U.S. GAAP requirement,
firms whose financial statements are prepared in accordance with the
GAAP principles of a European Union country other than the United
Kingdom will have a minimum financial requirement that is 5 times
the U.S. GAAP requirement, and firms whose financial statements are
prepared in accordance with any other type of GAAP will have a
minimum financial requirement that is 7 times the U.S. GAAP
requirement.
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The MBSD will continue to require non-domestic membership
applicants to submit, with their membership application, legal opinions
on the laws of the applicants' home jurisdictions. Updates to such
legal opinions will be required from direct foreign members on an
annual basis. Any additional legal risk \18\ posed by such applicants
due to their home country law may result in additional risk mitigation
measures, including, for example, the posting of letters of credit as
collateral. Members that are U.S. branches or agencies of non-U.S.
banks (``U.S. Branches'') will be classified as U.S. members, based
particularly on the rationale that such U.S. Branches are regulated by
the U.S. and/or state regulators.\19\
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\18\ ``Legal risk'' is currently defined in the rules as the
risk that, as a result of a law applicable to a Clearing Member's
insolvency or bankruptcy, FICC may be delayed or prohibited from:
(i) Accessing any portion of the Member's Clearing Fund, (ii)
netting, closing out or liquidating transactions, or setting off
obligations, or taking any other action contemplated by the rules
regarding clearing fund, cease to act, insolvency of a member or
(iii) otherwise exercising its rights pursuant to the rules.
\19\ As in the current version of MBSD rule Article III Rule 15
``Special Provisions Applicable to Non-Domestic Participants'', U.S.
Branches will not be required to submit annual updates to their
foreign legal opinions unless FICC deems it necessary to address
legal risk; applicants in this category will, however, continue to
be required to submit an initial foreign legal opinion on their home
country law with their membership application. See Securities
Exchange Release Act Release No. 34-62828 (Sep. 2, 2010), 75 FR
54929 (Sep. 9, 2010) [SR-FICC-2010-02].
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2. Ongoing Membership Requirements
Pursuant to Rule 3, ``Ongoing Membership Requirements,'' current
provisions applicable to the GSD netting membership under the GSD rules
have been carried over to the MBSD rules to apply to certain member
types. For example, the GSD currently assesses a premium against any
member whose Clearing Fund requirement exceeds its specified regulatory
capital figure.\20\ The MBSD will also apply this premium to members.
Also, bank, broker-dealer and UIP members of the MBSD will be rated.
Among other things, financial measures relevant to these types of
entities will be assessed. Any member that receives a poor rating may
be monitored more closely and/or placed on FICC's internal watch list.
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\20\ By way of example, under the current GSD rules, if a member
has a Clearing Fund requirement of $11.4 million and excess net
capital of $10 million, its ``ratio'' is 1.14 (or 114 percent), and
the applicable collateral premium would be 114 percent of $1.4
million (which is equal to the amount by which the member's Clearing
Fund requirement exceeds its excess net capital), or $1,596,000. The
current GSD rules provide that FICC has the right to: (i) Apply a
lesser collateral premium (including no premium) based on specific
circumstances (such as a member being subject to an unexpected
haircut or capital charge that does not fundamentally change its
risk profile), and (ii) return all or a portion of the collateral
premium amount if it believes that the member's risk profile does
not require the maintenance of that amount. These rights will be
carried over to the proposed MBSD rules.
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As set forth in Rule 3, the MBSD will take additional risk
management measures with respect to UIP members. Specifically, the
``value at risk'' (``VaR'') confidence level for UIP members will be
set at 99.5%, half a percentage higher than the standard assumption set
forth in the procedures of the Corporation (currently set to 99%).\21\
As set forth in Rule 2A, UIP members will also be required to achieve a
qualitative assessment rating of at least ``medium'' as part of the
initial membership requirement. Qualitative assessments will be based
on such factors as
[[Page 77290]]
management, capital, strategy/risk and profile, valuation procedures
and internal risk management controls. Any UIP member rated less than
``medium'' may be subject to an increased Required Fund Deposits that
may be achieved via higher confidence levels and may also become
subject to revocation of membership as set forth in Rule 3, Section 6.
Also, pursuant to Rule 4, the Clearing Fund requirement of UIPs shall
be no less than $1 million, whereas the current minimum is
$100,000.\22\
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\21\ The MBSD rules will provide FICC with the discretion to
increase the confidence level if it determines that it is
appropriate to do so with respect to a particular Clearing Member or
Members generally. As an initial matter, UIPs will begin the service
with a confidence level of 99.5%.
\22\ The MBSD rules will provide FICC with the discretion to
increase the minimum charge if it determines that it is appropriate
to do so with respect to a particular member or members generally.
As an initial matter, UIPs will begin the service with the higher
minimum of $1 million.
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C. Clearing Fund and Loss Allocation
MBSD Rule 4, ``Clearing Fund and Loss Allocation'' will set forth
requirements with respect to Clearing Fund \23\ deposited by Clearing
Members.
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\23\ The MBSD is adopting the term ``Clearing Fund'' to replace
``Participants Fund.''
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The MBSD has already standardized the clearing and settlement
processes. The objective in offering CCP services is to leverage
potential means by which risks can be curbed, efficiency increased, and
operational risk within the marketplace can be reduced.
The conversion of the MBSD to a CCP increases the amount of risk
for the clearing agency. The purpose of a CCP is to ensure settlement
can continue in the face of a member firm failure, and to reduce the
risk of loss due to that member failure. A CCP interposes itself as a
legal counterparty to both sides of a transaction. The CCP assumes the
counterparty credit risk of the other Clearing Members which primarily
includes (1) The market risk associated with liquidating the defaulted
Member's portfolio, and (2) the liquidity risk associated with
maintaining sufficient liquid resources to finance the defaulted
Member's scheduled settlement obligations.
The MBSD has established a robust risk management framework to
manage the credit risks from its Clearing Members and the credit risks
involved with its payment, clearing and settlement process.
The MBSD relies on five different controls to manage its
counterparty risk: Member standards, initial/variation margins, back/
stress testing, position/risk monitoring and non-margin collateral. The
first set of controls aims to prevent the CCP from dealing with or
reducing activity of counterparties that have unacceptably high
probabilities of default. As noted above in section B, concurrent with
the introduction of CCP services the MBSD will increase its minimum
financial standard for clearing membership eligibility to mirror GSD
eligibility standards and enhance its risk monitoring for UIPs.
The second line of defense is the margins collected from
counterparties in the form of cash and highly liquid government
securities in the Clearing Fund. The dual purpose of the Clearing Fund
is to provide readily accessible liquidity to facilitate settlement and
reduce loss-related costs which may be incurred in the event of a
Clearing Member's insolvency or failure to fulfil its contractual
obligations to the MBSD. Margins are intended to cover possible losses
between the time of default of a counterparty, at which point the CCP
would inherit its positions, and the close-out of these positions
through selling or hedging. For this purpose, the MBSD marks member
portfolios to the market on a daily basis and charges variation margins
accordingly, and establishes initial margins to cover a minimum 99th
percentile of expected possible losses that could arise over a 3-day
settlement period utilizing a VaR-based approach.\24\ In order to
enhance the MBSD's risk framework and concurrent with the introduction
of CCP services, the MBSD will add two new components--the margin
requirement differential and the coverage charge--to the Clearing Fund,
as well as additional MBSD mark-to-market items related to the new pool
netting services. The MBSD also has the ability to collect charges
above the systemically generated Clearing Fund charges when deemed
appropriate in order to protect the corporation and its members. If any
loss were incurred in the liquidation of a Member that was not covered
by the Member's Clearing Fund deposit or amounts available under the
cross guaranty arrangement to which FICC is a party, the MBSD would
invoke its loss allocation process.
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\24\ An index-based haircut methodology will be used for
securities with insufficient pricing data.
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The MBSD uses regular back and stress testing to monitor the
sufficiency of collected margin levels vis-a-vis the risk represented
by the 99th percentile of expected possible losses from member
portfolios and to monitor its tail risk exposure that is beyond the
99th percentile. If a member portfolio does not pass the back test,
additional margin will be collected via the coverage charge. Stress
tests are also used to evaluate margin adequacy. The MBSD's framework
reflects stress events from the last 10 years as well as special stress
events that were not within the past 10 years and takes the form of
swap rate shifts and credit spread shocks that reflect market
conditions for the instruments that the MBSD clears or holds as
collateral. As described in the Clearing Fund section below, the MBSD
analyzes and reviews on an intraday basis certain components of the
Clearing Fund that are recalculated using updated positions and prices
if there is increased exposure in a member's portfolio intraday. In
addition, the MBSD may at its discretion call for additional collateral
on an intraday basis if exposures are in excess of predefined
thresholds.
Finally, aside from the risk of loss that could be encountered from
a Clearing Member failure, a central counterparty could also face
liquidity risk, defined as the risk that the central counterparty has
insufficient financial resources to cover a default by a Clearing
Member to which it has the largest exposure. To that end, the MBSD
maintains sufficient resources to meet its observed liquidity risk. The
Clearing Fund would be the primary source to fulfil the liquidity need
incurred if MBSD had to complete settlement on behalf of the defaulting
Clearing Member. Other conventional funding tools such as loans secured
via the MBSD clearing banks and/or tri-party repo transactions would
also be used to fulfil the liquidity need, but if those were
unavailable or insufficient, the MBSD would invoke the ``Capped
Contingency Liquidity Facility,'' described in section G below to
provide additional financing in the event of a member default.
Tail risk is one of the risks the MBSD has to manage. The MBSD
addresses this through a continuous process of (1) Reviewing margining
methodologies with stakeholders; (2) analysis and monitoring of margin/
collateral requirements; (3) actively reviewing and timely/appropriate
action on market conditions and credit events; (4) reviews of back/
stress tests, and (5) identifying, assessing and managing risks
associated with the products and services provided by the MBSD and
FICC.
1. Clearing Fund
The underlying Clearing Fund methodology is designed primarily to
account for market risks associated with a Clearing Member's unsettled
portfolio. The Clearing Fund model is back tested on a monthly basis
and periodically validated by outside experts. Additional charges and
premiums may be considered to address additional risks (i.e., credit,
reputation, legal, etc.) or non-compliance with MBSD rules. The
Clearing Fund is calculated every business day for each MBSD Clearing
Member.
[[Page 77291]]
Clearing Fund requirements will be calculated in accordance with
the VaR model. The Clearing Fund components will consist of the VaR
charge,\25\ the coverage charge, the margin requirement differential
charge and the deterministic components charge (which will include the
mark-to-market charges, cash obligation items and accrued principal and
interest). The VaR methodology will utilize the prior 252 days of
historical information for cash positions, including prices, spreads,
and market variables to simulate the market environments in the
forthcoming three days. Projected portfolio losses are then calculated
assuming these simulated environments actually will be realized. The
coverage charge is an additional charge to bring the Clearing Member's
coverage to a targeted confidence level. The margin requirement
differential considers intra-day portfolio variations and estimates the
potential increased risk intra-day and the risk that the next margin
call will not be satisfied. The deterministic risk component combines
the mark-to-market of the portfolio, gain or loss for the difference
between the original contract value and the internally generated
netting price derived from the TBA netting process, principal and
interest adjustments on failed positions, and other miscellaneous cash
items. The deterministic risk component can result in an increase or
decrease to a member's total clearing fund requirement.
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\25\ The definition of ``VaR Charge'' (which is referred to as
``VaR Component'' in the current rules) is being amended to remove
the reference to the application of ``minimum amounts'' to such VaR
Charge. The MBSD is currently applying a minimum 5-basis point
charge which will not be applicable when the MBSD CCP becomes a CCP
because of the addition of the other components to the overall
Clearing Fund calculation. Minimum Clearing Fund deposit amounts per
Rule 4 remain applicable.
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Requirements as to acceptable forms of collateral will remain
unchanged in the new MBSD rulebook.
In order to further mitigate risk, and as part of FICC's efforts to
enhance its intraday monitoring capabilities, FICC has determined to
expand its intraday monitoring \26\ to recalculate the mark-to-market
elements of the deterministic risk component. This component of the
risk calculations will be updated at least hourly using intraday
pricing and position feeds for FICC members and compared against the
amounts that were previously collected in the Clearing Fund. If the
exposures increase above certain defined thresholds Risk Management
staff will be alerted to consider additional intraday margin calls,
outside of the formal Clearing Fund collection process. The proposed
rule change provides that such calls would need to be satisfied by the
affected members within one hour of FICC's notice. The initial
thresholds will be based on changes to a Clearing Member's position
size, composition and price changes on the constituent securities.
Qualitative factors including, but not limited to, Watch List status
and internal rating will also be considered in the application of
intraday mark-to-market.
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\26\ This proposal is different from the intra-day margining
that was approved by the Commission to implement the single-pot
margining with New York Portfolio Clearing, LLC (``NYPC''). See
Securities Exchange Act Release No. 63986 (Feb. 28, 2011), 76 FR
12144 (Mar. 4, 2011). In the FICC-NYPC rule filing, established
second scheduled calls were approved. In the present proposal, FICC
is seeking the authority to require additional margin outside of the
formal calls.
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2. Other Changes--Clearing Fund
Use of Payments and Deposits
FICC is proposing to revise Rule 4 ``Clearing Fund and Loss
Allocation'', Section 5 ``Use of Payments'' to include additional
disclosure relating to the Corporation's use of a Clearing Member's
deposits and payments for temporary financing needs. The proposed
revisions also clarify that whenever the Clearing Fund is charged for
any reason, other than to satisfy a clearing loss attributable to a
Clearing Member solely from that Clearing Member's Clearing Fund
deposit, the Corporation will provide the reasons therefore to each
Clearing Member. This would apply when the Clearing Fund is charged,
meaning the Corporation has applied the Clearing Fund for more than 30
days and is allocating the amount as a loss or for other loss
allocation purposes.
3. Loss Allocation
In this CCP proposal, FICC is also introducing a new loss
allocation methodology for the MBSD. If a defaulting Clearing Member's
Clearing Fund and any amounts of the Defaulting Member available under
a cross-guaranty agreement are not sufficient to cover losses incurred
in the liquidation of the defaulting Clearing Member's positions (the
``Remaining Losses''), the MBSD's loss allocation methodology will be
invoked. Under this proposed loss allocation methodology, Remaining
Losses will first be allocated to the retained earnings of FICC
attributable to the MBSD, in the amount of up to 25 percent of the
retained earnings or such higher amount as may be approved by the Board
of Directors of FICC. If a loss still remains, MBSD Clearing Members
are placed into one of two tiers for loss allocation purposes: Tier One
members are subject to loss mutualization, whereas Tier Two members are
not subject to loss mutualization.\27\ FICC will divide the Remaining
Losses between the Tier One members and Tier Two members. The division
of Remaining Losses is based on the amount each solvent Clearing Member
would have lost or gained if it had closed out its original outstanding
trades with the defaulting Clearing Member on a bilateral basis.\28\
FICC then will determine the relevant share of each Tier One member's
bilateral losses (members with a bilateral liquidation profit are
ignored) in the total of all members' bilateral losses and sum these
shares to determine the Tier One Remaining Loss. Similarly, FICC will
determine the relative share of each Tier Two member's bilateral loss
in the total of all members' bilateral losses and sum these shares to
determine the Tier Two Remaining Loss.
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\27\ Tier Two members are those that are legally prohibited from
participating in loss mutualization. Currently, only investment
companies registered under the Investment Company Act of 1940, as
amended, qualify as Tier Two members.
\28\ With respect to brokered trades, in the MBSD such trades
are done on a ``give-up basis,'' and brokers are thus not considered
parties to fully-matched trades. However, for purposes of loss
allocation, broker members will be subject to loss allocation for
certain partially-matched trades. Brokers are considered Tier One
members, and as such will be subject to loss mutualization.
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Tier One Remaining Losses will be allocated to Tier One members
first by assessing the Required Fund Deposit of each such Member in the
amount of up to $50,000, equally. If a loss remains, Tier One members
will be assessed ratably, in accordance with the respective amounts of
their Required Fund Deposits, based on the average daily amount of the
Clearing Member's Required Fund Deposit over the prior twelve months.
Tier Two Remaining Loss will be allocated to Tier Two Clearing Members
based on each Tier Two member's original trading activity with the
Defaulting Member that resulted in a loss. Tier Two members will only
be subject to loss to the extent they originally traded with the
Defaulting Member consistent with regulatory requirements applicable to
the Tier Two members. FICC shall assess such loss against the Tier Two
members ratably based upon their loss as a percentage of the entire
amount of the Tier Two Remaining Loss. This ensures that Tier Two
members are not subject to loss mutualization. Tier Two counterparties
will be liable for losses related to both direct and brokered trades
\29\ including partially-matched
[[Page 77292]]
trades for which the Tier Two member did not submit a statement to FICC
denying the existence of the trade.\30\
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\29\ Brokered trades involve a broker intermediary between two
dealers. Each dealer and broker must submit the trade details to the
MBSD for trade comparison. This means that each dealer submits
against the broker and the broker submits against each dealer. A
fully matched trade will be achieved when both dealers match against
the broker (i.e. all submissions discussed above match). With a
fully matched trade, both dealers assume principle status which
results in the broker having no settlement obligations with respect
to the trade; the broker cannot be subject to any loss with respect
to such trade. A partially matched trade results when only one of
the two submissions achieves a bilateral match versus the broker.
The dealer who has matched with the broker will have a settlement
guarantee and is subject to Clearing Fund requirements with respect
to such trade. If the unmatched dealer submits a statement to FICC
denying the existence of the trade, the broker becomes the other
side of the trade which means that the broker is responsible for
such trade from a risk management perspective and loss allocation.
If the unmatched dealer does not submit a statement to FICC denying
the existence of the trade, the dealer becomes responsible for the
settlement and risk management and the broker is released from these
responsibilities.
\30\ To illustrate the proposed MBSD Tier One (``T1'')/Tier 2
(``T2'') loss allocation rules, consider an example where the $20
million Clearing Fund requirement of an insolvent MBSD member X
turns out to be insufficient to cover the $30 million liquidation
loss that the MBSD incurred as a result of closing out all of X's
open positions. If X doesn't have any excess collateral, MBSD would
need to allocate a $10 million remaining loss.
Assume that X has unsettled trades with three Tier One original
counterparties (T1A, T1B and T1C) and three Tier Two original
counterparties (T2A, T2B and T2C), all executed directly.
Further assume that the bilateral liquidation results of X's
solvent original counterparties are as follows:
T1A: $5 million; T1B: ($5 million); T1C: ($15 million); T2A:
($20 million); T2B: ($10 million); T2C: $15 million; Total: ($30
million).
Also assume that there are no secondary defaults and no off-the-
market trades.
Based on these assumptions, the bilateral Tier One liquidation
losses amount to $20 million ($5 million attributable to T1B and $15
million attributable to T1C), while the bilateral Tier Two
liquidation losses amount to $30 million ($20 million attributable
to T2A and $10 million attributable to T2B). This means that out of
a total of $50 million bilateral liquidation losses, 40% or $20
million can be attributed to Tier One counterparties and 60% or $30
million to Tier Two counterparties. As a result, the Tier One
remaining loss would be $4 million (i.e., 40% of the MBSD's $10
million overall remaining loss) and the Tier Two remaining loss
would be $6 million (i.e., 60% of the MBSD's $10 million overall
remaining loss).
Given that T2A's and T2B's bilateral losses represent \2/3\ and
\1/3\ respectively of the Tier Two Remaining Loss, T2A's loss
allocation will be $4 million and T2B's loss allocation will be $2
million.
The $4 million Tier One Remaining Loss would first be assessed
equally to each Tier One member's clearing fund, up to an amount of
$50,000 per Tier One member. If a loss still remains, the amount is
allocated among Tier One members, pro-rata based on each Tier One
member's average daily level of clearing fund over the prior twelve
months (or shorter period if a member did not maintain a clearing
fund deposit over the full twelve month period).
Note that the loss allocation results are not impacted by
whether the defaulting Clearing Member is a Tier One or a Tier Two
member.
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D. TBA Trade Processing
Rule 5, ``Trade Comparison'' and Rule 6, ``TBA Netting'' of the
proposed MBSD rulebook mirror current MBSD rules as these processes
will remain unchanged from an operational perspective. Members will
continue to submit TBA transactions and SPTs to the MBSD through the
RTTM\TM\ system to bilaterally match their trade data with trade data
submitted by their counterparties. The significant change to the
comparison rule is the introduction of FICC's guarantee. Transactions
will be guaranteed for settlement at the point of comparison.\31\ SBOD
TBA trades will proceed through the TBA/SBO netting process as they do
today. After netting, members will use the EPN Service to allocate
pools in satisfaction of open TBA obligations (both trade-for-trade and
SBO transactions). In addition, members will now be required to submit
pool allocation information to the MBSD's RTTM\TM\ system \32\--pool
allocation processing will proceed as described below.
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\31\ While SPTs will be guaranteed at the point of comparison,
they will not be eligible for processing through the pool comparison
or pool netting systems. All SPTs will settle outside of FICC with
original counterparties.
\32\ Because Clearing Members will be required to allocate pools
via EPN and RTTM\TM\ in order for pool allocations to proceed to
pool comparison and netting, all MBSD Clearing Members will be
required to be EPN members.
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E. Pool Allocation Processing
Pool allocation processing refers to the Clearing Member's
submission via a RTTM\TM\ message of an allocated pool for matching and
pool netting services.
On the allocation date,\33\ Clearing Members will also be required
to submit pool allocation information (called ``Pool Instructs'') via
the RTTM system for pool comparison (which is a pre-requisite for pool
netting). As with EPN allocation, Pool Instructs are to be submitted
against all TBA obligations, whether stemming from Trade-for-Trade
activity or TBA Netting. As noted previously, allocations are not
performed for SPTs and they are not eligible for pool netting services
and Clearing Members may choose not to submit Pool Instructs against
trades matched with stipulations.\34\
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\33\ Pool allocation information (also known as ``Pool
instructs'') may be submitted up to the point that Pool Netting is
executed.
\34\ Trades with stipulations are those where certain trade
terms are agreed to at point of match (e.g., one pool per million);
under the proposal, Clearing Members will be provided with the
option to hold out stipulation allocations from the pool netting
process so that they can preserve their ability to obtain the pools
that satisfy the stipulations of the trade.
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Pool data information on Pool Instructs must be bilaterally
compared (i.e., the mandatory comparison pool data submitted by the
seller must match the mandatory comparison pool data submitted by the
buyer) in order for the Pool Instructs to be eligible for consideration
for pool netting. Pool Instructs must further be ``assigned'' by the
MBSD to a valid, open TBA position, meaning that the trade terms
submitted on the Pool Instruct must match the trade terms of a TBA
CUSIP that has sufficient open position. Only compared and assigned
Pool Instructs are evaluated for inclusion in pool netting.
Pool allocation processing will be governed by Rule 7, ``Pool
Comparison,'' Rule 8, ``Pool Netting,'' and Rule 9, ``Pool
Settlement''. Once netting eligible pools are defined by the MBSD, each
allocation will be netted into a single net position per pool CUSIP.
Pool netting results will be novated, meaning that open TBA obligations
will be terminated and replaced with resultant pool receive, deliver
and associated payment obligations which will settle versus FICC as
central counterparty.
F. Settlement
1. Settlement With FICC as Counterparty
As stated above, obligations generated by the pool netting system
will settle versus FICC--this settlement process will be governed by
Rule 9, ``Pool Settlement with the Corporation.'' Clearing Members will
be required to designate a clearing bank for purposes of delivering
securities to, and receiving securities from, the MBSD in satisfaction
of settlement obligations. All deliveries and receipts of securities in
satisfaction of pool deliver obligations and pool receive obligations
will be required to be made against simultaneous payment. These
securities settlement procedures mirror the current GSD securities
settlement rule.\35\
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\35\ GSD Rule 12, ``Securities Settlement.''
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2. Settlement Outside of FICC
For those allocated pools (or pools matched as trade terms on SPT
trades) which are not processed through the pool netting system,
Clearing Members will be required to settle such transactions
bilaterally with applicable settlement counterparties, outside of FICC.
Please refer to ``Processing Overview'' referenced above, for a
description of the trades that would be required to settle outside of
FICC. It should be noted that such trades remain guaranteed for
settlement by FICC; such
[[Page 77293]]
trades were guaranteed at the time of comparison. Pursuant to Rule 10,
``Notification of Settlement'', Clearing Members must continue to
submit to FICC Notifications of Settlement (``NOS''). NOS will be
required to be received on the applicable clearance date for each
transaction. When the MBSD receives NOS from each counterparty to a
transaction, the MBSD will report clearance of the applicable
transaction back to each Clearing Member, as is done today. At this
point, the MBSD will stop collecting margin on the transaction, and
will no longer be responsible for principal and interest payments.
3. Cash Settlement
Rule 11, ``Cash Settlement with the Corporation'' provides that
cash settlement processing will continue to be done via the Federal
Reserve's National Settlement Service and through the use of cash
settling banks appointed by Clearing Members. Several items have been
added to the calculation of each Clearing Member's cash settlement
obligation, including: (a) A ``net pool transaction adjustment
payment'' (to reflect the difference between the pool net price \36\
and a settlement price established at the TBA level); (b) principal and
interest payment amounts related to fails, and (c) a ``clearance
difference amount'' \37\ (to take into account the delivery to FICC of
mispriced securities by a member).
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\36\ ``Pool Net Price'' is defined in the proposed rules as the
uniform price for a pool (expressed in dollars per unit of par
value), not including accrued interest, established by the
Corporation on each business day, based on current market
information for each eligible security.
\37\ ``Clearance Difference Amount'' is defined in the proposed
rules as the absolute value of the dollar difference between the
settlement value of a pool deliver obligation or a pool receive
obligation and the actual value at which such pool deliver
obligation or pool receive obligation was settled.
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G. Additional Rule Changes
1. Capped Contingency Liquidity Facility
FICC is proposing to add a provision to the proposed MBSD rules
that introduces a ``Capped Contingency Liquidity Facility,'' which is a
procedure designed to ensure that the MBSD has sufficient liquidity
resources to cover the largest failure of a family of accounts. This
facility will only be invoked if FICC declares a default or a cease to
act against a Clearing Member, i.e., a defaulting Clearing Member and
FICC does not have the ability to obtain sufficient liquidity through
its Clearing Fund cash deposits and its established repurchase
agreement arrangements (``CCLF Event''). FICC believes that the Capped
Contingency Liquidity Facility provides Clearing Members with finality
of settlement and allows firms to prepare for and manage their
potential financing requirements in the event of a Member's default.
Once a CCLF Event has been declared, FICC will contact Clearing Members
that are due to deliver obligations to FICC that are owed to a
defaulting Clearing Member. FICC will either cancel the Clearing
Member's obligations or instruct the Clearing Member to hold the
obligations (or a portion thereof) and await instructions as to when to
make these deliveries. With respect to the obligations subject to
financing (the ``Financing Amount'') up to the Clearing Member's
defined liquidity contribution cap (the ``Defined Capped Liquidity
Amount''),\38\ FICC as counterparty, will enter into repurchase
agreements with the Clearing Member equal to the Financing Amount
pursuant to the terms of the deemed 1996 SIFMA Master Repurchase
Agreement (without referenced annexes). If a liquidity need still
exists (the ``Remaining Financing Amount''), FICC will inform Clearing
Members that are below the Defined Capped Liquidity Amount and also
inform Clearing Members that do not have a delivery obligation to
defaulting Clearing Member.\39\ After these Clearing Members have been
notified, FICC will distribute the remaining financing need to such
Clearing Members on a pro rata basis and enter into repurchase
agreements pursuant to the terms of the deemed 1996 SIFMA Master
Repurchase Agreement (without referenced annexes). These transactions
would remain open until FICC completes the liquidation of the
underlying obligations and a haircut based on market conditions will be
applied to the transactions.
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\38\ The ``Defined Capped Liquidity Amount'' is the maximum
amount that a Clearing Member shall be required to fund during a
CCLF Event. The Defined Capped Liquidity Amount will be established
as follows:
(a) For those Clearing Members that are eligible for and that
have established borrowing privileges at the Federal Reserve
Discount Window or for those Clearing Members who have an affiliate
that is eligible for and has established borrowing privileges at the
Federal Reserve Discount Window, FICC will conduct a study every six
months, or such other time period as FICC shall determine from time
to time as specified in Important Notices to Clearing Members, to
determine each Clearing Member's largest liquidity requirement for
the applicable time period based on a Clearing Member's sell
positions versus other Clearing Members at the family level on a
bilateral net basis within a TBA CUSIP. Based on the overall study,
FICC will define an adjustable percentage (the initial percentage
will be set at 60%), as determined by FICC from time to time, and
multiply that percentage amount against the maximum amount to
establish each Clearing Member's Defined Capped Liquidity Amount;
and
(b) For those Clearing Members that are ineligible for or have
not established borrowing privileges at the Federal Reserve Discount
Window and for those Clearing Members that do not have an affiliate
that is eligible for or has established borrowing privileges at the
Federal Reserve Discount Window, FICC will conduct a study every
month or such other time period as FICC shall determine from time to
time as specified in Important Notices to Clearing Members, to
determine each Clearing Member's largest liquidity requirement for
the applicable time period based on a Clearing Member's sell
positions versus other Clearing Members at the family level on a
bilateral net basis within a TBA CUSIP. The Clearing Member's
largest liquidity requirement for the past month, adjusted in each
case of a CCLF Event to be no greater than the actual Pool Delivery
Obligation to the defaulting Clearing Member, will represent the
Clearing Member's Defined Capped Liquidity Amount. Firms in this
category will have a defined non-adjustable percentage amount set to
100%. Clearing Members in this category will not be required to
finance any Remaining Financing Amount.
(c)
\39\ Applicable to those Clearing Members that are eligible for
and that have established borrowing privileges at the Federal
Reserve Discount Window or to those Clearing Members who have an
affiliate that is eligible for and has established borrowing
privileges at the Federal Reserve Discount Window.
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Once FICC completes the liquidation of the underlying obligation,
FICC will instruct the Clearing Member to deliver the securities back
to FICC. FICC will then close the repurchase transaction and deliver
the securities to complete settlement on the contractual settlement
date of the liquidating trade. Because FICC would be receiving and
delivering securities on the same day, FICC would not have a liquidity
need resulting from the transaction of a defaulting Clearing Member.
The applicable provisions of Rule 17 outline detailed procedures of
the mechanism that will be followed should FICC declare a Capped
Contingency Liquidity Facility event.
2. Corporation Default
FICC has been approached by some of its dealer Clearing Members who
have requested that FICC add provisions to the rules of the MBSD CCP
\40\ to make explicit the close-out netting of obligations running
between FICC and its Clearing Members in the unlikely event that FICC
becomes insolvent or defaults in its obligations to its Clearing
Members which are included in the proposed rule change. The firms have
stated that the proposed rule changes will provide clarity in their
application of balance sheet netting to their positions with FICC under
U.S. GAAP in accordance with the criteria specified
[[Page 77294]]
in the Financial Accounting Standards Board's Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts (FIN 39). The firms
have stated further that the provisions would allow them to comply with
Basel Accord Standards relating to netting. Specifically, firms are
able to calculate their capital requirements on the basis of their net
credit exposure where they have legally enforceable netting
arrangements with their counterparties, which includes a close-out
netting provision in the event of the default of the counterparty (in
this case, the division of the clearing corporation acting as a central
counterparty).
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\40\ The firms have also requested the filing with respect to
the GSD and this change was submitted as a rule filing and approved
by the Commission. See Securities Exchange Act Release No. 63038
(Oct. 5, 2010), 75 FR 62899 (Oct. 13, 2010) [SR-FICC-2010-04].
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H. Fails Charge
The Treasury Markets Practices Group (the ``TMPG''), a group of
market participants active in the Treasury securities market sponsored
by the Federal Reserve Bank of New York (the ``FRBNY''), has been
addressing the persistent settlement fails in Agency debt and mortgage-
backed securities transactions that have arisen, in part, due to low
interest rates.
To encourage market participants to resolve fails promptly, the
TMPG recommends expanding the applicability of the fails charge (which
currently applies to Treasury securities transactions) to the Agency
debt and MBS markets with the objective of reducing the incidence of
delivery failures and supporting liquidity in these markets.
The fails charge will apply to certain trades settled in the MBSD,
i.e., settlement of pools versus FICC involving failing agency MBS
issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.
Pursuant to the TMPG recommendations, a fails charge will not apply to
TBA and pool level ``round robins.'' \41\
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\41\ ``Round robins'' are a circular series of transactions
between multiple parties where there is no ultimate long and short
position to be settled. For example, if A sells to B and B sells to
C and C sells to A, this group of transactions would constitute a
``round robin''. In a round robin, there is no settlement of
securities, but there is satisfaction of money across all interested
parties. There can be a fail in a round robin transaction when a
deliver obligation arises because the trade submission of certain
members of the round robin do not match. The MBSD will not apply the
fails charge to a round robin if each affected Clearing Member in
the round robin provides the MBSD with the required information to
resolve the trade.
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The proposed charge will be equal to the greater of (a) 0 percent
and (b) 2 percent per annum minus the Federal funds target rate. The
charge accrues each calendar day a fail is outstanding. The MBSD will
not impose a fails charge if delivery occurs on either of the two
business days following the contractual settlement date. The MBSD will
not employ a minimum fail charge amount, but, instead, will apply the
fails charge to any pool for which delivery has not occurred within the
two business day grace period.\42\ Each business day, the MBSD will
provide reports reflecting fail charge amounts to Clearing Members and
will generate a consolidated monthly report at month end. Failing
parties with a net debit (i.e., the fails charge amounts such party
owes exceed the fails charge amounts it is owed) will be required to
pay such net amount in respect of those pools that have settled the
previous month and which are reflected in the previous month's
consolidated month end report by the Class ``B'' payable date (as
established by SIFMA guidelines) of the month following settlement in
conjunction with other cash movements. The fails charge funds received
by the MBSD then will be used to pay Clearing Members with fail net
credits.
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\42\ Fails charges are calculated between legal entities that
are counterparties to one another in an MBS transaction. Because the
MBSD is acting as a counterparty in multiple transactions, the MBSD
may owe a net credit to one counterparty which is financed by the
net debits owed to the MBSD by multiple counterparties (some of
which may be below the minimum $500 threshold identified in the TMPG
recommendations.) To ensure that the MBSD will be in a position to
deliver the net credits it owes, the MBSD is proposing to its
Clearing Members that it will not employ a minimum fails charge for
either debits or credits. Current Participants were informed of this
deviation from the TMPG recommendations via Important Notice (MBS
119.11) and have not objected.
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The MBSD will implement a rate change procedure so that if fails
accrue at one rate and the rate changes, the fail will keep the
original accrual and new fails calculations will be subject to the new
rate. When there is a substitution of the underlying pool, the fails
charge will be calculated pursuant to the above formula, using (in the
formul