Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the Rules Regarding the GCF Repo Service To Adopt Changes Recommended by the Tri-Party Repo Infrastructure Reform Task Force, 38108-38113 [2012-15536]
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38108
Federal Register / Vol. 77, No. 123 / Tuesday, June 26, 2012 / Notices
In Chapter V, an extra closing bracket
was added to the deletions to 2012–036
Exhibit 5. The extra bracket will be
removed to clarify that the entire section
will be deleted. In Chapter VI, Section
4, BX Rules 9000 Series should have
been underlined to denote new text. In
Chapter X, the Exchange added ‘‘See
also BX Rule 9216’’ to the 2012–036
Exhibit 5. The Exchange now proposes
to add that section reference to the end
of the sentence rather than in the
middle of the sentence. In addition, the
following sentence, which follows that
reference, should begin with a capital
‘‘T.’’ Finally, where ‘‘BX Rules 9000
Series’’ was added to the 2012–036
Exhibit 5, the word Series was not
underlined to denote that it was new
text.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the Act,4
in general, and with Section 6(b)(5) of
the Act,5 in particular, in that the
proposal is designed to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The proposed rule
change is consistent with these
provisions in that it will allow the
Exchange to make administrative
changes and correct inadvertent
typographical errors.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
This proposed rule change is filed
pursuant to paragraph (A) of section
19(b)(3) of the Exchange Act 6 and Rule
19b–4(f)(6) thereunder.7 This proposed
rule change does not significantly affect
4 15
U.S.C. 78f.
5 15 U.S.C. 78f(b)(5).
6 15 U.S.C. 78s(b)(3)(A).
7 17 CFR 240.19b–4(f)(6).
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the protection of investors or the public
interest, does not impose any significant
burden on competition, and, by its
terms, does not become operative for 30
days after the date of the filing, or such
shorter time as the Commission may
designate if consistent with the
protection of investors and the public
interest. At any time within 60 days of
the filing of the proposed rule change,
the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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–BX–2012–040 on the
subject line.
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–BX–2012–040. 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
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also will be available for inspection and
copying at the principal offices 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–BX–
2012–040, and should be submitted on
or before July 17, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–15493 Filed 6–25–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67227; File No. SR–FICC–
2012–05]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Proposed Rule Change To
Amend the Rules Regarding the GCF
Repo Service To Adopt Changes
Recommended by the Tri-Party Repo
Infrastructure Reform Task Force
June 20, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder 2
notice is hereby given that on June 8,
2012, the Fixed Income Clearing
Corporation (‘‘FICC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
primarily by FICC. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The purpose of the proposed rule
change is to seek the Commission’s
approval to extend the pilot program
(the ‘‘Pilot Program’’) that is currently in
effect for certain aspects of the GCF
Repo service®.3 FICC is requesting that
the Pilot Program be extended for one
year following the date of the
8 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 GCF Repo is a registered trademark of FICC/
DTCC.
1 15
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Federal Register / Vol. 77, No. 123 / Tuesday, June 26, 2012 / Notices
Commission’s approval of this proposed
rule change filing.4
certain modifications to the Pilot
Program as noted below.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Background: Description of the GCF
Repo Service and History
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 these statements.5
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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(i) On July 12, 2011, FICC submitted
a proposed rule change filing to the
Commission (SR–FICC–2011–05)
proposing to make certain changes to its
GCF Repo service in order to comply
with the recommendations that had
been made by the Tri-Party Repo
Infrastructure Reform Task Force
(‘‘TPR’’), an industry group formed and
sponsored by the Federal Reserve Bank
of New York.6 Because the GCF Repo
service operates as a tri-party
mechanism, FICC was requested to
incorporate changes to the GCF Repo
service to align the service with the
other TPR recommended changes for the
overall tri-party repo market.
The rule change described in SR–
FICC–2011–05 was proposed to be run
as a Pilot Program for one year starting
from the date on which the Commission
approved the filing.7 During this past
year, FICC implemented a portion of the
rule changes that were included in SR–
FICC–2011–05 and wishes to continue
to have these aspects of the GCF Repo
service continue as part of the renewed
Pilot Program. FICC also wishes to make
4 If FICC determines to change the parameters of
the service during the one-year Pilot Program
extension period, it will submit a proposed rule
change filing to the Commission. If FICC seeks to
extend the Pilot Program beyond the one-year
period or proposes to make the Pilot Program
permanent, it will also submit a proposed rule
change filing to the Commission.
5 The Commission has modified the text of the
summaries prepared by FICC.
6 The main purpose of the TPR was to develop
recommendations to address the risk presented by
tri-party repo transactions due to the current
morning reversal or ‘‘unwind’’ process and to move
to a process by which tri-party repo transactions are
collateralized all day.
7 Securities Exchange Act Release No. 34–65213
(August 29, 2011), 76 FR 54824 (September 2,
2011).
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(1) Creation of the GCF Repo Service
The GCF Repo service allows
Government Securities Division
(‘‘GSD’’) dealer members to trade
general collateral repos 8 throughout the
day without requiring intra-day, tradefor-trade settlement on a deliveryversus-payment (DVP) basis. The service
allows the dealers to trade such general
collateral repos, based on rate and term,
throughout the day with inter-dealer
broker netting members on a blind basis.
Standardized, generic CUSIP numbers
have been established exclusively for
GCF Repo processing and are used to
specify the acceptable type of
underlying Fedwire book-entry eligible
collateral, which includes Treasuries,
Agencies, and certain mortgage-backed
securities.9
The GCF Repo service was developed
as part of a collaborative effort among
the Government Securities Clearing
Corporation (‘‘GSCC’’) (GSD’s
predecessor), its two clearing banks
(The Bank of New York Mellon (‘‘BNY’’)
and JPMorgan Chase Bank, National
Association (‘‘Chase’’)), and industry
representatives. GSCC introduced the
GCF Repo service on an intra-clearing
bank basis in 1998.10 Under the
intrabank service, dealers could only
engage in GCF Repo transactions with
other dealers that cleared at the same
clearing bank.
(2) Creation of the Interbank Version of
the GCF Repo Service
In 1999, GSCC expanded the GCF
Repo service to permit dealer
participants to engage in GCF Repo
trading on an interbank basis, meaning
8 A general collateral repo is a repo in which the
underlying securities collateral is nonspecific,
general collateral whose identification is at the
option of the seller. This is in contrast to a specific
collateral repo.
9 In 2009, the Commission approved FICC rule
filing 2009–04 to add debt securities issued under
the Debt Guaranty Program component of the
Federal Deposit Insurance Corporation’s (‘‘FDIC’’)
Temporary Liquidity Guarantee Program (‘‘TLGP’’)
to the GCF Repo Service. See Securities Exchange
Act Release No. 34–59558 (March 11, 2009), 74 FR
11385 (March 17, 2009). The TLGP, one of the steps
taken by the U.S. Government to stabilize the credit
markets and stimulate lending, was designed to
allow banks to issue FDIC-insured debt, ensuring
that the banks would be able to roll over any debt
coming due in the coming months. The guarantee
consists of timely payment of principal and interest.
The expiration of the FDIC’s guarantee is the earlier
of either the maturity date of the issued debt or June
2012.
10 See Securities Exchange Act Release No. 34–
40623 (October 30, 1998), 63 FR 59831 (November
5, 1998).
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38109
that dealers using different clearing
banks could enter into GCF Repo
transactions (on a blind brokered
basis).11 Because dealer members that
participate in the GCF Repo service do
not all clear at the same clearing bank,
introducing the service as an interbank
service necessitated the establishment of
a mechanism to permit after-hours
movements of securities between the
two clearing banks to deal with the fact
that GSCC would likely have
unbalanced net GCF securities and cash
positions within each clearing bank
(that is, it is likely that at the end of GCF
Repo processing each business day, the
dealers in one clearing bank will be net
funds borrowers, while the dealers at
the other clearing bank will be net funds
lenders). To address this issue, GSCC
and its clearing banks established, and
the Commission approved, a legal
mechanism by which securities would
‘‘move’’ across the clearing banks
without the use of the Fedwire
Securities Service (‘‘Fedwire
Securities’’).12 (Movements of cash do
not present the same issue because the
Fedwire Funds Service (‘‘Fedwire
Funds’’) is open later than Fedwire
Securities). Therefore, at the end of the
day, after the GCF net results are
produced, securities are pledged via a
tri-party-like mechanism and the
interbank cash component is moved via
Fedwire Funds. In the morning, the
pledges are unwound, that is, funds are
returned to the net funds lenders and
securities are returned to the net funds
borrowers.
The following simplified example
illustrates the manner in which the GCF
Repo service works on an interbank
basis:
Assume that Dealer B clears at BNY and
Dealer C clears at Chase. Further assume that:
(i) outside of FICC, Dealer B engages in a triparty repo transaction with Party X to obtain
funds and seeks to invest such funds via a
GCF Repo transaction; (ii) outside of FICC,
Dealer C engages in a DVP repo transaction
with Party Y to buy securities and seeks to
finance these securities via a GCF Repo
transaction; and (iii) Dealer B and Dealer C
enter into a GCF Repo transaction (on a blind
basis via a GCF Repo broker) and submit the
trade details to FICC.
At the end of ‘‘Day 1,’’ GCF Repo
collateral must be allocated, i.e., Dealer
B must receive the securities. However,
the securities that Dealer B is to receive
are at Chase and Fedwire Securities is
closed. The after-hours movement
11 See Securities Exchange Act Release No. 34–
41303 (April 16, 1999), 64 FR 20346 (April 26,
1999).
12 See id. for a detailed description of the clearing
bank and FICC accounts needed to effect the afterhour movement of securities.
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Federal Register / Vol. 77, No. 123 / Tuesday, June 26, 2012 / Notices
mechanism permits the securities to be
‘‘sent’’ to Dealer B as follows: FICC will
instruct Chase to allocate to a special
FICC clearance account at Chase
securities in an amount equal to the net
short securities position.
FICC has established on its own books
and records two ‘‘securities accounts’’
as defined in Article 8 of the New York
Uniform Commercial Code, one in the
name of Chase (‘‘FICC Account for
Chase’’) and one in the name of BNY
(‘‘FICC Account for BNY’’). The FICC
Account for Chase is comprised of the
securities in FICC’s special clearance
account maintained by BNY (‘‘FICC
Special Clearance Account at BNY for
Chase’’), and the FICC Account for BNY
is comprised of the securities in FICC’s
special clearance account maintained by
Chase (‘‘FICC Special Clearance
Account at Chase for BNY’’).13 The
establishment of these securities
accounts by FICC in the name of the
clearing banks enables the clearing bank
that is in the net long securities position
to ‘‘receive’’ securities by pledge after
the close of Fedwire Securities. Once
the clearing bank has ‘‘received’’ the
securities by pledge, it can credit them
by book-entry to a FICC GCF Repo
account at that clearing bank and then
to the dealers that clear at that bank that
are net long the securities in connection
with GCF Repo trades.
In the example, Chase, as agent for
FICC, will transmit to BNY a description
of the securities in the FICC Special
Clearance Account at Chase for BNY.
Based on this description, BNY will
transfer funds equal to the funds
borrowed position to the FICC GCF
Repo account at Chase. Upon receipt of
the funds by Chase, Chase will release
any liens it may have on the FICC
Special Clearance Account at Chase for
BNY, and FICC will release any liens it
may have on the FICC Account for BNY
(both of these accounts being comprised
of the same securities). BNY will credit
the securities in the FICC Account for
BNY to FICC’s GCF Repo account at
BNY, and BNY will further credit these
securities to Dealer B, who, as noted, is
in a net long securities position. In the
morning of ‘‘Day 2,’’ all securities and
funds movements occurring on Day 1
are reversed (‘‘unwind’’).
13 FICC has appointed Chase as its agent to
maintain FICC’s books and records with respect to
the BNY securities account, and FICC has
appointed BNY as its agent to maintain FICC’s
books and records with respect to the Chase
securities account.
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(3) Issues With Morning Unwind
Process
In 2003, FICC shifted the GCF Repo
service back to intrabank status only.14
By that time, the service had grown
significantly in participation and
volume. However, with the increase in
use of the interbank service, certain
payments systems risk issues arose from
the inter-bank funds settlements related
to the service, namely, the large
interbank funds movement in the
morning. FICC shifted the service back
to intrabank status to enable
management to study the issues
presented and identify a satisfactory
solution for bringing the service back to
interbank status.
(4) The NFE Filing and Restoration of
Service to Interbank Status
In 2007, FICC submitted to the
Commission a proposed rule change to
address the issues raised by the
interbank morning funds movement and
return the GCF Repo service to
interbank status (‘‘2007 NFE Filing’’).15
The 2007 NFE Filing addressed these
issues by using a hold against a dealer’s
‘‘net free equity’’ (‘‘NFE’’) at the clearing
bank to collateralize its GCF Repo cash
obligation to FICC on an intraday
basis.16
The 2007 NFE Filing replaced the Day
2 morning unwind process with an
alternate process, which is currently in
effect. Specifically, in lieu of making
funds payments, the interbank dealers
grant to FICC a security interest in their
NFE-related collateral equal to their
prorated share of the total interbank
funds amount. FICC, in turn, grants to
the other clearing bank (that was due to
receive the funds) a security interest in
the NFE-related collateral to support the
debit in the FICC account at the clearing
bank. The debit in the FICC account
(‘‘Interbank Cash Amount Debit’’)
occurs because the dealers who are due
to receive funds in the morning must
receive those funds at that time in
return for their release of collateral. The
debit in the FICC account at the clearing
bank gets satisfied during the end of day
GCF Repo settlement process.
Specifically, that day’s new activity
yields a new interbank funds amount
14 See Securities Exchange Act Release No. 34–
48006 (June 10, 2003), 68 FR 35745 (June 16, 2003).
15 See Securities Exchange Act Release No. 34–
57652 (April 11, 2008), 73 FR 20999 (April 17,
2008).
16 NFE is a methodology that clearing banks use
to determine whether an account holder (such as a
dealer) has sufficient collateral to enter into a
specific transaction. NFE allows the clearing bank
to place a limit on its customer’s activity by
calculating a value on the customer’s balances at
the bank. Bank customers have the ability to
monitor their NFE balance throughout the day.
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that will move at end of day—however,
this amount gets netted with the amount
that would have been due in the
morning, thus further reducing the
interbank funds movement. The NFE
holds are released when the interbank
funds movement is made at end of day.
The 2007 NFE Filing did not involve
any changes to the after-hours
movement of securities occurring at the
end of the day on Day 1.
Using the example above:
On the morning of Day 2, Dealer C who
needs to return funds in the unwind, instead
of returning the funds in the morning, grants
to FICC a security interest in Dealer C’s NFErelated collateral equal to its funds
movement (it is assumed only one GCF Repo
transaction took place in this simplified
example). FICC, in turn, grants BNY (that was
due to receive the funds) a security interest
in the NFE-related collateral to support the
debit in the FICC account at BNY. As noted
above, the debit in FICC’s account at BNY
arises because, under the current processing,
Dealer B must receive its funds during the
morning unwind. The FICC debit is then
satisfied during the end of day GCF Repo
settlement process.
As part of the 2007 NFE Filing, FICC
imposed certain additional risk
management measures with respect to
the GCF Repo service. First, FICC
imposed a collateral premium (‘‘GCF
Premium Charge’’) on the GCF Repo
portion of the Clearing Fund deposits of
all GCF participants to further protect
FICC in the event of an intra-day default
of a GCF Repo participant. FICC
requires GCF Repo participants to
submit a quarterly ‘‘snapshot’’ of their
holdings by asset type to enable risk
management staff to determine the
appropriate Clearing Fund premium. As
with all other instances of late
submissions of required information,
members who do not submit this
required information by the deadlines
established by FICC are subject to a fine
and an increased Clearing Fund
premium.
Second, the 2007 NFE Filing
addressed the situation where FICC
becomes concerned about the volume of
interbank GCF Repo activity. Such a
concern might arise, for example, if
market events were to cause dealers to
turn to the GCF Repo service for
increased funding at levels beyond
normal processing. The 2007 NFE Filing
provides FICC with the discretion to
institute risk mitigation and appropriate
disincentive measures in order to bring
GCF Repo levels to a comfortable level
from a risk management perspective.17
17 Specifically, the 2007 NFE Filing introduced
the term ‘‘GCF Repo Event,’’ which will be declared
by FICC if either of the following occurs: (i) The
GCF interbank funds amount exceeds five times the
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Proposed Changes to the GCF Repo
Service To Implement the TPR’s
Recommendations
In SR–FICC–2011–05, FICC proposed
the following rule changes with respect
to the GCF Repo service to address the
TPR’s Recommendations:
(1) (a) To move the Day 2 unwind
from 7:30 a.m. to 3:30 p.m.; (b) to move
the NFE process 18 from morning to a
time established by FICC as announced
by notice to all members; 19 (c) to move
the cut-off time of GCF Repo
submissions from 3:35 p.m. to 3:00 p.m.;
and (d) to move the cut-off time for
dealer affirmation or disaffirmation from
3:45 p.m. to 3:00 p.m.; and
(2) To establish rules for intraday GCF
Repo collateral substitutions (i.e., SR–
FICC–2011–05 stated that with respect
to interbank GCF Repo transactions, the
substitution process would only permit
cash as an initial matter to
accommodate current processing
systems, however, as noted below,
following the approval of this proposed
rule change filing, the substitution
process will permit cash and/or
securities).
FICC has implemented the proposed
changes referred to in subsections 1(c)
and 1(d) above. FICC has not yet
implemented the proposed changes
referred to in subsections 1(a), 1(b) and
2 above. FICC is seeking the
Commission’s approval to extend the
Pilot Program for all of these changes for
an additional year as noted above. FICC
is working with its clearing banks with
respect to the implementation of the
average interbank funds amount over the previous
ninety days for three consecutive days; or (ii) the
GCF interbank funds amount exceeds fifty percent
of the amount of GCF Repo collateral pledged for
three consecutive days. FICC reviews these figures
on a semi-annual basis to determine whether they
remain adequate. FICC also has the right to declare
a GCF Repo Event in any other circumstances
where it is concerned about GCF Repo volumes and
believes it is necessary to declare a GCF Repo Event
in order to protect itself and its members. FICC will
inform its members about the declaration of the
GCF Repo Event via important notice. FICC will
also inform the Commission about the declaration
of the GCF Repo Event.
18 No other changes are being proposed to the
NFE process that was in place by the 2007 NFE
Filing; the risk management measures that were put
in place by the 2007 NFE Filing remain in place
with the present proposal.
19 SR–FICC–2011–05 noted that the possible time
range would be between 8 a.m. and 1 p.m. to
coincide with the collateral substitution mechanism
that was being developed between FICC and its
clearing banks. FICC wishes to clarify that the 8
a.m. to 1 p.m. proposed time range in SR–FICC–
2011–05 referred to the clearing bank hold on the
FICC interest in the NFE (i.e., as part of the NFE
process, FICC grants to the other clearing bank (that
was due to receive the funds) a security interest in
the NFE—related collateral to support the debit in
the FICC account at the clearing bank). With respect
to the NFE hold on the dealers, please see footnote
21 below.
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changes that have not yet been
implemented.
(1) Proposed Change Regarding the
Morning Unwind and Related Rule
Changes
The TPR has recommended that the
Day 2 unwind for all tri-party
transactions be moved from the morning
to 3:30 p.m. The TPR has made this
recommendation in order to reduce the
clearing banks’ intraday credit exposure
to the dealers. As previously stated,
because the GCF Repo service is
essentially a tri-party repo mechanism,
FICC has also been requested by the
TPR to accommodate this time change.
For the GSD rules, this necessitates a
change to the GSD’s ‘‘Schedule of GCF
Timeframes’’ (‘‘Schedule’’). Specifically,
the 7:30 a.m. time in the Schedule will
be deleted and the language therein
proposed to be moved to a new time of
3:30 p.m. on the Schedule.
The change to the time of the
intrabank unwind also necessitates a
change to the cut-off time for GCF Repo
trade submissions, which is currently
3:35 p.m. in the Schedule. FICC is
proposing to amend the Schedule to
change the cut-off time to 3 p.m. to
allow FICC to submit files to the
clearing banks which, in turn, will
provide files to the dealers by 3:30 p.m.;
this will permit the dealers to have a
complete picture of their positions as
the unwind occurs at 3:30 p.m. The 3:45
p.m. cutoff for dealer affirmation or
disaffirmation that is in the current
Schedule will move to 3 p.m. so that the
new 3 p.m. cutoff for submissions will
also now be the cutoff for dealer
affirmations and disaffirmations.20
Because the Day 2 unwind is
proposed to move from the morning to
3:30 p.m. and because the NFE process
established by the 2007 NFE Filing is
tied to the moment of the interbank
unwind, the NFE process will also move
to the time established by FICC as
announced by notice to all members.21
Because the NFE process is a legal
process and not an operational process,
it is not reflected on the Schedule. A
20 This change updates the current Schedule to
provide that the cutoff for submissions and dealer
affirmations/disaffirmations is at the same time; the
current practice is inconsistent with the current
Schedule and the proposed rule change would
remedy this inconsistency.
21 Currently, the NFE hold is from the time the
collateral is returned to the repo dealer
(approximately 7:30 a.m.) until the time the funds
move between the two clearing banks
(approximately 5 p.m.). When the systems
processing for the tri-party reform effort continues
on the part of the clearing banks, the unwind will
move to 3:30 p.m. and the funds will continue to
move between the two clearing banks at 5 p.m.;
when this occurs, the NFE hold which applies to
dealers will be between 3:30 p.m. and 5 p.m.
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38111
change is needed in Section 3 of Rule
20 to delete the reference to the
‘‘morning’’ timeframe on Day 2 with
respect to the NFE process and to add
language referencing ‘‘at the time
established by the Corporation.’’
(2) Proposed Change Regarding Intraday
GCF Repo Securities Collateral
Substitutions
As a result of the time change of the
unwind (i.e., the reversal on Day 2 of
collateral allocations established by
FICC for each netting member’s GCF net
funds borrower positions and GCF net
funds lender positions on Day 1) to 3:30
p.m., the provider of GCF Repo
securities collateral in a GCF Repo
transaction on Day 1 will no longer have
access to such securities at the
beginning of Day 2. Therefore, during
Day 2 prior to the unwind of the Day 1
collateral allocations, the provider of
GCF Repo securities collateral (Dealer C,
in the example) needs a substitution
mechanism for the return of its posted
GCF Repo securities collateral in order
to make securities deliveries for
utilization of such securities in its
business activities. (In the example,
Dealer C may need to return the
securities to Party Y depending upon
the terms of their transaction). FICC is
proposing to establish a substitution
process for this purpose in conjunction
with its clearing banks. The language for
the substitution mechanism is proposed
to be added to Section 3 of GSD Rule 20.
The proposed rule change provides that
all requests for substitution for the GCF
Repo securities collateral must be
submitted by the provider of the GCF
Repo securities collateral (i.e., Dealer C)
by the applicable deadline on Day 2 (the
‘‘substitution deadline’’).22
Substitutions on Intrabank GCF Repos
If the GCF Repo transaction is
between dealer counterparties effecting
the transaction through the same
clearing bank (i.e., on an intra-clearing
bank basis and in our example Dealer C
and other dealers clearing at Chase), on
Day 2 such clearing bank will process
each substitution request of the provider
of GCF Repo securities collateral (i.e.,
Dealer C) submitted prior to the
substitution deadline promptly upon
receipt of such request. The return of
22 FICC will establish such deadline prior to the
implementation of the changes to this service in
conjunction with the clearing banks and the Federal
Reserve in light of market circumstances. The initial
substitution deadline is anticipated to be 1 p.m.;
however, this will be finalized with the Federal
Reserve and the clearing banks. The possible time
range will be between 8 a.m. and 1 p.m. FICC will
provide members advanced notice of the
substitution deadline and any future changes
thereto by important notice.
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Federal Register / Vol. 77, No. 123 / Tuesday, June 26, 2012 / Notices
the GCF Repo securities collateral in
exchange for cash and/or eligible
securities of equivalent value can be
effected by simple debits and credits to
the accounts of the GCF Repo dealer
counterparties at the clearing agent bank
(i.e., in the example, Chase). Eligible
securities for this purpose will be the
same as those currently permitted under
the GSD rules for collateral allocations,
namely, Comparable Securities,23 (ii)
Other Acceptable Securities,24 or (iii)
U.S. Treasury bills, notes or bonds
maturing in a time frame no greater than
that of the securities that have been
traded (except where such traded
securities are U.S. Treasury bills,
substitution may be with Comparable
Securities and/or cash only).
rmajette on DSK2TPTVN1PROD with NOTICES
Substitutions on Interbank GCF Repos
For a GCF Repo that was processed on
an interbank basis and to accommodate
a potential substitution request, FICC
proposes to initiate a debit of the
securities in the account of the lender
through the FICC GCF Repo accounts at
the clearing bank of the lender and the
FICC GCF Repo account at the clearing
bank of the borrower (‘‘Interbank
Movement’’). This Interbank Movement
is being done so that a borrower who
elects to substitute collateral will have
access to the collateral for which it is
substituting. The Interbank Movement is
expected to occur in the morning,
though the clearing banks and FICC
have the capability to have the
Interbank Movement occur at any point
during the day up until 2:30 p.m.
During the Pilot Program, FICC and the
clearing banks will unwind the
intrabank GCF Repo transactions at 3:30
p.m. FICC and the clearing banks will
determine the most appropriate
timeframe for the Interbank Movement
process to occur.
In the example above, the GCF Repo
securities collateral will be debited from
the securities account of the receiver of
the collateral (i.e., Dealer B) at its
clearing bank (i.e., BNY), and from the
23 The GSD rules define ‘‘Comparable Securities’’
as follows: The term ‘‘Comparable Securities’’
means, with respect to a security or securities that
are represented by a particular Generic CUSIP
Number, any other security or securities that are
represented by the same Generic CUSIP Number.
24 The GSD rules define ‘‘Other Acceptable
Securities’’ as follows: The term ‘‘Other Acceptable
Securities’’ means, with respect to: (an) Adjustablerate mortgage-backed security or securities issued
by Ginnie Mae, any fixed-rate mortgage-backed
security or securities issued by Ginnie Mae, or (an)
adjustable-rate mortgage-backed security or
securities issued by either Fannie Mae or Freddie
Mac: (a) Any fixed-rate mortgage-backed security or
securities issued by Fannie Mae and Freddie Mac,
(b) any fixed-rate mortgage-backed security or
securities issued by Ginnie Mae, or (c) any
adjustable-rate mortgage-backed security or
securities issued by Ginnie Mae.
VerDate Mar<15>2010
15:33 Jun 25, 2012
Jkt 226001
FICC Account for BNY. If a substitution
request is received by the clearing bank
(i.e., Chase) of the provider of GCF Repo
securities collateral, prior to the
substitution deadline at a time specified
in FICC’s procedures,25 that clearing
bank will process the substitution
request by releasing the GCF Repo
securities collateral from the FICC GCF
Repo account at Chase and crediting it
to the account of the provider of GCF
Repo securities collateral (i.e., Dealer C).
All cash and/or securities substituted
for the GCF Repo securities collateral
being released will be credited to FICC’s
GCF Repo account at the clearing bank
(i.e., Chase).
Simultaneously, with the debit of the
GCF Repo securities collateral from the
account at the clearing bank (i.e., BNY)
of the original receiver of GCF Repo
securities collateral (i.e., Dealer B), for
purposes of making payment to the
original receiver of securities collateral
(i.e., Dealer B), such clearing bank will
effect a cash debit equal to the value of
the securities collateral in FICC’s GCF
Repo account at such clearing bank and
will credit the account of the original
receiver of securities collateral (i.e.,
Dealer B) at such clearing bank with
such cash amount. (This is because
when Dealer B is debited the securities,
Dealer B must receive the funds.) In
order to secure FICC’s obligation to
repay the balance in FICC’s GCF Repo
account at such clearing bank (i.e.,
BNY), FICC will grant to such clearing
bank a security interest in the cash and/
or securities substituted for the GCF
securities collateral in FICC’s GCF repo
account at the other clearing bank (i.e.,
Chase).
Using the example from above,
assume that Dealer C submits a
substitution notification—it requires the
securities collateral that has been
pledged to Dealer B and will substitute
cash and/or securities. BNY will debit
the securities from Dealer B’s account
and the relevant liens will be released
so that the securities are in FICC’s
account at Chase. Chase will credit the
securities to Dealer C’s account and the
cash and/or securities that Dealer C uses
for its collateral substitution will be
credited by Chase to FICC’s account at
25 This timeframe will also be established in
consultation with the clearing banks and the
Federal Reserve. The parties are considering
whether to have the substitution process be
accomplished in two batches during the day
depending upon the time of submission of the
notifications for substitution. In any event,
substitution requests will be subject to the
substitution deadline. The details of the batches, if
applied, will be announced to members by
important notice. The deadline for submission of
GCF Repo substitution requests will be the same for
intrabank and interbank processing.
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
Chase. From Dealer B’s perspective,
when BNY debits the securities from
Dealer B’s account, Dealer B is supposed
to receive the funds—but as noted, the
funds are at Chase. BNY will credit the
funds to Dealer B’s account and debit
FICC’s account at BNY.
At this point in the example, FICC is
running a credit at Chase and a debit at
BNY. In order to secure FICC’s debit at
BNY, FICC will grant a security interest
in the funds in the FICC account at
Chase.
For substitutions that occur with
respect to GCF Repo transactions that
were processed on an inter-clearing
bank basis, FICC and the clearing banks
will permit cash substitutions as noted
in SR–FICC–2011–05. However, as
discussions have developed between
FICC and its clearing banks, it has been
determined that cash and/or securities
may be used for substitutions. The
proposed rule change provides FICC
with flexibility in this regard by
referring to FICC’s procedures. When
interbank securities substitutions begin
to be permitted, FICC will announce
this to members by important notice.
Other Rule Changes
FICC is also proposing to make
technical clean-up changes to Section 7
of GSD Rule 20, which relate to the GCF
Repo collateral process. Specifically, a
correction is being made to change
references to the defined term
‘‘Security’’ to ‘‘security’’ to conform to
the use of ‘‘security’’ throughout the
rule. The proposed rule change also
introduces a term that previously had
not been included in the rules
inadvertently, ‘‘GCF Collateral Excess
Account.’’ This term is defined in the
proposed rule change as ‘‘the account
established by a GCF Custodian Bank in
the name of the Corporation to hold
securities it credits to the GCF
Securities Account the Corporation
establishes for another GCF Clearing
Bank.’’
(ii) FICC believes the proposed rule
changes are consistent with the
requirements of Section 17A of the
Act 26 and the rules and regulations
thereunder applicable to FICC because
the rule amendments are designed to
promote the prompt and accurate
clearance and settlement of security
transactions and assure the safeguarding
of securities and funds which are in the
custody or control of FICC by aligning
the GCF Repo service with
recommendations being made by the
TPR to address risks in the overall triparty repo market, which will serve to
26 15
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U.S.C. 78q–1.
26JNN1
Federal Register / Vol. 77, No. 123 / Tuesday, June 26, 2012 / Notices
safeguard the securities and funds for
which FICC is responsible.
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
FICC does not believe that the
proposed rule change would 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 rule change have not 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
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the 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:
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 Section, 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 filings
will also be available for inspection and
copying at the principal office of FICC
and on FICC’s Web site at https://
www.dtcc.com/downloads/legal/
rule_filings/2012/ficc/2012–05.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 SR–FICC–2012–05 and should
be submitted on or before July 17, 2012.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.27
Kevin O’Neill,
Deputy Secretary.
[FR Doc. 2012–15536 Filed 6–25–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
• 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–2012–05 on the
subject line.
Self-Regulatory Organizations; EDGA
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend EDGA Rules
To Add the Mid-Point Discretionary
Order
Paper Comments
rmajette on DSK2TPTVN1PROD with NOTICES
Electronic Comments
[Release No. 34–67226; File No. SR–EDGA–
2012–22]
June 20, 2012.
• 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–2012–05. 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
VerDate Mar<15>2010
15:33 Jun 25, 2012
Jkt 226001
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 8,
2012, the EDGA Exchange, Inc. (the
‘‘Exchange’’ or the ‘‘EDGA’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
EDGA Exchange, Inc. (‘‘EDGA’’ or the
‘‘Exchange’’) proposes to amend
Exchange Rule 11.5(c) to add a new
order type, the Mid-Point Discretionary
Order, to the rule. In addition, the
Exchange proposes to amend Exchange
Rule 11.8(a)(2)(C) to reflect the priority
that a Mid-Point Discretionary Order
would have under certain
circumstances. The text of the proposed
rule changes are attached as Exhibit 5
and are available on the Exchange’s Web
site at www.directedge.com, at the
Exchange’s principal office, and at the
Public Reference Room of the
Commission.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
self-regulatory organization 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
Purpose
1. Proposed Amendment to Rule 11.5(c)
Exchange Rule 11.5(c) describes the
Exchange’s current order types. In order
to provide additional flexibility and
increased functionality to its System 3
and its Users,4 the Exchange proposes to
add a new order type, the Mid-Point
Discretionary Order (the ‘‘MDO’’), to
Rule 11.5(c)(17). MDOs to buy would be
displayed at and pegged to the national
best bid (the ‘‘NBB 5’’), with discretion
to execute at prices up to and including
the mid-point of the National Best Bid
3 As
defined in Exchange Rule 1.5(cc)
defined in Exchange Rule 1.5(ee).
5 As defined in Exchange Rule 1.5(o) and Rule
600(b)(42) of Regulation NMS under the Securities
Exchange Act of 1934.
4 As
27 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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26JNN1
]]>Agencies
[Federal Register Volume 77, Number 123 (Tuesday, June 26, 2012)]
[Notices]
[Pages 38108-38113]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15536]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67227; File No. SR-FICC-2012-05]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Amend the Rules Regarding
the GCF Repo Service To Adopt Changes Recommended by the Tri-Party Repo
Infrastructure Reform Task Force
June 20, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that
on June 8, 2012, the Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared primarily by FICC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to seek the Commission's
approval to extend the pilot program (the ``Pilot Program'') that is
currently in effect for certain aspects of the GCF Repo
service[supreg].\3\ FICC is requesting that the Pilot Program be
extended for one year following the date of the
[[Page 38109]]
Commission's approval of this proposed rule change filing.\4\
---------------------------------------------------------------------------
\3\ GCF Repo is a registered trademark of FICC/DTCC.
\4\ If FICC determines to change the parameters of the service
during the one-year Pilot Program extension period, it will submit a
proposed rule change filing to the Commission. If FICC seeks to
extend the Pilot Program beyond the one-year period or proposes to
make the Pilot Program permanent, it will also submit a proposed
rule change filing to the Commission.
---------------------------------------------------------------------------
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 these
statements.\5\
---------------------------------------------------------------------------
\5\ The Commission has modified the text of the summaries
prepared by FICC.
---------------------------------------------------------------------------
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(i) On July 12, 2011, FICC submitted a proposed rule change filing
to the Commission (SR-FICC-2011-05) proposing to make certain changes
to its GCF Repo service in order to comply with the recommendations
that had been made by the Tri-Party Repo Infrastructure Reform Task
Force (``TPR''), an industry group formed and sponsored by the Federal
Reserve Bank of New York.\6\ Because the GCF Repo service operates as a
tri-party mechanism, FICC was requested to incorporate changes to the
GCF Repo service to align the service with the other TPR recommended
changes for the overall tri-party repo market.
---------------------------------------------------------------------------
\6\ The main purpose of the TPR was to develop recommendations
to address the risk presented by tri-party repo transactions due to
the current morning reversal or ``unwind'' process and to move to a
process by which tri-party repo transactions are collateralized all
day.
---------------------------------------------------------------------------
The rule change described in SR-FICC-2011-05 was proposed to be run
as a Pilot Program for one year starting from the date on which the
Commission approved the filing.\7\ During this past year, FICC
implemented a portion of the rule changes that were included in SR-
FICC-2011-05 and wishes to continue to have these aspects of the GCF
Repo service continue as part of the renewed Pilot Program. FICC also
wishes to make certain modifications to the Pilot Program as noted
below.
---------------------------------------------------------------------------
\7\ Securities Exchange Act Release No. 34-65213 (August 29,
2011), 76 FR 54824 (September 2, 2011).
---------------------------------------------------------------------------
Background: Description of the GCF Repo Service and History
(1) Creation of the GCF Repo Service
The GCF Repo service allows Government Securities Division
(``GSD'') dealer members to trade general collateral repos \8\
throughout the day without requiring intra-day, trade-for-trade
settlement on a delivery-versus-payment (DVP) basis. The service allows
the dealers to trade such general collateral repos, based on rate and
term, throughout the day with inter-dealer broker netting members on a
blind basis. Standardized, generic CUSIP numbers have been established
exclusively for GCF Repo processing and are used to specify the
acceptable type of underlying Fedwire book-entry eligible collateral,
which includes Treasuries, Agencies, and certain mortgage-backed
securities.\9\
---------------------------------------------------------------------------
\8\ A general collateral repo is a repo in which the underlying
securities collateral is nonspecific, general collateral whose
identification is at the option of the seller. This is in contrast
to a specific collateral repo.
\9\ In 2009, the Commission approved FICC rule filing 2009-04 to
add debt securities issued under the Debt Guaranty Program component
of the Federal Deposit Insurance Corporation's (``FDIC'') Temporary
Liquidity Guarantee Program (``TLGP'') to the GCF Repo Service. See
Securities Exchange Act Release No. 34-59558 (March 11, 2009), 74 FR
11385 (March 17, 2009). The TLGP, one of the steps taken by the U.S.
Government to stabilize the credit markets and stimulate lending,
was designed to allow banks to issue FDIC-insured debt, ensuring
that the banks would be able to roll over any debt coming due in the
coming months. The guarantee consists of timely payment of principal
and interest. The expiration of the FDIC's guarantee is the earlier
of either the maturity date of the issued debt or June 2012.
---------------------------------------------------------------------------
The GCF Repo service was developed as part of a collaborative
effort among the Government Securities Clearing Corporation (``GSCC'')
(GSD's predecessor), its two clearing banks (The Bank of New York
Mellon (``BNY'') and JPMorgan Chase Bank, National Association
(``Chase'')), and industry representatives. GSCC introduced the GCF
Repo service on an intra-clearing bank basis in 1998.\10\ Under the
intrabank service, dealers could only engage in GCF Repo transactions
with other dealers that cleared at the same clearing bank.
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 34-40623 (October
30, 1998), 63 FR 59831 (November 5, 1998).
---------------------------------------------------------------------------
(2) Creation of the Interbank Version of the GCF Repo Service
In 1999, GSCC expanded the GCF Repo service to permit dealer
participants to engage in GCF Repo trading on an interbank basis,
meaning that dealers using different clearing banks could enter into
GCF Repo transactions (on a blind brokered basis).\11\ Because dealer
members that participate in the GCF Repo service do not all clear at
the same clearing bank, introducing the service as an interbank service
necessitated the establishment of a mechanism to permit after-hours
movements of securities between the two clearing banks to deal with the
fact that GSCC would likely have unbalanced net GCF securities and cash
positions within each clearing bank (that is, it is likely that at the
end of GCF Repo processing each business day, the dealers in one
clearing bank will be net funds borrowers, while the dealers at the
other clearing bank will be net funds lenders). To address this issue,
GSCC and its clearing banks established, and the Commission approved, a
legal mechanism by which securities would ``move'' across the clearing
banks without the use of the Fedwire Securities Service (``Fedwire
Securities'').\12\ (Movements of cash do not present the same issue
because the Fedwire Funds Service (``Fedwire Funds'') is open later
than Fedwire Securities). Therefore, at the end of the day, after the
GCF net results are produced, securities are pledged via a tri-party-
like mechanism and the interbank cash component is moved via Fedwire
Funds. In the morning, the pledges are unwound, that is, funds are
returned to the net funds lenders and securities are returned to the
net funds borrowers.
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release No. 34-41303 (April 16,
1999), 64 FR 20346 (April 26, 1999).
\12\ See id. for a detailed description of the clearing bank and
FICC accounts needed to effect the after-hour movement of
securities.
---------------------------------------------------------------------------
The following simplified example illustrates the manner in which
the GCF Repo service works on an interbank basis:
Assume that Dealer B clears at BNY and Dealer C clears at Chase.
Further assume that: (i) outside of FICC, Dealer B engages in a tri-
party repo transaction with Party X to obtain funds and seeks to
invest such funds via a GCF Repo transaction; (ii) outside of FICC,
Dealer C engages in a DVP repo transaction with Party Y to buy
securities and seeks to finance these securities via a GCF Repo
transaction; and (iii) Dealer B and Dealer C enter into a GCF Repo
transaction (on a blind basis via a GCF Repo broker) and submit the
trade details to FICC.
At the end of ``Day 1,'' GCF Repo collateral must be allocated,
i.e., Dealer B must receive the securities. However, the securities
that Dealer B is to receive are at Chase and Fedwire Securities is
closed. The after-hours movement
[[Page 38110]]
mechanism permits the securities to be ``sent'' to Dealer B as follows:
FICC will instruct Chase to allocate to a special FICC clearance
account at Chase securities in an amount equal to the net short
securities position.
FICC has established on its own books and records two ``securities
accounts'' as defined in Article 8 of the New York Uniform Commercial
Code, one in the name of Chase (``FICC Account for Chase'') and one in
the name of BNY (``FICC Account for BNY''). The FICC Account for Chase
is comprised of the securities in FICC's special clearance account
maintained by BNY (``FICC Special Clearance Account at BNY for
Chase''), and the FICC Account for BNY is comprised of the securities
in FICC's special clearance account maintained by Chase (``FICC Special
Clearance Account at Chase for BNY'').\13\ The establishment of these
securities accounts by FICC in the name of the clearing banks enables
the clearing bank that is in the net long securities position to
``receive'' securities by pledge after the close of Fedwire Securities.
Once the clearing bank has ``received'' the securities by pledge, it
can credit them by book-entry to a FICC GCF Repo account at that
clearing bank and then to the dealers that clear at that bank that are
net long the securities in connection with GCF Repo trades.
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\13\ FICC has appointed Chase as its agent to maintain FICC's
books and records with respect to the BNY securities account, and
FICC has appointed BNY as its agent to maintain FICC's books and
records with respect to the Chase securities account.
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In the example, Chase, as agent for FICC, will transmit to BNY a
description of the securities in the FICC Special Clearance Account at
Chase for BNY. Based on this description, BNY will transfer funds equal
to the funds borrowed position to the FICC GCF Repo account at Chase.
Upon receipt of the funds by Chase, Chase will release any liens it may
have on the FICC Special Clearance Account at Chase for BNY, and FICC
will release any liens it may have on the FICC Account for BNY (both of
these accounts being comprised of the same securities). BNY will credit
the securities in the FICC Account for BNY to FICC's GCF Repo account
at BNY, and BNY will further credit these securities to Dealer B, who,
as noted, is in a net long securities position. In the morning of ``Day
2,'' all securities and funds movements occurring on Day 1 are reversed
(``unwind'').
(3) Issues With Morning Unwind Process
In 2003, FICC shifted the GCF Repo service back to intrabank status
only.\14\ By that time, the service had grown significantly in
participation and volume. However, with the increase in use of the
interbank service, certain payments systems risk issues arose from the
inter-bank funds settlements related to the service, namely, the large
interbank funds movement in the morning. FICC shifted the service back
to intrabank status to enable management to study the issues presented
and identify a satisfactory solution for bringing the service back to
interbank status.
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\14\ See Securities Exchange Act Release No. 34-48006 (June 10,
2003), 68 FR 35745 (June 16, 2003).
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(4) The NFE Filing and Restoration of Service to Interbank Status
In 2007, FICC submitted to the Commission a proposed rule change to
address the issues raised by the interbank morning funds movement and
return the GCF Repo service to interbank status (``2007 NFE
Filing'').\15\ The 2007 NFE Filing addressed these issues by using a
hold against a dealer's ``net free equity'' (``NFE'') at the clearing
bank to collateralize its GCF Repo cash obligation to FICC on an
intraday basis.\16\
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\15\ See Securities Exchange Act Release No. 34-57652 (April 11,
2008), 73 FR 20999 (April 17, 2008).
\16\ NFE is a methodology that clearing banks use to determine
whether an account holder (such as a dealer) has sufficient
collateral to enter into a specific transaction. NFE allows the
clearing bank to place a limit on its customer's activity by
calculating a value on the customer's balances at the bank. Bank
customers have the ability to monitor their NFE balance throughout
the day.
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The 2007 NFE Filing replaced the Day 2 morning unwind process with
an alternate process, which is currently in effect. Specifically, in
lieu of making funds payments, the interbank dealers grant to FICC a
security interest in their NFE-related collateral equal to their
prorated share of the total interbank funds amount. FICC, in turn,
grants to the other clearing bank (that was due to receive the funds) a
security interest in the NFE-related collateral to support the debit in
the FICC account at the clearing bank. The debit in the FICC account
(``Interbank Cash Amount Debit'') occurs because the dealers who are
due to receive funds in the morning must receive those funds at that
time in return for their release of collateral. The debit in the FICC
account at the clearing bank gets satisfied during the end of day GCF
Repo settlement process. Specifically, that day's new activity yields a
new interbank funds amount that will move at end of day--however, this
amount gets netted with the amount that would have been due in the
morning, thus further reducing the interbank funds movement. The NFE
holds are released when the interbank funds movement is made at end of
day. The 2007 NFE Filing did not involve any changes to the after-hours
movement of securities occurring at the end of the day on Day 1.
Using the example above:
On the morning of Day 2, Dealer C who needs to return funds in
the unwind, instead of returning the funds in the morning, grants to
FICC a security interest in Dealer C's NFE-related collateral equal
to its funds movement (it is assumed only one GCF Repo transaction
took place in this simplified example). FICC, in turn, grants BNY
(that was due to receive the funds) a security interest in the NFE-
related collateral to support the debit in the FICC account at BNY.
As noted above, the debit in FICC's account at BNY arises because,
under the current processing, Dealer B must receive its funds during
the morning unwind. The FICC debit is then satisfied during the end
of day GCF Repo settlement process.
As part of the 2007 NFE Filing, FICC imposed certain additional
risk management measures with respect to the GCF Repo service. First,
FICC imposed a collateral premium (``GCF Premium Charge'') on the GCF
Repo portion of the Clearing Fund deposits of all GCF participants to
further protect FICC in the event of an intra-day default of a GCF Repo
participant. FICC requires GCF Repo participants to submit a quarterly
``snapshot'' of their holdings by asset type to enable risk management
staff to determine the appropriate Clearing Fund premium. As with all
other instances of late submissions of required information, members
who do not submit this required information by the deadlines
established by FICC are subject to a fine and an increased Clearing
Fund premium.
Second, the 2007 NFE Filing addressed the situation where FICC
becomes concerned about the volume of interbank GCF Repo activity. Such
a concern might arise, for example, if market events were to cause
dealers to turn to the GCF Repo service for increased funding at levels
beyond normal processing. The 2007 NFE Filing provides FICC with the
discretion to institute risk mitigation and appropriate disincentive
measures in order to bring GCF Repo levels to a comfortable level from
a risk management perspective.\17\
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\17\ Specifically, the 2007 NFE Filing introduced the term ``GCF
Repo Event,'' which will be declared by FICC if either of the
following occurs: (i) The GCF interbank funds amount exceeds five
times the average interbank funds amount over the previous ninety
days for three consecutive days; or (ii) the GCF interbank funds
amount exceeds fifty percent of the amount of GCF Repo collateral
pledged for three consecutive days. FICC reviews these figures on a
semi-annual basis to determine whether they remain adequate. FICC
also has the right to declare a GCF Repo Event in any other
circumstances where it is concerned about GCF Repo volumes and
believes it is necessary to declare a GCF Repo Event in order to
protect itself and its members. FICC will inform its members about
the declaration of the GCF Repo Event via important notice. FICC
will also inform the Commission about the declaration of the GCF
Repo Event.
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[[Page 38111]]
Proposed Changes to the GCF Repo Service To Implement the TPR's
Recommendations
In SR-FICC-2011-05, FICC proposed the following rule changes with
respect to the GCF Repo service to address the TPR's Recommendations:
(1) (a) To move the Day 2 unwind from 7:30 a.m. to 3:30 p.m.; (b)
to move the NFE process \18\ from morning to a time established by FICC
as announced by notice to all members; \19\ (c) to move the cut-off
time of GCF Repo submissions from 3:35 p.m. to 3:00 p.m.; and (d) to
move the cut-off time for dealer affirmation or disaffirmation from
3:45 p.m. to 3:00 p.m.; and
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\18\ No other changes are being proposed to the NFE process that
was in place by the 2007 NFE Filing; the risk management measures
that were put in place by the 2007 NFE Filing remain in place with
the present proposal.
\19\ SR-FICC-2011-05 noted that the possible time range would be
between 8 a.m. and 1 p.m. to coincide with the collateral
substitution mechanism that was being developed between FICC and its
clearing banks. FICC wishes to clarify that the 8 a.m. to 1 p.m.
proposed time range in SR-FICC-2011-05 referred to the clearing bank
hold on the FICC interest in the NFE (i.e., as part of the NFE
process, FICC grants to the other clearing bank (that was due to
receive the funds) a security interest in the NFE--related
collateral to support the debit in the FICC account at the clearing
bank). With respect to the NFE hold on the dealers, please see
footnote 21 below.
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(2) To establish rules for intraday GCF Repo collateral
substitutions (i.e., SR-FICC-2011-05 stated that with respect to
interbank GCF Repo transactions, the substitution process would only
permit cash as an initial matter to accommodate current processing
systems, however, as noted below, following the approval of this
proposed rule change filing, the substitution process will permit cash
and/or securities).
FICC has implemented the proposed changes referred to in
subsections 1(c) and 1(d) above. FICC has not yet implemented the
proposed changes referred to in subsections 1(a), 1(b) and 2 above.
FICC is seeking the Commission's approval to extend the Pilot Program
for all of these changes for an additional year as noted above. FICC is
working with its clearing banks with respect to the implementation of
the changes that have not yet been implemented.
(1) Proposed Change Regarding the Morning Unwind and Related Rule
Changes
The TPR has recommended that the Day 2 unwind for all tri-party
transactions be moved from the morning to 3:30 p.m. The TPR has made
this recommendation in order to reduce the clearing banks' intraday
credit exposure to the dealers. As previously stated, because the GCF
Repo service is essentially a tri-party repo mechanism, FICC has also
been requested by the TPR to accommodate this time change. For the GSD
rules, this necessitates a change to the GSD's ``Schedule of GCF
Timeframes'' (``Schedule''). Specifically, the 7:30 a.m. time in the
Schedule will be deleted and the language therein proposed to be moved
to a new time of 3:30 p.m. on the Schedule.
The change to the time of the intrabank unwind also necessitates a
change to the cut-off time for GCF Repo trade submissions, which is
currently 3:35 p.m. in the Schedule. FICC is proposing to amend the
Schedule to change the cut-off time to 3 p.m. to allow FICC to submit
files to the clearing banks which, in turn, will provide files to the
dealers by 3:30 p.m.; this will permit the dealers to have a complete
picture of their positions as the unwind occurs at 3:30 p.m. The 3:45
p.m. cutoff for dealer affirmation or disaffirmation that is in the
current Schedule will move to 3 p.m. so that the new 3 p.m. cutoff for
submissions will also now be the cutoff for dealer affirmations and
disaffirmations.\20\
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\20\ This change updates the current Schedule to provide that
the cutoff for submissions and dealer affirmations/disaffirmations
is at the same time; the current practice is inconsistent with the
current Schedule and the proposed rule change would remedy this
inconsistency.
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Because the Day 2 unwind is proposed to move from the morning to
3:30 p.m. and because the NFE process established by the 2007 NFE
Filing is tied to the moment of the interbank unwind, the NFE process
will also move to the time established by FICC as announced by notice
to all members.\21\ Because the NFE process is a legal process and not
an operational process, it is not reflected on the Schedule. A change
is needed in Section 3 of Rule 20 to delete the reference to the
``morning'' timeframe on Day 2 with respect to the NFE process and to
add language referencing ``at the time established by the
Corporation.''
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\21\ Currently, the NFE hold is from the time the collateral is
returned to the repo dealer (approximately 7:30 a.m.) until the time
the funds move between the two clearing banks (approximately 5
p.m.). When the systems processing for the tri-party reform effort
continues on the part of the clearing banks, the unwind will move to
3:30 p.m. and the funds will continue to move between the two
clearing banks at 5 p.m.; when this occurs, the NFE hold which
applies to dealers will be between 3:30 p.m. and 5 p.m.
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(2) Proposed Change Regarding Intraday GCF Repo Securities Collateral
Substitutions
As a result of the time change of the unwind (i.e., the reversal on
Day 2 of collateral allocations established by FICC for each netting
member's GCF net funds borrower positions and GCF net funds lender
positions on Day 1) to 3:30 p.m., the provider of GCF Repo securities
collateral in a GCF Repo transaction on Day 1 will no longer have
access to such securities at the beginning of Day 2. Therefore, during
Day 2 prior to the unwind of the Day 1 collateral allocations, the
provider of GCF Repo securities collateral (Dealer C, in the example)
needs a substitution mechanism for the return of its posted GCF Repo
securities collateral in order to make securities deliveries for
utilization of such securities in its business activities. (In the
example, Dealer C may need to return the securities to Party Y
depending upon the terms of their transaction). FICC is proposing to
establish a substitution process for this purpose in conjunction with
its clearing banks. The language for the substitution mechanism is
proposed to be added to Section 3 of GSD Rule 20. The proposed rule
change provides that all requests for substitution for the GCF Repo
securities collateral must be submitted by the provider of the GCF Repo
securities collateral (i.e., Dealer C) by the applicable deadline on
Day 2 (the ``substitution deadline'').\22\
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\22\ FICC will establish such deadline prior to the
implementation of the changes to this service in conjunction with
the clearing banks and the Federal Reserve in light of market
circumstances. The initial substitution deadline is anticipated to
be 1 p.m.; however, this will be finalized with the Federal Reserve
and the clearing banks. The possible time range will be between 8
a.m. and 1 p.m. FICC will provide members advanced notice of the
substitution deadline and any future changes thereto by important
notice.
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Substitutions on Intrabank GCF Repos
If the GCF Repo transaction is between dealer counterparties
effecting the transaction through the same clearing bank (i.e., on an
intra-clearing bank basis and in our example Dealer C and other dealers
clearing at Chase), on Day 2 such clearing bank will process each
substitution request of the provider of GCF Repo securities collateral
(i.e., Dealer C) submitted prior to the substitution deadline promptly
upon receipt of such request. The return of
[[Page 38112]]
the GCF Repo securities collateral in exchange for cash and/or eligible
securities of equivalent value can be effected by simple debits and
credits to the accounts of the GCF Repo dealer counterparties at the
clearing agent bank (i.e., in the example, Chase). Eligible securities
for this purpose will be the same as those currently permitted under
the GSD rules for collateral allocations, namely, Comparable
Securities,\23\ (ii) Other Acceptable Securities,\24\ or (iii) U.S.
Treasury bills, notes or bonds maturing in a time frame no greater than
that of the securities that have been traded (except where such traded
securities are U.S. Treasury bills, substitution may be with Comparable
Securities and/or cash only).
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\23\ The GSD rules define ``Comparable Securities'' as follows:
The term ``Comparable Securities'' means, with respect to a security
or securities that are represented by a particular Generic CUSIP
Number, any other security or securities that are represented by the
same Generic CUSIP Number.
\24\ The GSD rules define ``Other Acceptable Securities'' as
follows: The term ``Other Acceptable Securities'' means, with
respect to: (an) Adjustable-rate mortgage-backed security or
securities issued by Ginnie Mae, any fixed-rate mortgage-backed
security or securities issued by Ginnie Mae, or (an) adjustable-rate
mortgage-backed security or securities issued by either Fannie Mae
or Freddie Mac: (a) Any fixed-rate mortgage-backed security or
securities issued by Fannie Mae and Freddie Mac, (b) any fixed-rate
mortgage-backed security or securities issued by Ginnie Mae, or (c)
any adjustable-rate mortgage-backed security or securities issued by
Ginnie Mae.
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Substitutions on Interbank GCF Repos
For a GCF Repo that was processed on an interbank basis and to
accommodate a potential substitution request, FICC proposes to initiate
a debit of the securities in the account of the lender through the FICC
GCF Repo accounts at the clearing bank of the lender and the FICC GCF
Repo account at the clearing bank of the borrower (``Interbank
Movement''). This Interbank Movement is being done so that a borrower
who elects to substitute collateral will have access to the collateral
for which it is substituting. The Interbank Movement is expected to
occur in the morning, though the clearing banks and FICC have the
capability to have the Interbank Movement occur at any point during the
day up until 2:30 p.m. During the Pilot Program, FICC and the clearing
banks will unwind the intrabank GCF Repo transactions at 3:30 p.m. FICC
and the clearing banks will determine the most appropriate timeframe
for the Interbank Movement process to occur.
In the example above, the GCF Repo securities collateral will be
debited from the securities account of the receiver of the collateral
(i.e., Dealer B) at its clearing bank (i.e., BNY), and from the FICC
Account for BNY. If a substitution request is received by the clearing
bank (i.e., Chase) of the provider of GCF Repo securities collateral,
prior to the substitution deadline at a time specified in FICC's
procedures,\25\ that clearing bank will process the substitution
request by releasing the GCF Repo securities collateral from the FICC
GCF Repo account at Chase and crediting it to the account of the
provider of GCF Repo securities collateral (i.e., Dealer C). All cash
and/or securities substituted for the GCF Repo securities collateral
being released will be credited to FICC's GCF Repo account at the
clearing bank (i.e., Chase).
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\25\ This timeframe will also be established in consultation
with the clearing banks and the Federal Reserve. The parties are
considering whether to have the substitution process be accomplished
in two batches during the day depending upon the time of submission
of the notifications for substitution. In any event, substitution
requests will be subject to the substitution deadline. The details
of the batches, if applied, will be announced to members by
important notice. The deadline for submission of GCF Repo
substitution requests will be the same for intrabank and interbank
processing.
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Simultaneously, with the debit of the GCF Repo securities
collateral from the account at the clearing bank (i.e., BNY) of the
original receiver of GCF Repo securities collateral (i.e., Dealer B),
for purposes of making payment to the original receiver of securities
collateral (i.e., Dealer B), such clearing bank will effect a cash
debit equal to the value of the securities collateral in FICC's GCF
Repo account at such clearing bank and will credit the account of the
original receiver of securities collateral (i.e., Dealer B) at such
clearing bank with such cash amount. (This is because when Dealer B is
debited the securities, Dealer B must receive the funds.) In order to
secure FICC's obligation to repay the balance in FICC's GCF Repo
account at such clearing bank (i.e., BNY), FICC will grant to such
clearing bank a security interest in the cash and/or securities
substituted for the GCF securities collateral in FICC's GCF repo
account at the other clearing bank (i.e., Chase).
Using the example from above, assume that Dealer C submits a
substitution notification--it requires the securities collateral that
has been pledged to Dealer B and will substitute cash and/or
securities. BNY will debit the securities from Dealer B's account and
the relevant liens will be released so that the securities are in
FICC's account at Chase. Chase will credit the securities to Dealer C's
account and the cash and/or securities that Dealer C uses for its
collateral substitution will be credited by Chase to FICC's account at
Chase. From Dealer B's perspective, when BNY debits the securities from
Dealer B's account, Dealer B is supposed to receive the funds--but as
noted, the funds are at Chase. BNY will credit the funds to Dealer B's
account and debit FICC's account at BNY.
At this point in the example, FICC is running a credit at Chase and
a debit at BNY. In order to secure FICC's debit at BNY, FICC will grant
a security interest in the funds in the FICC account at Chase.
For substitutions that occur with respect to GCF Repo transactions
that were processed on an inter-clearing bank basis, FICC and the
clearing banks will permit cash substitutions as noted in SR-FICC-2011-
05. However, as discussions have developed between FICC and its
clearing banks, it has been determined that cash and/or securities may
be used for substitutions. The proposed rule change provides FICC with
flexibility in this regard by referring to FICC's procedures. When
interbank securities substitutions begin to be permitted, FICC will
announce this to members by important notice.
Other Rule Changes
FICC is also proposing to make technical clean-up changes to
Section 7 of GSD Rule 20, which relate to the GCF Repo collateral
process. Specifically, a correction is being made to change references
to the defined term ``Security'' to ``security'' to conform to the use
of ``security'' throughout the rule. The proposed rule change also
introduces a term that previously had not been included in the rules
inadvertently, ``GCF Collateral Excess Account.'' This term is defined
in the proposed rule change as ``the account established by a GCF
Custodian Bank in the name of the Corporation to hold securities it
credits to the GCF Securities Account the Corporation establishes for
another GCF Clearing Bank.''
(ii) FICC believes the proposed rule changes are consistent with
the requirements of Section 17A of the Act \26\ and the rules and
regulations thereunder applicable to FICC because the rule amendments
are designed to promote the prompt and accurate clearance and
settlement of security transactions and assure the safeguarding of
securities and funds which are in the custody or control of FICC by
aligning the GCF Repo service with recommendations being made by the
TPR to address risks in the overall tri-party repo market, which will
serve to
[[Page 38113]]
safeguard the securities and funds for which FICC is responsible.
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\26\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
FICC does not believe that the proposed rule change would 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 rule change have not 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 up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the 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 rule-comments@sec.gov. Please include File Number
SR-FICC-2012-05 on the subject line.
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-2012-05. 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 Section, 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 filings will also be available for
inspection and copying at the principal office of FICC and on FICC's
Web site at https://www.dtcc.com/downloads/legal/rule_filings/2012/ficc/2012-05.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 SR-FICC-2012-05
and should be submitted on or before July 17, 2012.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-15536 Filed 6-25-12; 8:45 am]
BILLING CODE 8011-01-P
