Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Request To Extend the Pilot Program for Certain Government Securities Division Rules Relating to the GCF Repo® Service, 37631-37636 [2013-14795]
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Federal Register / Vol. 78, No. 120 / Friday, June 21, 2013 / Notices
on the part of any person concerned.
This condition does not apply with
respect to any services or transactions
between a Fund and its investment
adviser(s), or any person controlling,
controlled by or under common control
with such investment adviser(s).
5. The Fund of Funds Adviser, or
trustee or Sponsor of an Investing Trust,
as applicable, will waive fees otherwise
payable to it by the Fund of Funds in
an amount at least equal to any
compensation (including fees received
pursuant to any plan adopted by a Fund
under rule 12b-l under the Act) received
from a Fund by the Fund of Funds
Adviser, or trustee or Sponsor of the
Investing Trust, or an affiliated person
of the Fund of Funds Adviser, or trustee
or Sponsor of the Investing Trust, other
than any advisory fees paid to the Fund
of Funds Adviser, trustee or Sponsor of
an Investing Trust, or its affiliated
person by the Fund, in connection with
the investment by the Fund of Funds in
the Fund. Any Fund of Funds SubAdviser will waive fees otherwise
payable to the Fund of Funds SubAdviser, directly or indirectly, by the
Investing Management Company in an
amount at least equal to any
compensation received from a Fund by
the Fund of Funds Sub-Adviser, or an
affiliated person of the Fund of Funds
Sub-Adviser, other than any advisory
fees paid to the Fund of Funds SubAdviser or its affiliated person by the
Fund, in connection with the
investment by the Investing
Management Company in the Fund
made at the direction of the Fund of
Funds Sub-Adviser. In the event that the
Fund of Funds Sub-Adviser waives fees,
the benefit of the waiver will be passed
through to the Investing Management
Company.
6. No Fund of Funds or Fund of
Funds Affiliate (except to the extent it
is acting in its capacity as an investment
adviser to a Fund) will cause a Fund to
purchase a security in any Affiliated
Underwriting.
7. The Board of a Fund, including a
majority of the non-interested Board
members, will adopt procedures
reasonably designed to monitor any
purchases of securities by the Fund in
an Affiliated Underwriting, once an
investment by a Fund of Funds in the
securities of the Fund exceeds the limit
of section 12(d)(1)(A)(i) of the Act,
including any purchases made directly
from an Underwriting Affiliate. The
Board will review these purchases
periodically, but no less frequently than
annually, to determine whether the
purchases were influenced by the
investment by the Fund of Funds in the
Fund. The Board will consider, among
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other things: (i) Whether the purchases
were consistent with the investment
objectives and policies of the Fund; (ii)
how the performance of securities
purchased in an Affiliated Underwriting
compares to the performance of
comparable securities purchased during
a comparable period of time in
underwritings other than Affiliated
Underwritings or to a benchmark such
as a comparable market index; and (iii)
whether the amount of securities
purchased by the Fund in Affiliated
Underwritings and the amount
purchased directly from an
Underwriting Affiliate have changed
significantly from prior years. The
Board will take any appropriate actions
based on its review, including, if
appropriate, the institution of
procedures designed to ensure that
purchases of securities in Affiliated
Underwritings are in the best interest of
shareholders of the Fund.
8. Each Fund will maintain and
preserve permanently in an easily
accessible place a written copy of the
procedures described in the preceding
condition, and any modifications to
such procedures, and will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in Affiliated Underwritings
once an investment by a Fund of Funds
in the securities of the Fund exceeds the
limit of section 12(d)(1)(A)(i) of the Act,
setting forth from whom the securities
were acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or materials upon which
the Board’s determinations were made.
9. Before investing in a Fund in
excess of the limit in section
12(d)(1)(A), a Fund of Funds and the
Trust will execute a FOF Participation
Agreement stating without limitation
that their respective boards of directors
or trustees and their investment
advisers, or trustee and Sponsor, as
applicable, understand the terms and
conditions of the order, and agree to
fulfill their responsibilities under the
order. At the time of its investment in
Shares of a Fund in excess of the limit
in section 12(d)(1)(A)(i), a Fund of
Funds will notify the Fund of the
investment. At such time, the Fund of
Funds will also transmit to the Fund a
list of the names of each Fund of Funds
Affiliate and Underwriting Affiliate. The
Fund of Funds will notify the Fund of
any changes to the list of the names as
soon as reasonably practicable after a
change occurs. The Fund and the Fund
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37631
of Funds will maintain and preserve a
copy of the order, the FOF Participation
Agreement, and the list with any
updated information for the duration of
the investment and for a period of not
less than six years thereafter, the first
two years in an easily accessible place.
10. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company
including a majority of the disinterested
directors or trustees, will find that the
advisory fees charged under such
contract are based on services provided
that will be in addition to, rather than
duplicative of, the services provided
under the advisory contract(s) of any
Fund in which the Investing
Management Company may invest.
These findings and their basis will be
fully recorded in the minute books of
the appropriate Investing Management
Company.
11. Any sales charges and/or service
fees charged with respect to shares of a
Fund of Funds will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.
12. No Fund will acquire securities of
an investment company or company
relying on section 3(c)(1) or 3(c)(7) of
the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except
to the extent the Fund acquires
securities of another investment
company pursuant to exemptive relief
from the Commission permitting the
Fund to acquire securities of one or
more investment companies for shortterm cash management purposes.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–14803 Filed 6–20–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69774; File No. SR–FICC–
2013–06]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Request To Extend the Pilot
Program for Certain Government
Securities Division Rules Relating to
the GCF Repo® Service
June 17, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 notice is hereby given that, on
1 15
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Federal Register / Vol. 78, No. 120 / Friday, June 21, 2013 / Notices
June 5, 2013, the Fixed Income Clearing
Corporation (‘‘FICC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
changes 2 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 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 Rulebook of the
Government Securities Division
(‘‘GSD’’) in connection with the GCF
Repo® service.3
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
TKELLEY on DSK3SPTVN1PROD with NOTICES
FICC is seeking the Commission’s
approval to extend the current pilot
program (the ‘‘2012 Pilot Program’’) that
is currently in effect for the GCF Repo®
service. FICC is requesting that the 2012
Pilot Program be extended for one year
following the Commission’s approval of
the present filing.4
By way of background, on July 12,
2011, FICC submitted a rule filing to the
Commission (SR–FICC–2011–05)
proposing to make certain changes to its
2 The rule changes described in this notice
already appear in the rulebook of FICC’s
Government Securities Division because the
Commission temporarily approved the changes in
2012. See Securities Exchange Act Release No.
67621 (August 8, 2012), 77 FR 48572–01 (August
14, 2012) (SR–FICC–2012–05). As the Commission’s
approval will expire in August 2013, this filing
seeks Commission approval to extend those rule
changes for one additional year.
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 rule 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 rule filing to the Commission.
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GCF Repo service in order to comply
with the recommendations that had
been made by the Task Force on
Triparty Reform (‘‘TPR’’), an industry
group formed and sponsored by the
Federal Reserve Bank of New York.5
Because the GCF Repo service operates
as a triparty 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 triparty 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 filing was
approved by the Commission (the ‘‘2011
Pilot Program’’).6 Throughout 2011 and
the earlier half of 2012, FICC
implemented a portion of the rule
changes that were included in SR–
FICC–2011–05. As the expiration date of
the 2011 Pilot Program approached,
FICC elected to have certain aspects of
the 2011 Pilot Program continue,
however, FICC also proposed to make
certain modifications to the 2011 Pilot
Program. As a result, on June 8, 2012,
FICC submitted a rule filing for the 2012
Pilot Program (SR–FICC–2012–05).7
Because the 2012 Pilot Program is now
approaching its expiry date, FICC is
proposing to continue this pilot.8
Background: Description of the GCF
Repo Service and History
(1) Creation of the GCF Repo Service
The GCF Repo service allows GSD
dealer members to trade general
collateral repos 9 throughout the day
without requiring intra-day, trade-fortrade settlement on a delivery-versuspayment (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
5 The main purpose of the TPR was to develop
recommendations to address the risk presented by
triparty repo transactions due to the current
morning reversal or ‘‘unwind’’ process and to move
to a process by which transactions are collateralized
all day.
6 Securities Exchange Act Release No. 34–65213
(August 29, 2011), 76 FR 54824 (September 2,
2011)(SR–FICC–2011–05).
7 Securities Exchange Release No. 34–67621
(August 8, 2012); 77 FR 48572 (August 14, 2012)
(SR–FICC–2012–05).
8 If FICC determines to change the parameters of
the service during the one-year Pilot Program
extension period, it will submit a rule 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 rule filing to the Commission.
9 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.
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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.
The GCF Repo service was developed
as part of a collaborative effort among
GSCC (FICC’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 inter-clearing bank 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 securities
Fedwire.12 (Movements of cash do not
present the same issue because the cash
Fedwire is open later than the securities
Fedwire.) 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
10 See Securities Exchange Act Release No. 34–
40623 (October 30, 1998) 63 FR 59831 (November
5, 1998) (SR–GSCC–98–02).
11 See Securities Exchange Act Release No. 34–
41303 (April 16, 1999) 64 FR 20346 (April 26, 1999)
(SR–GSCC–99–01).
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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Fedwire. 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 services 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 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 the securities Fedwire
is closed. The after-hours movement
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 bank that is
in the net long securities position to
‘‘receive’’ securities by pledge after the
close of the securities Fedwire. 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
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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are net long the securities in connection
with GCF Repo trades.
In our 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 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.
(4) The NFE Filing and Restoration of
Service to Interbank Status
In 2007, FICC submitted a rule filing
to address the issues raised by the
interbank morning funds movement and
return the GCF Repo service to
interbank status (the ‘‘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
14 See Securities Exchange Act Release No. 34–
48006 (June 10, 2003), 68 FR 35745 (June 16, 2003)
(SR–FICC–2003–04).
15 See Securities Exchange Act Release No. 34–
57652 (April 11, 2008), 73 FR 20999 (April 17,
2008) (SR–FICC–2007–08).
16 NFE is a methodology that clearing banks use
to determine whether an account holder (such as a
dealer) has sufficient collateral to enter a specific
transaction. NFE allows the clearing bank to place
a limit on its customer’s activity by calculating a
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37633
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 our
simplified example:
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
(we have 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 (called
‘‘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
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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Federal Register / Vol. 78, No. 120 / Friday, June 21, 2013 / Notices
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. Members who do not
submit this required information by the
deadlines established by FICC are
subject to fine and an increased Clearing
Fund premium, as with all other
instances of late submission of required
information.
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
TKELLEY on DSK3SPTVN1PROD with NOTICES
2011 Pilot Program—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 the Corporation as
announced by notice to all members,19
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.
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 8 a.m. to 1 p.m. to coincide with
the collateral substitution mechanism that was
being developed between FICC and its clearing
banks. In rule filing SR–FICC–2012–05, FICC
clarified that the 8:00 a.m. to 1:00 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
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(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.
(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 will only permit
cash as an initial matter to
accommodate current processing
systems, however, as noted below, the
substitution process will permit cash
and/or securities).
During the term of the 2011 Pilot
Program, FICC implemented the
proposed changes referred to in
subsections 1(c) and 1(d) above and
during the term of the 2012 Pilot
Program, FICC implemented the
proposed changes referred to in
subsections 1(a), 1(b) and 2 above.
(1) Proposed Change Regarding the
Morning Unwind and Related Rule
Changes
The TPR recommended that the Day
2 unwind for all triparty transactions be
moved from the morning to 3:30 p.m.
The TPR made this recommendation in
order to achieve the benefit of reducing
the clearing banks’ intraday exposure to
the dealers. As stated, because the GCF
Repo service is essentially a triparty
mechanism, the TPR requested that
FICC accommodate this time change.
For the GSD rules, this necessitated a
change to the GSD’s ‘‘Schedule of GCF
Timeframes.’’ Specifically, the 7:30 a.m.
time in the Schedule was deleted and
the language therein was moved to a
new time of 3:30 p.m.
Because the Day 2 unwind moved
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 unwind, the NFE process
also was required to move. During 2012,
when the systems processing for the triparty reform effort continued on the part
of the clearing banks, the unwind
moved to 3:30 p.m. and the funds
continued to move between the two
clearing banks at 5:00 p.m.; the NFE
hold which applies to dealers moved to
between 3:30 p.m. and 5:00 p.m.
Because the NFE process is a legal
process and not an operational process,
it is not reflected on the Schedule of
GCF Timeframes and therefore no
change to the Schedule was required to
accommodate the move of the NFE
funds) a security interest in the NFE—related
collateral to support the debit in the FICC account
at the clearing bank). At present, given the move of
the NFE process (as discussed in more detail
below), this proposed time range has now moved
from 8:00 a.m. to 3:30 p.m.
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
process. A change was needed in
Section 3 of GSD 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 no longer has
possession of 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 (in our
simple example, Dealer C) 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 our example,
Dealer C may need to return the
securities to Party Y depending upon
the terms of their transaction.) In the
2012 Pilot Program, FICC established a
substitution process for this purpose in
conjunction with its clearing banks. The
language for the substitution mechanism
was added to Section 3 of GSD Rule 20.
It 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’’).20
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
the GCF Repo securities collateral in
20 As noted in SR–FICC–2012–05, 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. As noted in Important
Notice GOV088.12, once delivery has been made to
GSD on the new obligations for that business day,
no substitutions will be permitted for the remainder
of the day.
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Federal Register / Vol. 78, No. 120 / Friday, June 21, 2013 / Notices
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 our example, Chase). Eligible
securities for this purpose will be the
same as what is currently permitted
under the GSD rules for collateral
allocations, namely, Comparable
Securities,21 (ii) Other Acceptable
Securities,22 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).
TKELLEY on DSK3SPTVN1PROD 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
initiates 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 done so that a
borrower who elects to substitute
collateral will have access to the
collateral for which it is substituting.
The Interbank Movement occurs 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 2012 Pilot Program, FICC
and the clearing banks implemented a
change to unwind the intrabank GCF
Repo transactions at 3:30 p.m.
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
21 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.
22 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
18:32 Jun 20, 2013
Jkt 229001
in FICC’s procedures,23 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 the 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 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.
23 Rule filing SR–FICC–2012–05 noted that this
timeframe would also be established in consultation
with the clearing banks and the Federal Reserve. At
that time, the parties were 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. The clearing banks, however,
developed a real-time substitution mechanism for
both tri-party and GCF collateral making batch
processing unnecessary.
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
37635
At this point in our 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
permit cash and/or securities for the
substitutions. The proposed rule change
provided FICC with flexibility in this
regard by referring to FICC’s procedures.
As noted above, each of the abovereferenced changes were approved in
connection with SR–FICC–2011–05 24
and 2012–05 25. FICC proposes to
extend the pilot program reflecting these
changes for an additional one year. The
changes referenced above are reflected
in Exhibit 5.
(ii) The proposed rule change is
consistent with the Securities and
Exchange Act of 1934, as amended (the
‘‘Act’’) and the rules and regulations
promulgated thereunder because it will
align the GCF Repo service with
recommendations being made by the
TPR to address risks in the triparty
market overall and therefore will serve
to further 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 will have any
negative 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 rule changes 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
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
24 Securities Exchange Act Release No. 34–65213
(August 29, 2011) 76 FR 54824 (September 2, 2011).
25 Securities Exchange Act Release No. 34–67277
(June 20, 2012) 77 FR 38108 (June 26, 2012).
E:\FR\FM\21JNN1.SGM
21JNN1
37636
Federal Register / Vol. 78, No. 120 / Friday, June 21, 2013 / Notices
(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 rulecomment@sec.gov. Please include File
Number SR–FICC–2013–06 on the
subject line.
TKELLEY on DSK3SPTVN1PROD with 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–2013–06. 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 of submission. 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
10:00 a.m. and 3:00 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://www.dtcc.com/downloads/
legal/rule_filings/2013/ficc/SR-FICC2013-06.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 the File Number SR–
VerDate Mar<15>2010
18:32 Jun 20, 2013
Jkt 229001
FICC–2013–06 and should be submitted
on or before July 12, 2013.
the Commission’s Public Reference
Room.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Kevin M. O’Neill,
Deputy Secretary .
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2013–14795 Filed 6–20–13; 8:45 am]
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
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69773; File No. SR–BYX–
2013–020]
Self-Regulatory Organizations; BATS
Y-Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Related to Fees for Use
of BATS Y-Exchange, Inc.
June 17, 2013.
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 7,
2013, BATS Y-Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BYX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the Exchange. The Exchange has
designated the proposed rule change as
one establishing or changing a member
due, fee, or other charge imposed by the
Exchange under Section 19(b)(3)(A)(ii)
of the Act 3 and Rule 19b–4(f)(2)
thereunder,4 which renders the
proposed rule change effective upon
filing with the Commission. 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 the Substance
of the Proposed Rule Change
The Exchange proposes to amend the
fee schedule applicable to Members 5
and non-members of the Exchange
pursuant to BYX Rules 15.1(a) and (c).
Changes to the fee schedule pursuant to
this proposal will be effective upon
filing.
The text of the proposed rule change
is available at the Exchange’s Web site
at https://www.batstrading.com, at the
principal office of the Exchange, and at
26 17
CFR 200.30–3(a)(12)
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
5 A Member is any registered broker or dealer that
has been admitted to membership in the Exchange.
1 15
PO 00000
Frm 00133
Fmt 4703
Sfmt 4703
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to modify its
fee schedule effective June 7, 2013, in
order to amend the fee structure related
to its Retail Price Improvement (‘‘RPI’’)
program. Specifically, the Exchange is
proposing to: (i) Apply standard pricing
to all securities participating in the RPI
program; (ii) eliminate the language
related to groups of securities; and (iii)
eliminate RPI-specific fees for nondisplayed liquidity. In summary, the
Exchange is proposing a simplification
of the fees and rebates applied to the
RPI program, such that the Exchange
will: Provide a $0.0025 rebate per share
for a Retail Order 6 that removes
liquidity from the BYX order book,
except for a Retail Order that removes
displayed liquidity, which will be
subject to standard rebates and fees; and
charge a $0.0025 fee per share for any
Retail Price Improving Order 7 that adds
liquidity to the Exchange order book
and is removed by a Retail Order.
Under the RPI program as currently
constituted, the Exchange generally
provides a rebate of $0.0025 per share
for Retail Orders that remove liquidity
from the Exchange order book in Group
6 As defined in BYX Rule 11.24(a)(2), a ‘‘Retail
Order’’ is an agency order that originates from a
natural person and is submitted to the Exchange by
a Retail Member Organization, provided that no
change is made to the terms of the order with
respect to price or side of market and the order does
not originate from a trading algorithm or any other
computerized methodology.
7 As defined in BYX Rule 11.24(a)(3), a ‘‘Retail
Price Improvement Order’’ consists of nondisplayed interest on the Exchange that is priced
better than the Protected NBB or Protected NBO by
at least $0.001 and that is identified as such.
E:\FR\FM\21JNN1.SGM
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]]>Agencies
[Federal Register Volume 78, Number 120 (Friday, June 21, 2013)]
[Notices]
[Pages 37631-37636]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-14795]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69774; File No. SR-FICC-2013-06]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Request To Extend the Pilot Program for Certain
Government Securities Division Rules Relating to the GCF Repo[supreg]
Service
June 17, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that, on
[[Page 37632]]
June 5, 2013, the Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule changes \2\ 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
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ The rule changes described in this notice already appear in
the rulebook of FICC's Government Securities Division because the
Commission temporarily approved the changes in 2012. See Securities
Exchange Act Release No. 67621 (August 8, 2012), 77 FR 48572-01
(August 14, 2012) (SR-FICC-2012-05). As the Commission's approval
will expire in August 2013, this filing seeks Commission approval to
extend those rule changes for one additional year.
---------------------------------------------------------------------------
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 Rulebook
of the Government Securities Division (``GSD'') in connection with the
GCF Repo[supreg] service.\3\
---------------------------------------------------------------------------
\3\ GCF Repo is a registered trademark of FICC/DTCC.
---------------------------------------------------------------------------
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
FICC is seeking the Commission's approval to extend the current
pilot program (the ``2012 Pilot Program'') that is currently in effect
for the GCF Repo[supreg] service. FICC is requesting that the 2012
Pilot Program be extended for one year following the Commission's
approval of the present filing.\4\
---------------------------------------------------------------------------
\4\ If FICC determines to change the parameters of the service
during the one-year Pilot Program extension period, it will submit a
rule 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 rule filing to the
Commission.
---------------------------------------------------------------------------
By way of background, on July 12, 2011, FICC submitted a rule
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 Task Force on Triparty Reform
(``TPR''), an industry group formed and sponsored by the Federal
Reserve Bank of New York.\5\ Because the GCF Repo service operates as a
triparty 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 triparty market.
---------------------------------------------------------------------------
\5\ The main purpose of the TPR was to develop recommendations
to address the risk presented by triparty repo transactions due to
the current morning reversal or ``unwind'' process and to move to a
process by which 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
filing was approved by the Commission (the ``2011 Pilot Program'').\6\
Throughout 2011 and the earlier half of 2012, FICC implemented a
portion of the rule changes that were included in SR-FICC-2011-05. As
the expiration date of the 2011 Pilot Program approached, FICC elected
to have certain aspects of the 2011 Pilot Program continue, however,
FICC also proposed to make certain modifications to the 2011 Pilot
Program. As a result, on June 8, 2012, FICC submitted a rule filing for
the 2012 Pilot Program (SR-FICC-2012-05).\7\ Because the 2012 Pilot
Program is now approaching its expiry date, FICC is proposing to
continue this pilot.\8\
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 34-65213 (August 29,
2011), 76 FR 54824 (September 2, 2011)(SR-FICC-2011-05).
\7\ Securities Exchange Release No. 34-67621 (August 8, 2012);
77 FR 48572 (August 14, 2012) (SR-FICC-2012-05).
\8\ If FICC determines to change the parameters of the service
during the one-year Pilot Program extension period, it will submit a
rule 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 rule filing to the
Commission.
---------------------------------------------------------------------------
Background: Description of the GCF Repo Service and History
(1) Creation of the GCF Repo Service
The GCF Repo service allows GSD dealer members to trade general
collateral repos \9\ 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\ 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.
---------------------------------------------------------------------------
The GCF Repo service was developed as part of a collaborative
effort among GSCC (FICC'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) (SR-GSCC-98-02).
---------------------------------------------------------------------------
(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 inter-clearing bank
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 securities
Fedwire.\12\ (Movements of cash do not present the same issue because
the cash Fedwire is open later than the securities Fedwire.) 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
[[Page 37633]]
Fedwire. 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) (SR-GSCC-99-01).
\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 services 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 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 the securities Fedwire is
closed. The after-hours movement 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 bank that is in the net long securities position to ``receive''
securities by pledge after the close of the securities Fedwire. 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 our 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 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) (SR-FICC-2003-04).
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(4) The NFE Filing and Restoration of Service to Interbank Status
In 2007, FICC submitted a rule filing to address the issues raised
by the interbank morning funds movement and return the GCF Repo service
to interbank status (the ``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) (SR-FICC-2007-08).
\16\ NFE is a methodology that clearing banks use to determine
whether an account holder (such as a dealer) has sufficient
collateral to enter 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
our simplified example:
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 (we have 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 (called ``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
[[Page 37634]]
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. Members who do not submit this required
information by the deadlines established by FICC are subject to fine
and an increased Clearing Fund premium, as with all other instances of
late submission of required information.
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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2011 Pilot Program--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 the
Corporation 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.
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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
8 a.m. to 1 p.m. to coincide with the collateral substitution
mechanism that was being developed between FICC and its clearing
banks. In rule filing SR-FICC-2012-05, FICC clarified that the 8:00
a.m. to 1:00 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). At present, given the move of the NFE process (as
discussed in more detail below), this proposed time range has now
moved from 8:00 a.m. to 3:30 p.m.
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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 will only
permit cash as an initial matter to accommodate current processing
systems, however, as noted below, the substitution process will permit
cash and/or securities).
During the term of the 2011 Pilot Program, FICC implemented the
proposed changes referred to in subsections 1(c) and 1(d) above and
during the term of the 2012 Pilot Program, FICC implemented the
proposed changes referred to in subsections 1(a), 1(b) and 2 above.
(1) Proposed Change Regarding the Morning Unwind and Related Rule
Changes
The TPR recommended that the Day 2 unwind for all triparty
transactions be moved from the morning to 3:30 p.m. The TPR made this
recommendation in order to achieve the benefit of reducing the clearing
banks' intraday exposure to the dealers. As stated, because the GCF
Repo service is essentially a triparty mechanism, the TPR requested
that FICC accommodate this time change. For the GSD rules, this
necessitated a change to the GSD's ``Schedule of GCF Timeframes.''
Specifically, the 7:30 a.m. time in the Schedule was deleted and the
language therein was moved to a new time of 3:30 p.m.
Because the Day 2 unwind moved 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 unwind, the NFE process also was required to move.
During 2012, when the systems processing for the tri-party reform
effort continued on the part of the clearing banks, the unwind moved to
3:30 p.m. and the funds continued to move between the two clearing
banks at 5:00 p.m.; the NFE hold which applies to dealers moved to
between 3:30 p.m. and 5:00 p.m. Because the NFE process is a legal
process and not an operational process, it is not reflected on the
Schedule of GCF Timeframes and therefore no change to the Schedule was
required to accommodate the move of the NFE process. A change was
needed in Section 3 of GSD 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 no longer has possession
of 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 (in our simple example, Dealer C)
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 our
example, Dealer C may need to return the securities to Party Y
depending upon the terms of their transaction.) In the 2012 Pilot
Program, FICC established a substitution process for this purpose in
conjunction with its clearing banks. The language for the substitution
mechanism was added to Section 3 of GSD Rule 20. It 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'').\20\
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\20\ As noted in SR-FICC-2012-05, 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. As noted in Important Notice
GOV088.12, once delivery has been made to GSD on the new obligations
for that business day, no substitutions will be permitted for the
remainder of the day.
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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 the GCF Repo securities
collateral in
[[Page 37635]]
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 our example,
Chase). Eligible securities for this purpose will be the same as what
is currently permitted under the GSD rules for collateral allocations,
namely, Comparable Securities,\21\ (ii) Other Acceptable
Securities,\22\ 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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\21\ 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.
\22\ 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 initiates 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 done so that a borrower who elects to
substitute collateral will have access to the collateral for which it
is substituting. The Interbank Movement occurs 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 2012 Pilot Program, FICC and the clearing banks implemented a
change to unwind the intrabank GCF Repo transactions at 3:30 p.m.
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,\23\ 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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\23\ Rule filing SR-FICC-2012-05 noted that this timeframe would
also be established in consultation with the clearing banks and the
Federal Reserve. At that time, the parties were 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. The clearing banks, however,
developed a real-time substitution mechanism for both tri-party and
GCF collateral making batch processing unnecessary.
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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 the 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 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 our 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 permit cash and/or securities for the substitutions. The
proposed rule change provided FICC with flexibility in this regard by
referring to FICC's procedures.
As noted above, each of the above-referenced changes were approved
in connection with SR-FICC-2011-05 \24\ and 2012-05 \25\. FICC proposes
to extend the pilot program reflecting these changes for an additional
one year. The changes referenced above are reflected in Exhibit 5.
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\24\ Securities Exchange Act Release No. 34-65213 (August 29,
2011) 76 FR 54824 (September 2, 2011).
\25\ Securities Exchange Act Release No. 34-67277 (June 20,
2012) 77 FR 38108 (June 26, 2012).
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(ii) The proposed rule change is consistent with the Securities and
Exchange Act of 1934, as amended (the ``Act'') and the rules and
regulations promulgated thereunder because it will align the GCF Repo
service with recommendations being made by the TPR to address risks in
the triparty market overall and therefore will serve to further
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 will have any
negative 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 rule changes 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 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
[[Page 37636]]
(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-comment@sec.gov. Please include File
Number SR-FICC-2013-06 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-2013-06. 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 of submission. 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 10:00 a.m. and 3:00 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://www.dtcc.com/downloads/legal/rule_filings/2013/ficc/SR-FICC-2013-06.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 the File Number SR-FICC-2013-06 and should be submitted
on or before July 12, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
Kevin M. O'Neill,
Deputy Secretary .
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\26\ 17 CFR 200.30-3(a)(12)
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[FR Doc. 2013-14795 Filed 6-20-13; 8:45 am]
BILLING CODE 8011-01-P
