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, 29828-29833 [2014-11964]

Download as PDF mstockstill on DSK4VPTVN1PROD with NOTICES 29828 Federal Register / Vol. 79, No. 100 / Friday, May 23, 2014 / Notices employees have had no, and will not have any future, involvement in the Covered Persons’ activities in any capacity described in section 9(a) of the Act; and (iv) because the personnel of the Applicants (other than certain personnel of CSAG who were not involved in any of the Applicants’ Fund Service Activities) did not have any involvement in the Conduct, shareholders of the Funds and ESCs were not affected any differently than if those Funds and ESCs had received services from any other non-affiliated investment adviser or principal underwriter. 5. Except as discussed above, Applicants have agreed that neither they nor any of the other Covered Persons will employ any of the current or former employees of CSAG or any Covered Person who previously have been or who subsequently may be identified by CSAG or any U.S. or non-U.S. regulatory or enforcement agencies as having been responsible for the Conduct in any capacity without first making a further application to the Commission pursuant to section 9(c). Applicants also have agreed that each Applicant (and any Covered Person that acts in any capacity described in section 9(a) of the Act) will adopt and implement policies and procedures reasonably designed to ensure compliance with the terms and conditions of the order granted under section 9(c). In addition, CSAG has agreed to comply in all material respects with the material terms and conditions of the Plea Agreement and the material terms of the Federal Reserve Order and the DFS Order, and CS Group has agreed to comply in all material respects with the material terms and undertakings of the Commission Settlement. 6. Applicants further represent that the inability of CSAM, CSAML, CSHG, and CSSU to continue providing Fund Service Activities would result in potential hardships for both the Funds and the ESCs and their shareholders. Applicants state that they will distribute written materials, including an offer to meet in person to discuss the materials, to the board of trustees of the Funds, including the directors who are not ‘‘interested persons,’’ as defined in section 2(a)(19) of the Act, of such Funds, and their independent legal counsel as defined in rule 0–1(a)(6) under the Act, regarding the Plea Agreement, any impact on the Funds, and the application. The Applicants will provide the Funds with all information concerning the Plea Agreement and the application that is necessary for the Funds to fulfill their VerDate Mar<15>2010 20:09 May 22, 2014 Jkt 232001 disclosure and other obligations under the federal securities laws. 7. Applicants also state that, if CSAM, CSAML, CSHG, and CSSU were barred from providing Fund Service Activities to the Funds and the ESCs, the effect on their business and employees would be severe. 8. Applicants state that certain of the Applicants and their affiliates have received exemptive orders under section 9(c), as described in greater detail in the application. Applicants’ Conditions Applicants agree that any order granted by the Commission pursuant to the application will be subject to the following conditions: 1. Any temporary exemption granted pursuant to the application will be without prejudice to, and shall not limit the Commission’s rights in any manner with respect to, any Commission investigation of, or administrative proceedings involving or against, Covered Persons, including, without limitation, the consideration by the Commission of a permanent exemption from section 9(a) of the Act requested pursuant to the application or the revocation or removal of any temporary exemptions granted under the Act in connection with the application. 2. Except as set out in the second paragraph of Section IV.E of the application, neither the Applicants nor any of the other Covered Persons will employ any of the current or former employees of CSAG or any Covered Person who previously have been or who subsequently may be identified by CSAG or any U.S. or non-U.S. regulatory or enforcement agencies as having been responsible for the Conduct in any capacity without first making a further application to the Commission pursuant to section 9(c). 3. Each Applicant and Covered Person will adopt and implement policies and procedures reasonably designed to ensure that they will comply with the terms and conditions of the requested orders within 60 days of the date on which any permanent order is granted or, with respect to condition 4, such later date as may be contemplated by the Federal Reserve Order, the DFS Order, or the Commission Settlement, as applicable. 4. CSAG will comply in all material respects with the material terms and conditions of the Plea Agreement and with the material terms of the Federal Reserve Order and the DFS Order, and CS Group will comply in all material respects with the material terms and undertakings of the Commission Settlement. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 5. Applicants will provide written notification to the Chief Counsel of the Commission’s Division of Investment Management, with a copy to the Chief Counsel of the Commission’s Division of Enforcement, of a material violation of the terms and conditions of the requested orders within 30 days of discovery of the material violation. Temporary Order The Commission has considered the matter and finds that the Applicants have made the necessary showing to justify granting a temporary exemption. Accordingly It is hereby ordered, pursuant to section 9(c) of the Act, that the Applicants and the other Covered Persons are granted a temporary exemption from the provisions of section 9(a), effective forthwith, solely with respect to the Guilty Plea, subject to the representations and conditions in the application, until the date the Commission takes final action on their application for a permanent order. By the Commission. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–11929 Filed 5–22–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72184; File No. SR–FICC– 2014–02] 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 May 19, 2014. 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 May 5, 2014, the Fixed Income Clearing Corporation (‘‘FICC’’ or the ‘‘Corporation’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule changes3 as described in Items I, II and 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 The Commission temporarily approved the changes that are the subject of this filing in 2011, and renewed this temporary approval most recently in 2013. Securities Exchange Act Release No. 70068 (July 30, 2013), 78 FR 47453 (August 5, 2013) (SR– FICC–2013–06). Thus, while the Exhibit 5 attached to this filing is marked to indicate that new text is being added to the rulebook of FICC’s Government 2 17 E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 79, No. 100 / Friday, May 23, 2014 / Notices III below, which Items have been prepared by FICC. The Commission is publishing this notice to solicit comments on the proposed rule changes 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.4 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. mstockstill on DSK4VPTVN1PROD with NOTICES (i) Purpose of the Proposed Rule Change FICC is seeking the Commission’s approval to extend the current pilot program (the ‘‘2013 Pilot Program’’) that is currently in effect for the GCF Repo® service. FICC is requesting that the 2013 Pilot Program be extended for one year following the Commission’s approval of the present filing.5 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.6 Services Division (‘‘GSD’’), this text already appears in the GSD’s rulebook pursuant to the Commission’s prior approvals. The current filing seeks the Commission’s approval to retain this text in the GSD’s rulebook for one additional year. 4 GCF Repo is a registered trademark of FICC/ DTCC. 5 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. 6 The main purpose of the TPR was to develop recommendations to address the risk presented by VerDate Mar<15>2010 18:44 May 22, 2014 Jkt 232001 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’’).7 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).8 On June 5, 2013, FICC then submitted a rule filing to extend the Pilot Program for an additional year (SR–FICC–2013–06)9. Because the latest extension is now approaching its expiry date, FICC is seeking the Commission’s approval to extend the Pilot Program for an additional year while the final phase of the tri-party reform is put in to place.10 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 repos11 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 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. 7 Securities Exchange Act Release No. 34–65213 (August 29, 2011), 76 FR 54824 (September 2, 2011)(SR–FICC–2011–05). 8 See Securities Exchange Release No. 34–67621 (August 8, 2012); 77 FR 48572 (August 14, 2012) (SR–FICC–2012–05) 9 See Securities Exchange Act Release No. 34– 70068 (July 30, 2013) 78 FR 47453 (August 5, 2013) (SR–FICC–2013–06) 10 The final phase includes the development interactive messages for the interbank collateral substitution automation. If FICC determines to change the parameters of the service during the oneyear 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. 11 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. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 29829 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. 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 1998.12 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).13 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.14 (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 12 See Securities Exchange Act Release No. 34– 40623 (October 30, 1998) 63 FR 59831 (November 5, 1998) (SR–GSCC–98–02). 13 See Securities Exchange Act Release No. 34– 41303 (April 16, 1999) 64 FR 20346 (April 26, 1999) (SR–GSCC–99–01). 14 See id. for a detailed description of the clearing bank and FICC accounts needed to effect the afterhour movement of securities. E:\FR\FM\23MYN1.SGM 23MYN1 mstockstill on DSK4VPTVN1PROD with NOTICES 29830 Federal Register / Vol. 79, No. 100 / Friday, May 23, 2014 / Notices 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. 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’’).15 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 15 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. VerDate Mar<15>2010 18:44 May 22, 2014 Jkt 232001 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 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.16 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’’).17 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.18 16 See Securities Exchange Act Release No. 34– 48006 (June 10, 2003), 68 FR 35745 (June 16, 2003) (SR–FICC–2003–04). 17 See Securities Exchange Act Release No. 34– 57652 (April 11, 2008), 73 FR 20999 (April 17, 2008) (SR–FICC–2007–08). 18 NFE is a methodology that clearing banks use to determine whether an account holder (such as a PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 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 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. E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 79, No. 100 / Friday, May 23, 2014 / Notices 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. 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.19 mstockstill on DSK4VPTVN1PROD 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 process20 from morning to a time established by the Corporation as announced by notice to all members21, 19 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. 20 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. 21 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 VerDate Mar<15>2010 18:44 May 22, 2014 Jkt 232001 (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 (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 8:00am to 3:30pm. PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 29831 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’’).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 22 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. E:\FR\FM\23MYN1.SGM 23MYN1 29832 Federal Register / Vol. 79, No. 100 / Friday, May 23, 2014 / Notices receipt of such request. The return of 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 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,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). mstockstill on DSK4VPTVN1PROD 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 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. VerDate Mar<15>2010 18:44 May 22, 2014 Jkt 232001 (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 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 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 25 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 00094 Fmt 4703 Sfmt 4703 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 abovereferenced changes were approved in connection with SR–FICC–2011–0526, SR–FICC–2012–0527, and SR–FICC– 2013–0628. 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) Statutory Basis for the Proposed Rule Change 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. D. Advance Notices Filed Pursuant to Section 806(e) of the Payment, Clearing and Settlement Supervision Act (a) Not applicable. (b) Not applicable. 26 Securities Exchange Act Release No. 34–65213 (August 29, 2011) 76 FR 54824 (September 2, 2011) 27 Securities Exchange Act Release No. 34–67277 (June 20, 2012) 77 FR 38108 (June 26, 2012) 28 Securities Exchange Act Release No. 34–70068 (July 30, 2013) 78 FR 47453 (August 5, 2013) E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 79, No. 100 / Friday, May 23, 2014 / Notices (c) Not applicable. (d) Not applicable. 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 such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2014–02 on the subject line. Paper Comments mstockstill on DSK4VPTVN1PROD with NOTICES • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FICC–2014–02. 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/∼/media/Files/ Downloads/legal/rule-filings/2014/ficc/SRFICC%202014-02.ashx. All comments VerDate Mar<15>2010 18:44 May 22, 2014 Jkt 232001 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–2014–02 and should be submitted on or before June 13, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–11964 Filed 5–22–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [File No. 500–1] China Green Lighting Limited, China Kangtai Cactus Bio-Tech, Inc., Gemco Minerals, Inc., Perfectenergy International Limited, and Rodobo International, Inc.; Order of Suspension of Trading May 21, 2014. China Green Lighting Limited (CIK No. 1421378) is a delinquent Colorado corporation located in Jiangshan City, China with a class of securities registered with the Commission pursuant to Exchange Act Section 12(g). China Green Lighting Limited is delinquent in its periodic filings with the Commission, having not filed any periodic reports since it filed a Form 10–Q for the period ended September 30, 2011, which reported a net loss of $1,252,940 for the prior nine months. As of May 8, 2014, the company’s stock (symbol ‘‘CHGL’’) was quoted on OTC Link (previously, ‘‘Pink Sheets’’) operated by OTC Markets Group, Inc. (‘‘OTC Link’’), had three market makers, and was eligible for the ‘‘piggyback’’ exception of Exchange Act Rule 15c2– 11(f)(3). It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of China Green Lighting Limited because it has not filed any periodic reports since the period ended September 30, 2011. China Kangtai Cactus Bio-Tech, Inc. (CIK No. 1017699) is a revoked Nevada corporation located in Harbin, China with a class of securities registered with the Commission pursuant to Exchange Act Section 12(g). China Kangtai Cactus Biotech, Inc. is delinquent in its periodic filings with the Commission, having not filed any periodic reports since it filed a Form 10–Q for the period ended September 30, 2011. As of May 29 17 PO 00000 CFR 200.30–3(a)(12). Frm 00095 Fmt 4703 Sfmt 4703 29833 8, 2014, the company’s stock (symbol ‘‘CKGT’’) was quoted on OTC Link, had eight market makers, and was eligible for the ‘‘piggyback’’ exception of Exchange Act Rule 15c2–11(f)(3). It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of China Kangtai Cactus Biotech, Inc. because it has not filed any periodic reports since the period ended September 30, 2011. Gemco Minerals, Inc. (CIK No. 1338118) is a Florida corporation located in Langley, British Columbia, Canada, with a class of securities registered with the Commission pursuant to Exchange Act Section 12(g). Gemco Minerals, Inc. is delinquent in its periodic filings with the Commission, having not filed any periodic reports since it filed a Form 10–Q for the period ended November 30, 2009, which reported a net loss of $3,394,046 since the company’s August 21, 1997 inception. As of May 8, 2014, the company’s stock (symbol ‘‘GMML’’) was quoted on OTC Link, had three market makers, and was eligible for the ‘‘piggyback’’ exception of Exchange Act Rule 15c2–11(f)(3). It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Gemco Minerals, Inc. because it has not filed any periodic reports since the period ended November 30, 2009. Perfectenergy International Limited (CIK No. 1345432) is a revoked Nevada corporation located in Shanghai, China with a class of securities registered with the Commission pursuant to Exchange Act Section 12(g). Perfectenergy International Limited is delinquent in its periodic filings with the Commission, having not filed any periodic reports since it filed a Form 10–K for the fiscal year ended September 30, 2011, which reported a net loss of $7,627,177 for the prior eleven months. As of May 8, 2014, the company’s stock (symbol ‘‘PFGY’’) was quoted on OTC Link, had six market makers, and was eligible for the ‘‘piggyback’’ exception of Exchange Act Rule 15c2–11(f)(3). It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Perfectenergy International Limited because it has not filed any periodic reports since the period ended September 30, 2011. Rodobo International, Inc. (CIK No. 1177274) is a revoked Nevada corporation located in Harbin, China with a class of securities registered with the Commission pursuant to Exchange E:\FR\FM\23MYN1.SGM 23MYN1

Agencies

[Federal Register Volume 79, Number 100 (Friday, May 23, 2014)]
[Notices]
[Pages 29828-29833]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-11964]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72184; File No. SR-FICC-2014-02]


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

May 19, 2014.
    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 May 5, 2014, the Fixed Income Clearing Corporation (``FICC'' or the 
``Corporation'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule changes\3\ as described in Items I, 
II and

[[Page 29829]]

III below, which Items have been prepared by FICC. The Commission is 
publishing this notice to solicit comments on the proposed rule changes 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission temporarily approved the changes that are the 
subject of this filing in 2011, and renewed this temporary approval 
most recently in 2013. Securities Exchange Act Release No. 70068 
(July 30, 2013), 78 FR 47453 (August 5, 2013) (SR-FICC-2013-06). 
Thus, while the Exhibit 5 attached to this filing is marked to 
indicate that new text is being added to the rulebook of FICC's 
Government Services Division (``GSD''), this text already appears in 
the GSD's rulebook pursuant to the Commission's prior approvals. The 
current filing seeks the Commission's approval to retain this text 
in the GSD's rulebook for one additional year.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule changes consist of modifications to the Rulebook 
of the Government Securities Division (``GSD'') in connection with the 
GCF Repo[supreg] service.\4\
---------------------------------------------------------------------------

    \4\ 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.

(i) Purpose of the Proposed Rule Change
    FICC is seeking the Commission's approval to extend the current 
pilot program (the ``2013 Pilot Program'') that is currently in effect 
for the GCF Repo[supreg] service. FICC is requesting that the 2013 
Pilot Program be extended for one year following the Commission's 
approval of the present filing.\5\
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    \5\ 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.\6\ 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.
---------------------------------------------------------------------------

    \6\ 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'').\7\ 
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).\8\ On June 5, 2013, FICC then 
submitted a rule filing to extend the Pilot Program for an additional 
year (SR-FICC-2013-06)\9\. Because the latest extension is now 
approaching its expiry date, FICC is seeking the Commission's approval 
to extend the Pilot Program for an additional year while the final 
phase of the tri-party reform is put in to place.\10\
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    \7\ Securities Exchange Act Release No. 34-65213 (August 29, 
2011), 76 FR 54824 (September 2, 2011)(SR-FICC-2011-05).
    \8\ See Securities Exchange Release No. 34-67621 (August 8, 
2012); 77 FR 48572 (August 14, 2012) (SR-FICC-2012-05)
    \9\ See Securities Exchange Act Release No. 34-70068 (July 30, 
2013) 78 FR 47453 (August 5, 2013) (SR-FICC-2013-06)
    \10\ The final phase includes the development interactive 
messages for the interbank collateral substitution automation. 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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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\11\ 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.
---------------------------------------------------------------------------

    \11\ 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.\12\ Under 
the intrabank service, dealers could only engage in GCF Repo 
transactions with other dealers that cleared at the same clearing bank.
---------------------------------------------------------------------------

    \12\ 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).\13\ 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.\14\ (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

[[Page 29830]]

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. 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.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 34-41303 (April 16, 
1999) 64 FR 20346 (April 26, 1999) (SR-GSCC-99-01).
    \14\ 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'').\15\ 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.
---------------------------------------------------------------------------

    \15\ 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.
---------------------------------------------------------------------------

    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.\16\ 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.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 34-48006 (June 10, 
2003), 68 FR 35745 (June 16, 2003) (SR-FICC-2003-04).
---------------------------------------------------------------------------

(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'').\17\ 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.\18\
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    \17\ See Securities Exchange Act Release No. 34-57652 (April 11, 
2008), 73 FR 20999 (April 17, 2008) (SR-FICC-2007-08).
    \18\ 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.
---------------------------------------------------------------------------

    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

[[Page 29831]]

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. 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.\19\
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    \19\ 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\20\ from morning to a time established by the 
Corporation as announced by notice to all members\21\, (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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    \20\ 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.
    \21\ 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 8:00am to 3:30pm.
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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'').\22\
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    \22\ 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

[[Page 29832]]

receipt of such request. The return of 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 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,\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 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,\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\ 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 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 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\26\, SR-FICC-2012-05\27\, and SR-
FICC-2013-06\28\. 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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    \26\ Securities Exchange Act Release No. 34-65213 (August 29, 
2011) 76 FR 54824 (September 2, 2011)
    \27\ Securities Exchange Act Release No. 34-67277 (June 20, 
2012) 77 FR 38108 (June 26, 2012)
    \28\ Securities Exchange Act Release No. 34-70068 (July 30, 
2013) 78 FR 47453 (August 5, 2013)
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(ii) Statutory Basis for the Proposed Rule Change
    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.

D. Advance Notices Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act

    (a) Not applicable.
    (b) Not applicable.

[[Page 29833]]

    (c) Not applicable.
    (d) Not applicable.

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 such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2014-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2014-02. 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/~/media/Files/Downloads/legal/rule-
filings/2014/ficc/SR-FICC%202014-02.ashx. 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-2014-02 and 
should be submitted on or before June 13, 2014.


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
Kevin M. O'Neill,
Deputy Secretary.
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    \29\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-11964 Filed 5-22-14; 8:45 am]
BILLING CODE 8011-01-P
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