Self-Regulatory Organizations; The Fixed Income Clearing Corporation; Notice of No Objection to Advance Notice Filing, as Amended by Amendment No. 1, Concerning the Government Security Division's Inclusion of GCF Repo® Positions in Its Intraday Participant Clearing Fund Requirement Calculation, and Its Hourly Internal Surveillance Cycles, 63458-63461 [2014-25202]

Download as PDF 63458 Federal Register / Vol. 79, No. 205 / Thursday, October 23, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES intraday CFR could be unduly reduced. The EUIC for Early Unwinds will only apply to the reverse repo side (cash lender) since it is only the reverse side whose lockup is unwound early. The securities subject to the Early Unwind are not returned to the repo side (cash borrower) in connection with Early Unwinds. Early Unwinds are performed on the reverse repo side to ensure that the underlying collateral is available to the repo side at its settlement bank. As such, the reverse repo side is subject to the EUIC notwithstanding its inability to control the Early Unwind as their noon intraday CFR could be unduly reduced as a result of such Early Unwinds. GSD has discussed the EUIC with the participants that are likely to be materially impacted by this proposed charge. These participants did not express any concerns about the EUIC. There is no automatic unwind (return of securities) to the repo side. If the repo side needs its securities before the 3:30 p.m. (ET) scheduled unwind, it may perform a securities-for-securities substitution or a cash-for-securities substitution (in which case it may be subject to the EUIC). III. Discussion Section 19(b)(2)(C) of the Act 14 directs the Commission to approve a self-regulatory organization’s proposed rule change if the Commission finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. Section 17A(b)(3)(F) of the Act 15 requires, among other things, that the rules of a clearing agency are designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. The Commission finds that the proposed rule change to establish the EUIC to protect against the exposure that may result from intraday Cash Substitutions and Early Unwinds in connection with FICC’s proposal to include the underlying collateral pertaining to the GCF Repo® positions in GSD’s noon intraday participant CFR calculation and hourly internal surveillance cycles is consistent with Section 17A(b)(3)(F) of the Act.16 Although the inclusion of GCF Repo® positions into intraday participant CFR calculations and hourly surveillance cycles may better reflect the actual risk in its members’ portfolios, the inclusion of the EUIC may allow FICC to use even 14 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 16 15 U.S.C. 78q–1(b)(3)(F). 15 15 VerDate Sep<11>2014 16:52 Oct 22, 2014 Jkt 235001 more accurate and current position information in its margin calculations and mitigate the effects of Cash Substitutions and Early Unwinds that occur during the intraday period. This more accurate margin calculation may allow FICC to better safeguard and secure securities and funds which are in its custody or control or for which it is responsible. The proposed change is also consistent with Rule 17Ad–22 17 of the Clearing Agency Standards which establishes the minimum requirements regarding how registered clearing agencies must maintain effective risk management procedures and controls. Specifically, Rule 17Ad–22(b)(1) requires a clearing agency that performs CCP services to establish, implement, maintain, and enforce written policies reasonably designed to measure its credit exposures at least daily and to limit exposures to potential losses from defaults by participants under normal market conditions so that the operations of the clearing agency should not be disrupt and non-defaulting participants would not be exposed to losses that they cannot anticipate or control.18 Rule 17Ad–22(b)(2) requires FICC to establish, implement, maintain, and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements.19 To these ends, the change may provide FICC with a more accurate measurement of daily credit exposure using a risk-based model and is designed to address exposures that may occur from intraday activity. In sum, FICC’s more accurate and timely calculations around and monitoring of GCF Repo® activity should better enable FICC to respond in the event that a member defaults. IV. Conclusion On the basis of the foregoing, the Commission concludes that the proposal is consistent with the requirements of the Act, particularly the requirements of Section 17A of the Act,20 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,21 that the 17 17 CFR 240.17Ad–22. CFR 240.17Ad–22(b)(1). 19 17 CFR 240.17Ad–22(b)(2). 20 15 U.S.C. 78q–1. 21 15 U.S.C. 78s(b)(2). 22 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 18 17 PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 proposed rule change (File No. SR– FICC–2014–01) be and hereby is approved.22 For the Commission by the Division of Trading and Markets, pursuant to delegated authority.23 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–25207 Filed 10–22–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73388; File No. SR–FICC– 2014–801] Self-Regulatory Organizations; The Fixed Income Clearing Corporation; Notice of No Objection to Advance Notice Filing, as Amended by Amendment No. 1, Concerning the Government Security Division’s Inclusion of GCF Repo® Positions in Its Intraday Participant Clearing Fund Requirement Calculation, and Its Hourly Internal Surveillance Cycles October 17, 2014. On January 10, 2014, The Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–FICC–2014–801 (‘‘Advance Notice’’) pursuant to Section 806(e)(1)(A) of the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Payment, Clearing and Settlement Supervision Act’’ or ‘‘Title VIII’’) 1 and Rule 19b–4(n)(1)(i) of the Securities Exchange Act of 1934 (‘‘Act’’).2 The Advance Notice was published for comment in the Federal Register on February 10, 2014.3 On March 10, 2014, the Commission staff sent FICC a letter, pursuant to Section 806(e)(1)(D) 4 and Commission authorization, requesting additional information regarding this advance notice.5 FICC filed an amendment to the Advance Notice on August 11, 2014, which was published 23 17 CFR 200.30–3(a)(12). U.S.C. 5465(e)(1)(A). The Financial Stability Oversight Council designated FICC a systemically important financial market utility on July 18, 2012. See Financial Stability Oversight Council 2012 Annual Report, Appendix A, http:// www.treasury.gov/initiatives/fsoc/Documents/ 2012%20Annual%20Report.pdf. Therefore, FICC is required to comply with Title VIII of the Payment, Clearing and Settlement Supervision Act. 2 17 CFR 240.19b–4(n)(1)(i). 3 Securities Exchange Act Release No. 71469 (Feb. 4, 2014), 79 FR 7722 (Feb. 10, 2014) (SR–FICC– 2014–801). 4 12 U.S.C. 5465(e)(1)(D). 5 The Commission received a response to this request for additional information August 19, 2014, at which time a 60 day review period for the Advance Notice began pursuant to Section 806(e)(1)(G). 12 U.S.C. 5465(e)(1)(G). 1 12 E:\FR\FM\23OCN1.SGM 23OCN1 Federal Register / Vol. 79, No. 205 / Thursday, October 23, 2014 / Notices for comment in the Federal Register on September, 26, 2014.6 The Commission received no comments on the Advance Notice. This publication serves as a notice of no objection to the changes proposed in the Advance Notice. I. Description of the Advance Notice The Advance Notice concerns a proposal by FICC’s Government Securities Division (‘‘GSD’’) to include GCF Repo® 7 positions in its intraday (i.e., noon) participant Clearing Fund requirement calculation (‘‘CFR’’), and its hourly internal surveillance cycles. FICC intends for this enhancement to align GSD’s risk management calculations and monitoring with the changes that have been implemented to the tri-party infrastructure by the TriParty Repo Infrastructure Reform Task Force (‘‘Task Force’’) 8 specifically, with respect to locking up of GCF Repo® collateral until 3:30 p.m. (ET) rather than 7:30 a.m. (ET). The Advance Notice also provides FICC the ability to account for an altered intraday risk profile of members as a result of a member’s substitution of cash for securities that were used as collateral for a GCF Repo® position the prior day (‘‘Cash Substitution’’) or a clearing bank unwind of the cash lending side of the transaction for an inter-bank GCF Repo® transaction at 7:30 a.m. (ET) (‘‘Early Unwind’’) by implementing an Early Unwind Intraday Charge (‘‘EUIC’’) where appropriate. mstockstill on DSK4VPTVN1PROD with NOTICES (i) Historical Background Prior to the changes implemented by the Task Force, the underlying collateral pertaining to the GCF Repo® positions was locked up each afternoon (approximately 4:30 p.m. (ET)) and unwound at the beginning of the next business day (approximately 7:30 a.m. (ET)). Thus, the GCF Repo® positions were included in the end of day (‘‘EOD’’) CFR calculations but not included in FICC’s noon intraday CFR calculations. Because the GCF Repo® 6 Securities Exchange Act Release No. 73187 (September 23), 79 FR 58007 (September 26, 2014) (SR–FICC–2014–801). 7 The GCF Repo® service enables dealers to trade general collateral repos, based on rate, term, and underlying product, throughout the day without requiring intra-day, trade-for-trade settlement on a Deliver-versus-Payment (‘‘DVP’’) basis. The service fosters a highly liquid market for securities financing. 8 The Task Force was formed in September 2009 under the auspices of the Payments Risk Committee, a private-sector body sponsored by the Federal Reserve Bank of New York. The Task Force’s goal is to enhance the repo market’s ability to navigate stressed market conditions by implementing changes that help better safeguard the market. FICC has worked in close collaboration with the Task Force on its reform initiatives. VerDate Sep<11>2014 16:52 Oct 22, 2014 Jkt 235001 positions were not included in FICC’s noon intraday CFR calculation, the noon calculation could result in an undermargined condition relative to the same EOD 9 CFR. Thus, FICC imposed a ‘‘higher-of’’ standard on GCF Repo® participants, whereby their noon intraday CFR was the higher of the actual noon intraday CFR calculation or its prior EOD CFR calculation.10 With the advent of the Task Force’s reform, which resulted in moving the unwind from 7:30 a.m. (ET) to 3:30 p.m. (ET), details on the underlying collateral pertaining to GCF Repo® positions are now received from the clearing banks on an hourly basis and can be incorporated into the noon intraday CFR calculation. Substitutions of underlying collateral are now permitted between 8:30 a.m. (ET) and 3:30 p.m. (ET).11 (ii) Proposed Change Because GCF Repo® collateral remains locked-up until 3:30 p.m. (ET), FICC proposed incorporating the underlying collateral pertaining to GCF Repo® positions in its noon intraday participant CFR calculation, and its hourly internal surveillance cycles.12 This enhancement is intended to align FICC’s risk management calculations and monitoring with the changes that have been implemented to the tri-party infrastructure by the Task Force. In certain instances, Cash Substitutions, for repo and reverse repo 9 As used herein ‘‘prior EOD’’ refers to the end of day cycle immediately preceding the current noon intraday cycle and ‘‘same EOD’’ refers to the cycle immediately subsequent to the current noon intraday cycle. 10 For example, in the extreme case where a participant’s portfolio was comprised entirely of GCF Repo® positions, at each EOD margining cycle FICC could calculate a substantial margin requirement which had to be met by 9:30 a.m. (ET) the next morning. But at each intraday margining cycle, FICC would calculate a negligible margin requirement (because GCF Repo® positions were not included at intraday). This would allow the participant to withdraw substantially all its margin collateral before the same EOD. In this case, if the participant defaulted overnight, FICC would hold almost no margin collateral from the participant while having the exposure of liquidating losses on a substantial GCF Repo® portfolio. To prevent this potential under-margin condition, FICC imposed the ‘‘higher of’’ standard. 11 A key aspect of the GCF Repo® service is to give the repo side (cash borrower) the ability to retrieve its securities during the business day and deliver those securities to meet a delivery obligation. As a result, GCF Repo® was unwound in the morning. With the Tri-Party Reform’s change in the unwind from 7:30 a.m. (ET) to 3:30 p.m. (ET), participants now have access to their securities during the day via collateral substitutions. 12 In the ordinary course of business, the ‘‘higher of’’ standard will not apply. However, this standard will remain available in the event that one or both clearing banks do not provide intraday underlying collateral pertaining to the GCF Repo® position data because such clearing bank, as applicable, is unable to provide the data. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 63459 positions and the Early Unwind of interbank allocations for reverse repo positions, could result in higher cash balances in the underlying collateral pertaining to GCF Repo® positions at noon intraday than the same EOD, and could present a potential under-margin condition because cash collateral is not margined but the cash likely will be replaced by securities in the next GCF Repo® allocation of collateral. The under-margin condition will exist overnight because the VaR on the GCF Repo® collateral in the same EOD cycle will not be calculated until after Fedwire is closed, thus precluding members from satisfying margin deficits until the morning of the next business day. As a result, FICC amended its proposal 13 to include the EUIC to account for the altered intraday risk profile created by Cash Substitutions and Early Unwinds.14 In order to determine whether an EUIC should be applied, FICC will take the following steps: 1. At noon, FICC will compare the prior EOD VaR component of the CFR calculation with the current day’s noon intraday VaR component of the CFR calculation. 2. If the current day’s noon intraday VaR calculation is equal to or higher than the prior EOD’s VaR calculation then GSD will not apply an EUIC. If however, the current day’s noon calculation is lower, then FICC will proceed to the step 3 below. 3. FICC will review the GCF Repo® participant’s DVP and GCF Repo® portfolio to determine whether the reduction in the noon calculation may be attributable to the GCF Repo® participant’s intraday cash substitutions or early unwind of interbank allocations. If so, then FICC will apply the EUIC. 4. At the participant level, the EUIC 15 will be the lesser of (i) the net VaR decrease that may be deemed to be attributable to either Cash Substitutions 13 See Securities Exchange Act Release No. 73187 (September 23), 79 FR 58007 (September 26, 2014) (SR–FICC–2014–801). 14 If a member is assessed an EUIC that is deemed unnecessary, FICC management will have the discretion to waive such charge. 15 The EUIC will be included in the noon intraday participant CFR, but not the same EOD CFR. This is because the risk associated with cash lockups exists at intraday, that is, at any time before at EOD. At EOD in the normal course of business, GCF Repo® positions consist of 100% eligible non-cash securities. GCF Repo® is used for overnight financing of securities inventory. Absent extraordinary circumstances, participants do not use cash to collateralized overnight cash loans. Cash Substitutions occur at intraday as participants substitute in cash to withdraw securities they need for intraday deliveries. E:\FR\FM\23OCN1.SGM 23OCN1 63460 Federal Register / Vol. 79, No. 205 / Thursday, October 23, 2014 / Notices and/or Early Unwinds of interbank allocations or (ii) the prior EOD VaR minus the noon intraday VaR.16 The EUIC for Cash Substitutions will apply to both the repo side (cash borrower) and the reverse repo side (cash lender) of the transaction and the EUIC for the Early Unwinds of interbank allocations will apply to the reverse repo side only. The EUIC applies to the reverse repo side because although that side does not initiate the Cash Substitution or the Early Unwind of interbank allocations, these events change the reverse repo participants’ risk profile and as a result, their noon intraday CFR could be unduly reduced. The EUIC for the Early Unwind of interbank allocations will only apply to the reverse repo side (cash lender) since it is only the reverse side whose lockup is unwound early. The securities subject to the Early unwind are not returned to the repo side (cash borrower) in connection with the early unwind of interbank allocations. The Early Unwind of interbank allocations is performed on the reverse repo side to ensure that the underlying collateral is available to the repo side at its settlement bank. Cash is returned to the reverse repo side and thus unwound early. There is no automatic unwind (return of securities) to the repo side. If the repo side needs its securities before the 3:30 p.m. (ET) scheduled unwind, it may perform a securities-for-securities substitution or a cash-for-securities substitution (in which case it may be subject to the EUIC). II. Discussion and Commission Findings mstockstill on DSK4VPTVN1PROD with NOTICES Although the Payment, Clearing and Settlement Supervision Act does not specify a standard of review for an advance notice, the Commission believes its stated purpose is instructive.17 The stated purpose is to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically-important financial market utilities (‘‘FMU’’) and strengthening the 16 In the event that cash substitutions or early unwind of interbank allocations impacts the CFR, the prior end of day CFR is used as a proxy for the same end of day CFR for the portion of the portfolio that is impacted by such cash substitutions or early unwind of interbank allocations. The EUIC is designed to prevent the impact of cash substitutions and early unwind of interbank allocations from unduly reducing noon intraday CFR relative to the prior EOD CFR calculation, thus the EUIC will not increase the noon intraday CFR above the prior EOD CFR calculation. (But the noon intraday CFR calculation exclusive of EUIC could be higher than the prior EOD CFR calculation.) 17 See 12 U.S.C. 5461(b). VerDate Sep<11>2014 16:52 Oct 22, 2014 Jkt 235001 liquidity of systemically important FMUs.18 Section 805(a)(2) of the Payment, Clearing, and Settlement Supervision Act 19 authorizes the Commission to prescribe risk management standards for the payment, clearing, and settlement activities of designated clearing entities and financial institutions engaged in designated activities for which it is the supervisory agency or the appropriate financial regulator. Section 805(b) of the Payment, Clearing, and Settlement Supervision Act 20 states that the objectives and principles for the risk management standards prescribed under Section 805(a) shall be to: • Promote robust risk management; • promote safety and soundness; • reduce systemic risks; and • support the stability of the broader financial system. The Commission has adopted risk management standards under Section 805(a)(2) of the Payment, Clearing and Settlement Supervision Act 21 (‘‘Clearing Agency Standards’’).22 The Clearing Agency Standards became effective on January 2, 2013 and require registered clearing agencies that perform central counterparty (‘‘CCP’’) services to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis.23 As such, it is appropriate for the Commission to review advance notices against these Clearing Agency Standards and the objectives and principles of these risk management standards as described in Section 805(b) of the Payment, Clearing and Settlement Supervision Act.24 Because it was based on the previous pre-reform unwinding process described above, FICC’s intraday risk calculation does not currently capture the GCF Repo® positions on an intraday basis. The change to incorporate the underlying collateral pertaining to the 18 Id. 19 12 U.S.C. 5464(a)(2). U.S.C. 5464(b). 21 12 U.S.C. 5464(a)(2). 22 Rule 17Ad–22, 17 CFR 240.17Ad–22. Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7–08–11). 23 The Clearing Agency Standards are substantially similar to the risk management standards established by the Board of Governors of the Federal Reserve System (‘‘Federal Reserve’’) governing the operations of designated DFMUs that are not clearing entities and financial institutions engaged in designated activities for which the Commission or the Commodity Futures Trading Commission is the Supervisory Agency. See Financial Market Utilities, 77 FR 45907 (August 2, 2012). 24 12 U.S.C. 5464(b). 20 12 PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 GCF Repo® positions in its noon intraday participant CFR calculation, and its hourly internal surveillance cycles, should improve FICC’s risk management by providing a more accurate and timely view of member positions and their corresponding exposures and may help ensure that FICC collects sufficient clearing fund deposits to safeguard itself in the event of a member default. Further, incorporating GCF Repo® positions into intraday participant CFR calculations and hourly surveillance cycles may better reflect the actual risk in its members’ portfolios. Moreover, the inclusion of the EUIC may allow FICC to use more accurate position information in its margin calculations and mitigate the effects of Cash Substitutions and Early Unwinds that occur during the intraday period. The Commission believes that including GCF Repo® positions in FICC’s intraday participant clearing fund calculations and hourly internal surveillance meets the objectives and principles for the risk management standards prescribed under Section 805(a). The inclusion of GCF® Repo positions may provide FICC with a more accurate view of members’ intraday exposures and more accurate risk profiles. Additionally, the EUIC allows FICC to account for risks posed by intraday VaR fluctuations that are caused by Cash Substitutions and Early Unwinds and may allow FICC to better manage intraday risk. Thus, the proposal promotes robust risk management and safety and soundness of FICC’s risk management systems, reduces systemic risk, and supports the stability of the broader financial system.25 The proposed change is also consistent with Rule 17Ad–22 26 of the Clearing Agency Standards which establishes the minimum requirements regarding how registered clearing agencies must maintain effective risk management procedures and controls. Specifically, Rule 17Ad–22(b)(1) requires a clearing agency that performs CCP services to establish, implement, maintain and enforce written policies reasonably designed to measure its credit exposures at least daily and to limit exposures to potential losses from defaults by participants under normal market conditions so that the operations of the clearing agency should not be disrupt and non-defaulting participants would not be exposed to losses that they cannot anticipate or control.27 Rule 25 12 U.S.C. 5464(b). CFR 240.17Ad–22. 27 17 CFR 240.17Ad–22(b)(1). 26 17 E:\FR\FM\23OCN1.SGM 23OCN1 Federal Register / Vol. 79, No. 205 / Thursday, October 23, 2014 / Notices 17Ad–22(b)(2) requires FICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements.28 To these ends, the change may provide FICC with a more accurate measurement of daily credit exposure using a risk-based model and is designed to address exposures that may occur from intraday activity. In sum, FICC’s more accurate and timely calculations around and monitoring of GCF Repo® activity may better enable FICC to respond in the event that a member defaults. III. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Payment, Clearing and Settlement Supervision Act,29 that the Commission does not object to advance notice proposal (SR– FICC2014–801) and that FICC is authorized to implement the proposal as of the date of this notice or the date of an order by the Commission approving a proposed rule change that reflects rule changes that are consistent with this advance notice proposal (SR–FICC– 2014–01), whichever is later. By the Commission. Kevin O’Neill, Deputy Secretary. [FR Doc. 2014–25202 Filed 10–22–14; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice: 8919] 30-Day Notice of Proposed Information Collection: Individual, Corporate or Foundation, and Government Donor Letter Applications Notice of request for public comment and submission to OMB of proposed collection of information. ACTION: The Department of State has submitted the information collection described below to the Office of Management and Budget (OMB) for approval. In accordance with the Paperwork Reduction Act of 1995 we are requesting comments on this collection from all interested individuals and organizations. The purpose of this Notice is to allow 30 days for public comment. mstockstill on DSK4VPTVN1PROD with NOTICES SUMMARY: 28 17 29 12 CFR 240.17Ad–22(b)(2). U.S.C. 5465(e)(1)(I). VerDate Sep<11>2014 16:52 Oct 22, 2014 Jkt 235001 Submit comments directly to the Office of Management and Budget (OMB) up to November 24, 2014. ADDRESSES: Direct comments to the Department of State Desk Officer in the Office of Information and Regulatory Affairs at the Office of Management and Budget (OMB). You may submit comments by the following methods: • Email: oira_submission@ omb.eop.gov. You must include the DS form number, information collection title, and the OMB control number in the subject line of your message. • Fax: 202–395–5806. Attention: Desk Officer for Department of State. FOR FURTHER INFORMATION CONTACT: Direct requests for additional information regarding the collection listed in this notice, including requests for copies of the proposed collection instrument and supporting documents, to Ronda Harvey, who may be reached on (202) 647–6009 or at HarveyRJ2@ state.gov. DATE(S): SUPPLEMENTARY INFORMATION: • Title of Information Collection: Individual, Corporate or Foundation and Government Donor Letter Application. • OMB Control Number: None. • Type of Request: Collection in use without an OMB control number. • Originating Office: Office of Emergencies in the Diplomatic and Consular Service (EDCS). • Form Numbers: Donor Form— Individual (DS–4273), Donor Form— Corporate or Foundation (DS–4272), Donor Form—Government (DS–4271). • Respondents: Individuals, corporations, or foundations that make donations to the Department. • Estimated Number of Respondents: 3665. • Estimated Number of Responses: 3665. • Average Time per Response: 5 minutes per form. • Total Estimated Burden Time: 305 hours. • Frequency: On occasion. • Obligation to Respond: Mandatory. We are soliciting public comments to permit the Department to: • Evaluate whether the proposed information collection is necessary for the proper functions of the Department. • Evaluate the accuracy of our estimate of the time and cost burden for this proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond, including the PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 63461 use of automated collection techniques or other forms of information technology. Please note that comments submitted in response to this Notice are public record. Before including any detailed personal information, you should be aware that your comments as submitted, including your personal information, will be available for public review. Abstract of proposed collection: The Office of Emergencies in the Diplomatic and Consular Service (EDCS) manages the solicitation and acceptance of gifts to the U.S. Department of State. The information requested via donor letters is a necessary first step to accepting donations. The information is sought pursuant to 22 U.S.C. 2697, 5 U.S.C. 7324 and 22 CFR Part 3) and will be used by EDCS’s Gift Fund Coordinator to demonstrate the donor’s intention to donate either an in-kind or monetary gift to the Department. This information is mandatory and must be completed before the gift is received by the Department. Methodology: The information collection forms will be available electronically via the State Department’s Internet Web site (http:// eforms.state.gov). Donors can also complete hard-copies of the form and mail them to EDCS if internet access is not available. Dated: October 14, 2014. Frances Gidez, Gift Funds Coordinator, M/EDCS, Department of State. [FR Doc. 2014–25263 Filed 10–22–14; 8:45 am] BILLING CODE 4710–10–P DEPARTMENT OF STATE [Public Notice 8930] Overseas Security Advisory Council (Osac) Renewal The Department of State has renewed the Charter of the Overseas Security Advisory Council. This federal advisory committee will continue to interact on overseas security matters of mutual interest between the U.S. Government and the American private sector. The Council’s initiatives and security publications provide a unique contribution to protecting American private sector interests abroad. The Under Secretary for Management determined that renewal of the Charter is necessary and in the public interest. The Council consists of representatives from three (3) U.S. Government agencies and thirty-one (31) American private sector companies E:\FR\FM\23OCN1.SGM 23OCN1

Agencies

[Federal Register Volume 79, Number 205 (Thursday, October 23, 2014)]
[Notices]
[Pages 63458-63461]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-25202]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73388; File No. SR-FICC-2014-801]


Self-Regulatory Organizations; The Fixed Income Clearing 
Corporation; Notice of No Objection to Advance Notice Filing, as 
Amended by Amendment No. 1, Concerning the Government Security 
Division's Inclusion of GCF Repo[supreg] Positions in Its Intraday 
Participant Clearing Fund Requirement Calculation, and Its Hourly 
Internal Surveillance Cycles

October 17, 2014.
    On January 10, 2014, The Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-FICC-2014-801 (``Advance Notice'') 
pursuant to Section 806(e)(1)(A) of the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Payment, Clearing and Settlement 
Supervision Act'' or ``Title VIII'') \1\ and Rule 19b-4(n)(1)(i) of the 
Securities Exchange Act of 1934 (``Act'').\2\ The Advance Notice was 
published for comment in the Federal Register on February 10, 2014.\3\ 
On March 10, 2014, the Commission staff sent FICC a letter, pursuant to 
Section 806(e)(1)(D) \4\ and Commission authorization, requesting 
additional information regarding this advance notice.\5\ FICC filed an 
amendment to the Advance Notice on August 11, 2014, which was published

[[Page 63459]]

for comment in the Federal Register on September, 26, 2014.\6\ The 
Commission received no comments on the Advance Notice. This publication 
serves as a notice of no objection to the changes proposed in the 
Advance Notice.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1)(A). The Financial Stability Oversight 
Council designated FICC a systemically important financial market 
utility on July 18, 2012. See Financial Stability Oversight Council 
2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, FICC is 
required to comply with Title VIII of the Payment, Clearing and 
Settlement Supervision Act.
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Securities Exchange Act Release No. 71469 (Feb. 4, 2014), 79 
FR 7722 (Feb. 10, 2014) (SR-FICC-2014-801).
    \4\ 12 U.S.C. 5465(e)(1)(D).
    \5\ The Commission received a response to this request for 
additional information August 19, 2014, at which time a 60 day 
review period for the Advance Notice began pursuant to Section 
806(e)(1)(G). 12 U.S.C. 5465(e)(1)(G).
    \6\ Securities Exchange Act Release No. 73187 (September 23), 79 
FR 58007 (September 26, 2014) (SR-FICC-2014-801).
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I. Description of the Advance Notice

    The Advance Notice concerns a proposal by FICC's Government 
Securities Division (``GSD'') to include GCF Repo[supreg] \7\ positions 
in its intraday (i.e., noon) participant Clearing Fund requirement 
calculation (``CFR''), and its hourly internal surveillance cycles. 
FICC intends for this enhancement to align GSD's risk management 
calculations and monitoring with the changes that have been implemented 
to the tri-party infrastructure by the Tri-Party Repo Infrastructure 
Reform Task Force (``Task Force'') \8\ specifically, with respect to 
locking up of GCF Repo[supreg] collateral until 3:30 p.m. (ET) rather 
than 7:30 a.m. (ET). The Advance Notice also provides FICC the ability 
to account for an altered intraday risk profile of members as a result 
of a member's substitution of cash for securities that were used as 
collateral for a GCF Repo[supreg] position the prior day (``Cash 
Substitution'') or a clearing bank unwind of the cash lending side of 
the transaction for an inter-bank GCF Repo[supreg] transaction at 7:30 
a.m. (ET) (``Early Unwind'') by implementing an Early Unwind Intraday 
Charge (``EUIC'') where appropriate.
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    \7\ The GCF Repo[supreg] service enables dealers to trade 
general collateral repos, based on rate, term, and underlying 
product, throughout the day without requiring intra-day, trade-for-
trade settlement on a Deliver-versus-Payment (``DVP'') basis. The 
service fosters a highly liquid market for securities financing.
    \8\ The Task Force was formed in September 2009 under the 
auspices of the Payments Risk Committee, a private-sector body 
sponsored by the Federal Reserve Bank of New York. The Task Force's 
goal is to enhance the repo market's ability to navigate stressed 
market conditions by implementing changes that help better safeguard 
the market. FICC has worked in close collaboration with the Task 
Force on its reform initiatives.
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(i) Historical Background

    Prior to the changes implemented by the Task Force, the underlying 
collateral pertaining to the GCF Repo[supreg] positions was locked up 
each afternoon (approximately 4:30 p.m. (ET)) and unwound at the 
beginning of the next business day (approximately 7:30 a.m. (ET)). 
Thus, the GCF Repo[supreg] positions were included in the end of day 
(``EOD'') CFR calculations but not included in FICC's noon intraday CFR 
calculations. Because the GCF Repo[supreg] positions were not included 
in FICC's noon intraday CFR calculation, the noon calculation could 
result in an under-margined condition relative to the same EOD \9\ CFR. 
Thus, FICC imposed a ``higher-of'' standard on GCF Repo[supreg] 
participants, whereby their noon intraday CFR was the higher of the 
actual noon intraday CFR calculation or its prior EOD CFR 
calculation.\10\
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    \9\ As used herein ``prior EOD'' refers to the end of day cycle 
immediately preceding the current noon intraday cycle and ``same 
EOD'' refers to the cycle immediately subsequent to the current noon 
intraday cycle.
    \10\ For example, in the extreme case where a participant's 
portfolio was comprised entirely of GCF Repo[supreg] positions, at 
each EOD margining cycle FICC could calculate a substantial margin 
requirement which had to be met by 9:30 a.m. (ET) the next morning. 
But at each intraday margining cycle, FICC would calculate a 
negligible margin requirement (because GCF Repo[supreg] positions 
were not included at intraday). This would allow the participant to 
withdraw substantially all its margin collateral before the same 
EOD. In this case, if the participant defaulted overnight, FICC 
would hold almost no margin collateral from the participant while 
having the exposure of liquidating losses on a substantial GCF 
Repo[supreg] portfolio. To prevent this potential under-margin 
condition, FICC imposed the ``higher of'' standard.
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    With the advent of the Task Force's reform, which resulted in 
moving the unwind from 7:30 a.m. (ET) to 3:30 p.m. (ET), details on the 
underlying collateral pertaining to GCF Repo[supreg] positions are now 
received from the clearing banks on an hourly basis and can be 
incorporated into the noon intraday CFR calculation. Substitutions of 
underlying collateral are now permitted between 8:30 a.m. (ET) and 3:30 
p.m. (ET).\11\
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    \11\ A key aspect of the GCF Repo[supreg] service is to give the 
repo side (cash borrower) the ability to retrieve its securities 
during the business day and deliver those securities to meet a 
delivery obligation. As a result, GCF Repo[supreg] was unwound in 
the morning. With the Tri-Party Reform's change in the unwind from 
7:30 a.m. (ET) to 3:30 p.m. (ET), participants now have access to 
their securities during the day via collateral substitutions.
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(ii) Proposed Change

    Because GCF Repo[supreg] collateral remains locked-up until 3:30 
p.m. (ET), FICC proposed incorporating the underlying collateral 
pertaining to GCF Repo[supreg] positions in its noon intraday 
participant CFR calculation, and its hourly internal surveillance 
cycles.\12\ This enhancement is intended to align FICC's risk 
management calculations and monitoring with the changes that have been 
implemented to the tri-party infrastructure by the Task Force.
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    \12\ In the ordinary course of business, the ``higher of'' 
standard will not apply. However, this standard will remain 
available in the event that one or both clearing banks do not 
provide intraday underlying collateral pertaining to the GCF 
Repo[supreg] position data because such clearing bank, as 
applicable, is unable to provide the data.
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    In certain instances, Cash Substitutions, for repo and reverse repo 
positions and the Early Unwind of interbank allocations for reverse 
repo positions, could result in higher cash balances in the underlying 
collateral pertaining to GCF Repo[supreg] positions at noon intraday 
than the same EOD, and could present a potential under-margin condition 
because cash collateral is not margined but the cash likely will be 
replaced by securities in the next GCF Repo[supreg] allocation of 
collateral. The under-margin condition will exist overnight because the 
VaR on the GCF Repo[supreg] collateral in the same EOD cycle will not 
be calculated until after Fedwire is closed, thus precluding members 
from satisfying margin deficits until the morning of the next business 
day.
    As a result, FICC amended its proposal \13\ to include the EUIC to 
account for the altered intraday risk profile created by Cash 
Substitutions and Early Unwinds.\14\ In order to determine whether an 
EUIC should be applied, FICC will take the following steps:
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    \13\ See Securities Exchange Act Release No. 73187 (September 
23), 79 FR 58007 (September 26, 2014) (SR-FICC-2014-801).
    \14\ If a member is assessed an EUIC that is deemed unnecessary, 
FICC management will have the discretion to waive such charge.
---------------------------------------------------------------------------

    1. At noon, FICC will compare the prior EOD VaR component of the 
CFR calculation with the current day's noon intraday VaR component of 
the CFR calculation.
    2. If the current day's noon intraday VaR calculation is equal to 
or higher than the prior EOD's VaR calculation then GSD will not apply 
an EUIC. If however, the current day's noon calculation is lower, then 
FICC will proceed to the step 3 below.
    3. FICC will review the GCF Repo[supreg] participant's DVP and GCF 
Repo[supreg] portfolio to determine whether the reduction in the noon 
calculation may be attributable to the GCF Repo[supreg] participant's 
intraday cash substitutions or early unwind of interbank allocations. 
If so, then FICC will apply the EUIC.
    4. At the participant level, the EUIC \15\ will be the lesser of 
(i) the net VaR decrease that may be deemed to be attributable to 
either Cash Substitutions

[[Page 63460]]

and/or Early Unwinds of interbank allocations or (ii) the prior EOD VaR 
minus the noon intraday VaR.\16\
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    \15\ The EUIC will be included in the noon intraday participant 
CFR, but not the same EOD CFR. This is because the risk associated 
with cash lockups exists at intraday, that is, at any time before at 
EOD. At EOD in the normal course of business, GCF Repo[supreg] 
positions consist of 100% eligible non-cash securities. GCF 
Repo[supreg] is used for overnight financing of securities 
inventory. Absent extraordinary circumstances, participants do not 
use cash to collateralized overnight cash loans. Cash Substitutions 
occur at intraday as participants substitute in cash to withdraw 
securities they need for intraday deliveries.
    \16\ In the event that cash substitutions or early unwind of 
interbank allocations impacts the CFR, the prior end of day CFR is 
used as a proxy for the same end of day CFR for the portion of the 
portfolio that is impacted by such cash substitutions or early 
unwind of interbank allocations. The EUIC is designed to prevent the 
impact of cash substitutions and early unwind of interbank 
allocations from unduly reducing noon intraday CFR relative to the 
prior EOD CFR calculation, thus the EUIC will not increase the noon 
intraday CFR above the prior EOD CFR calculation. (But the noon 
intraday CFR calculation exclusive of EUIC could be higher than the 
prior EOD CFR calculation.)
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The EUIC for Cash Substitutions will apply to both the repo side (cash 
borrower) and the reverse repo side (cash lender) of the transaction 
and the EUIC for the Early Unwinds of interbank allocations will apply 
to the reverse repo side only. The EUIC applies to the reverse repo 
side because although that side does not initiate the Cash Substitution 
or the Early Unwind of interbank allocations, these events change the 
reverse repo participants' risk profile and as a result, their noon 
intraday CFR could be unduly reduced. The EUIC for the Early Unwind of 
interbank allocations will only apply to the reverse repo side (cash 
lender) since it is only the reverse side whose lockup is unwound 
early. The securities subject to the Early unwind are not returned to 
the repo side (cash borrower) in connection with the early unwind of 
interbank allocations. The Early Unwind of interbank allocations is 
performed on the reverse repo side to ensure that the underlying 
collateral is available to the repo side at its settlement bank. Cash 
is returned to the reverse repo side and thus unwound early. There is 
no automatic unwind (return of securities) to the repo side. If the 
repo side needs its securities before the 3:30 p.m. (ET) scheduled 
unwind, it may perform a securities-for-securities substitution or a 
cash-for-securities substitution (in which case it may be subject to 
the EUIC).

II. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, the Commission 
believes its stated purpose is instructive.\17\ The stated purpose is 
to mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically-important financial market utilities 
(``FMU'') and strengthening the liquidity of systemically important 
FMUs.\18\
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    \17\ See 12 U.S.C. 5461(b).
    \18\ Id.
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    Section 805(a)(2) of the Payment, Clearing, and Settlement 
Supervision Act \19\ authorizes the Commission to prescribe risk 
management standards for the payment, clearing, and settlement 
activities of designated clearing entities and financial institutions 
engaged in designated activities for which it is the supervisory agency 
or the appropriate financial regulator. Section 805(b) of the Payment, 
Clearing, and Settlement Supervision Act \20\ states that the 
objectives and principles for the risk management standards prescribed 
under Section 805(a) shall be to:
---------------------------------------------------------------------------

    \19\ 12 U.S.C. 5464(a)(2).
    \20\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Payment, Clearing and Settlement Supervision Act \21\ 
(``Clearing Agency Standards'').\22\ The Clearing Agency Standards 
became effective on January 2, 2013 and require registered clearing 
agencies that perform central counterparty (``CCP'') services to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for their operations and risk management practices on an 
ongoing basis.\23\ As such, it is appropriate for the Commission to 
review advance notices against these Clearing Agency Standards and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Payment, Clearing and Settlement 
Supervision Act.\24\
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    \21\ 12 U.S.C. 5464(a)(2).
    \22\ Rule 17Ad-22, 17 CFR 240.17Ad-22. Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
    \23\ The Clearing Agency Standards are substantially similar to 
the risk management standards established by the Board of Governors 
of the Federal Reserve System (``Federal Reserve'') governing the 
operations of designated DFMUs that are not clearing entities and 
financial institutions engaged in designated activities for which 
the Commission or the Commodity Futures Trading Commission is the 
Supervisory Agency. See Financial Market Utilities, 77 FR 45907 
(August 2, 2012).
    \24\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    Because it was based on the previous pre-reform unwinding process 
described above, FICC's intraday risk calculation does not currently 
capture the GCF Repo[supreg] positions on an intraday basis. The change 
to incorporate the underlying collateral pertaining to the GCF 
Repo[supreg] positions in its noon intraday participant CFR 
calculation, and its hourly internal surveillance cycles, should 
improve FICC's risk management by providing a more accurate and timely 
view of member positions and their corresponding exposures and may help 
ensure that FICC collects sufficient clearing fund deposits to 
safeguard itself in the event of a member default. Further, 
incorporating GCF Repo[supreg] positions into intraday participant CFR 
calculations and hourly surveillance cycles may better reflect the 
actual risk in its members' portfolios. Moreover, the inclusion of the 
EUIC may allow FICC to use more accurate position information in its 
margin calculations and mitigate the effects of Cash Substitutions and 
Early Unwinds that occur during the intraday period.
    The Commission believes that including GCF Repo[supreg] positions 
in FICC's intraday participant clearing fund calculations and hourly 
internal surveillance meets the objectives and principles for the risk 
management standards prescribed under Section 805(a). The inclusion of 
GCF[supreg] Repo positions may provide FICC with a more accurate view 
of members' intraday exposures and more accurate risk profiles. 
Additionally, the EUIC allows FICC to account for risks posed by 
intraday VaR fluctuations that are caused by Cash Substitutions and 
Early Unwinds and may allow FICC to better manage intraday risk. Thus, 
the proposal promotes robust risk management and safety and soundness 
of FICC's risk management systems, reduces systemic risk, and supports 
the stability of the broader financial system.\25\
---------------------------------------------------------------------------

    \25\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The proposed change is also consistent with Rule 17Ad-22 \26\ of 
the Clearing Agency Standards which establishes the minimum 
requirements regarding how registered clearing agencies must maintain 
effective risk management procedures and controls. Specifically, Rule 
17Ad-22(b)(1) requires a clearing agency that performs CCP services to 
establish, implement, maintain and enforce written policies reasonably 
designed to measure its credit exposures at least daily and to limit 
exposures to potential losses from defaults by participants under 
normal market conditions so that the operations of the clearing agency 
should not be disrupt and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control.\27\ Rule

[[Page 63461]]

17Ad-22(b)(2) requires FICC to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions and use risk-based models and parameters to 
set margin requirements.\28\ To these ends, the change may provide FICC 
with a more accurate measurement of daily credit exposure using a risk-
based model and is designed to address exposures that may occur from 
intraday activity. In sum, FICC's more accurate and timely calculations 
around and monitoring of GCF Repo[supreg] activity may better enable 
FICC to respond in the event that a member defaults.
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22.
    \27\ 17 CFR 240.17Ad-22(b)(1).
    \28\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Payment, Clearing and Settlement Supervision Act,\29\ that the 
Commission does not object to advance notice proposal (SR-FICC2014-801) 
and that FICC is authorized to implement the proposal as of the date of 
this notice or the date of an order by the Commission approving a 
proposed rule change that reflects rule changes that are consistent 
with this advance notice proposal (SR-FICC-2014-01), whichever is 
later.
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    \29\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2014-25202 Filed 10-22-14; 8:45 am]
BILLING CODE 8011-01-P