Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Amend the Government Securities Division Rulebook in Order To Establish an Early Unwind Intraday Charge in Connection With the Inclusion of GCF Repo® Positions in GSD's Intraday Participant Clearing Fund Requirement, and GSD's Hourly Internal Surveillance Cycles, 63456-63458 [2014-25207]

Download as PDF 63456 Federal Register / Vol. 79, No. 205 / Thursday, October 23, 2014 / Notices Section 6(b) of the Act,6 in general, and furthers the objectives of Sections 6(b)(5) 7 and 6(b)(7) 8 in particular in that it is designed: • To prevent fraudulent and manipulative acts and practices, • to promote just and equitable principles of trade, • to foster cooperation and coordination with persons engaged in facilitating transactions in securities, • to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest, and • to provide a fair procedure for the disciplining of members. The Exchange believes that the proposed rule change will strengthen its ability to carry out its responsibilities as a self-regulatory organization by clarifying that CFE may hold any parties to and Authorized Reporters for an ECRP transaction responsible for compliance with the related rule depending on the facts and circumstances and by adding violations to its Minor Rule Violation Rule. CFE also believes that the additions to the Minor Rule Violation Rule will serve as an effective deterrent to future violative conduct and as an effective and efficient means of disciplining for infractions that do not warrant a regular disciplinary proceeding. CFE additionally believes that these additions will promote consistent application of sanctions by the Exchange for minor rule violations, establish a fair procedure for the disciplining of TPHs for minor rule violations and reinforce its surveillance and enforcement functions. mstockstill on DSK4VPTVN1PROD with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition CFE does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act, in that the rule change makes enhancements to CFE’s ability to deter and discipline certain infractions. The Exchange believes that the proposed rule change is equitable and not unfairly discriminatory because the clarification of compliance responsibilities with respect to ECRP transactions and all of the additions to the Minor Rule Violation Rule would apply equally to all parties that are subject to the applicable requirements. 6 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 8 15 U.S.C. 78f(b)(7). C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The proposed rule change will become effective on October 16, 2014. At any time within 60 days of the date of effectiveness of the proposed rule change, the Commission, after consultation with the CFTC, may summarily abrogate the proposed rule change and require that the proposed rule change be refiled in accordance with the provisions of Section 19(b)(1) of the Act.9 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CFE–2014–003 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–CFE–2014–003. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://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 7 15 VerDate Sep<11>2014 16:52 Oct 22, 2014 9 15 Jkt 235001 PO 00000 U.S.C. 78s(b)(1). Frm 00080 Fmt 4703 Sfmt 4703 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 offices of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CFE– 2014–003, and should be submitted on or before November 13, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–25201 Filed 10–22–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73389; File No. SR–FICC– 2014–01] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Amend the Government Securities Division Rulebook in Order To Establish an Early Unwind Intraday Charge in Connection With the Inclusion of GCF Repo® Positions in GSD’s Intraday Participant Clearing Fund Requirement, and GSD’s Hourly Internal Surveillance Cycles October 17, 2014. I. Introduction On August 11, 2014, the Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–FICC–2014–01 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 The proposed rule 10 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. FICC also filed a proposed change as an advance notice concerning GSD’s inclusion of GCF® repo positions in its intraday participant clearing fund requirement calculation and its hourly internal surveillance cycles under Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Payment, Clearing and Settlement Supervision Act). 12 U.S.C. 5465(e)(1). Securities Exchange Act Release No. 71469 (February 4, 2014), 79 FR 7722 (February 10, 2014) (SR–FICC–2014–801). FICC subsequently amended the advance notice to establish the Early Unwind Intraday Charge described herein. Securities Exchange Act Release No. 73187 1 15 E:\FR\FM\23OCN1.SGM 23OCN1 Federal Register / Vol. 79, No. 205 / Thursday, October 23, 2014 / Notices change was published for comment in the Federal Register on August 29, 2014.3 The Commission received no comment letters in response to the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. II. Description FICC proposed to amend the Government Securities Division (‘‘GSD’’) Rulebook (the ‘‘Rules’’) in order to establish an Early Unwind Intraday Charge (‘‘EUIC’’) to protect against the exposure that may result from a member’s intraday 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’’) 4 in connection with including the underlying collateral pertaining to the GCF Repo® 5 positions in GSD’s noon intraday 6 participant Clearing Fund requirement (‘‘CFR’’) calculation, and its hourly internal surveillance cycles. Background mstockstill on DSK4VPTVN1PROD with NOTICES On January 10, 2014, FICC filed advance notice SR–FICC–2014–801 7 (‘‘Advance Notice’’) with the Commission. This filing describes FICC’s proposal to include the underlying collateral pertaining to the GCF Repo® positions in its noon intraday participant CFR calculation, and its hourly internal surveillance cycles. FICC intended 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 (September 23, 2014), 79 FR 58007 (September 26, 2014) (SR–FICC–2014–801). 3 Securities Exchange Act Release No. 72908 (August 25, 2014), 79 FR 51630 (August 29, 2014) (SR–FICC–2014–01). 4 The Early Unwind refers to the automatic return of the collateral from the reverse repo side (cash lender) to FICC’s account at the repo side’s (cash borrower’s) settlement bank and the return of cash to the reverse repo side, which typically occurs before the opening of Fedwire. 5 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. GCF Repo® is a registered trademark of The Depository Trust & Clearing Corporation. 6 Noon intraday refers to the routine intraday margining cycle which is based on a 12:00 p.m. (ET) position snap shot. Pursuant to Rule 4, FICC may request additional margin outside of the formal intraday margin calls. 7 See supra note 2. VerDate Sep<11>2014 16:52 Oct 22, 2014 Jkt 235001 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). Subsequent to the initial Advance Notice filing, FICC discovered that under the proposed change, a potential exposure may result from a GCF Repo® participant’s Cash Substitutions and Early Unwinds. As a result, on August 11, 2014, FICC filed this proposed rule change.9 Specifically, FICC discovered that there were instances where exposure to FICC arose as a result of certain Cash Substitutions or Early Unwind. This is because the noon intraday underlying collateral pertaining to the GCF Repo® positions of impacted participants may exhibit a different risk profile than their same end-of-day (‘‘EOD’’) 10 positions. The impact could be to increase or decrease the Value-at-Risk (‘‘VaR’’) component of the CFR. In certain instances, Cash Substitutions, for repo and reverse repo positions and Early Unwinds 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. In addition, FICC noted that it is likely that the cash will be replaced by securities in the next GCF Repo® allocation of collateral. The undermargin 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. (b) Proposed Change FICC’s rule change amends GSD’s Rules to establish the EUIC to protect against the exposure that may result from a member’s Cash Substitutions or Early Unwinds.11 GSD will adjust the 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. DTCC, FICC’s parent company, has worked in close collaboration with the Task Force on their reform initiatives. 9 At the same time, FICC filed Amendment No. 1 to the Advance Notice with the Commission, which contains the same change. See supra note 2. 10 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 end of day cycle immediately subsequent to the current noon intraday cycle. 11 If, however, a member is assessed an EUIC under circumstances that were not initially PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 63457 noon intraday CFR in the form of an EUIC to address this risk. In order to determine whether an EUIC should be applied, GSD will take the following steps: 1. At noon, GSD 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 GSD will proceed to the step 3 below. 3. GSD 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 Cash Substitutions or Early Unwinds. If so, then GSD will apply the EUIC. 4. At the participant level, the EUIC 12 will be the lesser of (i) the net VaR decrease that may be deemed to be attributable to either cash substitutions and/or early unwind of interbank allocations or (ii) the prior EOD VaR minus the noon intraday VaR.13 The EUIC for Cash Substitutions will apply to the repo side (cash borrower) and the reverse repo side (cash lender) of the transaction. As such, the reverse repo side is subject to the EUIC notwithstanding its inability to control the Cash Substitutions. The EUIC for Cash Substitutions applies to the reverse repo side because although they do not initiate the Cash Substitutions, the Cash Substitutions change the participant’s risk profile and as a result, their noon contemplated and the EUIC charge is deemed unnecessary, FICC management has the discretion to waive such charge. 12 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. 13 In the event that a Cash Substitution or Early Unwind 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). E:\FR\FM\23OCN1.SGM 23OCN1 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

Agencies

[Federal Register Volume 79, Number 205 (Thursday, October 23, 2014)]
[Notices]
[Pages 63456-63458]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-25207]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73389; File No. SR-FICC-2014-01]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Amend the Government Securities 
Division Rulebook in Order To Establish an Early Unwind Intraday Charge 
in Connection With the Inclusion of GCF Repo[supreg] Positions in GSD's 
Intraday Participant Clearing Fund Requirement, and GSD's Hourly 
Internal Surveillance Cycles

October 17, 2014.

I. Introduction

    On August 11, 2014, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2014-01 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule

[[Page 63457]]

change was published for comment in the Federal Register on August 29, 
2014.\3\ The Commission received no comment letters in response to the 
proposed rule change. For the reasons discussed below, the Commission 
is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. FICC also filed a proposed change as an 
advance notice concerning GSD's inclusion of GCF[supreg] repo 
positions in its intraday participant clearing fund requirement 
calculation and its hourly internal surveillance cycles under 
Section 806(e)(1) of the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Payment, Clearing and Settlement 
Supervision Act). 12 U.S.C. 5465(e)(1). Securities Exchange Act 
Release No. 71469 (February 4, 2014), 79 FR 7722 (February 10, 2014) 
(SR-FICC-2014-801). FICC subsequently amended the advance notice to 
establish the Early Unwind Intraday Charge described herein. 
Securities Exchange Act Release No. 73187 (September 23, 2014), 79 
FR 58007 (September 26, 2014) (SR-FICC-2014-801).
    \3\ Securities Exchange Act Release No. 72908 (August 25, 2014), 
79 FR 51630 (August 29, 2014) (SR-FICC-2014-01).
---------------------------------------------------------------------------

II. Description

    FICC proposed to amend the Government Securities Division (``GSD'') 
Rulebook (the ``Rules'') in order to establish an Early Unwind Intraday 
Charge (``EUIC'') to protect against the exposure that may result from 
a member's intraday 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 transaction at 7:30 a.m. 
(ET) (``Early Unwind'') \4\ in connection with including the underlying 
collateral pertaining to the GCF Repo[supreg] \5\ positions in GSD's 
noon intraday \6\ participant Clearing Fund requirement (``CFR'') 
calculation, and its hourly internal surveillance cycles.
---------------------------------------------------------------------------

    \4\ The Early Unwind refers to the automatic return of the 
collateral from the reverse repo side (cash lender) to FICC's 
account at the repo side's (cash borrower's) settlement bank and the 
return of cash to the reverse repo side, which typically occurs 
before the opening of Fedwire.
    \5\ 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. GCF 
Repo[supreg] is a registered trademark of The Depository Trust & 
Clearing Corporation.
    \6\ Noon intraday refers to the routine intraday margining cycle 
which is based on a 12:00 p.m. (ET) position snap shot. Pursuant to 
Rule 4, FICC may request additional margin outside of the formal 
intraday margin calls.
---------------------------------------------------------------------------

Background

    On January 10, 2014, FICC filed advance notice SR-FICC-2014-801 \7\ 
(``Advance Notice'') with the Commission. This filing describes FICC's 
proposal to include the underlying collateral pertaining to the GCF 
Repo[supreg] positions in its noon intraday participant CFR 
calculation, and its hourly internal surveillance cycles. FICC intended 
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). Subsequent to the initial Advance Notice filing, FICC discovered 
that under the proposed change, a potential exposure may result from a 
GCF Repo[supreg] participant's Cash Substitutions and Early Unwinds. As 
a result, on August 11, 2014, FICC filed this proposed rule change.\9\
---------------------------------------------------------------------------

    \7\ See supra note 2.
    \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. DTCC, FICC's parent company, has worked in close 
collaboration with the Task Force on their reform initiatives.
    \9\ At the same time, FICC filed Amendment No. 1 to the Advance 
Notice with the Commission, which contains the same change. See 
supra note 2.
---------------------------------------------------------------------------

    Specifically, FICC discovered that there were instances where 
exposure to FICC arose as a result of certain Cash Substitutions or 
Early Unwind. This is because the noon intraday underlying collateral 
pertaining to the GCF Repo[supreg] positions of impacted participants 
may exhibit a different risk profile than their same end-of-day 
(``EOD'') \10\ positions. The impact could be to increase or decrease 
the Value-at-Risk (``VaR'') component of the CFR.
---------------------------------------------------------------------------

    \10\ 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 end of day cycle immediately subsequent 
to the current noon intraday cycle.
---------------------------------------------------------------------------

    In certain instances, Cash Substitutions, for repo and reverse repo 
positions and Early Unwinds 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. In addition, FICC noted that it is likely that the cash 
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.
(b) Proposed Change
    FICC's rule change amends GSD's Rules to establish the EUIC to 
protect against the exposure that may result from a member's Cash 
Substitutions or Early Unwinds.\11\ GSD will adjust the noon intraday 
CFR in the form of an EUIC to address this risk. In order to determine 
whether an EUIC should be applied, GSD will take the following steps:
---------------------------------------------------------------------------

    \11\ If, however, a member is assessed an EUIC under 
circumstances that were not initially contemplated and the EUIC 
charge is deemed unnecessary, FICC management has the discretion to 
waive such charge.
---------------------------------------------------------------------------

    1. At noon, GSD 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 
GSD will proceed to the step 3 below.
    3. GSD 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 Cash Substitutions or Early Unwinds. 
If so, then GSD will apply the EUIC.
    4. At the participant level, the EUIC \12\ will be the lesser of 
(i) the net VaR decrease that may be deemed to be attributable to 
either cash substitutions and/or early unwind of interbank allocations 
or (ii) the prior EOD VaR minus the noon intraday VaR.\13\
---------------------------------------------------------------------------

    \12\ 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.
    \13\ In the event that a Cash Substitution or Early Unwind 
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 the repo side (cash 
borrower) and the reverse repo side (cash lender) of the transaction. 
As such, the reverse repo side is subject to the EUIC notwithstanding 
its inability to control the Cash Substitutions. The EUIC for Cash 
Substitutions applies to the reverse repo side because although they do 
not initiate the Cash Substitutions, the Cash Substitutions change the 
participant's risk profile and as a result, their noon

[[Page 63458]]

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.
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    \14\ 15 U.S.C. 78s(b)(2)(C).
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    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[supreg] 
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[supreg] 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 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.
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    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[supreg] activity should better enable 
FICC to respond in the event that a member defaults.
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    \17\ 17 CFR 240.17Ad-22.
    \18\ 17 CFR 240.17Ad-22(b)(1).
    \19\ 17 CFR 240.17Ad-22(b)(2).
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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.
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    \20\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (File No. SR-FICC-2014-01) be 
and hereby is approved.\22\
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    \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).
    \23\ 17 CFR 200.30-3(a)(12).

    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