Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Implement the Capped Contingency Liquidity Facility in the Government Securities Division Rulebook, 14401-14410 [2017-05401]
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Federal Register / Vol. 82, No. 52 / Monday, March 20, 2017 / Notices
Paper Comments
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. In fact, the
Exchange believes that the introduction
of the Fund would promote competition
by making available to investors an
actively managed investment strategy in
a structure that offers the cost and tax
efficiencies and shareholder protections
of ETFs, while removing the
requirement for daily portfolio holdings
disclosure to ensure a tight relationship
between market trading prices and
NAV. Moreover, the Exchange believes
that the proposed method of Share
trading would provide investors with
transparency of trading costs, and the
ability to control trading costs using
limit orders, that is not available for
conventionally traded ETFs.
These developments could
significantly enhance competition to the
benefit of the markets and investors.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
shall: (a) by order approve or disapprove
such proposed rule change, or (b)
institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
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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:
• 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–NASDAQ–2017–025. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office 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–
NASDAQ–2017–025 and should be
submitted on or before April 10, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–05404 Filed 3–17–17; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2017–025 on the subject line.
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14401
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80234; File No. SR–FICC–
2017–002]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Proposed Rule Change To
Implement the Capped Contingency
Liquidity Facility in the Government
Securities Division Rulebook
March 14, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’),1 and Rule 19b–4
thereunder,2 notice is hereby given that
on March 1, 2017, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II and III below, which Items
have been prepared by the clearing
agency.3 The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to FICC’s Government
Securities Division (‘‘GSD’’) Rulebook
(the ‘‘GSD Rules’’) 4 in order to include
a committed liquidity resource (referred
to as the ‘‘Capped Contingency
Liquidity Facility®’’ (‘‘CCLF’’)). This
facility would provide FICC with
additional liquid financial resources to
meet its cash settlement obligations in
the event of a default of the largest
family of affiliated Netting Members 5
(an ‘‘Affiliated Family’’) of GSD, as
described in greater detail below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 On March 1, 2017, FICC filed this proposed rule
change as an advance notice (SR–FICC–2017–802)
(‘‘Advance Notice Filing’’) with the Commission
pursuant to Section 806(e)(1) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act
entitled the Payment, Clearing, and Settlement
Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and
Rule 19b–4(n)(1)(i) of the Exchange Act, 17 CFR
240.19b–4(n)(1)(i). A copy of the advance notice is
available at https://www.dtcc.com/legal/sec-rulefilings.aspx.
4 GSD Rules, available at www.dtcc.com/legal/
rules-and-procedures.aspx. Capitalized terms used
herein and not otherwise defined shall have the
meaning assigned to such terms in the GSD Rules.
5 As defined in the GSD Rules, the term ‘‘Netting
Member’’ means a Member that is a Member of the
Comparison System and the Netting System. Id.
2 17
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concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
FICC is proposing to amend the GSD
Rules to include CCLF, which would be
a rules-based committed liquidity
facility designed to help ensure that
FICC maintains sufficient liquid
financial resources to meet its cash
settlement obligations in the event of a
default of the Affiliated Family to which
FICC has the largest exposure in
extreme but plausible market
conditions, as required by Rule 17Ad–
22(b)(3) 6 of the Exchange Act. This
proposal is also designed to comply
with newly adopted Rule 17Ad–22(e)(7)
under the Exchange Act.7 As of April
11, 2017, Rule 17Ad–22(e)(7) will
require FICC to have policies and
procedures reasonably designed to
effectively monitor, measure, and
manage liquidity risk.
A. Background
FICC occupies an important role in
the securities settlement system by
interposing itself as a central
counterparty between Netting Members
that are counterparties to transactions
cleared by GSD (‘‘GSD Transactions’’),
thereby reducing the risk faced by
Netting Members.8 To manage the
counterparty risk, FICC requires each
Netting Member to deposit margin
(referred to in the GSD Rules as
‘‘Required Fund Deposits’’) into the
Clearing Fund, which constitutes the
financial resources that FICC could use
to cover potential losses resulting from
a Netting Member default. In addition to
collecting and maintaining financial
resources to cover default losses, FICC
also maintains liquid resources to
satisfy its settlement obligations in the
6 See
17 CFR 240.17Ad7–22(b)(3).
17 CFR 240.17Ad–22(e)(7).
8 FICC operates two divisions—GSD and the
Mortgage-Backed Securities Division (‘‘MBSD’’).
GSD provides trade comparison, netting, risk
management, settlement and central counterparty
services for the U.S. government securities market,
while MBSD provides the same services for the U.S.
mortgage-backed securities market. Because GSD
and MBSD are separate divisions of FICC, each
division maintains its own rules, members, margin
from their respective members, Clearing Fund, and
liquid resources.
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7 See
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event of a Netting Member default.
Upon regulatory approval and
completion of a 12-month phase-in
period, as described below, CCLF would
become an additional liquid resource
available to FICC as part of its liquidity
risk management framework for GSD.9
B. Overview of the Proposal
CCLF would only be invoked if FICC
declared a ‘‘CCLF Event,’’ that is, if
FICC has ceased to act for a Netting
Member in accordance to GSD Rule
22A 10 (referred to as a ‘‘default’’) and
subsequent to such default, FICC
determines that it does not have the
ability to obtain sufficient liquidity from
GSD’s Clearing Fund, by entering into
repurchase transactions using securities
in the Clearing Fund or securities that
were destined to the defaulting Netting
Member, or through uncommitted bank
loans with its Clearing Agent Banks.
Upon declaration of a CCLF Event, each
Netting Member may be called upon to
enter into repurchase transactions with
FICC (‘‘CCLF Transactions’’) up to a
previously determined capped dollar
amount, as described below.
1. Declaration of a CCLF Event
Following a default, FICC would first
obtain liquidity through other available
liquid resources, as described above. If
and only if, FICC determines that these
sources of liquidity are not able to
generate sufficient cash to pay the nondefaulting Netting Members, FICC
would declare a CCLF Event by issuing
an Important Notice informing all
Netting Members of FICC’s need to
make such a declaration and enter into
CCLF Transactions, as necessary.11
2. CCLF Transactions
During a CCLF Event, FICC would
meet its liquidity need by initiating
CCLF Transactions with non-defaulting
Netting Members. Each CCLF
Transaction would be governed by the
terms of the September 1996 Securities
Industry and Financial Markets
Association Master Repurchase
9 In 2012, FICC amended MBSD’s Clearing Rules
(the ‘‘MBSD Rules’’) to create a CCLF for managing
MBSD’s liquidity risk. FICC is proposing to amend
the GSD Rules to create a CCLF for managing GSD’s
liquidity risk. Because this CCLF is for GSD only,
the description of the proposal should be
understood within the framework of the GSD Rules.
See Securities Exchange Act Release No. 34–66550
(March 9, 2012), 77 FR 15155 (March 14, 2012) (SR–
FICC–2008–01); MBSD Rule 17, MBSD Rules,
available at www.dtcc.com/legal/rules-andprocedures.aspx.
10 GSD Rules, supra note 4.
11 Such Important Notice would also advise
Netting Members to review their most recent
liquidity funding reports to determine their
respective maximum funding obligations.
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Agreement,12 which would be
incorporated by reference into the GSD
Rules as a master repurchase agreement
between FICC as seller and each Netting
Member as buyer with certain
modifications as outlined in the GSD
Rules (the ‘‘CCLF MRA’’).
Each Netting Member would be
obligated to enter into CCLF
Transactions up to a capped dollar
amount. FICC would first identify the
non-defaulting Netting Members that are
obligated to deliver securities destined
for the defaulting Netting Member
(‘‘Direct Affected Members’’) and FICC’s
cash payment obligation to such Direct
Affected Member that FICC would need
to finance through CCLF to cover the
defaulting Netting Member’s failure to
deliver cash (the ‘‘Financing Amount’’).
FICC would notify each Direct Affected
Member of its Financing Amount and
whether such Direct Affected Member
should deliver to FICC or suppress any
securities that were destined for the
defaulting Netting Member. FICC would
then initiate CCLF Transactions with
each Direct Affected Member for its
purchase of the securities (the
‘‘Financed Securities’’) that were
destined for the defaulting Netting
Member.13 The aggregate purchase price
of the CCLF Transactions with the
Direct Affected Member would equal
but never exceed its maximum funding
obligation (the ‘‘Individual Total
Amount’’).14
If any Direct Affected Member’s
Financing Amount exceeds its
Individual Total Amount (the
‘‘Remaining Financing Amount’’), FICC
would advise (A) each other Direct
Affected Member whose Financing
Amount is less than its Individual Total
Amount, and (B) each Netting Member
that has not otherwise entered into
CCLF Transactions with FICC (the
12 The September 1996 Securities Industry and
Financial Markets Association Master Repurchase
Agreement (the ‘‘SIFMA MRA’’) is available at
https://www.sifma.org/services/standard-forms-anddocumentation/mra,-gmra,-msla-and-msftas/. The
SIFMA MRA would be incorporated by reference
into the GSD Rules without referenced annexes,
other than in the case of any Netting Member that
is a registered investment company, then Annex VII
would be applicable to such Member. At the time
of this filing, there are no registered investment
companies that are also GSD Netting Members. If
a registered investment company would become a
GSD Netting Member, then Annex VII would be
applicable to such Member.
13 It should be noted that FICC would have the
authority to initiate CCLF Transactions in respect
of any securities that are in the Direct Affected
Member’s portfolio which are bound to the
defaulting Netting Member.
14 As described in Section C. herein, a Netting
Member’s Individual Total Amount represents such
Member’s maximum liquidity funding obligation.
The Individual Total Amount would be based on
a Netting Member’s observed peak historical
liquidity need.
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‘‘Indirect Affected Members,’’ and
together with the Direct Affected
Members, ‘‘Affected Members’’) that
FICC intends to initiate CCLF
Transactions with them for the
Remaining Financing Amount.
The order in which FICC would enter
into CCLF Transactions for the
Remaining Financing Amount would be
based upon the Affected Members that
have the most funding available within
their Individual Total Amounts. No
Affected Member would be obligated to
enter into CCLF Transactions greater
than its Individual Total Amount.
During a CCLF Event, FICC would
engage its investment advisor subject to
the approval of its Board and seek to
minimize liquidation losses on the
Financed Securities through hedging,
strategic dispositions, or other
investment transactions as determined
by FICC under relevant market
conditions. Once FICC completes the
liquidation of the underlying securities
by selling them to a new buyer, FICC
would instruct the Affected Member to
close the repo trade and deliver the
Financed Securities to FICC to complete
settlement on the contractual settlement
date of the liquidating trade. FICC
would endeavor to unwind the CCLF
Transactions based on the order that it
enters into the Liquidating Trades. Each
CCLF Transaction would remain open
until the earlier of (x) such time that
FICC has liquidated the Affected
Member’s Financed Securities, (y) such
time that FICC has obtained liquidity
through its available liquid resources or
(z) 30 or 60 calendar days after entry
into the CCLF Transaction for U.S.
government bonds and mortgage-backed
securities, respectively.
The original GSD Transactions, which
FICC is obligated to settle, are
independent from the CCLF
Transactions. The proposed rule change
would clarify that, under the original
GSD Transaction, FICC’s obligation to
pay cash to a Direct Affected Member,
and the Direct Affected Member’s
obligation to deliver securities, would
be deemed satisfied by entry into CCLF
Transactions, and that such settlement
would be final.
C. CCLF Sizing and Allocation
As noted above, FICC would only
enter into CCLF Transactions with a
Netting Member in an amount that is up
to such Netting Member’s maximum
funding obligation. This amount would
be based on each Netting Member’s
observed peak historical liquidity need.
Initially, FICC would calculate the
Netting Member’s peak historical
liquidity need based on a six-month
look-back period.
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FICC’s liquidity need during a CCLF
Event would be determined by the cash
settlement obligations presented by the
default of a Netting Member and an
Affiliated Family. FICC would include
an additional amount (i.e., a buffer) to
account for changes in Netting
Members’ cash settlement obligations
that may not be observed during the sixmonth look-back period during which
CCLF would be sized. The buffer would
also account for the possibility that the
defaulting Netting Member is the largest
CCLF contributor. FICC would allocate
its observed liquidity need among all
Netting Members based on their
historical settlement activity. Netting
Members that present the highest cash
settlement obligations would be
required to maintain higher funding
obligations.
Listed below are the steps that FICC
would take to size and allocate each
Netting Member’s CCLF requirement.
Step 1: CCLF Sizing
Historical Cover 1 Liquidity
Requirement
FICC’s historical liquidity need for the
six-month look-back period would be an
amount equal to the dollar amount of
the largest sum of an Affiliated Family’s
obligation to receive GSD eligible
securities plus the net dollar amount of
its Funds-Only Settlement Amount 15
(collectively, the ‘‘Historical Cover 1
Liquidity Requirement’’). FICC believes
that it is appropriate to calculate the
Historical Cover 1 Liquidity
Requirement in this manner because the
default of the largest Affiliated Family
would generate the highest liquidity
need for FICC.
Liquidity Buffer
The Historical Cover 1 Liquidity
Requirement would be based on the
largest Affiliated Family’s activity
during a six-month look-back period.
However, FICC is cognizant that the
Historical Cover 1 Liquidity
Requirement would not account for
changes in a Netting Member’s current
trading behavior, which may result in a
liquidity need that is greater than the
Historical Cover 1 Liquidity
Requirement. As a result, FICC proposes
15 The Funds-Only Settlement Amount reflects
the amount that FICC collects and passes to the
contra-side once FICC marks the securities in a
Netting Member’s portfolio to the current market
value. This amount is the difference between the
contract value vs. the current market value of a
Netting Member’s GSD portfolio. FICC would
consider this amount when calculating the
Historical Cover 1 Liquidity Requirement because
in the event that an Affiliated Family defaults, the
Funds-Only Settlement Amount would also reflect
the cash obligation to non-defaulting Netting
Members.
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to add an additional amount to the
Historical Cover 1 Liquidity
Requirement as a buffer (the ‘‘Liquidity
Buffer’’) to arrive at FICC’s anticipated
total liquidity need for GSD during a
CCLF Event.
Under the proposed rule change, the
Liquidity Buffer would be 20% to 30%
of the Historical Cover 1 Liquidity
Requirement, subject to a minimum
amount of $15 billion. FICC believes
that 20% to 30% of the Historical Cover
1 Liquidity Requirement is appropriate
based on its analysis of the calculated
coefficient of variation 16 with respect to
Affiliated Families’ liquidity needs
throughout 2015 and 2016.17 FICC also
believes that the $15 billion minimum
dollar amount is necessary to cover
changes in a Netting Member’s trading
activity that could exceed the amount
that is implied by the calculated
coefficient of variation.
FICC would have the discretion to
adjust the Liquidity Buffer based on its
analysis of the stability of the Historical
Cover 1 Liquidity Requirement over the
look-back periods of 3-, 6-, 12-, and 24months. Should FICC observe changes
in the stability of the Historical Cover 1
Liquidity Requirements, FICC would
have the discretion to increase the sixmonth look-back period to help ensure
that the calculation of its liquidity need
appropriately accounts for variability in
the Historical Cover 1 Liquidity
Requirement. This would help FICC to
ensure that its liquidity resources are
sufficient under a wide range of
potential market scenarios that may lead
to a change in Netting Member behavior.
FICC would also analyze the trading
behavior of Netting Members that
present larger liquidity needs than the
majority of the Netting Members (as
described below).
Aggregate Total Amount
FICC’s anticipated total liquidity need
during a CCLF Event (i.e., the sum of the
Historical Cover 1 Liquidity
Requirement plus the Liquidity Buffer)
16 The ‘‘coefficient of variation’’ is a statistical
measurement that is calculated as the standard
deviation divided by the mean. It is a typical
approach used to compare variability across
different data sets.
17 In connection with this proposed rule change,
the coefficient of variation would be used to set the
Liquidity Buffer by quantifying the variance of each
Affiliated Family’s daily liquidity need. During this
period, FICC observed that the coefficient of
variation ranged from an average of 15%–19% for
Affiliated Families with liquidity needs above $50
billion, and an average of 18%–21% for Affiliated
Families with liquidity needs above $35 billion.
Based on the calculated coefficient of variation,
FICC believes that an amount equaling 20% to 30%
of the Historical Cover 1 Liquidity Requirement
subject to a minimum of $15 billion would be an
appropriate Liquidity Buffer.
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would be referred to as the ‘‘Aggregate
Total Amount.’’
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Step 2: FICC’s Allocation of the
Aggregate Total Amount Among Netting
Members
(A) FICC’s Allocation of the Aggregate
Regular Amount Among Netting
Members
After FICC determines the Aggregate
Total Amount, which initially would be
set to the Historical Cover 1 Liquidity
Requirement plus the greater of 20% of
the Historical Cover 1 Liquidity
Requirement or $15 billion. FICC would
allocate the Aggregate Total Amount
among Netting Members in order to
arrive at each Netting Member’s
Individual Total Amount. FICC would
take a two-tiered approach in its
allocation of the Aggregate Total
Amount. First, FICC would determine
the portion of the Aggregate Total
Amount that should be allocated among
all Netting Members (‘‘Aggregate
Regular Amount’’). Then, FICC would
allocate the remainder of the Aggregate
Total Amount (the ‘‘Aggregate
Supplemental Amount’’) among Netting
Members that incur liquidity needs
above the Aggregate Regular Amount
within the six-month look-back period.
FICC believes that this two-tiered
approach reflects FICC’s consideration
of fairness, transparency and the
burdens of the funding obligations on
each Netting Member’s management of
its own liquidity.
Under the proposed rule change, FICC
would set the Aggregate Regular
Amount at $15 billion. FICC believes
that this amount is appropriate because
FICC observed that from 2015 to 2016,
the average Netting Member’s liquidity
need was approximately $7 billion, with
a majority of Netting Members’ liquidity
needs not exceeding an amount of $15
billion.18 Based on that analysis, FICC
believes that the Aggregate Regular
Amount should capture the liquidity
needs of a majority of the Netting
Members. Thus, FICC believes that
setting the Aggregate Regular Amount at
$15 billion is appropriate.
Under the proposal, the Aggregate
Regular Amount would be allocated
among all Netting Members, but Netting
Members with larger Receive
Obligations would be required to
contribute a larger amount. FICC
believes that this approach is
appropriate because a defaulting Netting
18 From 2015 to 2016, 59% of all Netting
Members presented average liquidity needs
between $0 to $5 billion, 78% of all Netting
Members presented average liquidity needs
between $0 and $10 billion, and 85% of all Netting
Members presented average liquidity needs
between $0 and $15 billion.
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Member’s Receive Obligations are the
primary cash settlement obligations that
FICC would have to satisfy as a result
of the default of a Netting Member or an
Affiliated Family. However, FICC also
believes that some portion of the
Aggregate Regular Amount should be
allocated based on Netting Members’
aggregate Deliver Obligations since FICC
guarantees both sides of a GSD
Transaction and all Netting Members
benefit from FICC’s risk mitigation. As
a result, FICC is proposing to allocate
the Aggregate Regular Amount based on
a scaling factor. Given that the
Aggregate Regular Amount is sized at
$15 billion and covers approximately
80% of Netting Members’ observed
liquidity needs, FICC proposes to set the
scaling factor in the range of 65%–85%
to the value of Netting Members’
Receive Obligations and set the scaling
factor in the range of 15%–35% to the
value of Netting Members’ Deliver
Obligations.
Initially, FICC would assign a 20%
weighting percentage to a Netting
Member’s aggregate Deliver Obligations
(the ‘‘Deliver Scaling Factor’’) and the
remaining percentage difference, 80% in
this case, to a Netting Member’s
aggregate Receive Obligations (‘‘Receive
Scaling Factor’’). FICC would have the
discretion to adjust these scaling factors
based on a quarterly analysis that
would, in part, assess Netting Members’
observed liquidity needs that are at or
below $15 billion. This assessment
would ensure that the Aggregate Regular
Amount would be appropriately
allocated across all Netting Members.
FICC would calculate a Netting
Member’s portion of the Aggregate
Regular Amount (its ‘‘Individual
Regular Amount’’) by adding (a) and (b)
below.
(a) FICC would (x) divide the absolute
value of a Netting Member’s peak
Receive Obligations by the absolute
value of the sum of all Netting Members’
peak Receive Obligations, then (y)
multiply such resulting value by the
Aggregate Regular Amount, then (z)
multiply the resulting value by the
Receive Scaling Factor (which would
initially be 80%).
(b) FICC would (x) divide the absolute
value of a Netting Member’s peak
Deliver Obligations by the absolute
value of the sum of all Netting Members’
peak Deliver Obligations, then (y)
multiply such resulting value by the
Aggregate Regular Amount, then (z)
multiply the resulting value by the
Deliver Scaling Factor (which would
initially be 20%).
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(B) FICC’s Allocation of the Aggregate
Supplemental Amount Among Netting
Members
The remainder of the Aggregate Total
Amount (i.e., the Aggregate
Supplemental Amount) would be
allocated among Netting Members that
present liquidity needs in excess of the
Aggregate Regular Amount.
FICC would allocate the Aggregate
Supplemental Amount across liquidity
tiers (‘‘Liquidity Tiers’’). The allocation
to each Liquidity Tier would be based
on how many times (i.e.,
‘‘observations’’) the Netting Members’
daily liquidity needs have reached the
respective Liquidity Tier. This
assignment would result in a larger
proportion of the Aggregate
Supplemental Amount being borne by
those Netting Members who present the
highest liquidity needs.
FICC would set the Liquidity Tiers in
$5 billion increments. FICC believes
that this increment would appropriately
distinguish Netting Members that
present the highest liquidity needs on a
frequent basis and allocate more of the
Individual Supplemental Amount to
Netting Members in the top Liquidity
Tiers. Increments set to an amount
greater than $5 billion would provide
FICC with less ability to allocate the
Aggregate Supplemental Amount to
Netting Members with the highest
liquidity needs.19
FICC would have the discretion to
reduce any one or all of the Liquidity
Tiers to $2.5 billion if FICC determines
that the majority of the Netting
Members’ liquidity needs in such
Liquidity Tiers are above or below the
midpoint of the Liquidity Tier.
Once the Liquidity Tiers are set, FICC
would first allocate the Aggregate
Supplemental Amount to each Liquidity
Tier in proportion to the total number
of observations across all Liquidity
Tiers. Next, FICC would allocate the
Individual Supplemental Amount to
each Netting Member in accordance
with each Netting Member’s liquidity
needs within each Liquidity Tier. This
allocation would be based on such
Netting Member’s number of
observations within each Liquidity Tier
in proportion to the aggregate of all
19 For example, assume that there are two Netting
Members and each Netting Member has 125
liquidity observations each across a six-month
period. Member A has 125 observations within the
$15–$20 billion Liquidity Tier and Member B has
125 observations equally dispersed between the
$15–$20 billion and $20–$25 billion Liquidity
Tiers. Under the proposed rule change, Member B
would have a higher Individual Supplemental
Amount than Member A, because Member B would
be allocated a pro-rata share of the Aggregate
Supplemental Amount for the $20–$25 billion
Liquidity Tier.
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Netting Member’s observations within a
particular Liquidity Tier. The sum of a
Netting Member’s allocation across all
Liquidity Tiers would be such Netting
Member’s Individual Supplemental
Amount.
FICC would sum each Netting
Member’s Individual Regular Amount
and its Individual Supplemental
Amount (if any) to arrive at such Netting
Member’s Individual Total Amount.
CCLF Parameters as of January 2017
Table 1 includes the actual values
FICC would set for each step described
above, as of January 1, 2017.20 These
values would be reset every six months.
Table 1:
$ billion
CCLF Sizing: Components of the Aggregate Total Amount
Step
Component
1 .......................
Historical Cover 1 Liquidity Requirement ..................................................................................
Liquidity Buffer (20% of the Historical Cover 1 Liquidity Requirement subject to a minimum
of $15B).
Aggregate Total Amount ............................................................................................................
Aggregate Regular Amount .......................................................................................................
Receive Scaling Factor (80% of the Aggregate Regular Amount) ...........................................
Deliver Scaling Factor (20% of the Aggregate Regular Amount) .............................................
Aggregate Supplemental Amount ..............................................................................................
Liquidity Tier 1 ($15–$20B) ....................................................................................................
Liquidity Tier 2 ($20–$25B) ....................................................................................................
Liquidity Tier 3 ($25–$30B) ....................................................................................................
Liquidity Tier 4 ($30–$35B) ....................................................................................................
Liquidity Tier 5 ($35–$40B) ....................................................................................................
Liquidity Tier 6 ($40–$45B) ....................................................................................................
Liquidity Tier 7 ($45–$50B) ....................................................................................................
Liquidity Tier 8 ($50–$55B) ....................................................................................................
Liquidity Tier 9 ($55–$60B) ....................................................................................................
2 .......................
2a .....................
2b .....................
2c .....................
The example in Table 2 reflects the
allocation of the CCLF size for a
hypothetical Netting Member. This
Size
example is based on a six-month lookback period of July 1, 2016 through
December 31, 2016.
$58.84
15.00
73.84
15.00
........................
........................
58.84
........................
........................
........................
........................
........................
........................
........................
........................
........................
$12.00
3.00
21.04
14.29
10.32
6.14
3.32
1.86
1.10
0.62
0.14
Table 2:
$ billion
CCLF Sizing: Components of the aggregate total amount
Allocation of aggregate total amount
hypothetical member A
Size
Step
Component
(X)
Member A’s
percentage
Member A’s
allocation of the
component
(Y)
2a ..........................
2b ..........................
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20 As noted above, FICC would use a six-month
look-back period. On January 1, 2017, the look-back
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$12.00
5.0
$0.60
..............................
3.00
2.5
0.08
0.68
8.5
13.0
16.0
20.0
35.0
52.0
65.0
80.0
100.0
1.79
1.86
1.65
1.23
1.16
0.97
0.72
0.50
0.14
Member A’s
individual
supplemental
amount
Aggregate Supplemental Amount ........
Liquidity Tier 1 ($15–$20B) ..............
Liquidity Tier 2 ($20–$25B) ..............
Liquidity Tier 3 ($25–$30B) ..............
Liquidity Tier 4 ($30–$35B) ..............
Liquidity Tier 5 ($35–$40B) ..............
Liquidity Tier 6 ($40–$45B) ..............
Liquidity Tier 7 ($45–$50B) ..............
Liquidity Tier 8 ($50–$55B) ..............
Liquidity Tier 9 ($55–$60B) ..............
$15.00
..............................
Member A’s
individual regular
amount
2c ..........................
Aggregate Regular Amount .................
Receive Scaling Factor (80% of the
Aggregate Regular Amount).
Deliver Scaling Factor (20% of the Aggregate Regular Amount).
10.01
58.84
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
21.04
14.29
10.32
6.14
3.32
1.86
1.10
0.62
0.14
period would be July 1, 2016 through December 31,
2016.
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CCLF Sizing: Components of the aggregate total amount
Allocation of aggregate total amount
hypothetical member A
Size
Step
Component
Member A’s
percentage
(X)
Member A’s
allocation of the
component
(Y)
Member A’s
individual total
amount
D. FICC’s Ongoing Assessment of the
Sufficiency of CCLF
As described above, the Aggregate
Total Amount and each Netting
Member’s Individual Total Amount (i.e.,
each Netting Member’s allocation of the
Aggregate Total Amount) would
initially be calculated using a six-month
look-back period that FICC would reset
every six months (‘‘reset period’’). On a
quarterly basis, FICC’s Liquidity
Product Risk Unit 21 would assess the
following parameters that it uses to
calculate the Aggregate Total Amount
and may recommend to the Board’s Risk
Committee changes to such parameters:
• Peak daily liquidity need for the
largest Affiliated Family;
• the Liquidity Buffer;
• the Aggregate Regular Amount;
• the Aggregate Supplemental
Amount;
• the Deliver Scaling Factor and the
Receive Scaling Factor used to allocate
the Aggregate Regular Amount;
• the increments for the Liquidity
Tiers; and
• the length of the look-back period
and the reset period for the Aggregate
Total Amount.
In the event that any changes to the
above-referenced parameters result in an
increase in a Netting Member’s
Individual Total Amount, such increase
would be effective as of the next reset.
Increase in aggregate total amount
Additionally, on a daily basis, FICC
would examine the Aggregate Total
Amount to ensure that such amount is
sufficient to satisfy FICC’s liquidity
needs. If FICC determines that the
Aggregate Total Amount is insufficient
to satisfy its liquidity needs, FICC may
modify the length of the look-back or
reset periods or otherwise increase the
Aggregate Total Amount.
Any increase in the Aggregate Total
Amount resulting from the Liquidity
Product Risk Unit’s quarterly
assessments or FICC’s daily monitoring
would be subject to the approvals, as set
forth in Table 3 below.
Table 3:
Required approval level
≤$500 mil ..................................................................................................
$501 mil to $1.0 B ....................................................................................
$1.1 B to $1.9 B .......................................................................................
≥$2.0 B .....................................................................................................
Managing Director, Financial Risk Management.
Group Chief Risk Officer.
Management Risk Committee, or designee.
Chair of the Board Risk Committee, or designee.
The CCLF proposal would become
operative 12 months after the later date
of the Commission’s approval of this
proposed rule change or its no objection
of the Advance Notice Filing. During
this 12-month period, FICC would
periodically provide each Netting
Member with estimated Individual Total
Amounts. The delayed implementation
and the estimated Individual Total
Amounts are designed to give Netting
Members the opportunity to assess the
impact that the CCLF proposal would
have on their business profile.
Prior to the effective date, FICC would
add a legend to the GSD Rules to state
that the specified changes to the GSD
Rules are approved but not yet operative
and to provide the date such approved
changes would become operative. The
legend would also include the file
numbers of the approved proposed rule
change and Advance Notice Filing and
would state that once operative, the
legend would automatically be removed
from the GSD Rules.
As of the implementation date and
annually thereafter, FICC would require
that each Netting Member attest that its
Individual Total Amount has been
incorporated into its liquidity plans.22
This required attestation would be from
authorized officers of the Netting
Member or otherwise in form and
substance satisfactory to FICC making
the following certification: (1) Such
officers have read and understand the
GSD Rules, including the CCLF rules,
(2) the Netting Member’s Individual
Total Amount has been incorporated
into the Netting Member’s liquidity
planning, (3) the Netting Member
acknowledges and agrees that its
Individual Total Amount may be
changed at the conclusion of any reset
period or otherwise upon ten (10)
Business Days’ Notice, (4) the Netting
Member will incorporate any changes to
its Individual Total Amount into its
liquidity planning, and (5) the Netting
Member will continually reassess its
liquidity plans and related operational
plans, including in the event of any
changes to such Netting Member’s
Individual Total Amount, to ensure
such Netting Member’s ability to meet
its Individual Total Amount. FICC may
require any Netting Member to provide
FICC with a new certification in the
21 FICC’s Liquidity Product Risk Unit is
responsible for assessing the liquidity needs of GSD
and MBSD.
22 The attestation would not refer to the actual
dollar amount that has been allocated as the
Individual Total Amount. Each Netting Member’s
Individual Total Amount would be made available
to such Member via GSD’s access controlled portal
Web site.
If FICC increases a Netting Member’s
Individual Total Amount as a result of
its daily monitoring, such increase will
not be effective until ten (10) Business
Days after FICC provides an Important
Notice regarding the increase.
If FICC determines that its liquidity
needs may be satisfied with a lower
Aggregate Total Amount, a reduction in
the Aggregate Total Amount would be
reflected at the conclusion of the reset
period.
E. Implementation of the Proposed Rule
Change and Required Attestation From
Each Netting Member
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foregoing form at any time, including
upon a change to a Netting Member’s
Individual Total Amount or in the event
that a Netting Member undergoes a
change in its corporate structure.
In addition to the above, on a
quarterly basis, FICC’s Counterparty
Credit Risk Management group would
conduct due diligence to assess each
Netting Member’s ability to meet its
Individual Total Amount. This due
diligence would include a review of all
information that the Netting Member
has provided FICC in connection with
its ongoing reporting obligations
pursuant to the GSD Rules and a review
of other publicly available information.
Additionally, FICC would test its
operational procedures for invoking a
CCLF Event. Pursuant to GSD Rule 3
Section 6, Netting Members would be
required to participate in such tests. If
a Netting Member fails to participate in
such testing when required by FICC,
FICC may take disciplinary measures as
set forth in GSD Rule 3 Section 7.
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F. FICC’s Commitment to Enhanced
Transparency
FICC understands that each Netting
Member must be able to evaluate the
risks of its membership and plan for its
funding obligations. Additionally, FICC
believes that it is critical that each
Netting Member understands the risks
that its activity presents to FICC, and
that each Netting Member should be
prepared to monitor its activity and alter
its behavior in order to minimize the
liquidity risk that it presents to FICC.
Accordingly, on each Business Day,
FICC would make a liquidity funding
report available to each Netting Member
that would include the following:
1. The Netting Member’s Individual
Total Amount, Individual Regular
Amount and, if applicable, its
Individual Supplemental Amount;
2. FICC’s Aggregate Total Amount,
Aggregate Regular Amount and
Aggregate Supplemental Amount; and
3. FICC’s regulatory liquidity
requirements as of the prior Business
Day.
The liquidity funding report would be
provided for informational purposes
only. Pursuant to the proposed rule
change, upon a CCLF Event, each
Netting Member would be required to
enter into CCLF Transactions having an
aggregate purchase price up to its
Individual Total Amount as calculated
by FICC.
G. Proposed Changes to the GSD Rules
GSD Rule 1—Definitions
In order to help effectuate the
proposed changes, FICC proposes to add
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the following defined terms to the GSD
Rule 1: Affected Member; Aggregate
Regular Amount; Aggregate
Supplemental Amount; Aggregate Total
Amount; CCLF Event; CCLF MRA; CCLF
MRA Termination Date; CCLF
Transaction; Deliver Scaling Factor;
Direct Affected Member; Financed
Securities; Financing Amount;
Historical Cover 1 Liquidity
Requirement; Indirect Affected Member;
Individual Regular Amount; Individual
Supplemental Amount; Individual Total
Amount; Liquidating Trade; Liquidity
Buffer; Liquidity Need; Liquidity
Percentage; Liquidity Tier; Look-Back
Period; Observation; Receive Scaling
Factor; Relative Inter-Tier Frequency;
Relative Intra-Tier Frequency; Relevant
Securities; Remaining Financing
Amount; Required Attestation; and
SIFMA MRA.
Rule 22A—Procedures for When the
Corporation Ceases To Act
FICC is proposing to amend Rule 22A
to include a new section in this Rule.
This new section would be entitled
‘‘Section 2a.’’ Proposed Section 2a
would incorporate the CCLF MRA into
the GSD Rules subject to the
amendments proposed therein. In
addition, the proposed section would
include (1) the notification process that
would occur once FICC invokes a CCLF
Event; (2) the CCLF Transactions that
FICC would enter into once it invokes
a CCLF Event; (3) disclosure of each
relevant CCLF sizing component that
FICC would assess; (4) the calculation
that FICC would use to determine each
Netting Member’s Individual Regular
Amount and Individual Supplemental
Amount, if applicable; and (5) a
description of the officers’ certificate
that each Netting Member would be
required to provide certifying that,
among other things, its Individual Total
Amount has been incorporated into its
liquidity plans.
2. Statutory Basis
Section 17A(b)(3)(F) of the Exchange
Act requires, in part, that the rules of a
clearing agency be 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.23
FICC believes that the CCLF proposal
would enable FICC to access additional
liquidity in the event that its other
liquidity resources are insufficient upon
the default of a Netting Member, which
would help ensure that FICC has
sufficient funds to meet its cash
settlement obligations to its non-
defaulting Netting Members. As a result,
FICC believes that the proposal has been
designed to assure the safeguarding of
securities and funds in FICC’s custody
or control, consistent with Section
17A(b)(3)(F) of the Exchange Act.24
Rule 17Ad–22(b)(3) under the
Exchange Act requires a registered
clearing agency that performs central
counterparty services to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to maintain
sufficient financial resources to
withstand, at a minimum, a default by
the participant family to which it has
the largest exposure in extreme but
plausible market conditions.25 As
described above, FICC would size CCLF
based on the peak liquidity need that
would be generated by the default of its
largest participant family (its Historical
Cover 1 Liquidity Requirement), plus an
additional Liquidity Buffer to account
for unexpected Netting Member trading
behavior that could increase FICC’s
Historical Cover 1 Liquidity
Requirement or a situation in which its
largest Netting Member defaults and
cannot contribute to the CCLF. Thus,
FICC believes that the proposal would
be consistent with Rule 17Ad–22(b)(3)
because it is designed to provide FICC
with sufficient financial resources to
withstand a default by the participant
family to which it has the largest
exposure in extreme but plausible
market conditions.
Rule 17Ad–22(d)(9) under the
Exchange Act requires a registered
clearing agency that performs central
counterparty services to establish,
implement, maintain and enforce
written policies and procedures to
provide market participants with
sufficient information for them to
identify and evaluate the risks and costs
associated with using its services.26 As
described above, on each Business Day,
FICC would make a liquidity funding
report available to each Netting
Member. This report would include (1)
the Netting Member’s Individual Total
Amount, Individual Regular Amount
and, to the extent applicable, its
Individual Supplemental Amount; (2)
FICC’s Aggregate Total Amount,
Aggregate Regular Amount and
Aggregate Supplemental Amount; and
(3) FICC’s regulatory liquidity
requirements as of the prior Business
Day. This report would enable each
Netting Member to prepare for its
maximum funding obligations and alter
its trading behavior should it desire to
24 Id.
25 See
23 15
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26 See
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17 CFR 240.17Ad–22(b)(3).
17 CFR 240.17Ad–22(d)(9).
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minimize the liquidity risk it presents to
FICC. FICC believes that the proposed
rule change would be consistent with
Rule 17Ad–22(d)(9) because the
liquidity funding report would provide
Netting Members with sufficient
information to identify and evaluate the
risks and costs associated with using the
services that FICC provides through
GSD.
Rule 17Ad–22(e)(7) under the
Exchange Act, which was recently
adopted by the Commission, will
require FICC to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
effectively measure, monitor, and
manage liquidity risk that arises in or is
borne by FICC, including measuring,
monitoring, and managing its settlement
and funding flows on an ongoing and
timely basis, and its use of intraday
liquidity.27
Rule 17Ad–22(e)(7)(i) will require
FICC to maintain sufficient liquid
resources to effect same-day settlement
of payment obligations in the event of
a default of the participant family that
would generate the largest aggregate
payment obligation for the covered
clearing agency in extreme but plausible
market conditions.28 FICC believes that
the proposal would be consistent with
Rule 17Ad–22(e)(7)(i) because CCLF
would be sized based on the peak
liquidity need that would be generated
by the default of its largest participant
family (its Historical Cover 1 Liquidity
Requirement), plus an additional
Liquidity Buffer, which would help
FICC maintain sufficient liquid
resources to settle the cash obligations
of an Affiliated Family that would
generate the largest aggregate payment
obligation for FICC in extreme but
plausible market conditions.
Rule 17Ad–22(e)(7)(ii) will require
FICC to hold qualifying liquid resources
sufficient to satisfy payment obligations
owed to clearing members.29 FICC
believes that the proposed rule change
would be consistent with Rule 17Ad–
22(e)(7)(ii) because the CCLF MRA
would be a committed arrangement and
all CCLF Transactions entered into
pursuant the CCLF MRA would be
readily available and the related assets
would be convertible into cash in order
to settle cash obligations owed to nondefaulting Netting Members.
Rule 17Ad–22(e)(7)(iv) under the
Exchange Act will require FICC to
undertake due diligence that confirms
that it has a reasonable basis to believe
each of its liquidity providers has: (a)
17 CFR 240.17Ad–22(e)(7).
17 CFR 240.17Ad–22(e)(7)(i).
29 See 17 CFR 240.17Ad–22(e)(7)(ii).
Sufficient information to understand
and manage the liquidity provider’s
liquidity risks; and (b) the capacity to
perform as required under its
commitments to provide liquidity.30 As
described above, on a quarterly basis,
FICC would conduct due diligence to
assess each Netting Member’s ability to
meet its Individual Total Amount. This
due diligence would include a review of
all information that the Netting Member
has provided FICC in connection with
its ongoing reporting requirements
pursuant to the GSD Rules as well as a
review of other publicly available
information. As a result, FICC believes
that its due diligence of Netting
Members would be consistent with Rule
17Ad–22(e)(7)(iv).
Additionally, Rule 17Ad–22(e)(7)(v)
under the Exchange Act will require
FICC to maintain and test with each
liquidity provider, to the extent
practicable, FICC’s procedures and
operational capacity for accessing its
relevant liquid resources.31 As
described above, FICC would test its
operational procedures for invoking a
CCLF Event and pursuant to GSD Rule
3 Section 6, Netting Members would be
required to participate in such tests. As
a result, FICC believes that its testing of
its capability to invoke a CCLF MRA
would be consistent with Rule 17Ad–
22(e)(7)(v).
(B) Clearing Agency’s Statement on
Burden on Competition
FICC believes that the proposed rule
change could have an impact upon
competition because each Netting
Member’s Individual Total Amount
would place a committed funding
obligation on Netting Members and this
obligation would increase the cost of
participating in GSD. The proposed rule
change could impose a larger burden on
competition on Netting Members that
are subject to an Individual
Supplemental Amount because such
Members would bear higher funding
obligations than Netting Members who
are not subject to an Individual
Supplemental Amount.
FICC believes that the burden on
competition that is created by the
proposed rule change is necessary to
comply with the requirements of the
Exchange Act and rules thereunder. As
noted above, FICC believes that the
proposal would assure that FICC
safeguards securities and funds in its
custody or control by providing FICC
with additional liquidity to meet its
cash settlement obligations. Moreover,
the proposal would support FICC’s
27 See
28 See
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compliance with Rule 17Ad–22(b)(3) 32
under the Exchange Act because the
CCLF would be sized to provide FICC
with sufficient financial resources to
withstand, at a minimum, a default by
the participant family to which it has
the largest exposure in extreme but
plausible market conditions.
Additionally, the proposed rule change
would support FICC’s compliance with
Rule 17Ad–22(e)(7)(ii) 33 under the
Exchange Act because the CCLF MRA
would be a committed liquidity
arrangement and all CCLF Transactions
entered into pursuant the CCLF MRA
would be readily available and the
related assets would be convertible into
cash in order to settle cash obligations
owed to non-defaulting Netting
Members. The proposed rule change
would support FICC’s compliance with
Rules 17Ad–22(e)(7)(iv) and (v) 34 under
the Exchange Act because FICC would
conduct due diligence to assess each
Netting Member’s ability to meet its
Individual Total Amount and FICC
would test its procedures and
operational capability to invoke a CCLF
Event. Pursuant to GSD Rule 3 Section
6, Netting Members would be required
to participate in such tests.
FICC believes that the burden on
competition created by the Individual
Total Amount and Individual
Supplemental Amount would be
appropriate in furtherance of the
Exchange Act. While the proposal may
result in FICC requiring each Netting
Member to contribute different amounts
to CCLF, those contributions would be
calculated in proportion to the liquidity
needs that each Netting Member
presents to FICC over a given six-month
look-back period. Moreover, the
Individual Supplemental Amount
would only be applied to Netting
Members that place the largest liquidity
needs on FICC, and these needs are a
direct result of such Members’ trading
behavior during the six-month lookback period. As a result, the proposal
would ensure that all Netting Members
fairly and equitably contribute to FICC’s
liquid financial resources based on the
liquidity need they present to FICC.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
The proposal addresses a risk that
spans beyond ‘‘extreme but plausible.’’
FICC has received feedback that the
proposed rule change seeks to address a
risk that is not reasonable given the
32 See
30 See
17 CFR 240.17Ad–22(e)(7)(iv).
31 See 17 CFR 240.17Ad–22(e)(7)(v).
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17 CFR 240.17Ad–22(b)(3).
17 CFR 240.17Ad–22(e)(7)(ii).
34 See 17 CFR 240.17Ad–22(e)(7)(iv) and (v).
33 See
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current structure of the short-term triparty repurchase market (‘‘repo’’) in
U.S. Government securities.
Commenters have explained that a
committed liquidity tool such as CCLF
is unnecessary because the repo market
remained robust during periods of
historical market stress and would
continue to adequately perform during
the next crisis. They have also noted
that U.S. Treasury securities continue to
be considered a ‘‘risk-free’’ instrument.
While FICC believes that historical
market behavior allows market
participants to observe trends in the
repo market, FICC also believes that the
adoption of CCLF would better position
FICC to protect itself and its Netting
Members should the repurchase
financing market materially contract in
the future. Additionally, the proposed
rule change would adhere to Rule
17Ad–22(e)(7)(i) which requires FICC to
maintain sufficient liquid resources to
effect same-day settlement of payment
obligations in the event of a default of
the participant family that would
generate the largest aggregate payment
obligation for the covered clearing
agency in extreme but plausible market
conditions.35
The proposal may impact behavior of
smaller market participants.
FICC has also received feedback that
the proposed rule change would create
concentration risk by forcing smaller
Netting Members to clear through large
financial institutions or exit the
business. Commenters have explained
that the funding obligation under the
CCLF proposal may significantly impact
their available capital or operating
profiles. As a result, the CCLF proposal
may force certain Netting Members to
(1) clear through other financial
institutions or (2) terminate their
membership with FICC and engage in
bilateral arrangements.
FICC values each Netting Member and
does not wish to force any Netting
Member to clear through larger Netting
Members or exit the business as a result
of this proposed rule change. However,
FICC believes that all Netting Members
should endeavor to maintain suitable
capital to meet FICC’s enhanced
participation requirements so that such
Members do not have to clear through
larger financial institutions or exit the
business. Because each Netting Member
is in the best position to monitor and
manage the liquidity risks presented by
its own activity, FICC believes that
Netting Members should endeavor to
manage their own liquidity. In an effort
to enable each Netting Member to
prepare for its liquidity funding
35 See
17 CFR 240.17Ad–22(e)(7)(i).
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18:36 Mar 17, 2017
Jkt 241001
obligation, FICC would provide a
liquidity funding report to each Netting
Member on a daily basis. This report
would enable each Netting Member to
prepare for its maximum funding
obligations and alter its trading behavior
should it desire to minimize the
liquidity risk that it presents to FICC.
FICC is cognizant that Netting
Members would need to incorporate
their respective funding obligation into
their internal liquidity plans and
evaluate the appropriate course of
action for their firm based on the
economic impact that such Netting
Members believe the funding obligation
imposes. Given the added liquidity cost,
as noted in the feedback, FICC would
implement the proposed rule change 12
months after the later date of the
Commission’s approval of this filing or
its no objection of the Advance Notice
Filing. During this 12-month period,
FICC would periodically provide
Netting Members with estimates of their
Individual Total Amounts. The deferred
implementation and the estimate
Individual Total Amounts are designed
to give Netting Members the
opportunity to assess the impact of their
Individual Total Amount on their
business profile and make any changes
that such Netting Members deem
necessary to lower their respective
allocation.
As noted above, FICC understands
that Netting Members must be able to
plan for their funding obligations. At the
same time, FICC also believes that it is
critical that Netting Members
understand the risks that their own
activity presents to FICC, and be
prepared to monitor their own activity
and alter their behavior in order to
minimize the liquidity risk they present
to FICC.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self- regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
14409
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 Exchange
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FICC–2017–002 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–FICC–2017–002. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FICC and on DTCC’s Web site
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FICC–
2017–002 and should be submitted on
or before April 10, 2017.
E:\FR\FM\20MRN1.SGM
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14410
Federal Register / Vol. 82, No. 52 / Monday, March 20, 2017 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–05401 Filed 3–17–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80242; File No. SR–
BatsBZX–2017–19]
Self-Regulatory Organizations; Bats
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Related to Fees
March 14, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 8,
2017, Bats BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the Exchange. The Exchange has
designated the proposed rule change as
one establishing or changing a member
due, fee, or other charge imposed by the
Exchange under Section 19(b)(3)(A)(ii)
of the Act 3 and Rule 19b–4(f)(2)
thereunder,4 which renders the
proposed rule change effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
sradovich on DSK3GMQ082PROD with NOTICES
The Exchange filed a proposal to
amend the fee schedule applicable to
Members 5 and non-members of the
Exchange pursuant to BZX Rules 15.1(a)
and (c).
The text of the proposed rule change
is available at the Exchange’s Web site
at www.bats.com, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
36 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
5 The term ‘‘Member’’ is defined as ‘‘any
registered broker or dealer that has been admitted
to membership in the Exchange.’’ See Exchange
Rule 1.5(n).
1 15
VerDate Sep<11>2014
18:36 Mar 17, 2017
Jkt 241001
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
fee schedule applicable to its equities
trading platform (‘‘BZX Equities’’) to: (i)
Modify the criteria required to meet the
Market Depth Tier; (ii) add a new CrossAsset Add Volume Tier 2 under
footnote 1; and (iii) delete the alternate
criteria to meet Tiers 1 through 6 under
footnote 1.
Modifications to Market Depth Tier
The Exchange proposes to modify the
required criteria for Market Depth Tier
under footnote 1 of the fee schedule.
The Exchange currently offers enhanced
rebates ranging from $0.0025 to $0.0032
per share under eight Add Volume Tiers
set forth in footnote 1 of the fee
schedule. Under the Market Depth Tier,
qualifying Members earn a rebate per
share of $0.0032 on displayed orders
that add liquidity and yield fee codes B,
V, or Y.6 Currently, to qualify for this
tier a Member must: (i) Add an ADV 7
greater than or equal to 1.00% of the
TCV; 8 and (ii) add an ADV greater than
or equal to 0.10% of the TCV in nondisplayed orders that yield fee codes
HA 9 or HI.10 The Exchange now
6 Fee codes B, V, and Y are appended to displayed
orders that add liquidity in tape B, A, or C,
respectively. See the Exchange’s fee schedule
available at https://www.bats.com/us/equities/
membership/fee_schedule/bzx/.
7 ‘‘ADV’’ means average daily volume calculated
as the number of shares added or removed,
combined, per day, and is calculated on a monthly
basis. Id.
8 ‘‘TCV’’ means total consolidated volume
calculated as the volume reported by all exchanges
and trade reporting facilities to a consolidated
transaction reporting plan for the month for which
the fees apply. Id.
9 Fee code HA is appended to non-displayed
orders which add liquidity on the Exchange and
receive a rebate of $0.0017 per share. Id.
10 Fee code HI is appended to non-displayed
orders which receive price improvement and add
PO 00000
Frm 00068
Fmt 4703
Sfmt 4703
proposes to decrease the first prong of
the tier’s criteria while increasing the
second prong of the criteria for this tier,
thus keeping the difficulty of achieving
the tier the same while adjusting to
current market dynamics. Specifically,
to receive a rebate of $0.0032 per share
under the Market Depth Tier a Member
must now: (i) Add an ADV greater than
or equal to 0.70% of the TCV; and (ii)
add an ADV greater than or equal to
0.12% of the TCV in non-displayed
orders that yield fee codes HA or HI.
Proposed Cross-Asset Add Volume
Tier 2
The Exchange proposes to offer an
additional Cross-Asset Add Volume Tier
under footnote 1 of the fee schedule.
Included amongst the volume tiers
offered by the Exchange under footnote
1 is a Cross-Asset Add Volume Tier
which requires participation on the
Exchange’s equity options platform
(‘‘BZX Options’’). Under the Exchange’s
current Cross-Asset Add Volume Tier, a
Member’s order that yield fee codes B,
V, or Y may receive an enhanced rebate
of $0.0028 per share where that Member
has an: (i) ADAV 11 as a percentage of
TCV greater than or equal to 0.15%; and
(ii) Options Customer Add TCV 12
greater than or equal to 0.10%. Under
proposed tier to be called the ‘‘CrossAsset Add Volume Tier 2’’,13 a
Member’s orders that yield fee codes B,
V or Y may receive an enhanced rebate
of $0.0030 per share where the Member:
(i) Has on BZX Options an ADAV in
Customer 14 orders greater than or equal
to 0.60% of average TCV; (ii) has on
BZX Options an ADAV in Market
Maker 15 orders greater than or equal to
liquidity. Orders that yield fee code HI are charged
no fee nor do they receive a rebate. Id.
11 ‘‘ADAV’’ means average daily added volume
calculated as the number of contracts added and
‘‘ADV’’ means average daily volume calculated as
the number of contracts added or removed,
combined, per day. See the Exchange’s fee schedule
available at https://www.bats.com/us/options/
membership/fee_schedule/bzx/.
12 ‘‘Options Customer Add TCV’’ means, for
purposes of equities pricing, ADAV resulting from
Customer orders as a percentage of TCV, using the
definitions of ADAV, Customer and TCV as
provided under the Exchange’s fee schedule for
BZX Options. Id.
13 The Exchange proposes to rename the current
Cross-Asset Add Volume Tier as ‘‘Cross-Asset Add
Volume Tier 1’’.
14 ‘‘Customer’’ applies to any transaction
identified by a Member for clearing in the Customer
range at the OCC, excluding any transaction for a
Broker Dealer or a ‘‘Professional’’ as defined in
Exchange Rule 16.1. See the BZX Options fee
schedule available at https://www.bats.com/us/
options/membership/fee_schedule/bzx/.
15 ‘‘Market Maker’’ applies to any transaction
identified by a Member for clearing in the Market
Maker range at the OCC, where such Member is
registered with the Exchange as a Market Maker as
defined in Rule 16.1(a)(37). Id.
E:\FR\FM\20MRN1.SGM
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]]>Agencies
[Federal Register Volume 82, Number 52 (Monday, March 20, 2017)]
[Notices]
[Pages 14401-14410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05401]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80234; File No. SR-FICC-2017-002]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Implement the Capped
Contingency Liquidity Facility in the Government Securities Division
Rulebook
March 14, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on March 1, 2017, Fixed Income Clearing Corporation
(``FICC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the clearing
agency.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On March 1, 2017, FICC filed this proposed rule change as an
advance notice (SR-FICC-2017-802) (``Advance Notice Filing'') with
the Commission pursuant to Section 806(e)(1) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010, 12 U.S.C.
5465(e)(1), and Rule 19b-4(n)(1)(i) of the Exchange Act, 17 CFR
240.19b-4(n)(1)(i). A copy of the advance notice is available at
https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to FICC's
Government Securities Division (``GSD'') Rulebook (the ``GSD Rules'')
\4\ in order to include a committed liquidity resource (referred to as
the ``Capped Contingency Liquidity Facility[supreg]'' (``CCLF'')). This
facility would provide FICC with additional liquid financial resources
to meet its cash settlement obligations in the event of a default of
the largest family of affiliated Netting Members \5\ (an ``Affiliated
Family'') of GSD, as described in greater detail below.
---------------------------------------------------------------------------
\4\ GSD Rules, available at www.dtcc.com/legal/rules-and-procedures.aspx. Capitalized terms used herein and not otherwise
defined shall have the meaning assigned to such terms in the GSD
Rules.
\5\ As defined in the GSD Rules, the term ``Netting Member''
means a Member that is a Member of the Comparison System and the
Netting System. Id.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements
[[Page 14402]]
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The clearing agency has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
FICC is proposing to amend the GSD Rules to include CCLF, which
would be a rules-based committed liquidity facility designed to help
ensure that FICC maintains sufficient liquid financial resources to
meet its cash settlement obligations in the event of a default of the
Affiliated Family to which FICC has the largest exposure in extreme but
plausible market conditions, as required by Rule 17Ad-22(b)(3) \6\ of
the Exchange Act. This proposal is also designed to comply with newly
adopted Rule 17Ad-22(e)(7) under the Exchange Act.\7\ As of April 11,
2017, Rule 17Ad-22(e)(7) will require FICC to have policies and
procedures reasonably designed to effectively monitor, measure, and
manage liquidity risk.
---------------------------------------------------------------------------
\6\ See 17 CFR 240.17Ad7-22(b)(3).
\7\ See 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------
A. Background
FICC occupies an important role in the securities settlement system
by interposing itself as a central counterparty between Netting Members
that are counterparties to transactions cleared by GSD (``GSD
Transactions''), thereby reducing the risk faced by Netting Members.\8\
To manage the counterparty risk, FICC requires each Netting Member to
deposit margin (referred to in the GSD Rules as ``Required Fund
Deposits'') into the Clearing Fund, which constitutes the financial
resources that FICC could use to cover potential losses resulting from
a Netting Member default. In addition to collecting and maintaining
financial resources to cover default losses, FICC also maintains liquid
resources to satisfy its settlement obligations in the event of a
Netting Member default. Upon regulatory approval and completion of a
12-month phase-in period, as described below, CCLF would become an
additional liquid resource available to FICC as part of its liquidity
risk management framework for GSD.\9\
---------------------------------------------------------------------------
\8\ FICC operates two divisions--GSD and the Mortgage-Backed
Securities Division (``MBSD''). GSD provides trade comparison,
netting, risk management, settlement and central counterparty
services for the U.S. government securities market, while MBSD
provides the same services for the U.S. mortgage-backed securities
market. Because GSD and MBSD are separate divisions of FICC, each
division maintains its own rules, members, margin from their
respective members, Clearing Fund, and liquid resources.
\9\ In 2012, FICC amended MBSD's Clearing Rules (the ``MBSD
Rules'') to create a CCLF for managing MBSD's liquidity risk. FICC
is proposing to amend the GSD Rules to create a CCLF for managing
GSD's liquidity risk. Because this CCLF is for GSD only, the
description of the proposal should be understood within the
framework of the GSD Rules. See Securities Exchange Act Release No.
34-66550 (March 9, 2012), 77 FR 15155 (March 14, 2012) (SR-FICC-
2008-01); MBSD Rule 17, MBSD Rules, available at www.dtcc.com/legal/rules-and-procedures.aspx.
---------------------------------------------------------------------------
B. Overview of the Proposal
CCLF would only be invoked if FICC declared a ``CCLF Event,'' that
is, if FICC has ceased to act for a Netting Member in accordance to GSD
Rule 22A \10\ (referred to as a ``default'') and subsequent to such
default, FICC determines that it does not have the ability to obtain
sufficient liquidity from GSD's Clearing Fund, by entering into
repurchase transactions using securities in the Clearing Fund or
securities that were destined to the defaulting Netting Member, or
through uncommitted bank loans with its Clearing Agent Banks. Upon
declaration of a CCLF Event, each Netting Member may be called upon to
enter into repurchase transactions with FICC (``CCLF Transactions'') up
to a previously determined capped dollar amount, as described below.
---------------------------------------------------------------------------
\10\ GSD Rules, supra note 4.
---------------------------------------------------------------------------
1. Declaration of a CCLF Event
Following a default, FICC would first obtain liquidity through
other available liquid resources, as described above. If and only if,
FICC determines that these sources of liquidity are not able to
generate sufficient cash to pay the non-defaulting Netting Members,
FICC would declare a CCLF Event by issuing an Important Notice
informing all Netting Members of FICC's need to make such a declaration
and enter into CCLF Transactions, as necessary.\11\
---------------------------------------------------------------------------
\11\ Such Important Notice would also advise Netting Members to
review their most recent liquidity funding reports to determine
their respective maximum funding obligations.
---------------------------------------------------------------------------
2. CCLF Transactions
During a CCLF Event, FICC would meet its liquidity need by
initiating CCLF Transactions with non-defaulting Netting Members. Each
CCLF Transaction would be governed by the terms of the September 1996
Securities Industry and Financial Markets Association Master Repurchase
Agreement,\12\ which would be incorporated by reference into the GSD
Rules as a master repurchase agreement between FICC as seller and each
Netting Member as buyer with certain modifications as outlined in the
GSD Rules (the ``CCLF MRA'').
---------------------------------------------------------------------------
\12\ The September 1996 Securities Industry and Financial
Markets Association Master Repurchase Agreement (the ``SIFMA MRA'')
is available at https://www.sifma.org/services/standard-forms-and-documentation/mra,-gmra,-msla-and-msftas/. The SIFMA MRA would be
incorporated by reference into the GSD Rules without referenced
annexes, other than in the case of any Netting Member that is a
registered investment company, then Annex VII would be applicable to
such Member. At the time of this filing, there are no registered
investment companies that are also GSD Netting Members. If a
registered investment company would become a GSD Netting Member,
then Annex VII would be applicable to such Member.
---------------------------------------------------------------------------
Each Netting Member would be obligated to enter into CCLF
Transactions up to a capped dollar amount. FICC would first identify
the non-defaulting Netting Members that are obligated to deliver
securities destined for the defaulting Netting Member (``Direct
Affected Members'') and FICC's cash payment obligation to such Direct
Affected Member that FICC would need to finance through CCLF to cover
the defaulting Netting Member's failure to deliver cash (the
``Financing Amount''). FICC would notify each Direct Affected Member of
its Financing Amount and whether such Direct Affected Member should
deliver to FICC or suppress any securities that were destined for the
defaulting Netting Member. FICC would then initiate CCLF Transactions
with each Direct Affected Member for its purchase of the securities
(the ``Financed Securities'') that were destined for the defaulting
Netting Member.\13\ The aggregate purchase price of the CCLF
Transactions with the Direct Affected Member would equal but never
exceed its maximum funding obligation (the ``Individual Total
Amount'').\14\
---------------------------------------------------------------------------
\13\ It should be noted that FICC would have the authority to
initiate CCLF Transactions in respect of any securities that are in
the Direct Affected Member's portfolio which are bound to the
defaulting Netting Member.
\14\ As described in Section C. herein, a Netting Member's
Individual Total Amount represents such Member's maximum liquidity
funding obligation. The Individual Total Amount would be based on a
Netting Member's observed peak historical liquidity need.
---------------------------------------------------------------------------
If any Direct Affected Member's Financing Amount exceeds its
Individual Total Amount (the ``Remaining Financing Amount''), FICC
would advise (A) each other Direct Affected Member whose Financing
Amount is less than its Individual Total Amount, and (B) each Netting
Member that has not otherwise entered into CCLF Transactions with FICC
(the
[[Page 14403]]
``Indirect Affected Members,'' and together with the Direct Affected
Members, ``Affected Members'') that FICC intends to initiate CCLF
Transactions with them for the Remaining Financing Amount.
The order in which FICC would enter into CCLF Transactions for the
Remaining Financing Amount would be based upon the Affected Members
that have the most funding available within their Individual Total
Amounts. No Affected Member would be obligated to enter into CCLF
Transactions greater than its Individual Total Amount.
During a CCLF Event, FICC would engage its investment advisor
subject to the approval of its Board and seek to minimize liquidation
losses on the Financed Securities through hedging, strategic
dispositions, or other investment transactions as determined by FICC
under relevant market conditions. Once FICC completes the liquidation
of the underlying securities by selling them to a new buyer, FICC would
instruct the Affected Member to close the repo trade and deliver the
Financed Securities to FICC to complete settlement on the contractual
settlement date of the liquidating trade. FICC would endeavor to unwind
the CCLF Transactions based on the order that it enters into the
Liquidating Trades. Each CCLF Transaction would remain open until the
earlier of (x) such time that FICC has liquidated the Affected Member's
Financed Securities, (y) such time that FICC has obtained liquidity
through its available liquid resources or (z) 30 or 60 calendar days
after entry into the CCLF Transaction for U.S. government bonds and
mortgage-backed securities, respectively.
The original GSD Transactions, which FICC is obligated to settle,
are independent from the CCLF Transactions. The proposed rule change
would clarify that, under the original GSD Transaction, FICC's
obligation to pay cash to a Direct Affected Member, and the Direct
Affected Member's obligation to deliver securities, would be deemed
satisfied by entry into CCLF Transactions, and that such settlement
would be final.
C. CCLF Sizing and Allocation
As noted above, FICC would only enter into CCLF Transactions with a
Netting Member in an amount that is up to such Netting Member's maximum
funding obligation. This amount would be based on each Netting Member's
observed peak historical liquidity need. Initially, FICC would
calculate the Netting Member's peak historical liquidity need based on
a six-month look-back period.
FICC's liquidity need during a CCLF Event would be determined by
the cash settlement obligations presented by the default of a Netting
Member and an Affiliated Family. FICC would include an additional
amount (i.e., a buffer) to account for changes in Netting Members' cash
settlement obligations that may not be observed during the six-month
look-back period during which CCLF would be sized. The buffer would
also account for the possibility that the defaulting Netting Member is
the largest CCLF contributor. FICC would allocate its observed
liquidity need among all Netting Members based on their historical
settlement activity. Netting Members that present the highest cash
settlement obligations would be required to maintain higher funding
obligations.
Listed below are the steps that FICC would take to size and
allocate each Netting Member's CCLF requirement.
Step 1: CCLF Sizing
Historical Cover 1 Liquidity Requirement
FICC's historical liquidity need for the six-month look-back period
would be an amount equal to the dollar amount of the largest sum of an
Affiliated Family's obligation to receive GSD eligible securities plus
the net dollar amount of its Funds-Only Settlement Amount \15\
(collectively, the ``Historical Cover 1 Liquidity Requirement''). FICC
believes that it is appropriate to calculate the Historical Cover 1
Liquidity Requirement in this manner because the default of the largest
Affiliated Family would generate the highest liquidity need for FICC.
---------------------------------------------------------------------------
\15\ The Funds-Only Settlement Amount reflects the amount that
FICC collects and passes to the contra-side once FICC marks the
securities in a Netting Member's portfolio to the current market
value. This amount is the difference between the contract value vs.
the current market value of a Netting Member's GSD portfolio. FICC
would consider this amount when calculating the Historical Cover 1
Liquidity Requirement because in the event that an Affiliated Family
defaults, the Funds-Only Settlement Amount would also reflect the
cash obligation to non-defaulting Netting Members.
---------------------------------------------------------------------------
Liquidity Buffer
The Historical Cover 1 Liquidity Requirement would be based on the
largest Affiliated Family's activity during a six-month look-back
period. However, FICC is cognizant that the Historical Cover 1
Liquidity Requirement would not account for changes in a Netting
Member's current trading behavior, which may result in a liquidity need
that is greater than the Historical Cover 1 Liquidity Requirement. As a
result, FICC proposes to add an additional amount to the Historical
Cover 1 Liquidity Requirement as a buffer (the ``Liquidity Buffer'') to
arrive at FICC's anticipated total liquidity need for GSD during a CCLF
Event.
Under the proposed rule change, the Liquidity Buffer would be 20%
to 30% of the Historical Cover 1 Liquidity Requirement, subject to a
minimum amount of $15 billion. FICC believes that 20% to 30% of the
Historical Cover 1 Liquidity Requirement is appropriate based on its
analysis of the calculated coefficient of variation \16\ with respect
to Affiliated Families' liquidity needs throughout 2015 and 2016.\17\
FICC also believes that the $15 billion minimum dollar amount is
necessary to cover changes in a Netting Member's trading activity that
could exceed the amount that is implied by the calculated coefficient
of variation.
---------------------------------------------------------------------------
\16\ The ``coefficient of variation'' is a statistical
measurement that is calculated as the standard deviation divided by
the mean. It is a typical approach used to compare variability
across different data sets.
\17\ In connection with this proposed rule change, the
coefficient of variation would be used to set the Liquidity Buffer
by quantifying the variance of each Affiliated Family's daily
liquidity need. During this period, FICC observed that the
coefficient of variation ranged from an average of 15%-19% for
Affiliated Families with liquidity needs above $50 billion, and an
average of 18%-21% for Affiliated Families with liquidity needs
above $35 billion. Based on the calculated coefficient of variation,
FICC believes that an amount equaling 20% to 30% of the Historical
Cover 1 Liquidity Requirement subject to a minimum of $15 billion
would be an appropriate Liquidity Buffer.
---------------------------------------------------------------------------
FICC would have the discretion to adjust the Liquidity Buffer based
on its analysis of the stability of the Historical Cover 1 Liquidity
Requirement over the look-back periods of 3-, 6-, 12-, and 24-months.
Should FICC observe changes in the stability of the Historical Cover 1
Liquidity Requirements, FICC would have the discretion to increase the
six-month look-back period to help ensure that the calculation of its
liquidity need appropriately accounts for variability in the Historical
Cover 1 Liquidity Requirement. This would help FICC to ensure that its
liquidity resources are sufficient under a wide range of potential
market scenarios that may lead to a change in Netting Member behavior.
FICC would also analyze the trading behavior of Netting Members that
present larger liquidity needs than the majority of the Netting Members
(as described below).
Aggregate Total Amount
FICC's anticipated total liquidity need during a CCLF Event (i.e.,
the sum of the Historical Cover 1 Liquidity Requirement plus the
Liquidity Buffer)
[[Page 14404]]
would be referred to as the ``Aggregate Total Amount.''
Step 2: FICC's Allocation of the Aggregate Total Amount Among Netting
Members
(A) FICC's Allocation of the Aggregate Regular Amount Among Netting
Members
After FICC determines the Aggregate Total Amount, which initially
would be set to the Historical Cover 1 Liquidity Requirement plus the
greater of 20% of the Historical Cover 1 Liquidity Requirement or $15
billion. FICC would allocate the Aggregate Total Amount among Netting
Members in order to arrive at each Netting Member's Individual Total
Amount. FICC would take a two-tiered approach in its allocation of the
Aggregate Total Amount. First, FICC would determine the portion of the
Aggregate Total Amount that should be allocated among all Netting
Members (``Aggregate Regular Amount''). Then, FICC would allocate the
remainder of the Aggregate Total Amount (the ``Aggregate Supplemental
Amount'') among Netting Members that incur liquidity needs above the
Aggregate Regular Amount within the six-month look-back period. FICC
believes that this two-tiered approach reflects FICC's consideration of
fairness, transparency and the burdens of the funding obligations on
each Netting Member's management of its own liquidity.
Under the proposed rule change, FICC would set the Aggregate
Regular Amount at $15 billion. FICC believes that this amount is
appropriate because FICC observed that from 2015 to 2016, the average
Netting Member's liquidity need was approximately $7 billion, with a
majority of Netting Members' liquidity needs not exceeding an amount of
$15 billion.\18\ Based on that analysis, FICC believes that the
Aggregate Regular Amount should capture the liquidity needs of a
majority of the Netting Members. Thus, FICC believes that setting the
Aggregate Regular Amount at $15 billion is appropriate.
---------------------------------------------------------------------------
\18\ From 2015 to 2016, 59% of all Netting Members presented
average liquidity needs between $0 to $5 billion, 78% of all Netting
Members presented average liquidity needs between $0 and $10
billion, and 85% of all Netting Members presented average liquidity
needs between $0 and $15 billion.
---------------------------------------------------------------------------
Under the proposal, the Aggregate Regular Amount would be allocated
among all Netting Members, but Netting Members with larger Receive
Obligations would be required to contribute a larger amount. FICC
believes that this approach is appropriate because a defaulting Netting
Member's Receive Obligations are the primary cash settlement
obligations that FICC would have to satisfy as a result of the default
of a Netting Member or an Affiliated Family. However, FICC also
believes that some portion of the Aggregate Regular Amount should be
allocated based on Netting Members' aggregate Deliver Obligations since
FICC guarantees both sides of a GSD Transaction and all Netting Members
benefit from FICC's risk mitigation. As a result, FICC is proposing to
allocate the Aggregate Regular Amount based on a scaling factor. Given
that the Aggregate Regular Amount is sized at $15 billion and covers
approximately 80% of Netting Members' observed liquidity needs, FICC
proposes to set the scaling factor in the range of 65%-85% to the value
of Netting Members' Receive Obligations and set the scaling factor in
the range of 15%-35% to the value of Netting Members' Deliver
Obligations.
Initially, FICC would assign a 20% weighting percentage to a
Netting Member's aggregate Deliver Obligations (the ``Deliver Scaling
Factor'') and the remaining percentage difference, 80% in this case, to
a Netting Member's aggregate Receive Obligations (``Receive Scaling
Factor''). FICC would have the discretion to adjust these scaling
factors based on a quarterly analysis that would, in part, assess
Netting Members' observed liquidity needs that are at or below $15
billion. This assessment would ensure that the Aggregate Regular Amount
would be appropriately allocated across all Netting Members.
FICC would calculate a Netting Member's portion of the Aggregate
Regular Amount (its ``Individual Regular Amount'') by adding (a) and
(b) below.
(a) FICC would (x) divide the absolute value of a Netting Member's
peak Receive Obligations by the absolute value of the sum of all
Netting Members' peak Receive Obligations, then (y) multiply such
resulting value by the Aggregate Regular Amount, then (z) multiply the
resulting value by the Receive Scaling Factor (which would initially be
80%).
(b) FICC would (x) divide the absolute value of a Netting Member's
peak Deliver Obligations by the absolute value of the sum of all
Netting Members' peak Deliver Obligations, then (y) multiply such
resulting value by the Aggregate Regular Amount, then (z) multiply the
resulting value by the Deliver Scaling Factor (which would initially be
20%).
(B) FICC's Allocation of the Aggregate Supplemental Amount Among
Netting Members
The remainder of the Aggregate Total Amount (i.e., the Aggregate
Supplemental Amount) would be allocated among Netting Members that
present liquidity needs in excess of the Aggregate Regular Amount.
FICC would allocate the Aggregate Supplemental Amount across
liquidity tiers (``Liquidity Tiers''). The allocation to each Liquidity
Tier would be based on how many times (i.e., ``observations'') the
Netting Members' daily liquidity needs have reached the respective
Liquidity Tier. This assignment would result in a larger proportion of
the Aggregate Supplemental Amount being borne by those Netting Members
who present the highest liquidity needs.
FICC would set the Liquidity Tiers in $5 billion increments. FICC
believes that this increment would appropriately distinguish Netting
Members that present the highest liquidity needs on a frequent basis
and allocate more of the Individual Supplemental Amount to Netting
Members in the top Liquidity Tiers. Increments set to an amount greater
than $5 billion would provide FICC with less ability to allocate the
Aggregate Supplemental Amount to Netting Members with the highest
liquidity needs.\19\
---------------------------------------------------------------------------
\19\ For example, assume that there are two Netting Members and
each Netting Member has 125 liquidity observations each across a
six-month period. Member A has 125 observations within the $15-$20
billion Liquidity Tier and Member B has 125 observations equally
dispersed between the $15-$20 billion and $20-$25 billion Liquidity
Tiers. Under the proposed rule change, Member B would have a higher
Individual Supplemental Amount than Member A, because Member B would
be allocated a pro-rata share of the Aggregate Supplemental Amount
for the $20-$25 billion Liquidity Tier.
---------------------------------------------------------------------------
FICC would have the discretion to reduce any one or all of the
Liquidity Tiers to $2.5 billion if FICC determines that the majority of
the Netting Members' liquidity needs in such Liquidity Tiers are above
or below the midpoint of the Liquidity Tier.
Once the Liquidity Tiers are set, FICC would first allocate the
Aggregate Supplemental Amount to each Liquidity Tier in proportion to
the total number of observations across all Liquidity Tiers. Next, FICC
would allocate the Individual Supplemental Amount to each Netting
Member in accordance with each Netting Member's liquidity needs within
each Liquidity Tier. This allocation would be based on such Netting
Member's number of observations within each Liquidity Tier in
proportion to the aggregate of all
[[Page 14405]]
Netting Member's observations within a particular Liquidity Tier. The
sum of a Netting Member's allocation across all Liquidity Tiers would
be such Netting Member's Individual Supplemental Amount.
FICC would sum each Netting Member's Individual Regular Amount and
its Individual Supplemental Amount (if any) to arrive at such Netting
Member's Individual Total Amount.
CCLF Parameters as of January 2017
Table 1 includes the actual values FICC would set for each step
described above, as of January 1, 2017.\20\ These values would be reset
every six months.
---------------------------------------------------------------------------
\20\ As noted above, FICC would use a six-month look-back
period. On January 1, 2017, the look-back period would be July 1,
2016 through December 31, 2016.
---------------------------------------------------------------------------
Table 1:
$ billion
----------------------------------------------------------------------------------------------------------------
CCLF Sizing: Components of the Aggregate Total Amount
----------------------------------------------------------------------------------------------------------------
Step Component............................... Size
----------------------------------------------------------------------------------------------------------------
1..................................... Historical Cover 1 Liquidity Requirement $58.84
Liquidity Buffer (20% of the Historical 15.00
Cover 1 Liquidity Requirement subject
to a minimum of $15B).
2..................................... Aggregate Total Amount.................. 73.84
2a.................................... Aggregate Regular Amount................ 15.00
2b.................................... Receive Scaling Factor (80% of the .............. $12.00
Aggregate Regular Amount).
Deliver Scaling Factor (20% of the .............. 3.00
Aggregate Regular Amount).
2c.................................... Aggregate Supplemental Amount........... 58.84
Liquidity Tier 1 ($15-$20B) .............. 21.04
Liquidity Tier 2 ($20-$25B) .............. 14.29
Liquidity Tier 3 ($25-$30B) .............. 10.32
Liquidity Tier 4 ($30-$35B) .............. 6.14
Liquidity Tier 5 ($35-$40B) .............. 3.32
Liquidity Tier 6 ($40-$45B) .............. 1.86
Liquidity Tier 7 ($45-$50B) .............. 1.10
Liquidity Tier 8 ($50-$55B) .............. 0.62
Liquidity Tier 9 ($55-$60B) .............. 0.14
----------------------------------------------------------------------------------------------------------------
The example in Table 2 reflects the allocation of the CCLF size for
a hypothetical Netting Member. This example is based on a six-month
look-back period of July 1, 2016 through December 31, 2016.
Table 2:
$ billion
--------------------------------------------------------------------------------------------------------------------------------------------------------
CCLF Sizing: Components of the aggregate total amount Allocation of aggregate total amount
-------------------------------------------------------------------------------------------------------------- hypothetical member A
Size ---------------------------------------------
---------------------------------------- Member A's allocation
of the component
-------------------------
Step Component Member A's (Z)
(X) percentage
(Y) (X)
(Y)
----------------------------------------------------------------------------------------------------------------------------------------------------- -----
2a...................................... Aggregate Regular Amount... $15.00
2b...................................... Receive Scaling Factor (80% .................. $12.00 5.0 $0.60
of the Aggregate Regular
Amount).
Deliver Scaling Factor (20% .................. 3.00 2.5 0.08
of the Aggregate Regular
Amount).
--------------------------------------------------------------------------------------------------------------------------------------------------------
Member A's 0.68
individual regular
amount
--------------------------------------------------------------------------------------------------------------------------------------------------------
2c...................................... Aggregate Supplemental 58.84
Amount.
Liquidity Tier 1 ($15- .................. 21.04 8.5 1.79
$20B)
Liquidity Tier 2 ($20- .................. 14.29 13.0 1.86
$25B)
Liquidity Tier 3 ($25- .................. 10.32 16.0 1.65
$30B)
Liquidity Tier 4 ($30- .................. 6.14 20.0 1.23
$35B)
Liquidity Tier 5 ($35- .................. 3.32 35.0 1.16
$40B)
Liquidity Tier 6 ($40- .................. 1.86 52.0 0.97
$45B)
Liquidity Tier 7 ($45- .................. 1.10 65.0 0.72
$50B)
Liquidity Tier 8 ($50- .................. 0.62 80.0 0.50
$55B)
Liquidity Tier 9 ($55- .................. 0.14 100.0 0.14
$60B)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Member A's 10.01
individual
supplemental
amount
------------------------------------------
[[Page 14406]]
Member A's 10.68
individual total
amount
--------------------------------------------------------------------------------------------------------------------------------------------------------
D. FICC's Ongoing Assessment of the Sufficiency of CCLF
As described above, the Aggregate Total Amount and each Netting
Member's Individual Total Amount (i.e., each Netting Member's
allocation of the Aggregate Total Amount) would initially be calculated
using a six-month look-back period that FICC would reset every six
months (``reset period''). On a quarterly basis, FICC's Liquidity
Product Risk Unit \21\ would assess the following parameters that it
uses to calculate the Aggregate Total Amount and may recommend to the
Board's Risk Committee changes to such parameters:
---------------------------------------------------------------------------
\21\ FICC's Liquidity Product Risk Unit is responsible for
assessing the liquidity needs of GSD and MBSD.
---------------------------------------------------------------------------
Peak daily liquidity need for the largest Affiliated
Family;
the Liquidity Buffer;
the Aggregate Regular Amount;
the Aggregate Supplemental Amount;
the Deliver Scaling Factor and the Receive Scaling Factor
used to allocate the Aggregate Regular Amount;
the increments for the Liquidity Tiers; and
the length of the look-back period and the reset period
for the Aggregate Total Amount.
In the event that any changes to the above-referenced parameters
result in an increase in a Netting Member's Individual Total Amount,
such increase would be effective as of the next reset.
Additionally, on a daily basis, FICC would examine the Aggregate
Total Amount to ensure that such amount is sufficient to satisfy FICC's
liquidity needs. If FICC determines that the Aggregate Total Amount is
insufficient to satisfy its liquidity needs, FICC may modify the length
of the look-back or reset periods or otherwise increase the Aggregate
Total Amount.
Any increase in the Aggregate Total Amount resulting from the
Liquidity Product Risk Unit's quarterly assessments or FICC's daily
monitoring would be subject to the approvals, as set forth in Table 3
below.
Table 3:
------------------------------------------------------------------------
Increase in aggregate total amount Required approval level
------------------------------------------------------------------------
<=$500 mil............................. Managing Director, Financial
Risk Management.
$501 mil to $1.0 B..................... Group Chief Risk Officer.
$1.1 B to $1.9 B....................... Management Risk Committee, or
designee.
>=$2.0 B............................... Chair of the Board Risk
Committee, or designee.
------------------------------------------------------------------------
If FICC increases a Netting Member's Individual Total Amount as a
result of its daily monitoring, such increase will not be effective
until ten (10) Business Days after FICC provides an Important Notice
regarding the increase.
If FICC determines that its liquidity needs may be satisfied with a
lower Aggregate Total Amount, a reduction in the Aggregate Total Amount
would be reflected at the conclusion of the reset period.
E. Implementation of the Proposed Rule Change and Required Attestation
From Each Netting Member
The CCLF proposal would become operative 12 months after the later
date of the Commission's approval of this proposed rule change or its
no objection of the Advance Notice Filing. During this 12-month period,
FICC would periodically provide each Netting Member with estimated
Individual Total Amounts. The delayed implementation and the estimated
Individual Total Amounts are designed to give Netting Members the
opportunity to assess the impact that the CCLF proposal would have on
their business profile.
Prior to the effective date, FICC would add a legend to the GSD
Rules to state that the specified changes to the GSD Rules are approved
but not yet operative and to provide the date such approved changes
would become operative. The legend would also include the file numbers
of the approved proposed rule change and Advance Notice Filing and
would state that once operative, the legend would automatically be
removed from the GSD Rules.
As of the implementation date and annually thereafter, FICC would
require that each Netting Member attest that its Individual Total
Amount has been incorporated into its liquidity plans.\22\ This
required attestation would be from authorized officers of the Netting
Member or otherwise in form and substance satisfactory to FICC making
the following certification: (1) Such officers have read and understand
the GSD Rules, including the CCLF rules, (2) the Netting Member's
Individual Total Amount has been incorporated into the Netting Member's
liquidity planning, (3) the Netting Member acknowledges and agrees that
its Individual Total Amount may be changed at the conclusion of any
reset period or otherwise upon ten (10) Business Days' Notice, (4) the
Netting Member will incorporate any changes to its Individual Total
Amount into its liquidity planning, and (5) the Netting Member will
continually reassess its liquidity plans and related operational plans,
including in the event of any changes to such Netting Member's
Individual Total Amount, to ensure such Netting Member's ability to
meet its Individual Total Amount. FICC may require any Netting Member
to provide FICC with a new certification in the
[[Page 14407]]
foregoing form at any time, including upon a change to a Netting
Member's Individual Total Amount or in the event that a Netting Member
undergoes a change in its corporate structure.
---------------------------------------------------------------------------
\22\ The attestation would not refer to the actual dollar amount
that has been allocated as the Individual Total Amount. Each Netting
Member's Individual Total Amount would be made available to such
Member via GSD's access controlled portal Web site.
---------------------------------------------------------------------------
In addition to the above, on a quarterly basis, FICC's Counterparty
Credit Risk Management group would conduct due diligence to assess each
Netting Member's ability to meet its Individual Total Amount. This due
diligence would include a review of all information that the Netting
Member has provided FICC in connection with its ongoing reporting
obligations pursuant to the GSD Rules and a review of other publicly
available information. Additionally, FICC would test its operational
procedures for invoking a CCLF Event. Pursuant to GSD Rule 3 Section 6,
Netting Members would be required to participate in such tests. If a
Netting Member fails to participate in such testing when required by
FICC, FICC may take disciplinary measures as set forth in GSD Rule 3
Section 7.
F. FICC's Commitment to Enhanced Transparency
FICC understands that each Netting Member must be able to evaluate
the risks of its membership and plan for its funding obligations.
Additionally, FICC believes that it is critical that each Netting
Member understands the risks that its activity presents to FICC, and
that each Netting Member should be prepared to monitor its activity and
alter its behavior in order to minimize the liquidity risk that it
presents to FICC. Accordingly, on each Business Day, FICC would make a
liquidity funding report available to each Netting Member that would
include the following:
1. The Netting Member's Individual Total Amount, Individual Regular
Amount and, if applicable, its Individual Supplemental Amount;
2. FICC's Aggregate Total Amount, Aggregate Regular Amount and
Aggregate Supplemental Amount; and
3. FICC's regulatory liquidity requirements as of the prior
Business Day.
The liquidity funding report would be provided for informational
purposes only. Pursuant to the proposed rule change, upon a CCLF Event,
each Netting Member would be required to enter into CCLF Transactions
having an aggregate purchase price up to its Individual Total Amount as
calculated by FICC.
G. Proposed Changes to the GSD Rules
GSD Rule 1--Definitions
In order to help effectuate the proposed changes, FICC proposes to
add the following defined terms to the GSD Rule 1: Affected Member;
Aggregate Regular Amount; Aggregate Supplemental Amount; Aggregate
Total Amount; CCLF Event; CCLF MRA; CCLF MRA Termination Date; CCLF
Transaction; Deliver Scaling Factor; Direct Affected Member; Financed
Securities; Financing Amount; Historical Cover 1 Liquidity Requirement;
Indirect Affected Member; Individual Regular Amount; Individual
Supplemental Amount; Individual Total Amount; Liquidating Trade;
Liquidity Buffer; Liquidity Need; Liquidity Percentage; Liquidity Tier;
Look-Back Period; Observation; Receive Scaling Factor; Relative Inter-
Tier Frequency; Relative Intra-Tier Frequency; Relevant Securities;
Remaining Financing Amount; Required Attestation; and SIFMA MRA.
Rule 22A--Procedures for When the Corporation Ceases To Act
FICC is proposing to amend Rule 22A to include a new section in
this Rule. This new section would be entitled ``Section 2a.'' Proposed
Section 2a would incorporate the CCLF MRA into the GSD Rules subject to
the amendments proposed therein. In addition, the proposed section
would include (1) the notification process that would occur once FICC
invokes a CCLF Event; (2) the CCLF Transactions that FICC would enter
into once it invokes a CCLF Event; (3) disclosure of each relevant CCLF
sizing component that FICC would assess; (4) the calculation that FICC
would use to determine each Netting Member's Individual Regular Amount
and Individual Supplemental Amount, if applicable; and (5) a
description of the officers' certificate that each Netting Member would
be required to provide certifying that, among other things, its
Individual Total Amount has been incorporated into its liquidity plans.
2. Statutory Basis
Section 17A(b)(3)(F) of the Exchange Act requires, in part, that
the rules of a clearing agency be 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.\23\
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
FICC believes that the CCLF proposal would enable FICC to access
additional liquidity in the event that its other liquidity resources
are insufficient upon the default of a Netting Member, which would help
ensure that FICC has sufficient funds to meet its cash settlement
obligations to its non-defaulting Netting Members. As a result, FICC
believes that the proposal has been designed to assure the safeguarding
of securities and funds in FICC's custody or control, consistent with
Section 17A(b)(3)(F) of the Exchange Act.\24\
---------------------------------------------------------------------------
\24\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(b)(3) under the Exchange Act requires a registered
clearing agency that performs central counterparty services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to maintain sufficient financial
resources to withstand, at a minimum, a default by the participant
family to which it has the largest exposure in extreme but plausible
market conditions.\25\ As described above, FICC would size CCLF based
on the peak liquidity need that would be generated by the default of
its largest participant family (its Historical Cover 1 Liquidity
Requirement), plus an additional Liquidity Buffer to account for
unexpected Netting Member trading behavior that could increase FICC's
Historical Cover 1 Liquidity Requirement or a situation in which its
largest Netting Member defaults and cannot contribute to the CCLF.
Thus, FICC believes that the proposal would be consistent with Rule
17Ad-22(b)(3) because it is designed to provide FICC with sufficient
financial resources to withstand a default by the participant family to
which it has the largest exposure in extreme but plausible market
conditions.
---------------------------------------------------------------------------
\25\ See 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------
Rule 17Ad-22(d)(9) under the Exchange Act requires a registered
clearing agency that performs central counterparty services to
establish, implement, maintain and enforce written policies and
procedures to provide market participants with sufficient information
for them to identify and evaluate the risks and costs associated with
using its services.\26\ As described above, on each Business Day, FICC
would make a liquidity funding report available to each Netting Member.
This report would include (1) the Netting Member's Individual Total
Amount, Individual Regular Amount and, to the extent applicable, its
Individual Supplemental Amount; (2) FICC's Aggregate Total Amount,
Aggregate Regular Amount and Aggregate Supplemental Amount; and (3)
FICC's regulatory liquidity requirements as of the prior Business Day.
This report would enable each Netting Member to prepare for its maximum
funding obligations and alter its trading behavior should it desire to
[[Page 14408]]
minimize the liquidity risk it presents to FICC. FICC believes that the
proposed rule change would be consistent with Rule 17Ad-22(d)(9)
because the liquidity funding report would provide Netting Members with
sufficient information to identify and evaluate the risks and costs
associated with using the services that FICC provides through GSD.
---------------------------------------------------------------------------
\26\ See 17 CFR 240.17Ad-22(d)(9).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(7) under the Exchange Act, which was recently
adopted by the Commission, will require FICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage liquidity risk
that arises in or is borne by FICC, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity.\27\
---------------------------------------------------------------------------
\27\ See 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(7)(i) will require FICC to maintain sufficient
liquid resources to effect same-day settlement of payment obligations
in the event of a default of the participant family that would generate
the largest aggregate payment obligation for the covered clearing
agency in extreme but plausible market conditions.\28\ FICC believes
that the proposal would be consistent with Rule 17Ad-22(e)(7)(i)
because CCLF would be sized based on the peak liquidity need that would
be generated by the default of its largest participant family (its
Historical Cover 1 Liquidity Requirement), plus an additional Liquidity
Buffer, which would help FICC maintain sufficient liquid resources to
settle the cash obligations of an Affiliated Family that would generate
the largest aggregate payment obligation for FICC in extreme but
plausible market conditions.
---------------------------------------------------------------------------
\28\ See 17 CFR 240.17Ad-22(e)(7)(i).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(7)(ii) will require FICC to hold qualifying liquid
resources sufficient to satisfy payment obligations owed to clearing
members.\29\ FICC believes that the proposed rule change would be
consistent with Rule 17Ad-22(e)(7)(ii) because the CCLF MRA would be a
committed arrangement and all CCLF Transactions entered into pursuant
the CCLF MRA would be readily available and the related assets would be
convertible into cash in order to settle cash obligations owed to non-
defaulting Netting Members.
---------------------------------------------------------------------------
\29\ See 17 CFR 240.17Ad-22(e)(7)(ii).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(7)(iv) under the Exchange Act will require FICC to
undertake due diligence that confirms that it has a reasonable basis to
believe each of its liquidity providers has: (a) Sufficient information
to understand and manage the liquidity provider's liquidity risks; and
(b) the capacity to perform as required under its commitments to
provide liquidity.\30\ As described above, on a quarterly basis, FICC
would conduct due diligence to assess each Netting Member's ability to
meet its Individual Total Amount. This due diligence would include a
review of all information that the Netting Member has provided FICC in
connection with its ongoing reporting requirements pursuant to the GSD
Rules as well as a review of other publicly available information. As a
result, FICC believes that its due diligence of Netting Members would
be consistent with Rule 17Ad-22(e)(7)(iv).
---------------------------------------------------------------------------
\30\ See 17 CFR 240.17Ad-22(e)(7)(iv).
---------------------------------------------------------------------------
Additionally, Rule 17Ad-22(e)(7)(v) under the Exchange Act will
require FICC to maintain and test with each liquidity provider, to the
extent practicable, FICC's procedures and operational capacity for
accessing its relevant liquid resources.\31\ As described above, FICC
would test its operational procedures for invoking a CCLF Event and
pursuant to GSD Rule 3 Section 6, Netting Members would be required to
participate in such tests. As a result, FICC believes that its testing
of its capability to invoke a CCLF MRA would be consistent with Rule
17Ad-22(e)(7)(v).
---------------------------------------------------------------------------
\31\ See 17 CFR 240.17Ad-22(e)(7)(v).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed rule change could have an impact
upon competition because each Netting Member's Individual Total Amount
would place a committed funding obligation on Netting Members and this
obligation would increase the cost of participating in GSD. The
proposed rule change could impose a larger burden on competition on
Netting Members that are subject to an Individual Supplemental Amount
because such Members would bear higher funding obligations than Netting
Members who are not subject to an Individual Supplemental Amount.
FICC believes that the burden on competition that is created by the
proposed rule change is necessary to comply with the requirements of
the Exchange Act and rules thereunder. As noted above, FICC believes
that the proposal would assure that FICC safeguards securities and
funds in its custody or control by providing FICC with additional
liquidity to meet its cash settlement obligations. Moreover, the
proposal would support FICC's compliance with Rule 17Ad-22(b)(3) \32\
under the Exchange Act because the CCLF would be sized to provide FICC
with sufficient financial resources to withstand, at a minimum, a
default by the participant family to which it has the largest exposure
in extreme but plausible market conditions. Additionally, the proposed
rule change would support FICC's compliance with Rule 17Ad-22(e)(7)(ii)
\33\ under the Exchange Act because the CCLF MRA would be a committed
liquidity arrangement and all CCLF Transactions entered into pursuant
the CCLF MRA would be readily available and the related assets would be
convertible into cash in order to settle cash obligations owed to non-
defaulting Netting Members. The proposed rule change would support
FICC's compliance with Rules 17Ad-22(e)(7)(iv) and (v) \34\ under the
Exchange Act because FICC would conduct due diligence to assess each
Netting Member's ability to meet its Individual Total Amount and FICC
would test its procedures and operational capability to invoke a CCLF
Event. Pursuant to GSD Rule 3 Section 6, Netting Members would be
required to participate in such tests.
---------------------------------------------------------------------------
\32\ See 17 CFR 240.17Ad-22(b)(3).
\33\ See 17 CFR 240.17Ad-22(e)(7)(ii).
\34\ See 17 CFR 240.17Ad-22(e)(7)(iv) and (v).
---------------------------------------------------------------------------
FICC believes that the burden on competition created by the
Individual Total Amount and Individual Supplemental Amount would be
appropriate in furtherance of the Exchange Act. While the proposal may
result in FICC requiring each Netting Member to contribute different
amounts to CCLF, those contributions would be calculated in proportion
to the liquidity needs that each Netting Member presents to FICC over a
given six-month look-back period. Moreover, the Individual Supplemental
Amount would only be applied to Netting Members that place the largest
liquidity needs on FICC, and these needs are a direct result of such
Members' trading behavior during the six-month look-back period. As a
result, the proposal would ensure that all Netting Members fairly and
equitably contribute to FICC's liquid financial resources based on the
liquidity need they present to FICC.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
The proposal addresses a risk that spans beyond ``extreme but
plausible.''
FICC has received feedback that the proposed rule change seeks to
address a risk that is not reasonable given the
[[Page 14409]]
current structure of the short-term tri-party repurchase market
(``repo'') in U.S. Government securities. Commenters have explained
that a committed liquidity tool such as CCLF is unnecessary because the
repo market remained robust during periods of historical market stress
and would continue to adequately perform during the next crisis. They
have also noted that U.S. Treasury securities continue to be considered
a ``risk-free'' instrument.
While FICC believes that historical market behavior allows market
participants to observe trends in the repo market, FICC also believes
that the adoption of CCLF would better position FICC to protect itself
and its Netting Members should the repurchase financing market
materially contract in the future. Additionally, the proposed rule
change would adhere to Rule 17Ad-22(e)(7)(i) which requires FICC to
maintain sufficient liquid resources to effect same-day settlement of
payment obligations in the event of a default of the participant family
that would generate the largest aggregate payment obligation for the
covered clearing agency in extreme but plausible market conditions.\35\
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\35\ See 17 CFR 240.17Ad-22(e)(7)(i).
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The proposal may impact behavior of smaller market participants.
FICC has also received feedback that the proposed rule change would
create concentration risk by forcing smaller Netting Members to clear
through large financial institutions or exit the business. Commenters
have explained that the funding obligation under the CCLF proposal may
significantly impact their available capital or operating profiles. As
a result, the CCLF proposal may force certain Netting Members to (1)
clear through other financial institutions or (2) terminate their
membership with FICC and engage in bilateral arrangements.
FICC values each Netting Member and does not wish to force any
Netting Member to clear through larger Netting Members or exit the
business as a result of this proposed rule change. However, FICC
believes that all Netting Members should endeavor to maintain suitable
capital to meet FICC's enhanced participation requirements so that such
Members do not have to clear through larger financial institutions or
exit the business. Because each Netting Member is in the best position
to monitor and manage the liquidity risks presented by its own
activity, FICC believes that Netting Members should endeavor to manage
their own liquidity. In an effort to enable each Netting Member to
prepare for its liquidity funding obligation, FICC would provide a
liquidity funding report to each Netting Member on a daily basis. This
report would enable each Netting Member to prepare for its maximum
funding obligations and alter its trading behavior should it desire to
minimize the liquidity risk that it presents to FICC.
FICC is cognizant that Netting Members would need to incorporate
their respective funding obligation into their internal liquidity plans
and evaluate the appropriate course of action for their firm based on
the economic impact that such Netting Members believe the funding
obligation imposes. Given the added liquidity cost, as noted in the
feedback, FICC would implement the proposed rule change 12 months after
the later date of the Commission's approval of this filing or its no
objection of the Advance Notice Filing. During this 12-month period,
FICC would periodically provide Netting Members with estimates of their
Individual Total Amounts. The deferred implementation and the estimate
Individual Total Amounts are designed to give Netting Members the
opportunity to assess the impact of their Individual Total Amount on
their business profile and make any changes that such Netting Members
deem necessary to lower their respective allocation.
As noted above, FICC understands that Netting Members must be able
to plan for their funding obligations. At the same time, FICC also
believes that it is critical that Netting Members understand the risks
that their own activity presents to FICC, and be prepared to monitor
their own activity and alter their behavior in order to minimize the
liquidity risk they present to FICC.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self- regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
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 Exchange Act. Comments may be submitted
by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FICC-2017-002 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-FICC-2017-002. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of FICC and on
DTCC's Web site (https://dtcc.com/legal/sec-rule-filings.aspx). All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-FICC-2017-002 and should be
submitted on or before April 10, 2017.
[[Page 14410]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-05401 Filed 3-17-17; 8:45 am]
BILLING CODE 8011-01-P
