Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change to the Mortgage-Backed Securities Division Clearing Rules Regarding Fixed Income Clearing Corporation's (1) Time of Novation, (2) Treatment of Itself as the Settlement Counterparty for Certain Transaction Types, and (3) Proposal to Implement New Processes to Promote Operational Efficiencies for Its Clearing Members, 31378-31384 [2017-14142]

Download as PDF 31378 Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices and refiled the submission on May 23, 2017.’’ Brent J. Fields, Secretary. [FR Doc. 2017–14199 Filed 7–5–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81051; File No. SR–FICC– 2017–012] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change to the Mortgage-Backed Securities Division Clearing Rules Regarding Fixed Income Clearing Corporation’s (1) Time of Novation, (2) Treatment of Itself as the Settlement Counterparty for Certain Transaction Types, and (3) Proposal to Implement New Processes to Promote Operational Efficiencies for Its Clearing Members June 29, 2017. I. Introduction On May 15, 2017, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–FICC–2017–012, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder 2 (hereinafter, ‘‘Proposed Rule Change’’). The Proposed Rule Change was published for comment in the Federal Register on May 24, 2017.3 The Commission received no comments to the Proposed Rule Change. This order approves the Proposed Rule Change. II. Description of the Proposed Rule Change The Proposed Rule Change consists of modifications to FICC’s MortgageBacked Securities Division (‘‘MBSD’’) Clearing Rules (‘‘MBSD Rules’’).4 Specifically, the Proposed Rule Change 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 80716 (May 18, 2017), 82 FR 23852 (May 24, 2017) (SR–FICC– 2017–012) (‘‘Notice’’). 4 FICC is comprised of two divisions, MBSD and the Government Securities Division (‘‘GSD’’). MBSD provides, among other things, clearance and settlement for trades in mortgage-backed securities. GSD provides, among other things, clearance and settlement for trades in U.S. government debt issues. MBSD and GSD maintain separate sets of rules, margin models, and clearing funds. The Proposed Rule Change relates solely to the MBSD Rules. Capitalized terms used and not otherwise defined shall have the meaning assigned to such terms in the MBSD Rules or the FICC MBSD EPN Rules, as applicable, available at http:// www.dtcc.com/en/legal/rules-and-procedures. sradovich on DSK3GMQ082PROD with NOTICES 2 17 VerDate Sep<11>2014 18:13 Jul 05, 2017 Jkt 241001 would (1) change the time that FICC treats itself as the settlement counterparty for SBO-Destined Trades 5 to the time of trade comparison, which is earlier in the lifecycle of the trade than the current practice; (2) change the time that FICC novates 6 and treats itself as the settlement counterparty for Trade-for-Trade Transactions 7 to the time of trade comparison, which is earlier in the lifecycle of the trade than the current practice; (3) regarding Specified Pool Trades,8 novate and establish FICC as the settlement counterparty at the time of trade comparison; and (4) regarding Stipulated Trades 9 (a new proposed trade type), guarantee, novate, and establish FICC as the settlement counterparty at the time of trade comparison. The Proposed Rule Change also includes several changes to the MBSD Rules regarding the operational processes for clearing MBSD trades. These changes include (1) eliminating the Notification of Settlement process regarding trades that currently settle bilaterally, as the process would become obsolete once FICC novates and directly 5 The Proposed Rule Change would add the new defined term ‘‘SBO’’ to define the settlement balance orders that constitute the net positions of a Clearing Member as a result of the TBA Netting process. Notice, 82 FR at 23860. The term ‘‘SBODestined Trade’’ means a ‘‘To-Be-Announced’’ (‘‘TBA’’) transaction intended for TBA Netting. MBSD Rule 1, supra note 4. TBA transactions are trades for which the actual identities of and/or the number of pools underlying each trade are unknown at the time of trade execution. See Notice, 82 FR at 23854. ‘‘TBA Netting’’ means the netting service that FICC provides to Clearing Members in connection with TBA transactions. MBSD Rule 1, supra note 4. The MBSD settlement balance order (‘‘SBO’’) system nets trades within the same mortgage backed security (‘‘MBS’’) product, coupon rate, maturity, and settlement date. The SBO system provides netting efficiencies, eliminating the need for Clearing Members to settle all but the resulting net buy and sell obligations. 6 Novation terminates the obligations between Clearing Members to deliver, receive, and make payments to each other, and replaces those obligations with identical obligations between the Clearing Members and FICC. MBSD Rule 5 Section 13, supra note 4. 7 The term ‘‘Trade-for-Trade Transaction’’ means a TBA transaction submitted to FICC that is not intended for TBA Netting. MBSD Rule 1, supra note 4. Entities use Trade-for-Trade Transactions either by choice or for trades that are not eligible for netting. 8 The term ‘‘Specified Pool Trade’’ means a trade in which all required pool data, including the pool number to be delivered upon settlement are agreed by the counterparties at the time of trade execution. MBSD Rule 1, supra note 4. 9 A ‘‘Stipulated Trade’’ is a trade in which pools allocated and delivered against the trade must satisfy certain conditions that are agreed upon by the parties at the time of trade execution. See Notice, 82 FR at 23856. Trades carrying stipulations may reflect terms that include, but are not limited to issuance year, issuance month, weighted average coupon, weighted average maturity and/or weighted average loan age, etc. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 settles all SBO-Destined Transactions, Trade-for-Trade Transactions, and Specified Pool Trades, as proposed; (2) establishing the ‘‘Do Not Allocate’’ (‘‘DNA’’) process, which would allow Clearing Members 10 to offset SBON Trades 11 and Trade-for-Trade Transactions; (3) establishing the ‘‘Expanded Pool Netting’’ process, which would net Pool Instructs 12 stemming from SBON Trades and Trade-for-Trade Transactions to arrive at a single net position per counterparty in a particular Pool Number 13 for next-day delivery; (4) eliminating the ‘‘give-up’’ process for Brokered Transactions,14 as the process would become obsolete once FICC novates and settles all such transactions, as proposed; and (5) amending the components of the Cash Settlement 15 calculation to reflect the changes above. Finally, the Proposed Rule Change would modify FICC’s Real-Time Trade Matching (‘‘RTTM’’) system to remove size restrictions on SBO-Destined Trades. Since trade size submission 10 The term ‘‘Clearing Member’’ means any entity admitted into MBSD membership pursuant to MBSD Rule 2A. MBSD Rule 1, supra note 4. 11 The proposed MBSD Rules would use the term ‘‘SBON Trades’’ to signify obligations that result from the TBA Netting process. Such obligations would reflect FICC as the settlement counterparty. 12 The term ‘‘Pool Instruct’’ is defined in FICC’s MBS Pool Netting User Guide to mean ‘‘[a]n input used by a [M]ember to submit pool details directly into [FICC’s Real-Time Trade Matching System] pool netting for bilateral matching and assignment to a corresponding open TBA position as a prerequisite to pool netting. FICC MBS Pool Netting User Guide, available at http://www.dtcc.com/ clearing-services/ficc-mbsd/ficc-mbsd-userdocumentation. 13 The term ‘‘Pool Number’’ is defined in FICC’s MBS Pool Netting User Guide to mean a ‘‘[u]nique number assigned by the industry to identify the pool (in addition to the pool CUSIP [(i.e., the Committee on Uniform Securities Identification Procedures identifying number for a security)], since the pool CUSIP is not always known at the time of issuance).’’ FICC MBS Pool Netting User Guide, supra note 12. 14 The term ‘‘Brokered Transaction’’ means any ‘‘give-up’’ transaction calling for the delivery of a security for which data has been submitted to FICC by Members, in transactions to which a Broker is a party. MBSD Rule 1, supra note 4. FICC operates its brokered business on a ‘‘give-up’’ basis, which means that MBSD discloses (i.e., ‘‘gives-up’’) the identity of each Dealer (i.e., a Member that is in the business of buying and selling Securities as principal, either directly or through a Broker.) to a Brokered Transaction after a period of time. MBSD Rule 1; Rule 5 Section 7, supra note 4. 15 The term ‘‘Cash Settlement’’ refers to the payment each business day by FICC to a Member or by a Member to FICC pursuant to Rule 11. MBSD Rule 1, supra note 4. Cash Settlement is a daily process of generating a single net credit or debit cash amount at the ‘‘Aggregated Account’’ level (i.e., either a single account linked to an aggregate ID or a set of accounts linked to an aggregate ID for the processing of transactions.) Clearing Members’ Cash Settlement obligations are calculated on a net basis at the aggregate ID level. MBSD Rule 1, supra note 4. E:\FR\FM\06JYN1.SGM 06JYN1 Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices requirements are not reflected in the MBSD Rules, this change would not require changes to the MBSD Rules. sradovich on DSK3GMQ082PROD with NOTICES A. MBSD’s Current Trade Comparison and Netting Processes MBSD currently processes four types of trades: (1) SBO-Destined Trades; (2) Trade-for-Trade Transactions; (3) Specified Pool Trades; and (4) Option Contracts. SBO-Destined Trades and Trade-for-Trade Transactions are TBA transactions, which are trades for which the actual identities of and/or the number of pools underlying each trade are unknown at the time of trade execution. Specified Pool Trades are trades for which all pool data is agreed upon by the Clearing Members at the time of trade execution. Option Contracts are not addressed by the Proposed Rule Change. The first step of MBSD’s clearance and settlement process is trade comparison, which consists of the reporting, validating, and matching by FICC of both sides of a transaction to ensure that the details of the trades are in agreement between the parties.16 Clearing Members enter trade data into the RTTM system, and once the trade is deemed compared, FICC guarantees settlement of the trade, provided that the trade meets the requirements of the MBSD Rules and was entered into in good faith.17 FICC novates SBO-Destined Trades upon trade comparison.18 In contrast, FICC does not novate Trade-for-Trade Transactions at the time of trade comparison. However, FICC guarantees the settlement of Trade-for-Trade Transactions upon trade comparison.19 FICC treats Stipulated Trades as Tradefor-Trade Transactions because Clearing Members currently do not notify FICC of the stipulations. Similarly, Specified Pool Trades are not novated upon trade comparison. However, FICC guarantees the obligations of Specified Pool Trade counterparties to deliver, receive, and make payment for securities that satisfy the same generic criteria as the securities underlying Specified Pool Trades upon trade comparison.20 MBSD employs two netting processes to reduce settlement obligations as well as the number of securities and the amount of cash to be exchanged at settlement: The TBA Netting system; and the Pool Netting system.21 The TBA Netting system is used to net eligible 16 MBSD Rule 5, supra note 4. Rule 5 Section 8, supra note 4. 18 MBSD Rule 5 Section 13, supra note 4. 19 Id. 20 MBSD Rule 5 Section 12, supra note 4. 21 MBSD Rules 6, 7 and 8, supra note 4. 17 MBSD VerDate Sep<11>2014 18:13 Jul 05, 2017 Jkt 241001 SBO-Destined Trades.22 Three business days prior to the established settlement date of the TBA settlement obligations (referred to as ‘‘72-Hour Day’’),23 TBA Netting for the applicable class occurs. On 72-Hour Day, all compared SBODestined Trades within the class that have been designated for the TBA Netting process are netted within and across counterparties. Even though FICC has become the legal counterparty for each SBO-Destined Trade upon trade comparison, TBA Netting occurs as though each SBO-Destined Trade is with the Original Contra-Side Member.24 The net positions created by the TBA Netting process are referred to as the settlement balance order positions (‘‘SBO positions’’), which constitute settlement obligations against which Clearing Members will submit Pool Instructs for the Pool Netting process.25 Two business days prior to the established settlement date of the TBA settlement obligations (referred to as ‘‘48-Hour Day’’), Clearing Members that have an obligation to deliver pools (‘‘Pool Sellers’’) must notify their counterparties (‘‘Pool Buyers’’) through MBSD’s Electronic Pool Notification Service (‘‘EPN Service’’) 26 of the relevant Pool Instructs (i.e., pools that such Pool Sellers intend to allocate in satisfaction of their SBO positions and/ or Trade-for-Trade Transactions).27 For Trade-for-Trade Transactions, the 22 Although Trade-for-Trade Transactions are not netted through the TBA Netting system, they constitute TBA settlement obligations against which Pool Instructs may be submitted. Specified Pool Trades are also not netted through the TBA Netting system, nor do such trades enter the Pool Netting system. MBSD Rules 6 and 8, supra note 4. 23 MBSD performs the TBA Netting process four times per month, corresponding to each of the four primary settlement classes and dates established by the Securities Industry Financial Markets Association (‘‘SIFMA’’). SIFMA publishes a calendar that specifies one settlement date per month for four different product classes (known as Classes A, B, C and D) that are used to categorize the various types of TBA securities. These product classes and the associated settlement dates are recognized by the industry, and they provide the foundation for MBSD’s TBA Netting process. 24 The term ‘‘Original Contra-Side Member’’ means a Member with whom a Member has entered into a contract for the purchase or sale of a security. MBSD Rule 1, supra note 4. 25 MBSD Rule 6, supra note 4. 26 MBSD’s electronic pool notification service (the ‘‘EPN Service’’) provides Clearing Members with the ability to electronically communicate pool information to MBSD, as described in the proposed rule changes. MBSD Rule 1, supra note 4. 27 Pool allocations occur for all TBA Obligations, whether established on 72-Hour Day through the TBA Netting process or established upon comparison when the Trade-for-Trade Transaction was submitted. Pool allocations are not performed for Specified Pool Trades because the pool that is to be delivered in connection with such trade is specified upon submission. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 31379 relevant counterparty is the Original Contra-Side Member. For SBO-Destined Trades, although FICC is the legal counterparty, Clearing Members are directed to treat a designated SBO Contra-Side Member 28 as their counterparty.29 Clearing Members are required to submit Pool Instructs on 48Hour Day to MBSD through its RTTM system for Pool Comparison 30 (which is a prerequisite to Pool Netting).31 Trade counterparties must bilaterally match their respective pools. At this stage, the Pool Netting System processes the compared pool allocations (provided that neither Clearing Member has cancelled the submitted allocation).32 Pool netting takes place one business day prior to the established settlement date of the TBA settlement obligations (referred to as ‘‘24-Hour Day’’). The Pool Netting system reduces the number of pool settlements by netting Pool Instructs stemming from SBO Trades and Trade-for-Trade Transactions to arrive at a single net position per counterparty in a particular pool number for next-day delivery. On each business day, MBSD makes available to each Clearing Member a report with information to enable such Clearing Member to settle its Pool Net Settlement Positions 33 on that business day. At that time, all deliver, receive and related payment obligations between Clearing Members resulting 28 The term ‘‘SBO Contra-Side Member’’ means the Member with whom a Member is directed by the Corporation to settle an SBO Trade. The term ‘‘SBO Trade’’ means a settlement balance order that offsets an SBO Net Open Position pursuant to the MBSD Rules. A Member which has one or more ‘‘Long SBO Trades’’ in a particular CUSIP number is a net purchaser with respect to that CUSIP number, as the case may be; a Member which has one or more ‘‘Short SBO Trades’’ is a net seller. MBSD Rule 1, supra note 4. An ‘‘SBON Contra-Side Member’’ is an SBO Contra-Side Member that is not an Original Contra-Side Member with respect to such SBO Trade. An ‘‘SBOO Contra-Side Member’’ is an SBO Contra-Side Member that is also an Original Contra-Side Member with respect to such SBO Trade. MBSD Rule, supra note 4. 29 A Clearing Member’s ‘‘counterparty’’ for purposes of notifications, netting, and processing is the SBO Contra-Side Member or the Original Contra-Side Member for SBO-Destined Trades and Trade-for-Trade Transactions, respectively. MBSD Rule 6, supra note 4. 30 The term ‘‘Pool Comparison’’ means the service provided to Clearing Members, as applicable, and the operations carried out by FICC in the course of providing such service, in accordance with Rule 7. MBSD Rule 1, supra note 4. 31 As with the EPN Service allocation process described above, Clearing Members submit Pool Instructs against all of their TBA Obligations, regardless of whether the TBA Obligation is established upon trade comparison or stems from the TBA Netting process. 32 MBSD Rule 8, supra note 4. 33 The term ‘‘Pool Net Settlement Position’’ means either a Pool Net Short Position or a Pool Net Long Position, as the context requires. MBSD Rule 1, supra note 4. E:\FR\FM\06JYN1.SGM 06JYN1 31380 Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices from compared pools that comprise a Pool Net Settlement Position or Positions are terminated and replaced by the Pool Deliver Obligations,34 Pool Receive Obligations,35 and related payment obligations to and from FICC. Each Clearing Member then provides appropriate instructions to its clearing bank to deliver to MBSD, and/or to receive from MBSD, Eligible Securities against payment or receipt at the appropriate settlement value. Clearing Members are required to settle certain obligations directly with their applicable settlement counterparties (i.e., outside of FICC).36 These obligations include (1) Pool Instructs that are not included in Pool Netting (either because they are ineligible or because they do not meet selection criteria for inclusion); and (2) Specified Pool Trades, which are not eligible for Pool Netting. Upon settling such obligations, Clearing Members must notify FICC by submitting a Notification of Settlement to MBSD for pool settlements relating to all trade types (excluding Option Contracts).37 Notification of Settlement is required for bilateral settlement because MBSD will not otherwise know that the subject pools have actually settled directly between Clearing Members. Upon both Clearing Members’ submission of Notification of Settlement, the relevant obligation is deemed to have settled and is, therefore, no longer subject to MBSD’s risk management. sradovich on DSK3GMQ082PROD with NOTICES B. Proposed Changes to MBSD’s Trade Comparison and Netting Processes FICC proposes to novate all transactions (except Option Contracts) at the time of trade comparison. Upon trade comparison, the deliver, receive, and related payment obligations between the Clearing Members, with respect to SBO-Destined Trades and Trade-for-Trade Transactions, would terminate and be replaced by identical obligations to and from FICC (i.e., FICC would become the buyer to every seller and the seller to every buyer). A similar process would occur for Specified Pool Trades and Stipulated Trades, except that, for those trades, the existing deliver, receive, and related payment obligations would terminate and be replaced with obligations to deliver, receive and make payment for securities 34 The term ‘‘Pool Deliver Obligation’’ means a Clearing Member’s obligation to deliver securities to FICC. MBSD Rule 1, supra note 4. 35 The term ‘‘Pool Receive Obligation’’ means a Clearing Member’s obligation to receive securities from FICC. MBSD Rule 1, supra note 4. 36 MBSD Rule 5 Section 12 and MBSD Rule 8 Section 2, supra note 4. 37 MBSD Rule 10, supra note 4. VerDate Sep<11>2014 18:13 Jul 05, 2017 Jkt 241001 that satisfy the same generic criteria (such as coupon rate, maturity, agency, and product) as the securities underlying the Specified Pool Trades or Stipulated Trades.38 In addition, FICC proposes to treat itself as the settlement counterparty throughout the lifecycle of the trade for netting, processing, and settlement purposes.39 These changes are described in detail below. 1. SBO-Destined Trades As described above, FICC currently novates SBO-Destined Trades at the time of trade comparison; however, FICC does not currently treat itself as the settlement counterparty for netting and processing purposes until after the Pool Netting process is complete and FICC has established Pool Receive Obligations or Pool Deliver Obligations. As a result, Clearing Members are directed to (1) allocate pools through the EPN Service to designated SBO ContraSide Members and (2) submit Pool Instructs through the RTTM system.40 Under the Proposed Rule Change, FICC would treat itself as settlement counterparty for netting and processing purposes from the time of trade comparison. SBO-Destined Trades would proceed to the TBA Netting process as they do currently; however, the SBO positions that result from the TBA Netting process would reflect FICC as the settlement counterparty. Thus, Clearing Members would no longer settle with a designated SBO ContraSide Member,41 but with FICC instead. On 48-Hour Day, Clearing Members that are Pool Sellers would notify MBSD (rather than their designated SBO Contra-Side Member) through the EPN Service of the allocated pools. FICC would then submit corresponding notifications to Clearing Members that are Pool Buyers. Clearing Members would continue to submit Pool Instructs to MBSD on 48-Hour Day through FICC’s RTTM system. If a Clearing Member does not submit its Pool 38 In other words, FICC would not novate or guarantee the obligations to deliver the particular securities underlying Specified Pool Trades or securities that contain the particular stipulations set forth in Stipulated Trades. 39 Upon trade comparison, Clearing Members would receive a notification through the RTTM system establishing FICC as each party’s novated and settlement counterparty. 40 MBSD Rule 7, supra note 4. 41 FICC would eliminate its calculation for determining the Settlement Value of ‘‘SBON Trades’’ (i.e., SBO Trades which a Member settles with an SBON Contra-Side Member) and ‘‘SBOO Trades’’ (i.e., SBO Trades which a Member settles with an SBOO Contra-Side member). MBSD Rule 1, supra note 4. The MBSD Rules refer to the calculation as ‘‘CUSIP Average Price’’ or ‘‘CAP’’ for SBON Trades and ‘‘Firm CUSIP Average Price’’ or ‘‘FCAP’’ for SBOO Trades. MBSD Rule 6, supra note 4. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 Instructs by the established deadline, FICC would determine and apply the Pool Instructs for that Clearing Member. Such determination would be based on the allocated pools that the Clearing Member has submitted through the EPN Service. As a result of this proposed change, all pools would be compared, and FICC would no longer require Clearing Members to settle uncompared pools directly with their applicable settlement counterparties (i.e., outside of FICC). Additionally, FICC proposes to eliminate the trade size restriction for SBO-Destined Trades. Currently, SBODestined Trades are only eligible for the TBA Netting process in multiple amounts of one million, with the minimum set at one million. FICC proposes to remove this size restriction from the RTTM system so that Clearing Members would be permitted to submit SBO-Destined Trades in any trade size. Since trade size restrictions are not reflected in the MBSD Rules, this proposed change would not necessitate any changes to the MBSD Rules. For the avoidance of doubt, FICC does not propose to change the trade size restrictions for Trade-for-Trade Transactions or Specified Pool Trades. 2. Trade-for-Trade Transactions Currently, as described above, FICC does not novate Trade-for-Trade Transactions or treat itself as settlement counterparty for purposes of netting, processing, and settlement until, in each case, the Pool Netting process is complete and each Clearing Member receives their Pool Receive Obligation or Pool Deliver Obligations, as applicable, from FICC.42 As a result, Clearing Members are required to allocate pools to their original counterparties through the EPN Service, and submit Pool Instructs through the RTTM system. Once Pool Netting is complete, the deliver, receive, and related payment obligations between Clearing Members that were created by compared pools that comprise a Pool Net Settlement Position are terminated and replaced by Pool Deliver Obligations, Pool Receive Obligations, and related payment obligations to and from FICC.43 Under the Proposed Rule Change, FICC would novate Trade-for-Trade Transactions at trade comparison and treat itself as settlement counterparty, at that time, for purposes of processing and settlement. Similar to the process with SBO-Destined Trades, Clearing Members with an obligation to deliver pools would notify MBSD (rather than 42 MBSD 43 MBSD E:\FR\FM\06JYN1.SGM Rule 8 Section 4, supra note 4. Rule 8 Section 6, supra note 4. 06JYN1 Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES their original counterparty) through the EPN Service, and FICC would submit corresponding notifications to Clearing Members that are Pool Buyers. Clearing Members would continue to be required to submit Pool Instructs. In the event that Pool Instructs are not submitted by the established deadline, FICC would determine Pool Instructs for that Clearing Member. Such determinations would be based on the allocated pools that the Clearing Member has submitted through the EPN Service. 3. Specified Pool Trades Currently, as described above, FICC does not novate Specified Pool Trades during any point of the trade lifecycle (though, upon trade comparison of Specified Pool Trades, FICC guarantees the obligation to deliver, receive, and pay for securities that satisfy the same generic criteria as the underlying securities).44 Specified Pool Trades are currently ineligible for the TBA Netting process and the Pool Netting process. Specified Pool Trades are currently settled between the original counterparties directly (i.e., outside of FICC). Under the Proposed Rule Change, FICC would novate Specified Pool Trades upon trade comparison. Such novation would be limited to the obligations to deliver, receive, and make payment for securities satisfying the same generic criteria as the securities underlying the Specified Pool Trades. As a result, upon trade comparison, the existing deliver, receive, and related payment obligations between Clearing Members under Specified Pool Trades would be terminated and replaced with obligations to or from FICC to deliver, receive, and make payment for securities satisfying the same generic criteria as the securities underlying the Specified Pool Trades. FICC would not novate the obligation to deliver the securities for the particular specified pool. Additionally, FICC proposes to settle Specified Pool Trades directly with the Clearing Member party thereto (rather than require that counterparties to such trades settle directly with one another). No other changes are being proposed with respect to the processing of Specified Pool Trades. Such trades would continue to be ineligible for the TBA Netting and Pool Netting systems. 4. Stipulated Trades Currently, as described above, FICC does not treat Stipulated Trades as a separate type of trading activity because Clearing Members submit Stipulated Trades to FICC as Trade-for-Trade Transactions, without notifying FICC of the stipulations. Under the Proposed Rule Change, FICC would add Stipulated Trades as a new trade type that would be eligible for processing by MBSD. FICC would guarantee and novate Stipulated Trades at trade comparison, provided that such trades meet the requirements of the MBSD Rules and are entered into in good faith. Such guarantee and novation would be limited to the obligations to deliver, receive, and make payment for securities satisfying the same generic criteria as the securities underlying the Stipulated Trade, but not the obligation to deliver securities that contain the particular stipulations contained in the Stipulated Trades. At trade comparison, the deliver, receive, and related payment obligations between Clearing Members would be terminated and replaced with obligations to or from FICC to deliver, receive, and make payment for securities satisfying the same generic criteria as the securities underlying the Stipulated Trades. Because of the narrow nature of FICC’s guarantee and novation, in the event of a Clearing Member’s default, FICC would only be required to deliver, receive, or make payment for securities that have the same generic terms, such as coupon rate, maturity, agency, and product, as the securities underlying the Stipulated Transaction. Clearing Members would be required to allocate Stipulated Trades to FICC through the EPN Service. Such allocation would result in the creation of pool obligations, which would settle with FICC based on the settlement date agreed to as part of the terms of the trade. Similar to Specified Pool Trades, Stipulated Trades would not be eligible for the TBA Netting process and the Pool Netting process. 5. Notification of Settlement Process As described above, the Notification of Settlement process currently requires Clearing Members to notify FICC of obligations that have settled directly between Clearing Members and their applicable settlement counterparties.45 Once both parties to a transaction submit a Notification of Settlement to MBSD through the RTTM system, the obligations are no longer subject to MBSD’s margin calculation process.46 Because, under the Proposed Rule Change, FICC would novate and directly settle all SBO-Destined Transactions, Trade-for-Trade Transactions, and Specified Pool Trades, the Notification 45 MBSD 44 MBSD Rule 5, supra note 4. VerDate Sep<11>2014 18:13 Jul 05, 2017 46 MBSD Jkt 241001 PO 00000 Rule 10, supra note 4. Rule 4, supra note 4. Frm 00099 Fmt 4703 Sfmt 4703 31381 of Settlement process would become obsolete. Therefore, FICC proposes to delete Notification of Settlement from the MBSD Rules. 6. Do Not Allocate (‘‘DNA’’) Process Under the Proposed Rule Change, FICC would establish a process to enable Clearing Members to offset Trade-for-Trade Transactions 47 and SBON Trades. This process would be referred to as the ‘‘Do Not Allocate’’ or ‘‘DNA’’ process. The purpose of this process is to exclude SBON Trades and Trade-for-Trade Transactions from the pool allocation process 48 and securities settlement. The DNA process would be available to Clearing Members at the start of the business day on 48-Hour Day through 4:30 p.m.49 on 24-Hour Day. During this time, Clearing Members with two or more open TBA Obligations 50 with the same Par Amount,51 CUSIP Number, and SIFMA designated settlement date would be permitted to offset such obligations. In order to initiate the offset, Clearing Members would be required to submit a request (‘‘DNA Request’’) to MBSD through the RTTM system. Upon FICC’s validation of this request, the obligations would be reduced, and the Clearing Member would not be required to allocate pools against such obligations. As a result, a Clearing Member’s overall number of open obligations would be reduced. Clearing Members would be permitted to cancel a DNA Request; however, such cancellation must be submitted through the RTTM system prior to the time that the designated offsetting TBA Obligations have settled. Upon FICC’s timely receipt of a cancellation request, the trades that were previously marked for the DNA process would reopen and the Clearing Member would be expected 47 Specified Pool Trades and Stipulated Trades would not be eligible for the proposed DNA process because such trades are not eligible for the Pool Netting process. MBSD Rule 8, supra note 4. 48 As noted above, the pool allocation process requires Clearing Members to allocate pools on 48Hour Day through the EPN Service. Under the Proposed Rule Change, Clearing Members would not be required to allocate pools for obligations that have been offset through the DNA process. 49 All times referenced herein are Eastern Time. 50 The term ‘‘TBA Obligations’’ means SBODestined obligations and, with respect to Trade-forTrade Transactions, settlement obligations generated by the Trade Comparison system. MBSD Rule 1, supra note 4. 51 The term ‘‘Par Amount’’ means for Trade-forTrade and SBO Transactions, Option Contracts and Pool Deliver and Pool Receive Obligations, the current face value of a Security to be delivered on the Contractual Settlement Date. With respect to Specified Pool Trades, ‘‘Par Amount’’ shall mean the original face value of a Security to be delivered on the Contractual Settlement Date. MBSD Rule 1, supra note 4. E:\FR\FM\06JYN1.SGM 06JYN1 31382 Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES to notify MBSD through the EPN Service of the pools that such Clearing Member intends to allocate to the open obligations.52 The proposed DNA process would generate Cash Settlement credits and debits from the price differential of the resulting offsetting obligations. The proposed Cash Settlement obligations are described more fully below in Item 9. 7. Expanded Pool Netting Process As described above, the Pool Netting system reduces the number of pool settlements by netting Pool Instructs stemming from SBON Trades and Trade-for-Trade Transactions to arrive at a single net position per counterparty in a particular pool number for next-day delivery. Prior to the Pool Netting process, Pool Sellers must notify their Pool Buyers through MBSD’s EPN Service of the pools to be allocated in satisfaction of a TBA Obligation. In accordance with the SIFMA Guidelines,53 such notifications must occur before 3:00 p.m. on 48-Hour Day.54 Notifications that take place after this time are considered late, and the delivery of such pools to the related Pool Buyers will be delayed for one additional business day. In order to capture notifications submitted after 3:00 p.m. on 48-Hour Day through 4:30 p.m. on 24-Hour Day, FICC proposes to establish an additional netting cycle, referred to as ‘‘Expanded Pool Netting.’’ Similar to the initial Pool Netting process, Expanded Pool Netting would result in a reduction in the number of Pool Delivery Obligations. As with the existing Pool Netting process, the proposed Expanded Pool Netting process would (1) calculate Pool Net Settlement Positions in a manner that is consistent with Section 3 of MBSD Rule 8, and (2) allocate Pool Deliver Obligations and Pool Receive Obligations in a manner that is consistent with Section 4 of MBSD Rule 8. The Expanded Pool Netting process would occur four times per month in accordance with the SIFMA designated settlement dates. Pool Net Settlement Positions and the resultant Pool Deliver Obligations and Pool Receive Obligations would only be provided to Clearing Members during such times. The proposed Expanded Pool Netting process would generate Cash Settlement 52 A detailed example of the DNA process is described in the Notice. Notice, 82 FR at 23857. 53 The term ‘‘SIFMA Guidelines’’ means the guidelines for good delivery of Mortgage-Backed Securities as promulgated from time to time by SIFMA. MBSD Rule 1, supra note 4. 54 All times referenced herein are Eastern Time. VerDate Sep<11>2014 18:13 Jul 05, 2017 Jkt 241001 credits and debits, described more fully below in Item 9. 8. Give-Up Process for Brokered Transactions Currently, as described above, FICC operates its brokered business on a ‘‘give-up’’ basis, which means that MBSD discloses (i.e., ‘‘gives-up’’) the identity of each Dealer to a Brokered Transaction after a period of time.55 Under the Proposed Rule Change, FICC would eliminate the need to disclose Dealers’ identities because FICC would novate all Brokered Transactions and treat itself as the settlement counterparty upon trade comparison. Thus, the report that FICC issues after trade comparison of a Brokered Transaction would refer to FICC as settlement counterparty. 9. Cash Settlement Calculations As described above, Cash Settlement is a daily process of generating a single net credit or debit cash amount at the Aggregated Account level and settling those cash amounts between Clearing Members and MBSD.56 FICC’s proposal to become the settlement counterparty upon trade comparison and the proposed DNA process would require several changes to the Cash Settlement calculation described below.57 • SBO Market Differential. Under the Proposed Rule Change, FICC would eliminate the SBO Market Differential 58 because it reflects the price difference for SBO positions settled among Clearing Members. This amount would no longer be required because Clearing Members would settle all SBO-Destined Trades directly with FICC. • TBA Transaction Adjustment Payment. Under the Proposed Rule Change, FICC would add the TBA Transaction Adjustment Payment to reflect the cash differential that would result when calculating the net proceeds of the contractual quantity of an SBODestined Trade when comparing such trade’s Settlement Price 59 and the Rule 5 Section 7, supra note 4. Rule 11, supra note 4. 57 Detailed examples of the proposed changes to the Cash Settlement calculations are provided in the Notice. Notice, 82 FR at 23858–59. 58 The term ‘‘SBO Market Differential’’ means the amount computed pursuant to the MBSD Rules, reflecting the difference between Firm CUSIP Average Prices (i.e., the average purchase or sale contract price of a Member’s SBO-Destined Trades with a particular Original Contra-Side Member in a particular CUSIP number) or between the CUSIP Average Price (i.e., the average contract price of all SBO-Destined Trades in the CUSIP number that have been netted) and the Firm CUSIP Average Price, as the case may be. MBSD Rule 1, supra note 4. 59 The term ‘‘Settlement Price’’ means: (a) In the case of a Trade-for-Trade Transaction, Specified PO 00000 55 MBSD 56 MBSD Frm 00100 Fmt 4703 Sfmt 4703 System Price.60 The proposed TBA Transaction Adjustment Payment would be an amount equal to the difference between the SBO-Destined Trade’s Settlement Price and the System Price, multiplied by the contractual quantity of such trade, and then divided by 100. To differentiate between the buyer and seller of the transaction, an indicator of ¥1 for the buy trade and +1 for the sell trade is multiplied by the contractual quantity of such trade. • Expanded Pool Net Transaction Adjustment Payment. Under the Proposed Rule Change, FICC would add the Expanded Pool Net Transaction Adjustment Payment to be applied when a Clearing Member misses the deadline established by FICC for the Pool Netting process. Unlike the daily Pool Netting process, the Expanded Pool Netting process would only run four times per month in accordance with the SIFMA designated settlement dates. As a result, an Expanded Pool Net Transaction Adjustment Payment would only occur four times per month. The Expanded Pool Net Transaction Adjustment Payment would reflect an amount equal to the difference between the System Price and the SBON Trade’s Settlement Price or Trade-for-Trade Transaction’s Settlement Price, as applicable, multiplied by the total current face value of the pools used to satisfy such obligation, and then divided by 100. To differentiate between a buy and sell transaction, an indicator of +1 for a buy trade and ¥1 for a sell trade would be multiplied by the total current face value of the pools used to satisfy the obligation. • Do Not Allocate Transaction Adjustment Payment. Under the Proposed Rule Change, FICC would add the Do Not Allocate Transaction Adjustment Payment to reflect the cash differential among TBA Obligations that have been offset through the DNA process. The proposed Do Not Allocate Transaction Adjustment Payment would be an amount equal to the difference between the Settlement Price of the buy and sell TBA Obligation transactions multiplied by the contractual quantity. To differentiate between a buy and sell transaction, an indicator of ¥1 for a buy Pool Trade, or SBO-Destined Trade, the contractual settlement price agreed to by the parties; (b) in the case of an SBON Trade, the CUSIP Average Price; (c) in the case of an SBOO Trade, the Firm CUSIP Average Price; and (d) in the case of a Pool Deliver or Pool Receive Obligation, the Pool Net Price. MBSD Rule 1, supra note 4. 60 The term ‘‘System Price’’ means the price for any trade or any Pool Deliver Obligations or Pool Receive Obligation not including accrued interest, established by FICC on each Business Day, based on current market information, for each security. MBSD Rule 1, supra note 4. E:\FR\FM\06JYN1.SGM 06JYN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices trade and +1 for a sell trade is multiplied by the contractual quantity of such trade. • TBA Reprice Transaction Adjustment Payment. Under the Proposed Rule Change, FICC would add the TBA Reprice Transaction Adjustment Payment to reflect the cash differential between the price of a TBA Obligation that was not allocated by a Clearing Member before the deadline established by FICC and the price of the replacement TBA Obligation that was calculated at the System Price. The TBA Reprice Transaction Adjustment Payment would be an amount equal to the difference between the TBA Obligation’s Settlement Price and the System Price, multiplied by the unallocated contractual quantity, and then divided by 100. To differentiate between a buy and sell transaction, an indicator of ¥1 for a sell trade and +1 for a buy trade is multiplied by the unallocated pool’s contractual quantity. • Variance Transaction Adjustment Payment. Under the Proposed Rule Change, FICC would add the Variance Transaction Adjustment Payment to capture the variance (i.e., difference) 61 between a TBA Obligation and the current face value of the pools allocated in satisfaction of such obligation. Specifically, this payment would reflect the cash differential calculated between the SBON Trade’s Settlement Price or the Trade-for-Trade Transaction’s Settlement Price, as applicable, and the System Price using the variance of the Pool Netting process or the Expanded Pool Netting process, as applicable, based on the current face value of the pools used in satisfaction of the trade. The Variance Transaction Adjustment Payment would be an amount equal to the difference between the SBON Trade’s Settlement Price or the Tradefor-Trade Transaction’s Settlement Price, as applicable, and the System Price, multiplied by the difference between the TBA Obligation and the allocated pools used in satisfaction of such trade, and then divided by 100. To differentiate between a buy and sell transaction, an indicator of ¥1 for a buy trade and +1 for a sell trade would be multiplied by the total variance amount. • Factor Update Adjustment Payment. Under the Proposed Rule Change, FICC would add the Factor Update Adjustment Payment, to be applied when updated pool factor 61 Pursuant to the SIFMA Guidelines, TBA trades are allowed to have a variance equal to plus or minus 0.01 percent of the dollar amount of the transaction agreed to by the parties. As a result of this guideline, FICC would capture the variance of TBA Obligations and the current face value of the pools allocated in satisfaction of such obligations. VerDate Sep<11>2014 18:13 Jul 05, 2017 Jkt 241001 information is released after the clearing bank’s settlement of a pool. This update would create a cash differential that would require a debit to the seller and a credit to the buyer. III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act 62 directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and rules and regulations thereunder applicable to such organization. After carefully considering the Proposed Rule Change, the Commission finds that the Proposed Rule Change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to FICC. In particular, the Commission finds that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act 63 and Rule 17Ad–22(e)(21) 64 under the Act. Section 17A(b)(3)(F) of the Act requires, in part, that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions.65 As discussed above, the Proposed Rule Change would result in FICC novating and treating itself as the settlement counterparty from the time of trade comparison with respect to SBODestined Trades, Trade-for-Trade Transactions, Specified Pool Trades, and Stipulated Trades. By novating such trades to FICC and treating FICC as the settlement counterparty to such trades the Proposed Rule Change would make FICC the only counterparty to whom the Clearing Members are obligated, as compared to the current process where Clearing Members may have multiple counterparties with whom they need to settle multiple obligations outside of FICC. Additionally, the Proposed Rule Change would also accelerate the point in time at which FICC becomes that ultimate counterparty (i.e., at the time of trade comparison), resulting in such trades being governed by the MBSD Rules from that time. Collectively, the proposed changes are designed to simplify, streamline, and centralize trade processing under the MBSD Rules, which would help promote the prompt and accurate clearance and settlement of these types of securities transactions. Therefore, the Commission believes that PO 00000 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 64 17 CFR 240.17Ad–22(e)(21). 65 15 U.S.C. 78q–1(b)(3)(F). the Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act.66 As discussed above, the Proposed Rule Change would make a number of operational changes with respect to MBSD trade processing. Specifically, the Proposed Rule Change would provide that (1) the submission of Pool Instructs by Clearing Members would become optional because FICC would be permitted to submit on behalf Clearing Members; (2) Clearing Members would no longer to be required to fulfill Notification of Settlement obligations because all of the above-referenced transactions would settle with FICC; (3) Clearing Members would have the ability to exclude TBA Obligations from the pool allocation process, netting, and securities settlement through the DNA process; (4) Clearing Members would have the ability to net their pools via the Expanded Pool Netting process in the event that such Clearing Members miss the established deadline for the initial Pool Netting process; (5) Dealer Netting Members would remain anonymous with the elimination of the ‘‘give-up’’ process for Brokered Transactions; (6) Clearing Members would be allowed to submit SBO-Destined Trades in all trade sizes; and (7) Clearing Members would be allowed to submit Stipulated Trades as a new trade type. These proposed changes are designed to eliminate operational steps in the current trade processing cycle and enable Clearing Members to take advantage of MBSD’s trade processing efficiencies at an earlier point, which would help promote the prompt and accurate clearance and settlement of these types of securities transactions. Therefore, Commission believes that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act.67 Rule 17Ad–22(e)(21) under the Act requires, in part, that FICC establish, implement, maintain, and enforce written policies and procedures reasonably designed to be efficient and effective in meeting the requirements of its participants and the markets it serves, and regularly review the efficiency and effectiveness of its (i) clearing and settlement arrangements; (ii) operating structure; and (iii) scope of products cleared or settled.68 As discussed above, the Proposed Rule Change would enable FICC to novate MBS trades at an earlier point the trade lifecycle (i.e., upon trade comparison). Additionally, as described above, the Proposed Rule Change would add Stipulated Trades as a new trade type 62 15 63 15 Frm 00101 Fmt 4703 Sfmt 4703 31383 66 15 U.S.C. 78q–1(b)(3)(F). 67 Id. 68 See E:\FR\FM\06JYN1.SGM 17 CFR 240.17Ad–22(e)(21). 06JYN1 31384 Federal Register / Vol. 82, No. 128 / Thursday, July 6, 2017 / Notices that could be cleared and settled at MBSD, and it would remove the size restrictions with respect to SBODestined Trades. With these changes, which were developed in consideration of the feedback received from MBSD Clearing Members,69 FICC could provide a more efficient and effective operational processes in connection with the clearance and settlement of MBS trades, expand the scope of products cleared and settled by MBSD, and enable Clearing Members to submit such trades in any size. Therefore, the Commission believes that the Proposed Rule Change is designed to help FICC be more efficient and effective in meeting the requirements of its participants and the markets it serves, and in providing clearing and settlement arrangements, operating structure, and scope of products cleared or settled, which is consistent with Rule 17Ad–22(e)(21). V. Conclusion sradovich on DSK3GMQ082PROD with NOTICES On the basis of the foregoing, the Commission finds that the Proposed Rule Change is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act 70 and the rules and regulations promulgated thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act 71 that proposed rule change SR–FICC–2017– 012 be, and hereby is, approved.72 69 FICC describes in Item 7 of its Form 19b–4 responses the extent to which the proposed changes were informed by feedback from its Clearing Members and various working groups over numerous years. Available at http://www.dtcc.com/ legal/sec-rule-filings. Specifically, FICC states that in 2015, 92 Clearing Member representatives participated in forums held in June, and 157 representatives participated in forums in September and October. Id. FICC states that in 2016, 139 representatives participated in forums held in March, 241 representatives participated in forums held in August, and 121 participated in forums held in December. Id. Additionally, FICC states that it held a number of conference calls with individual Clearing Members to address questions and concerns on the subject. Id. Moreover, FICC explains that the Proposed Rule Change was even the subject of a prior rule filing with the Commission to fund the proposed changes. Id. See also Exchange Act Release No. 74033 (January 12, 2015), 80 FR 2452 (January 16, 2015) (SR–FICC– 2014–12). 70 15 U.S.C. 78q–1. 71 15 U.S.C. 78s(b)(2). 72 In approving the proposed rule change, the Commission considered the proposals’ impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). VerDate Sep<11>2014 18:13 Jul 05, 2017 Jkt 241001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.73 Jill M. Peterson, Assistant Secretary. [FR Doc. 2017–14142 Filed 7–5–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81044; File No. SR–NSCC– 2017–009] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Further Describe and Codify Existing Practices Relating to the Bond Haircut June 29, 2017. Pursuant toSection 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 23, 2017, National Securities Clearing Corporation (‘‘NSCC’’) 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. 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 NSCC’s Rules & Procedures (‘‘Rules’’) 3 in order to (1) provide additional transparency in the Rules with respect to the existing methodology for calculating margin on Members’ Net Unsettled Positions and Net Balance Order Unsettled Positions (for purposes of this filing, referred to collectively herein as ‘‘Net Unsettled Positions’’) in corporate and municipal bonds (‘‘Bond Haircut’’), which are excluded from the parametric volatility component of the margin calculation (‘‘VaR Charge’’); and (2) codify NSCC’s existing practice of applying the Bond Haircut to all corporate and municipal bonds without discretion, as described below. CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Terms not defined herein are defined in the Rules, available at www.dtcc.com/∼/media/Files/ Downloads/legal/rules/nscc_rules.pdf. PO 00000 73 17 1 15 Frm 00102 Fmt 4703 Sfmt 4703 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 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 Proposal Overview The proposed rule change would provide additional transparency in the Rules with respect to the calculation and the application of the Bond Haircut. NSCC currently excludes Net Unsettled Positions in corporate and municipal bonds from its parametric VaR calculation and instead charges a Bond Haircut, which is calculated by multiplying the absolute value of the Net Unsettled Positions in each security by a percentage that is no less than two percent. NSCC is proposing to enhance the description of the Bond Haircut in Procedure XV to provide more detail regarding the determination of the applied percentage, and to codify NSCC’s existing practice of applying the Bond Haircut to all corporate and municipal bonds without discretion. The Required Deposit and the Bond Haircut A primary objective of NSCC’s Clearing Fund is to have on deposit from each applicable Member assets sufficient to satisfy losses that may otherwise be incurred by NSCC as the result of the default of the Member and the resultant close out of that Member’s unsettled positions under NSCC’s trade guaranty. Each Member’s Clearing Fund required deposit is calculated daily pursuant to a formula set forth in Procedure XV of the Rules designed to provide sufficient funds to cover this risk of loss. The Clearing Fund formula accounts for a variety of risk factors through the application of a number of charges, each described in Procedure XV. The VaR Charge is a core component of this formula and is designed to calculate the amount of money that may be lost on a portfolio over a given period of time assumed necessary to liquidate E:\FR\FM\06JYN1.SGM 06JYN1

Agencies

[Federal Register Volume 82, Number 128 (Thursday, July 6, 2017)]
[Notices]
[Pages 31378-31384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14142]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81051; File No. SR-FICC-2017-012]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change to the Mortgage-Backed 
Securities Division Clearing Rules Regarding Fixed Income Clearing 
Corporation's (1) Time of Novation, (2) Treatment of Itself as the 
Settlement Counterparty for Certain Transaction Types, and (3) Proposal 
to Implement New Processes to Promote Operational Efficiencies for Its 
Clearing Members

June 29, 2017.

I. Introduction

    On May 15, 2017, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-FICC-2017-012, pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder 
\2\ (hereinafter, ``Proposed Rule Change''). The Proposed Rule Change 
was published for comment in the Federal Register on May 24, 2017.\3\ 
The Commission received no comments to the Proposed Rule Change. This 
order approves the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 80716 (May 18, 2017), 82 
FR 23852 (May 24, 2017) (SR-FICC-2017-012) (``Notice'').
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II. Description of the Proposed Rule Change

    The Proposed Rule Change consists of modifications to FICC's 
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD 
Rules'').\4\ Specifically, the Proposed Rule Change would (1) change 
the time that FICC treats itself as the settlement counterparty for 
SBO-Destined Trades \5\ to the time of trade comparison, which is 
earlier in the lifecycle of the trade than the current practice; (2) 
change the time that FICC novates \6\ and treats itself as the 
settlement counterparty for Trade-for-Trade Transactions \7\ to the 
time of trade comparison, which is earlier in the lifecycle of the 
trade than the current practice; (3) regarding Specified Pool 
Trades,\8\ novate and establish FICC as the settlement counterparty at 
the time of trade comparison; and (4) regarding Stipulated Trades \9\ 
(a new proposed trade type), guarantee, novate, and establish FICC as 
the settlement counterparty at the time of trade comparison.
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    \4\ FICC is comprised of two divisions, MBSD and the Government 
Securities Division (``GSD''). MBSD provides, among other things, 
clearance and settlement for trades in mortgage-backed securities. 
GSD provides, among other things, clearance and settlement for 
trades in U.S. government debt issues. MBSD and GSD maintain 
separate sets of rules, margin models, and clearing funds. The 
Proposed Rule Change relates solely to the MBSD Rules. Capitalized 
terms used and not otherwise defined shall have the meaning assigned 
to such terms in the MBSD Rules or the FICC MBSD EPN Rules, as 
applicable, available at http://www.dtcc.com/en/legal/rules-and-procedures.
    \5\ The Proposed Rule Change would add the new defined term 
``SBO'' to define the settlement balance orders that constitute the 
net positions of a Clearing Member as a result of the TBA Netting 
process. Notice, 82 FR at 23860. The term ``SBO-Destined Trade'' 
means a ``To-Be-Announced'' (``TBA'') transaction intended for TBA 
Netting. MBSD Rule 1, supra note 4. TBA transactions are trades for 
which the actual identities of and/or the number of pools underlying 
each trade are unknown at the time of trade execution. See Notice, 
82 FR at 23854. ``TBA Netting'' means the netting service that FICC 
provides to Clearing Members in connection with TBA transactions. 
MBSD Rule 1, supra note 4. The MBSD settlement balance order 
(``SBO'') system nets trades within the same mortgage backed 
security (``MBS'') product, coupon rate, maturity, and settlement 
date. The SBO system provides netting efficiencies, eliminating the 
need for Clearing Members to settle all but the resulting net buy 
and sell obligations.
    \6\ Novation terminates the obligations between Clearing Members 
to deliver, receive, and make payments to each other, and replaces 
those obligations with identical obligations between the Clearing 
Members and FICC. MBSD Rule 5 Section 13, supra note 4.
    \7\ The term ``Trade-for-Trade Transaction'' means a TBA 
transaction submitted to FICC that is not intended for TBA Netting. 
MBSD Rule 1, supra note 4. Entities use Trade-for-Trade Transactions 
either by choice or for trades that are not eligible for netting.
    \8\ The term ``Specified Pool Trade'' means a trade in which all 
required pool data, including the pool number to be delivered upon 
settlement are agreed by the counterparties at the time of trade 
execution. MBSD Rule 1, supra note 4.
    \9\ A ``Stipulated Trade'' is a trade in which pools allocated 
and delivered against the trade must satisfy certain conditions that 
are agreed upon by the parties at the time of trade execution. See 
Notice, 82 FR at 23856. Trades carrying stipulations may reflect 
terms that include, but are not limited to issuance year, issuance 
month, weighted average coupon, weighted average maturity and/or 
weighted average loan age, etc.
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    The Proposed Rule Change also includes several changes to the MBSD 
Rules regarding the operational processes for clearing MBSD trades. 
These changes include (1) eliminating the Notification of Settlement 
process regarding trades that currently settle bilaterally, as the 
process would become obsolete once FICC novates and directly settles 
all SBO-Destined Transactions, Trade-for-Trade Transactions, and 
Specified Pool Trades, as proposed; (2) establishing the ``Do Not 
Allocate'' (``DNA'') process, which would allow Clearing Members \10\ 
to offset SBON Trades \11\ and Trade-for-Trade Transactions; (3) 
establishing the ``Expanded Pool Netting'' process, which would net 
Pool Instructs \12\ stemming from SBON Trades and Trade-for-Trade 
Transactions to arrive at a single net position per counterparty in a 
particular Pool Number \13\ for next-day delivery; (4) eliminating the 
``give-up'' process for Brokered Transactions,\14\ as the process would 
become obsolete once FICC novates and settles all such transactions, as 
proposed; and (5) amending the components of the Cash Settlement \15\ 
calculation to reflect the changes above.
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    \10\ The term ``Clearing Member'' means any entity admitted into 
MBSD membership pursuant to MBSD Rule 2A. MBSD Rule 1, supra note 4.
    \11\ The proposed MBSD Rules would use the term ``SBON Trades'' 
to signify obligations that result from the TBA Netting process. 
Such obligations would reflect FICC as the settlement counterparty.
    \12\ The term ``Pool Instruct'' is defined in FICC's MBS Pool 
Netting User Guide to mean ``[a]n input used by a [M]ember to submit 
pool details directly into [FICC's Real-Time Trade Matching System] 
pool netting for bilateral matching and assignment to a 
corresponding open TBA position as a prerequisite to pool netting. 
FICC MBS Pool Netting User Guide, available at http://www.dtcc.com/clearing-services/ficc-mbsd/ficc-mbsd-user-documentation.
    \13\ The term ``Pool Number'' is defined in FICC's MBS Pool 
Netting User Guide to mean a ``[u]nique number assigned by the 
industry to identify the pool (in addition to the pool CUSIP [(i.e., 
the Committee on Uniform Securities Identification Procedures 
identifying number for a security)], since the pool CUSIP is not 
always known at the time of issuance).'' FICC MBS Pool Netting User 
Guide, supra note 12.
    \14\ The term ``Brokered Transaction'' means any ``give-up'' 
transaction calling for the delivery of a security for which data 
has been submitted to FICC by Members, in transactions to which a 
Broker is a party. MBSD Rule 1, supra note 4. FICC operates its 
brokered business on a ``give-up'' basis, which means that MBSD 
discloses (i.e., ``gives-up'') the identity of each Dealer (i.e., a 
Member that is in the business of buying and selling Securities as 
principal, either directly or through a Broker.) to a Brokered 
Transaction after a period of time. MBSD Rule 1; Rule 5 Section 7, 
supra note 4.
    \15\ The term ``Cash Settlement'' refers to the payment each 
business day by FICC to a Member or by a Member to FICC pursuant to 
Rule 11. MBSD Rule 1, supra note 4. Cash Settlement is a daily 
process of generating a single net credit or debit cash amount at 
the ``Aggregated Account'' level (i.e., either a single account 
linked to an aggregate ID or a set of accounts linked to an 
aggregate ID for the processing of transactions.) Clearing Members' 
Cash Settlement obligations are calculated on a net basis at the 
aggregate ID level. MBSD Rule 1, supra note 4.
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    Finally, the Proposed Rule Change would modify FICC's Real-Time 
Trade Matching (``RTTM'') system to remove size restrictions on SBO-
Destined Trades. Since trade size submission

[[Page 31379]]

requirements are not reflected in the MBSD Rules, this change would not 
require changes to the MBSD Rules.

A. MBSD's Current Trade Comparison and Netting Processes

    MBSD currently processes four types of trades: (1) SBO-Destined 
Trades; (2) Trade-for-Trade Transactions; (3) Specified Pool Trades; 
and (4) Option Contracts. SBO-Destined Trades and Trade-for-Trade 
Transactions are TBA transactions, which are trades for which the 
actual identities of and/or the number of pools underlying each trade 
are unknown at the time of trade execution. Specified Pool Trades are 
trades for which all pool data is agreed upon by the Clearing Members 
at the time of trade execution. Option Contracts are not addressed by 
the Proposed Rule Change.
    The first step of MBSD's clearance and settlement process is trade 
comparison, which consists of the reporting, validating, and matching 
by FICC of both sides of a transaction to ensure that the details of 
the trades are in agreement between the parties.\16\ Clearing Members 
enter trade data into the RTTM system, and once the trade is deemed 
compared, FICC guarantees settlement of the trade, provided that the 
trade meets the requirements of the MBSD Rules and was entered into in 
good faith.\17\
---------------------------------------------------------------------------

    \16\ MBSD Rule 5, supra note 4.
    \17\ MBSD Rule 5 Section 8, supra note 4.
---------------------------------------------------------------------------

    FICC novates SBO-Destined Trades upon trade comparison.\18\ In 
contrast, FICC does not novate Trade-for-Trade Transactions at the time 
of trade comparison. However, FICC guarantees the settlement of Trade-
for-Trade Transactions upon trade comparison.\19\ FICC treats 
Stipulated Trades as Trade-for-Trade Transactions because Clearing 
Members currently do not notify FICC of the stipulations. Similarly, 
Specified Pool Trades are not novated upon trade comparison. However, 
FICC guarantees the obligations of Specified Pool Trade counterparties 
to deliver, receive, and make payment for securities that satisfy the 
same generic criteria as the securities underlying Specified Pool 
Trades upon trade comparison.\20\
---------------------------------------------------------------------------

    \18\ MBSD Rule 5 Section 13, supra note 4.
    \19\ Id.
    \20\ MBSD Rule 5 Section 12, supra note 4.
---------------------------------------------------------------------------

    MBSD employs two netting processes to reduce settlement obligations 
as well as the number of securities and the amount of cash to be 
exchanged at settlement: The TBA Netting system; and the Pool Netting 
system.\21\ The TBA Netting system is used to net eligible SBO-Destined 
Trades.\22\ Three business days prior to the established settlement 
date of the TBA settlement obligations (referred to as ``72-Hour 
Day''),\23\ TBA Netting for the applicable class occurs. On 72-Hour 
Day, all compared SBO-Destined Trades within the class that have been 
designated for the TBA Netting process are netted within and across 
counterparties. Even though FICC has become the legal counterparty for 
each SBO-Destined Trade upon trade comparison, TBA Netting occurs as 
though each SBO-Destined Trade is with the Original Contra-Side 
Member.\24\ The net positions created by the TBA Netting process are 
referred to as the settlement balance order positions (``SBO 
positions''), which constitute settlement obligations against which 
Clearing Members will submit Pool Instructs for the Pool Netting 
process.\25\
---------------------------------------------------------------------------

    \21\ MBSD Rules 6, 7 and 8, supra note 4.
    \22\ Although Trade-for-Trade Transactions are not netted 
through the TBA Netting system, they constitute TBA settlement 
obligations against which Pool Instructs may be submitted. Specified 
Pool Trades are also not netted through the TBA Netting system, nor 
do such trades enter the Pool Netting system. MBSD Rules 6 and 8, 
supra note 4.
    \23\ MBSD performs the TBA Netting process four times per month, 
corresponding to each of the four primary settlement classes and 
dates established by the Securities Industry Financial Markets 
Association (``SIFMA''). SIFMA publishes a calendar that specifies 
one settlement date per month for four different product classes 
(known as Classes A, B, C and D) that are used to categorize the 
various types of TBA securities. These product classes and the 
associated settlement dates are recognized by the industry, and they 
provide the foundation for MBSD's TBA Netting process.
    \24\ The term ``Original Contra-Side Member'' means a Member 
with whom a Member has entered into a contract for the purchase or 
sale of a security. MBSD Rule 1, supra note 4.
    \25\ MBSD Rule 6, supra note 4.
---------------------------------------------------------------------------

    Two business days prior to the established settlement date of the 
TBA settlement obligations (referred to as ``48-Hour Day''), Clearing 
Members that have an obligation to deliver pools (``Pool Sellers'') 
must notify their counterparties (``Pool Buyers'') through MBSD's 
Electronic Pool Notification Service (``EPN Service'') \26\ of the 
relevant Pool Instructs (i.e., pools that such Pool Sellers intend to 
allocate in satisfaction of their SBO positions and/or Trade-for-Trade 
Transactions).\27\ For Trade-for-Trade Transactions, the relevant 
counterparty is the Original Contra-Side Member. For SBO-Destined 
Trades, although FICC is the legal counterparty, Clearing Members are 
directed to treat a designated SBO Contra-Side Member \28\ as their 
counterparty.\29\ Clearing Members are required to submit Pool 
Instructs on 48-Hour Day to MBSD through its RTTM system for Pool 
Comparison \30\ (which is a prerequisite to Pool Netting).\31\ Trade 
counterparties must bilaterally match their respective pools. At this 
stage, the Pool Netting System processes the compared pool allocations 
(provided that neither Clearing Member has cancelled the submitted 
allocation).\32\
---------------------------------------------------------------------------

    \26\ MBSD's electronic pool notification service (the ``EPN 
Service'') provides Clearing Members with the ability to 
electronically communicate pool information to MBSD, as described in 
the proposed rule changes. MBSD Rule 1, supra note 4.
    \27\ Pool allocations occur for all TBA Obligations, whether 
established on 72-Hour Day through the TBA Netting process or 
established upon comparison when the Trade-for-Trade Transaction was 
submitted. Pool allocations are not performed for Specified Pool 
Trades because the pool that is to be delivered in connection with 
such trade is specified upon submission.
    \28\ The term ``SBO Contra-Side Member'' means the Member with 
whom a Member is directed by the Corporation to settle an SBO Trade. 
The term ``SBO Trade'' means a settlement balance order that offsets 
an SBO Net Open Position pursuant to the MBSD Rules. A Member which 
has one or more ``Long SBO Trades'' in a particular CUSIP number is 
a net purchaser with respect to that CUSIP number, as the case may 
be; a Member which has one or more ``Short SBO Trades'' is a net 
seller. MBSD Rule 1, supra note 4. An ``SBON Contra-Side Member'' is 
an SBO Contra-Side Member that is not an Original Contra-Side Member 
with respect to such SBO Trade. An ``SBOO Contra-Side Member'' is an 
SBO Contra-Side Member that is also an Original Contra-Side Member 
with respect to such SBO Trade. MBSD Rule, supra note 4.
    \29\ A Clearing Member's ``counterparty'' for purposes of 
notifications, netting, and processing is the SBO Contra-Side Member 
or the Original Contra-Side Member for SBO-Destined Trades and 
Trade-for-Trade Transactions, respectively. MBSD Rule 6, supra note 
4.
    \30\ The term ``Pool Comparison'' means the service provided to 
Clearing Members, as applicable, and the operations carried out by 
FICC in the course of providing such service, in accordance with 
Rule 7. MBSD Rule 1, supra note 4.
    \31\ As with the EPN Service allocation process described above, 
Clearing Members submit Pool Instructs against all of their TBA 
Obligations, regardless of whether the TBA Obligation is established 
upon trade comparison or stems from the TBA Netting process.
    \32\ MBSD Rule 8, supra note 4.
---------------------------------------------------------------------------

    Pool netting takes place one business day prior to the established 
settlement date of the TBA settlement obligations (referred to as ``24-
Hour Day''). The Pool Netting system reduces the number of pool 
settlements by netting Pool Instructs stemming from SBO Trades and 
Trade-for-Trade Transactions to arrive at a single net position per 
counterparty in a particular pool number for next-day delivery.
    On each business day, MBSD makes available to each Clearing Member 
a report with information to enable such Clearing Member to settle its 
Pool Net Settlement Positions \33\ on that business day. At that time, 
all deliver, receive and related payment obligations between Clearing 
Members resulting

[[Page 31380]]

from compared pools that comprise a Pool Net Settlement Position or 
Positions are terminated and replaced by the Pool Deliver 
Obligations,\34\ Pool Receive Obligations,\35\ and related payment 
obligations to and from FICC. Each Clearing Member then provides 
appropriate instructions to its clearing bank to deliver to MBSD, and/
or to receive from MBSD, Eligible Securities against payment or receipt 
at the appropriate settlement value.
---------------------------------------------------------------------------

    \33\ The term ``Pool Net Settlement Position'' means either a 
Pool Net Short Position or a Pool Net Long Position, as the context 
requires. MBSD Rule 1, supra note 4.
    \34\ The term ``Pool Deliver Obligation'' means a Clearing 
Member's obligation to deliver securities to FICC. MBSD Rule 1, 
supra note 4.
    \35\ The term ``Pool Receive Obligation'' means a Clearing 
Member's obligation to receive securities from FICC. MBSD Rule 1, 
supra note 4.
---------------------------------------------------------------------------

    Clearing Members are required to settle certain obligations 
directly with their applicable settlement counterparties (i.e., outside 
of FICC).\36\ These obligations include (1) Pool Instructs that are not 
included in Pool Netting (either because they are ineligible or because 
they do not meet selection criteria for inclusion); and (2) Specified 
Pool Trades, which are not eligible for Pool Netting. Upon settling 
such obligations, Clearing Members must notify FICC by submitting a 
Notification of Settlement to MBSD for pool settlements relating to all 
trade types (excluding Option Contracts).\37\ Notification of 
Settlement is required for bilateral settlement because MBSD will not 
otherwise know that the subject pools have actually settled directly 
between Clearing Members. Upon both Clearing Members' submission of 
Notification of Settlement, the relevant obligation is deemed to have 
settled and is, therefore, no longer subject to MBSD's risk management.
---------------------------------------------------------------------------

    \36\ MBSD Rule 5 Section 12 and MBSD Rule 8 Section 2, supra 
note 4.
    \37\ MBSD Rule 10, supra note 4.
---------------------------------------------------------------------------

B. Proposed Changes to MBSD's Trade Comparison and Netting Processes

    FICC proposes to novate all transactions (except Option Contracts) 
at the time of trade comparison. Upon trade comparison, the deliver, 
receive, and related payment obligations between the Clearing Members, 
with respect to SBO-Destined Trades and Trade-for-Trade Transactions, 
would terminate and be replaced by identical obligations to and from 
FICC (i.e., FICC would become the buyer to every seller and the seller 
to every buyer). A similar process would occur for Specified Pool 
Trades and Stipulated Trades, except that, for those trades, the 
existing deliver, receive, and related payment obligations would 
terminate and be replaced with obligations to deliver, receive and make 
payment for securities that satisfy the same generic criteria (such as 
coupon rate, maturity, agency, and product) as the securities 
underlying the Specified Pool Trades or Stipulated Trades.\38\ In 
addition, FICC proposes to treat itself as the settlement counterparty 
throughout the lifecycle of the trade for netting, processing, and 
settlement purposes.\39\ These changes are described in detail below.
---------------------------------------------------------------------------

    \38\ In other words, FICC would not novate or guarantee the 
obligations to deliver the particular securities underlying 
Specified Pool Trades or securities that contain the particular 
stipulations set forth in Stipulated Trades.
    \39\ Upon trade comparison, Clearing Members would receive a 
notification through the RTTM system establishing FICC as each 
party's novated and settlement counterparty.
---------------------------------------------------------------------------

1. SBO-Destined Trades
    As described above, FICC currently novates SBO-Destined Trades at 
the time of trade comparison; however, FICC does not currently treat 
itself as the settlement counterparty for netting and processing 
purposes until after the Pool Netting process is complete and FICC has 
established Pool Receive Obligations or Pool Deliver Obligations. As a 
result, Clearing Members are directed to (1) allocate pools through the 
EPN Service to designated SBO Contra-Side Members and (2) submit Pool 
Instructs through the RTTM system.\40\
---------------------------------------------------------------------------

    \40\ MBSD Rule 7, supra note 4.
---------------------------------------------------------------------------

    Under the Proposed Rule Change, FICC would treat itself as 
settlement counterparty for netting and processing purposes from the 
time of trade comparison. SBO-Destined Trades would proceed to the TBA 
Netting process as they do currently; however, the SBO positions that 
result from the TBA Netting process would reflect FICC as the 
settlement counterparty. Thus, Clearing Members would no longer settle 
with a designated SBO Contra-Side Member,\41\ but with FICC instead.
---------------------------------------------------------------------------

    \41\ FICC would eliminate its calculation for determining the 
Settlement Value of ``SBON Trades'' (i.e., SBO Trades which a Member 
settles with an SBON Contra-Side Member) and ``SBOO Trades'' (i.e., 
SBO Trades which a Member settles with an SBOO Contra-Side member). 
MBSD Rule 1, supra note 4. The MBSD Rules refer to the calculation 
as ``CUSIP Average Price'' or ``CAP'' for SBON Trades and ``Firm 
CUSIP Average Price'' or ``FCAP'' for SBOO Trades. MBSD Rule 6, 
supra note 4.
---------------------------------------------------------------------------

    On 48-Hour Day, Clearing Members that are Pool Sellers would notify 
MBSD (rather than their designated SBO Contra-Side Member) through the 
EPN Service of the allocated pools. FICC would then submit 
corresponding notifications to Clearing Members that are Pool Buyers. 
Clearing Members would continue to submit Pool Instructs to MBSD on 48-
Hour Day through FICC's RTTM system. If a Clearing Member does not 
submit its Pool Instructs by the established deadline, FICC would 
determine and apply the Pool Instructs for that Clearing Member. Such 
determination would be based on the allocated pools that the Clearing 
Member has submitted through the EPN Service. As a result of this 
proposed change, all pools would be compared, and FICC would no longer 
require Clearing Members to settle uncompared pools directly with their 
applicable settlement counterparties (i.e., outside of FICC).
    Additionally, FICC proposes to eliminate the trade size restriction 
for SBO-Destined Trades. Currently, SBO-Destined Trades are only 
eligible for the TBA Netting process in multiple amounts of one 
million, with the minimum set at one million. FICC proposes to remove 
this size restriction from the RTTM system so that Clearing Members 
would be permitted to submit SBO-Destined Trades in any trade size. 
Since trade size restrictions are not reflected in the MBSD Rules, this 
proposed change would not necessitate any changes to the MBSD Rules. 
For the avoidance of doubt, FICC does not propose to change the trade 
size restrictions for Trade-for-Trade Transactions or Specified Pool 
Trades.
2. Trade-for-Trade Transactions
    Currently, as described above, FICC does not novate Trade-for-Trade 
Transactions or treat itself as settlement counterparty for purposes of 
netting, processing, and settlement until, in each case, the Pool 
Netting process is complete and each Clearing Member receives their 
Pool Receive Obligation or Pool Deliver Obligations, as applicable, 
from FICC.\42\ As a result, Clearing Members are required to allocate 
pools to their original counterparties through the EPN Service, and 
submit Pool Instructs through the RTTM system. Once Pool Netting is 
complete, the deliver, receive, and related payment obligations between 
Clearing Members that were created by compared pools that comprise a 
Pool Net Settlement Position are terminated and replaced by Pool 
Deliver Obligations, Pool Receive Obligations, and related payment 
obligations to and from FICC.\43\
---------------------------------------------------------------------------

    \42\ MBSD Rule 8 Section 4, supra note 4.
    \43\ MBSD Rule 8 Section 6, supra note 4.
---------------------------------------------------------------------------

    Under the Proposed Rule Change, FICC would novate Trade-for-Trade 
Transactions at trade comparison and treat itself as settlement 
counterparty, at that time, for purposes of processing and settlement. 
Similar to the process with SBO-Destined Trades, Clearing Members with 
an obligation to deliver pools would notify MBSD (rather than

[[Page 31381]]

their original counterparty) through the EPN Service, and FICC would 
submit corresponding notifications to Clearing Members that are Pool 
Buyers. Clearing Members would continue to be required to submit Pool 
Instructs. In the event that Pool Instructs are not submitted by the 
established deadline, FICC would determine Pool Instructs for that 
Clearing Member. Such determinations would be based on the allocated 
pools that the Clearing Member has submitted through the EPN Service.
3. Specified Pool Trades
    Currently, as described above, FICC does not novate Specified Pool 
Trades during any point of the trade lifecycle (though, upon trade 
comparison of Specified Pool Trades, FICC guarantees the obligation to 
deliver, receive, and pay for securities that satisfy the same generic 
criteria as the underlying securities).\44\ Specified Pool Trades are 
currently ineligible for the TBA Netting process and the Pool Netting 
process. Specified Pool Trades are currently settled between the 
original counterparties directly (i.e., outside of FICC).
---------------------------------------------------------------------------

    \44\ MBSD Rule 5, supra note 4.
---------------------------------------------------------------------------

    Under the Proposed Rule Change, FICC would novate Specified Pool 
Trades upon trade comparison. Such novation would be limited to the 
obligations to deliver, receive, and make payment for securities 
satisfying the same generic criteria as the securities underlying the 
Specified Pool Trades. As a result, upon trade comparison, the existing 
deliver, receive, and related payment obligations between Clearing 
Members under Specified Pool Trades would be terminated and replaced 
with obligations to or from FICC to deliver, receive, and make payment 
for securities satisfying the same generic criteria as the securities 
underlying the Specified Pool Trades. FICC would not novate the 
obligation to deliver the securities for the particular specified pool.
    Additionally, FICC proposes to settle Specified Pool Trades 
directly with the Clearing Member party thereto (rather than require 
that counterparties to such trades settle directly with one another). 
No other changes are being proposed with respect to the processing of 
Specified Pool Trades. Such trades would continue to be ineligible for 
the TBA Netting and Pool Netting systems.
4. Stipulated Trades
    Currently, as described above, FICC does not treat Stipulated 
Trades as a separate type of trading activity because Clearing Members 
submit Stipulated Trades to FICC as Trade-for-Trade Transactions, 
without notifying FICC of the stipulations. Under the Proposed Rule 
Change, FICC would add Stipulated Trades as a new trade type that would 
be eligible for processing by MBSD. FICC would guarantee and novate 
Stipulated Trades at trade comparison, provided that such trades meet 
the requirements of the MBSD Rules and are entered into in good faith. 
Such guarantee and novation would be limited to the obligations to 
deliver, receive, and make payment for securities satisfying the same 
generic criteria as the securities underlying the Stipulated Trade, but 
not the obligation to deliver securities that contain the particular 
stipulations contained in the Stipulated Trades. At trade comparison, 
the deliver, receive, and related payment obligations between Clearing 
Members would be terminated and replaced with obligations to or from 
FICC to deliver, receive, and make payment for securities satisfying 
the same generic criteria as the securities underlying the Stipulated 
Trades.
    Because of the narrow nature of FICC's guarantee and novation, in 
the event of a Clearing Member's default, FICC would only be required 
to deliver, receive, or make payment for securities that have the same 
generic terms, such as coupon rate, maturity, agency, and product, as 
the securities underlying the Stipulated Transaction.
    Clearing Members would be required to allocate Stipulated Trades to 
FICC through the EPN Service. Such allocation would result in the 
creation of pool obligations, which would settle with FICC based on the 
settlement date agreed to as part of the terms of the trade. Similar to 
Specified Pool Trades, Stipulated Trades would not be eligible for the 
TBA Netting process and the Pool Netting process.
5. Notification of Settlement Process
    As described above, the Notification of Settlement process 
currently requires Clearing Members to notify FICC of obligations that 
have settled directly between Clearing Members and their applicable 
settlement counterparties.\45\ Once both parties to a transaction 
submit a Notification of Settlement to MBSD through the RTTM system, 
the obligations are no longer subject to MBSD's margin calculation 
process.\46\ Because, under the Proposed Rule Change, FICC would novate 
and directly settle all SBO-Destined Transactions, Trade-for-Trade 
Transactions, and Specified Pool Trades, the Notification of Settlement 
process would become obsolete. Therefore, FICC proposes to delete 
Notification of Settlement from the MBSD Rules.
---------------------------------------------------------------------------

    \45\ MBSD Rule 10, supra note 4.
    \46\ MBSD Rule 4, supra note 4.
---------------------------------------------------------------------------

6. Do Not Allocate (``DNA'') Process
    Under the Proposed Rule Change, FICC would establish a process to 
enable Clearing Members to offset Trade-for-Trade Transactions \47\ and 
SBON Trades. This process would be referred to as the ``Do Not 
Allocate'' or ``DNA'' process. The purpose of this process is to 
exclude SBON Trades and Trade-for-Trade Transactions from the pool 
allocation process \48\ and securities settlement.
---------------------------------------------------------------------------

    \47\ Specified Pool Trades and Stipulated Trades would not be 
eligible for the proposed DNA process because such trades are not 
eligible for the Pool Netting process. MBSD Rule 8, supra note 4.
    \48\ As noted above, the pool allocation process requires 
Clearing Members to allocate pools on 48-Hour Day through the EPN 
Service. Under the Proposed Rule Change, Clearing Members would not 
be required to allocate pools for obligations that have been offset 
through the DNA process.
---------------------------------------------------------------------------

    The DNA process would be available to Clearing Members at the start 
of the business day on 48-Hour Day through 4:30 p.m.\49\ on 24-Hour 
Day. During this time, Clearing Members with two or more open TBA 
Obligations \50\ with the same Par Amount,\51\ CUSIP Number, and SIFMA 
designated settlement date would be permitted to offset such 
obligations. In order to initiate the offset, Clearing Members would be 
required to submit a request (``DNA Request'') to MBSD through the RTTM 
system. Upon FICC's validation of this request, the obligations would 
be reduced, and the Clearing Member would not be required to allocate 
pools against such obligations. As a result, a Clearing Member's 
overall number of open obligations would be reduced.
---------------------------------------------------------------------------

    \49\ All times referenced herein are Eastern Time.
    \50\ The term ``TBA Obligations'' means SBO-Destined obligations 
and, with respect to Trade-for-Trade Transactions, settlement 
obligations generated by the Trade Comparison system. MBSD Rule 1, 
supra note 4.
    \51\ The term ``Par Amount'' means for Trade-for-Trade and SBO 
Transactions, Option Contracts and Pool Deliver and Pool Receive 
Obligations, the current face value of a Security to be delivered on 
the Contractual Settlement Date. With respect to Specified Pool 
Trades, ``Par Amount'' shall mean the original face value of a 
Security to be delivered on the Contractual Settlement Date. MBSD 
Rule 1, supra note 4.
---------------------------------------------------------------------------

    Clearing Members would be permitted to cancel a DNA Request; 
however, such cancellation must be submitted through the RTTM system 
prior to the time that the designated offsetting TBA Obligations have 
settled. Upon FICC's timely receipt of a cancellation request, the 
trades that were previously marked for the DNA process would reopen and 
the Clearing Member would be expected

[[Page 31382]]

to notify MBSD through the EPN Service of the pools that such Clearing 
Member intends to allocate to the open obligations.\52\
---------------------------------------------------------------------------

    \52\ A detailed example of the DNA process is described in the 
Notice. Notice, 82 FR at 23857.
---------------------------------------------------------------------------

    The proposed DNA process would generate Cash Settlement credits and 
debits from the price differential of the resulting offsetting 
obligations. The proposed Cash Settlement obligations are described 
more fully below in Item 9.
7. Expanded Pool Netting Process
    As described above, the Pool Netting system reduces the number of 
pool settlements by netting Pool Instructs stemming from SBON Trades 
and Trade-for-Trade Transactions to arrive at a single net position per 
counterparty in a particular pool number for next-day delivery. Prior 
to the Pool Netting process, Pool Sellers must notify their Pool Buyers 
through MBSD's EPN Service of the pools to be allocated in satisfaction 
of a TBA Obligation. In accordance with the SIFMA Guidelines,\53\ such 
notifications must occur before 3:00 p.m. on 48-Hour Day.\54\ 
Notifications that take place after this time are considered late, and 
the delivery of such pools to the related Pool Buyers will be delayed 
for one additional business day.
---------------------------------------------------------------------------

    \53\ The term ``SIFMA Guidelines'' means the guidelines for good 
delivery of Mortgage-Backed Securities as promulgated from time to 
time by SIFMA. MBSD Rule 1, supra note 4.
    \54\ All times referenced herein are Eastern Time.
---------------------------------------------------------------------------

    In order to capture notifications submitted after 3:00 p.m. on 48-
Hour Day through 4:30 p.m. on 24-Hour Day, FICC proposes to establish 
an additional netting cycle, referred to as ``Expanded Pool Netting.'' 
Similar to the initial Pool Netting process, Expanded Pool Netting 
would result in a reduction in the number of Pool Delivery Obligations. 
As with the existing Pool Netting process, the proposed Expanded Pool 
Netting process would (1) calculate Pool Net Settlement Positions in a 
manner that is consistent with Section 3 of MBSD Rule 8, and (2) 
allocate Pool Deliver Obligations and Pool Receive Obligations in a 
manner that is consistent with Section 4 of MBSD Rule 8.
    The Expanded Pool Netting process would occur four times per month 
in accordance with the SIFMA designated settlement dates. Pool Net 
Settlement Positions and the resultant Pool Deliver Obligations and 
Pool Receive Obligations would only be provided to Clearing Members 
during such times. The proposed Expanded Pool Netting process would 
generate Cash Settlement credits and debits, described more fully below 
in Item 9.
8. Give-Up Process for Brokered Transactions
    Currently, as described above, FICC operates its brokered business 
on a ``give-up'' basis, which means that MBSD discloses (i.e., ``gives-
up'') the identity of each Dealer to a Brokered Transaction after a 
period of time.\55\ Under the Proposed Rule Change, FICC would 
eliminate the need to disclose Dealers' identities because FICC would 
novate all Brokered Transactions and treat itself as the settlement 
counterparty upon trade comparison. Thus, the report that FICC issues 
after trade comparison of a Brokered Transaction would refer to FICC as 
settlement counterparty.
---------------------------------------------------------------------------

    \55\ MBSD Rule 5 Section 7, supra note 4.
---------------------------------------------------------------------------

9. Cash Settlement Calculations
    As described above, Cash Settlement is a daily process of 
generating a single net credit or debit cash amount at the Aggregated 
Account level and settling those cash amounts between Clearing Members 
and MBSD.\56\ FICC's proposal to become the settlement counterparty 
upon trade comparison and the proposed DNA process would require 
several changes to the Cash Settlement calculation described below.\57\
---------------------------------------------------------------------------

    \56\ MBSD Rule 11, supra note 4.
    \57\ Detailed examples of the proposed changes to the Cash 
Settlement calculations are provided in the Notice. Notice, 82 FR at 
23858-59.
---------------------------------------------------------------------------

     SBO Market Differential. Under the Proposed Rule Change, 
FICC would eliminate the SBO Market Differential \58\ because it 
reflects the price difference for SBO positions settled among Clearing 
Members. This amount would no longer be required because Clearing 
Members would settle all SBO-Destined Trades directly with FICC.
---------------------------------------------------------------------------

    \58\ The term ``SBO Market Differential'' means the amount 
computed pursuant to the MBSD Rules, reflecting the difference 
between Firm CUSIP Average Prices (i.e., the average purchase or 
sale contract price of a Member's SBO-Destined Trades with a 
particular Original Contra-Side Member in a particular CUSIP number) 
or between the CUSIP Average Price (i.e., the average contract price 
of all SBO-Destined Trades in the CUSIP number that have been 
netted) and the Firm CUSIP Average Price, as the case may be. MBSD 
Rule 1, supra note 4.
---------------------------------------------------------------------------

     TBA Transaction Adjustment Payment. Under the Proposed 
Rule Change, FICC would add the TBA Transaction Adjustment Payment to 
reflect the cash differential that would result when calculating the 
net proceeds of the contractual quantity of an SBO-Destined Trade when 
comparing such trade's Settlement Price \59\ and the System Price.\60\ 
The proposed TBA Transaction Adjustment Payment would be an amount 
equal to the difference between the SBO-Destined Trade's Settlement 
Price and the System Price, multiplied by the contractual quantity of 
such trade, and then divided by 100. To differentiate between the buyer 
and seller of the transaction, an indicator of -1 for the buy trade and 
+1 for the sell trade is multiplied by the contractual quantity of such 
trade.
---------------------------------------------------------------------------

    \59\ The term ``Settlement Price'' means: (a) In the case of a 
Trade-for-Trade Transaction, Specified Pool Trade, or SBO-Destined 
Trade, the contractual settlement price agreed to by the parties; 
(b) in the case of an SBON Trade, the CUSIP Average Price; (c) in 
the case of an SBOO Trade, the Firm CUSIP Average Price; and (d) in 
the case of a Pool Deliver or Pool Receive Obligation, the Pool Net 
Price. MBSD Rule 1, supra note 4.
    \60\ The term ``System Price'' means the price for any trade or 
any Pool Deliver Obligations or Pool Receive Obligation not 
including accrued interest, established by FICC on each Business 
Day, based on current market information, for each security. MBSD 
Rule 1, supra note 4.
---------------------------------------------------------------------------

     Expanded Pool Net Transaction Adjustment Payment. Under 
the Proposed Rule Change, FICC would add the Expanded Pool Net 
Transaction Adjustment Payment to be applied when a Clearing Member 
misses the deadline established by FICC for the Pool Netting process. 
Unlike the daily Pool Netting process, the Expanded Pool Netting 
process would only run four times per month in accordance with the 
SIFMA designated settlement dates. As a result, an Expanded Pool Net 
Transaction Adjustment Payment would only occur four times per month. 
The Expanded Pool Net Transaction Adjustment Payment would reflect an 
amount equal to the difference between the System Price and the SBON 
Trade's Settlement Price or Trade-for-Trade Transaction's Settlement 
Price, as applicable, multiplied by the total current face value of the 
pools used to satisfy such obligation, and then divided by 100. To 
differentiate between a buy and sell transaction, an indicator of +1 
for a buy trade and -1 for a sell trade would be multiplied by the 
total current face value of the pools used to satisfy the obligation.
     Do Not Allocate Transaction Adjustment Payment. Under the 
Proposed Rule Change, FICC would add the Do Not Allocate Transaction 
Adjustment Payment to reflect the cash differential among TBA 
Obligations that have been offset through the DNA process. The proposed 
Do Not Allocate Transaction Adjustment Payment would be an amount equal 
to the difference between the Settlement Price of the buy and sell TBA 
Obligation transactions multiplied by the contractual quantity. To 
differentiate between a buy and sell transaction, an indicator of -1 
for a buy

[[Page 31383]]

trade and +1 for a sell trade is multiplied by the contractual quantity 
of such trade.
     TBA Reprice Transaction Adjustment Payment. Under the 
Proposed Rule Change, FICC would add the TBA Reprice Transaction 
Adjustment Payment to reflect the cash differential between the price 
of a TBA Obligation that was not allocated by a Clearing Member before 
the deadline established by FICC and the price of the replacement TBA 
Obligation that was calculated at the System Price. The TBA Reprice 
Transaction Adjustment Payment would be an amount equal to the 
difference between the TBA Obligation's Settlement Price and the System 
Price, multiplied by the unallocated contractual quantity, and then 
divided by 100. To differentiate between a buy and sell transaction, an 
indicator of -1 for a sell trade and +1 for a buy trade is multiplied 
by the unallocated pool's contractual quantity.
     Variance Transaction Adjustment Payment. Under the 
Proposed Rule Change, FICC would add the Variance Transaction 
Adjustment Payment to capture the variance (i.e., difference) \61\ 
between a TBA Obligation and the current face value of the pools 
allocated in satisfaction of such obligation. Specifically, this 
payment would reflect the cash differential calculated between the SBON 
Trade's Settlement Price or the Trade-for-Trade Transaction's 
Settlement Price, as applicable, and the System Price using the 
variance of the Pool Netting process or the Expanded Pool Netting 
process, as applicable, based on the current face value of the pools 
used in satisfaction of the trade. The Variance Transaction Adjustment 
Payment would be an amount equal to the difference between the SBON 
Trade's Settlement Price or the Trade-for-Trade Transaction's 
Settlement Price, as applicable, and the System Price, multiplied by 
the difference between the TBA Obligation and the allocated pools used 
in satisfaction of such trade, and then divided by 100. To 
differentiate between a buy and sell transaction, an indicator of -1 
for a buy trade and +1 for a sell trade would be multiplied by the 
total variance amount.
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    \61\ Pursuant to the SIFMA Guidelines, TBA trades are allowed to 
have a variance equal to plus or minus 0.01 percent of the dollar 
amount of the transaction agreed to by the parties. As a result of 
this guideline, FICC would capture the variance of TBA Obligations 
and the current face value of the pools allocated in satisfaction of 
such obligations.
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     Factor Update Adjustment Payment. Under the Proposed Rule 
Change, FICC would add the Factor Update Adjustment Payment, to be 
applied when updated pool factor information is released after the 
clearing bank's settlement of a pool. This update would create a cash 
differential that would require a debit to the seller and a credit to 
the buyer.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \62\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the Proposed Rule 
Change, the Commission finds that the Proposed Rule Change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FICC. In particular, the 
Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act \63\ and Rule 17Ad-22(e)(21) \64\ under 
the Act.
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    \62\ 15 U.S.C. 78s(b)(2)(C).
    \63\ 15 U.S.C. 78q-1(b)(3)(F).
    \64\ 17 CFR 240.17Ad-22(e)(21).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\65\ As discussed 
above, the Proposed Rule Change would result in FICC novating and 
treating itself as the settlement counterparty from the time of trade 
comparison with respect to SBO-Destined Trades, Trade-for-Trade 
Transactions, Specified Pool Trades, and Stipulated Trades. By novating 
such trades to FICC and treating FICC as the settlement counterparty to 
such trades the Proposed Rule Change would make FICC the only 
counterparty to whom the Clearing Members are obligated, as compared to 
the current process where Clearing Members may have multiple 
counterparties with whom they need to settle multiple obligations 
outside of FICC. Additionally, the Proposed Rule Change would also 
accelerate the point in time at which FICC becomes that ultimate 
counterparty (i.e., at the time of trade comparison), resulting in such 
trades being governed by the MBSD Rules from that time. Collectively, 
the proposed changes are designed to simplify, streamline, and 
centralize trade processing under the MBSD Rules, which would help 
promote the prompt and accurate clearance and settlement of these types 
of securities transactions. Therefore, the Commission believes that the 
Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the 
Act.\66\
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    \65\ 15 U.S.C. 78q-1(b)(3)(F).
    \66\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the Proposed Rule Change would make a number of 
operational changes with respect to MBSD trade processing. 
Specifically, the Proposed Rule Change would provide that (1) the 
submission of Pool Instructs by Clearing Members would become optional 
because FICC would be permitted to submit on behalf Clearing Members; 
(2) Clearing Members would no longer to be required to fulfill 
Notification of Settlement obligations because all of the above-
referenced transactions would settle with FICC; (3) Clearing Members 
would have the ability to exclude TBA Obligations from the pool 
allocation process, netting, and securities settlement through the DNA 
process; (4) Clearing Members would have the ability to net their pools 
via the Expanded Pool Netting process in the event that such Clearing 
Members miss the established deadline for the initial Pool Netting 
process; (5) Dealer Netting Members would remain anonymous with the 
elimination of the ``give-up'' process for Brokered Transactions; (6) 
Clearing Members would be allowed to submit SBO-Destined Trades in all 
trade sizes; and (7) Clearing Members would be allowed to submit 
Stipulated Trades as a new trade type. These proposed changes are 
designed to eliminate operational steps in the current trade processing 
cycle and enable Clearing Members to take advantage of MBSD's trade 
processing efficiencies at an earlier point, which would help promote 
the prompt and accurate clearance and settlement of these types of 
securities transactions. Therefore, Commission believes that the 
Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the 
Act.\67\
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    \67\ Id.
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    Rule 17Ad-22(e)(21) under the Act requires, in part, that FICC 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to be efficient and effective in meeting 
the requirements of its participants and the markets it serves, and 
regularly review the efficiency and effectiveness of its (i) clearing 
and settlement arrangements; (ii) operating structure; and (iii) scope 
of products cleared or settled.\68\ As discussed above, the Proposed 
Rule Change would enable FICC to novate MBS trades at an earlier point 
the trade lifecycle (i.e., upon trade comparison). Additionally, as 
described above, the Proposed Rule Change would add Stipulated Trades 
as a new trade type

[[Page 31384]]

that could be cleared and settled at MBSD, and it would remove the size 
restrictions with respect to SBO-Destined Trades.
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    \68\ See 17 CFR 240.17Ad-22(e)(21).
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    With these changes, which were developed in consideration of the 
feedback received from MBSD Clearing Members,\69\ FICC could provide a 
more efficient and effective operational processes in connection with 
the clearance and settlement of MBS trades, expand the scope of 
products cleared and settled by MBSD, and enable Clearing Members to 
submit such trades in any size. Therefore, the Commission believes that 
the Proposed Rule Change is designed to help FICC be more efficient and 
effective in meeting the requirements of its participants and the 
markets it serves, and in providing clearing and settlement 
arrangements, operating structure, and scope of products cleared or 
settled, which is consistent with Rule 17Ad-22(e)(21).
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    \69\ FICC describes in Item 7 of its Form 19b-4 responses the 
extent to which the proposed changes were informed by feedback from 
its Clearing Members and various working groups over numerous years. 
Available at http://www.dtcc.com/legal/sec-rule-filings. 
Specifically, FICC states that in 2015, 92 Clearing Member 
representatives participated in forums held in June, and 157 
representatives participated in forums in September and October. Id. 
FICC states that in 2016, 139 representatives participated in forums 
held in March, 241 representatives participated in forums held in 
August, and 121 participated in forums held in December. Id. 
Additionally, FICC states that it held a number of conference calls 
with individual Clearing Members to address questions and concerns 
on the subject. Id. Moreover, FICC explains that the Proposed Rule 
Change was even the subject of a prior rule filing with the 
Commission to fund the proposed changes. Id. See also Exchange Act 
Release No. 74033 (January 12, 2015), 80 FR 2452 (January 16, 2015) 
(SR-FICC-2014-12).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \70\ and 
the rules and regulations promulgated thereunder.
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    \70\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\71\ that proposed rule change SR-FICC-2017-012 be, and hereby is, 
approved.\72\
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    \71\ 15 U.S.C. 78s(b)(2).
    \72\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\73\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2017-14142 Filed 7-5-17; 8:45 am]
 BILLING CODE 8011-01-P