Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the GSD Rulebook To Establish a Process To Address Liquidity Needs in Certain Situations in the GCF Repo and CCIT Services and Make Other Changes, 45608-45617 [2019-18632]

Download as PDF 45608 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices of the Act 16 and paragraph (f) of Rule 19b–417 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: khammond on DSKBBV9HB2PROD with NOTICES Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CboeEDGX–2019–052 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–CboeEDGX–2019–052. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also 16 15 17 17 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f). VerDate Sep<11>2014 17:00 Aug 28, 2019 Jkt 247001 will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– CboeEDGX–2019–052 and should be submitted on or before September 19, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–18634 Filed 8–28–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of amendments to the FICC Government Securities Division (‘‘GSD’’) Rulebook (the ‘‘Rules’’) 4 to: (i) Establish a new deadline and associated late fees for satisfaction of net cash obligations in GCF Repo Transaction 5 and CCIT Transaction 6 activity (hereinafter ‘‘GCF Repo/CCIT activity’’) 7 and remove the current 6 p.m. Collateral Allocation Obligation 8 deadline; (ii) establish a process to provide liquidity to FICC in situations where a Netting Member or CCIT Member 9 with a net cash obligation in GCF Repo/CCIT activity, that is otherwise in good standing, is either (1) delayed in satisfying or (2) unable to satisfy its cash obligation (in whole or in part); and (iii) make a clarification, certain technical changes and corrections, all as further described below. [Release No. 34–86745; File No. SR–FICC– 2019–004] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the GSD Rulebook To Establish a Process To Address Liquidity Needs in Certain Situations in the GCF Repo and CCIT Services and Make Other Changes August 23, 2019. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on August 9, 2019, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the clearing agency.3 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 18 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 On August 9, 2019, FICC filed this proposed rule change as an advance notice (SR–FICC–2019– 801) with the Commission pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b– 4(n)(1)(i) under the Act, 17 CFR 240.19b–4(n)(1)(i). A copy of the advance notice is available at https:// www.dtcc.com/legal/sec-rule-filings.aspx. 1 15 PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 4 Capitalized terms not defined herein are defined in the Rules, available at https://www.dtcc.com/ legal/rules-and-procedures. 5 ‘‘GCF Repo Transaction’’ means a Repo Transaction involving Generic CUSIP Numbers the data on which are submitted to FICC on a LockedIn-Trade basis pursuant to the provisions of Rule 6C, for netting and settlement by FICC pursuant to the provisions of Rule 20. Rule 1, supra note 4. 6 ‘‘CCIT Transaction’’ means a transaction that is processed by FICC in the CCIT Service. Because the CCIT Service leverages the infrastructure and processes of the GCF Repo Service, a CCIT Transaction must be: (i) In a Generic CUSIP Number approved for the GCF Repo Service and (ii) between a CCIT Member and a Netting Member who participates in the GCF Repo Service where the CCIT Member is the cash lender in the transaction. Rule 1, supra note 4. 7 The GCF Repo Service is primarily governed by Rule 20 and enables Netting Members to trade general collateral finance repurchase agreement transactions based on rate, term, and underlying product throughout the day with brokers on a blind basis. The CCIT Service is governed by Rule 3B and enables tri-party repurchase agreement transactions in GCF Repo Securities between Netting Members that participate in the GCF Repo Service and institutional cash lenders (other than investment companies registered under the Investment Company Act of 1940, as amended). Rule 20 and Rule 3B, supra note 4. 8 ‘‘Collateral Allocation Obligation’’ means the obligation of a Netting Member to allocate securities or cash for the benefit of FICC to secure such Member’s GCF Net Funds Borrower Position. Rule 1, supra note 4. 9 ‘‘CCITTM’’ means Centrally Cleared Institutional Triparty. The terms ‘‘Centrally Cleared Institutional Triparty Member’’ and ‘‘CCIT Member’’ mean a legal entity other than a Registered Investment Company approved to participate in the FICC’s CCIT Service as a cash lender. Rule 1, supra note 4. Eligibility to become a CCIT Member is described in Section 2 of Rule 3B. Rule 3B, Section 2, supra note 4. E:\FR\FM\29AUN1.SGM 29AUN1 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices 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 The proposed rule change would amend the Rules to: (i) Establish a new deadline and associated late fees for satisfaction of net cash obligations in GCF Repo/CCIT activity and remove the current 6 p.m. Collateral Allocation Obligation deadline; (ii) establish a process to provide liquidity to FICC in situations where a Netting Member or CCIT Member with a net cash obligation in GCF Repo/CCIT activity, that is otherwise in good standing, is either (1) delayed in satisfying or (2) unable to satisfy its cash obligation (in whole or in part); and (iii) make a clarification, certain technical changes and corrections, all as further described below. khammond on DSKBBV9HB2PROD with NOTICES (i) Proposed Change To Establish a New Deadline and Associated Late Fees for Satisfaction of Net Cash Obligations in GCF Repo/CCIT Activity and Remove the Current 6 p.m. Collateral Allocation Obligation Deadline Securities Obligations (Collateral Allocation Obligations) The Rules (Section 3 of Rule 20, the Schedule of GCF Timeframes and the Fee Structure) currently address a Netting Member’s failure to satisfy its Collateral Allocation Obligation on a timely basis.10 Specifically, Section 3 of Rule 20 states that Collateral Allocation Obligations must be satisfied by a Netting Member within the timeframes established for such by FICC.11 The current deadline in the Schedule of GCF Timeframes for Netting Member allocation of collateral to satisfy securities obligations is 4:30 p.m.12 This 10 Rule 20, Section 3, Schedule of GCF Timeframes, and Fee Structure, supra note 4. Collateral Allocation Obligations do not apply to CCIT Members because they can only be cash lenders in the CCIT Transactions. 11 Rule 20, Section 3, supra note 4. 12 Schedule of GCF Timeframes, supra note 4. VerDate Sep<11>2014 17:00 Aug 28, 2019 Jkt 247001 4:30 p.m. deadline is the first deadline by which Netting Members that have Collateral Allocation Obligations must allocate their securities collateral or be subject to a late fee of $500 (the late fee is set forth in the Fee Structure of the Rules).13 In addition, the Schedule of GCF Timeframes includes a second deadline of 6 p.m. by which Netting Members that have Collateral Allocation Obligations must allocate their securities collateral; after 6 p.m., FICC will process such collateral allocations on a good faith basis only.14 These provisions are mirrored in Section 3 of Rule 20, which also references the ‘‘final cutoff’’ (i.e., the 6 p.m. deadline).15 Section 3 of Rule 20 also provides FICC’s processing of such late allocations is on a good faith basis only.16 Furthermore, Section 3 of Rule 20 states that Netting Members that do not satisfy their Collateral Allocation Obligations by the close of the Fedwire Funds Service shall be deemed to have failed on such Position (the consequence of which shall be that such Netting Member would not be entitled to receive the funds borrowed, but shall owe interest on such funds amount).17 With respect to the foregoing regarding allocation of securities collateral on a timely basis, FICC proposes to establish 4:30 p.m. as the only deadline for Netting Member allocation of collateral.18 In other words, FICC proposes to remove the current second deadline (i.e., 6 p.m.) by which Netting Members that have Collateral Allocation Obligations must allocate their securities obligations. This proposed change would align the deadline for allocating securities obligations with the proposed deadline for satisfying cash obligations (i.e., 4:30 p.m. or one hour after the close of the Fedwire Securities Service reversals, if later). Netting Members typically have obligations to satisfy outside of FICC after the collateral allocations occur at FICC. FICC believes that all parties (including FICC) would benefit from 13 Fee Structure, supra note 4. of GCF Timeframes, supra note 4. Today, after 6:00 p.m., FICC will process collateral allocations on a good faith basis, namely if FICC is able to contact both affected Netting Members and such Netting Members agree to settle such transaction, then FICC and its GCF Clearing Agent Bank will settle such transaction. 15 Rule 20, Section 3, supra note 4. 16 Id. 17 Id. 18 See Schedule of GCF Timeframes, supra note 4. Currently, the Schedule of GCF Timeframes provides that the first deadline for collateral allocation is 4:30 p.m. or one hour after the close of the securities FedWire, if later. The reference regarding one hour after the FedWire close would remain, subject to a correction discussed below in Item II(A)1(iii) of this filing. 14 Schedule PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 45609 securities settlement occurring by 4:30 p.m. This is because the more settlements that complete earlier, the more potential operational risk is removed from the market. Specifically, there is interconnectivity between the GCF Repo market and the tri-party market outside of FICC. The securities collateral that is used to settle GCF Repo positions can be subsequently used by Netting Members to complete tri-party transactions outside of FICC. Therefore, the earlier that securities settlement occurs in the GCF Repo Service, the less potential operational risk of incomplete tri-party transactions outside of FICC. Under the current Rules, the second deadline of 6 p.m. creates an environment of later settlement both at FICC and outside of FICC. Even though Netting Members are generally abiding by the 4:30 p.m. securities allocation deadline, FICC would like to address the possibility of later settlement by deleting the 6 p.m. deadline. Therefore, by imposing 4:30 p.m. as the only deadline, FICC believes it would be lowering potential operational risk in the market that could arise if Netting Members chose to avail themselves of the current 6:00 p.m. deadline. This risk is the risk of disorder if firms are attempting to fulfill GCF Repo settlement and tri-party transaction settlement at the same time later in the day. Under the proposal, FICC would continue to process collateral allocations after the 4:30 p.m. deadline on a good faith basis only (like it currently does for collateral allocations after the current 6 p.m. deadline). Netting Members would remain subject to the $500 late fee if they do not meet the 4:30 p.m. deadline unless FICC determines, in its sole discretion, that failure to meet this timeframe is not primarily the fault of the Netting Member, as currently stated in Section IX of the Fee Structure. This determination would be made by FICC Product Management based on input from the GCF Clearing Agent Bank, internal FICC Operations staff and the Netting Member. The Netting Member would not be charged if the lateness is due to the GCF Clearing Agent Bank or FICC. Cash Obligations The Rules do not currently contain a deadline for a Netting Member’s or CCIT Member’s satisfaction of cash obligations in the GCF Repo Service and the CCIT Service. FICC proposes to establish 4:30 p.m. (or one hour after the close of the Fedwire Securities Service reversals, if later) as the deadline for a ‘‘Net Funds Payor’’ (as defined by this E:\FR\FM\29AUN1.SGM 29AUN1 45610 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES proposed rule change) 19 to satisfy their cash obligations after which a late fee of $500 would be imposed unless FICC determines that failure to meet this timeframe is not the fault of the Net Funds Payor. This determination would be made by FICC Product Management based on input from the GCF Clearing Agent Bank, internal FICC Operations staff and the Netting Member. The Net Funds Payor would not be charged if the lateness is due to the GCF Clearing Agent Bank or FICC. To encourage Netting Members and CCIT Members that are Net Funds Payors to satisfy their cash obligations by the 4:30 p.m. deadline, the proposed rule change would provide for progressive increases in the amount of the late fee for additional late occurrences. Specifically, the late fees would apply as follows: (a) $500 for the first occurrence (within 30 calendar days), (b) $1,000 for the second occurrence (within 30 calendar days), (c) $2,000 for the third occurrence (within 30 calendar days), and (d) $3,000 for the fourth occurrence (within 30 calendar days) or additional occurrences (within the 30 calendar days). The Rules currently set forth a late fee of $500 for late securities settlement. As such, for late cash settlement, FICC is also proposing to establish $500 as the initial late fee; however, as described above, there would be progressive increases in the amount of the late fee for additional late occurrences. FICC derived these amounts by starting with the equivalent late fee of $500 that is currently imposed with respect to late securities settlement and then increased the late fee amounts to provide a disincentive effect.20 In addition, FICC proposes to establish additional late fees that would be imposed on Netting Members and CCIT Members that are Net Funds Payors that fail to make the required payment of cash by the close of the Fedwire Funds Service. Specifically, the following additional late fees would be imposed if cash obligations are not satisfied by the close of the Fedwire Funds Service (unless FICC determines that the failure to meet this timeframe is not primarily the fault of the Net Funds Payors): 21 (a) 100 basis points on 19 FICC is proposing to add ‘‘Net Funds Payor’’ as a new definition as explained in Item II(A)1(iii) below. 20 Because the deadline for cash settlement is newly proposed, FICC would like to provide a disincentive for cash lateness and, therefore, is proposing fee increases. 21 This determination would be made by FICC Product Management based on input from the GCF Clearing Agent Bank, internal FICC Operations staff and the Netting Member. The Net Funds Payor VerDate Sep<11>2014 17:00 Aug 28, 2019 Jkt 247001 the unsatisfied cash obligation amount for the first occurrence (within 90 calendar days),22 (b) 200 basis points on the unsatisfied cash obligation amount for the second occurrence (within 90 calendar days), (c) 300 basis points on the unsatisfied cash obligation amount for the third occurrence (within 90 calendar days), and (d) 400 basis points on the unsatisfied cash obligation amount for the fourth occurrence (within 90 calendar days) or additional occurrences (within the 90 calendar days). As there is no comparative data, FICC believes these amounts in this section represent reasonable and scaling incentives for Netting Members and CCIT Members that are Net Funds Payors to satisfy their cash obligations in a timely manner. The proposed late fees related to the 4:30 p.m. deadline are in flat dollar amounts whereas the proposed late fees related to cash obligations not being satisfied by the close of the Fedwire Funds Service are in basis points and based on the amount of unsettled cash obligations. FICC has structured its proposal in this way because the proposed late fees related to the 4:30 p.m. deadline would address lateness whereas the proposed late fee related to cash obligations not being satisfied by the close of the Fedwire Funds Service would charge for the amount of cash that was not settled. (ii) Proposed Change To Establish a Process To Provide Liquidity to FICC in Situations Where a Netting Member or CCIT Member With a Net Cash Obligation in GCF Repo/CCIT Activity, That is Otherwise in Good Standing, is Either (1) Delayed in Satisfying Or (2) Unable To Satisfy its Cash Obligation (in Whole or in Part) Proposed Process FICC is proposing to establish a process to address FICC’s liquidity needs in situations in which a Netting Member or CCIT Member that is a Net Funds Payor, that is otherwise in good standing with FICC, is delayed or unable to satisfy (either in whole or in part) its GCF Repo/CCIT activity cash obligations.23 The proposed process would not be charged if the lateness is due to the GCF Clearing Agent Bank or FICC. 22 The late fee is based on the ACT/360 day count convention, where ‘‘ACT’’ represents the actual number of days in the period. For example, assuming a first occurrence unsatisfied cash obligation of $100 million, the late fee would be $100 million * 100/3600000 = $2,777.78. This example uses the first occurrence amount. This calculation would apply to the rest of the proposed late fees in this section. 23 Such delay could, for example, be due to operational issues experienced by the Net Funds Payor. If a Netting Member with a collateral obligation does not deliver its securities, FICC PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 would not apply if FICC ceases to act for the Netting Member or CCIT Member, in which case the close-out rules would apply.24 Because settlement of GCF Repo/CCIT activity occurs late in the day, having an established process to handle a non-default related liquidity need would benefit FICC and its members by improving FICC’s ability to complete settlement and thereby reduce risk to FICC and the industry. This proposal would provide FICC with the tools to replace failed settlement with a financing transaction with FICC, as further described below. FICC would first evaluate whether to recommend to the Board’s Risk Committee that FICC cease to act for such Net Funds Payor. FICC would consider, but would not be limited to, the following factors in its evaluation: (i) The Net Funds Payor’s current financial position, (ii) the amount of the outstanding payment, (iii) the cause of the late payment, (iv) current market conditions, and (v) the size of the potential overnight reverse repurchase transactions under the GCF Repo Allocation Waterfall MRAs (as defined below) on the GSD membership.25 Pursuant to the proposal, once FICC determines that a Net Funds Payor is in good standing with GSD but is experiencing an issue, such as an operational issue, that may result in a late payment, partial payment or nonpayment of its cash obligation on the settlement date, the following process would occur: • In the case where the Net Funds Payor only satisfies part of its cash obligation, the GCF Clearing Agent Bank would settle the cash it received pursuant to such GCF Clearing Agent Bank’s settlement algorithm (as is done today). The GCF Clearing Agent Bank has its own settlement algorithm, which would allocate the partial amount of cash received from the Net Funds Payor among the various Net Funds Receivers.26 • FICC would evaluate whether FICC will provide liquidity (in the form of end-of-day borrowing of Clearing Fund cash (‘‘EOD Clearing Fund Cash,’’ which is a new definition proposed to be added by this filing) and/or GCF considers it a fail. However, if a Netting Member or CCIT Member with a cash obligation is unable to deliver its cash (and is in good standing), FICC intends to employ the proposed process. 24 See Rule 22A, supra note 4. 25 FICC already has the authority to cease to act for a member that does not fulfill an obligation to FICC and will continually evaluate throughout the proposed process whether FICC will cease to act. 26 An example of how the satisfaction of a partial cash obligation may be allocated among the Net Funds Receivers is provided in the third paragraph under ‘‘Example’’ in this section of this filing. E:\FR\FM\29AUN1.SGM 29AUN1 khammond on DSKBBV9HB2PROD with NOTICES Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices Clearing Agent Bank loans) to satisfy any remaining unsettled cash obligation of a Net Funds Payor on a pro rata basis based upon such Net Funds Receivers’ percentage of the entire remaining amount of the unsettled cash obligation. • FICC would first consider whether its GCF Clearing Agent Bank will provide overnight financing. Because FICC’s overnight financing arrangements with its GCF Clearing Agent Bank are uncommitted, such arrangements are subject to the GCF Clearing Agent Bank’s discretion. Financing extended by the GCF Clearing Agent Bank would use such bank’s haircut schedule, and Clearing Fund securities would be used to satisfy the haircut.27 FICC would not set a priority between the Clearing Fund cash and the overnight financing arrangements from its GCF Clearing Agent Bank (if any) because GSD’s decision to use either or both resources would be influenced on a case-by-case basis by factors such as the specific circumstances, availability of a bank loan, market conditions, commercial considerations and ease of operational execution.28 • FICC’s use of EOD Clearing Fund Cash for this situation would be subject to certain internal limitations. Specifically, GSD would establish a cap on the amount of EOD Clearing Fund Cash that may be used for this purpose to the lesser of $1 billion or 20 percent of available Clearing Fund Cash. GSD reviewed GCF and CCIT settlement activity for the period from July 2, 2018 through February 28, 2019 and noted that the average cash amount required across all 71 Members was between zero and $23.7 billion. Over this period, there were 27 Members with no cash amount required and 18 Members with an average cash amount of less than $1 billion. Therefore, FICC believes that the proposed cap would provide resources to facilitate settlement for a typical cash amount at a level that would not materially impact its liquidity resources in the event that there is a simultaneous need for liquidity both under the scenario this proposal is seeking to address and another Member-related default. GSD would not set a priority between Clearing Fund cash and overnight financing by the GCF Clearing Agent Bank (if any) because GSD’s decision to use either or both resources would be influenced on a case-by-case 27 See Rule 4, Section 5, supra note 4. 28 The specific circumstances that FICC would consider are the time of day and the size of the shortfall. Regarding the market conditions, FICC would consider whether there are stress events occurring in the market. With respect to commercial considerations, FICC would consider the current loan rates. VerDate Sep<11>2014 17:00 Aug 28, 2019 Jkt 247001 basis by various factors, as described in the previous bullet. • The cash amount that FICC would be able to raise from EOD Clearing Fund Cash and/or GCF Clearing Agent Bank loans would be applied to unsettled cash obligations of the Net Funds Receivers on a pro rata basis. The proration would be based upon the percentage of each Net Fund Receiver’s unsettled obligation versus the total amount of all unsettled obligations. For example, assume the unsettled obligations totaled $1 billion and the liquidity raised is $800 million. In this case, FICC would instruct the GCF Clearing Agent Bank(s) to apply the liquidity amount ($800 million) to the remaining unsettled GCF Repo/CCIT obligations. Assume there are two Net Funds Receivers with unsettled obligations (one Netting/CCIT Member is short $600 million and the other is short $400 million). In this case, the first Net Funds Receiver would receive 60 percent of the $800 million ($480 million) and the second Net Funds Receiver would receive 40 percent of the $800 million ($320 million). The remaining unfunded $200 million would be distributed via overnight reverse repurchase transactions.29 • To the extent that the amount from the application of the Clearing Fund cash and overnight financing arrangement (if any) is insufficient to cover the outstanding cash obligations, FICC would enter into overnight repurchase agreements with Net Funds Receivers that are in unsettled Net Funds Receiver Positions. These repos would be done pursuant to the ‘‘GCF Repo Allocation Waterfall MRA’’ (as proposed to be added by this filing) and would be Rules-based. • FICC would notify each unsettled Net Funds Receiver at the GCF Clearing Agent Bank that did not satisfy its cash obligation, and each such Net Funds Receiver would be required to enter into an overnight reverse repurchase agreement at the applicable Generic CUSIP Number with FICC. The amount of such reverse repurchase agreement would be at the remaining unsettled amount per Net Funds Receiver. Therefore, amounts received by FICC from these overnight reverse repurchase agreements would be used to satisfy remaining unsettled cash obligations. • Such reverse repurchase agreements would be entered into pursuant to the terms of a 1996 SIFMA Master Repurchase Agreement,30 which would 29 All pro-ration calculations would be rounded to the nearest million unless a smaller denomination is required to complete settlement. 30 The September 1996 Securities Industry and Financial Markets Association Master Repurchase PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 45611 be incorporated into the Rules, subject to specific changes set forth in the Rules. Such reverse repurchase transactions would be overnight trades at a market rate.31 The associated overnight interest of the reverse repurchase agreement would be debited from the Net Funds Payor that did not satisfy its cash obligation and credited to the affected Net Funds Receivers in the funds-only settlement process as a Miscellaneous Adjustment Amount.32 • Any resulting costs incurred by the Net Funds Receivers would be debited from the Net Funds Payor whose shortfall raised the need for the reverse repurchase agreement. The Net Funds Receivers requesting compensation in this regard would need to submit a formal claim to FICC. Upon review and approval by FICC, the Net Funds Receiver would receive a credit that would be processed in the funds-only settlement process as a Miscellaneous Adjustment Amount.33 The debit of the Net Funds Payor would be processed in the same way. • Unless FICC has restricted the Member’s access to services pursuant to Rule 21 or Rule 21A or has ceased to act for the Member pursuant to Rule 21 or Rule 21A, the Net Funds Payor shall be permitted to continue to submit activity to FICC. Example The following example illustrates the application of the proposed rule changes described above: Assume that Dealer A has a cash payment obligation for $100 million and Dealers B, C, D and E are in GCF Net Funds Receiver Positions for $25 million each. Assume further that by 4:30 p.m., Dealer A satisfies only $60 million of its cash obligation thereby leaving $40 million outstanding. Dealer A would be subject to a late fee of $500. The GCF Clearing Agent Bank satisfies transactions based upon its own settlement algorithms. As such, assume that the $60 million was settled as follows: (i) $25 million was settled with Dealer B, (ii) $10 million was settled with Dealer C, (iii) $25 million was settled with Dealer D, and (iv) $0 was settled with Dealer E. As such, $40 million remains unfunded. Assume FICC uses its liquidity resources (EOD Clearing Fund Agreement is available at https://www.sifma.org/ services/standard-forms-and-documentation/mra,gmra,-msla-and-msftas/. 31 The market rate would be the overnight par weighted average rate at the Generic CUSIP Number level. 32 See Rule 13, Section 1(m) and Rule 3B, Section 13(a)(ii), supra note 4. 33 Id. E:\FR\FM\29AUN1.SGM 29AUN1 khammond on DSKBBV9HB2PROD with NOTICES 45612 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices Cash and financing arrangements with the GCF Clearing Agent Bank (if available)) and is only able to raise $30 million. Dealer A would be responsible for the financing costs incurred by FICC. The $30 million borrowed by FICC would be prorated among the Netting Members in GCF Net Funds Receiver Positions that still have unsettled obligations. In this example, Dealer C has an unsettled obligation of $15 million and Dealer E has an unsettled obligation of $25 million. The proration calculation would be the percentage of the dealer’s unsettled obligation versus the entire unsettled amount. In Dealer C’s case, the $15 million unsettled amount is 38 percent of the $40 million total unsettled amount and in Dealer E’s case, the $25 million unsettled amount is 62 percent of the $40 million. Dealer C would receive 38 percent of the $30 million that was raised by FICC (i.e., $11,400,000), and Dealer E would receive 62 percent of the $30 million that was raised by FICC (i.e., $18,600,000). At this point, $10 million remains unsettled. This is the amount that would need to be satisfied using overnight reverse repos under the GCF Repo Allocation Waterfall MRA and would be distributed between the two remaining unsettled amounts with Dealer C (i.e., $3,600,000) and Dealer E (i.e., $6,400,000). FICC would notify these dealers and initiate the GCF Repo Allocation Waterfall MRA requirement with each of them. Dealer A would be subject to a late fee for failing to settle by the close of the Fedwire Funds Service. Such late fee of 100 basis points would be calculated based on the $40 million that Dealer A did not fund. In addition, the reverse repurchase agreements would be overnight trades at a market rate; 34 the associated overnight interest of the reverse repurchase agreement would be debited from Dealer A and credited to Dealers C and E in funds-only settlement. If Dealers C and/ or E incurred any damages from the cost of securing alternate financing, FICC would determine if such costs are sufficiently demonstrated and would charge Dealer A for such costs to the extent that they do not include special, consequential, or punitive damages. Throughout the foregoing process, Dealer A is subject to disciplinary action, up to and including termination of its GSD membership. Moreover, FICC retains its right to cease to act for Dealer A. 34 Supra note 31. VerDate Sep<11>2014 17:00 Aug 28, 2019 Jkt 247001 (iii) Clarification, Technical Changes and Corrections FICC proposes to make a clarification to Section 3 of Rule 20 by adding a descriptive parenthetical regarding netof-net settlement. FICC also proposes to make a technical change to the title of the ‘‘Schedule of GCF Timeframes,’’ which would be amended to ‘‘Schedule of GCF Repo Timeframes’’ to enhance accuracy. References to ‘‘Schedule of GCF Timeframes’’ in Section 3 of Rule 20 would also be updated to ‘‘Schedule of GCF Repo Timeframes.’’ FICC also proposes to make a correction by revising the language in ‘‘Late Fee Related to GCF Repo Transactions’’ in Section IX (Late Fees) of the Fee Structure from ‘‘Fedwire reversals’’ to ‘‘Fedwire Securities Service reversals.’’ FICC also proposes to revise ‘‘securities FedWire’’ to ‘‘Fedwire Securities Service reversals’’ in the Schedule of GCF Timeframes to be consistent with the proposed change in ‘‘Late Fee Related to GCF Repo Transactions’’ in Section IX (Late Fees) of the Fee Structure. FICC also proposes to revise the title from ‘‘Late Fee Related to GCF Repo Transactions’’ to ‘‘Late Fees Related to GCF Repo Transactions.’’ FICC believes these proposed changes would enhance consistency, clarity, and accuracy. FICC also proposes to update the current references to ‘‘dealer,’’ ‘‘dealers,’’ or ‘‘GCF Counterparties (‘‘dealers’’)’’ in the ‘‘Schedule of GCF Timeframes’’ and ‘‘Fee Structure’’ to ‘‘Netting Member’’ or ‘‘Netting Members’’ for additional clarity and consistency because the GCF Repo Service is not only available to Dealer Netting Members and FICC believes that the references to ‘‘dealers’’ may cause confusion. In addition, FICC proposes to update the descriptions for 3 p.m. and 3:30 p.m. in the Schedule of GCF Timeframes to correct certain descriptions that appear to have been reversed in error. Specifically, the description for 3 p.m. currently states that collateral allocations begin. However, collateral allocations actually begin at 3:30 p.m. and therefore, FICC proposes to correct this error by deleting the reference to collateral allocations beginning in the 3 p.m. description and adding a reference to the 3:30 p.m. description that would state that collateral allocations begin. Furthermore, the current 3 p.m. description states that notifications by FICC to banks and dealers of final positions occurs at this time, which is incorrect. There is not a strict established time for notifications by PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 FICC to Members of final positions. FICC believes that it is reasonably and fairly implied that output would follow the cut-off for trade submission and therefore, does not believe the phrase ‘‘notification by FICC to banks and dealers of final positions’’ is necessary in the Schedule of GCF Timeframes. As such, FICC proposes to correct this error by deleting the reference to notifications by FICC to banks and dealers of final positions from the 3 p.m. description. Furthermore, in connection with the proposed changes described herein, FICC also proposes to revise four relevant defined terms that indicate whether a Netting Member’s obligation is a cash obligation or a securities obligation with respect to GCF Repo/ CCIT activity (i.e., ‘‘GCF Net Funds Borrower Position,’’ ‘‘GCF Net Funds Borrower,’’ ‘‘GCF Net Funds Lender Position,’’ and ‘‘GCF Net Funds Lender’’). In addition, FICC would add two new defined terms (i.e., ‘‘Net Funds Payor Position’’ and ‘‘Net Funds Receiver Position’’) to distinguish the foregoing defined terms from a Netting Member’s or CCIT Member’s after netof-net settlement.35 Specifically, there are currently four relevant defined terms that indicate whether a Netting Member’s obligation is a cash obligation or a securities obligation with respect to GCF Repo/ CCIT activity. These terms are: ‘‘GCF Net Funds Borrower Position,’’ 36 ‘‘GCF Net Funds Borrower,’’ ‘‘GCF Net Funds Lender Position,’’ 37 and ‘‘GCF Net 35 A Netting Member’s or CCIT Member’s obligation prior to net-of-net settlement describes such Netting Member’s or CCIT Member’s obligation for that particular Business Day. A Netting Member’s or CCIT Member’s obligation after net-of-net settlement describes such Netting Member’s or CCIT Member’s obligation after its obligation from the previous Business Day has been netted with its obligation for that particular Business Day. 36 The term ‘‘GCF Net Funds Borrower Position’’ means, with respect to a particular Generic CUSIP Number, both the amount of funds that a Netting Member has borrowed as the net result of its outstanding GCF Repo Transactions and CCIT Transactions and the equivalent amount of Eligible Netting Securities and/or cash that such Netting Member is obligated, pursuant to Rule 20, to allocate to the Corporation to secure such borrowing (such Netting Member holding a GCF Net Funds Borrower Position, a ‘‘GCF Net Funds Borrower’’). See Rule 1, supra note 4. 37 The term ‘‘GCF Net Funds Lender Position’’ means, with respect to a particular Generic CUSIP Number, both the amount of funds that a Netting Member or CCIT Member has lent as the result of its outstanding GCF Repo Transactions or its outstanding CCIT Transactions, as applicable, and the equivalent amount of Eligible Netting Securities and/or cash that such Netting Member or CCIT Member, as applicable, is entitled, pursuant to Rule 20, to be allocated for its benefit to secure such loan (such Netting Member or CCIT Member holding a GCF Net Funds Lender Position, a ‘‘GCF Net Funds Lender’’). See Rule 1, supra note 4. E:\FR\FM\29AUN1.SGM 29AUN1 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices Funds Lender.’’ With respect to CCIT Members, which are only permitted to initiate transactions as cash lenders for submission to GSD, the applicable definitions are ‘‘GCF Net Funds Lender Position’’ and ‘‘GCF Net Funds Lender.’’ The four existing terms represent a Netting Member’s and CCIT Member’s position with respect to GCF Repo/CCIT activity that is processed by GSD on a particular Business Day prior to net-ofnet settlement 38 and the proposed rule change would add language in the definitions of ‘‘GCF Net Funds Borrower Position’’ and ‘‘GCF Net Funds Lender Position’’ to make this clear. To distinguish the foregoing from a Netting Member’s or CCIT Member’s position after net-of-net settlement, FICC proposes to amend Rule 1 (Definitions) to add two new defined terms, ‘‘Net Funds Payor Position’’ and ‘‘Net Funds Receiver Position’’ with two additional defined terms embedded within these definitions, ‘‘Net Funds Payor’’ and ‘‘Net Funds Receiver,’’ respectively. These defined terms would represent a Netting Member’s and CCIT Member’s, as applicable, position in GCF Repo/CCIT activity as a result of net-of-net settlement. Specifically, as a result of net-of-net settlement, a Netting Member or CCIT Member may be either in a cash debit position (i.e., in a ‘‘Net Funds Payor Position’’ or a ‘‘Net Funds Payor’’) or cash credit position (i.e., in a ‘‘Net Funds Receiver Position’’ or a ‘‘Net Funds Receiver’’).39 (iv) Implementation Timeframe khammond on DSKBBV9HB2PROD with NOTICES Subject to the approval of this proposed rule change and no objection to the related advance notice filing (the ‘‘Advance Notice Filing’’) 40 by the Commission, FICC would implement the proposed changes no later than 60 days after the later of the approval of the proposed rule change and no objection to the Advance Notice Filing by the Commission. FICC would announce the effective date of the proposed changes by Important Notice posted to its website. 38 Net-of-net settlement is described in Section 3 of Rule 20 and the proposal would add a parenthetical to clarify that such applicable paragraph in this section refers to net-of-net settlement, as described further below. 39 Even though CCIT Members can only initiate cash lending transactions, they could be Net Funds Receivers. For example, assume that on Monday, a CCIT Member entered into a CCIT Transaction to lend $125 million and on Tuesday, the same CCIT Member entered into a CCIT Transaction to lend $50 million in the same Generic CUSIP Number. On Tuesday, after net-of-net settlement, the CCIT Member would be in a Net Funds Receiver Position of $75 million. 40 Supra note 3. VerDate Sep<11>2014 17:00 Aug 28, 2019 Jkt 247001 2. Statutory Basis FICC believes that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered clearing agency. Specifically, FICC believes that the proposed rule change is consistent with Sections 17A(b)(3)(F) and 17A(b)(3)(D) of the Act 41 and Rule 17Ad–22(e)(7)(i), (ii), and (viii),42 as promulgated under the Act, for the reasons described below. Section 17A(b)(3)(F) of the Act requires that the Rules be designed to promote the prompt and accurate clearance and settlement of securities transactions.43 FICC believes that the proposed rule changes described in Item II(A)1(i) of this filing regarding the establishment of a new deadline and associated late fees and the removal of a current deadline would help promote the prompt and accurate clearance and settlement of securities transactions.44 FICC believes that the proposed rule changes would incent Netting Members and CCIT Members to meet their settlement obligations on a more timely basis and thereby better enable FICC to settle on a timely basis. As described above, under the current Rules, the second deadline of 6 p.m. creates an environment of later settlement both at FICC and outside of FICC. Even though Netting Members are generally abiding by the 4:30 p.m. securities allocation deadline, FICC would like to address the possibility of later settlement by deleting the 6 p.m. deadline. FICC believes that the proposed removal of the 6 p.m. deadline for satisfaction of Collateral Allocation Obligations would also incent members to satisfy their securities obligations earlier in the day because after the 4:30 p.m. deadline, FICC would process Collateral Allocation Obligations on a good faith basis only. As such, FICC believes imposing 4:30 p.m. as the only deadline would help enable FICC to complete settlement on a more timely basis. In addition, as noted above, Netting Members typically have obligations to satisfy outside of FICC after the collateral allocations occur at FICC. As described above, specifically, there is interconnectivity between the GCF Repo market and the tri-party market outside of FICC. The securities collateral that is used to settle GCF Repo positions can be subsequently used by Netting Members to complete tri-party transactions outside of FICC. Therefore, FICC believes that the earlier that securities settlement occurs in the GCF Repo Service, the less potential operational risk of incomplete tri-party transactions outside of FICC. By imposing 4:30 p.m. as the only deadline, FICC believes it would be lowering potential operational risk in the market that could arise if Netting Members chose to avail themselves of the current 6 p.m. deadline. This risk is the risk of disorder if firms are attempting to fulfill settlement and tri-party transaction settlement at the same time later in the day. As such, FICC believes that timely settlement at FICC would help with the timely completion of onward processing outside FICC. Therefore, FICC believes that these proposed changes are designed to help promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act.45 FICC also believes that the proposed rule changes to make a clarification, technical changes and corrections described in Item II(A)1(iii) of this filing are designed to provide technical accuracy and additional clarity to Members, which would then help Members to better understand the functioning of the Rules and thereby are designed to help promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act.46 Section 17A(b)(3)(F) of the Act requires that the Rules be designed to assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.47 FICC believes that the proposed changes described in Item II(A)1(ii) above to establish a process to provide liquidity to FICC in situations where a Netting Member or CCIT Member with a net cash obligation in GCF Repo/CCIT activity, that is otherwise in good standing, is either (1) delayed in satisfying or (2) unable to satisfy its cash obligation (in whole or in part) would help assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.48 This is because the proposed rule changes would provide a process for FICC to raise liquidity to complete settlement. By enabling FICC to complete settlement, FICC and its members would be less likely to be faced with the uncertainty of unsettled obligations and the risks related thereto. 41 15 45 Id. 42 17 46 Id. U.S.C. 78q–1(b)(3)(D) and (F). CFR 240.17Ad–22(e)(7)(i), (ii), and (viii). 43 15 U.S.C. 78q–1(b)(3)(F). 44 Id. PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 45613 47 Id. 48 Id. E:\FR\FM\29AUN1.SGM 29AUN1 khammond on DSKBBV9HB2PROD with NOTICES 45614 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices As such, FICC believes that these proposed rule changes are designed to assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.49 Section 17A(b)(3)(D) of the Act, which requires, in part, that the Rules provide for the equitable allocation of reasonable dues, fees, and other charges among participants.50 As described above, FICC proposes to establish (1) late fees for Net Funds Payors that do not satisfy their cash obligations by the proposed deadline of 4:30 p.m. and (2) additional late fees for Net Funds Payors that do not satisfy their cash obligations by the close of the Fedwire Funds Service. FICC believes these proposed changes to establish late fees for satisfaction of net cash obligations in GCF Repo/CCIT activity is consistent with Section 17A(b)(3)(D) of the Act.51 As described above, FICC would establish an initial late fee of $500 for Net Funds Payors that do not satisfy their cash obligations by the proposed deadline of 4:30 p.m. To encourage Netting Members and CCIT Members that are Net Funds Payors to satisfy their cash obligations by the proposed 4:30 p.m. deadline, FICC would also establish progressive increases in the amount of the late fee for additional late occurrences (i.e., $1,000 for the second occurrence (within 30 calendar days), $2,000 for the third occurrence (within 30 calendar days), and $3,0000 for the fourth occurrence (within 30 calendar days) or additional occurrences (within the 30 calendar days)). FICC believes these proposed late fees for failure to satisfy cash obligations by the proposed deadline of 4:30 p.m. would provide for the equitable allocation of reasonable fees among participants. Specifically, FICC believes these proposed late fees are equitably allocated because they would apply to all Net Funds Payors that do not satisfy their cash obligations by the proposed deadline of 4:30 p.m. FICC also believes that the proposed initial late fee for late cash settlement of $500 is reasonable because it would be aligned with the current late fee of $500 for late securities settlement. FICC derived the initial late fee for late cash settlement from the late fee of $500 that is currently imposed for late securities settlement. FICC also believes that the progressive increases in the amount of the late fee for additional late occurrences are reasonable because FICC believes these progressive 49 Id. 50 15 increases would encourage Net Funds Payors to satisfy their cash obligations by the proposed 4:30 p.m. deadline and would provide a disincentive for cash lateness. Furthermore, Net Funds Payor would not be charged the proposed late fee if the lateness is due to the GCF Clearing Agent Bank or FICC. As such, FICC believes these proposed late fees for Net Funds Payors that do not satisfy their cash obligations by the proposed deadline of 4:30 p.m. are consistent with Section 17A(b)(3)(D) of the Act.52 In addition, as described above, FICC proposes to establish additional late fees that would be imposed on Net Funds Payors that fail to make the required payment of cash by the close of the Fedwire Funds Service. Specifically, FICC proposes to establish the following additional late fees: (i) 100 Basis points on the unsatisfied cash obligation amount for the first occurrence (within 90 calendar days), (ii) 200 basis points on the unsatisfied cash obligation amount for the second occurrence (within 90 calendar days), (iii) 300 basis points on the unsatisfied cash obligation amount for the third occurrence (within 90 calendar days), and (iv) 400 basis points on the unsatisfied cash obligation amount for the fourth occurrence (within 90 days) or additional occurrences (within the 90 calendar days). FICC believes these proposed changes to establish additional late fees for failure to make the required payment of cash by the close of the Fedwire Funds Service would provide for the equitable allocation of reasonable fees among participants because the proposal would apply to all Net Funds Payors that have failed to make such cash payment by the close of the Fedwire Funds Service. FICC also believes these proposed additional late fees are reasonable. Specifically, FICC believes that, as there is no comparative data, these proposed additional late fees represent reasonable and scaling incentives for Net Funds Payors to satisfy their cash obligations in a timely manner. Furthermore, Net Funds Payors would not be charged the proposed additional fee if the lateness is due to the GCF Clearing Bank or FICC. Also, these proposed additional late fees are in basis points and applied to the amount of the unsettled cash obligations in order to charge for the amount of cash that was not settled. As such, FICC believes these proposed late fees for Net Funds Payors that fail to make the required payment of cash by the close of the Fedwire Funds Service are U.S.C. 78q–1(b)(3)(D). 52 Id. 17:00 Aug 28, 2019 53 Id. 54 17 CFR 240.17Ad–22(e)(7)(i). 55 Id. 51 Id. VerDate Sep<11>2014 consistent with Section 17A(b)(3)(D) of the Act.53 Rule 17Ad–22(e)(7)(i) requires FICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by the covered clearing agency, including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity by maintaining sufficient liquid resources to effect same-day settlement of payment obligations in the event of a default of the participant family that would generate the largest aggregate payment obligation for the covered clearing agency in extreme but plausible market conditions.54 FICC believes that the proposal would be consistent with Rule 17Ad–22(e)(7)(i) because the GCF Repo Allocation Waterfall MRA would help FICC maintain sufficient liquid resources to settle the same-day cash obligations of a Netting Member or CCIT Member that is otherwise in good standing with FICC but (i) is delayed in satisfying its cash obligation related to its GCF Repo/CCIT activity or (ii) does not fulfill, or only partially fulfills, such cash obligation.55 FICC believes that the proposal would be consistent with Rule 17Ad–22(e)(7)(i) because the GCF Repo Allocation Waterfall MRA would be sized based on the actual liquidity need which would help FICC maintain sufficient liquid resources to settle the cash obligations of a Netting Member.56 The GCF Repo Allocation Waterfall MRA would be a committed arrangement that would be available to avoid unwinding, revoking, or delaying same-day settlement obligations. All transactions entered into pursuant to the GCF Allocation Waterfall MRA are designed to be readily available to meet the cash obligations owed to nondefaulting Netting Members in instances where existing resources (i) may not be readily available after 4:30 p.m. to permit timely settlement or (ii) are maintained primarily to settle the outstanding transactions in the event of a default of a Member and its entire affiliated family. Rule 17Ad–22(e)(7)(ii) requires FICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by the covered clearing agency, Jkt 247001 PO 00000 Frm 00152 56 Id. Fmt 4703 Sfmt 4703 E:\FR\FM\29AUN1.SGM 29AUN1 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity by holding qualifying liquid resources 57 sufficient to meet the minimum liquidity resource requirement under Rule 17Ad–22(e)(7)(i) in each relevant currency for which the covered clearing agency has payment obligations owed to clearing Members.58 FICC believes that the proposed rule change would be consistent with Rule 17Ad–22(e)(7)(ii) because the GCF Repo Allocation Waterfall MRA would be a committed arrangement,59 and all transactions entered into pursuant to the GCF Repo Allocation Waterfall MRA are designed to be readily available to meet the cash obligations owed to Netting Members.60 Rule 17Ad–22(e)(7)(viii) requires FICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by the covered clearing agency, including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity by addressing foreseeable liquidity shortfalls that would not be covered by the covered clearing agency’s liquid resources and seek to avoid unwinding, revoking, or delaying the same-day settlement of payment obligations.61 FICC believes that the proposed rule change would be consistent with Rule 17Ad–22(e)(7)(viii) because the GCF Repo Allocation Waterfall MRA would be a committed arrangement, and all transactions entered into pursuant to the GCF Repo Allocation Waterfall MRA are designed to be readily available to settle same-day 57 ‘‘Qualifying liquid resources’’ means, for any covered clearing agency, the following, in each relevant currency: (i) Cash held either at the central bank of issue or at creditworthy commercial banks; (ii) Assets that are readily available and convertible into cash through prearranged funding arrangements, such as: (A) Committed arrangements without material adverse change provisions, including (1) Lines of credit; (2) Foreign exchange swaps; and (3) Repurchase agreements; or (B) Other prearranged funding arrangements determined to be highly reliable even in extreme but plausible market conditions by the board of directors of the covered clearing agency following a review conducted for this purpose not less than annually; and (iii) Other assets that are readily available and eligible for pledging to (or conducting other appropriate forms of transactions with) a relevant central bank, if the covered clearing agency has access to routine credit at such central bank in a jurisdiction that permits said pledges or other transactions by the covered clearing agency. 17 CFR 240.17Ad–22(a)(14). 58 17 CFR 240.17Ad–22(e)(7)(ii). 59 See 17 CFR 240.17Ad–22(a)(14). 60 Id. 61 17 CFR 240.17Ad–22(e)(7)(viii). VerDate Sep<11>2014 17:00 Aug 28, 2019 Jkt 247001 cash obligations owed to non-defaulting Netting Members.62 (B) Clearing Agency’s Statement on Burden on Competition FICC believes that the proposed rule changes described in Item II(A)1(i) of this filing to establish a new deadline and associated late fees for satisfaction of net cash obligations in GCF Repo/ CCIT activity could impose a burden on competition. Specifically, Members that do not meet the applicable deadlines would be subject to late fees and this could burden Members with lower operating costs. However, FICC does not believe that this would in and of itself create a significant burden on competition because FICC believes that Members would need to violate the deadlines numerous times for the fees to have a significant burden on their operating costs. Whether the proposed basis point fees would create a significant burden on competition would depend on the financial status of each individual firm and the amount of the fee. Regardless of whether the burden on competition resulting from the proposed rule changes referenced in this paragraph would be significant, FICC believes that such burden on competition would be necessary and appropriate in furtherance of the Act.63 Specifically, FICC believes that the proposed rule changes described in the previous paragraph would be necessary in furtherance of the Act in order to incent Netting Members and CCIT Members, as applicable, to meet their obligations on a timely basis.64 Timely satisfaction of settlement obligations on the part of Members would better enable FICC to complete its settlement process in a more timely manner and not have FICC and its Members left with the uncertainty of unsettled obligations and the risks associated thereto. This, FICC believes, would thereby promote the prompt and accurate clearance and settlement of securities transactions in furtherance of the Act.65 FICC also believes that the proposed changes described above would be appropriate in furtherance of the Act.66 Specifically, the proposed changes discussed in the previous paragraph track the GCF Repo/CCIT processing day including applicable external deadlines such as the close of the Fedwire Funds Service, to which all Netting Members and CCIT Members 62 Id. 63 15 U.S.C. 78q–1(b)(3)(I). participating in FICC’s services are accustomed. Furthermore, FICC believes that: (i) The proposed late fees for Net Funds Payors that do not satisfy their cash obligations by the proposed deadline of 4:30 p.m. and (ii) the proposed additional late fees for Net Funds Payors that do not satisfy their cash obligations by the close of Fedwire Funds Service are appropriate in furtherance of the Act because such amounts should serve as a deterrent to lateness in settlement and thereby would allow these services to settle timely, again promoting the prompt and accurate clearance and settlement of securities transactions in furtherance of the Act.67 FICC believes the progressive increases in the amount of the late fee for both the late fee associated with the 4:30 p.m. deadline and the late fees associated with the close of the Fedwire Funds Service would provide disincentives for cash lateness. With respect to the proposed late fees for Net Funds Payors that do not satisfy their cash obligations by the proposed 4:30 p.m. deadline, FICC derived these late fees by starting with the equivalent late fee of $500 that is currently imposed for late securities settlement and then, increased the late fee amounts for each additional occurrence. Similarly, with respect to the proposed additional late fees for Net Funds Payors that do fail to make the required payment of cash by the close of the Fedwire Funds Service, the proposed additional late fees would be in basis points, based on the amount of the unsettled cash obligations, and would also increase with additional occurrences. Therefore, FICC believes these represent reasonable and scaling incentives for Net Funds Payors to satisfy their cash obligations in a timely manner. As such, FICC believes these proposed late fees would better allow these services to settle timely, and therefore, promote the prompt and accurate clearance and settlement of securities transactions in furtherance of the Act.68 In addition, as described above, FICC believes that (i) the proposed late fees for Net Funds Payors that do not satisfy their cash obligations by the proposed deadline of 4:30 p.m. and (ii) the proposed additional late fees for Net Funds Payors that do not satisfy their cash obligations by the close of Fedwire Funds Service are appropriate in furtherance of the Act because they would provide for the equitable allocation of reasonable fees among 64 Id. 65 15 66 15 PO 00000 U.S.C. 78q–1(b)(3)(F). U.S.C. 78q–1(b)(3)(I). Frm 00153 Fmt 4703 Sfmt 4703 45615 67 15 U.S.C. 78q–1(b)(3)(F). 68 Id. E:\FR\FM\29AUN1.SGM 29AUN1 45616 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES participants, in furtherance of the Act.69 As described above, FICC believes that these proposed fees provide for the equitable allocation of reasonable fees among Net Funds Payors because they would apply to all Net Funds Payors and would not be imposed if the lateness is due to the GCF Clearing Agent Bank or FICC. Furthermore, FICC believes that the proposed fees are reasonable because FICC has structured these proposed fees so that the proposed late fees associated with the 4:30 p.m. deadline would address lateness whereas the proposed additional late fees associated with the close of the Fedwire Funds Service would charge for the amount of cash that was not settled. For both of these proposed fees, Net Funds Payors would not be charged if the lateness is due to the GCF Clearing Agent Bank or FICC. As described in greater detail above, FICC also believes these proposed late fees would encourage Net Funds Payors to satisfy their cash obligations in a timely manner. Therefore, FICC believes these proposed late fees are appropriate in furtherance of the Act.70 FICC believes that the proposal to delete the current 6 p.m. deadline for Collateral Allocation Obligations (which functions as the second deadline for Collateral Allocation Obligations after which such allocations are processed by FICC on a good faith basis only 71) and to instead provide that FICC would process such Allocations on a good faith basis only after 4:30 p.m. could impose a burden on competition because it would remove the option of having additional time. Specifically, under the current Rules, Members have an hour and half more. FICC does not believe that this proposed rule change would result in a significant burden on competition because Members today are generally not availing themselves of the 6 p.m. deadline and most allocations are occurring by 4:30 p.m.72 Regardless of whether the burden on competition resulting from the proposed rule change referenced in this paragraph would be significant, FICC believes that such burden on competition would be necessary and appropriate in furtherance of the Act.73 Specifically, FICC believes the proposed change to delete the 6 p.m. deadline for Collateral 69 15 U.S.C. 78q–1(b)(3)(D) and 15 U.S.C. 78q– 1(b)(3)(I). 70 15 U.S.C. 78q–1(b)(3)(I). 71 Rule 20, Section 3 and Schedule of GCF Timeframes, supra note 4. 72 As stated above, it is the risk that Members could use the 6:00 p.m. deadline that FICC is proposing to eliminate. 73 15 U.S.C. 78q–1(b)(3)(I). VerDate Sep<11>2014 17:00 Aug 28, 2019 Jkt 247001 Allocation Obligations and process such allocations on a good faith basis only from 4:30 p.m. on is necessary in order to further encourage timely securities settlement earlier in the processing day. Such timely settlement at FICC would enable FICC to better promote the prompt and accurate clearance and settlement of securities transactions as required by the Act.74 In addition, such timely settlement would facilitate the processing of securities movements that could occur outside of FICC once FICC completes settlement. FICC also believes that this proposed change would be appropriate in furtherance of the Act 75 because all participating Netting Members are subject and accustomed to the 4:30 p.m. deadline today, which is the deadline to which the current late fee applies.76 As such, FICC is already encouraging Netting Members to satisfy their Collateral Allocation Obligations by 4:30 p.m. In addition, under the proposed rule change, FICC would continue to process such allocations after 4:30 p.m., as long as both counterparties can be reached to assist FICC in doing so, and FICC would do so after 6 p.m. as well. As such, FICC believes that any burden of competition caused by the proposed removal of the 6 p.m. deadline and the processing of Collateral Allocation Obligations after 4:30 p.m. would be necessary and appropriate in furtherance of the Act.77 FICC believes that the proposed rule changes described in Item II(A)1(ii) of this filing to establish a process to provide liquidity to FICC in situations where a Netting Member or CCIT Member with a net cash obligation in GCF Repo/CCIT activity, that is otherwise in good standing, is either (1) delayed in satisfying or (2) unable to satisfy its cash obligation (in whole or in part) could impose a burden on competition. Specifically, affected Members that would be required to enter into reverse repos with FICC under the proposal could incur financing costs and this could negatively affect their operating costs. Whether such burden could be significant would depend on the facts surrounding each affected Member’s circumstances, including the amount of the required reverse repo and the associated financing costs and how this figure compares to the Member’s financial position. Regardless of whether the burden on competition is deemed significant, FICC believes these proposed rule changes would be necessary and appropriate in furtherance of the Act.78 Specifically, FICC believes that the proposed rule changes referenced in the previous paragraph would be necessary in furtherance of the Act because the use of the proposed reverse repo would better enable FICC to complete GCF Repo/CCIT settlement.79 This is because the proposed rule changes would better enable FICC to obtain requisite liquidity to complete settlement by the end of the business day by establishing a committed, rules-based arrangement that is readily available to cover remaining unsettled amounts. As such, the proposed rule changes would help FICC to promote the prompt and accurate clearance and settlement of securities transactions in furtherance of the Act.80 FICC also believes that the proposed rule changes described in the previous paragraph would be appropriate in furtherance of the Act.81 This is because the amount of the reverse repo for each Netting Member and CCIT Member would be limited to the remaining unsettled amount of each such Netting Member and CCIT Member; this means that a Netting Member and CCIT Member would only need to cover liquidity up to the amount of their own outstanding positions. Moreover, employing a reverse repo is an effective means for FICC to raise liquidity because it would be operationally efficient to require affected Members to hold their securities deliveries and thereby provide FICC with the requisite liquidity to compete settlement. In addition, any resulting costs incurred by FICC and/or Net Funds Receivers from employing the reverse repo would be debited from the Net Funds Payor whose shortfall caused the liquidity need. The Net Funds Receivers requesting compensation in this regard would be required to provide proof of commercially reasonable expenses and would need to submit a formal claim to FICC. Upon approval by FICC, the Net Funds Receiver would receive a credit that would be processed in the FundsOnly Settlement process as a Miscellaneous Adjustment Amount and the debit for the Net Funds Payor would be processed in the same way. As such, FICC believes that any burden on competition imposed by the proposed rule changes referenced in the previous 74 15 78 Id. 75 15 79 Id. U.S.C. 78q–1(b)(3)(F). U.S.C. 78q–1(b)(3)(I). 76 Schedule of GCF Timeframes, supra note 4. 77 15 U.S.C. 78q–1(b)(3)(I). PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 80 15 81 15 E:\FR\FM\29AUN1.SGM U.S.C. 78q–1(b)(3)(F). U.S.C. 78q–1(b)(3)(I). 29AUN1 Federal Register / Vol. 84, No. 168 / Thursday, August 29, 2019 / Notices paragraph would be necessary and appropriate in furtherance of the Act.82 FICC does not believe that the proposed clarification and technical changes and corrections described in Item II(A)1(iii) of this filing would impose a burden on competition because these are all non-substantive clarifying changes and corrections that would not change or affect Members’ substantive rights or obligations. (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to the proposed rule changes have not been solicited or received. FICC will notify the Commission of any written comments received by FICC. III. Date of Effectiveness of the Proposed Rule Change, and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: khammond on DSKBBV9HB2PROD with NOTICES Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2019–004 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to File Number SR–FICC–2019–004. This file 82 Id. VerDate Sep<11>2014 number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of FICC and on DTCC’s website (https://dtcc.com/legal/sec-rulefilings.aspx). All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FICC– 2019–004 and should be submitted on or before September 19, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.83 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–18632 Filed 8–28–19; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice 10857] 30-Day Notice of Proposed Information Collection: Supplemental Questionnaire To Determine Entitlement for a U.S. Passport Notice of request for public comment and submission to OMB of proposed collection of information. ACTION: The Department of State has submitted the information collection described below to the Office of Management and Budget (OMB) for approval. In accordance with the SUMMARY: 83 17 17:00 Aug 28, 2019 Jkt 247001 PO 00000 CFR 200.30–3(a)(12). Frm 00155 Fmt 4703 Sfmt 4703 45617 Paperwork Reduction Act of 1995 we are requesting comments on this collection from all interested individuals and organizations. The purpose of this Notice is to allow 30 days for public comment. DATES: Submit comments directly to the Office of Management and Budget (OMB) up to September 30, 2019. ADDRESSES: Direct comments to the Department of State Desk Officer in the Office of Information and Regulatory Affairs at the Office of Management and Budget (OMB). You may submit comments by the following methods: • Email: oira_submission@ omb.eop.gov. You must include the DS form number, information collection title, and the OMB control number in the subject line of your message. • Fax: 202–395–5806. Attention: Desk Officer for Department of State. SUPPLEMENTARY INFORMATION: • Title of Information Collection: Supplemental Questionnaire to Determine Entitlement for a U.S. Passport. • OMB Control Number: 1405–0214. • Type of Request: Revision of a Currently Approved Collection. • Originating Office: Bureau of Consular Affairs, Passport Services (CA/ PPT). • Form Number: DS–5513. • Respondents: United States Citizens and Noncitizen Nationals. • Estimated Number of Respondents: 4,076. • Estimated Number of Responses: 4,076. • Average Time per Response: 85 minutes. • Total Estimated Burden Time: 5,774 annual hours. • Frequency: On occasion. • Obligation to Respond: Required to Obtain a Benefit. We are soliciting public comments to permit the Department to: • Evaluate whether the proposed information collection is necessary for the proper functions of the Department. • Evaluate the accuracy of our estimate of the time and cost burden for this proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond, including the use of automated collection techniques or other forms of information technology. Please note that comments submitted in response to this Notice are public record. Before including any detailed E:\FR\FM\29AUN1.SGM 29AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 168 (Thursday, August 29, 2019)]
[Notices]
[Pages 45608-45617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18632]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86745; File No. SR-FICC-2019-004]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Amend the GSD Rulebook To
Establish a Process To Address Liquidity Needs in Certain Situations in
the GCF Repo and CCIT Services and Make Other Changes

August 23, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 9, 2019, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On August 9, 2019, FICC filed this proposed rule change as
an advance notice (SR-FICC-2019-801) with the Commission pursuant to
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act entitled the Payment, Clearing, and
Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule
19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of
the advance notice is available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

The proposed rule change consists of amendments to the FICC
Government Securities Division (``GSD'') Rulebook (the ``Rules'') \4\
to: (i) Establish a new deadline and associated late fees for
satisfaction of net cash obligations in GCF Repo Transaction \5\ and
CCIT Transaction \6\ activity (hereinafter ``GCF Repo/CCIT activity'')
\7\ and remove the current 6 p.m. Collateral Allocation Obligation \8\
deadline; (ii) establish a process to provide liquidity to FICC in
situations where a Netting Member or CCIT Member \9\ with a net cash
obligation in GCF Repo/CCIT activity, that is otherwise in good
standing, is either (1) delayed in satisfying or (2) unable to satisfy
its cash obligation (in whole or in part); and (iii) make a
clarification, certain technical changes and corrections, all as
further described below.
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\4\ Capitalized terms not defined herein are defined in the
Rules, available at https://www.dtcc.com/legal/rules-and-procedures.
\5\ ``GCF Repo Transaction'' means a Repo Transaction involving
Generic CUSIP Numbers the data on which are submitted to FICC on a
Locked-In-Trade basis pursuant to the provisions of Rule 6C, for
netting and settlement by FICC pursuant to the provisions of Rule
20. Rule 1, supra note 4.
\6\ ``CCIT Transaction'' means a transaction that is processed
by FICC in the CCIT Service. Because the CCIT Service leverages the
infrastructure and processes of the GCF Repo Service, a CCIT
Transaction must be: (i) In a Generic CUSIP Number approved for the
GCF Repo Service and (ii) between a CCIT Member and a Netting Member
who participates in the GCF Repo Service where the CCIT Member is
the cash lender in the transaction. Rule 1, supra note 4.
\7\ The GCF Repo Service is primarily governed by Rule 20 and
enables Netting Members to trade general collateral finance
repurchase agreement transactions based on rate, term, and
underlying product throughout the day with brokers on a blind basis.
The CCIT Service is governed by Rule 3B and enables tri-party
repurchase agreement transactions in GCF Repo Securities between
Netting Members that participate in the GCF Repo Service and
institutional cash lenders (other than investment companies
registered under the Investment Company Act of 1940, as amended).
Rule 20 and Rule 3B, supra note 4.
\8\ ``Collateral Allocation Obligation'' means the obligation of
a Netting Member to allocate securities or cash for the benefit of
FICC to secure such Member's GCF Net Funds Borrower Position. Rule
1, supra note 4.
\9\ ``CCIT^TM'' means Centrally Cleared Institutional
Triparty. The terms ``Centrally Cleared Institutional Triparty
Member'' and ``CCIT Member'' mean a legal entity other than a
Registered Investment Company approved to participate in the FICC's
CCIT Service as a cash lender. Rule 1, supra note 4. Eligibility to
become a CCIT Member is described in Section 2 of Rule 3B. Rule 3B,
Section 2, supra note 4.

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[[Page 45609]]

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
The proposed rule change would amend the Rules to: (i) Establish a
new deadline and associated late fees for satisfaction of net cash
obligations in GCF Repo/CCIT activity and remove the current 6 p.m.
Collateral Allocation Obligation deadline; (ii) establish a process to
provide liquidity to FICC in situations where a Netting Member or CCIT
Member with a net cash obligation in GCF Repo/CCIT activity, that is
otherwise in good standing, is either (1) delayed in satisfying or (2)
unable to satisfy its cash obligation (in whole or in part); and (iii)
make a clarification, certain technical changes and corrections, all as
further described below.
(i) Proposed Change To Establish a New Deadline and Associated Late
Fees for Satisfaction of Net Cash Obligations in GCF Repo/CCIT Activity
and Remove the Current 6 p.m. Collateral Allocation Obligation Deadline
Securities Obligations (Collateral Allocation Obligations)
The Rules (Section 3 of Rule 20, the Schedule of GCF Timeframes and
the Fee Structure) currently address a Netting Member's failure to
satisfy its Collateral Allocation Obligation on a timely basis.\10\
Specifically, Section 3 of Rule 20 states that Collateral Allocation
Obligations must be satisfied by a Netting Member within the timeframes
established for such by FICC.\11\ The current deadline in the Schedule
of GCF Timeframes for Netting Member allocation of collateral to
satisfy securities obligations is 4:30 p.m.\12\ This 4:30 p.m. deadline
is the first deadline by which Netting Members that have Collateral
Allocation Obligations must allocate their securities collateral or be
subject to a late fee of $500 (the late fee is set forth in the Fee
Structure of the Rules).\13\ In addition, the Schedule of GCF
Timeframes includes a second deadline of 6 p.m. by which Netting
Members that have Collateral Allocation Obligations must allocate their
securities collateral; after 6 p.m., FICC will process such collateral
allocations on a good faith basis only.\14\ These provisions are
mirrored in Section 3 of Rule 20, which also references the ``final
cutoff'' (i.e., the 6 p.m. deadline).\15\ Section 3 of Rule 20 also
provides FICC's processing of such late allocations is on a good faith
basis only.\16\ Furthermore, Section 3 of Rule 20 states that Netting
Members that do not satisfy their Collateral Allocation Obligations by
the close of the Fedwire Funds Service shall be deemed to have failed
on such Position (the consequence of which shall be that such Netting
Member would not be entitled to receive the funds borrowed, but shall
owe interest on such funds amount).\17\
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\10\ Rule 20, Section 3, Schedule of GCF Timeframes, and Fee
Structure, supra note 4. Collateral Allocation Obligations do not
apply to CCIT Members because they can only be cash lenders in the
CCIT Transactions.
\11\ Rule 20, Section 3, supra note 4.
\12\ Schedule of GCF Timeframes, supra note 4.
\13\ Fee Structure, supra note 4.
\14\ Schedule of GCF Timeframes, supra note 4. Today, after 6:00
p.m., FICC will process collateral allocations on a good faith
basis, namely if FICC is able to contact both affected Netting
Members and such Netting Members agree to settle such transaction,
then FICC and its GCF Clearing Agent Bank will settle such
transaction.
\15\ Rule 20, Section 3, supra note 4.
\16\ Id.
\17\ Id.
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With respect to the foregoing regarding allocation of securities
collateral on a timely basis, FICC proposes to establish 4:30 p.m. as
the only deadline for Netting Member allocation of collateral.\18\ In
other words, FICC proposes to remove the current second deadline (i.e.,
6 p.m.) by which Netting Members that have Collateral Allocation
Obligations must allocate their securities obligations. This proposed
change would align the deadline for allocating securities obligations
with the proposed deadline for satisfying cash obligations (i.e., 4:30
p.m. or one hour after the close of the Fedwire Securities Service
reversals, if later). Netting Members typically have obligations to
satisfy outside of FICC after the collateral allocations occur at FICC.
FICC believes that all parties (including FICC) would benefit from
securities settlement occurring by 4:30 p.m. This is because the more
settlements that complete earlier, the more potential operational risk
is removed from the market. Specifically, there is interconnectivity
between the GCF Repo market and the tri-party market outside of FICC.
The securities collateral that is used to settle GCF Repo positions can
be subsequently used by Netting Members to complete tri-party
transactions outside of FICC. Therefore, the earlier that securities
settlement occurs in the GCF Repo Service, the less potential
operational risk of incomplete tri-party transactions outside of FICC.
Under the current Rules, the second deadline of 6 p.m. creates an
environment of later settlement both at FICC and outside of FICC. Even
though Netting Members are generally abiding by the 4:30 p.m.
securities allocation deadline, FICC would like to address the
possibility of later settlement by deleting the 6 p.m. deadline.
Therefore, by imposing 4:30 p.m. as the only deadline, FICC believes it
would be lowering potential operational risk in the market that could
arise if Netting Members chose to avail themselves of the current 6:00
p.m. deadline. This risk is the risk of disorder if firms are
attempting to fulfill GCF Repo settlement and tri-party transaction
settlement at the same time later in the day. Under the proposal, FICC
would continue to process collateral allocations after the 4:30 p.m.
deadline on a good faith basis only (like it currently does for
collateral allocations after the current 6 p.m. deadline). Netting
Members would remain subject to the $500 late fee if they do not meet
the 4:30 p.m. deadline unless FICC determines, in its sole discretion,
that failure to meet this timeframe is not primarily the fault of the
Netting Member, as currently stated in Section IX of the Fee Structure.
This determination would be made by FICC Product Management based on
input from the GCF Clearing Agent Bank, internal FICC Operations staff
and the Netting Member. The Netting Member would not be charged if the
lateness is due to the GCF Clearing Agent Bank or FICC.
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\18\ See Schedule of GCF Timeframes, supra note 4. Currently,
the Schedule of GCF Timeframes provides that the first deadline for
collateral allocation is 4:30 p.m. or one hour after the close of
the securities FedWire, if later. The reference regarding one hour
after the FedWire close would remain, subject to a correction
discussed below in Item II(A)1(iii) of this filing.
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Cash Obligations
The Rules do not currently contain a deadline for a Netting
Member's or CCIT Member's satisfaction of cash obligations in the GCF
Repo Service and the CCIT Service. FICC proposes to establish 4:30 p.m.
(or one hour after the close of the Fedwire Securities Service
reversals, if later) as the deadline for a ``Net Funds Payor'' (as
defined by this

[[Page 45610]]

proposed rule change) \19\ to satisfy their cash obligations after
which a late fee of $500 would be imposed unless FICC determines that
failure to meet this timeframe is not the fault of the Net Funds Payor.
This determination would be made by FICC Product Management based on
input from the GCF Clearing Agent Bank, internal FICC Operations staff
and the Netting Member. The Net Funds Payor would not be charged if the
lateness is due to the GCF Clearing Agent Bank or FICC. To encourage
Netting Members and CCIT Members that are Net Funds Payors to satisfy
their cash obligations by the 4:30 p.m. deadline, the proposed rule
change would provide for progressive increases in the amount of the
late fee for additional late occurrences. Specifically, the late fees
would apply as follows: (a) $500 for the first occurrence (within 30
calendar days), (b) $1,000 for the second occurrence (within 30
calendar days), (c) $2,000 for the third occurrence (within 30 calendar
days), and (d) $3,000 for the fourth occurrence (within 30 calendar
days) or additional occurrences (within the 30 calendar days). The
Rules currently set forth a late fee of $500 for late securities
settlement. As such, for late cash settlement, FICC is also proposing
to establish $500 as the initial late fee; however, as described above,
there would be progressive increases in the amount of the late fee for
additional late occurrences. FICC derived these amounts by starting
with the equivalent late fee of $500 that is currently imposed with
respect to late securities settlement and then increased the late fee
amounts to provide a disincentive effect.\20\
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\19\ FICC is proposing to add ``Net Funds Payor'' as a new
definition as explained in Item II(A)1(iii) below.
\20\ Because the deadline for cash settlement is newly proposed,
FICC would like to provide a disincentive for cash lateness and,
therefore, is proposing fee increases.
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In addition, FICC proposes to establish additional late fees that
would be imposed on Netting Members and CCIT Members that are Net Funds
Payors that fail to make the required payment of cash by the close of
the Fedwire Funds Service. Specifically, the following additional late
fees would be imposed if cash obligations are not satisfied by the
close of the Fedwire Funds Service (unless FICC determines that the
failure to meet this timeframe is not primarily the fault of the Net
Funds Payors): \21\ (a) 100 basis points on the unsatisfied cash
obligation amount for the first occurrence (within 90 calendar
days),\22\ (b) 200 basis points on the unsatisfied cash obligation
amount for the second occurrence (within 90 calendar days), (c) 300
basis points on the unsatisfied cash obligation amount for the third
occurrence (within 90 calendar days), and (d) 400 basis points on the
unsatisfied cash obligation amount for the fourth occurrence (within 90
calendar days) or additional occurrences (within the 90 calendar days).
As there is no comparative data, FICC believes these amounts in this
section represent reasonable and scaling incentives for Netting Members
and CCIT Members that are Net Funds Payors to satisfy their cash
obligations in a timely manner. The proposed late fees related to the
4:30 p.m. deadline are in flat dollar amounts whereas the proposed late
fees related to cash obligations not being satisfied by the close of
the Fedwire Funds Service are in basis points and based on the amount
of unsettled cash obligations. FICC has structured its proposal in this
way because the proposed late fees related to the 4:30 p.m. deadline
would address lateness whereas the proposed late fee related to cash
obligations not being satisfied by the close of the Fedwire Funds
Service would charge for the amount of cash that was not settled.
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\21\ This determination would be made by FICC Product Management
based on input from the GCF Clearing Agent Bank, internal FICC
Operations staff and the Netting Member. The Net Funds Payor would
not be charged if the lateness is due to the GCF Clearing Agent Bank
or FICC.
\22\ The late fee is based on the ACT/360 day count convention,
where ``ACT'' represents the actual number of days in the period.
For example, assuming a first occurrence unsatisfied cash obligation
of $100 million, the late fee would be $100 million * 100/3600000 =
$2,777.78. This example uses the first occurrence amount. This
calculation would apply to the rest of the proposed late fees in
this section.
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(ii) Proposed Change To Establish a Process To Provide Liquidity to
FICC in Situations Where a Netting Member or CCIT Member With a Net
Cash Obligation in GCF Repo/CCIT Activity, That is Otherwise in Good
Standing, is Either (1) Delayed in Satisfying Or (2) Unable To Satisfy
its Cash Obligation (in Whole or in Part)
Proposed Process
FICC is proposing to establish a process to address FICC's
liquidity needs in situations in which a Netting Member or CCIT Member
that is a Net Funds Payor, that is otherwise in good standing with
FICC, is delayed or unable to satisfy (either in whole or in part) its
GCF Repo/CCIT activity cash obligations.\23\ The proposed process would
not apply if FICC ceases to act for the Netting Member or CCIT Member,
in which case the close-out rules would apply.\24\ Because settlement
of GCF Repo/CCIT activity occurs late in the day, having an established
process to handle a non-default related liquidity need would benefit
FICC and its members by improving FICC's ability to complete settlement
and thereby reduce risk to FICC and the industry. This proposal would
provide FICC with the tools to replace failed settlement with a
financing transaction with FICC, as further described below.
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\23\ Such delay could, for example, be due to operational issues
experienced by the Net Funds Payor. If a Netting Member with a
collateral obligation does not deliver its securities, FICC
considers it a fail. However, if a Netting Member or CCIT Member
with a cash obligation is unable to deliver its cash (and is in good
standing), FICC intends to employ the proposed process.
\24\ See Rule 22A, supra note 4.
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FICC would first evaluate whether to recommend to the Board's Risk
Committee that FICC cease to act for such Net Funds Payor. FICC would
consider, but would not be limited to, the following factors in its
evaluation: (i) The Net Funds Payor's current financial position, (ii)
the amount of the outstanding payment, (iii) the cause of the late
payment, (iv) current market conditions, and (v) the size of the
potential overnight reverse repurchase transactions under the GCF Repo
Allocation Waterfall MRAs (as defined below) on the GSD membership.\25\
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\25\ FICC already has the authority to cease to act for a member
that does not fulfill an obligation to FICC and will continually
evaluate throughout the proposed process whether FICC will cease to
act.
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Pursuant to the proposal, once FICC determines that a Net Funds
Payor is in good standing with GSD but is experiencing an issue, such
as an operational issue, that may result in a late payment, partial
payment or non-payment of its cash obligation on the settlement date,
the following process would occur:
In the case where the Net Funds Payor only satisfies part
of its cash obligation, the GCF Clearing Agent Bank would settle the
cash it received pursuant to such GCF Clearing Agent Bank's settlement
algorithm (as is done today). The GCF Clearing Agent Bank has its own
settlement algorithm, which would allocate the partial amount of cash
received from the Net Funds Payor among the various Net Funds
Receivers.\26\
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\26\ An example of how the satisfaction of a partial cash
obligation may be allocated among the Net Funds Receivers is
provided in the third paragraph under ``Example'' in this section of
this filing.
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FICC would evaluate whether FICC will provide liquidity
(in the form of end-of-day borrowing of Clearing Fund cash (``EOD
Clearing Fund Cash,'' which is a new definition proposed to be added by
this filing) and/or GCF

[[Page 45611]]

Clearing Agent Bank loans) to satisfy any remaining unsettled cash
obligation of a Net Funds Payor on a pro rata basis based upon such Net
Funds Receivers' percentage of the entire remaining amount of the
unsettled cash obligation.
FICC would first consider whether its GCF Clearing Agent
Bank will provide overnight financing. Because FICC's overnight
financing arrangements with its GCF Clearing Agent Bank are
uncommitted, such arrangements are subject to the GCF Clearing Agent
Bank's discretion. Financing extended by the GCF Clearing Agent Bank
would use such bank's haircut schedule, and Clearing Fund securities
would be used to satisfy the haircut.\27\ FICC would not set a priority
between the Clearing Fund cash and the overnight financing arrangements
from its GCF Clearing Agent Bank (if any) because GSD's decision to use
either or both resources would be influenced on a case-by-case basis by
factors such as the specific circumstances, availability of a bank
loan, market conditions, commercial considerations and ease of
operational execution.\28\
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\27\ See Rule 4, Section 5, supra note 4.
\28\ The specific circumstances that FICC would consider are the
time of day and the size of the shortfall. Regarding the market
conditions, FICC would consider whether there are stress events
occurring in the market. With respect to commercial considerations,
FICC would consider the current loan rates.
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FICC's use of EOD Clearing Fund Cash for this situation
would be subject to certain internal limitations. Specifically, GSD
would establish a cap on the amount of EOD Clearing Fund Cash that may
be used for this purpose to the lesser of $1 billion or 20 percent of
available Clearing Fund Cash. GSD reviewed GCF and CCIT settlement
activity for the period from July 2, 2018 through February 28, 2019 and
noted that the average cash amount required across all 71 Members was
between zero and $23.7 billion. Over this period, there were 27 Members
with no cash amount required and 18 Members with an average cash amount
of less than $1 billion. Therefore, FICC believes that the proposed cap
would provide resources to facilitate settlement for a typical cash
amount at a level that would not materially impact its liquidity
resources in the event that there is a simultaneous need for liquidity
both under the scenario this proposal is seeking to address and another
Member-related default. GSD would not set a priority between Clearing
Fund cash and overnight financing by the GCF Clearing Agent Bank (if
any) because GSD's decision to use either or both resources would be
influenced on a case-by-case basis by various factors, as described in
the previous bullet.
The cash amount that FICC would be able to raise from EOD
Clearing Fund Cash and/or GCF Clearing Agent Bank loans would be
applied to unsettled cash obligations of the Net Funds Receivers on a
pro rata basis. The pro-ration would be based upon the percentage of
each Net Fund Receiver's unsettled obligation versus the total amount
of all unsettled obligations.
For example, assume the unsettled obligations totaled $1 billion
and the liquidity raised is $800 million. In this case, FICC would
instruct the GCF Clearing Agent Bank(s) to apply the liquidity amount
($800 million) to the remaining unsettled GCF Repo/CCIT obligations.
Assume there are two Net Funds Receivers with unsettled obligations
(one Netting/CCIT Member is short $600 million and the other is short
$400 million). In this case, the first Net Funds Receiver would receive
60 percent of the $800 million ($480 million) and the second Net Funds
Receiver would receive 40 percent of the $800 million ($320 million).
The remaining unfunded $200 million would be distributed via overnight
reverse repurchase transactions.\29\
---------------------------------------------------------------------------

\29\ All pro-ration calculations would be rounded to the nearest
million unless a smaller denomination is required to complete
settlement.
---------------------------------------------------------------------------

To the extent that the amount from the application of the
Clearing Fund cash and overnight financing arrangement (if any) is
insufficient to cover the outstanding cash obligations, FICC would
enter into overnight repurchase agreements with Net Funds Receivers
that are in unsettled Net Funds Receiver Positions. These repos would
be done pursuant to the ``GCF Repo Allocation Waterfall MRA'' (as
proposed to be added by this filing) and would be Rules-based.
FICC would notify each unsettled Net Funds Receiver at the
GCF Clearing Agent Bank that did not satisfy its cash obligation, and
each such Net Funds Receiver would be required to enter into an
overnight reverse repurchase agreement at the applicable Generic CUSIP
Number with FICC. The amount of such reverse repurchase agreement would
be at the remaining unsettled amount per Net Funds Receiver. Therefore,
amounts received by FICC from these overnight reverse repurchase
agreements would be used to satisfy remaining unsettled cash
obligations.
Such reverse repurchase agreements would be entered into
pursuant to the terms of a 1996 SIFMA Master Repurchase Agreement,\30\
which would be incorporated into the Rules, subject to specific changes
set forth in the Rules. Such reverse repurchase transactions would be
overnight trades at a market rate.\31\ The associated overnight
interest of the reverse repurchase agreement would be debited from the
Net Funds Payor that did not satisfy its cash obligation and credited
to the affected Net Funds Receivers in the funds-only settlement
process as a Miscellaneous Adjustment Amount.\32\
---------------------------------------------------------------------------

\30\ The September 1996 Securities Industry and Financial
Markets Association Master Repurchase Agreement is available at
https://www.sifma.org/services/standard-forms-and-documentation/mra,-gmra,-msla-and-msftas/.
\31\ The market rate would be the overnight par weighted average
rate at the Generic CUSIP Number level.
\32\ See Rule 13, Section 1(m) and Rule 3B, Section 13(a)(ii),
supra note 4.
---------------------------------------------------------------------------

Any resulting costs incurred by the Net Funds Receivers
would be debited from the Net Funds Payor whose shortfall raised the
need for the reverse repurchase agreement. The Net Funds Receivers
requesting compensation in this regard would need to submit a formal
claim to FICC. Upon review and approval by FICC, the Net Funds Receiver
would receive a credit that would be processed in the funds-only
settlement process as a Miscellaneous Adjustment Amount.\33\ The debit
of the Net Funds Payor would be processed in the same way.
---------------------------------------------------------------------------

\33\ Id.
---------------------------------------------------------------------------

Unless FICC has restricted the Member's access to services
pursuant to Rule 21 or Rule 21A or has ceased to act for the Member
pursuant to Rule 21 or Rule 21A, the Net Funds Payor shall be permitted
to continue to submit activity to FICC.
Example
The following example illustrates the application of the proposed
rule changes described above:
Assume that Dealer A has a cash payment obligation for $100 million
and Dealers B, C, D and E are in GCF Net Funds Receiver Positions for
$25 million each. Assume further that by 4:30 p.m., Dealer A satisfies
only $60 million of its cash obligation thereby leaving $40 million
outstanding. Dealer A would be subject to a late fee of $500.
The GCF Clearing Agent Bank satisfies transactions based upon its
own settlement algorithms. As such, assume that the $60 million was
settled as follows: (i) $25 million was settled with Dealer B, (ii) $10
million was settled with Dealer C, (iii) $25 million was settled with
Dealer D, and (iv) $0 was settled with Dealer E.
As such, $40 million remains unfunded. Assume FICC uses its
liquidity resources (EOD Clearing Fund

[[Page 45612]]

Cash and financing arrangements with the GCF Clearing Agent Bank (if
available)) and is only able to raise $30 million. Dealer A would be
responsible for the financing costs incurred by FICC. The $30 million
borrowed by FICC would be prorated among the Netting Members in GCF Net
Funds Receiver Positions that still have unsettled obligations. In this
example, Dealer C has an unsettled obligation of $15 million and Dealer
E has an unsettled obligation of $25 million. The proration calculation
would be the percentage of the dealer's unsettled obligation versus the
entire unsettled amount. In Dealer C's case, the $15 million unsettled
amount is 38 percent of the $40 million total unsettled amount and in
Dealer E's case, the $25 million unsettled amount is 62 percent of the
$40 million. Dealer C would receive 38 percent of the $30 million that
was raised by FICC (i.e., $11,400,000), and Dealer E would receive 62
percent of the $30 million that was raised by FICC (i.e., $18,600,000).
At this point, $10 million remains unsettled. This is the amount
that would need to be satisfied using overnight reverse repos under the
GCF Repo Allocation Waterfall MRA and would be distributed between the
two remaining unsettled amounts with Dealer C (i.e., $3,600,000) and
Dealer E (i.e., $6,400,000). FICC would notify these dealers and
initiate the GCF Repo Allocation Waterfall MRA requirement with each of
them. Dealer A would be subject to a late fee for failing to settle by
the close of the Fedwire Funds Service. Such late fee of 100 basis
points would be calculated based on the $40 million that Dealer A did
not fund. In addition, the reverse repurchase agreements would be
overnight trades at a market rate; \34\ the associated overnight
interest of the reverse repurchase agreement would be debited from
Dealer A and credited to Dealers C and E in funds-only settlement. If
Dealers C and/or E incurred any damages from the cost of securing
alternate financing, FICC would determine if such costs are
sufficiently demonstrated and would charge Dealer A for such costs to
the extent that they do not include special, consequential, or punitive
damages.
---------------------------------------------------------------------------

\34\ Supra note 31.
---------------------------------------------------------------------------

Throughout the foregoing process, Dealer A is subject to
disciplinary action, up to and including termination of its GSD
membership. Moreover, FICC retains its right to cease to act for Dealer
A.
(iii) Clarification, Technical Changes and Corrections
FICC proposes to make a clarification to Section 3 of Rule 20 by
adding a descriptive parenthetical regarding net-of-net settlement.
FICC also proposes to make a technical change to the title of the
``Schedule of GCF Timeframes,'' which would be amended to ``Schedule of
GCF Repo Timeframes'' to enhance accuracy. References to ``Schedule of
GCF Timeframes'' in Section 3 of Rule 20 would also be updated to
``Schedule of GCF Repo Timeframes.''
FICC also proposes to make a correction by revising the language in
``Late Fee Related to GCF Repo Transactions'' in Section IX (Late Fees)
of the Fee Structure from ``Fedwire reversals'' to ``Fedwire Securities
Service reversals.'' FICC also proposes to revise ``securities
FedWire'' to ``Fedwire Securities Service reversals'' in the Schedule
of GCF Timeframes to be consistent with the proposed change in ``Late
Fee Related to GCF Repo Transactions'' in Section IX (Late Fees) of the
Fee Structure. FICC also proposes to revise the title from ``Late Fee
Related to GCF Repo Transactions'' to ``Late Fees Related to GCF Repo
Transactions.'' FICC believes these proposed changes would enhance
consistency, clarity, and accuracy.
FICC also proposes to update the current references to ``dealer,''
``dealers,'' or ``GCF Counterparties (``dealers'')'' in the ``Schedule
of GCF Timeframes'' and ``Fee Structure'' to ``Netting Member'' or
``Netting Members'' for additional clarity and consistency because the
GCF Repo Service is not only available to Dealer Netting Members and
FICC believes that the references to ``dealers'' may cause confusion.
In addition, FICC proposes to update the descriptions for 3 p.m.
and 3:30 p.m. in the Schedule of GCF Timeframes to correct certain
descriptions that appear to have been reversed in error. Specifically,
the description for 3 p.m. currently states that collateral allocations
begin. However, collateral allocations actually begin at 3:30 p.m. and
therefore, FICC proposes to correct this error by deleting the
reference to collateral allocations beginning in the 3 p.m. description
and adding a reference to the 3:30 p.m. description that would state
that collateral allocations begin. Furthermore, the current 3 p.m.
description states that notifications by FICC to banks and dealers of
final positions occurs at this time, which is incorrect. There is not a
strict established time for notifications by FICC to Members of final
positions. FICC believes that it is reasonably and fairly implied that
output would follow the cut-off for trade submission and therefore,
does not believe the phrase ``notification by FICC to banks and dealers
of final positions'' is necessary in the Schedule of GCF Timeframes. As
such, FICC proposes to correct this error by deleting the reference to
notifications by FICC to banks and dealers of final positions from the
3 p.m. description.
Furthermore, in connection with the proposed changes described
herein, FICC also proposes to revise four relevant defined terms that
indicate whether a Netting Member's obligation is a cash obligation or
a securities obligation with respect to GCF Repo/CCIT activity (i.e.,
``GCF Net Funds Borrower Position,'' ``GCF Net Funds Borrower,'' ``GCF
Net Funds Lender Position,'' and ``GCF Net Funds Lender''). In
addition, FICC would add two new defined terms (i.e., ``Net Funds Payor
Position'' and ``Net Funds Receiver Position'') to distinguish the
foregoing defined terms from a Netting Member's or CCIT Member's after
net-of-net settlement.\35\
---------------------------------------------------------------------------

\35\ A Netting Member's or CCIT Member's obligation prior to
net-of-net settlement describes such Netting Member's or CCIT
Member's obligation for that particular Business Day. A Netting
Member's or CCIT Member's obligation after net-of-net settlement
describes such Netting Member's or CCIT Member's obligation after
its obligation from the previous Business Day has been netted with
its obligation for that particular Business Day.
---------------------------------------------------------------------------

Specifically, there are currently four relevant defined terms that
indicate whether a Netting Member's obligation is a cash obligation or
a securities obligation with respect to GCF Repo/CCIT activity. These
terms are: ``GCF Net Funds Borrower Position,'' \36\ ``GCF Net Funds
Borrower,'' ``GCF Net Funds Lender Position,'' \37\ and ``GCF Net

[[Page 45613]]

Funds Lender.'' With respect to CCIT Members, which are only permitted
to initiate transactions as cash lenders for submission to GSD, the
applicable definitions are ``GCF Net Funds Lender Position'' and ``GCF
Net Funds Lender.'' The four existing terms represent a Netting
Member's and CCIT Member's position with respect to GCF Repo/CCIT
activity that is processed by GSD on a particular Business Day prior to
net-of-net settlement \38\ and the proposed rule change would add
language in the definitions of ``GCF Net Funds Borrower Position'' and
``GCF Net Funds Lender Position'' to make this clear.
---------------------------------------------------------------------------

\36\ The term ``GCF Net Funds Borrower Position'' means, with
respect to a particular Generic CUSIP Number, both the amount of
funds that a Netting Member has borrowed as the net result of its
outstanding GCF Repo Transactions and CCIT Transactions and the
equivalent amount of Eligible Netting Securities and/or cash that
such Netting Member is obligated, pursuant to Rule 20, to allocate
to the Corporation to secure such borrowing (such Netting Member
holding a GCF Net Funds Borrower Position, a ``GCF Net Funds
Borrower''). See Rule 1, supra note 4.
\37\ The term ``GCF Net Funds Lender Position'' means, with
respect to a particular Generic CUSIP Number, both the amount of
funds that a Netting Member or CCIT Member has lent as the result of
its outstanding GCF Repo Transactions or its outstanding CCIT
Transactions, as applicable, and the equivalent amount of Eligible
Netting Securities and/or cash that such Netting Member or CCIT
Member, as applicable, is entitled, pursuant to Rule 20, to be
allocated for its benefit to secure such loan (such Netting Member
or CCIT Member holding a GCF Net Funds Lender Position, a ``GCF Net
Funds Lender''). See Rule 1, supra note 4.
\38\ Net-of-net settlement is described in Section 3 of Rule 20
and the proposal would add a parenthetical to clarify that such
applicable paragraph in this section refers to net-of-net
settlement, as described further below.
---------------------------------------------------------------------------

To distinguish the foregoing from a Netting Member's or CCIT
Member's position after net-of-net settlement, FICC proposes to amend
Rule 1 (Definitions) to add two new defined terms, ``Net Funds Payor
Position'' and ``Net Funds Receiver Position'' with two additional
defined terms embedded within these definitions, ``Net Funds Payor''
and ``Net Funds Receiver,'' respectively. These defined terms would
represent a Netting Member's and CCIT Member's, as applicable, position
in GCF Repo/CCIT activity as a result of net-of-net settlement.
Specifically, as a result of net-of-net settlement, a Netting Member or
CCIT Member may be either in a cash debit position (i.e., in a ``Net
Funds Payor Position'' or a ``Net Funds Payor'') or cash credit
position (i.e., in a ``Net Funds Receiver Position'' or a ``Net Funds
Receiver'').\39\
---------------------------------------------------------------------------

\39\ Even though CCIT Members can only initiate cash lending
transactions, they could be Net Funds Receivers. For example, assume
that on Monday, a CCIT Member entered into a CCIT Transaction to
lend $125 million and on Tuesday, the same CCIT Member entered into
a CCIT Transaction to lend $50 million in the same Generic CUSIP
Number. On Tuesday, after net-of-net settlement, the CCIT Member
would be in a Net Funds Receiver Position of $75 million.
---------------------------------------------------------------------------

(iv) Implementation Timeframe
Subject to the approval of this proposed rule change and no
objection to the related advance notice filing (the ``Advance Notice
Filing'') \40\ by the Commission, FICC would implement the proposed
changes no later than 60 days after the later of the approval of the
proposed rule change and no objection to the Advance Notice Filing by
the Commission. FICC would announce the effective date of the proposed
changes by Important Notice posted to its website.
---------------------------------------------------------------------------

\40\ Supra note 3.
---------------------------------------------------------------------------

2. Statutory Basis
FICC believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. Specifically, FICC believes
that the proposed rule change is consistent with Sections 17A(b)(3)(F)
and 17A(b)(3)(D) of the Act \41\ and Rule 17Ad-22(e)(7)(i), (ii), and
(viii),\42\ as promulgated under the Act, for the reasons described
below.
---------------------------------------------------------------------------

\41\ 15 U.S.C. 78q-1(b)(3)(D) and (F).
\42\ 17 CFR 240.17Ad-22(e)(7)(i), (ii), and (viii).
---------------------------------------------------------------------------

Section 17A(b)(3)(F) of the Act requires that the Rules be designed
to promote the prompt and accurate clearance and settlement of
securities transactions.\43\ FICC believes that the proposed rule
changes described in Item II(A)1(i) of this filing regarding the
establishment of a new deadline and associated late fees and the
removal of a current deadline would help promote the prompt and
accurate clearance and settlement of securities transactions.\44\ FICC
believes that the proposed rule changes would incent Netting Members
and CCIT Members to meet their settlement obligations on a more timely
basis and thereby better enable FICC to settle on a timely basis. As
described above, under the current Rules, the second deadline of 6 p.m.
creates an environment of later settlement both at FICC and outside of
FICC. Even though Netting Members are generally abiding by the 4:30
p.m. securities allocation deadline, FICC would like to address the
possibility of later settlement by deleting the 6 p.m. deadline. FICC
believes that the proposed removal of the 6 p.m. deadline for
satisfaction of Collateral Allocation Obligations would also incent
members to satisfy their securities obligations earlier in the day
because after the 4:30 p.m. deadline, FICC would process Collateral
Allocation Obligations on a good faith basis only. As such, FICC
believes imposing 4:30 p.m. as the only deadline would help enable FICC
to complete settlement on a more timely basis. In addition, as noted
above, Netting Members typically have obligations to satisfy outside of
FICC after the collateral allocations occur at FICC. As described
above, specifically, there is interconnectivity between the GCF Repo
market and the tri-party market outside of FICC. The securities
collateral that is used to settle GCF Repo positions can be
subsequently used by Netting Members to complete tri-party transactions
outside of FICC. Therefore, FICC believes that the earlier that
securities settlement occurs in the GCF Repo Service, the less
potential operational risk of incomplete tri-party transactions outside
of FICC. By imposing 4:30 p.m. as the only deadline, FICC believes it
would be lowering potential operational risk in the market that could
arise if Netting Members chose to avail themselves of the current 6
p.m. deadline. This risk is the risk of disorder if firms are
attempting to fulfill settlement and tri-party transaction settlement
at the same time later in the day. As such, FICC believes that timely
settlement at FICC would help with the timely completion of onward
processing outside FICC. Therefore, FICC believes that these proposed
changes are designed to help promote the prompt and accurate clearance
and settlement of securities transactions, consistent with Section
17A(b)(3)(F) of the Act.\45\
---------------------------------------------------------------------------

\43\ 15 U.S.C. 78q-1(b)(3)(F).
\44\ Id.
\45\ Id.
---------------------------------------------------------------------------

FICC also believes that the proposed rule changes to make a
clarification, technical changes and corrections described in Item
II(A)1(iii) of this filing are designed to provide technical accuracy
and additional clarity to Members, which would then help Members to
better understand the functioning of the Rules and thereby are designed
to help promote the prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\46\
---------------------------------------------------------------------------

\46\ Id.
---------------------------------------------------------------------------

Section 17A(b)(3)(F) of the Act requires that the Rules be designed
to assure the safeguarding of securities and funds which are in the
custody or control of FICC or for which it is responsible, consistent
with Section 17A(b)(3)(F) of the Act.\47\ FICC believes that the
proposed changes described in Item II(A)1(ii) above to establish a
process to provide liquidity to FICC in situations where a Netting
Member or CCIT Member with a net cash obligation in GCF Repo/CCIT
activity, that is otherwise in good standing, is either (1) delayed in
satisfying or (2) unable to satisfy its cash obligation (in whole or in
part) would help assure the safeguarding of securities and funds which
are in the custody or control of FICC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.\48\ This is because
the proposed rule changes would provide a process for FICC to raise
liquidity to complete settlement. By enabling FICC to complete
settlement, FICC and its members would be less likely to be faced with
the uncertainty of unsettled obligations and the risks related thereto.

[[Page 45614]]

As such, FICC believes that these proposed rule changes are designed to
assure the safeguarding of securities and funds which are in the
custody or control of FICC or for which it is responsible, consistent
with Section 17A(b)(3)(F) of the Act.\49\
---------------------------------------------------------------------------

\47\ Id.
\48\ Id.
\49\ Id.
---------------------------------------------------------------------------

Section 17A(b)(3)(D) of the Act, which requires, in part, that the
Rules provide for the equitable allocation of reasonable dues, fees,
and other charges among participants.\50\ As described above, FICC
proposes to establish (1) late fees for Net Funds Payors that do not
satisfy their cash obligations by the proposed deadline of 4:30 p.m.
and (2) additional late fees for Net Funds Payors that do not satisfy
their cash obligations by the close of the Fedwire Funds Service. FICC
believes these proposed changes to establish late fees for satisfaction
of net cash obligations in GCF Repo/CCIT activity is consistent with
Section 17A(b)(3)(D) of the Act.\51\
---------------------------------------------------------------------------

\50\ 15 U.S.C. 78q-1(b)(3)(D).
\51\ Id.
---------------------------------------------------------------------------

As described above, FICC would establish an initial late fee of
$500 for Net Funds Payors that do not satisfy their cash obligations by
the proposed deadline of 4:30 p.m. To encourage Netting Members and
CCIT Members that are Net Funds Payors to satisfy their cash
obligations by the proposed 4:30 p.m. deadline, FICC would also
establish progressive increases in the amount of the late fee for
additional late occurrences (i.e., $1,000 for the second occurrence
(within 30 calendar days), $2,000 for the third occurrence (within 30
calendar days), and $3,0000 for the fourth occurrence (within 30
calendar days) or additional occurrences (within the 30 calendar
days)). FICC believes these proposed late fees for failure to satisfy
cash obligations by the proposed deadline of 4:30 p.m. would provide
for the equitable allocation of reasonable fees among participants.
Specifically, FICC believes these proposed late fees are equitably
allocated because they would apply to all Net Funds Payors that do not
satisfy their cash obligations by the proposed deadline of 4:30 p.m.
FICC also believes that the proposed initial late fee for late cash
settlement of $500 is reasonable because it would be aligned with the
current late fee of $500 for late securities settlement. FICC derived
the initial late fee for late cash settlement from the late fee of $500
that is currently imposed for late securities settlement. FICC also
believes that the progressive increases in the amount of the late fee
for additional late occurrences are reasonable because FICC believes
these progressive increases would encourage Net Funds Payors to satisfy
their cash obligations by the proposed 4:30 p.m. deadline and would
provide a disincentive for cash lateness. Furthermore, Net Funds Payor
would not be charged the proposed late fee if the lateness is due to
the GCF Clearing Agent Bank or FICC. As such, FICC believes these
proposed late fees for Net Funds Payors that do not satisfy their cash
obligations by the proposed deadline of 4:30 p.m. are consistent with
Section 17A(b)(3)(D) of the Act.\52\
---------------------------------------------------------------------------

\52\ Id.
---------------------------------------------------------------------------

In addition, as described above, FICC proposes to establish
additional late fees that would be imposed on Net Funds Payors that
fail to make the required payment of cash by the close of the Fedwire
Funds Service. Specifically, FICC proposes to establish the following
additional late fees: (i) 100 Basis points on the unsatisfied cash
obligation amount for the first occurrence (within 90 calendar days),
(ii) 200 basis points on the unsatisfied cash obligation amount for the
second occurrence (within 90 calendar days), (iii) 300 basis points on
the unsatisfied cash obligation amount for the third occurrence (within
90 calendar days), and (iv) 400 basis points on the unsatisfied cash
obligation amount for the fourth occurrence (within 90 days) or
additional occurrences (within the 90 calendar days). FICC believes
these proposed changes to establish additional late fees for failure to
make the required payment of cash by the close of the Fedwire Funds
Service would provide for the equitable allocation of reasonable fees
among participants because the proposal would apply to all Net Funds
Payors that have failed to make such cash payment by the close of the
Fedwire Funds Service. FICC also believes these proposed additional
late fees are reasonable. Specifically, FICC believes that, as there is
no comparative data, these proposed additional late fees represent
reasonable and scaling incentives for Net Funds Payors to satisfy their
cash obligations in a timely manner. Furthermore, Net Funds Payors
would not be charged the proposed additional fee if the lateness is due
to the GCF Clearing Bank or FICC. Also, these proposed additional late
fees are in basis points and applied to the amount of the unsettled
cash obligations in order to charge for the amount of cash that was not
settled. As such, FICC believes these proposed late fees for Net Funds
Payors that fail to make the required payment of cash by the close of
the Fedwire Funds Service are consistent with Section 17A(b)(3)(D) of
the Act.\53\
---------------------------------------------------------------------------

\53\ Id.
---------------------------------------------------------------------------

Rule 17Ad-22(e)(7)(i) requires FICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage the liquidity risk
that arises in or is borne by the covered clearing agency, including
measuring, monitoring, and managing its settlement and funding flows on
an ongoing and timely basis, and its use of intraday liquidity by
maintaining sufficient liquid resources to effect same-day settlement
of payment obligations in the event of a default of the participant
family that would generate the largest aggregate payment obligation for
the covered clearing agency in extreme but plausible market
conditions.\54\ FICC believes that the proposal would be consistent
with Rule 17Ad-22(e)(7)(i) because the GCF Repo Allocation Waterfall
MRA would help FICC maintain sufficient liquid resources to settle the
same-day cash obligations of a Netting Member or CCIT Member that is
otherwise in good standing with FICC but (i) is delayed in satisfying
its cash obligation related to its GCF Repo/CCIT activity or (ii) does
not fulfill, or only partially fulfills, such cash obligation.\55\ FICC
believes that the proposal would be consistent with Rule 17Ad-
22(e)(7)(i) because the GCF Repo Allocation Waterfall MRA would be
sized based on the actual liquidity need which would help FICC maintain
sufficient liquid resources to settle the cash obligations of a Netting
Member.\56\ The GCF Repo Allocation Waterfall MRA would be a committed
arrangement that would be available to avoid unwinding, revoking, or
delaying same-day settlement obligations. All transactions entered into
pursuant to the GCF Allocation Waterfall MRA are designed to be readily
available to meet the cash obligations owed to non-defaulting Netting
Members in instances where existing resources (i) may not be readily
available after 4:30 p.m. to permit timely settlement or (ii) are
maintained primarily to settle the outstanding transactions in the
event of a default of a Member and its entire affiliated family.
---------------------------------------------------------------------------

\54\ 17 CFR 240.17Ad-22(e)(7)(i).
\55\ Id.
\56\ Id.
---------------------------------------------------------------------------

Rule 17Ad-22(e)(7)(ii) requires FICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage the liquidity risk
that arises in or is borne by the covered clearing agency,

[[Page 45615]]

including measuring, monitoring, and managing its settlement and
funding flows on an ongoing and timely basis, and its use of intraday
liquidity by holding qualifying liquid resources \57\ sufficient to
meet the minimum liquidity resource requirement under Rule 17Ad-
22(e)(7)(i) in each relevant currency for which the covered clearing
agency has payment obligations owed to clearing Members.\58\ FICC
believes that the proposed rule change would be consistent with Rule
17Ad-22(e)(7)(ii) because the GCF Repo Allocation Waterfall MRA would
be a committed arrangement,\59\ and all transactions entered into
pursuant to the GCF Repo Allocation Waterfall MRA are designed to be
readily available to meet the cash obligations owed to Netting
Members.\60\
---------------------------------------------------------------------------

\57\ ``Qualifying liquid resources'' means, for any covered
clearing agency, the following, in each relevant currency: (i) Cash
held either at the central bank of issue or at creditworthy
commercial banks; (ii) Assets that are readily available and
convertible into cash through prearranged funding arrangements, such
as: (A) Committed arrangements without material adverse change
provisions, including (1) Lines of credit; (2) Foreign exchange
swaps; and (3) Repurchase agreements; or (B) Other prearranged
funding arrangements determined to be highly reliable even in
extreme but plausible market conditions by the board of directors of
the covered clearing agency following a review conducted for this
purpose not less than annually; and (iii) Other assets that are
readily available and eligible for pledging to (or conducting other
appropriate forms of transactions with) a relevant central bank, if
the covered clearing agency has access to routine credit at such
central bank in a jurisdiction that permits said pledges or other
transactions by the covered clearing agency. 17 CFR 240.17Ad-
22(a)(14).
\58\ 17 CFR 240.17Ad-22(e)(7)(ii).
\59\ See 17 CFR 240.17Ad-22(a)(14).
\60\ Id.
---------------------------------------------------------------------------

Rule 17Ad-22(e)(7)(viii) requires FICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively measure, monitor, and manage the liquidity risk
that arises in or is borne by the covered clearing agency, including
measuring, monitoring, and managing its settlement and funding flows on
an ongoing and timely basis, and its use of intraday liquidity by
addressing foreseeable liquidity shortfalls that would not be covered
by the covered clearing agency's liquid resources and seek to avoid
unwinding, revoking, or delaying the same-day settlement of payment
obligations.\61\ FICC believes that the proposed rule change would be
consistent with Rule 17Ad-22(e)(7)(viii) because the GCF Repo
Allocation Waterfall MRA would be a committed arrangement, and all
transactions entered into pursuant to the GCF Repo Allocation Waterfall
MRA are designed to be readily available to settle same-day cash
obligations owed to non-defaulting Netting Members.\62\
---------------------------------------------------------------------------

\61\ 17 CFR 240.17Ad-22(e)(7)(viii).
\62\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

FICC believes that the proposed rule changes described in Item
II(A)1(i) of this filing to establish a new deadline and associated
late fees for satisfaction of net cash obligations in GCF Repo/CCIT
activity could impose a burden on competition. Specifically, Members
that do not meet the applicable deadlines would be subject to late fees
and this could burden Members with lower operating costs. However, FICC
does not believe that this would in and of itself create a significant
burden on competition because FICC believes that Members would need to
violate the deadlines numerous times for the fees to have a significant
burden on their operating costs. Whether the proposed basis point fees
would create a significant burden on competition would depend on the
financial status of each individual firm and the amount of the fee.
Regardless of whether the burden on competition resulting from the
proposed rule changes referenced in this paragraph would be
significant, FICC believes that such burden on competition would be
necessary and appropriate in furtherance of the Act.\63\
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\63\ 15 U.S.C. 78q-1(b)(3)(I).
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Specifically, FICC believes that the proposed rule changes
described in the previous paragraph would be necessary in furtherance
of the Act in order to incent Netting Members and CCIT Members, as
applicable, to meet their obligations on a timely basis.\64\ Timely
satisfaction of settlement obligations on the part of Members would
better enable FICC to complete its settlement process in a more timely
manner and not have FICC and its Members left with the uncertainty of
unsettled obligations and the risks associated thereto. This, FICC
believes, would thereby promote the prompt and accurate clearance and
settlement of securities transactions in furtherance of the Act.\65\
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\64\ Id.
\65\ 15 U.S.C. 78q-1(b)(3)(F).
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FICC also believes that the proposed changes described above would
be appropriate in furtherance of the Act.\66\ Specifically, the
proposed changes discussed in the previous paragraph track the GCF
Repo/CCIT processing day including applicable external deadlines such
as the close of the Fedwire Funds Service, to which all Netting Members
and CCIT Members participating in FICC's services are accustomed.
---------------------------------------------------------------------------

\66\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

Furthermore, FICC believes that: (i) The proposed late fees for Net
Funds Payors that do not satisfy their cash obligations by the proposed
deadline of 4:30 p.m. and (ii) the proposed additional late fees for
Net Funds Payors that do not satisfy their cash obligations by the
close of Fedwire Funds Service are appropriate in furtherance of the
Act because such amounts should serve as a deterrent to lateness in
settlement and thereby would allow these services to settle timely,
again promoting the prompt and accurate clearance and settlement of
securities transactions in furtherance of the Act.\67\ FICC believes
the progressive increases in the amount of the late fee for both the
late fee associated with the 4:30 p.m. deadline and the late fees
associated with the close of the Fedwire Funds Service would provide
disincentives for cash lateness. With respect to the proposed late fees
for Net Funds Payors that do not satisfy their cash obligations by the
proposed 4:30 p.m. deadline, FICC derived these late fees by starting
with the equivalent late fee of $500 that is currently imposed for late
securities settlement and then, increased the late fee amounts for each
additional occurrence. Similarly, with respect to the proposed
additional late fees for Net Funds Payors that do fail to make the
required payment of cash by the close of the Fedwire Funds Service, the
proposed additional late fees would be in basis points, based on the
amount of the unsettled cash obligations, and would also increase with
additional occurrences. Therefore, FICC believes these represent
reasonable and scaling incentives for Net Funds Payors to satisfy their
cash obligations in a timely manner. As such, FICC believes these
proposed late fees would better allow these services to settle timely,
and therefore, promote the prompt and accurate clearance and settlement
of securities transactions in furtherance of the Act.\68\
---------------------------------------------------------------------------

\67\ 15 U.S.C. 78q-1(b)(3)(F).
\68\ Id.
---------------------------------------------------------------------------

In addition, as described above, FICC believes that (i) the
proposed late fees for Net Funds Payors that do not satisfy their cash
obligations by the proposed deadline of 4:30 p.m. and (ii) the proposed
additional late fees for Net Funds Payors that do not satisfy their
cash obligations by the close of Fedwire Funds Service are appropriate
in furtherance of the Act because they would provide for the equitable
allocation of reasonable fees among

[[Page 45616]]

participants, in furtherance of the Act.\69\ As described above, FICC
believes that these proposed fees provide for the equitable allocation
of reasonable fees among Net Funds Payors because they would apply to
all Net Funds Payors and would not be imposed if the lateness is due to
the GCF Clearing Agent Bank or FICC. Furthermore, FICC believes that
the proposed fees are reasonable because FICC has structured these
proposed fees so that the proposed late fees associated with the 4:30
p.m. deadline would address lateness whereas the proposed additional
late fees associated with the close of the Fedwire Funds Service would
charge for the amount of cash that was not settled. For both of these
proposed fees, Net Funds Payors would not be charged if the lateness is
due to the GCF Clearing Agent Bank or FICC. As described in greater
detail above, FICC also believes these proposed late fees would
encourage Net Funds Payors to satisfy their cash obligations in a
timely manner. Therefore, FICC believes these proposed late fees are
appropriate in furtherance of the Act.\70\
---------------------------------------------------------------------------

\69\ 15 U.S.C. 78q-1(b)(3)(D) and 15 U.S.C. 78q-1(b)(3)(I).
\70\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

FICC believes that the proposal to delete the current 6 p.m.
deadline for Collateral Allocation Obligations (which functions as the
second deadline for Collateral Allocation Obligations after which such
allocations are processed by FICC on a good faith basis only \71\) and
to instead provide that FICC would process such Allocations on a good
faith basis only after 4:30 p.m. could impose a burden on competition
because it would remove the option of having additional time.
Specifically, under the current Rules, Members have an hour and half
more.
---------------------------------------------------------------------------

\71\ Rule 20, Section 3 and Schedule of GCF Timeframes, supra
note 4.
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FICC does not believe that this proposed rule change would result
in a significant burden on competition because Members today are
generally not availing themselves of the 6 p.m. deadline and most
allocations are occurring by 4:30 p.m.\72\ Regardless of whether the
burden on competition resulting from the proposed rule change
referenced in this paragraph would be significant, FICC believes that
such burden on competition would be necessary and appropriate in
furtherance of the Act.\73\ Specifically, FICC believes the proposed
change to delete the 6 p.m. deadline for Collateral Allocation
Obligations and process such allocations on a good faith basis only
from 4:30 p.m. on is necessary in order to further encourage timely
securities settlement earlier in the processing day. Such timely
settlement at FICC would enable FICC to better promote the prompt and
accurate clearance and settlement of securities transactions as
required by the Act.\74\ In addition, such timely settlement would
facilitate the processing of securities movements that could occur
outside of FICC once FICC completes settlement.
---------------------------------------------------------------------------

\72\ As stated above, it is the risk that Members could use the
6:00 p.m. deadline that FICC is proposing to eliminate.
\73\ 15 U.S.C. 78q-1(b)(3)(I).
\74\ 15 U.S.C. 78q-1(b)(3)(F).
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FICC also believes that this proposed change would be appropriate
in furtherance of the Act \75\ because all participating Netting
Members are subject and accustomed to the 4:30 p.m. deadline today,
which is the deadline to which the current late fee applies.\76\ As
such, FICC is already encouraging Netting Members to satisfy their
Collateral Allocation Obligations by 4:30 p.m. In addition, under the
proposed rule change, FICC would continue to process such allocations
after 4:30 p.m., as long as both counterparties can be reached to
assist FICC in doing so, and FICC would do so after 6 p.m. as well. As
such, FICC believes that any burden of competition caused by the
proposed removal of the 6 p.m. deadline and the processing of
Collateral Allocation Obligations after 4:30 p.m. would be necessary
and appropriate in furtherance of the Act.\77\
---------------------------------------------------------------------------

\75\ 15 U.S.C. 78q-1(b)(3)(I).
\76\ Schedule of GCF Timeframes, supra note 4.
\77\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

FICC believes that the proposed rule changes described in Item
II(A)1(ii) of this filing to establish a process to provide liquidity
to FICC in situations where a Netting Member or CCIT Member with a net
cash obligation in GCF Repo/CCIT activity, that is otherwise in good
standing, is either (1) delayed in satisfying or (2) unable to satisfy
its cash obligation (in whole or in part) could impose a burden on
competition. Specifically, affected Members that would be required to
enter into reverse repos with FICC under the proposal could incur
financing costs and this could negatively affect their operating costs.
Whether such burden could be significant would depend on the facts
surrounding each affected Member's circumstances, including the amount
of the required reverse repo and the associated financing costs and how
this figure compares to the Member's financial position. Regardless of
whether the burden on competition is deemed significant, FICC believes
these proposed rule changes would be necessary and appropriate in
furtherance of the Act.\78\
---------------------------------------------------------------------------

\78\ Id.
---------------------------------------------------------------------------

Specifically, FICC believes that the proposed rule changes
referenced in the previous paragraph would be necessary in furtherance
of the Act because the use of the proposed reverse repo would better
enable FICC to complete GCF Repo/CCIT settlement.\79\ This is because
the proposed rule changes would better enable FICC to obtain requisite
liquidity to complete settlement by the end of the business day by
establishing a committed, rules-based arrangement that is readily
available to cover remaining unsettled amounts. As such, the proposed
rule changes would help FICC to promote the prompt and accurate
clearance and settlement of securities transactions in furtherance of
the Act.\80\
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\79\ Id.
\80\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

FICC also believes that the proposed rule changes described in the
previous paragraph would be appropriate in furtherance of the Act.\81\
This is because the amount of the reverse repo for each Netting Member
and CCIT Member would be limited to the remaining unsettled amount of
each such Netting Member and CCIT Member; this means that a Netting
Member and CCIT Member would only need to cover liquidity up to the
amount of their own outstanding positions. Moreover, employing a
reverse repo is an effective means for FICC to raise liquidity because
it would be operationally efficient to require affected Members to hold
their securities deliveries and thereby provide FICC with the requisite
liquidity to compete settlement. In addition, any resulting costs
incurred by FICC and/or Net Funds Receivers from employing the reverse
repo would be debited from the Net Funds Payor whose shortfall caused
the liquidity need. The Net Funds Receivers requesting compensation in
this regard would be required to provide proof of commercially
reasonable expenses and would need to submit a formal claim to FICC.
Upon approval by FICC, the Net Funds Receiver would receive a credit
that would be processed in the Funds-Only Settlement process as a
Miscellaneous Adjustment Amount and the debit for the Net Funds Payor
would be processed in the same way. As such, FICC believes that any
burden on competition imposed by the proposed rule changes referenced
in the previous

[[Page 45617]]

paragraph would be necessary and appropriate in furtherance of the
Act.\82\
---------------------------------------------------------------------------

\81\ 15 U.S.C. 78q-1(b)(3)(I).
\82\ Id.
---------------------------------------------------------------------------

FICC does not believe that the proposed clarification and technical
changes and corrections described in Item II(A)1(iii) of this filing
would impose a burden on competition because these are all non-
substantive clarifying changes and corrections that would not change or
affect Members' substantive rights or obligations.

Written comments relating to the proposed rule changes have not
been solicited or received. FICC will notify the Commission of any
written comments received by FICC.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.

IV. Solicitation of Comments

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

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FICC-2019-004 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2019-004. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FICC-2019-004 and should be submitted on
or before September 19, 2019.
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\83\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\83\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18632 Filed 8-28-19; 8:45 am]
BILLING CODE 8011-01-P

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