Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Advance Notice 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, 47618-47625 [2019-19538]

Download as PDF 47618 Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Notices Other matters relating to enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting agenda items that may consist of adjudicatory, examination, litigation, or regulatory matters. CONTACT PERSON FOR MORE INFORMATION: For further information; please contact Vanessa A. Countryman from the Office of the Secretary at (202) 551–5400. Dated: September 5, 2019. Vanessa A. Countryman, Secretary. [FR Doc. 2019–19617 Filed 9–6–19; 11:15 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–86876; File No. SR–FICC– 2019–801] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Advance Notice 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 September 5, 2019. 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 (‘‘Clearing Supervision Act’’) 1 and Rule 19b–4(n)(1)(i) under the Securities Exchange Act of 1934 (‘‘Act’’),2 notice is hereby given that on August 9, 2019, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the advance notice SR–FICC–2019–801 (‘‘Advance Notice’’) 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 Advance Notice from interested persons. khammond on DSKBBV9HB2PROD with NOTICES I. Clearing Agency’s Statement of the Terms of Substance of the Advance Notice This Advance Notice consists of amendments to the FICC Government Securities Division (‘‘GSD’’) Rulebook 1 12 U.S.C. 5465(e)(1). CFR 240.19b–4(n)(1)(i). 3 On August 9, 2019, FICC filed this Advance Notice as a proposed rule change (SR–FICC–2019– 004) with the Commission pursuant to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b–4 thereunder, 17 CFR 240.19b–4. A copy of the proposed rule change is available at https:// www.dtcc.com/legal/sec-rule-filings.aspx. 2 17 VerDate Sep<11>2014 16:56 Sep 09, 2019 Jkt 247001 (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 6:00 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. II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Advance Notice In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the Advance Notice and discussed any comments it received on the Advance Notice. The text of these statements may be examined at the places specified in 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. PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 Item IV below. The clearing agency has prepared summaries, set forth in sections A and B below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement on Comments on the Advance Notice Received From Members, Participants, or Others Written comments relating to this proposal have not been solicited or received. FICC will notify the Commission of any written comments received by FICC. (B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing Supervision Act Nature of the Proposed Change 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 6:00 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 6:00 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 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. E:\FR\FM\10SEN1.SGM 10SEN1 Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Notices 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 6:00 p.m. by which Netting Members that have Collateral Allocation Obligations must allocate their securities collateral; after 6:00 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 6:00 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., 6:00 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 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(B)(iii) of this filing. khammond on DSKBBV9HB2PROD with NOTICES 14 Schedule VerDate Sep<11>2014 16:56 Sep 09, 2019 Jkt 247001 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 6:00 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 6:00 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 6:00 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 PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 47619 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(B)(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 E:\FR\FM\10SEN1.SGM Continued 10SEN1 47620 Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Notices 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) khammond on DSKBBV9HB2PROD with NOTICES 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 VerDate Sep<11>2014 16:56 Sep 09, 2019 Jkt 247001 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. PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 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. 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. 28 The E:\FR\FM\10SEN1.SGM 10SEN1 khammond on DSKBBV9HB2PROD with NOTICES Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Notices 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 VerDate Sep<11>2014 16:56 Sep 09, 2019 Jkt 247001 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. PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 47621 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 E:\FR\FM\10SEN1.SGM note 31. 10SEN1 47622 Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES (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 3:00 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 3:00 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 3:00 p.m. description and adding a reference to the 3:30 p.m. description that would state that collateral allocations begin. Furthermore, the current 3:00 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 VerDate Sep<11>2014 16:56 Sep 09, 2019 Jkt 247001 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 3:00 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 PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 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 Subject to no objection to this Advance Notice and the approval of the related proposed rule change (the ‘‘Proposed Rule Change’’) 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 this Advance Notice by the Commission. FICC would announce the effective date of the proposed changes 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. 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. E:\FR\FM\10SEN1.SGM 10SEN1 Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES by Important Notice posted to its website. Expected Effect on Risks to the Clearing Agency, its Participants and the Market FICC believes that the proposed rule change described in Item II(B)(i) above to establish a new deadline and associated late fees for satisfaction of net cash obligations in GCF Repo/CCIT activity and remove the current 6:00 p.m. Collateral Allocation deadline would help lower the potential operational risk of incomplete tri-party transactions outside of FICC. As described above, FICC believes that all parties (including FICC) would benefit from securities settlement occurring by 4:30 p.m. because the more settlements that complete earlier, the more potential operational risk is removed from the market. Specifically, FICC believes having securities settlement occur by 4:30 p.m. would lower the risk of disorder that could arise if firms are attempting to fulfill GCF Repo settlement and tri-party transaction settlement at the same time later in the day. There is interconnectivity between the GCF Repo market and the tri-party market outside of FICC, so 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. FICC believes the current second deadline of 6:00 p.m. for allocation of securities collateral creates an environment of later settlement both at FICC and outside of FICC. FICC believes that it would be lowering potential operational risk in the market (i.e., the risk of disorder) that could arise if Members chose to avail themselves of the current 6:00 p.m. deadline. FICC believes that timely settlement at FICC would help with timely completion of onward processing outside of FICC. FICC also proposes to establish a deadline for a Netting Member’s or CCIT Member’s satisfaction of cash obligations in the GCF Repo Service and the CCIT Service. As described above, for late cash settlement, the initial late fee would be $500 and would progressively increase for additional late occurrences. In addition, FICC would also impose additional late fees 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. 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 for repeated late occurrences in satisfying cash obligations. FICC believes that the proposed deadline for VerDate Sep<11>2014 16:56 Sep 09, 2019 Jkt 247001 satisfaction of cash obligations and the associated late fees would mitigate the risk of later settlement by incenting Netting Members and CCIT Members to meet their settlement obligations on a more timely basis, which would better enable FICC to settle on a timely basis. FICC believes that the proposed rule change described in Item II(B)(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 benefit FICC and its members. FICC believes that because settlement of GCF Repo/CCIT activity occurs late in the day, having an established process to handle non-default related liquidity would improve FICC’s ability to complete settlement and thereby reduce risk to FICC and the industry. Management of Identified Risks FICC believes that that the proposed changes described in Item II(B)(i) above are designed to help FICC manage the potential operational risk (i.e., the risk of disorder) of incomplete tri-party transactions outside of FICC. FICC believes that, removing the 6:00 p.m. deadline and establishing 4:30 p.m. as the deadline for securities settlement, it would encourage Members to complete more settlements earlier and thereby, lower potential operational risk from the market. FICC believes that the proposed changes described in Item II(B)(i) above to establish a new deadline and associated late fees for satisfaction of net cash obligations in GCF Repo/CCIT activity are designed to help FICC manage the risk of later settlement. FICC believes that the proposed new deadline and the related increasing late fees would provide an incentive for Netting Members and CCIT Members to meet their cash settlement obligations on a more timely basis, which in turn, would better enable FICC to complete settle on a timely basis. FICC believes that the proposed changes described in Item II(B)(ii) above are designed to help FICC manage its risks by establishing 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). This proposed process would provide a process for FICC to raise liquidity to complete settlement. By PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 47623 better enabling FICC to complete settlement by providing FICC with a process to raise liquidity, FICC and its members would be less likely to be faced with the uncertainty of unsettled obligations and the risks related thereto. As such, FICC believes this proposed process would better enable FICC to better manage its risk related to the uncertainty of unsettled obligations and later settlement. Consistency With the Clearing Supervision Act FICC believes that the proposed rule change would be consistent with Section 805(b) of the Clearing Supervision Act.41 The objectives and principles of Section 805(b) of the Clearing Supervision Act are to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system.42 FICC believes that the proposed changes described in Item II(B)(i) regarding securities collateral above are designed to promote robust risk management, promote safety and soundness, and support the stability of the broader financial system. 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 6:00 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 6:00 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 41 12 U.S.C. 5464(b). 42 Id. E:\FR\FM\10SEN1.SGM 10SEN1 khammond on DSKBBV9HB2PROD with NOTICES 47624 Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Notices transaction settlement at the same time later in the day. As such, FICC believes the proposed change to remove the 6:00 p.m. deadline for securities settlement would promote robust risk management by lessening the potential operational risk of incomplete tri-party transactions outside of FICC and also promote the safety and soundness and support the stability of the broader financial market by lessening the risk of disorder if firms are attempting to fulfill GCF Repo settlement and tri-party transactions settlement at the same time later in the day. FICC also believes that the proposed changes described in Item II(B)(i) above to establish a new deadline and associated late fees for satisfaction of net cash obligations in GCF Repo/CCIT activity are designed to help promote robust risk management, promote safety and soundness, and support the stability of the broader financial system. Specifically, FICC believes the proposed deadline and associated late fees are designed to promote robust risk management by helping FICC manage the risk of later settlement because FICC believes that the proposed new deadline and the related increasing late fees would provide an incentive for Netting Members and CCIT Members to meet their cash settlement obligations on a more timely basis, which in turn, would better enable FICC to complete settle on a timely basis. FICC believes that having settlement complete on a timely basis would promote safety and soundness and also support the stability of the broader financial system by lessening the potential operational risk of incomplete settlement. FICC believes that the proposed changes described in Item II(B)(ii) above are designed to promote robust risk management, promote safety and soundness, and support the stability of the broader financial market. FICC believes this proposed process is designed to promote robust risk management because the proposed process would enable FICC to mitigate the risks related to the uncertainty of unsettled obligations and later settlement in certain circumstances. FICC would be able to mitigate these risks because the proposed process is designed to provide FICC with liquidity in certain circumstances (i.e., 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)). FICC believes having a proposed process to provide FICC with liquidity in the circumstances described above would VerDate Sep<11>2014 16:56 Sep 09, 2019 Jkt 247001 better enable FICC to complete timely settlement. In turn, timely settlement would promote safety and soundness by providing FICC’s members with certainty as to the completion of their transactions that were submitted to FICC. Furthermore, timely settlement at FICC would support the stability of the broader financial system by aiming to avoid the market disruption that could occur if FICC cannot settle. Timely settlement at FICC demonstrates to the market that parties’ rights and obligations vis-a`-vis settlement have been completed and therefore, promotes certainty and stability. FICC also believes that the proposed conforming and technical changes described above are designed to provide clear and coherent Rules regarding GCF Repo transactions for Netting Members and CCIT Members. FICC believes that clear and coherent Rules would enhance the ability of FICC and its Netting Members and CCIT Members to more effectively plan for, manage, and address the risks related to GCF Repo transactions. As such, FICC believes that the conforming and technical changes are designed to promote robust risk management, consistent with the objectives and principles of Section 805(b) of the Clearing Supervision Act cited above. FICC believes the proposal would be consistent with Rule 17Ad–22(e)(7)(i), (ii), and (viii), as promulgated under the Act, for the reasons described below.43 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.44 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 43 17 44 17 PO 00000 CFR 240.17Ad–22(e)(7)(i), (ii), and (viii). CFR 240.17Ad–22(e)(7)(i). Frm 00151 Fmt 4703 Sfmt 4703 its GCF Repo/CCIT activity or (ii) does not fulfill, or only partially fulfills, such cash obligation.45 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.46 The GCF Repo Allocation Waterfall MRA would be a committed arrangement, and all transactions entered into pursuant to the GCF Allocation Waterfall MRA are designed to be readily available to meet the cash obligations owed to Netting Members. 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, 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 47 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.48 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,49 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.50 Rule 17Ad–22(e)(7)(viii) requires FICC to establish, implement, maintain 45 Id. 46 Id. 47 ‘‘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). 48 17 CFR 240.17Ad–22(e)(7)(ii). 49 See 17 CFR 240.17Ad–22(a)(14). 50 Id. E:\FR\FM\10SEN1.SGM 10SEN1 Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Notices 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.51 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 that would be available to avoid unwinding, revoking, or delaying same-day settlement obligations. 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 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. khammond on DSKBBV9HB2PROD with NOTICES III. Date of Effectiveness of the Advance Notice, and Timing for Commission Action The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date that the proposed change was filed with the Commission or (ii) the date that any additional information requested by the Commission is received. The clearing agency shall not implement the proposed change if the Commission has any objection to the proposed change. The Commission may extend the period for review by an additional 60 days if the proposed change raises novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an 51 17 CFR 240.17Ad–22(e)(7)(viii). VerDate Sep<11>2014 16:56 Sep 09, 2019 Jkt 247001 earlier date, subject to any conditions imposed by the Commission. The clearing agency shall post notice on its website of proposed changes that are implemented. 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 Advance Notice is consistent with the Clearing Supervision Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2019–801 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–2019–801. 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 Advance Notice that are filed with the Commission, and all written communications relating to the Advance Notice 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 PO 00000 Frm 00152 Fmt 4703 Sfmt 4703 47625 information that you wish to make available publicly. All submissions should refer to File Number SR–FICC– 2019–801 and should be submitted on or before September 25, 2019. By the Commission. Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–19538 Filed 9–9–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–86874] Order Granting Application by The Financial Information Forum and Security Traders Association for an Exemption Pursuant to Rule 606(c) of Regulation NMS Under the Exchange Act From Certain Requirements of Rule 606 of Regulation NMS Under the Exchange Act September 4, 2019. I. Introduction The Financial Information Forum (‘‘FIF’’) and Security Traders Association (‘‘STA’’) have filed with the Securities and Exchange Commission (‘‘Commission’’) an application for an exemption from certain requirements 1 of Rule 606 of Regulation NMS under the Exchange Act.2 This order grants the following exemptive relief from certain requirements of Rule 606, subject to certain conditions, which are outlined in greater detail below: (1) All brokerdealers are exempt from the requirement to comply with Rule 606(a) until January 1, 2020; (2) all broker-dealers that engage in self-routing activity are exempt from the requirement to comply with Rule 606(b)(3) until January 1, 2020; and (3) all broker-dealers that engage in outsourced routing activity are exempt from the requirement to comply with Rule 606(b)(3) until April 1, 2020. II. Background On November 2, 2018, the Commission adopted amendments to Rules 600, 605, and 606 of Regulation NMS under the Exchange Act.3 The 1 See letter from Christopher Bok, Director, FIF, and James Toes, President & CEO, STA, to Brett Redfearn, Director, Division of Trading and Markets (‘‘Division’’), Securities and Exchange Commission (‘‘Commission’’), dated August 2, 2019 (‘‘FIF/STA Letter’’). 2 17 CFR 242.606. 3 See Exchange Act Release No. 84528 (November 2, 2018), 83 FR 58338 (November 19, 2018) (‘‘Adopting Release’’). E:\FR\FM\10SEN1.SGM 10SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 175 (Tuesday, September 10, 2019)]
[Notices]
[Pages 47618-47625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19538]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86876; File No. SR-FICC-2019-801]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Advance Notice 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

September 5, 2019.
    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 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on 
August 9, 2019, Fixed Income Clearing Corporation (``FICC'') filed with 
the Securities and Exchange Commission (``Commission'') the advance 
notice SR-FICC-2019-801 (``Advance Notice'') 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 Advance Notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On August 9, 2019, FICC filed this Advance Notice as a 
proposed rule change (SR-FICC-2019-004) with the Commission pursuant 
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change 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 Advance 
Notice

    This Advance Notice 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 6:00 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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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the Advance Notice 
and discussed any comments it received on the Advance Notice. 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 and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

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

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Nature of the Proposed Change
    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 6:00 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 6:00 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

[[Page 47619]]

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 6:00 p.m. by which Netting Members that have 
Collateral Allocation Obligations must allocate their securities 
collateral; after 6:00 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 6:00 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., 
6:00 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 6:00 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 6:00 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 6:00 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.
---------------------------------------------------------------------------

    \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(B)(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 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(B)(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.
---------------------------------------------------------------------------

    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

[[Page 47620]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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 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.
---------------------------------------------------------------------------

     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

[[Page 47621]]

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 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.

[[Page 47622]]

(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 3:00 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 3:00 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 3:00 
p.m. description and adding a reference to the 3:30 p.m. description 
that would state that collateral allocations begin. Furthermore, the 
current 3:00 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 3:00 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\
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    \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 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.
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    \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 no objection to this Advance Notice and the approval of 
the related proposed rule change (the ``Proposed Rule Change'') \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 this Advance Notice by the Commission. FICC would 
announce the effective date of the proposed changes

[[Page 47623]]

by Important Notice posted to its website.
---------------------------------------------------------------------------

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

Expected Effect on Risks to the Clearing Agency, its Participants and 
the Market
    FICC believes that the proposed rule change described in Item 
II(B)(i) above to establish a new deadline and associated late fees for 
satisfaction of net cash obligations in GCF Repo/CCIT activity and 
remove the current 6:00 p.m. Collateral Allocation deadline would help 
lower the potential operational risk of incomplete tri-party 
transactions outside of FICC. As described above, FICC believes that 
all parties (including FICC) would benefit from securities settlement 
occurring by 4:30 p.m. because the more settlements that complete 
earlier, the more potential operational risk is removed from the 
market. Specifically, FICC believes having securities settlement occur 
by 4:30 p.m. would lower the risk of disorder that could arise if firms 
are attempting to fulfill GCF Repo settlement and tri-party transaction 
settlement at the same time later in the day. There is 
interconnectivity between the GCF Repo market and the tri-party market 
outside of FICC, so 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. FICC believes the 
current second deadline of 6:00 p.m. for allocation of securities 
collateral creates an environment of later settlement both at FICC and 
outside of FICC. FICC believes that it would be lowering potential 
operational risk in the market (i.e., the risk of disorder) that could 
arise if Members chose to avail themselves of the current 6:00 p.m. 
deadline. FICC believes that timely settlement at FICC would help with 
timely completion of onward processing outside of FICC.
    FICC also proposes to establish a deadline for a Netting Member's 
or CCIT Member's satisfaction of cash obligations in the GCF Repo 
Service and the CCIT Service. As described above, for late cash 
settlement, the initial late fee would be $500 and would progressively 
increase for additional late occurrences. In addition, FICC would also 
impose additional late fees 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. 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 for 
repeated late occurrences in satisfying cash obligations. FICC believes 
that the proposed deadline for satisfaction of cash obligations and the 
associated late fees would mitigate the risk of later settlement by 
incenting Netting Members and CCIT Members to meet their settlement 
obligations on a more timely basis, which would better enable FICC to 
settle on a timely basis.
    FICC believes that the proposed rule change described in Item 
II(B)(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 benefit FICC and its 
members. FICC believes that because settlement of GCF Repo/CCIT 
activity occurs late in the day, having an established process to 
handle non-default related liquidity would improve FICC's ability to 
complete settlement and thereby reduce risk to FICC and the industry.
Management of Identified Risks
    FICC believes that that the proposed changes described in Item 
II(B)(i) above are designed to help FICC manage the potential 
operational risk (i.e., the risk of disorder) of incomplete tri-party 
transactions outside of FICC. FICC believes that, removing the 6:00 
p.m. deadline and establishing 4:30 p.m. as the deadline for securities 
settlement, it would encourage Members to complete more settlements 
earlier and thereby, lower potential operational risk from the market.
    FICC believes that the proposed changes described in Item II(B)(i) 
above to establish a new deadline and associated late fees for 
satisfaction of net cash obligations in GCF Repo/CCIT activity are 
designed to help FICC manage the risk of later settlement. FICC 
believes that the proposed new deadline and the related increasing late 
fees would provide an incentive for Netting Members and CCIT Members to 
meet their cash settlement obligations on a more timely basis, which in 
turn, would better enable FICC to complete settle on a timely basis.
    FICC believes that the proposed changes described in Item II(B)(ii) 
above are designed to help FICC manage its risks by establishing 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). This proposed process would provide a process for FICC to raise 
liquidity to complete settlement. By better enabling FICC to complete 
settlement by providing FICC with a process to raise liquidity, FICC 
and its members would be less likely to be faced with the uncertainty 
of unsettled obligations and the risks related thereto. As such, FICC 
believes this proposed process would better enable FICC to better 
manage its risk related to the uncertainty of unsettled obligations and 
later settlement.
Consistency With the Clearing Supervision Act
    FICC believes that the proposed rule change would be consistent 
with Section 805(b) of the Clearing Supervision Act.\41\ The objectives 
and principles of Section 805(b) of the Clearing Supervision Act are to 
promote robust risk management, promote safety and soundness, reduce 
systemic risks, and support the stability of the broader financial 
system.\42\
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 5464(b).
    \42\ Id.
---------------------------------------------------------------------------

    FICC believes that the proposed changes described in Item II(B)(i) 
regarding securities collateral above are designed to promote robust 
risk management, promote safety and soundness, and support the 
stability of the broader financial system. 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 6:00 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 6:00 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

[[Page 47624]]

transaction settlement at the same time later in the day. As such, FICC 
believes the proposed change to remove the 6:00 p.m. deadline for 
securities settlement would promote robust risk management by lessening 
the potential operational risk of incomplete tri-party transactions 
outside of FICC and also promote the safety and soundness and support 
the stability of the broader financial market by lessening the risk of 
disorder if firms are attempting to fulfill GCF Repo settlement and 
tri-party transactions settlement at the same time later in the day.
    FICC also believes that the proposed changes described in Item 
II(B)(i) above to establish a new deadline and associated late fees for 
satisfaction of net cash obligations in GCF Repo/CCIT activity are 
designed to help promote robust risk management, promote safety and 
soundness, and support the stability of the broader financial system. 
Specifically, FICC believes the proposed deadline and associated late 
fees are designed to promote robust risk management by helping FICC 
manage the risk of later settlement because FICC believes that the 
proposed new deadline and the related increasing late fees would 
provide an incentive for Netting Members and CCIT Members to meet their 
cash settlement obligations on a more timely basis, which in turn, 
would better enable FICC to complete settle on a timely basis. FICC 
believes that having settlement complete on a timely basis would 
promote safety and soundness and also support the stability of the 
broader financial system by lessening the potential operational risk of 
incomplete settlement.
    FICC believes that the proposed changes described in Item II(B)(ii) 
above are designed to promote robust risk management, promote safety 
and soundness, and support the stability of the broader financial 
market. FICC believes this proposed process is designed to promote 
robust risk management because the proposed process would enable FICC 
to mitigate the risks related to the uncertainty of unsettled 
obligations and later settlement in certain circumstances. FICC would 
be able to mitigate these risks because the proposed process is 
designed to provide FICC with liquidity in certain circumstances (i.e., 
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)). FICC believes having a proposed process to provide 
FICC with liquidity in the circumstances described above would better 
enable FICC to complete timely settlement. In turn, timely settlement 
would promote safety and soundness by providing FICC's members with 
certainty as to the completion of their transactions that were 
submitted to FICC. Furthermore, timely settlement at FICC would support 
the stability of the broader financial system by aiming to avoid the 
market disruption that could occur if FICC cannot settle. Timely 
settlement at FICC demonstrates to the market that parties' rights and 
obligations vis-[agrave]-vis settlement have been completed and 
therefore, promotes certainty and stability.
    FICC also believes that the proposed conforming and technical 
changes described above are designed to provide clear and coherent 
Rules regarding GCF Repo transactions for Netting Members and CCIT 
Members. FICC believes that clear and coherent Rules would enhance the 
ability of FICC and its Netting Members and CCIT Members to more 
effectively plan for, manage, and address the risks related to GCF Repo 
transactions. As such, FICC believes that the conforming and technical 
changes are designed to promote robust risk management, consistent with 
the objectives and principles of Section 805(b) of the Clearing 
Supervision Act cited above.
    FICC believes the proposal would be consistent with Rule 17Ad-
22(e)(7)(i), (ii), and (viii), as promulgated under the Act, for the 
reasons described below.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.17Ad-22(e)(7)(i), (ii), and (viii).
---------------------------------------------------------------------------

    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.\44\ 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.\45\ 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.\46\ The GCF Repo Allocation Waterfall MRA would be a committed 
arrangement, and all transactions entered into pursuant to the GCF 
Allocation Waterfall MRA are designed to be readily available to meet 
the cash obligations owed to Netting Members.
---------------------------------------------------------------------------

    \44\ 17 CFR 240.17Ad-22(e)(7)(i).
    \45\ Id.
    \46\ 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, 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 \47\ 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.\48\ 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,\49\ 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.\50\
---------------------------------------------------------------------------

    \47\ ``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).
    \48\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \49\ See 17 CFR 240.17Ad-22(a)(14).
    \50\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(viii) requires FICC to establish, implement, 
maintain

[[Page 47625]]

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.\51\ 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 that would be 
available to avoid unwinding, revoking, or delaying same-day settlement 
obligations. 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 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.
---------------------------------------------------------------------------

    \51\ 17 CFR 240.17Ad-22(e)(7)(viii).
---------------------------------------------------------------------------

III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    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 Advance 
Notice is consistent with the Clearing Supervision 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-2019-801 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-2019-801. 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 Advance Notice that are filed with the 
Commission, and all written communications relating to the Advance 
Notice 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-2019-801 and should be submitted on 
or before September 25, 2019.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19538 Filed 9-9-19; 8:45 am]
BILLING CODE 8011-01-P

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