Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of No Objection To Advance Notice To Include Same-Day Settling Trades in the Risk Management, Novation, Guarantee, and Settlement Services of the Government Securities Division's Delivery-Versus-Payment Service, and Make Other Changes, 6724-6729 [2021-01324]
Download as PDF
<![CDATA[
6724
Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
products available to market
participants and investors, including
products offered by certain competing
U.S. equities exchanges without charge.
In this competitive environment
potential subscribers are free to choose
which competing product to purchase to
satisfy their need for market
information. Often, the choice comes
down to price, as market data customers
look to purchase cheaper top-of-book
data products, and quality, as market
participants seek to purchase data that
represents significant market liquidity.
Intramarket Competition. The
Exchange believes that the proposed
fees do not put any market participants
at a relative disadvantage compared to
other market participants. As discussed,
the proposed fees would apply to all
internal distributors of the EDGX Top
Feed on an equal and nondiscriminatory basis. The Exchange
therefore believes that the proposed fees
neither favor nor penalize one or more
categories of market participants in a
manner that would impose an undue
burden on competition. To the extent
that particular fees would apply to only
a subset of subscribers, e.g., Professional
versus Non-Professional Users, those
distinctions are not unfairly
discriminatory and do not unfairly
burden one set of customers over
another.
Intermarket Competition. The
Exchange believes that the proposed
fees do not impose a burden on
competition or on other SROs that is not
necessary or appropriate in furtherance
of the purposes of the Act. In setting the
proposed fees, the Exchange is
constrained by the availability of
numerous substitute products offered by
other national securities exchanges as
well as core data offered by the SIPs.
Because market data customers can find
suitable substitute feeds, an exchange
that overprices its market data products
stands a high risk that users may
substitute another product. These
competitive pressures ensure that no
one exchange’s market data fees can
impose an undue burden on
competition, and the Exchange’s
proposed fees do not do so here.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
VerDate Sep<11>2014
19:27 Jan 21, 2021
Jkt 253001
of the Act 40 and paragraph (f) of Rule
19b–4 41 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeEDGX–2021–002 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeEDGX–2021–002. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGX–2021–002 and
should be submitted on or before
February 12, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–01280 Filed 1–21–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90931; File No. SR–FICC–
2020–803]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
No Objection To Advance Notice To
Include Same-Day Settling Trades in
the Risk Management, Novation,
Guarantee, and Settlement Services of
the Government Securities Division’s
Delivery-Versus-Payment Service, and
Make Other Changes
January 14, 2021.
On November 19, 2020, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–FICC–2020–803 (‘‘Advance
Notice’’) pursuant to Section 806(e)(1) of
Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled Payment, Clearing and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’),1 and Rule
19b–4(n)(1)(i) 2 under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’).3 In the Advance Notice, FICC
proposes to (1) expand its provision of
central counterparty services to include
the start leg of certain repurchase
agreement (‘‘repo’’) transactions, and (2)
enable participating FICC members to
pair-off and settle certain offsetting
obligations, as described more fully
below. The Advance Notice was
published for public comment in the
Federal Register on December 29,
42 17
CFR 200.30–3(a)(12).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78a et seq.
1 12
40 15
41 17
PO 00000
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
Frm 00113
Fmt 4703
Sfmt 4703
E:\FR\FM\22JAN1.SGM
22JAN1
Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Notices
2020,4 and the Commission has received
no comments regarding the changes
proposed in the Advance Notice.5 This
publication serves as notice of no
objection to the Advance Notice.
I. The Advance Notice
jbell on DSKJLSW7X2PROD with NOTICES
A. Background
FICC, through its Government
Securities Division (‘‘GSD’’), serves as a
central counterparty (‘‘CCP’’) and
provider of clearance and settlement
services for cash-settled U.S. Treasury
securities.6 Among its services, FICC
provides real-time trade matching,
clearing, risk management, and netting
for repo transactions in U.S. Treasury
securities in which all securities
delivery obligations are made against
full payment (‘‘delivery-versuspayment’’ or ‘‘DVP’’) (the ‘‘DVP
Service’’).7
4 Securities Exchange Act Release No. 90736
(December 21, 2020), 85 FR 85743 (December 29,
2020) (File No. SR–FICC–2020–803) (‘‘Notice of
Filing’’).
5 On November 19, 2020, FICC also filed a related
proposed rule change (SR–FICC–2020–015)
(‘‘Proposed Rule Change’’) with the Commission
pursuant to Section 19(b)(1) of the Exchange Act
and Rule 19b–4 thereunder. See 15 U.S.C. 78s(b)(1)
and 17 CFR 240.19b–4 respectively. The Proposed
Rule Change was published in the Federal Register
on December 8, 2020. Securities Exchange Act
Release No. 90551 (December 2, 2020), 85 FR 79051
(December 8, 2020). In the Proposed Rule Change,
FICC seeks approval of proposed changes to its
rules necessary to implement the Advance Notice.
The comment period for the related Proposed Rule
Change filing closed on December 29, 2020, and the
Commission received no comments. As the
proposals contained in the Advance Notice were
also filed as a proposed rule change, all public
comments received on the proposal are considered,
regardless of whether the comments are submitted
on the Proposed Rule Change or the Advance
Notice.
6 FICC is composed of two divisions: GSD and the
Mortgage-Backed Securities Division (‘‘MBSD’’).
GSD provides real-time trade matching, clearing,
risk management, and netting for trades in U.S.
government debt issues. MBSD provides real-time
automated trade matching, trade confirmation, risk
management, netting, and electronic pool
notification to the mortgage-backed securities
(‘‘MBS’’) market. The Advance Notice deals solely
with proposed changes to the GSD Rulebook
(‘‘Rules’’), which are available at https://
www.dtcc.com/legal/rules-and-procedures.
7 In addition to the DVP Service, FICC also
provides such services to facilitate trading other
types of repos. FICC’s General Collateral Finance
(‘‘GCF’’) Repo® Service enables members to trade
general collateral finance repos based on rate, term,
and underlying product throughout the day on a
blind basis. See Rule 20—Special Provisions for
GCF Repo Transactions, supra note 6. FICC’s
Centrally Cleared Institutional Triparty (‘‘CCIT’’)
Service enables trading of tri-party repos between
members that participate in the GCF Repo Service
and members that are institutional cash lenders
(other than investment companies registered under
the Investment Company Act of 1940, as amended).
See Rule 3B—CCIT Service, supra note 6. Unlike
the DVP Service, the GCF Repo and CCIT Services
settle via the triparty platform of a clearing bank.
This Advance Notice proposes changes specific to
the DVP Service.
VerDate Sep<11>2014
19:27 Jan 21, 2021
Jkt 253001
DVP repos involve a pair of
transactions between two parties. The
first transaction (the ‘‘Start Leg’’)
consists of the sale of securities, in
which one party delivers securities in
exchange for the other party’s delivery
of cash. The second transaction (the
‘‘End Leg’’) occurs on a date after that
of the Start Leg and consists of the
repurchase of securities, in which the
obligations to deliver cash and
securities are the reverse of the Start
Leg. The parties agree to the terms of the
trade, including the specific securities,
principal amount, interest rate, haircut,
and date of maturity (i.e., either
overnight or term).
A DVP repo that is scheduled to start
one or more business days after the
submission of trade details to FICC is a
‘‘forward starting’’ repo. A DVP repo
that is scheduled to start on the same
business day as trade details are
submitted to FICC is a ‘‘same-day
starting’’ repo. For forward starting
repos, FICC acts as CCP for both the
Start Leg and the End Leg. However,
since the inception of the DVP Service,
for same-day starting repos, FICC
generally has acted as CCP for the End
Leg only.8 Although FICC does not
currently novate the Start Leg of sameday starting repos, FICC collects margin
from the parties for the End Leg on the
scheduled settlement date of the Start
Leg.9 Currently, the parties to a sameday starting repo settle the Start Leg
bilaterally outside of FICC.
The first step in the clearance and
settlement process of a DVP repo is for
the parties to submit the trade details to
FICC.10 Upon receipt, FICC validates the
trade details in a procedure referred to
in FICC’s Rules as ‘‘Trade Comparison,’’
which culminates in the legally binding
and enforceable contract between FICC
and the parties to the trade.11 There are
different types of Trade Comparisons,
depending on which entity submits the
trade details to FICC, and the
procedures, timing, and other applicable
operational arrangements vary
depending on the type. For example, a
Bilateral Comparison occurs when the
individual FICC members that are the
parties to a trade each submit trade
8 There is one limited scenario in which FICC
currently acts as CCP for the Start Leg of a brokered
same-day starting repo. Specifically, if the Start Leg
fails to settle on its original scheduled settlement
date, FICC currently assumes responsibility for
settlement of the Start Leg on the evening of the
original scheduled settlement date. See Notice of
Filing, supra note 4 at 85744.
9 See Notice of Filing, supra note 4 at 85744, 50.
10 Trade details may be submitted to FICC by, or
on behalf of, a member in a form, manner, and
timeframe prescribed by FICC’s Rules. See Rule 5—
Comparison System, supra note 6.
11 Id.
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
6725
details to FICC.12 A Demand
Comparison occurs when an InterDealer Broker (‘‘IDB’’) or qualifying nonIDB repo broker 13 (each, a ‘‘Repo
Broker’’) submits trade details to FICC
on behalf of both parties to a trade.14
FICC generally novates and
guarantees settlement of a trade upon
Trade Comparison.15 Additionally, on a
daily basis, FICC aggregates and
matches a member’s offsetting
obligations resulting from the member’s
trades, thereby netting the member’s
total daily settlement obligations.16 In
the DVP Service, such netting takes
place the night before the scheduled
settlement date of whichever leg of the
repo would settle on the following
business day.17
Trades that settle bilaterally outside of
FICC do not have the benefit of FICC’s
CCP services, and therefore, such trades
can be subject to greater risk of
settlement fails.18 Moreover, trades
facilitated by a Repo Broker that settle
outside of FICC require multiple
bilateral securities movements between
the parties to the trade and the Repo
Broker. The greater the number of
bilateral securities movements involved
in trade settlement, the greater the
potential for operational risk resulting
in settlement fails. If the Start Leg of a
DVP repo submitted by a Repo Broker
fails to settle on the original scheduled
settlement date, FICC currently steps in
that evening as CCP and assumes
12 See
Rule 6A—Bilateral Comparison, supra note
6.
13 For purposes of the Advance Notice, both IDBs
and non-IDB repo brokers are FICC members. A
qualifying non-IDB repo broker is one that FICC has
determined: (1) Operates as a broker with regard to
activity in a segregated repo account, and (2) agrees
and participates in FICC’s repo netting service in
the same manner as an IDB that participates in the
service. See Rule 1—Definitions, supra note 6.
14 See Rule 6B—Demand Comparison, supra note
6.
15 See Rule 5—Comparison System, supra note 6.
16 See Rule 11—Netting System, supra note 6.
17 See Notice of Filing, supra note 4 at 85745–46.
18 There are several risk factors inherent to trades
that clear bilaterally as opposed to trades that clear
through a CCP. For example, the credit risk
associated with bilaterally cleared trades remains
with the original counterparties, who might not
utilize robust and transparent margin requirements,
multilateral netting, emergency liquidity and loss
sharing arrangements, or other risk mitigation
measures. See U.S. Department of the Treasury
Report, A Financial System That Creates Economic
Opportunities: Capital Markets at 78, 81 (October
2017), available at https://www.treasury.gov/presscenter/press-releases/documents/a-financialsystem-capital-markets-final-final.pdf; Joint Staff
Report: The U.S. Treasury Market at 55 (October 15,
2014), available at https://www.treasury.gov/presscenter/press-releases/Documents/Joint_Staff_
Report_Treasury_10-15-2014.pdf; Treasury Market
Practices Group, White Paper on Clearing and
Settlement in the Secondary Market for U.S.
Treasury Securities at 2–4 (July 11, 2019), available
at https://www.newyorkfed.org/medialibrary/
Microsites/tmpg/files/CS_FinalPaper_071119.pdf.
E:\FR\FM\22JAN1.SGM
22JAN1
6726
Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Notices
responsibility for settling the trade.19
This process may involve FICC
receiving securities from the failing
party or netting the settlement
obligations arising from the Start Leg
against those of the End Leg of the same
or another repo. FICC states that
although its current process of
centralizing the settlement of such
failed Start Legs decreases further
settlement risk, the current process is
operationally inefficient because it does
not eliminate the multiple securities
movements that give rise to the risk of
settlement fails.20
jbell on DSKJLSW7X2PROD with NOTICES
B. Proposed Same-Day Settling Service
FICC states that its members have
expressed an interest in FICC acting as
CCP for the Start Leg of same-day
starting repos.21 In the Advance Notice,
FICC proposes to modify its Rules to
include the Start Leg of same-day
starting repos in the risk management,
novation, guarantee, and settlement
services of the DVP Service (the ‘‘SameDay Settling Service’’). Upon Trade
Comparison, FICC would act as CCP for
the Start Leg of same-day starting repos,
which would settle on the same
business day. FICC’s margin collection
with respect to the trade would not
change from the current process. After
FICC’s novation, if the Start Leg were to
fail, the parties’ obligations to and from
FICC would go through the netting
process that evening, and FICC would
continue to apply the margin amounts
collected with respect to the trade
towards FICC’s risk management of the
End Leg.
FICC believes that the Same-Day
Starting Service could increase
settlement efficiencies and decrease
settlement risk because it would
eliminate the movement of securities
between members by centralizing the
settlement of the Start Leg of same-day
starting repos with FICC.22 Moreover,
for same-day starting repos submitted by
Repo Brokers, the Same-Day Settling
Service would remove the Repo Broker
from the settlement process by
eliminating the multiple bilateral
securities movements involved in the
settlement of the Start Leg.
1. Voluntary for Repo Brokers;
Mandatory for Other Members
As proposed in the Advance Notice,
participation in the proposed Same-Day
Settling Service would be voluntary for
Repo Brokers. Repo Brokers often
19 See Section 5, Rule 19—Special Provisions for
Brokered Repo Transactions, supra note 6.
20 See Notice of Filing, supra note 4 at 85744.
21 Id.
22 See Notice of Filing, supra note 4 at 85744, 49–
50.
VerDate Sep<11>2014
19:27 Jan 21, 2021
Jkt 253001
provide a suite of services to their
clients, including facilitating the
bilateral settlement of the Start Leg of
same-day starting repos. FICC states that
a requirement on Repo Brokers to
participate in the Same-Day Settling
Service could disrupt the current
service offerings from Repo Brokers to
their clients.23 Since Repo Brokers
submit trade details to FICC on behalf
of both parties to a trade, a Repo Broker
opting out of the Same-Day Settling
Service would simply result in
settlement of the Start Leg bilaterally
outside of FICC, as is done currently.
FICC believes that providing optionality
would allow Repo Brokers and their
clients to determine whether a Repo
Broker should participate in the SameDay Settling Service.24 For participating
Repo Brokers, FICC would no longer
assume responsibility for a failed Start
Leg because FICC would already be
acting as CCP for the Start Leg upon
Trade Comparison.
For FICC’s members that are not Repo
Brokers, participation in the Same-Day
Settling Service would be mandatory.
Unlike Repo Brokers, FICC’s individual
members submit trade details with
respect to their own side of a trade only,
such that Trade Comparison only occurs
after FICC validates the trade details
submitted by both parties to the trade.25
Accordingly, if one party to a same-day
starting repo could choose to opt out of
the Same-Day Settling Service, FICC
would not be able to act as CCP with
equal and opposite settlement
obligations between the two parties.
Such trades would, therefore, need to
settle outside of FICC as they do
currently. However, unlike the clients of
a Repo Broker, such members would not
know in advance whether any given
Start Leg would settle with FICC as CCP
or bilaterally outside of FICC. By
requiring such members to participate
in the Same-Day Settling Service,
members would have certainty that their
Compared Trades would settle with
FICC acting as CCP.
2. As-Of Trades
For purposes of the Advance Notice,
same-day starting repos would include
As-Of Trades,26 in which a member
submits a DVP repo for comparison on
the business day after the scheduled
settlement date for the Start Leg, and the
End Leg is the current business day or
thereafter. FICC states that members
occasionally submit As-Of Trades due to
23 See
Notice of Filing, supra note 4 at 85746.
24 Id.
25 See
Rule 6A—Bilateral Comparison, supra note
26 See
Rule 1, supra note 6.
6.
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
human or operational errors.27 FICC
further states that it included As-Of
Trades in the Advance Notice in order
to reasonably include as many
variations of same-day starting repos as
possible to ensure that FICC would
provide consistent settlement
processing for all same-day starting
repos.28
Currently, the Start Leg of an As-Of
Trade settles outside of FICC. An End
Leg scheduled to settle on the current
business day also settles outside of
FICC. However, an End Leg scheduled
to settle on a date after the current
business day settles with FICC acting as
CCP. As proposed in the Advance
Notice, FICC would act as CCP with
respect to both the Start and End Legs
of a same-day starting repo, regardless of
the timing of the respective scheduled
settlement dates.
3. Settlement at Contract Value or
System Value
As mentioned above, netting in the
DVP Service occurs the night before the
scheduled settlement date. Because
settlement of Start Legs within the
Same-Day Settling Service would occur
on the same business day as Trade
Comparison, such transactions would
generally not be netted.29 Instead, FICC
would settle such transactions on a
trade-for-trade basis. Transactions that
FICC settles on a trade-for-trade basis
(i.e., transactions that are not netted)
settle at ‘‘Contract Value,’’ which means
the dollar value at which the transaction
is to be settled on the scheduled
settlement date.30 Transactions that
settle on a future date (i.e., transactions
that are netted) settle at ‘‘System
Value,’’ which includes accrued
interest. For consistency with the
foregoing, FICC proposes to clarify the
Rules with respect to the Same-Day
Settling Service to reflect that any leg of
a DVP repo to be settled on a trade-fortrade basis would settle at Contract
Value, whereas any leg to be settled on
a future date would settle at System
Value.31
27 See
Notice of Filing, supra note 4 at 85745.
28 Id.
29 The Start Leg of same-day starting repos would
be netted in the limited scenario of a brokered repo
settlement fail on the scheduled settlement date.
See supra note 8; Notice of Filing, supra note 4 at
85744.
30 See Rule 1—Definitions, supra note 6.
31 For example, for an overnight repo that is an
As-Of Trade, both legs would settle at Contract
Value because both would settle on the date of
Trade Comparison and therefore would not be
netted. For an overnight repo that is a same-day
starting repo, the Start Leg would settle on the date
of Trade Comparison at Contract Value, whereas the
End Leg would be netted that evening and settle the
following business day at System Value. For an
overnight repo that is forward starting (i.e., both
E:\FR\FM\22JAN1.SGM
22JAN1
Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Notices
4. Late-Day Compared Trades
FICC states that members occasionally
execute same-day starting repos after the
close of the Fedwire Securities Service
(‘‘Fedwire’’), which is the service that
members generally use for settling
bilateral securities obligations.32
Currently, such trades settle bilaterally
between the parties outside of FICC,
provided that both parties use the same
clearing bank for settlement. In the
Advance Notice, FICC proposes to
include such late-day trades in the
Same-Day Settling Service (i.e., FICC
proposes to act as CCP for the Start Leg)
on a reasonable efforts basis, meaning
that FICC would attempt to contact the
parties to the trade and FICC’s clearing
bank to confirm agreement to settle the
trade.33
Specifically, for members that clear at
FICC’s clearing bank, FICC would
attempt to settle any same-day starting
repos that are compared between 3:01
p.m. and 5:00 p.m., provided that (1)
FICC is able to contact the parties to the
trade and FICC’s clearing bank, and (2)
the parties and FICC’s clearing bank
agree to settle the trade. For members
that do not clear at FICC’s clearing bank,
FICC proposes to attempt to settle, on a
reasonable efforts basis, same-day
starting repos that are compared during
the Fedwire reversal period between
3:01 p.m. and 3:30 p.m., provided that
(1) FICC is able to contact FICC’s
clearing bank and the parties to the
trade, (2) FICC’s clearing bank and the
parties to the trade confirm agreement to
settle the trade, and (3) FICC’s clearing
bank, the member’s clearing bank, and
the Federal Reserve Bank of New York
each permit settlement of the trade.
jbell on DSKJLSW7X2PROD with NOTICES
5. Other Changes to FICC’s Rules To
Incorporate the Same-Day Settling
Service
In the Advance Notice, FICC proposes
changes to several Rule provisions to
ensure the relevant applicability of such
provisions to the Same-Day Settling
Service. FICC proposes to add a newly
defined term ‘‘Same-Day Settling Trade’’
to capture the universe of DVP repos
legs would settle on dates in the future), both legs
would be subject to netting and settle at System
Value. Notice of Filing, supra note 4 at 85746.
32 The Fedwire is a service provided by the
Federal Reserve Banks that includes settlement and
transfer of DVP securities transactions. The Fedwire
operates daily from 8:30 a.m. to 3:30 p.m. (All times
herein are Eastern Time.) See Fedwire and National
Securities Service, Federal Reserve Bank of New
York (March 2015), available at https://
www.newyorkfed.org/aboutthefed/fedpoint/
fed43.html; Fedwire Securities Service, Board of
Governors of the Federal Reserve System (July 31,
2014), available at https://www.federalreserve.gov/
paymentsystems/fedsecs_about.htm.
33 See Notice of Filing, supra note 4 at 85748.
VerDate Sep<11>2014
19:27 Jan 21, 2021
Jkt 253001
that would be covered by the Same-Day
Settling Service. FICC proposes to
modify the definitions of ‘‘Deliver
Obligation’’ and ‘‘Receive Obligation’’ to
include references to Same-Day Settling
Trades. FICC proposes to modify the
definitions of ‘‘Settlement Value’’ and
‘‘System Value’’ to contemplate that
Same-Day Settling Trades could settle at
Contract Value or System Value,
depending on the circumstances of the
trade, as described above.
FICC proposes to incorporate SameDay Settling Trades into the existing
Rule provisions governing the
Comparison System and Netting
System. FICC proposes to add Rule
provisions addressing eligibility
requirements for Same-Day Settling
Trades to qualify for FICC’s novation
and settlement guarantee. FICC
proposes to incorporate Same-Day
Settling Trades into the Rule provisions
governing how parties satisfy their
obligations to FICC, including trades
that become uncompared or canceled.
FICC proposes to incorporate Same-Day
Settling Trades into the Rule provisions
dealing with settlement fails. Finally,
FICC proposes to include appropriate
cross-references to ensure that various
Rule provisions related to general
securities settlement apply to Same-Day
Settling Trades.
C. Proposed Pair-Off Service
Settlement fails occur because one
party does not have inventory to settle
with the other party on the scheduled
settlement date. Currently, a member’s
obligations that remain unsettled when
the Fedwire closes go through FICC’s
overnight netting system for settlement
the following business day, and the
member is subject to FICC’s fails
charge.34 In a scenario where a member
has offsetting unsettled failed
obligations in the same security (i.e.,
separate failed obligations to both
deliver and receive the same security)
after the close of the Fedwire, those
obligations currently go through the
overnight netting system for settlement
the following day.
In the Advance Notice, FICC proposes
an optional service for members
whereby FICC would pair-off a
member’s offsetting failed securities
settlement obligations each day,
beginning at 3:32 p.m. (shortly after the
Fedwire closes) until 4:00 p.m. (the
‘‘Pair-Off Service’’). Additionally, the
member would receive either a debit or
credit, as applicable, to account for any
difference in the settlement value of its
deliver and receive obligations as part of
FICC’s intraday funds-only settlement
(‘‘FOS’’) process. Therefore, the
proposed Pair-Off Service would enable
participating members to settle their
obligations on the day they arise, rather
than continuing to the next day as
unsettled failed obligations, as they
would under the current practice. Failed
obligations that remain unsettled
overnight present market risk exposure
to both FICC and the parties to such
trades. FICC believes that by enabling
the earlier settlement of a member’s
offsetting obligations, the proposed PairOff Service could reduce such overnight
market risk.35
FICC proposes to start the Pair-Off
Service at approximately 3:32 p.m., and
provide FOS banks with their intraday
net FOS figures by 4:00 p.m. for
acknowledgement by 4:30 p.m.
Accordingly, FICC proposes to change
the timing of FOS processing from the
current time of 3:15 p.m. to 4:30 p.m. to
enable FICC to settle any net money
differences that would arise from the
proposed Pair-Off Service.
II. Discussion and Commission
Findings
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, the stated
purpose of the Clearing Supervision Act
is instructive: To mitigate systemic risk
in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for SIFMUs and
strengthening the liquidity of SIFMUs.36
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe regulations
containing risk management standards
for the payment, clearing, and
settlement activities of designated
clearing entities engaged in designated
activities for which the Commission is
the supervisory agency.37 Section 805(b)
of the Clearing Supervision Act
provides the following objectives and
principles for the Commission’s risk
management standards prescribed under
Section 805(a): 38
• To promote robust risk
management;
• to promote safety and soundness;
• to reduce systemic risks; and
• to support the stability of the
broader financial system.
Section 805(c) provides, in addition,
that the Commission’s risk management
standards may address such areas as
35 See
Notice of Filing, supra note 4 at 85749–50.
12 U.S.C. 5461(b).
37 12 U.S.C. 5464(a)(2).
38 12 U.S.C. 5464(b).
36 See
34 See Section 14, Rule 11—Netting System, supra
note 6.
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
6727
E:\FR\FM\22JAN1.SGM
22JAN1
6728
Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Notices
risk management and default policies
and procedures, among others areas.39
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act and Section 17A of the Exchange
Act (the ‘‘Clearing Agency Rules’’).40
The Clearing Agency Rules require,
among other things, each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to meet certain minimum
requirements for its operations and risk
management practices on an ongoing
basis.41 As such, it is appropriate for the
Commission to review advance notices
against the Clearing Agency Rules and
the objectives and principles of these
risk management standards as described
in Section 805(b) of the Clearing
Supervision Act. As discussed below,
the Commission believes the proposals
in the Advance Notice are consistent
with the objectives and principles
described in Section 805(b) of the
Clearing Supervision Act 42 and in the
Clearing Agency Rules, in particular
Rule 17Ad–22(e)(21).43
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission believes that the
Advance Notice is consistent with the
stated objectives and principles of
Section 805(b) of the Clearing
Supervision Act because the changes
proposed in the Advance Notice are
consistent with reducing systemic risks,
supporting the stability of the broader
financial system, promoting robust risk
management, and promoting safety and
soundness.44
The Commission believes that the
proposals in the Advance Notice are
consistent with the principles of
reducing systemic risk and supporting
the stability of the broader financial
system. When a CCP novates a trade and
takes offsetting and guaranteed
positions between the two original
parties to the trade, the length of time
from novation to trade settlement may
affect the CCP’s exposure to credit,
market, and liquidity risk. For example,
settlement fails extend the time to
settlement and can thereby present risk
39 12
U.S.C. 5464(c).
CFR 240.17Ad–22. See Securities Exchange
Act Release No. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11). See also
Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (S7–03–14) (‘‘Covered Clearing Agency
Standards’’). FICC is a ‘‘covered clearing agency’’ as
defined in Rule 17Ad–22(a)(5).
41 Id.
42 12 U.S.C. 5464(b).
43 17 CFR 240.17Ad–22(e)(21)(i), (ii), and (iii).
44 12 U.S.C. 5464(b).
jbell on DSKJLSW7X2PROD with NOTICES
40 17
VerDate Sep<11>2014
19:27 Jan 21, 2021
Jkt 253001
to the CCP that a member’s positions
and other resources that the CCP holds
(generally, the member’s margin)
decline in market value as the CCP
considers whether and how it might
liquidate, transfer, or otherwise dispose
of such assets to minimize losses.
Settlement fails can also affect the
amount of liquidity risk a CCP may need
to bear for purposes of settling an
unsettled trade because CCPs may rely
on incoming payments from some
members to facilitate payments to other
members. For FICC’s members, a
settlement fail on a securities delivery
obligation causes the non-failing party
to withhold payment while settlement is
rescheduled for the following business
day and until the trade ultimately
settles. In the interim, the non-failing
party cannot use the securities, which it
may have already committed to deliver
in subsequent trading activity, giving
rise to the risk of further settlement
fails. Also, the failing party does not
have use of the cash proceeds from the
trade. Settlement fails can, therefore,
undermine the liquidity of a wellfunctioning market, and a member
default could lead to the default of other
members and market participants as
well. Settlement fails can therefore be a
source of systemic risk and instability to
the broader market.
As described above in Section I.A.,
FICC currently acts as CCP for only the
End Leg of a same-day starting DVP
repo. The Start Leg currently settles
bilaterally outside of FICC between the
parties to the trade. Trades that settle
bilaterally outside of FICC are generally
exposed to more operational risk and
consequently may result in more
settlement fails than trades which are
novated and risk-managed by FICC in its
role as CCP.45
By centralizing settlement of the Start
Leg of same-day starting repos, the
proposal would eliminate the current
bilateral settlement of securities
between the parties. Once the Start Leg
is subject to FICC’s settlement
guarantee, a settlement fail would be
contained between the failing party and
FICC. Even if the start leg were to fail,
FICC’s margin collection and other risk
mitigation measures would be in place
to protect the non-failing party
originally on the other side of the trade.
The Same-Day Settling Service would
thereby likely reduce the spread of
settlement fails to other market
participants. As a result, the
Commission believes that the Same-Day
Settling Service could reduce the risk
associated with settlement fails in the
DVP repo market. More broadly, by
45 See
PO 00000
supra note 18.
Frm 00117
Fmt 4703
Sfmt 4703
preventing the spread of settlement fails
to other market participants, the SameDay Settling Service also could help
reduce systemic risk and support the
stability of the broader financial system.
Additionally, as discussed above in
Section I.A., trades facilitated by a Repo
Broker that settle outside of FICC
require multiple bilateral securities
movements between the parties to the
trade and the Repo Broker. The greater
the number of bilateral securities
movements involved in trade
settlement, the greater the potential for
operational risk resulting in settlement
fails. FICC currently manages the risk of
a failed Start Leg for a brokered repo by
assuming responsibility for trade
settlement on the evening of the original
scheduled settlement date. While this
approach decreases further settlement
risk, it neither prevents the original
settlement fail nor does it eliminate the
multiple bilateral securities movements
for settling the Start Leg until after a
settlement fail. For participating Repo
Brokers, the Same-Day Settling Service
would eliminate the bilateral securities
movements and the associated risk of
settlement fails because FICC would
novate and guarantee settlement of the
Start Leg upon Trade Comparison. As a
result, the Commission believes that the
Same-Day Settling Service could
improve efficiency in the settlement
process for brokered DVP repos and
thereby reduce the risk of settlement
fails.
Finally, as discussed above in Section
I.C., the proposed Pair-Off Service
would enable participating members to
settle their offsetting failed securities
settlement obligations each day after the
Fedwire closes. FICC’s current process
is for such failed obligations to go
through the evening netting system,
with settlement rescheduled for the
following business day. The proposed
Pair-Off Service represents a more
efficient process for resolving failed
settlement obligations because
settlement would occur on the day they
arise, rather than continuing as
settlement fails to the next business day.
Moreover, failed obligations that remain
unsettled overnight present market risk
exposure to both FICC and the parties to
such trades. By enabling the earlier
settlement of a member’s offsetting
obligations, the proposed Pair-Off
Service could reduce such overnight
market risk.
For the reasons discussed above, the
Commission believes that the proposals
in the Advance Notice could minimize
the occurrence of settlement fails,
reduce associated risks, and improve
settlement efficiency. Accordingly, the
Commission believes that the proposals
E:\FR\FM\22JAN1.SGM
22JAN1
Federal Register / Vol. 86, No. 13 / Friday, January 22, 2021 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
in the Advance Notice are consistent
with the objectives of reducing systemic
risks and supporting the stability of the
broader financial system.46
The Commission further believes that
FICC’s proposals in the Advance Notice
are consistent with the objectives of
promoting robust risk management and
promoting safety and soundness. First,
as discussed above in Section I.A., FICC
currently acts as CCP for the End Leg of
same-day starting repos. In that role,
FICC risk manages, novates, and
guarantees settlement of such trades.
The proposed Same-Day Settling
Service would expand FICC’s role as
CCP to include the Start Leg of sameday starting repos, thereby applying
FICC’s existing risk management
standards to such trades. The
Commission believes that extending
FICC’s existing risk management
standards in acting as CCP for the Start
Leg of same-day settling repos is
consistent with the objective of
promoting robust risk management.47
Additionally, as discussed above in
Section I.C., the proposed Pair-Off
Service would enable participating
members to settle their offsetting failed
securities settlement obligations each
day, shortly after the Fedwire closes.
FICC’s current process is for such failed
obligations to go through the evening
netting system, with settlement
rescheduled for the following business
day. The proposed Pair-Off Service
represents a more efficient process for
resolving failed settlement obligations
because settlement would occur on the
day they arise, rather than continuing as
settlement fails to the next business day.
As discussed above, failed obligations
that remain unsettled overnight present
market risk exposure to both FICC and
the parties to such trades. By enabling
the earlier settlement of a member’s
offsetting obligations for those members
who choose to use the service, the
proposed Pair-Off Service could reduce
such overnight market risk and protect
FICC from sustaining associated losses.
Accordingly, the Commission believes
that adopting the proposed Pair-Off
Service is consistent with the objectives
of promoting robust risk management
and promoting safety and soundness.48
B. Consistency With Rule 17Ad–
22(e)(21)
Rule 17Ad–22(e)(21) under the
Exchange Act requires each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
46 Id.
47 Id.
48 Id.
VerDate Sep<11>2014
19:27 Jan 21, 2021
Jkt 253001
be efficient and effective in meeting the
requirements of its participants and the
markets it serves, and have the covered
clearing agency’s management regularly
review the efficiency and effectiveness
of its (i) clearing and settlement
arrangements, (ii) operating structure,
including risk management policies,
procedures and systems, and (iii) scope
of products cleared or settled.49
As discussed above in Section I.B, the
proposed Same-Day Settling Service
would eliminate bilateral settlements
between the parties to the Start Leg of
a DVP repo and allow FICC to settle
both the Start and End Legs of a DVP
Repo. In that regard, the proposed
Same-Day Settling Service represents a
more efficient and effective settlement
process than FICC’s current process,
which generally includes bilateral
settlement of the Start Leg. FICC
designed the Same-Day Settling Service
in response to requests from its
members, to mitigate the operational
risk that can result in settlement fails.
As discussed above, if not contained,
settlement fails can spread to other
market participants and undermine the
liquidity of a well-functioning market.50
In contrast, reducing the occurrence of
settlement fails (and their resultant
effects) would strengthen broader
market liquidity. Therefore, by reducing
the risk of settlement fails, the proposal
would benefit FICC’s members when it
results in transactions that settle on time
that might have otherwise failed, with
lower overall transaction costs.
Accordingly, the Commission believes
that adopting the proposed Same-Day
Settling Service would be consistent
with Rule 17Ad–22(e)(21) 51 because the
proposal would broaden the scope of
the DVP Service to include the Start Leg
of same-day starting repos in a manner
designed to be efficient and effective in
reducing settlement fails to the benefit
of FICC’s members and the broader DVP
repo market.
Moreover, as discussed above in
Section I.C, the proposed Pair-Off
Service would enable participating
members to settle their offsetting failed
securities settlement obligations each
day, shortly after the Fedwire closes.
Under FICC’s current process, such
failed obligations go through the
evening netting system, with settlement
rescheduled for the following business
day. The proposed Pair-Off Service
represents a more efficient process for
49 17
CFR 240.17Ad–22(e)(21).
when a FICC member fails to
meet its settlement obligations, the member incurs
FICC’s fails charge, which could further impact the
member’s liquidity. See Section 14, Rule 11—
Netting System, supra note 6.
51 17 CFR 240.17Ad–22(e)(21).
50 Additionally,
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
6729
resolving failed settlement obligations
because settlement would occur on the
day the obligations arise, rather than
continuing as settlement fails to the next
business day. As discussed above, failed
obligations that remain unsettled
overnight present market risk exposure
to both FICC and the parties to such
trades. By enabling earlier settlement of
a member’s offsetting obligations, the
proposed Pair-Off Service could reduce
such overnight market risk.
Accordingly, the Commission believes
that adopting the proposed Pair-Off
Service would be consistent with Rule
17Ad–22(e)(21) 52 because the proposal
would enable the earlier settlement of a
member’s offsetting failed obligations in
a manner designed to be efficient and
effective in reducing overnight market
risk to the benefit of FICC’s members.
III. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to Advance Notice (SR–
FICC–2020–803) and that FICC is
authorized to implement the proposed
change as of the date of this notice or
the date of an order by the Commission
approving proposed rule change SR–
FICC–2020–015, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–01324 Filed 1–21–21; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice: 11330]
Notice of Department of State
Sanctions Actions on Hong Kong
Normalization
The Secretary of State has
imposed sanctions on fourteen
individuals pursuant to Executive Order
13936, the President’s Executive Order
on Hong Kong Normalization.
DATES: The Secretary of State’s
determination regarding the fourteen
individuals identified in the
SUPPLEMENTARY INFORMATION section
was effective on December 7, 2020.
FOR FURTHER INFORMATION CONTACT:
Taylor Ruggles, Director, Office of
Economic Sanctions Policy and
Implementation, Bureau of Economic
and Business Affairs, Department of
State, Washington, DC 20520, tel.: (202)
647–7677, email: RugglesTV@state.gov.
SUPPLEMENTARY INFORMATION: Pursuant
to Section 4(a)(iii)(A) of E.O. 13936 the
SUMMARY:
52 Id.
E:\FR\FM\22JAN1.SGM
22JAN1
]]>Agencies
[Federal Register Volume 86, Number 13 (Friday, January 22, 2021)]
[Notices]
[Pages 6724-6729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01324]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90931; File No. SR-FICC-2020-803]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of No Objection To Advance Notice To Include Same-Day Settling
Trades in the Risk Management, Novation, Guarantee, and Settlement
Services of the Government Securities Division's Delivery-Versus-
Payment Service, and Make Other Changes
January 14, 2021.
On November 19, 2020, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-FICC-2020-803 (``Advance Notice'') pursuant to
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, entitled Payment, Clearing and Settlement
Supervision Act of 2010 (``Clearing Supervision Act''),\1\ and Rule
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934
(``Exchange Act'').\3\ In the Advance Notice, FICC proposes to (1)
expand its provision of central counterparty services to include the
start leg of certain repurchase agreement (``repo'') transactions, and
(2) enable participating FICC members to pair-off and settle certain
offsetting obligations, as described more fully below. The Advance
Notice was published for public comment in the Federal Register on
December 29,
[[Page 6725]]
2020,\4\ and the Commission has received no comments regarding the
changes proposed in the Advance Notice.\5\ This publication serves as
notice of no objection to the Advance Notice.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ Securities Exchange Act Release No. 90736 (December 21,
2020), 85 FR 85743 (December 29, 2020) (File No. SR-FICC-2020-803)
(``Notice of Filing'').
\5\ On November 19, 2020, FICC also filed a related proposed
rule change (SR-FICC-2020-015) (``Proposed Rule Change'') with the
Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4
respectively. The Proposed Rule Change was published in the Federal
Register on December 8, 2020. Securities Exchange Act Release No.
90551 (December 2, 2020), 85 FR 79051 (December 8, 2020). In the
Proposed Rule Change, FICC seeks approval of proposed changes to its
rules necessary to implement the Advance Notice. The comment period
for the related Proposed Rule Change filing closed on December 29,
2020, and the Commission received no comments. As the proposals
contained in the Advance Notice were also filed as a proposed rule
change, all public comments received on the proposal are considered,
regardless of whether the comments are submitted on the Proposed
Rule Change or the Advance Notice.
---------------------------------------------------------------------------
I. The Advance Notice
A. Background
FICC, through its Government Securities Division (``GSD''), serves
as a central counterparty (``CCP'') and provider of clearance and
settlement services for cash-settled U.S. Treasury securities.\6\ Among
its services, FICC provides real-time trade matching, clearing, risk
management, and netting for repo transactions in U.S. Treasury
securities in which all securities delivery obligations are made
against full payment (``delivery-versus-payment'' or ``DVP'') (the
``DVP Service'').\7\
---------------------------------------------------------------------------
\6\ FICC is composed of two divisions: GSD and the Mortgage-
Backed Securities Division (``MBSD''). GSD provides real-time trade
matching, clearing, risk management, and netting for trades in U.S.
government debt issues. MBSD provides real-time automated trade
matching, trade confirmation, risk management, netting, and
electronic pool notification to the mortgage-backed securities
(``MBS'') market. The Advance Notice deals solely with proposed
changes to the GSD Rulebook (``Rules''), which are available at
https://www.dtcc.com/legal/rules-and-procedures.
\7\ In addition to the DVP Service, FICC also provides such
services to facilitate trading other types of repos. FICC's General
Collateral Finance (``GCF'') Repo[supreg] Service enables members to
trade general collateral finance repos based on rate, term, and
underlying product throughout the day on a blind basis. See Rule
20--Special Provisions for GCF Repo Transactions, supra note 6.
FICC's Centrally Cleared Institutional Triparty (``CCIT'') Service
enables trading of tri-party repos between members that participate
in the GCF Repo Service and members that are institutional cash
lenders (other than investment companies registered under the
Investment Company Act of 1940, as amended). See Rule 3B--CCIT
Service, supra note 6. Unlike the DVP Service, the GCF Repo and CCIT
Services settle via the triparty platform of a clearing bank. This
Advance Notice proposes changes specific to the DVP Service.
---------------------------------------------------------------------------
DVP repos involve a pair of transactions between two parties. The
first transaction (the ``Start Leg'') consists of the sale of
securities, in which one party delivers securities in exchange for the
other party's delivery of cash. The second transaction (the ``End
Leg'') occurs on a date after that of the Start Leg and consists of the
repurchase of securities, in which the obligations to deliver cash and
securities are the reverse of the Start Leg. The parties agree to the
terms of the trade, including the specific securities, principal
amount, interest rate, haircut, and date of maturity (i.e., either
overnight or term).
A DVP repo that is scheduled to start one or more business days
after the submission of trade details to FICC is a ``forward starting''
repo. A DVP repo that is scheduled to start on the same business day as
trade details are submitted to FICC is a ``same-day starting'' repo.
For forward starting repos, FICC acts as CCP for both the Start Leg and
the End Leg. However, since the inception of the DVP Service, for same-
day starting repos, FICC generally has acted as CCP for the End Leg
only.\8\ Although FICC does not currently novate the Start Leg of same-
day starting repos, FICC collects margin from the parties for the End
Leg on the scheduled settlement date of the Start Leg.\9\ Currently,
the parties to a same-day starting repo settle the Start Leg
bilaterally outside of FICC.
---------------------------------------------------------------------------
\8\ There is one limited scenario in which FICC currently acts
as CCP for the Start Leg of a brokered same-day starting repo.
Specifically, if the Start Leg fails to settle on its original
scheduled settlement date, FICC currently assumes responsibility for
settlement of the Start Leg on the evening of the original scheduled
settlement date. See Notice of Filing, supra note 4 at 85744.
\9\ See Notice of Filing, supra note 4 at 85744, 50.
---------------------------------------------------------------------------
The first step in the clearance and settlement process of a DVP
repo is for the parties to submit the trade details to FICC.\10\ Upon
receipt, FICC validates the trade details in a procedure referred to in
FICC's Rules as ``Trade Comparison,'' which culminates in the legally
binding and enforceable contract between FICC and the parties to the
trade.\11\ There are different types of Trade Comparisons, depending on
which entity submits the trade details to FICC, and the procedures,
timing, and other applicable operational arrangements vary depending on
the type. For example, a Bilateral Comparison occurs when the
individual FICC members that are the parties to a trade each submit
trade details to FICC.\12\ A Demand Comparison occurs when an Inter-
Dealer Broker (``IDB'') or qualifying non-IDB repo broker \13\ (each, a
``Repo Broker'') submits trade details to FICC on behalf of both
parties to a trade.\14\
---------------------------------------------------------------------------
\10\ Trade details may be submitted to FICC by, or on behalf of,
a member in a form, manner, and timeframe prescribed by FICC's
Rules. See Rule 5--Comparison System, supra note 6.
\11\ Id.
\12\ See Rule 6A--Bilateral Comparison, supra note 6.
\13\ For purposes of the Advance Notice, both IDBs and non-IDB
repo brokers are FICC members. A qualifying non-IDB repo broker is
one that FICC has determined: (1) Operates as a broker with regard
to activity in a segregated repo account, and (2) agrees and
participates in FICC's repo netting service in the same manner as an
IDB that participates in the service. See Rule 1--Definitions, supra
note 6.
\14\ See Rule 6B--Demand Comparison, supra note 6.
---------------------------------------------------------------------------
FICC generally novates and guarantees settlement of a trade upon
Trade Comparison.\15\ Additionally, on a daily basis, FICC aggregates
and matches a member's offsetting obligations resulting from the
member's trades, thereby netting the member's total daily settlement
obligations.\16\ In the DVP Service, such netting takes place the night
before the scheduled settlement date of whichever leg of the repo would
settle on the following business day.\17\
---------------------------------------------------------------------------
\15\ See Rule 5--Comparison System, supra note 6.
\16\ See Rule 11--Netting System, supra note 6.
\17\ See Notice of Filing, supra note 4 at 85745-46.
---------------------------------------------------------------------------
Trades that settle bilaterally outside of FICC do not have the
benefit of FICC's CCP services, and therefore, such trades can be
subject to greater risk of settlement fails.\18\ Moreover, trades
facilitated by a Repo Broker that settle outside of FICC require
multiple bilateral securities movements between the parties to the
trade and the Repo Broker. The greater the number of bilateral
securities movements involved in trade settlement, the greater the
potential for operational risk resulting in settlement fails. If the
Start Leg of a DVP repo submitted by a Repo Broker fails to settle on
the original scheduled settlement date, FICC currently steps in that
evening as CCP and assumes
[[Page 6726]]
responsibility for settling the trade.\19\ This process may involve
FICC receiving securities from the failing party or netting the
settlement obligations arising from the Start Leg against those of the
End Leg of the same or another repo. FICC states that although its
current process of centralizing the settlement of such failed Start
Legs decreases further settlement risk, the current process is
operationally inefficient because it does not eliminate the multiple
securities movements that give rise to the risk of settlement
fails.\20\
---------------------------------------------------------------------------
\18\ There are several risk factors inherent to trades that
clear bilaterally as opposed to trades that clear through a CCP. For
example, the credit risk associated with bilaterally cleared trades
remains with the original counterparties, who might not utilize
robust and transparent margin requirements, multilateral netting,
emergency liquidity and loss sharing arrangements, or other risk
mitigation measures. See U.S. Department of the Treasury Report, A
Financial System That Creates Economic Opportunities: Capital
Markets at 78, 81 (October 2017), available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf; Joint Staff Report: The U.S.
Treasury Market at 55 (October 15, 2014), available at https://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2014.pdf; Treasury Market
Practices Group, White Paper on Clearing and Settlement in the
Secondary Market for U.S. Treasury Securities at 2-4 (July 11,
2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf.
\19\ See Section 5, Rule 19--Special Provisions for Brokered
Repo Transactions, supra note 6.
\20\ See Notice of Filing, supra note 4 at 85744.
---------------------------------------------------------------------------
B. Proposed Same-Day Settling Service
FICC states that its members have expressed an interest in FICC
acting as CCP for the Start Leg of same-day starting repos.\21\ In the
Advance Notice, FICC proposes to modify its Rules to include the Start
Leg of same-day starting repos in the risk management, novation,
guarantee, and settlement services of the DVP Service (the ``Same-Day
Settling Service''). Upon Trade Comparison, FICC would act as CCP for
the Start Leg of same-day starting repos, which would settle on the
same business day. FICC's margin collection with respect to the trade
would not change from the current process. After FICC's novation, if
the Start Leg were to fail, the parties' obligations to and from FICC
would go through the netting process that evening, and FICC would
continue to apply the margin amounts collected with respect to the
trade towards FICC's risk management of the End Leg.
---------------------------------------------------------------------------
\21\ Id.
---------------------------------------------------------------------------
FICC believes that the Same-Day Starting Service could increase
settlement efficiencies and decrease settlement risk because it would
eliminate the movement of securities between members by centralizing
the settlement of the Start Leg of same-day starting repos with
FICC.\22\ Moreover, for same-day starting repos submitted by Repo
Brokers, the Same-Day Settling Service would remove the Repo Broker
from the settlement process by eliminating the multiple bilateral
securities movements involved in the settlement of the Start Leg.
---------------------------------------------------------------------------
\22\ See Notice of Filing, supra note 4 at 85744, 49-50.
---------------------------------------------------------------------------
1. Voluntary for Repo Brokers; Mandatory for Other Members
As proposed in the Advance Notice, participation in the proposed
Same-Day Settling Service would be voluntary for Repo Brokers. Repo
Brokers often provide a suite of services to their clients, including
facilitating the bilateral settlement of the Start Leg of same-day
starting repos. FICC states that a requirement on Repo Brokers to
participate in the Same-Day Settling Service could disrupt the current
service offerings from Repo Brokers to their clients.\23\ Since Repo
Brokers submit trade details to FICC on behalf of both parties to a
trade, a Repo Broker opting out of the Same-Day Settling Service would
simply result in settlement of the Start Leg bilaterally outside of
FICC, as is done currently. FICC believes that providing optionality
would allow Repo Brokers and their clients to determine whether a Repo
Broker should participate in the Same-Day Settling Service.\24\ For
participating Repo Brokers, FICC would no longer assume responsibility
for a failed Start Leg because FICC would already be acting as CCP for
the Start Leg upon Trade Comparison.
---------------------------------------------------------------------------
\23\ See Notice of Filing, supra note 4 at 85746.
\24\ Id.
---------------------------------------------------------------------------
For FICC's members that are not Repo Brokers, participation in the
Same-Day Settling Service would be mandatory. Unlike Repo Brokers,
FICC's individual members submit trade details with respect to their
own side of a trade only, such that Trade Comparison only occurs after
FICC validates the trade details submitted by both parties to the
trade.\25\ Accordingly, if one party to a same-day starting repo could
choose to opt out of the Same-Day Settling Service, FICC would not be
able to act as CCP with equal and opposite settlement obligations
between the two parties. Such trades would, therefore, need to settle
outside of FICC as they do currently. However, unlike the clients of a
Repo Broker, such members would not know in advance whether any given
Start Leg would settle with FICC as CCP or bilaterally outside of FICC.
By requiring such members to participate in the Same-Day Settling
Service, members would have certainty that their Compared Trades would
settle with FICC acting as CCP.
---------------------------------------------------------------------------
\25\ See Rule 6A--Bilateral Comparison, supra note 6.
---------------------------------------------------------------------------
2. As-Of Trades
For purposes of the Advance Notice, same-day starting repos would
include As-Of Trades,\26\ in which a member submits a DVP repo for
comparison on the business day after the scheduled settlement date for
the Start Leg, and the End Leg is the current business day or
thereafter. FICC states that members occasionally submit As-Of Trades
due to human or operational errors.\27\ FICC further states that it
included As-Of Trades in the Advance Notice in order to reasonably
include as many variations of same-day starting repos as possible to
ensure that FICC would provide consistent settlement processing for all
same-day starting repos.\28\
---------------------------------------------------------------------------
\26\ See Rule 1, supra note 6.
\27\ See Notice of Filing, supra note 4 at 85745.
\28\ Id.
---------------------------------------------------------------------------
Currently, the Start Leg of an As-Of Trade settles outside of FICC.
An End Leg scheduled to settle on the current business day also settles
outside of FICC. However, an End Leg scheduled to settle on a date
after the current business day settles with FICC acting as CCP. As
proposed in the Advance Notice, FICC would act as CCP with respect to
both the Start and End Legs of a same-day starting repo, regardless of
the timing of the respective scheduled settlement dates.
3. Settlement at Contract Value or System Value
As mentioned above, netting in the DVP Service occurs the night
before the scheduled settlement date. Because settlement of Start Legs
within the Same-Day Settling Service would occur on the same business
day as Trade Comparison, such transactions would generally not be
netted.\29\ Instead, FICC would settle such transactions on a trade-
for-trade basis. Transactions that FICC settles on a trade-for-trade
basis (i.e., transactions that are not netted) settle at ``Contract
Value,'' which means the dollar value at which the transaction is to be
settled on the scheduled settlement date.\30\ Transactions that settle
on a future date (i.e., transactions that are netted) settle at
``System Value,'' which includes accrued interest. For consistency with
the foregoing, FICC proposes to clarify the Rules with respect to the
Same-Day Settling Service to reflect that any leg of a DVP repo to be
settled on a trade-for-trade basis would settle at Contract Value,
whereas any leg to be settled on a future date would settle at System
Value.\31\
---------------------------------------------------------------------------
\29\ The Start Leg of same-day starting repos would be netted in
the limited scenario of a brokered repo settlement fail on the
scheduled settlement date. See supra note 8; Notice of Filing, supra
note 4 at 85744.
\30\ See Rule 1--Definitions, supra note 6.
\31\ For example, for an overnight repo that is an As-Of Trade,
both legs would settle at Contract Value because both would settle
on the date of Trade Comparison and therefore would not be netted.
For an overnight repo that is a same-day starting repo, the Start
Leg would settle on the date of Trade Comparison at Contract Value,
whereas the End Leg would be netted that evening and settle the
following business day at System Value. For an overnight repo that
is forward starting (i.e., both legs would settle on dates in the
future), both legs would be subject to netting and settle at System
Value. Notice of Filing, supra note 4 at 85746.
---------------------------------------------------------------------------
[[Page 6727]]
4. Late-Day Compared Trades
FICC states that members occasionally execute same-day starting
repos after the close of the Fedwire Securities Service (``Fedwire''),
which is the service that members generally use for settling bilateral
securities obligations.\32\ Currently, such trades settle bilaterally
between the parties outside of FICC, provided that both parties use the
same clearing bank for settlement. In the Advance Notice, FICC proposes
to include such late-day trades in the Same-Day Settling Service (i.e.,
FICC proposes to act as CCP for the Start Leg) on a reasonable efforts
basis, meaning that FICC would attempt to contact the parties to the
trade and FICC's clearing bank to confirm agreement to settle the
trade.\33\
---------------------------------------------------------------------------
\32\ The Fedwire is a service provided by the Federal Reserve
Banks that includes settlement and transfer of DVP securities
transactions. The Fedwire operates daily from 8:30 a.m. to 3:30 p.m.
(All times herein are Eastern Time.) See Fedwire and National
Securities Service, Federal Reserve Bank of New York (March 2015),
available at https://www.newyorkfed.org/aboutthefed/fedpoint/fed43.html; Fedwire Securities Service, Board of Governors of the
Federal Reserve System (July 31, 2014), available at https://www.federalreserve.gov/paymentsystems/fedsecs_about.htm.
\33\ See Notice of Filing, supra note 4 at 85748.
---------------------------------------------------------------------------
Specifically, for members that clear at FICC's clearing bank, FICC
would attempt to settle any same-day starting repos that are compared
between 3:01 p.m. and 5:00 p.m., provided that (1) FICC is able to
contact the parties to the trade and FICC's clearing bank, and (2) the
parties and FICC's clearing bank agree to settle the trade. For members
that do not clear at FICC's clearing bank, FICC proposes to attempt to
settle, on a reasonable efforts basis, same-day starting repos that are
compared during the Fedwire reversal period between 3:01 p.m. and 3:30
p.m., provided that (1) FICC is able to contact FICC's clearing bank
and the parties to the trade, (2) FICC's clearing bank and the parties
to the trade confirm agreement to settle the trade, and (3) FICC's
clearing bank, the member's clearing bank, and the Federal Reserve Bank
of New York each permit settlement of the trade.
5. Other Changes to FICC's Rules To Incorporate the Same-Day Settling
Service
In the Advance Notice, FICC proposes changes to several Rule
provisions to ensure the relevant applicability of such provisions to
the Same-Day Settling Service. FICC proposes to add a newly defined
term ``Same-Day Settling Trade'' to capture the universe of DVP repos
that would be covered by the Same-Day Settling Service. FICC proposes
to modify the definitions of ``Deliver Obligation'' and ``Receive
Obligation'' to include references to Same-Day Settling Trades. FICC
proposes to modify the definitions of ``Settlement Value'' and ``System
Value'' to contemplate that Same-Day Settling Trades could settle at
Contract Value or System Value, depending on the circumstances of the
trade, as described above.
FICC proposes to incorporate Same-Day Settling Trades into the
existing Rule provisions governing the Comparison System and Netting
System. FICC proposes to add Rule provisions addressing eligibility
requirements for Same-Day Settling Trades to qualify for FICC's
novation and settlement guarantee. FICC proposes to incorporate Same-
Day Settling Trades into the Rule provisions governing how parties
satisfy their obligations to FICC, including trades that become
uncompared or canceled. FICC proposes to incorporate Same-Day Settling
Trades into the Rule provisions dealing with settlement fails. Finally,
FICC proposes to include appropriate cross-references to ensure that
various Rule provisions related to general securities settlement apply
to Same-Day Settling Trades.
C. Proposed Pair-Off Service
Settlement fails occur because one party does not have inventory to
settle with the other party on the scheduled settlement date.
Currently, a member's obligations that remain unsettled when the
Fedwire closes go through FICC's overnight netting system for
settlement the following business day, and the member is subject to
FICC's fails charge.\34\ In a scenario where a member has offsetting
unsettled failed obligations in the same security (i.e., separate
failed obligations to both deliver and receive the same security) after
the close of the Fedwire, those obligations currently go through the
overnight netting system for settlement the following day.
---------------------------------------------------------------------------
\34\ See Section 14, Rule 11--Netting System, supra note 6.
---------------------------------------------------------------------------
In the Advance Notice, FICC proposes an optional service for
members whereby FICC would pair-off a member's offsetting failed
securities settlement obligations each day, beginning at 3:32 p.m.
(shortly after the Fedwire closes) until 4:00 p.m. (the ``Pair-Off
Service''). Additionally, the member would receive either a debit or
credit, as applicable, to account for any difference in the settlement
value of its deliver and receive obligations as part of FICC's intraday
funds-only settlement (``FOS'') process. Therefore, the proposed Pair-
Off Service would enable participating members to settle their
obligations on the day they arise, rather than continuing to the next
day as unsettled failed obligations, as they would under the current
practice. Failed obligations that remain unsettled overnight present
market risk exposure to both FICC and the parties to such trades. FICC
believes that by enabling the earlier settlement of a member's
offsetting obligations, the proposed Pair-Off Service could reduce such
overnight market risk.\35\
---------------------------------------------------------------------------
\35\ See Notice of Filing, supra note 4 at 85749-50.
---------------------------------------------------------------------------
FICC proposes to start the Pair-Off Service at approximately 3:32
p.m., and provide FOS banks with their intraday net FOS figures by 4:00
p.m. for acknowledgement by 4:30 p.m. Accordingly, FICC proposes to
change the timing of FOS processing from the current time of 3:15 p.m.
to 4:30 p.m. to enable FICC to settle any net money differences that
would arise from the proposed Pair-Off Service.
II. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: To mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for SIFMUs and
strengthening the liquidity of SIFMUs.\36\
---------------------------------------------------------------------------
\36\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\37\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a): \38\
---------------------------------------------------------------------------
\37\ 12 U.S.C. 5464(a)(2).
\38\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as
[[Page 6728]]
risk management and default policies and procedures, among others
areas.\39\
---------------------------------------------------------------------------
\39\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\40\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\41\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the proposals in the Advance
Notice are consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act \42\ and in the Clearing
Agency Rules, in particular Rule 17Ad-22(e)(21).\43\
---------------------------------------------------------------------------
\40\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). FICC is a ``covered clearing agency'' as
defined in Rule 17Ad-22(a)(5).
\41\ Id.
\42\ 12 U.S.C. 5464(b).
\43\ 17 CFR 240.17Ad-22(e)(21)(i), (ii), and (iii).
---------------------------------------------------------------------------
A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the Advance Notice is consistent with
the stated objectives and principles of Section 805(b) of the Clearing
Supervision Act because the changes proposed in the Advance Notice are
consistent with reducing systemic risks, supporting the stability of
the broader financial system, promoting robust risk management, and
promoting safety and soundness.\44\
---------------------------------------------------------------------------
\44\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
The Commission believes that the proposals in the Advance Notice
are consistent with the principles of reducing systemic risk and
supporting the stability of the broader financial system. When a CCP
novates a trade and takes offsetting and guaranteed positions between
the two original parties to the trade, the length of time from novation
to trade settlement may affect the CCP's exposure to credit, market,
and liquidity risk. For example, settlement fails extend the time to
settlement and can thereby present risk to the CCP that a member's
positions and other resources that the CCP holds (generally, the
member's margin) decline in market value as the CCP considers whether
and how it might liquidate, transfer, or otherwise dispose of such
assets to minimize losses. Settlement fails can also affect the amount
of liquidity risk a CCP may need to bear for purposes of settling an
unsettled trade because CCPs may rely on incoming payments from some
members to facilitate payments to other members. For FICC's members, a
settlement fail on a securities delivery obligation causes the non-
failing party to withhold payment while settlement is rescheduled for
the following business day and until the trade ultimately settles. In
the interim, the non-failing party cannot use the securities, which it
may have already committed to deliver in subsequent trading activity,
giving rise to the risk of further settlement fails. Also, the failing
party does not have use of the cash proceeds from the trade. Settlement
fails can, therefore, undermine the liquidity of a well-functioning
market, and a member default could lead to the default of other members
and market participants as well. Settlement fails can therefore be a
source of systemic risk and instability to the broader market.
As described above in Section I.A., FICC currently acts as CCP for
only the End Leg of a same-day starting DVP repo. The Start Leg
currently settles bilaterally outside of FICC between the parties to
the trade. Trades that settle bilaterally outside of FICC are generally
exposed to more operational risk and consequently may result in more
settlement fails than trades which are novated and risk-managed by FICC
in its role as CCP.\45\
---------------------------------------------------------------------------
\45\ See supra note 18.
---------------------------------------------------------------------------
By centralizing settlement of the Start Leg of same-day starting
repos, the proposal would eliminate the current bilateral settlement of
securities between the parties. Once the Start Leg is subject to FICC's
settlement guarantee, a settlement fail would be contained between the
failing party and FICC. Even if the start leg were to fail, FICC's
margin collection and other risk mitigation measures would be in place
to protect the non-failing party originally on the other side of the
trade. The Same-Day Settling Service would thereby likely reduce the
spread of settlement fails to other market participants. As a result,
the Commission believes that the Same-Day Settling Service could reduce
the risk associated with settlement fails in the DVP repo market. More
broadly, by preventing the spread of settlement fails to other market
participants, the Same-Day Settling Service also could help reduce
systemic risk and support the stability of the broader financial
system.
Additionally, as discussed above in Section I.A., trades
facilitated by a Repo Broker that settle outside of FICC require
multiple bilateral securities movements between the parties to the
trade and the Repo Broker. The greater the number of bilateral
securities movements involved in trade settlement, the greater the
potential for operational risk resulting in settlement fails. FICC
currently manages the risk of a failed Start Leg for a brokered repo by
assuming responsibility for trade settlement on the evening of the
original scheduled settlement date. While this approach decreases
further settlement risk, it neither prevents the original settlement
fail nor does it eliminate the multiple bilateral securities movements
for settling the Start Leg until after a settlement fail. For
participating Repo Brokers, the Same-Day Settling Service would
eliminate the bilateral securities movements and the associated risk of
settlement fails because FICC would novate and guarantee settlement of
the Start Leg upon Trade Comparison. As a result, the Commission
believes that the Same-Day Settling Service could improve efficiency in
the settlement process for brokered DVP repos and thereby reduce the
risk of settlement fails.
Finally, as discussed above in Section I.C., the proposed Pair-Off
Service would enable participating members to settle their offsetting
failed securities settlement obligations each day after the Fedwire
closes. FICC's current process is for such failed obligations to go
through the evening netting system, with settlement rescheduled for the
following business day. The proposed Pair-Off Service represents a more
efficient process for resolving failed settlement obligations because
settlement would occur on the day they arise, rather than continuing as
settlement fails to the next business day. Moreover, failed obligations
that remain unsettled overnight present market risk exposure to both
FICC and the parties to such trades. By enabling the earlier settlement
of a member's offsetting obligations, the proposed Pair-Off Service
could reduce such overnight market risk.
For the reasons discussed above, the Commission believes that the
proposals in the Advance Notice could minimize the occurrence of
settlement fails, reduce associated risks, and improve settlement
efficiency. Accordingly, the Commission believes that the proposals
[[Page 6729]]
in the Advance Notice are consistent with the objectives of reducing
systemic risks and supporting the stability of the broader financial
system.\46\
---------------------------------------------------------------------------
\46\ Id.
---------------------------------------------------------------------------
The Commission further believes that FICC's proposals in the
Advance Notice are consistent with the objectives of promoting robust
risk management and promoting safety and soundness. First, as discussed
above in Section I.A., FICC currently acts as CCP for the End Leg of
same-day starting repos. In that role, FICC risk manages, novates, and
guarantees settlement of such trades. The proposed Same-Day Settling
Service would expand FICC's role as CCP to include the Start Leg of
same-day starting repos, thereby applying FICC's existing risk
management standards to such trades. The Commission believes that
extending FICC's existing risk management standards in acting as CCP
for the Start Leg of same-day settling repos is consistent with the
objective of promoting robust risk management.\47\
---------------------------------------------------------------------------
\47\ Id.
---------------------------------------------------------------------------
Additionally, as discussed above in Section I.C., the proposed
Pair-Off Service would enable participating members to settle their
offsetting failed securities settlement obligations each day, shortly
after the Fedwire closes. FICC's current process is for such failed
obligations to go through the evening netting system, with settlement
rescheduled for the following business day. The proposed Pair-Off
Service represents a more efficient process for resolving failed
settlement obligations because settlement would occur on the day they
arise, rather than continuing as settlement fails to the next business
day. As discussed above, failed obligations that remain unsettled
overnight present market risk exposure to both FICC and the parties to
such trades. By enabling the earlier settlement of a member's
offsetting obligations for those members who choose to use the service,
the proposed Pair-Off Service could reduce such overnight market risk
and protect FICC from sustaining associated losses. Accordingly, the
Commission believes that adopting the proposed Pair-Off Service is
consistent with the objectives of promoting robust risk management and
promoting safety and soundness.\48\
---------------------------------------------------------------------------
\48\ Id.
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(21)
Rule 17Ad-22(e)(21) under the Exchange Act requires each covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to be efficient and
effective in meeting the requirements of its participants and the
markets it serves, and have the covered clearing agency's management
regularly review the efficiency and effectiveness of its (i) clearing
and settlement arrangements, (ii) operating structure, including risk
management policies, procedures and systems, and (iii) scope of
products cleared or settled.\49\
---------------------------------------------------------------------------
\49\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------
As discussed above in Section I.B, the proposed Same-Day Settling
Service would eliminate bilateral settlements between the parties to
the Start Leg of a DVP repo and allow FICC to settle both the Start and
End Legs of a DVP Repo. In that regard, the proposed Same-Day Settling
Service represents a more efficient and effective settlement process
than FICC's current process, which generally includes bilateral
settlement of the Start Leg. FICC designed the Same-Day Settling
Service in response to requests from its members, to mitigate the
operational risk that can result in settlement fails. As discussed
above, if not contained, settlement fails can spread to other market
participants and undermine the liquidity of a well-functioning
market.\50\ In contrast, reducing the occurrence of settlement fails
(and their resultant effects) would strengthen broader market
liquidity. Therefore, by reducing the risk of settlement fails, the
proposal would benefit FICC's members when it results in transactions
that settle on time that might have otherwise failed, with lower
overall transaction costs. Accordingly, the Commission believes that
adopting the proposed Same-Day Settling Service would be consistent
with Rule 17Ad-22(e)(21) \51\ because the proposal would broaden the
scope of the DVP Service to include the Start Leg of same-day starting
repos in a manner designed to be efficient and effective in reducing
settlement fails to the benefit of FICC's members and the broader DVP
repo market.
---------------------------------------------------------------------------
\50\ Additionally, when a FICC member fails to meet its
settlement obligations, the member incurs FICC's fails charge, which
could further impact the member's liquidity. See Section 14, Rule
11--Netting System, supra note 6.
\51\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------
Moreover, as discussed above in Section I.C, the proposed Pair-Off
Service would enable participating members to settle their offsetting
failed securities settlement obligations each day, shortly after the
Fedwire closes. Under FICC's current process, such failed obligations
go through the evening netting system, with settlement rescheduled for
the following business day. The proposed Pair-Off Service represents a
more efficient process for resolving failed settlement obligations
because settlement would occur on the day the obligations arise, rather
than continuing as settlement fails to the next business day. As
discussed above, failed obligations that remain unsettled overnight
present market risk exposure to both FICC and the parties to such
trades. By enabling earlier settlement of a member's offsetting
obligations, the proposed Pair-Off Service could reduce such overnight
market risk. Accordingly, the Commission believes that adopting the
proposed Pair-Off Service would be consistent with Rule 17Ad-22(e)(21)
\52\ because the proposal would enable the earlier settlement of a
member's offsetting failed obligations in a manner designed to be
efficient and effective in reducing overnight market risk to the
benefit of FICC's members.
---------------------------------------------------------------------------
\52\ Id.
---------------------------------------------------------------------------
III. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-FICC-2020-803) and that FICC is authorized to
implement the proposed change as of the date of this notice or the date
of an order by the Commission approving proposed rule change SR-FICC-
2020-015, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01324 Filed 1-21-21; 8:45 am]
BILLING CODE 8011-01-P
