

[Federal Register: February 12, 2008 (Volume 73, Number 29)]
[Notices]               
[Page 8081-8084]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12fe08-69]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57281; File No. SR-FICC-2007-08]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change as Amended by Amendment No. 1 
To Resume Interbank Clearing for the GCF Repo Service

February 6, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 11, 2007, the Fixed 
Income Clearing Corporation (``FICC'') filed with the

[[Page 8082]]

Securities and Exchange Commission (``Commission'') proposed rule 
change SR-FICC-2007-08. On August 28, 2007, the Commission published 
notice of the proposed rule change to solicit comments from interested 
parties.\2\ On January 22, 2008, FICC submitted Amendment No. 1 to the 
proposed rule change. The proposed rule change, as amended by Amendment 
No. 1, is described in Items I, II, and III below, which items have 
been prepared by FICC. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 56303 (August 22, 2007), 
72 FR 49339.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FICC is seeking to resume interbank clearing for the GCF Repo 
service.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FICC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FICC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by FICC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Background
    The GCF Repo service allows FICC Government Securities Division 
(``GSD'') dealer members to trade GCF repos throughout the day with 
inter-dealer broker netting members (``brokers'') on a blind basis 
without requiring intraday, trade-for-trade settlement on a delivery-
versus-payment (DVP) basis. Standardized, generic CUSIP numbers have 
been established exclusively for GCF Repo processing and are used to 
specify the acceptable type of underlying Fedwire book-entry eligible 
collateral, which includes Treasuries, Agencies, and certain mortgage-
backed securities.
    The GCF Repo service was developed as part of a collaborative 
effort among FICC's predecessor, the Government Securities Clearing 
Corporation (``GSCC''), its two clearing banks, The Bank of New York 
(``BNY'') and The Chase Manhattan Bank, now JP Morgan Chase Bank, 
National Association (``Chase''), and industry representatives.\4\ GSCC 
introduced the GCF Repo service on an intraclearing bank basis in 
1998.\5\ Under the intrabank service, dealer members could only engage 
in GCF Repo transactions with other dealers that cleared at the same 
clearing bank.
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    \4\ BNY and Chase remain the two clearing banks approved by FICC 
to provide GCF Repo settlement services. In the future, other banks 
that FICC in its sole discretion determines meet its operational 
requirements may be approved to provide GCF Repo settlement 
services.
    \5\ Securities Exchange Act Release No. 40623 (October 30, 
1998), 63 FR 59831 (November 5, 1998) (SR-GSCC-98-02).
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    In 1999, GSCC expanded the GCF Repo service to permit dealer 
members to engage in GCF Repo trading on an interclearing bank basis, 
which allowed dealers using different clearing banks to enter into GCF 
Repo transactions on a blind brokered basis.\6\ Because dealer members 
that participated in the GCF Repo service did not, and still do not, 
all clear at the same clearing bank, expanding the service to be 
interclearing bank necessitated the establishment of a mechanism to 
permit after-hours movements of securities between the two clearing 
banks because GSCC would probably have unbalanced net GCF securities 
positions and unbalanced net cash positions within each clearing bank 
at the end of each day. (In other words, it was probable that at the 
end of GCF Repo processing each business day, the dealers at one 
clearing bank would be net funds borrowers while the dealers at the 
other clearing bank would be net funds lenders). To address this issue, 
GSCC and its clearing banks established a legal mechanism by which 
securities would ``move'' across the clearing banks without the use of 
the securities Fedwire.\7\ At the end of the day after the GCF Repo net 
results were produced, securities were pledged using a tri-party-like 
mechanism, and the interbank cash component was moved through the cash 
Fedwire. In the morning, the pledges were unwound with the funds being 
returned to the net funds lenders and the securities being returned to 
the net funds borrowers.
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    \6\ Securities Exchange Act Release No. 41303 (April 16, 1999), 
64 FR 20346 (April 26, 1999) (SR-GSCC-99-01).
    \7\ Movements of cash did not present the same need because the 
cash Fedwire is open later than the securities Fedwire.
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    However, as use of the service increased, certain payment systems 
risk issues from the interbank funds settlements arose. In 2003, FICC 
shifted the service back to intrabank status to enable it to study the 
risk issues presented and to devise a satisfactory solution to those 
issues in order that it could bring the service back to interbank 
status.\8\
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    \8\ Securities Exchange Act Release No. 48006 (June 10, 2003), 
68 FR 35745 (June 16, 2003) (SR-FICC-2003-04).
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2. Proposal
    FICC is now seeking to return the GCF Repo service to interbank 
status. This proposed rule change would address the risk issues raised 
by the interbank funds movement by placing a security interest on a 
dealer's ``net free equity'' (``NFE'') at its clearing bank to 
collateralize its GCF Repo cash obligation to FICC on an intraday basis 
and by making changes with respect to the morning ``unwind'' period.\9\ 
No changes are being proposed with respect to the procedures used for 
after-hours movement of securities, which procedures were used when the 
interbank service was first introduced.
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    \9\ NFE is a methodology that clearing banks use to determine 
whether an account holder, such as a dealer, has sufficient 
collateral to enter a specific transaction. NFE allows the clearing 
bank to place a limit on its customer's activity by calculating a 
value on the customer's balances at the bank. Bank customers have 
the ability to monitor their NFE balance throughout the day.
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    Specifically, the interbank funds payment would not move during the 
GCF Repo morning unwind process. In lieu of making funds payments, each 
interbank dealer (``Interbank Pledging Member'') at the GCF net funds 
borrower bank would grant to FICC a security interest in its NFE-
Related Collateral in an amount equal to its pro rata share of the 
total interbank funds debit (``Prorated Interbank Cash Amount'').\10\ 
FICC's lien on this collateral would be pari passu to any lien created 
by the dealer in favor of the relevant GCF clearing bank.
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    \10\ ``NFE-Related Collateral'' is the total amount of 
collateral that a dealer has at its clearing bank.
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    FICC would in turn grant to the GCF net funds lender bank, which 
was due to receive funds, a security interest in the NFE-Related 
Collateral to support the debit in the FICC account. The debit in the 
FICC account (``Interbank Cash Amount Debit'') would occur because the 
dealers that are due to receive funds in the morning must receive those 
funds in return for their release of GCF collateral. The clearing banks 
would agree to manage the collateral value of the NFE-Related 
Collateral as they do today.
    The debit in the FICC account at the GCF net funds lender bank 
would be satisfied during the end of day GCF settlement process. 
Specifically, that day's new activity would yield a new

[[Page 8083]]

interbank funds amount to move at end of day; however, this new 
interbank funds amount would be netted with the amount that was due in 
the morning to reduce the interbank funds movement. The NFE security 
interest would be released when the interbank funds movement is made at 
end of day.
    As described above, FICC would have a security interest in the 
dealers' NFE-Related Collateral on an intraday basis. In the unlikely 
event of an intraday GCF participant default, FICC would need to have 
the NFE-Related Collateral liquidated in order to have use of the 
proceeds. FICC would enter into an agreement with each of the clearing 
banks whereby each bank would agree to liquidate the NFE-Related 
Collateral both for itself as well as on behalf of FICC. FICC and each 
bank would agree to share pro rata in the liquidation proceeds.
    Due to the nature of the various assets that may be part of a 
particular dealer's NFE-Related Collateral, liquidation of the NFE-
Related Collateral might take longer than one day, GSD's typical 
collateral liquidation time frame, to be completed. Therefore, FICC 
would establish standby liquidity facilities or other financing 
arrangements with each of the clearing banks to be invoked as needed in 
the event of the default of an interbank pledging member.
    FICC is also proposing to impose a collateral premium (``GCF 
Premium Charge'') on the GCF Repo portion of the Clearing Fund deposits 
of all GCF participants to further protect FICC in the event of an 
intraday default of a GCF participant. FICC would require GCF Repo 
participants to submit a quarterly ``snapshot'' of their holdings by 
asset type to enable FICC Risk Management staff to determine the 
appropriate Clearing Fund premium. Any GCF Repo participant that does 
not submit this required information by the deadlines established by 
FICC would be subject to a fine and an increased Clearing Fund premium.
    Because the NFE-Related Collateral is held at the clearing banks 
and because the clearing banks monitor the activity of their dealer 
customers, FICC would have the right, using its sole discretion, to 
cease to act for a member that is a GCF Repo participant in the event 
that a clearing bank ceases to extend credit to such member.
    The proposal results in the need for the following specific GSD 
rule changes.
    1. The new terms referred to above (GCF Premium Charge, Interbank 
Cash Amount Debit, Interbank Pledging Member, NFE-Related Collateral, 
and Prorated Interbank Cash Amount) would be added to Rule 1 
(Definitions). A new term, ``NFE-Related Account,'' which is referred 
to in the definition of ``NFE-Related Collateral,'' would also be 
added.
    2. Section 3 (Collateral Allocation) of Rule 20 (Special Provisions 
for GCF Repo Transactions), which governs the GCF Repo collateral 
allocation process, would be amended to reflect the new process that 
would occur on the morning of the unwind (to be referred to as the 
morning of ``Day 2'' in the Rules).
    3. Section 3 of Rule 20 would be further amended to provide for the 
following:
    (a) the granting of the security interest in the NFE-Related 
Collateral to FICC by the dealers;
    (b) the granting of authority for FICC to provide instructions to 
the clearing banks regarding the NFE-Related Collateral by the dealers;
    (c) the granting of the security interest in the NFE-Related 
Collateral to the clearing banks by FICC; and
    (d) FICC's right to enter into agreements with the clearing banks 
regarding the collateral management of the NFE-Related Collateral, the 
liquidation of the NFE-Related Collateral, and the standby liquidity 
facilities or other financing arrangements.
    4. Rule 4 (Clearing Fund, Watch List, and Loss Allocation) would be 
amended to provide for the Clearing Fund premium that would be imposed 
on GCF Repo participants. Rule 3 (Ongoing Membership Requirements) 
would be amended to include the quarterly NFE reporting requirement 
which, if not followed timely by the members, would result in fines and 
Clearing Fund premium consequences.
    5. Rules 21 (Restrictions on Access to Services) and 22 (Insolvency 
of a Member) would be amended to provide that FICC may in its sole 
discretion cease to act for a member in the event that the member's 
clearing bank has ceased to extend credit to the member.
    6. The schedule of GCF time frames would be amended to reflect 
technical changes.
3. The Amendment
    The amendment to the proposed rule change addresses the situation 
where FICC becomes concerned about the volume of interbank GCF Repo 
activity. For example, such a concern might arise if market events were 
to cause dealers to turn to the GCF Repo service for increased funding 
at levels above normal processing. In order to protect itself and its 
members, FICC believes it is important to have the discretion to 
institute risk mitigation and appropriate disincentive measures in 
order to bring GCF Repo levels down to a comfortable level from a risk 
management perspective.
    Specifically, the amendment introduces the term ``GCF Repo Event,'' 
which would be declared by FICC if either of the following occurs: (i) 
the GCF interbank funds amount exceeds five times the average interbank 
funds amount over the previous ninety days for three consecutive days 
\11\ or (ii) the GCF interbank funds amount exceeded fifty percent of 
the amount of GCF Repo collateral pledged for three consecutive 
days.\12\ FICC would review the Repo Event triggering levels on a semi-
annual basis to determine whether they remain adequate.\13\ FICC would 
also have the right to declare a GCF Repo Event in any other 
circumstances where it was concerned about GCF Repo volumes and 
believed it was necessary to declare a Repo Event in order to protect 
itself and its members.\14\
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    \11\ For example, assume that the average interbank funds amount 
over the previous ninety days is $11 billion. FICC would declare a 
GCF Repo Event if the interbank funds amount exceeded $55 billion 
over three consecutive days.
    \12\ For example, assume that on Monday the total amount of GCF 
Repo collateral pledged was $86.8 billion and that $11 billion was 
the interbank funds amount. The interbank funds amount would be 12.7 
percent of the daily pledged amount. A GCF Repo Event would be 
declared if the overall pledged amount stayed at $86.6 billion and 
the interbank amount exceeded $43.3 billion for three consecutive 
days.
    \13\ Any changes to these figures would require FICC to submit a 
proposed rule change to the Commission.
    \14\ For example, FICC may determine to declare a GCF Repo Event 
if one of the specified events noted above occurs for less than 
three consecutive days.
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    The declaration of a GCF Repo Event would trigger the imposition of 
risk mitigation and disincentive measures. These measures would be 
imposed each day during the Event, and they would be imposed on each 
day's GCF net funds borrowers whose aggregate GCF net short position 
exceeded a certain threshold.\15\
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    \15\ FICC would inform its members about the declaration of a 
GCF Repo Event by issuing an Important Notice. The Important Notice, 
which, would, among other things, inform members of the 
implementation date of the measures. FICC would also inform the 
Commission about the declaration of the Event. The GCF Repo Event 
would last until FICC notifies its members that the Event has ended.
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    Specifically, FICC would establish a ``GCF Repo Event Parameter,'' 
which would be a certain percentage of each dealer's average GCF Repo 
net short settlement amount during a one-month look-back period. FICC 
would establish 140 percent as the maximum percentage for the GCF Repo 
Event Parameter and would have the discretion to reduce this percentage 
during a GCF Repo Event if it believed that the maximum

[[Page 8084]]

percentage was not adequately addressing the particular event. Any GCF 
Repo net short settlement amount that exceeded the GCF Repo Event 
Parameter would be subject to a ``GCF Repo Event Clearing Fund 
Premium'' and a ``GCF Repo Event Carry Charge.''\16\
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    \16\ For example, assume that FICC has declared a GCF Repo 
Event, and on the day of implementation of the protective measures, 
Dealer A's average net short settlement amount is $1 billion. This 
means that Dealer A's GCF Repo Event Parameter is $1.4 billion. On 
the day of implementation of the protective measures, Dealer A's net 
settlement amount is $1.9 billion, so the measures will be applied 
to $500 million (i.e., $1.9 billion minus $1.4 billion). If the 
percentage for the GCF Repo Event Collateral Premium is 12 percent 
and the GCF Repo Event Carry Charge is 50 basis points, Dealer A 
will pay a GCF Repo Event Clearing Fund Premium of $60 million and a 
GCF Repo Event Carry Charge of $6,944.44 on the day of 
implementation. On each succeeding day that the GCF Repo Event 
remains in effect, FICC will reevaluate, Dealer A's net settlement 
position.
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    FICC would set 12% as the minimum percentage on which the GCF Repo 
Event Clearing Fund Premium would be based and 50 basis points as the 
minimum on which the GCF Repo Event Carry Charge would be based, and 
would have the discretion to increase these amounts during a GCF Repo 
Event if FICC believed that the minimums were not adequately addressing 
the particular GCF Repo Event.
    FICC would retain the right to waive imposition of the GCF Repo 
Event Clearing Fund Premium and the GCF Repo Event Carry Charge if FICC 
determined, based on monitoring against the GCF Repo Event Parameters, 
that these measures were not necessary to protect FICC and its members.
4. Statutory Basis
    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \17\ and the rules and 
regulations thereunder applicable to FICC because it should allow GCF 
Repo participants to expand their use of the GCF Repo service to 
include GCF Repos done with dealers that clear at a different clearing 
bank in a manner that will support the prompt and accurate clearance 
and settlement of securities transactions.
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    \17\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change would have any 
impact or impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments have not been solicited with respect to the 
proposed rule change, and none have been received. FICC will notify the 
Commission of any written comments it receives.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-FICC-2007-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2007-08. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://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 inspection and 
copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 am and 3 pm. Copies of such filing also will be available for 
inspection and copying at the principal office of FICC and on FICC's 
Web site at http://www.ficc.com/gov/gov.docs.jsp?NS-query. All comments 

received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FICC-2007-08 and should be 
submitted on or before March 4, 2008. 

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-2471 Filed 2-11-08; 8:45 am]

BILLING CODE 8011-01-P
