
[Federal Register Volume 77, Number 123 (Tuesday, June 26, 2012)]
[Notices]
[Pages 38108-38113]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15536]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67227; File No. SR-FICC-2012-05]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend the Rules Regarding 
the GCF Repo Service To Adopt Changes Recommended by the Tri-Party Repo 
Infrastructure Reform Task Force

June 20, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on June 8, 2012, the Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared primarily by FICC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to seek the Commission's 
approval to extend the pilot program (the ``Pilot Program'') that is 
currently in effect for certain aspects of the GCF Repo 
service[supreg].\3\ FICC is requesting that the Pilot Program be 
extended for one year following the date of the

[[Page 38109]]

Commission's approval of this proposed rule change filing.\4\
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    \3\ GCF Repo is a registered trademark of FICC/DTCC.
    \4\ If FICC determines to change the parameters of the service 
during the one-year Pilot Program extension period, it will submit a 
proposed rule change filing to the Commission. If FICC seeks to 
extend the Pilot Program beyond the one-year period or proposes to 
make the Pilot Program permanent, it will also submit a proposed 
rule change filing to the Commission.
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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.\5\
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    \5\ 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

    (i) On July 12, 2011, FICC submitted a proposed rule change filing 
to the Commission (SR-FICC-2011-05) proposing to make certain changes 
to its GCF Repo service in order to comply with the recommendations 
that had been made by the Tri-Party Repo Infrastructure Reform Task 
Force (``TPR''), an industry group formed and sponsored by the Federal 
Reserve Bank of New York.\6\ Because the GCF Repo service operates as a 
tri-party mechanism, FICC was requested to incorporate changes to the 
GCF Repo service to align the service with the other TPR recommended 
changes for the overall tri-party repo market.
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    \6\ The main purpose of the TPR was to develop recommendations 
to address the risk presented by tri-party repo transactions due to 
the current morning reversal or ``unwind'' process and to move to a 
process by which tri-party repo transactions are collateralized all 
day.
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    The rule change described in SR-FICC-2011-05 was proposed to be run 
as a Pilot Program for one year starting from the date on which the 
Commission approved the filing.\7\ During this past year, FICC 
implemented a portion of the rule changes that were included in SR-
FICC-2011-05 and wishes to continue to have these aspects of the GCF 
Repo service continue as part of the renewed Pilot Program. FICC also 
wishes to make certain modifications to the Pilot Program as noted 
below.
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    \7\ Securities Exchange Act Release No. 34-65213 (August 29, 
2011), 76 FR 54824 (September 2, 2011).
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Background: Description of the GCF Repo Service and History
(1) Creation of the GCF Repo Service
    The GCF Repo service allows Government Securities Division 
(``GSD'') dealer members to trade general collateral repos \8\ 
throughout the day without requiring intra-day, trade-for-trade 
settlement on a delivery-versus-payment (DVP) basis. The service allows 
the dealers to trade such general collateral repos, based on rate and 
term, throughout the day with inter-dealer broker netting members on a 
blind 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.\9\
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    \8\ A general collateral repo is a repo in which the underlying 
securities collateral is nonspecific, general collateral whose 
identification is at the option of the seller. This is in contrast 
to a specific collateral repo.
    \9\ In 2009, the Commission approved FICC rule filing 2009-04 to 
add debt securities issued under the Debt Guaranty Program component 
of the Federal Deposit Insurance Corporation's (``FDIC'') Temporary 
Liquidity Guarantee Program (``TLGP'') to the GCF Repo Service. See 
Securities Exchange Act Release No. 34-59558 (March 11, 2009), 74 FR 
11385 (March 17, 2009). The TLGP, one of the steps taken by the U.S. 
Government to stabilize the credit markets and stimulate lending, 
was designed to allow banks to issue FDIC-insured debt, ensuring 
that the banks would be able to roll over any debt coming due in the 
coming months. The guarantee consists of timely payment of principal 
and interest. The expiration of the FDIC's guarantee is the earlier 
of either the maturity date of the issued debt or June 2012.
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    The GCF Repo service was developed as part of a collaborative 
effort among the Government Securities Clearing Corporation (``GSCC'') 
(GSD's predecessor), its two clearing banks (The Bank of New York 
Mellon (``BNY'') and JPMorgan Chase Bank, National Association 
(``Chase'')), and industry representatives. GSCC introduced the GCF 
Repo service on an intra-clearing bank basis in 1998.\10\ Under the 
intrabank service, dealers could only engage in GCF Repo transactions 
with other dealers that cleared at the same clearing bank.
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    \10\ See Securities Exchange Act Release No. 34-40623 (October 
30, 1998), 63 FR 59831 (November 5, 1998).
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(2) Creation of the Interbank Version of the GCF Repo Service
    In 1999, GSCC expanded the GCF Repo service to permit dealer 
participants to engage in GCF Repo trading on an interbank basis, 
meaning that dealers using different clearing banks could enter into 
GCF Repo transactions (on a blind brokered basis).\11\ Because dealer 
members that participate in the GCF Repo service do not all clear at 
the same clearing bank, introducing the service as an interbank service 
necessitated the establishment of a mechanism to permit after-hours 
movements of securities between the two clearing banks to deal with the 
fact that GSCC would likely have unbalanced net GCF securities and cash 
positions within each clearing bank (that is, it is likely that at the 
end of GCF Repo processing each business day, the dealers in one 
clearing bank will be net funds borrowers, while the dealers at the 
other clearing bank will be net funds lenders). To address this issue, 
GSCC and its clearing banks established, and the Commission approved, a 
legal mechanism by which securities would ``move'' across the clearing 
banks without the use of the Fedwire Securities Service (``Fedwire 
Securities'').\12\ (Movements of cash do not present the same issue 
because the Fedwire Funds Service (``Fedwire Funds'') is open later 
than Fedwire Securities). Therefore, at the end of the day, after the 
GCF net results are produced, securities are pledged via a tri-party-
like mechanism and the interbank cash component is moved via Fedwire 
Funds. In the morning, the pledges are unwound, that is, funds are 
returned to the net funds lenders and securities are returned to the 
net funds borrowers.
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    \11\ See Securities Exchange Act Release No. 34-41303 (April 16, 
1999), 64 FR 20346 (April 26, 1999).
    \12\ See id. for a detailed description of the clearing bank and 
FICC accounts needed to effect the after-hour movement of 
securities.
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    The following simplified example illustrates the manner in which 
the GCF Repo service works on an interbank basis:

    Assume that Dealer B clears at BNY and Dealer C clears at Chase. 
Further assume that: (i) outside of FICC, Dealer B engages in a tri-
party repo transaction with Party X to obtain funds and seeks to 
invest such funds via a GCF Repo transaction; (ii) outside of FICC, 
Dealer C engages in a DVP repo transaction with Party Y to buy 
securities and seeks to finance these securities via a GCF Repo 
transaction; and (iii) Dealer B and Dealer C enter into a GCF Repo 
transaction (on a blind basis via a GCF Repo broker) and submit the 
trade details to FICC.

    At the end of ``Day 1,'' GCF Repo collateral must be allocated, 
i.e., Dealer B must receive the securities. However, the securities 
that Dealer B is to receive are at Chase and Fedwire Securities is 
closed. The after-hours movement

[[Page 38110]]

mechanism permits the securities to be ``sent'' to Dealer B as follows: 
FICC will instruct Chase to allocate to a special FICC clearance 
account at Chase securities in an amount equal to the net short 
securities position.
    FICC has established on its own books and records two ``securities 
accounts'' as defined in Article 8 of the New York Uniform Commercial 
Code, one in the name of Chase (``FICC Account for Chase'') and one in 
the name of BNY (``FICC Account for BNY''). The FICC Account for Chase 
is comprised of the securities in FICC's special clearance account 
maintained by BNY (``FICC Special Clearance Account at BNY for 
Chase''), and the FICC Account for BNY is comprised of the securities 
in FICC's special clearance account maintained by Chase (``FICC Special 
Clearance Account at Chase for BNY'').\13\ The establishment of these 
securities accounts by FICC in the name of the clearing banks enables 
the clearing bank that is in the net long securities position to 
``receive'' securities by pledge after the close of Fedwire Securities. 
Once the clearing bank has ``received'' the securities by pledge, it 
can credit them by book-entry to a FICC GCF Repo account at that 
clearing bank and then to the dealers that clear at that bank that are 
net long the securities in connection with GCF Repo trades.
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    \13\ FICC has appointed Chase as its agent to maintain FICC's 
books and records with respect to the BNY securities account, and 
FICC has appointed BNY as its agent to maintain FICC's books and 
records with respect to the Chase securities account.
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    In the example, Chase, as agent for FICC, will transmit to BNY a 
description of the securities in the FICC Special Clearance Account at 
Chase for BNY. Based on this description, BNY will transfer funds equal 
to the funds borrowed position to the FICC GCF Repo account at Chase. 
Upon receipt of the funds by Chase, Chase will release any liens it may 
have on the FICC Special Clearance Account at Chase for BNY, and FICC 
will release any liens it may have on the FICC Account for BNY (both of 
these accounts being comprised of the same securities). BNY will credit 
the securities in the FICC Account for BNY to FICC's GCF Repo account 
at BNY, and BNY will further credit these securities to Dealer B, who, 
as noted, is in a net long securities position. In the morning of ``Day 
2,'' all securities and funds movements occurring on Day 1 are reversed 
(``unwind'').
(3) Issues With Morning Unwind Process
    In 2003, FICC shifted the GCF Repo service back to intrabank status 
only.\14\ By that time, the service had grown significantly in 
participation and volume. However, with the increase in use of the 
interbank service, certain payments systems risk issues arose from the 
inter-bank funds settlements related to the service, namely, the large 
interbank funds movement in the morning. FICC shifted the service back 
to intrabank status to enable management to study the issues presented 
and identify a satisfactory solution for bringing the service back to 
interbank status.
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    \14\ See Securities Exchange Act Release No. 34-48006 (June 10, 
2003), 68 FR 35745 (June 16, 2003).
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(4) The NFE Filing and Restoration of Service to Interbank Status
    In 2007, FICC submitted to the Commission a proposed rule change to 
address the issues raised by the interbank morning funds movement and 
return the GCF Repo service to interbank status (``2007 NFE 
Filing'').\15\ The 2007 NFE Filing addressed these issues by using a 
hold against a dealer's ``net free equity'' (``NFE'') at the clearing 
bank to collateralize its GCF Repo cash obligation to FICC on an 
intraday basis.\16\
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    \15\ See Securities Exchange Act Release No. 34-57652 (April 11, 
2008), 73 FR 20999 (April 17, 2008).
    \16\ NFE is a methodology that clearing banks use to determine 
whether an account holder (such as a dealer) has sufficient 
collateral to enter into 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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    The 2007 NFE Filing replaced the Day 2 morning unwind process with 
an alternate process, which is currently in effect. Specifically, in 
lieu of making funds payments, the interbank dealers grant to FICC a 
security interest in their NFE-related collateral equal to their 
prorated share of the total interbank funds amount. FICC, in turn, 
grants to the other clearing bank (that was due to receive the funds) a 
security interest in the NFE-related collateral to support the debit in 
the FICC account at the clearing bank. The debit in the FICC account 
(``Interbank Cash Amount Debit'') occurs because the dealers who are 
due to receive funds in the morning must receive those funds at that 
time in return for their release of collateral. The debit in the FICC 
account at the clearing bank gets satisfied during the end of day GCF 
Repo settlement process. Specifically, that day's new activity yields a 
new interbank funds amount that will move at end of day--however, this 
amount gets netted with the amount that would have been due in the 
morning, thus further reducing the interbank funds movement. The NFE 
holds are released when the interbank funds movement is made at end of 
day. The 2007 NFE Filing did not involve any changes to the after-hours 
movement of securities occurring at the end of the day on Day 1.
    Using the example above:

    On the morning of Day 2, Dealer C who needs to return funds in 
the unwind, instead of returning the funds in the morning, grants to 
FICC a security interest in Dealer C's NFE-related collateral equal 
to its funds movement (it is assumed only one GCF Repo transaction 
took place in this simplified example). FICC, in turn, grants BNY 
(that was due to receive the funds) a security interest in the NFE-
related collateral to support the debit in the FICC account at BNY. 
As noted above, the debit in FICC's account at BNY arises because, 
under the current processing, Dealer B must receive its funds during 
the morning unwind. The FICC debit is then satisfied during the end 
of day GCF Repo settlement process.

    As part of the 2007 NFE Filing, FICC imposed certain additional 
risk management measures with respect to the GCF Repo service. First, 
FICC imposed 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 intra-day default of a GCF Repo 
participant. FICC requires GCF Repo participants to submit a quarterly 
``snapshot'' of their holdings by asset type to enable risk management 
staff to determine the appropriate Clearing Fund premium. As with all 
other instances of late submissions of required information, members 
who do not submit this required information by the deadlines 
established by FICC are subject to a fine and an increased Clearing 
Fund premium.
    Second, the 2007 NFE Filing addressed the situation where FICC 
becomes concerned about the volume of interbank GCF Repo activity. Such 
a concern might arise, for example, if market events were to cause 
dealers to turn to the GCF Repo service for increased funding at levels 
beyond normal processing. The 2007 NFE Filing provides FICC with the 
discretion to institute risk mitigation and appropriate disincentive 
measures in order to bring GCF Repo levels to a comfortable level from 
a risk management perspective.\17\
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    \17\ Specifically, the 2007 NFE Filing introduced the term ``GCF 
Repo Event,'' which will 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; or (ii) the GCF interbank funds 
amount exceeds fifty percent of the amount of GCF Repo collateral 
pledged for three consecutive days. FICC reviews these figures on a 
semi-annual basis to determine whether they remain adequate. FICC 
also has the right to declare a GCF Repo Event in any other 
circumstances where it is concerned about GCF Repo volumes and 
believes it is necessary to declare a GCF Repo Event in order to 
protect itself and its members. FICC will inform its members about 
the declaration of the GCF Repo Event via important notice. FICC 
will also inform the Commission about the declaration of the GCF 
Repo Event.

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[[Page 38111]]

Proposed Changes to the GCF Repo Service To Implement the TPR's 
Recommendations
    In SR-FICC-2011-05, FICC proposed the following rule changes with 
respect to the GCF Repo service to address the TPR's Recommendations:
    (1) (a) To move the Day 2 unwind from 7:30 a.m. to 3:30 p.m.; (b) 
to move the NFE process \18\ from morning to a time established by FICC 
as announced by notice to all members; \19\ (c) to move the cut-off 
time of GCF Repo submissions from 3:35 p.m. to 3:00 p.m.; and (d) to 
move the cut-off time for dealer affirmation or disaffirmation from 
3:45 p.m. to 3:00 p.m.; and
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    \18\ No other changes are being proposed to the NFE process that 
was in place by the 2007 NFE Filing; the risk management measures 
that were put in place by the 2007 NFE Filing remain in place with 
the present proposal.
    \19\ SR-FICC-2011-05 noted that the possible time range would be 
between 8 a.m. and 1 p.m. to coincide with the collateral 
substitution mechanism that was being developed between FICC and its 
clearing banks. FICC wishes to clarify that the 8 a.m. to 1 p.m. 
proposed time range in SR-FICC-2011-05 referred to the clearing bank 
hold on the FICC interest in the NFE (i.e., as part of the NFE 
process, FICC grants to the other clearing bank (that was due to 
receive the funds) a security interest in the NFE--related 
collateral to support the debit in the FICC account at the clearing 
bank). With respect to the NFE hold on the dealers, please see 
footnote 21 below.
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    (2) To establish rules for intraday GCF Repo collateral 
substitutions (i.e., SR-FICC-2011-05 stated that with respect to 
interbank GCF Repo transactions, the substitution process would only 
permit cash as an initial matter to accommodate current processing 
systems, however, as noted below, following the approval of this 
proposed rule change filing, the substitution process will permit cash 
and/or securities).
    FICC has implemented the proposed changes referred to in 
subsections 1(c) and 1(d) above. FICC has not yet implemented the 
proposed changes referred to in subsections 1(a), 1(b) and 2 above. 
FICC is seeking the Commission's approval to extend the Pilot Program 
for all of these changes for an additional year as noted above. FICC is 
working with its clearing banks with respect to the implementation of 
the changes that have not yet been implemented.
(1) Proposed Change Regarding the Morning Unwind and Related Rule 
Changes
    The TPR has recommended that the Day 2 unwind for all tri-party 
transactions be moved from the morning to 3:30 p.m. The TPR has made 
this recommendation in order to reduce the clearing banks' intraday 
credit exposure to the dealers. As previously stated, because the GCF 
Repo service is essentially a tri-party repo mechanism, FICC has also 
been requested by the TPR to accommodate this time change. For the GSD 
rules, this necessitates a change to the GSD's ``Schedule of GCF 
Timeframes'' (``Schedule''). Specifically, the 7:30 a.m. time in the 
Schedule will be deleted and the language therein proposed to be moved 
to a new time of 3:30 p.m. on the Schedule.
    The change to the time of the intrabank unwind also necessitates a 
change to the cut-off time for GCF Repo trade submissions, which is 
currently 3:35 p.m. in the Schedule. FICC is proposing to amend the 
Schedule to change the cut-off time to 3 p.m. to allow FICC to submit 
files to the clearing banks which, in turn, will provide files to the 
dealers by 3:30 p.m.; this will permit the dealers to have a complete 
picture of their positions as the unwind occurs at 3:30 p.m. The 3:45 
p.m. cutoff for dealer affirmation or disaffirmation that is in the 
current Schedule will move to 3 p.m. so that the new 3 p.m. cutoff for 
submissions will also now be the cutoff for dealer affirmations and 
disaffirmations.\20\
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    \20\ This change updates the current Schedule to provide that 
the cutoff for submissions and dealer affirmations/disaffirmations 
is at the same time; the current practice is inconsistent with the 
current Schedule and the proposed rule change would remedy this 
inconsistency.
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    Because the Day 2 unwind is proposed to move from the morning to 
3:30 p.m. and because the NFE process established by the 2007 NFE 
Filing is tied to the moment of the interbank unwind, the NFE process 
will also move to the time established by FICC as announced by notice 
to all members.\21\ Because the NFE process is a legal process and not 
an operational process, it is not reflected on the Schedule. A change 
is needed in Section 3 of Rule 20 to delete the reference to the 
``morning'' timeframe on Day 2 with respect to the NFE process and to 
add language referencing ``at the time established by the 
Corporation.''
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    \21\ Currently, the NFE hold is from the time the collateral is 
returned to the repo dealer (approximately 7:30 a.m.) until the time 
the funds move between the two clearing banks (approximately 5 
p.m.). When the systems processing for the tri-party reform effort 
continues on the part of the clearing banks, the unwind will move to 
3:30 p.m. and the funds will continue to move between the two 
clearing banks at 5 p.m.; when this occurs, the NFE hold which 
applies to dealers will be between 3:30 p.m. and 5 p.m.
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(2) Proposed Change Regarding Intraday GCF Repo Securities Collateral 
Substitutions
    As a result of the time change of the unwind (i.e., the reversal on 
Day 2 of collateral allocations established by FICC for each netting 
member's GCF net funds borrower positions and GCF net funds lender 
positions on Day 1) to 3:30 p.m., the provider of GCF Repo securities 
collateral in a GCF Repo transaction on Day 1 will no longer have 
access to such securities at the beginning of Day 2. Therefore, during 
Day 2 prior to the unwind of the Day 1 collateral allocations, the 
provider of GCF Repo securities collateral (Dealer C, in the example) 
needs a substitution mechanism for the return of its posted GCF Repo 
securities collateral in order to make securities deliveries for 
utilization of such securities in its business activities. (In the 
example, Dealer C may need to return the securities to Party Y 
depending upon the terms of their transaction). FICC is proposing to 
establish a substitution process for this purpose in conjunction with 
its clearing banks. The language for the substitution mechanism is 
proposed to be added to Section 3 of GSD Rule 20. The proposed rule 
change provides that all requests for substitution for the GCF Repo 
securities collateral must be submitted by the provider of the GCF Repo 
securities collateral (i.e., Dealer C) by the applicable deadline on 
Day 2 (the ``substitution deadline'').\22\
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    \22\ FICC will establish such deadline prior to the 
implementation of the changes to this service in conjunction with 
the clearing banks and the Federal Reserve in light of market 
circumstances. The initial substitution deadline is anticipated to 
be 1 p.m.; however, this will be finalized with the Federal Reserve 
and the clearing banks. The possible time range will be between 8 
a.m. and 1 p.m. FICC will provide members advanced notice of the 
substitution deadline and any future changes thereto by important 
notice.
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Substitutions on Intrabank GCF Repos
    If the GCF Repo transaction is between dealer counterparties 
effecting the transaction through the same clearing bank (i.e., on an 
intra-clearing bank basis and in our example Dealer C and other dealers 
clearing at Chase), on Day 2 such clearing bank will process each 
substitution request of the provider of GCF Repo securities collateral 
(i.e., Dealer C) submitted prior to the substitution deadline promptly 
upon receipt of such request. The return of

[[Page 38112]]

the GCF Repo securities collateral in exchange for cash and/or eligible 
securities of equivalent value can be effected by simple debits and 
credits to the accounts of the GCF Repo dealer counterparties at the 
clearing agent bank (i.e., in the example, Chase). Eligible securities 
for this purpose will be the same as those currently permitted under 
the GSD rules for collateral allocations, namely, Comparable 
Securities,\23\ (ii) Other Acceptable Securities,\24\ or (iii) U.S. 
Treasury bills, notes or bonds maturing in a time frame no greater than 
that of the securities that have been traded (except where such traded 
securities are U.S. Treasury bills, substitution may be with Comparable 
Securities and/or cash only).
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    \23\ The GSD rules define ``Comparable Securities'' as follows: 
The term ``Comparable Securities'' means, with respect to a security 
or securities that are represented by a particular Generic CUSIP 
Number, any other security or securities that are represented by the 
same Generic CUSIP Number.
    \24\ The GSD rules define ``Other Acceptable Securities'' as 
follows: The term ``Other Acceptable Securities'' means, with 
respect to: (an) Adjustable-rate mortgage-backed security or 
securities issued by Ginnie Mae, any fixed-rate mortgage-backed 
security or securities issued by Ginnie Mae, or (an) adjustable-rate 
mortgage-backed security or securities issued by either Fannie Mae 
or Freddie Mac: (a) Any fixed-rate mortgage-backed security or 
securities issued by Fannie Mae and Freddie Mac, (b) any fixed-rate 
mortgage-backed security or securities issued by Ginnie Mae, or (c) 
any adjustable-rate mortgage-backed security or securities issued by 
Ginnie Mae.
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Substitutions on Interbank GCF Repos
    For a GCF Repo that was processed on an interbank basis and to 
accommodate a potential substitution request, FICC proposes to initiate 
a debit of the securities in the account of the lender through the FICC 
GCF Repo accounts at the clearing bank of the lender and the FICC GCF 
Repo account at the clearing bank of the borrower (``Interbank 
Movement''). This Interbank Movement is being done so that a borrower 
who elects to substitute collateral will have access to the collateral 
for which it is substituting. The Interbank Movement is expected to 
occur in the morning, though the clearing banks and FICC have the 
capability to have the Interbank Movement occur at any point during the 
day up until 2:30 p.m. During the Pilot Program, FICC and the clearing 
banks will unwind the intrabank GCF Repo transactions at 3:30 p.m. FICC 
and the clearing banks will determine the most appropriate timeframe 
for the Interbank Movement process to occur.
    In the example above, the GCF Repo securities collateral will be 
debited from the securities account of the receiver of the collateral 
(i.e., Dealer B) at its clearing bank (i.e., BNY), and from the FICC 
Account for BNY. If a substitution request is received by the clearing 
bank (i.e., Chase) of the provider of GCF Repo securities collateral, 
prior to the substitution deadline at a time specified in FICC's 
procedures,\25\ that clearing bank will process the substitution 
request by releasing the GCF Repo securities collateral from the FICC 
GCF Repo account at Chase and crediting it to the account of the 
provider of GCF Repo securities collateral (i.e., Dealer C). All cash 
and/or securities substituted for the GCF Repo securities collateral 
being released will be credited to FICC's GCF Repo account at the 
clearing bank (i.e., Chase).
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    \25\ This timeframe will also be established in consultation 
with the clearing banks and the Federal Reserve. The parties are 
considering whether to have the substitution process be accomplished 
in two batches during the day depending upon the time of submission 
of the notifications for substitution. In any event, substitution 
requests will be subject to the substitution deadline. The details 
of the batches, if applied, will be announced to members by 
important notice. The deadline for submission of GCF Repo 
substitution requests will be the same for intrabank and interbank 
processing.
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    Simultaneously, with the debit of the GCF Repo securities 
collateral from the account at the clearing bank (i.e., BNY) of the 
original receiver of GCF Repo securities collateral (i.e., Dealer B), 
for purposes of making payment to the original receiver of securities 
collateral (i.e., Dealer B), such clearing bank will effect a cash 
debit equal to the value of the securities collateral in FICC's GCF 
Repo account at such clearing bank and will credit the account of the 
original receiver of securities collateral (i.e., Dealer B) at such 
clearing bank with such cash amount. (This is because when Dealer B is 
debited the securities, Dealer B must receive the funds.) In order to 
secure FICC's obligation to repay the balance in FICC's GCF Repo 
account at such clearing bank (i.e., BNY), FICC will grant to such 
clearing bank a security interest in the cash and/or securities 
substituted for the GCF securities collateral in FICC's GCF repo 
account at the other clearing bank (i.e., Chase).
    Using the example from above, assume that Dealer C submits a 
substitution notification--it requires the securities collateral that 
has been pledged to Dealer B and will substitute cash and/or 
securities. BNY will debit the securities from Dealer B's account and 
the relevant liens will be released so that the securities are in 
FICC's account at Chase. Chase will credit the securities to Dealer C's 
account and the cash and/or securities that Dealer C uses for its 
collateral substitution will be credited by Chase to FICC's account at 
Chase. From Dealer B's perspective, when BNY debits the securities from 
Dealer B's account, Dealer B is supposed to receive the funds--but as 
noted, the funds are at Chase. BNY will credit the funds to Dealer B's 
account and debit FICC's account at BNY.
    At this point in the example, FICC is running a credit at Chase and 
a debit at BNY. In order to secure FICC's debit at BNY, FICC will grant 
a security interest in the funds in the FICC account at Chase.
    For substitutions that occur with respect to GCF Repo transactions 
that were processed on an inter-clearing bank basis, FICC and the 
clearing banks will permit cash substitutions as noted in SR-FICC-2011-
05. However, as discussions have developed between FICC and its 
clearing banks, it has been determined that cash and/or securities may 
be used for substitutions. The proposed rule change provides FICC with 
flexibility in this regard by referring to FICC's procedures. When 
interbank securities substitutions begin to be permitted, FICC will 
announce this to members by important notice.
Other Rule Changes
    FICC is also proposing to make technical clean-up changes to 
Section 7 of GSD Rule 20, which relate to the GCF Repo collateral 
process. Specifically, a correction is being made to change references 
to the defined term ``Security'' to ``security'' to conform to the use 
of ``security'' throughout the rule. The proposed rule change also 
introduces a term that previously had not been included in the rules 
inadvertently, ``GCF Collateral Excess Account.'' This term is defined 
in the proposed rule change as ``the account established by a GCF 
Custodian Bank in the name of the Corporation to hold securities it 
credits to the GCF Securities Account the Corporation establishes for 
another GCF Clearing Bank.''
    (ii) FICC believes the proposed rule changes are consistent with 
the requirements of Section 17A of the Act \26\ and the rules and 
regulations thereunder applicable to FICC because the rule amendments 
are designed to promote the prompt and accurate clearance and 
settlement of security transactions and assure the safeguarding of 
securities and funds which are in the custody or control of FICC by 
aligning the GCF Repo service with recommendations being made by the 
TPR to address risks in the overall tri-party repo market, which will 
serve to

[[Page 38113]]

safeguard the securities and funds for which FICC is responsible.
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    \26\ 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 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 relating to the proposed rule change have not been 
solicited or received. FICC will notify the Commission of any written 
comments received by FICC.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 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 email to rule-comments@sec.gov. Please include File Number 
SR-FICC-2012-05 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2012-05. 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 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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filings will also be available for 
inspection and copying at the principal office of FICC and on FICC's 
Web site at http://www.dtcc.com/downloads/legal/rule_filings/2012/ficc/2012-05.pdf
    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-2012-05 
and should be submitted on or before July 17, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-15536 Filed 6-25-12; 8:45 am]
BILLING CODE 8011-01-P


