
[Federal Register Volume 79, Number 168 (Friday, August 29, 2014)]
[Notices]
[Pages 51630-51633]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-20557]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72908; File No. SR-FICC-2014-01]


Self-Regulatory Organization; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend the Government 
Securities Division Rulebook in Order To Establish an Early Unwind 
Intraday Charge in Connection With the Inclusion of GCF Repo[supreg] 
Positions in GSD's Intraday Participant Clearing Fund Requirement, and 
GSD's Hourly Internal Surveillance Cycles

August 25, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on August 11, 2014, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by FICC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On January 10, 2014, FICC filed advance notice SR-FICC-2014-
801 pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act titled the Payment, 
Clearing, and Settlement Supervision Act of 2010, 12 U.S.C. 
5465(e)(1), and Rule 19b-4(n)(1)(i) of the Securities Exchange Act 
of 1934, 17 CFR 240.19b-4(n)(1)(i). The Commission published notice 
for comment in the Federal Register on February 10, 2014. Securities 
Exchange Act Release No. 34-71469 (February 4, 2014), 79 FR 7722 
(February 10, 2014) (SR-FICC-2014-801). FICC filed Amendment No. 1 
to this advance notice on August 11, 2014. A copy of the advance 
notice and Amendment No. 1 are available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The Government Securities Division (``GSD'') of FICC is proposing 
to amend the GSD Rulebook (the ``Rules'') in order to establish an 
early unwind intraday charge to protect against the exposure that may 
result from intraday cash substitutions and early unwind of interbank 
allocations \4\ in connection with GSD's proposal to include the 
underlying collateral pertaining to the GCF Repo[supreg] \5\ positions 
in GSD's noon intraday \6\ participant Clearing Fund requirement 
(``CFR'') calculation, and GSD's hourly internal surveillance cycles.
---------------------------------------------------------------------------

    \4\ The ``early unwind of interbank allocations'' refers to the 
automatic return of the collateral from the reverse repo side (cash 
lender) to FICC's account at the repo side's (cash borrower's) 
settlement bank and the return of cash to the reverse repo side, 
which typically occurs before the opening of Fedwire.
    \5\ The GCF Repo[supreg] service enables dealers to trade 
general collateral repos, based on rate, term, and underlying 
product, throughout the day without requiring intra-day, trade-for-
trade settlement on a Deliver-versus-Payment (``DVP'') basis. The 
service fosters a highly liquid market for securities financing. GCF 
Repo[supreg] is a registered trademark of The Depository Trust & 
Clearing Corporation.
    \6\ Noon intraday refers to the routine intraday margining cycle 
which is based on a 12:00 p.m. (ET) position snap shot. Pursuant to 
Rule 4, FICC may request additional margin outside of the formal 
intraday margin calls.
---------------------------------------------------------------------------

II. Clearing Agency'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.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    GSD is proposing to amend its Rules in order to establish an early 
unwind intraday charge (``EUIC'') \7\ (discussed below) to protect 
against the exposure

[[Page 51631]]

that may result from intraday cash substitutions and early unwind of 
interbank allocations in connection with including the underlying 
collateral pertaining to the GCF Repo[supreg] positions in its noon 
intraday participant CFR calculation, and its hourly internal 
surveillance cycles.
---------------------------------------------------------------------------

    \7\ In connection with GSD's proposal to include the underlying 
collateral pertaining to the GCF Repo[supreg] positions in its noon 
intraday CFR, GSD discovered circumstances under which a member 
would be charged an EUIC. If, however, a member is assessed an EUIC 
under circumstances that were not initially contemplated and the 
EUIC charge is deemed unnecessary, management will have the 
discretion to waive such charge.
---------------------------------------------------------------------------

(a) Background
    On January 10, 2014, FICC filed advance notice SR-FICC-2014-801 \8\ 
(``Advance Notice'') with the Commission. This filing describes FICC's 
proposal to include the underlying collateral pertaining to the GCF 
Repo[supreg] positions in its noon intraday participant CFR 
calculation, and its hourly internal surveillance cycles. This 
enhancement is intended to align GSD's risk management calculations and 
monitoring with the changes that have been implemented to the tri-party 
infrastructure by the Tri-Party Reform Task Force,\9\ specifically, 
with respect to locking up of GCF Repo[supreg] collateral until 3:30 
p.m. (ET) rather than 7:30 a.m. (ET). Subsequent to the initial Advance 
Notice filing, FICC discovered that under the proposed change, a 
potential exposure may result from a GCF Repo[supreg] participant's 
cash substitutions and early unwinds of interbank allocations. As a 
result, on August 11, 2014, FICC filed Amendment No. 1 to the Advance 
Notice with the Commission. FICC is filing this proposed rule change in 
order to amend its Rules to establish an EUIC to protect against the 
exposure that may result from intraday cash substitutions and early 
unwind of interbank allocations.
---------------------------------------------------------------------------

    \8\ Securities Exchange Act Release No. 34-71469 (February 4, 
2014), 79 FR 7722 (February 10, 2014) (SR-FICC-2014-801). A copy of 
this Advance Notice filing and the amendment thereto are available 
at http://www.dtcc.com/legal/sec-rule-filings.aspx.
    \9\ The Task Force was formed in September 2009 under the 
auspices of the Payments Risk Committee, a private-sector body 
sponsored by the Federal Reserve Bank of New York. The Task Force's 
goal is to enhance the repo market's ability to navigate stressed 
market conditions by implementing changes that help better safeguard 
the market. DTCC has worked in close collaboration with the Task 
Force on their reform initiatives.
---------------------------------------------------------------------------

(b) Proposed Change
    As noted above, GSD is proposing to establish an EUIC \10\ to 
protect against the exposure that may result from intraday cash 
substitutions and early unwind of interbank allocations in connection 
with including the underlying collateral pertaining to the GCF 
Repo[supreg] positions in its noon intraday participant CFR 
calculation, and its hourly internal surveillance cycles.
---------------------------------------------------------------------------

    \10\ GSD's discovered circumstances under which a member would 
be charged an EUIC. If, however, a member is assessed an EUIC under 
circumstances that were not initially contemplated and the EUIC 
charge is deemed unnecessary, management will have the discretion to 
waive such charge.
---------------------------------------------------------------------------

    In connection with its review of its proposal to incorporate the 
underlying collateral pertaining to the GCF Repo[supreg] positions in 
the GSD's noon intraday participant CFR calculation, GSD discovered 
that there were instances where exposure to FICC arose as a result of 
certain cash substitutions or early unwind of interbank allocations. 
This is because the noon intraday underlying collateral pertaining to 
the GCF Repo[supreg] positions of impacted participants may exhibit a 
different risk profile than their same end-of-day (``EOD'') \11\ 
positions. The impact could be to increase or decrease the Value-at-
Risk (``VaR'') component of the CFR.
---------------------------------------------------------------------------

    \11\ As used herein ``prior EOD'' refers to the end of day cycle 
immediately preceding the current noon intraday cycle and ``same 
EOD'' refers to the end of day cycle immediately subsequent to the 
current noon intraday cycle.
---------------------------------------------------------------------------

    In certain instances, cash substitutions, for repo and reverse repo 
positions and the early unwind of interbank allocations for reverse 
repo positions, could result in higher cash balances in the underlying 
collateral pertaining to GCF Repo[supreg] positions at noon intraday 
than the same EOD, and could present a potential under-margin condition 
because cash collateral is not margined. In addition, it is likely that 
the cash will be replaced by securities in the next GCF Repo[supreg] 
allocation of collateral. The under-margin condition will exist 
overnight because the VaR on the GCF Repo[supreg] collateral in the 
same EOD cycle will not be calculated until after Fedwire is closed 
thus precluding members from satisfying margin deficits until the 
morning of the next business day. Accordingly, GSD will adjust the noon 
intraday CFR in the form of an EUIC, to address this risk. In order to 
determine whether an EUIC should be applied, GSD will take the 
following steps:
    1. At noon, GSD will compare the prior EOD VaR component of the CFR 
calculation with the current day's noon intraday VaR component of the 
CFR calculation.
    2. If the current day's noon intraday VaR calculation is equal to 
or higher than the prior EOD's VaR calculation then GSD will not apply 
an EUIC. If however, the current day's noon calculation is lower, then 
GSD will proceed to the step 3. below.
    3. GSD will review the GCF Repo[supreg] participant's DVP and GCF 
Repo[supreg] portfolio to determine whether the reduction in the noon 
calculation may be attributable to the GCF Repo[supreg] participant's 
intraday cash substitutions or early unwind of interbank allocations. 
If so, then GSD will apply the EUIC.
    4. At the participant level, the EUIC \12\ will be the lesser of 
(i) the net VaR decrease that may be deemed to be attributable to 
either cash substitutions and/or early unwind of interbank allocations 
or (ii) the prior EOD VaR minus the noon intraday VaR.\13\
---------------------------------------------------------------------------

    \12\ The EUIC will be included in the noon intraday participant 
CFR, but not the same EOD CFR. This is because the risk associated 
with cash lockups exists at intraday, that is, at any time before at 
EOD. At EOD in the normal course of business, GCF Repo[supreg] 
positions consist of 100% eligible non-cash securities. GCF 
Repo[supreg] is used for overnight financing of securities 
inventory. Absent extraordinary circumstances, participants do not 
use cash to collateralized overnight cash loans. Cash substitutions 
occur at intraday as participants substitute in cash to withdraw 
securities they need for intraday deliveries.
    \13\ In the event that cash substitutions or early unwind of 
interbank allocations impacts the CFR, the prior end of day CFR is 
used as a proxy for the same end of day CFR for the portion of the 
portfolio that is impacted by such cash substitutions or early 
unwind of interbank allocations. The EUIC is designed to prevent the 
impact of cash substitutions and early unwind of interbank 
allocations from unduly reducing noon intraday CFR relative to the 
prior EOD CFR calculation, thus the EUIC will not increase the noon 
intraday CFR above the prior EOD CFR calculation. (But the noon 
intraday CFR calculation exclusive of EUIC could be higher than the 
prior EOD CFR calculation).
---------------------------------------------------------------------------

    The EUIC for cash substitutions will apply to the repo side (cash 
borrower) and the reverse repo side (cash lender) of the transaction. 
As such, it should be noted that the reverse repo side is subject to 
the EUIC notwithstanding its inability to control the substitutions. 
The EUIC for cash substitutions applies to the reverse repo side 
because although they do not initiate the cash substitutions, the cash 
substitutions change the participant's risk profile and as a result, 
their noon intraday CFR could be unduly reduced. The EUIC for the early 
unwind of interbank allocations will only apply to the reverse repo 
side (cash lender) since it is only the reverse side whose lockup is 
unwound early. The securities subject to the early unwind are not 
returned to the repo side (cash borrower) in connection with the early 
unwind of interbank allocations. The early unwind of interbank 
allocations is performed on the reverse repo side to ensure that the 
underlying collateral is available to the repo side at its settlement 
bank. Cash is returned to the reverse repo side and thus unwound early. 
As such, it should be noted that the reverse repo side is subject to 
the EUIC notwithstanding its inability to control the early unwind of 
interbank allocations as their noon intraday CFR could be unduly 
reduced as a result of such early unwind. GSD

[[Page 51632]]

has discussed the EUIC with the participants that are likely to be 
materially impacted by this proposed charge. These participants did not 
express any concerns about the EUIC.
    There is no automatic unwind (return of securities) to the repo 
side. If the repo side needs its securities before the 3:30 p.m. (ET) 
scheduled unwind, it may perform a securities-for-securities 
substitution or a cash-for-securities substitution (in which case it 
may be subject to the EUIC).
    FICC believes it is important to incorporate the proposed changes 
in its risk management process as soon as possible because such changes 
will allow GSD to use more accurate position information in its margin 
calculations.
2. Statutory Basis
    The proposed charge is consistent with the requirements of Section 
of 17A(b)(3)(F) of the Securities Exchange Act of 1934, as amended (the 
``Act''), and the rules and regulations thereunder, because it applies 
prudent risk management to potential exposure that may result from 
intraday cash substitutions or early unwind of interbank allocations, 
and therefore facilitates the prompt and accurate clearance and 
settlement of securities transactions and assures the safeguarding of 
securities and funds which are in the custody or control of FICC or for 
which it is responsible. As noted above, GSD discovered that cash 
substitutions and the early unwind of interbank allocations may unduly 
reduce the margin requirements of affected participants. The EUIC will 
ensure that GSD's noon intraday CFR is commensurate with a 
participant's risk profile by appropriately reflecting the exposure 
that may result from intraday cash substitutions and early unwind of 
interbank allocations.

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

    As noted above, the EUIC for cash substitutions will apply to both 
the repo side (cash borrower) and the reverse repo side (cash lender) 
of the transaction and the EUIC for the early unwind of interbank 
allocations will apply to the reverse repo side only. As such, it 
should be noted that the reverse repo side is subject to the EUIC 
notwithstanding its inability to control the substitutions or the early 
unwind. The EUIC applies to the reverse repo side because although they 
do not initiate the cash substitutions or the early unwind of interbank 
allocations, these events change the reverse repo participants' risk 
profile and as a result, their noon intraday CFR could be unduly 
reduced. GSD has discussed the EUIC with the participants that are 
likely to be materially impacted by this proposed charge. These 
participants did not express concerns about the EUIC. The EUIC for the 
early unwind of interbank allocations will only apply to the reverse 
repo side (cash lender) since it is only the reverse side whose lockup 
is unwound early. The securities subject to the early unwind are not 
returned to the repo side (cash borrower) in connection with the early 
unwind of interbank allocations. The early unwind of interbank 
allocations is performed on the reverse repo side to ensure that the 
underlying collateral is available to the repo side at its settlement 
bank. Cash is returned to the reverse repo side and thus unwound early.
    GSD believes that the proposal will not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act, as the EUIC adjusts the noon intraday CFR when the 
CFR may have been unduly reduced due to cash substitutions or early 
unwind of interbank allocations. Thus, the proposal will allow GSD to 
adjust the noon intraday CFR with the EUIC in order to more accurately 
capture the risks presented to the clearing agency, and will help to 
ensure that GSD is not under margined during the time period covered by 
the noon intraday CFR. In this way, the proposal contributes to the 
goal of financial stability in the event of participant default, and 
will render not unreasonable or inappropriate any burden on competition 
that the changes could be regarded as imposing. Furthermore, GSD 
believes that the proposal will help facilitate the prompt and accurate 
clearance and settlement of securities transactions and protect 
investors and the public interest, in furtherance of the requirements 
of the Act applicable to GSD. As such, to the extent there remains any 
perceived burden on competition caused by the proposal, GSD believes 
that any such burden would be both necessary and appropriate in 
furtherance of the purposes of the Act, in particular Section 
17A(b)(3)(F) of the Act, as described above.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed rule changes have not yet 
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 Commissions 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-2014-01 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-FICC-2014-01. 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 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for

[[Page 51633]]

inspection and copying at the principal office of FICC and on FICC's 
Web site at http://www.dtcc.com/legal/sec-rule-filings.aspx.
    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-2014-01 
and should be submitted on or before September 19, 2014.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated Authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-20557 Filed 8-28-14; 8:45 am]
BILLING CODE 8011-01-P


