
[Federal Register Volume 79, Number 187 (Friday, September 26, 2014)]
[Notices]
[Pages 58007-58010]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22991]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73187; File No. SR-FICC-2014-801]


Self-Regulatory Organizations; The Fixed Income Clearing 
Corporation; Notice of Filing Amendment No. 1 to Advance Notice 
Relating to the Government Securities Division's Inclusion of GCF 
Repo[supreg] Positions in GSD's Intraday Participant Clearing Fund 
Requirement Calculation, and GSD's Hourly Internal Surveillance Cycles

September 23, 2014.
    On January 10, 2014, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-FICC-2014-801 (``Advance Notice'') pursuant to 
Section 806(e)(1)(A) of the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 
19b-4(n)(1)(i) \2\ of the Securities Exchange Act of 1934 (the 
``Exchange Act''). The Advance Notice was published in the Federal 
Register on February 10, 2014.\3\ On March 10, 2014, pursuant to 
Section 806(e)(1)(D) of the Clearing Supervision Act \4\, additional 
information regarding this advance notice was requested. Pursuant to 
Section 806(e)(1)`` \5\ of the Clearing Supervision Act and Rule 19b-
4(n)(1)(i) \6\ of the Exchange Act, notice is hereby given that on 
August 11, 2014, FICC filed with the Commission, Amendment No. 1 to the 
Advance Notice as described in Items I, II, and III below, which Items 
have been prepared primarily by FICC.\7\ The Commission is publishing 
this notice to solicit comments on the advance notice from interested 
persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Securities Exchange Act Release No. 34-71469 (February 4, 
2014), 79 FR 7722 (February 10, 2014) (SR-FICC-2014-801).
    \4\ 12 U.S.C. 5465(e)(1)(D).
    \5\ 12 U.S.C. 5465(e)(1).
    \6\ 17 CFR 240.19b-4(n)(1)(i).
    \7\ FICC also filed the proposal contained in this amendment to 
the advance notice as a proposed rule change under Section 19(b)(1) 
of the Exchange Act and Rule 19b-4 thereunder. 15 U.S.C. 78s(b)(1); 
17 CFR 240.19b-4. See Securities Exchange Act Release No. 72908 
(August 25, 2014), 79 FR 51630 (August 29, 2014).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Advance Notice

    This filing constitutes Amendment No. 1 (``Amendment No. 1'') to 
the Advance Notice previously filed by FICC in connection with the 
Government Securities Division's (``GSD'') inclusion of the underlying 
collateral pertaining to the GCF Repo[supreg] \8\ positions in GSD's 
noon intraday \9\ participant Clearing Fund requirement (``CFR'') 
calculation, and GSD's hourly internal surveillance cycles.
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    \8\ 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.
    \9\ 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.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, FICC included statements 
concerning the purpose of and basis for the Advance Notice, as modified 
by Amendment No. 1, and discussed any comments it received on the 
Advance Notice. The text of these statements may be examined at the 
places specified in Item IV below. FICC has prepared summaries, set 
forth in sections A and B below, of the most significant aspects of 
such statements.

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

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

(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act.

1. Description of the Change
(i) Overview
    On January 10, 2014, FICC filed an Advance Notice with the 
Commission. The Advance Notice related to FICC's proposal to 
incorporate 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 \10\ (the ``Task 
Force''), 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 a potential 
exposure may result from a GCF Repo[supreg] participant's cash 
substitutions and early unwinds of interbank allocations.\11\ As a 
result, FICC is amending the initial Advance Notice to discuss the 
manner in which GSD intends to protect itself and its members from the 
potential exposure.
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    \10\ 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.
    \11\ 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.
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(ii) Historical Background
    Prior to the changes implemented by the Task Force, the underlying 
collateral pertaining to the GCF Repo[supreg] positions was locked up 
each afternoon (approximately 4:30 p.m. (ET)) and unwound at the 
beginning of the next business day (approximately 7:30 a.m. (ET)). 
Thus, the GCF Repo[supreg] positions were included in the end of day 
(``EOD'') CFR calculations but not included in GSD's noon intraday CFR 
calculations. Because the GCF Repo[supreg] positions were not included 
in GSD's noon intraday CFR calculation, the noon calculation could 
result in an under-margined condition relative to the same EOD \12\ 
CFR. Thus, GSD imposed a ``higher-of'' standard on GCF Repo[supreg] 
participants, whereby their noon intraday CFR was the higher of the 
actual noon intraday CFR calculation or its prior EOD CFR 
calculation.\13\
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    \12\ 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 cycle immediately subsequent to the current noon 
intraday cycle.
    \13\ For example, in the extreme case where a participant's 
portfolio was comprised entirely of GCF Repo[supreg] positions, at 
each EOD margining cycle GSD could calculate a substantial margin 
requirement which had to be met by 9:30 a.m. (ET) the next morning. 
But at each intraday margining cycle, GSD would calculate a 
negligible margin requirement (because GCF Repo[supreg] positions 
were not included at intraday). This would allow the participant to 
withdraw substantially all its margin collateral before the same 
EOD. In this case, if the participant defaulted overnight, GSD would 
hold almost no margin collateral from the participant while having 
the exposure of liquidating losses on a substantial GCF Repo[supreg] 
portfolio. To prevent this potential under-margin condition, GSD 
imposed the ``higher of'' standard.

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[[Page 58008]]

    With the advent of the Task Force's reform, which resulted in 
moving the unwind from 7:30 a.m. (ET) to 3:30 p.m. (ET), details on the 
underlying collateral pertaining to GCF Repo[supreg] positions are now 
received from the clearing banks on an hourly basis and can be 
incorporated into the noon intraday CFR calculation. Substitutions of 
underlying collateral are now permitted between 8:30 a.m. (ET) and 3:30 
p.m. (ET).\14\
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    \14\ A key aspect of the GCF Repo[supreg] service is to give the 
repo side (cash borrower) the ability to retrieve its securities 
during the business day and deliver those securities to meet a 
delivery obligation. As a result, GCF Repo[supreg] was unwound in 
the morning. With the Tri-Party Reform's change in the unwind from 
7:30 a.m. (ET) to 3:30 p.m. (ET), participants now have access to 
their securities during the day via collateral substitutions.
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    At the time of the initial Advance Notice filing, GSD believed that 
the noon intraday CFR calculation based on the actual underlying 
collateral pertaining to the GCF Repo[supreg] positions provided a more 
accurate CFR and would be more equitable for participants rather than 
imposing a ``higher-of'' standard. In connection with this proposal, 
GSD performed the testing that was described in SR-FICC-2014-801. The 
testing revealed that a potential exposure may result from a GCF 
Repo[supreg] participant's cash substitutions and early unwind of 
interbank allocations. This information became available after FICC 
formally filed the initial Advance Notice with the Commission. As a 
result, this information was not included in the filing at that time.
(iii) Proposed Change
    GSD plans to incorporate the underlying collateral pertaining to 
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 Task Force.
    In connection with the Task Force's tri-party reform, GCF 
Repo[supreg] collateral now remains locked up until 3:30 p.m. (ET), 
with substitutions permitted intraday at the times established by each 
clearing bank. Because the GCF Repo[supreg] collateral was unwound at 
7:30 a.m. (ET), the current production system does not include GCF 
Repo[supreg] collateral in the GSD noon intraday CFR calculation, and 
its hourly surveillance cycles. To account for the risk associated with 
the underlying collateral pertaining to the GCF Repo[supreg] positions, 
GSD's margin requirements currently apply a ``higher of'' standard, 
which means that the margin calculation takes the higher of the prior 
EOD core charge \15\ (which includes GCF Repo[supreg] collateral) or 
the current day's noon intraday core charge (which does not \16\ 
include GCF Repo[supreg] collateral). However, now that the collateral 
is locked-up until 3:30 p.m. (ET), the noon intraday participant CFR 
and hourly surveillance calculations will be based on the actual 
locked-up GCF Repo[supreg] collateral. In the ordinary course of 
business, the ``higher of'' standard will not apply. However, this 
standard will remain available in the event that one or both clearing 
banks do not provide intraday underlying collateral pertaining to the 
GCF Repo[supreg] position data because such clearing bank, as 
applicable, is unable to provide the data.
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    \15\ The core charge consists primarily of value-at-risk, the 
implied volatility charge (also known as the augmented volatility 
multiplier) and the coverage component.
    \16\ Since GCF Repo[supreg] collateral is excluded, only DVP 
positions are included in the noon core charge.
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    In connection with the testing described in the Advance Notice, GSD 
observed that cash substitutions and early unwinds of interbank 
allocations resulted in reducing the underlying securities pertaining 
to GCF Repo[supreg] positions of impacted participants. As a result, 
GSD is proposing the Early Unwind Intraday Charge (``EUIC'') to protect 
itself and its membership from the exclusion of the portion of the 
underlying collateral pertaining to the GCF Repo[supreg] positions 
impacted by cash substitutions or early unwinds of interbank 
allocations.\17\ GSD will remove the ``higher of'' standard which will 
give margin relief to participants who truly have a lower portfolio 
risk profile at intraday, but will impose the EUIC to adjust for the 
exposure for the portion of the GCF Repo[supreg] portfolio impacted by 
cash substitutions and early unwinds of interbank allocations.
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    \17\ GSD's review during the parallel testing revealed 
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.
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    The proposed change is consistent with Rule 17Ad-22 \18\ (the 
``Clearing Agency Standards'') which establishes the minimum 
requirements regarding how registered clearing agencies must maintain 
effective risk management procedures and controls. Specifically, 
consistent with Rule 17Ad-22(b)(1) \19\ and (b)(2),\20\ the proposed 
change (1) provides a more accurate and timely view of member positions 
and their corresponding exposures and (2) addresses exposures that 
arise as a result of certain cash substitutions or early unwind of 
interbank allocations. In sum, FICC's more accurate and timely 
calculations around and monitoring of GCF Repo[supreg] activity will 
better enable FICC to respond in the event that a member defaults. As 
such, FICC believes that the proposal promotes robust risk management, 
and the safety and soundness of FICC's operations, which reduce 
systemic risk and support the stability of the broader financial system 
which is consistent with the Clearing Agency Standards.\21\
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    \18\ 17 CFR 240.17Ad-22.
    \19\ 17 CFR 240.17Ad-22(b)(1).
    \20\ 17 CFR 240.17Ad-22(b)(2).
    \21\ 17 CFR 240.17Ad-22.
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(iv) Membership Outreach
    In connection with this initiative, FICC is providing an extended 
member parallel period which began on January 13, 2014. The parallel 
period has continued for over six months during which GCF Repo[supreg] 
participants have been able to view their production and test 
requirements on a daily basis. This allows members to assess the impact 
of the change in margining for the noon intraday CFR calculation and 
potentially adjust their GCF Repo[supreg] activity prior to 
implementation of the change. Because this proposal remains subject to 
the Commission's approval, the parallel testing period did not include 
the proposed EUIC. However, GSD 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.
2. Anticipated Effect on and Management of Risks
    FICC believes that the proposed change to incorporate the 
underlying collateral pertaining to the GCF Repo[supreg] positions in 
its noon intraday participant CFR calculation, and its hourly internal 
surveillance cycles, will improve its risk management by providing a 
more accurate and timely view of member positions and their 
corresponding exposures. FICC believes that the proposed changes will 
better reflect the actual risk in its members' portfolios. For members 
who participate in the GCF Repo[supreg] service, this change will 
impact their CFRs. However, because of the parallel period, members

[[Page 58009]]

will have time to review the possible impact and potentially modify 
their settlement and trading activity to align with the changes to the 
noon intraday CFR calculation. FICC's parallel period, which began on 
January 13, 2014, has covered over six months in order to give 
customers ample time to review the impact and consider changes to their 
portfolios.
    In addition to the above, FICC is addressing an exposure that may 
arise with the incorporation of the GCF Repo[supreg] positions in its 
noon intraday participant CFR calculation, and its hourly internal 
surveillance cycles. Specifically, in connection with the review of the 
testing that was described in the initial Advance Notice, GSD 
discovered that there were instances where exposure 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 EOD positions. The impact could 
be to increase or decrease the Value-at-Risk (``VaR'') component of the 
CFR.
    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 \22\ 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.\23\
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    \22\ 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.
    \23\ 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).
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    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.
    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).
    Prior to implementation of the proposed changes (including the 
proposed EUIC), several steps were and/or will be taken to prepare for 
the changes and to prepare members for the changes. These steps include 
(1) internal review of the data available in the test environment, (2) 
FICC's parallel period, which began on January 13, 2014, and has 
covered over six months in order to give customers ample time to review 
the impact and consider changes to their portfolios, and (3) outreach 
to all GCF Repo[supreg] customers, plus additional outreach to give an 
overview of the proposed EUIC to those customers who are likely to be 
the most impacted by 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.

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

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The Clearing Agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the Clearing Agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the Clearing Agency in writing that it does not object to the 
proposed change and

[[Page 58010]]

authorizes the Clearing Agency to implement the proposed change on an 
earlier date, subject to any conditions imposed by the Commission.
    The Clearing Agency shall post notice on its Web site of proposed 
changes that are implemented.
    The proposed change shall not take effect until all regulatory 
actions required with respect to the proposal are complete.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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-2014-801 on the subject line.
Paper Comments
     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-FICC-2014-801. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method of submission. 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 advance notice that are 
filed with the Commission, and all written communications relating to 
the advance notice between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room on official business 
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing 
also will be available for inspection and copying at the principal 
office of FICC and on 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-2014-801 and should be submitted on or before October 14, 2014.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-22991 Filed 9-25-14; 8:45 am]
BILLING CODE 8011-01-P


