
[Federal Register Volume 79, Number 205 (Thursday, October 23, 2014)]
[Notices]
[Pages 63456-63458]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-25207]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73389; File No. SR-FICC-2014-01]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving 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

October 17, 2014.

I. Introduction

    On August 11, 2014, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2014-01 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule

[[Page 63457]]

change was published for comment in the Federal Register on August 29, 
2014.\3\ The Commission received no comment letters in response to the 
proposed rule change. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. FICC also filed a proposed change as an 
advance notice concerning GSD's inclusion of GCF[supreg] repo 
positions in its intraday participant clearing fund requirement 
calculation and its hourly internal surveillance cycles under 
Section 806(e)(1) of the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Payment, Clearing and Settlement 
Supervision Act). 12 U.S.C. 5465(e)(1). Securities Exchange Act 
Release No. 71469 (February 4, 2014), 79 FR 7722 (February 10, 2014) 
(SR-FICC-2014-801). FICC subsequently amended the advance notice to 
establish the Early Unwind Intraday Charge described herein. 
Securities Exchange Act Release No. 73187 (September 23, 2014), 79 
FR 58007 (September 26, 2014) (SR-FICC-2014-801).
    \3\ Securities Exchange Act Release No. 72908 (August 25, 2014), 
79 FR 51630 (August 29, 2014) (SR-FICC-2014-01).
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II. Description

    FICC proposed to amend the Government Securities Division (``GSD'') 
Rulebook (the ``Rules'') in order to establish an Early Unwind Intraday 
Charge (``EUIC'') to protect against the exposure that may result from 
a member's intraday substitution of cash for securities that were used 
as collateral for a GCF Repo[supreg] position the prior day (``Cash 
Substitution'') or a clearing bank unwind of the cash lending side of 
the transaction for an inter-bank GCF Repo transaction at 7:30 a.m. 
(ET) (``Early Unwind'') \4\ in connection with including the underlying 
collateral pertaining to the GCF Repo[supreg] \5\ positions in GSD's 
noon intraday \6\ participant Clearing Fund requirement (``CFR'') 
calculation, and its hourly internal surveillance cycles.
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    \4\ The Early Unwind 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.
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Background

    On January 10, 2014, FICC filed advance notice SR-FICC-2014-801 \7\ 
(``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. FICC intended 
this enhancement 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 Repo Infrastructure Reform Task Force 
(``Task Force''),\8\ 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. As 
a result, on August 11, 2014, FICC filed this proposed rule change.\9\
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    \7\ See supra note 2.
    \8\ 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, FICC's parent company, has worked in close 
collaboration with the Task Force on their reform initiatives.
    \9\ At the same time, FICC filed Amendment No. 1 to the Advance 
Notice with the Commission, which contains the same change. See 
supra note 2.
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    Specifically, FICC discovered that there were instances where 
exposure to FICC arose as a result of certain Cash Substitutions or 
Early Unwind. 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'') \10\ positions. The impact could be to increase or decrease 
the Value-at-Risk (``VaR'') component of the CFR.
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    \10\ 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.
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    In certain instances, Cash Substitutions, for repo and reverse repo 
positions and Early Unwinds 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, FICC noted that 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.
(b) Proposed Change
    FICC's rule change amends GSD's Rules to establish the EUIC to 
protect against the exposure that may result from a member's Cash 
Substitutions or Early Unwinds.\11\ 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:
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    \11\ If, however, a member is assessed an EUIC under 
circumstances that were not initially contemplated and the EUIC 
charge is deemed unnecessary, FICC management has the discretion to 
waive such charge.
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    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 Cash Substitutions or Early Unwinds. 
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\
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    \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 a Cash Substitution or Early Unwind 
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 the repo side (cash 
borrower) and the reverse repo side (cash lender) of the transaction. 
As such, the reverse repo side is subject to the EUIC notwithstanding 
its inability to control the Cash 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

[[Page 63458]]

intraday CFR could be unduly reduced. The EUIC for Early Unwinds 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 Early Unwinds. Early Unwinds are performed on the 
reverse repo side to ensure that the underlying collateral is available 
to the repo side at its settlement bank. As such, the reverse repo side 
is subject to the EUIC notwithstanding its inability to control the 
Early Unwind as their noon intraday CFR could be unduly reduced as a 
result of such Early Unwinds. 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.
    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).

III. Discussion

    Section 19(b)(2)(C) of the Act \14\ directs the Commission to 
approve a self-regulatory organization's proposed rule change if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) of the Act \15\ 
requires, among other things, that the rules of a clearing agency are 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agency or for which it is 
responsible.
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    \14\ 15 U.S.C. 78s(b)(2)(C).
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed rule change to establish the 
EUIC to protect against the exposure that may result from intraday Cash 
Substitutions and Early Unwinds in connection with FICC's proposal to 
include the underlying collateral pertaining to the GCF Repo[supreg] 
positions in GSD's noon intraday participant CFR calculation and hourly 
internal surveillance cycles is consistent with Section 17A(b)(3)(F) of 
the Act.\16\ Although the inclusion of GCF Repo[supreg] positions into 
intraday participant CFR calculations and hourly surveillance cycles 
may better reflect the actual risk in its members' portfolios, the 
inclusion of the EUIC may allow FICC to use even more accurate and 
current position information in its margin calculations and mitigate 
the effects of Cash Substitutions and Early Unwinds that occur during 
the intraday period. This more accurate margin calculation may allow 
FICC to better safeguard and secure securities and funds which are in 
its custody or control or for which it is responsible.
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed change is also consistent with Rule 17Ad-22 \17\ of 
the Clearing Agency Standards which establishes the minimum 
requirements regarding how registered clearing agencies must maintain 
effective risk management procedures and controls. Specifically, Rule 
17Ad-22(b)(1) requires a clearing agency that performs CCP services to 
establish, implement, maintain, and enforce written policies reasonably 
designed to measure its credit exposures at least daily and to limit 
exposures to potential losses from defaults by participants under 
normal market conditions so that the operations of the clearing agency 
should not be disrupt and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control.\18\ Rule 
17Ad-22(b)(2) requires FICC to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions and use risk-based models and parameters to 
set margin requirements.\19\ To these ends, the change may provide FICC 
with a more accurate measurement of daily credit exposure using a risk-
based model and is designed to address exposures that may occur from 
intraday activity. In sum, FICC's more accurate and timely calculations 
around and monitoring of GCF Repo[supreg] activity should better enable 
FICC to respond in the event that a member defaults.
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    \17\ 17 CFR 240.17Ad-22.
    \18\ 17 CFR 240.17Ad-22(b)(1).
    \19\ 17 CFR 240.17Ad-22(b)(2).
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IV. Conclusion

    On the basis of the foregoing, the Commission concludes that the 
proposal is consistent with the requirements of the Act, particularly 
the requirements of Section 17A of the Act,\20\ and the rules and 
regulations thereunder.
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    \20\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (File No. SR-FICC-2014-01) be 
and hereby is approved.\22\
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25207 Filed 10-22-14; 8:45 am]
BILLING CODE 8011-01-P


