
[Federal Register Volume 81, Number 130 (Thursday, July 7, 2016)]
[Notices]
[Pages 44388-44390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16033]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78206; File No. SR-FICC-2016-002]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Suspend the Interbank Service 
of the GCF Repo[supreg] Service

June 30, 2016.
    On May 5, 2016, the Fixed Income Clearing Corporation (``FICC'' or 
the ``Corporation'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-FICC-2016-002 pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule change was published 
for comment in the Federal Register on May 20, 2016.\3\ The Commission 
received no comments on 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.
    \3\ Securities Exchange Act Release No. 34-77840 (May 16, 2016), 
81 FR 31996 (May 20, 2016) (SR-FICC-2016-002).
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I. Description of the Proposed Rule Change

    FICC seeks the Commission's approval to suspend the interbank 
service of the GCF Repo[supreg] service, as described more fully below. 
The suspension does not require changes to the text of the Government 
Securities Division (``GSD'') Rulebook (the ``GSD Rules''), however, 
the suspension requires changes to FICC's Real-Time Trade Matching 
(``RTTM[supreg]'') system.

A. The GCF Repo Service

    The GCF Repo service allows dealer members of FICC's Government 
Services Division to trade general collateral finance repos (``GCF 
Repos'') \4\ throughout the day without requiring intraday, trade-for-
trade settlement on a delivery-versus-payment basis.\5\ The service 
allows dealers to trade GCF Repos, based on rate and term, 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 type of underlying security 
that is eligible to serve as collateral for GCF Repos. Only Fedwire 
eligible, book-entry securities may serve as collateral for GCF Repos. 
Acceptable collateral for GCF Repos include most U.S. Treasury 
securities, non-mortgage-backed federal agency securities, fixed and 
adjustable rate mortgage-backed securities, Treasury Inflation-
Protected Securities and separate trading of registered interest and 
principal securities.\6\
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    \4\ A GCF Repo is one in which the lender of funds is willing to 
accept any of a class of U.S. Treasuries, U.S. government agency 
securities, and certain mortgage-backed securities as collateral for 
the repurchase obligation. This is in contrast to a specific 
collateral repo.
    \5\ Delivery-versus-payment is a settlement procedure in which 
the buyer's cash payment for the securities it has purchased is due 
at the time the securities are delivered.
    \6\ See Securities Exchange Act Release No. 34-58696 (September 
30, 2008), 73 FR 58698, 58699 (October 7, 2008) (SR-FICC-2008-04).
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    The GCF Repo service has operated on both an ``interbank'' and 
``intrabank'' basis. ``Interbank'' means that the two GCF Repo 
Participants which have been matched in a GCF Repo transaction each 
clear at a different clearing bank. ``Intrabank'' means that the two 
GCF Repo Participants which have been matched in a GCF Repo transaction 
clear at the same clearing bank.

B. Suspension of the Interbank Service of the GCF Repo Service

    Since 2011, FICC has made several changes to its GCF Repo service 
in order to comply with recommendations 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. The main purpose 
of the TPR was to develop recommendations to address the risk presented 
by triparty repo transactions due to the morning reversal (commonly 
referred to as the ``unwind'') process, by replacing it with a process 
by which transactions are collateralized all day. The GCF Repo service 
was originally designed to have transactions ``unwind'' every morning 
in order to mirror the transactions in the triparty repo market. Prior 
to Triparty Reform, transactions submitted on ``Day 1'' unwound on the 
morning of ``Day 2.'' To ``unwind'' means that the securities are 
returned to the lender of securities in the transaction and the cash is 
returned to the borrower of securities. Because of certain changes to 
the way in which the Triparty Reform effort was to proceed

[[Page 44389]]

and the impact of such changes on the interbank service of the GCF Repo 
service as further described below, FICC seeks to suspend the interbank 
service of the GCF Repo service. FICC's proposal seeks no changes to 
the intrabank service.
    All collateral that is settled via the interbank service is unwound 
the next morning to FICC's account at the pledging Clearing Bank in 
order to make the collateral available for collateral substitutions. In 
order to facilitate this intraday collateral substitution process, the 
Clearing Banks currently extend credit each business day to FICC at no 
charge. This uncapped and uncommitted credit extension to FICC 
facilitates the GCF Repo settlement process for both the intra-day and 
end of day settlement. The final changes related to the Triparty Reform 
effort would have eliminated the need for uncapped and uncommitted 
credit (a TPR goal) by including the development of interactive 
messages for the collateral substitution process (this was referred to 
as the ``Sub Hub''), which would have eliminated the need for the 
current morning unwind of interbank GCF Repos, and would have allowed 
for substitution of collateral across the Clearing Banks with minimal 
intra-day credit required. The last change was also going to include a 
streamlined end of day GCF Repo settlement process to reduce the amount 
of cash and collateral needed in order to complete settlement. This 
change would have incorporated the concept of a ``cap'' on FICC credit 
from the Clearing Banks, and an automated solution would have been 
developed to process the interbank GCF Repo settlement without 
breaching the defined and agreed to caps. As a result, the amount of 
credit that FICC would have needed from the Clearing Banks would have 
been managed to a minimal amount.
    Plans to implement the Sub Hub have not come to fruition. 
Therefore, to continue providing the interbank service, FICC would need 
a capped line of credit (without the benefits of any re-design to 
manage the amounts of needed credit). In other words, the capped line 
of credit would be applied to the interbank service as the service 
currently operates, and not in the re-designed fashion that was 
contemplated by the Triparty Reform effort, which would have allowed 
for smaller settlement amounts. FICC states that there would be 
prohibitive operational constraints in attempting to trade and settle 
GCF Repos while attempting to implement a cap on interbank GCF Repo 
trading and settlement. Specifically, FICC states that inter-dealer 
brokers would need to be integrated as a group from a technological 
perspective in order to be able to track the GCF Repo Participants' 
real-time netted positions, from an intrabank and interbank 
perspective, to ensure that the cap is not breached. FICC states that 
this would require an integrated pre-trade check across each inter-
dealer broker's platform and FICC to ensure conformity to the cap, 
which is not feasible.
    FICC seeks to suspend the interbank service of the GCF Repo service 
because: (1) FICC cannot operate the current interbank service within a 
capped credit amount; and (2) it is not feasible to institute a pre-
trade validation system. FICC seeks to suspend the interbank service of 
the GCF Repo service after July 15, 2016 (the ``Suspension Date''), 
which is approximately six (6) weeks prior to the date that one of the 
Clearing Banks has stated it will begin to impose the capped line of 
credit (September 1, 2016 or the ``Capped Charges Date''). According to 
FICC's proposal, subsequent to the Suspension Date, inter-dealer 
brokers would only be permitted to execute transactions among GCF Repo 
Participants within the same Clearing Bank. Inter-dealer brokers would 
establish two markets for GCF Repo trading--one for each Clearing Bank. 
This is the same approach that FICC utilized when it previously 
suspended the interbank service between 2003 and 2008. In addition, GSD 
would only accept and process transactions among GCF Repo Participants 
that settle within the same Clearing Bank. As a result, the 
RTTM[supreg] system would not accept and process transactions among GCF 
Repo Participants who settle at different Clearing Banks. FICC states 
that it will continue to explore whether there are other ways to re-
introduce the interbank service in the future.

II. Discussion

    Section 19(b)(2)(C) of the Act \7\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
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 \8\ 
requires, among other things, that the rules of a clearing agency be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions. The Commission finds that the proposed rule 
change is consistent with section 17A of the Act \9\ and the rules 
thereunder applicable to FICC.
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 15 U.S.C. 78q-1.
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    As described above, Triparty Reform efforts have sought to 
eliminate the need for Clearing Banks to provide FICC with uncapped and 
uncommitted credit within the settlement process. Specifically, the Sub 
Hub project described above, if approved and implemented, would have 
eliminated the need for the current morning unwind of interbank GCF 
Repos, and would have allowed for substitution of collateral across the 
Clearing Banks with minimal intra-day credit required. A streamlined 
end of day GCF Repo settlement process would have reduced the amount of 
cash and collateral needed in order to complete settlement, in which 
circumstances, there would have been a cap on the line of credit from 
the Clearing Banks to FICC, with an automated solution to process the 
interbank GCF Repo settlement within the cap. As a result, the amount 
of credit that FICC would have needed from the Clearing Banks would 
have been managed to a minimal amount.
    However, in the Sub Hub's absence, according to FICC, a capped line 
of credit without the benefits of any re-design to manage the amounts 
of needed credit would present prohibitive operational constraints in 
attempting to trade and settle GCF Repos on an interbank basis. 
Specifically, inter-dealer brokers would need to be integrated as a 
group from a technological perspective in order to be able to track the 
GCF Repo Participants' real-time netted positions to ensure that the 
cap is not breached. This would require an integrated pre-trade check 
across each inter-dealer broker's platform and FICC to ensure 
conformity to the cap, which, FICC states, is not feasible. 
Accordingly, suspension of the interbank service will enable FICC to 
avoid accepting GCF Repo trades for clearing in an amount exceeding a 
Clearing Bank's capped line of credit, while allowing FICC to continue 
to clear GCF Repo transactions on an intrabank basis, thereby promoting 
the prompt and accurate clearance and settlement of securities 
transactions, consistent with section 17A(b)(3)(F) of the Act.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
particularly those set forth in section 17A,\10\ and the rules and 
regulations thereunder.
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    \10\ 15 U.S.C. 78q-1.

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[[Page 44390]]

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-FICC-2016-002) be, and 
hereby is, approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f).
    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16033 Filed 7-6-16; 8:45 am]
 BILLING CODE 8011-01-P


