[Federal Register Volume 83, Number 5 (Monday, January 8, 2018)]
[Notices]
[Pages 854-871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00075]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82427; File No. SR-FICC-2017-022]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change To Amend the Loss Allocation 
Rules and Make Other Changes

January 2, 2018.
    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 December 18, 2017, 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 the clearing agency.\3\ 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.
    \3\ On December 18, 2017, FICC filed this proposed rule change 
as an advance notice (SR-FICC-2017-806) with the Commission pursuant 
to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act entitled 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 Act, 17 CFR 240.19b-4(n)(1)(i). A copy of 
the advance notice is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to FICC's 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') and 
Mortgage-Backed Securities Division (``MBSD'' and, together with GSD, 
the ``Divisions'' and, each, a ``Division'') Clearing Rules (``MBSD 
Rules,'' and collectively with the GSD Rules, the ``Rules'') in order 
to amend provisions in the Rules regarding loss allocation as well as 
make other changes, as described in greater detail below.\4\
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    \4\ Capitalized terms not defined herein are defined in the GSD 
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf, and the MBSD Rules, available at 
www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

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

1. Purpose
    The primary purpose of this proposed rule change is to amend GSD's 
and MBSD's loss allocation rules in order to enhance the resiliency of 
the Divisions' loss allocation processes so that each Division can take 
timely action to address multiple loss events that occur in succession 
during a short period of time (defined and explained in detail below). 
In connection therewith, the proposed rule change would (i) align the 
loss allocation rules of the three clearing agencies of The Depository 
Trust & Clearing Corporation (``DTCC''), namely The Depository Trust 
Company, National Securities Clearing Corporation (``NSCC''), and FICC 
(collectively, the ``DTCC Clearing Agencies''), so as to provide 
consistent treatment, to the extent practicable and appropriate, 
especially for firms that are participants of two or more DTCC Clearing 
Agencies, (ii) increase transparency and accessibility of the loss 
allocation rules by enhancing their readability and clarity, (iii) 
amend language regarding FICC's use of MBSD Clearing Fund, and (iv) 
make conforming and technical changes.
(i) Background
    Central counterparties (``CCPs'') play a key role in financial 
markets by mitigating counterparty credit risk on transactions between 
market participants. CCPs achieve this by providing guaranties to 
participants and, as a consequence, are typically exposed to credit 
risks that could lead to default losses. In addition, in performing its 
critical functions, a CCP could be exposed to non-default losses that 
are otherwise incident to the CCP's clearance and settlement business.

[[Page 855]]

    A CCP's rulebook should provide a complete description of how 
losses would be allocated to participants if the size of the losses 
exceeded the CCP's pre-funded resources. Doing so provides for an 
orderly allocation of losses, and potentially allows the CCP to 
continue providing critical services to the market and thereby results 
in significant financial stability benefits. In addition, a clear 
description of the loss allocation process offers transparency and 
accessibility to the CCP's participants.
Current FICC Loss Allocation Process
    As CCPs, FICC's Divisions' loss allocation processes are key 
components of their respective risk management processes. Risk 
management is the foundation of FICC's ability to guarantee settlement 
in each Division, as well as the means by which FICC protects itself 
and its members from the risks inherent in the clearance and settlement 
process. FICC's risk management processes must account for the fact 
that, in certain extreme circumstances, the collateral and other 
financial resources that secure FICC's risk exposures may not be 
sufficient to fully cover losses resulting from the liquidation of the 
portfolio of a member for whom a Division has ceased to act.\5\
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    \5\ GSD is permitted to cease to act for (i) a GSD Member 
pursuant to GSD Rule 22A (Procedures for When the Corporation Ceases 
to Act), (ii) a Sponsoring Member pursuant to Section 14 of GSD Rule 
3A (Sponsoring Members and Sponsored Members), and (iii) a Sponsored 
Member pursuant to Section 13 of GSD Rule 3A (Sponsoring Members and 
Sponsored Members). MBSD is permitted to cease to act for an MBSD 
Member pursuant to MBSD Rule 17 (Procedures for When the Corporation 
Ceases to Act). GSD Rule 21 (Restrictions on Access to Services) and 
GSD Rule 22 (Insolvency of a Member), and MBSD Rule 14 (Restrictions 
on Access to Services) and MBSD Rule 16 (Insolvency of a Member) set 
out the circumstances under which FICC may cease to act for a member 
and the types of actions it may take. Supra note 4.
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    The GSD Rules and the MBSD Rules each currently provide for a loss 
allocation process through which both FICC (by applying up to 25% of 
its retained earnings in accordance with Section 7(b) of GSD Rule 4 and 
Section 7(c) of MBSD Rule 4) and its members would share in the 
allocation of a loss resulting from the default of a member for whom a 
Division has ceased to act pursuant to the Rules. The GSD Rules and the 
MBSD Rules also recognize that FICC may incur losses outside the 
context of a defaulting member that are otherwise incident to each 
Division's clearance and settlement business.
    The current GSD and MBSD loss allocation rules provide that, in the 
event the Division ceases to act for a member, the amounts on deposit 
to the Clearing Fund from the defaulting member, along with any other 
resources of, or attributable to, the defaulting member that FICC may 
access under the GSD Rules or the MBSD Rules (e.g., payments from 
Cross-Guaranty Agreements), are the first source of funds the Division 
would use to cover any losses that may result from the closeout of the 
defaulting member's guaranteed positions. If these amounts are not 
sufficient to cover all losses incurred, then each Division will apply 
the following available resources, in the following loss allocation 
waterfall order:
    First, as provided in the current Section 7(b) of GSD Rule 4 and 
Section 7(c) of MBSD Rule 4, FICC's corporate contribution of up to 25 
percent of FICC's retained earnings existing at the time of the failure 
of a defaulting member to fulfill its obligations to FICC, or such 
greater amount as the Board of Directors may determine; and
    Second, if a loss still remains, use of the Clearing Fund of the 
Division and assessing the Division's Members in the manner provided in 
GSD Rule 4 and MBSD Rule 4, as the case may be. Specifically, FICC will 
divide the loss ratably between Tier One Netting Members and Tier Two 
Members with respect to GSD, or between Tier One Members and Tier Two 
Members with respect to MBSD, based on original counterparty activity 
with the defaulting member. Then the loss allocation process applicable 
to Tier One Netting Members or Tier One Members, as applicable, and 
Tier Two Members will proceed in the manner provided in GSD Rule 4 and 
MBSD Rule 4, as the case may be.
    Specifically, the applicable Division will first assess each Tier 
One Netting Member or Tier One Member, as applicable, an amount up to 
$50,000, in an equal basis per such member. If a loss remains, the 
Division will allocate the remaining loss ratably among Tier One 
Netting Members or Tier One Members, as applicable, in accordance with 
the amount of each Tier One Netting Member's or Tier One Member's, as 
applicable, respective average daily Required Fund Deposit over the 
prior twelve (12) months. If a Tier One Netting Member or Tier One 
Member, as applicable, did not maintain a Required Fund Deposit for 
twelve (12) months, its loss allocation amount will be based on its 
average daily Required Fund Deposit over the time period during which 
such member did maintain a Required Fund Deposit.
    Pursuant to current Section 7(g) of GSD Rule 4 and MBSD Rule 4, if, 
as a result of the Division's application of the Required Fund Deposit 
of a member, a member's actual Clearing Fund deposit is less than its 
Required Fund Deposit, it will be required to eliminate such deficiency 
in order to satisfy its Required Fund Deposit amount. In addition to 
losses that may result from the closeout of the defaulting member's 
guaranteed positions, Tier One Netting Members or Tier One Members, as 
applicable, can also be assessed for non-default losses incident to 
each Division's clearance and settlement business, pursuant to current 
Section 7(f) of GSD Rule 4 and MBSD Rule 4.
    The Rules of both Divisions currently provide that Tier Two Members 
are only subject to loss allocation to the extent they traded with the 
defaulting member and their trades resulted in a liquidation loss. FICC 
will assess Tier Two Members ratably based on their loss as a 
percentage of the entire remaining loss attributable to Tier Two 
Members.\6\ Tier Two Members are required to pay their loss allocation 
obligations in full and replenish their Required Fund Deposits as 
needed and as applicable. The current Rule provisions which provide for 
loss allocation of non-default losses incident to each Division's 
clearance and settlement business (i.e., Section 7(f) of GSD Rule 4 and 
MBSD Rule 4) do not apply to Tier Two Members.
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    \6\ GSD Rule 3B, Section 7 (Loss Allocation Obligations of CCIT 
Members) provides that CCIT Members will be allocated losses as Tier 
Two Members and will be responsible for the total amount of loss 
allocated to them. With respect to CCIT Members with a Joint Account 
Submitter, loss allocation will be calculated at the Joint Account 
level and then applied pro rata to each CCIT Member within the Joint 
Account based on the trade settlement allocation instructions. Supra 
note 4.
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Overview of the Proposed Rule Changes
A. Changes To Enhance Resiliency of GSD's and MBSD's Loss Allocation 
Processes
    In order to enhance the resiliency of GSD's and MBSD's loss 
allocation processes, FICC proposes to change the manner in which each 
of the aspects of the loss allocation waterfall described above would 
be employed. GSD and MBSD would retain the current core loss allocation 
process following the application of the defaulting member's resources, 
i.e., first, by applying FICC's corporate contribution, and second, by 
pro rata allocations to Tier One Netting Members or Tier One Members, 
as applicable, and Tier Two Members. However, GSD and MBSD would 
clarify or adjust certain elements and introduce certain new loss 
allocation concepts, as further discussed below. The proposal would 
also retain the types of losses that can be allocated to Tier One 
Netting

[[Page 856]]

Members or Tier One Members, as applicable, and Tier Two Members as 
stated above. In addition, the proposed rule change would address the 
loss allocation process as it relates to losses arising from or 
relating to multiple default or non-default events in a short period of 
time, also as described below.
    Accordingly, FICC is proposing five (5) key changes to enhance each 
Division's loss allocation process:
    (1) Changing the calculation and application of FICC's corporate 
contribution.
    As stated above, Section 7(b) of GSD Rule 4 and Section 7(c) of 
MBSD Rule 4 currently provide that FICC will contribute up to 25% of 
its retained earnings (or such higher amount as the Board of Directors 
shall determine) to a loss or liability that is not satisfied by the 
defaulting member's Clearing Fund deposit. Under the proposal, FICC 
would amend the calculation of its corporate contribution from a 
percentage of its retained earnings to a mandatory amount equal to 50% 
of the FICC General Business Risk Capital Requirement.\7\ FICC's 
General Business Risk Capital Requirement, as defined in FICC's 
Clearing Agency Policy on Capital Requirements,\8\ is, at a minimum, 
equal to the regulatory capital that FICC is required to maintain in 
compliance with Rule 17Ad-22(e)(15) under the Act.\9\ The proposed 
Corporate Contribution (as defined below and in the proposed rule 
change) would be held in addition to FICC's General Business Risk 
Capital Requirement.
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    \7\ FICC calculates its General Business Risk Capital 
Requirement as the amount equal to the greatest of (i) an amount 
determined based on its general business profile, (ii) an amount 
determined based on the time estimated to execute a recovery or 
orderly wind-down of FICC's critical operations, and (iii) an amount 
determined based on an analysis of FICC's estimated operating 
expenses for a six (6) month period.
    \8\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-FICC-2017-007).
    \9\ 17 CFR 240.17Ad-22(e)(15).
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    Currently, the Rules do not require FICC to contribute its retained 
earnings to losses and liabilities other than those from member 
defaults. Under the proposal, FICC would apply its corporate 
contribution to non-default losses as well. The proposed Corporate 
Contribution would apply to losses arising from Defaulting Member 
Events and Declared Non-Default Loss Events (as such terms are defined 
below and in the proposed rule change), and would be a mandatory 
contribution by FICC prior to any allocation of the loss among the 
applicable Division's members.\10\ As proposed, if the Corporate 
Contribution is fully or partially used against a loss or liability 
relating to an Event Period (as defined below and in the proposed rule 
change) by one or both Divisions, the Corporate Contribution would be 
reduced to the remaining unused amount, if any, during the following 
two hundred fifty (250) Business Days in order to permit FICC to 
replenish the Corporate Contribution.\11\ To ensure transparency, all 
GSD Members and MBSD Members would receive notice of any such reduction 
to the Corporate Contribution. There would be one FICC Corporate 
Contribution, the amount of which would be available to both Divisions 
and would be applied against a loss or liability in either Division in 
the order in which such loss or liability occurs, i.e., FICC would not 
have two separate Corporate Contributions, one for each Division. In 
the event of a loss or liability relating to an Event Period, whether 
arising out of or relating to a Defaulting Member Event or a Declared 
Non-Default Loss Event, attributable to only one Division, the 
Corporate Contribution would be applied to that Division up to the 
amount then available. If a loss or liability relating to an Event 
Period, whether arising out of or relating to a Defaulting Member Event 
or a Declared Non-Default Loss Event, occurs simultaneously at both 
Divisions, the Corporate Contribution would be applied to the 
respective Divisions in the same proportion that the aggregate Average 
RFDs (as defined below and in the proposed rule change) of all members 
in that Division bears to the aggregate Average RFDs of all members in 
both Divisions.\12\
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    \10\ The proposed rule change would not require a Corporate 
Contribution with respect to the use of each Division's Clearing 
Fund as a liquidity resource; however, if FICC uses a Division's 
Clearing Fund as a liquidity resource for more than 30 calendar 
days, as set forth in proposed Section 5 of GSD Rule 4 and MBSD Rule 
4, then FICC would have to consider the amount used as a loss to the 
respective Division's Clearing Fund incurred as a result of a 
Defaulting Member Event and allocate the loss pursuant to proposed 
Section 7 of Rule 4, which would then require the application of 
FICC's Corporate Contribution.
    \11\ FICC believes that two hundred and fifth (250) Business 
Days would be a reasonable estimate of the time frame that FICC 
would require to replenish the Corporate Contribution by equity in 
accordance with FICC's Clearing Agency Policy on Capital 
Requirements, including a conservative additional period to account 
for any potential delays and/or unknown exigencies in times of 
distress.
    \12\ FICC believes that if a loss or liability relating to an 
Event Period, whether arising out of or relating to a Defaulting 
Member Event or a Declared Non-Default Loss Event, occurs 
simultaneously at both Divisions, allocating the Corporate 
Contribution ratably between the two Divisions based on the 
aggregate Average RFDs of their respective members is appropriate 
because the aggregate Average RFDs of all members in a Division 
represents the amount of risks that those members bring to FICC over 
the look-back period of seventy (70) Business Days.
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    As compared to the current approach of applying ``up to'' a 
percentage of retained earnings to defaulting member losses, the 
proposed Corporate Contribution would be a fixed percentage of FICC's 
General Business Risk Capital Requirement, which would provide greater 
transparency and accessibility to members. The proposed Corporate 
Contribution would apply not only towards losses and liabilities 
arising out of or relating to Defaulting Member Events but also those 
arising out of or relating to Declared Non-Default Loss Events, which 
is consistent with the current industry guidance that ``a CCP should 
identify the amount of its own resources to be applied towards losses 
arising from custody and investment risk, to bolster confidence that 
participants' assets are prudently safeguarded.'' \13\
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    \13\ See Resilience of central counterparties (CCPs): Further 
guidance on the PFMI, issued by the Committee on Payments and Market 
Infrastructures and the International Organization of Securities 
Commissions, at 42 (July 2017), available at www.bis.org/cpmi/publ/d163.pdf.
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    Under current Section 7(b) of GSD Rule 4 and Section 7(c) of MBSD 
Rule 4, FICC has the discretion to contribute amounts higher than the 
specified percentage of retained earnings, as determined by the Board 
of Directors, to any loss or liability incurred by FICC as result of 
the failure of a Defaulting Member to fulfill its obligations to FICC. 
This option would be retained and expanded under the proposal so that 
it would be clear that FICC can voluntarily apply amounts greater than 
the Corporate Contribution against any loss or liability (including 
non-default losses) of the Divisions, if the Board of Directors, in its 
sole discretion, believes such to be appropriate under the factual 
situation existing at the time.
    The proposed rule changes relating to the calculation and 
application of Corporate Contribution are set forth in proposed 
Sections 7 and 7a of GSD Rule 4 and Sections 7 and 7a of MBSD Rule 4, 
as further described below.
    (2) Introducing an Event Period.
    In order to clearly define the obligations of each Division and its 
respective Members regarding loss allocation and to balance the need to 
manage the risk of sequential loss events against members' need for 
certainty concerning their maximum loss allocation exposures, FICC is 
proposing to introduce the concept of an ``Event Period'' to the GSD 
Rules and the MBSD Rules to address the losses and

[[Page 857]]

liabilities that may arise from or relate to multiple Defaulting Member 
Events and/or Declared Non-Default Loss Events that arise in quick 
succession in a Division. Specifically, the proposal would group 
Defaulting Member Events and Declared Non-Default Loss Events occurring 
in a period of ten (10) Business Days (``Event Period'') for purposes 
of allocating losses to Members of the respective Divisions in one or 
more rounds (as described below), subject to the limitations of loss 
allocation set forth in the proposed rule change and as explained 
below.\14\ In the case of a loss or liability arising from or relating 
to a Defaulting Member Event, an Event Period would begin on the day 
one or both Divisions notify their respective members that FICC has 
ceased to act \15\ for a GSD Defaulting Member and/or an MBSD 
Defaulting Member (or the next Business Day, if such day is not a 
Business Day). In the case of a loss or liability arising from or 
relating to a Declared Non-Default Loss Event, an Event Period would 
begin on the day that FICC notifies members of the respective Divisions 
of the determination by the Board of Directors that the applicable loss 
or liability may be a significant and substantial loss or liability 
that may materially impair the ability of FICC to provide clearance and 
settlement services in an orderly manner and will potentially generate 
losses to be mutualized among the Tier One Netting Members or Tier One 
Members, as applicable, in order to ensure that FICC may continue to 
offer clearance and settlement services in an orderly manner (or the 
next Business Day, if such day is not a Business Day). If a subsequent 
Defaulting Member Event or Declared Non-Default Loss Event occurs 
during an Event Period, any losses or liabilities arising out of or 
relating to any such subsequent event would be resolved as losses or 
liabilities that are part of the same Event Period, without extending 
the duration of such Event Period. An Event Period may include both 
Defaulting Member Events and Declared Non-Default Loss Events, and 
there would not be separate Event Periods for Defaulting Member Events 
or Declared Non-Default Loss Events occurring during overlapping ten 
(10) Business Day periods.
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    \14\ FICC believes that having a ten (10) Business Day Event 
Period would provide a reasonable period of time to encompass 
potential sequential Defaulting Member Events or Declared Non-
Default Loss Events that are likely to be closely linked to an 
initial event and/or a severe market dislocation episode, while 
still providing appropriate certainty for members concerning their 
maximum exposure to mutualized losses with respect to such events.
    \15\ Supra note 5.
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    The amount of losses that may be allocated by each Division, 
subject to the required Corporate Contribution, and to which a Loss 
Allocation Cap (as defined below and in the proposed rule change) would 
apply for any withdrawing member, would include any and all losses from 
any Defaulting Member Events and any Declared Non-Default Loss Events 
during the Event Period, regardless of the amount of time, during or 
after the Event Period, required for such losses to be crystallized and 
allocated.
    The proposed rule changes relating to the implementation of an 
Event Period are set forth in proposed Section 7 of GSD Rule 4 and 
Section 7 of MBSD Rule 4, as further described below.
    (3) Introducing the concept of ``rounds'' and Loss Allocation 
Notice.
    Pursuant to the proposed rule change, a loss allocation ``round'' 
would mean a series of loss allocations relating to an Event Period, 
the aggregate amount of which is limited by the sum of the Loss 
Allocation Caps of affected Tier One Netting Members or Tier One 
Members, as applicable (a ``round cap''). When the aggregate amount of 
losses allocated in a round equals the round cap, any additional losses 
relating to the applicable Event Period would be allocated in one or 
more subsequent rounds, in each case subject to a round cap for that 
round. FICC may continue the loss allocation process in successive 
rounds until all losses from the Event Period are allocated among Tier 
One Netting Members or Tier One Members, as applicable, that have not 
submitted a Loss Allocation Withdrawal Notice (as defined below and in 
the proposed rule change) in accordance with proposed Section 7b of GSD 
Rule 4 or MBSD Rule 4.
    Each loss allocation would be communicated to Tier One Netting 
Members or Tier One Members, as applicable, by the issuance of a Loss 
Allocation Notice (as defined below and in the proposed rule change). 
Each Loss Allocation Notice would specify the relevant Event Period and 
the round to which it relates. The first Loss Allocation Notice in any 
first, second, or subsequent round would expressly state that such Loss 
Allocation Notice reflects the beginning of the first, second, or 
subsequent round, as the case may be, and that each Tier One Netting 
Member or Tier One Member, as applicable, in that round has five (5) 
Business Days from the issuance of such first Loss Allocation Notice 
for the round to notify FICC of its election to withdraw from 
membership with GSD or MBSD, as applicable, pursuant to proposed 
Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, and thereby 
benefit from its Loss Allocation Cap.\16\
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    \16\ Pursuant to current Section 7(g) of GSD Rule 4 and MBSD 
Rule 4, the time period for a member to give notice, pursuant to 
Section 13 of GSD Rule 3 and MBSD Rule 3, of its election to 
terminate its membership in GSD or MBSD, as applicable, in respect 
of an allocation arising from any Remaining Loss allocated by FICC 
pursuant to Section 7(d) of GSD Rule 4 or Section 7(e) of MBSD Rule 
4, as applicable, and any Other Loss, is the Close of Business on 
the Business Day on which the loss allocation payment is due to 
FICC. Current Section 13 of GSD Rule 4 and MBSD Rule 4 requires a 
10-day notice period. Supra note 4.
    FICC believes that it is appropriate to shorten such time period 
from 10 days to five (5) Business Days because FICC needs timely 
notice of which Tier One Netting Members or Tier One Members, as 
applicable, would remain in its membership for purpose of 
calculating the loss allocation for any subsequent round. FICC 
believes that five (5) Business Days would provide Tier One Netting 
Members or Tier One Members, as applicable, with sufficient time to 
decide whether to cap their loss allocation obligations by 
withdrawing from their membership in GSD or MBSD, as applicable.
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    The amount of any second or subsequent round cap may differ from 
the first or preceding round cap because there may be fewer Tier One 
Netting Members or Tier One Members, as applicable, in a second or 
subsequent round if Tier One Netting Members or Tier One Members, as 
applicable, elect to withdraw from membership with GSD or MBSD, as 
applicable, as provided in proposed Section 7b of GSD Rule 4 or MBSD 
Rule 4, as applicable, following the first Loss Allocation Notice in 
any round.
    For example, for illustrative purposes only, after the required 
Corporate Contribution, if FICC has a $5 billion loss determined with 
respect to an Event Period and the sum of Loss Allocation Caps for all 
Tier One Netting Members or Tier One Members, as applicable, subject to 
the loss allocation is $4 billion, the first round would begin when 
FICC issues the first Loss Allocation Notice for that Event Period. 
FICC could issue one or more Loss Allocation Notices for the first 
round until the sum of losses allocated equals $4 billion. Once the $4 
billion is allocated, the first round would end and FICC would need a 
second round in order to allocate the remaining $1 billion of loss. 
FICC would then issue a Loss Allocation Notice for the $1 billion and 
this notice would be the first Loss Allocation Notice for the second 
round. The issuance of the Loss Allocation Notice for the $1 billion 
would begin the second round.
    The proposed rule change would link the Loss Allocation Cap to a 
round in order to provide Tier One Netting Members or Tier One Members, 
as applicable, the option to limit their loss allocation exposure at 
the beginning of

[[Page 858]]

each round. As proposed and as described further below, a Tier One 
Netting Member or Tier One Member, as applicable, could limit its loss 
allocation exposure to its Loss Allocation Cap by providing notice of 
its election to withdraw from membership within five (5) Business Days 
after the issuance of the first Loss Allocation Notice in any round.
    The proposed rule changes relating to the implementation of 
``rounds'' and Loss Allocation Notices are set forth in proposed 
Section 7 of GSD Rule 4 and Section 7 of MBSD Rule 4, as further 
described below.
    (4) Implementing a revised ``look-back'' period to calculate a 
member's loss allocation pro rata share and its Loss Allocation Cap.
    Currently, the GSD Rules and the MBSD Rules calculate a Tier One 
Netting Member's or a Tier One Member's pro rata share for purposes of 
loss allocation based on the member's average daily Required Fund 
Deposit over the prior twelve (12) months (or such shorter period as 
may be available in the case of a member which has not maintained a 
deposit over such time period). The Rules currently do not anticipate 
the possibility of more than one Defaulting Member Event or Declared 
Non-Default Loss Event in quick succession.
    GSD and MBSD are proposing to calculate each Tier One Netting 
Member's or Tier One Member's, as applicable, pro rata share of losses 
and liabilities to be allocated in any round (as described below and in 
the proposed rule change) to be equal to (i) the average of a member's 
Required Fund Deposit for the seventy (70) Business Days prior to the 
first day of the applicable Event Period (or such shorter period of 
time that the member has been a member) (``Average RFD'') divided by 
(ii) the sum of Average RFD amounts for all members that are subject to 
loss allocation in such round.
    Additionally, GSD and MBSD are proposing that each member's maximum 
payment obligation with respect to any loss allocation round (the 
member's Loss Allocation Cap) be equal to the greater of (i) its 
Required Fund Deposit on the first day of the applicable Event Period 
or (ii) its Average RFD.
    FICC believes that employing a revised look-back period of seventy 
(70) Business Days instead of twelve (12) months to calculate a Tier 
One Netting Member's or a Tier One Member's, as applicable, loss 
allocation pro rata share and Loss Allocation Cap is appropriate, 
because FICC recognizes that the current look-back period of twelve 
(12) months is a very long period during which a member's business 
strategy and outlook could have shifted significantly, resulting in 
material changes to the size of its portfolios. A look-back period of 
seventy (70) Business Days would minimize that issue yet still would be 
long enough to enable FICC to capture a full calendar quarter of such 
members' activities and smooth out the impact from any abnormalities 
and/or arbitrariness that may have occurred.
    The proposed rule changes relating to the implementation of the 
revised look-back period are set forth in proposed Section 7 of GSD 
Rule 4 and Section 7 of MBSD Rule 4, as further described below.
    (5) Capping withdrawing members' loss allocation exposure and 
related changes.
    Currently, pursuant to Section 7(g) of GSD Rule 4 and MBSD Rule 4, 
a member can withdraw from membership in order to avail itself of a cap 
on loss allocation if the member notifies FICC via a written notice, in 
accordance with Section 13 of GSD Rule 3 or MBSD Rule 3, as applicable, 
of its election to terminate its membership. Such notice must be 
provided by the Close of Business on the Business Day on which the loss 
allocation payment is due to FICC and, if properly provided to FICC, 
would limit the member's liability for a loss allocation to its 
Required Fund Deposit for the Business Day on which the notification of 
allocation is provided to the member.\17\ As discussed above, the 
proposed rule change would continue providing members the opportunity 
to limit their loss allocation exposure by offering withdrawal options; 
however, the cap on loss allocation would be calculated differently and 
the associated withdrawal process would also be modified as it relates 
to withdrawals associated with the loss allocation process. In 
particular, the proposed rule change would shorten the withdrawal 
notification period from 10 days to five (5) Business Days, as further 
described below.
---------------------------------------------------------------------------

    \17\ Current Section 13 of GSD Rule 3 and MBSD Rule 3 requires a 
member to provide FICC with 10 days written notice of the member's 
termination; however, FICC, in its discretion, may accept such 
termination within a shorter notice period. Supra note 4.
---------------------------------------------------------------------------

    As proposed, if a member provides notice of its withdrawal from 
membership, the maximum amount of losses it would be responsible for 
would be its Loss Allocation Cap,\18\ provided that the member complies 
with the requirements of the withdrawal process in proposed Section 7b 
of GSD Rule 4 and Section 7b of MBSD Rule 4.
---------------------------------------------------------------------------

    \18\ If a member's Loss Allocation Cap exceeds the member's 
then-current Required Fund Deposit, it must still cover the excess 
amount.
---------------------------------------------------------------------------

    Currently, pursuant to Section 7(g) of GSD Rule 4 and MBSD Rule 4, 
if notification is provided to a member that an allocation has been 
made against the member pursuant to GSD Rule 4 or MBSD Rule 4, as 
applicable, and that application of the member's Required Fund Deposit 
is not sufficient to satisfy such obligation to make payment to FICC, 
the member is required to deliver to FICC by the Close of Business on 
the next Business Day, or by the Close of Business on the Business Day 
of issuance of the notification if so determined by FICC, that amount 
which is necessary to eliminate any such deficiency, unless the member 
elects to terminate its membership in FICC. To increase transparency of 
the timeframe under which FICC would require funds from members to 
satisfy their loss allocation obligations, FICC is proposing that 
members would receive two (2) Business Days' notice of a loss 
allocation, and members would be required to pay the requisite amount 
no later than the second Business Day following issuance of such 
notice.\19\ Members would have five (5) Business Days \20\ from the 
issuance of the first Loss Allocation Notice in any round of an Event 
Period to decide whether to withdraw from membership.
---------------------------------------------------------------------------

    \19\ FICC believes that allowing members two (2) Business Days 
to satisfy their loss allocation obligations would provide Members 
sufficient notice to arrange funding, if necessary, while allowing 
FICC to address losses in a timely manner.
    \20\ Supra note 16.
---------------------------------------------------------------------------

    Each round would allow a Tier One Netting Member or Tier One 
Member, as applicable, the opportunity to notify FICC of its election 
to withdraw from membership after satisfaction of the losses allocated 
in such round. Multiple Loss Allocation Notices may be issued with 
respect to each round to allocate losses up to the round cap.
    Specifically, the first round and each subsequent round of loss 
allocation would allocate losses up to a round cap of the aggregate of 
all Loss Allocation Caps of those Tier One Netting Members or Tier One 
Members, as applicable, included in the round. If a Tier One Netting 
Member or Tier One Member, as applicable, provides notice of its 
election to withdraw from membership, it would be subject to loss 
allocation in that round, up to its Loss Allocation Cap. If the first 
round of loss allocation does not fully cover FICC's losses, a second 
round will be noticed to those members that did not elect to withdraw 
from membership in the previous round; however, as noted above, the 
amount of any second or subsequent

[[Page 859]]

round cap may differ from the first or preceding round cap because 
there may be fewer Tier One Netting Members or Tier One Members, as 
applicable, in a second or subsequent round if Tier One Netting Members 
or Tier One Members, as applicable, elect to withdraw from membership 
with GSD or MBSD, as applicable, as provided in proposed Section 7b of 
GSD Rule 4 or MBSD Rule 4, as applicable, following the first Loss 
Allocation Notice in any round.
    Pursuant to the proposed rule change, in order to avail itself of 
its Loss Allocation Cap, a Tier One Netting Member or Tier One Member, 
as applicable, would need to follow the requirements in proposed 
Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, which would 
provide that the Tier One Netting Member or Tier One Member, as 
applicable, must: (i) Specify in its Loss Allocation Withdrawal Notice 
an effective date of withdrawal, which date shall not be prior to the 
scheduled final settlement date of any remaining obligations owed by 
the member to FICC, unless otherwise approved by FICC, and (ii) as of 
the time of such member's submission of the Loss Allocation Withdrawal 
Notice, cease submitting transactions to FICC for processing, clearance 
or settlement, unless otherwise approved by FICC.
    The proposed rule changes are designed to enable FICC to continue 
the loss allocation process in successive rounds until all of FICC's 
losses are allocated. To the extent that the Loss Allocation Cap of a 
Tier One Netting Member or Tier One Member, as applicable, exceeds such 
member's Required Fund Deposit on the first day of an Event Period, 
FICC may in its discretion retain any excess amounts on deposit from 
the member, up to the Loss Allocation Cap of a Tier One Netting Member 
or Tier One Member, as applicable.
    The proposed rule changes relating to capping withdrawing members' 
loss allocation exposure and related changes to the withdrawal process 
are set forth in proposed Sections 7 and 7b of GSD Rule 4 and Sections 
7 and 7b of MBSD Rule 4, as further described below.
B. Changes To Align Loss Allocation Rules
    The proposed rule changes would align the loss allocation rules, to 
the extent practicable and appropriate, of the three DTCC Clearing 
Agencies so as to provide consistent treatment, especially for firms 
that are participants of two or more DTCC Clearing Agencies. As 
proposed, the loss allocation waterfall and certain related provisions, 
e.g., returning a former member's Clearing Fund, would be consistent 
across the DTCC Clearing Agencies to the extent practicable and 
appropriate. The proposed rule changes of FICC that would align loss 
allocation rules of the DTCC Clearing Agencies are set forth in 
proposed Sections 1, 5, 6, 10, and 11 of GSD Rule 4 and MBSD Rule 4, as 
further described below.
C. Clarifying Changes Relating to Loss Allocation
    The proposed rule changes are intended to make the provisions in 
the Rules governing loss allocation more transparent and accessible to 
members. In particular, FICC is proposing the following changes 
relating to loss allocation to clarify members' obligations for 
Declared Non-Default Loss Events.
    Aside from losses that FICC might face as a result of a Defaulting 
Member Event, FICC could incur non-default losses incident to each 
Division's clearance and settlement business.\21\ The GSD Rules and the 
MBSD Rules currently permit FICC to apply Clearing Fund to non-default 
losses.\22\ Section 5 of GSD Rule 4 and MBSD Rule 4 provides that the 
use of Clearing Fund deposits is limited to satisfaction of losses or 
liabilities of FICC, which includes losses or liabilities that are 
otherwise incident to the operation of the clearance and settlement 
business of FICC, although the application of Clearing Fund to such 
losses or liabilities is more limited under MBSD Rule 4 when compared 
to GSD Rule 4.\23\ Section 7(f) of GSD Rule 4 and MBSD Rule 4 provides 
that any loss or liability incurred by the Corporation incident to its 
clearance and settlement business arising other than from a Remaining 
Loss shall be allocated among Tier One Netting Members or Tier One 
Members, as applicable, ratably, in accordance with their Average 
Required Clearing Fund Deposits.\24\
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    \21\ Non-default losses may arise from events such as damage to 
physical assets, a cyber-attack, or custody and investment losses.
    \22\ Arguably there is an ambiguity created by the first 
paragraph of Section 7 in both GSD Rule 4 and MBSD Rule 4, which 
suggests that losses or liabilities may only be allocated in a 
member default scenario, while Section 5 in both GSD Rule 4 and MBSD 
Rule 4 makes it clear that the applicable Division's Clearing Fund 
may be used to satisfy non-default losses.
    \23\ Section 5 of GSD Rule 4 provides that ``The use of the 
Clearing Fund deposits shall be limited to satisfaction of losses or 
liabilities of the Corporation . . . otherwise incident to the 
clearance and settlement business of the Corporation . . .'' Supra 
note 4.
    Section 5 of MBSD Rule 4 provides that ``The use of the Clearing 
Fund deposits and assets and property on which the Corporation has a 
lien on shall be limited to satisfaction of losses or liabilities of 
the Corporation . . . otherwise incident to the clearance and 
settlement business of the Corporation with respect to losses and 
liabilities to meet unexpected or unusual requirements for funds 
that represent a small percentage of the Clearing Fund . . .'' Supra 
note 4.
    \24\ Section 7(f) of GSD Rule 4 provides that ``Any loss or 
liability incurred by the Corporation incident to its clearance and 
settlement business . . . arising other than from a Remaining Loss 
(hereinafter, an ``Other Loss'') shall be allocated among Tier One 
Netting Members, ratably, in accordance with the respective amounts 
of their Average Required FICC Clearing Fund Deposits. Supra note 4.
     Section 7(f) of MBSD Rule 4 provides that ``Any loss or 
liability incurred by the Corporation incident to its clearance and 
settlement business . . . arising other than from a Remaining Loss 
(hereinafter, an ``Other Loss''), shall be allocated among Tier One 
Members, ratably, in accordance with the respective amounts of their 
Average Required Clearing Fund Deposits. Supra note 4.
---------------------------------------------------------------------------

    If there is a failure of FICC following a non-default loss, such 
occurrence would affect members in much the same way as a failure of 
FICC following a Defaulting Member Event. Accordingly, FICC is 
proposing rule changes to enhance the provisions relating to non-
default losses by clarifying members' obligations for such losses and 
aligning the non-default loss provisions in the GSD Rules and the MBSD 
Rules.
    Specifically, for both the GSD Rules and the MBSD Rules, FICC is 
proposing enhancement of the governance around non-default losses that 
would trigger loss allocation to Tier One Netting Members or Tier One 
Members, as applicable, by specifying that the Board of Directors would 
have to determine that there is a non-default loss that may be a 
significant and substantial loss or liability that may materially 
impair the ability of FICC to provide clearance and settlement services 
in an orderly manner and will potentially generate losses to be 
mutualized among the Tier One Netting Members or Tier One Members, as 
applicable, in order to ensure that FICC may continue to offer 
clearance and settlement services in an orderly manner. The proposed 
rule change would provide that FICC would then be required to promptly 
notify members of this determination (a ``Declared Non-Default Loss 
Event''). In addition, FICC is proposing to better align the interest 
of FICC with those of its members by stipulating a mandatory Corporate 
Contribution apply to a Declared Non-Default Loss Event prior to any 
allocation of the loss among members, as described above. Additionally, 
FICC is proposing language to clarify members' obligations for Declared 
Non-Default Loss Events.
    Under the proposal, FICC would clarify the Rules of both Divisions 
to make clear that Tier One Netting Members or Tier One Members, as

[[Page 860]]

applicable, are subject to loss allocation for non-default losses 
(i.e., Declared Non-Default Loss Events under the proposal) and Tier 
Two Members are not subject to loss allocation for non-default losses.
    The proposed rule changes relating to Declared Non-Default Loss 
Events and members' obligations for such events are set forth in 
proposed Section 7 of GSD Rule 4 and Section 7 of MBSD Rule 4, as 
further described below.
D. Amending Language Regarding FICC's Use of MBSD Clearing Fund
    The proposed rule change would delete language currently in Section 
5 of MBSD Rule 4 that limits certain uses by FICC of the MBSD Clearing 
Fund to ``unexpected or unusual'' requirements for funds that represent 
a ``small percentage'' of the MBSD Clearing Fund. FICC believes that 
these limiting phrases (which appear in connection with FICC's use of 
MBSD Clearing Fund to cover losses and liabilities incident to its 
clearance and settlement business outside the context of an MBSD 
Defaulting Member Event as well as to cover certain liquidity needs) 
are vague and imprecise, and should be replaced in their entirety. 
Specifically, FICC is proposing to delete the limiting language with 
respect to FICC's use of MBSD Clearing Fund to cover losses and 
liabilities incident to its clearance and settlement business outside 
the context of an MBSD Defaulting Member Event so as to not have such 
language be interpreted as impairing FICC's ability to access the MBSD 
Clearing Fund in order to manage non-default losses. FICC is also 
proposing to delete the limiting language with respect to FICC's use of 
MBSD Clearing Fund to cover certain liquidity needs because the effect 
of the limitation in this context is confusing and unclear.
    The proposed rule changes relating to FICC's use of MBSD Clearing 
Fund are set forth in proposed Section 5 of MBSD Rule 4, as further 
described below.
    The foregoing changes as well as other changes (including a number 
of conforming and technical changes) that FICC is proposing in order to 
improve the transparency and accessibility of the Rules are described 
in detail below.
(ii) Detailed Description of the Proposed Rule Changes Related to Loss 
Allocation

A. Proposed Changes to GSD Rule 4 (Clearing Fund and Loss Allocation) 
and MBSD Rule 4 (Clearing Fund and Loss Allocation)

Overview of GSD Rule 4 and MBSD Rule 4
    GSD Rule 4 and MBSD Rule 4 currently address Clearing Fund 
requirements and loss allocation obligations, as well as permissible 
uses of the Clearing Fund. These Rules address the various Clearing 
Fund calculations for each Division's Clearing Fund and set forth 
rights, obligations and other aspects associated with each Division's 
Clearing Fund, as well as each Division's loss allocation process. GSD 
Rule 4 and MBSD Rule 4 are each currently organized into 12 sections. 
Sections of these Rules that FICC is proposing to change are described 
below.
Section 1 of GSD Rule 4 and MBSD Rule 4
    Currently, Section 1 of GSD Rule 4 and MBSD Rule 4 set forth the 
requirement that each GSD Netting Member and each MBSD Clearing Member 
make and maintain a deposit to the Clearing Fund at the minimum level 
set forth in the respective Rule 4 and note that the timing of such 
payment is set forth in another section of the respective Rule 4. 
Current Section 1 of the respective rule also provides that the 
deposits to the Clearing Fund will be held by FICC or its designated 
agents. Current Section 1 of MBSD Rule 4 also defines the term 
``Transaction'' for purposes of MBSD Rule 4 and references a Member's 
obligation to replenish the deficit in its Required Fund Deposit if it 
is charged by FICC under certain circumstances.
    FICC is proposing to rename the subheading of Section 1 of Rule 4 
in both the GSD Rules and MBSD Rules from ``General'' to ``Required 
Fund Deposits'' and to restructure the wording of the provisions for 
clarity and readability.
    Under the proposed rule change, Section 1 of GSD Rule 4 and Section 
1 of MBSD Rule 4 would continue to have the same provisions as they 
relate to Netting Members or Clearing Members, as applicable, except 
for the following: (i) The language throughout the sections would be 
reorganized, streamlined and clarified, and (ii) language would be 
added regarding additional deposits maintained by the Netting Members 
or Clearing Members, as applicable, at FICC, and highlight for members 
that such additional deposits would be deemed to be part of the 
Clearing Fund and the member's Actual Deposit (as discussed below and 
as defined in the proposed rule change) but would not be deemed to be 
part of the member's Required Fund Deposit.
    The proposed language regarding maintenance of a member's Actual 
Deposit would also make it clear that FICC will not be required to 
segregate such deposit, but shall maintain books and records concerning 
the assets that constitute each member's Actual Deposit.
    In addition, FICC proposes a technical change to update a cross 
reference in Section 1 of GSD Rule 4 and MBSD Rule 4.
    Furthermore, in Section 1 of MBSD Rule 4, FICC is proposing to move 
the definition of ``Transactions'' to proposed Section 2(a) of MBSD 
Rule 4, where the first usage of ``Transactions'' in MBSD Rule 4 
appears. FICC is also proposing to delete the last sentence in Section 
1 of MBSD Rule 4, which references a Member's obligation to replenish 
the deficit in its Required Fund Deposit if it is charged by FICC under 
certain circumstances, because it would no longer be relevant under the 
proposed rule change to Section 7 of MBSD Rule 4, as FICC would require 
members to pay their loss allocation amounts instead of charging their 
Required Fund Deposits for Clearing Fund losses.
Section 2 of GSD Rule 4 and MBSD Rule 4
    Current Section 2 of GSD Rule 4 and MBSD Rule 4 set forth more 
detailed requirements pertaining to members' Required Fund Deposits. 
FICC is proposing to rename the subheadings in these sections from 
``Required Fund Deposit'' to ``Required Fund Deposit Requirements'' in 
order to better reflect the purpose of this section.
    In addition, FICC is proposing to expand the definition of ``Legal 
Risk'' in both the GSD and MBSD provisions (current Section 2(e) of GSD 
Rule 4 and Section 2(f) of MBSD Rule 4) by deleting references to Legal 
Risk being defined only in reference to a member's insolvency or 
bankruptcy, as FICC believes that Legal Risk may arise outside the 
context of an insolvency or bankruptcy event regarding a member, and 
FICC should be permitted to adequately protect itself in those non- 
insolvency/bankruptcy circumstances as well.
    For better organization of Rule 4, FICC is also proposing to 
relocate the provision on minimum Clearing Fund cash requirements 
(current Section 2(b)

[[Page 861]]

of GSD Rule 4 and Section 2(d) of MBSD Rule 4) to the section in each 
of GSD Rule 4 and MBSD Rule 4 dealing specifically with the form of 
Clearing Fund deposits (proposed Section 3 of GSD Rule 4 and MBSD Rule 
4). This would necessitate the re-lettering of the provisions in 
Section 2. In addition, as stated above, the provision regarding the 
definition of ``Transactions'' for purposes of MBSD Rule 4 would be 
moved to proposed Section 2(a) from current Section 1.
    FICC is proposing technical changes to correct typographical errors 
in current Section 2 of GSD Rule 4.
Sections 3, 3a and 3b of GSD Rule 4 and MBSD Rule 4
    Currently, Sections 3, 3a and 3b of GSD Rule 4 and MBSD Rule 4 
address the permissible form of Clearing Fund deposits and contain 
detailed requirements regarding each form. FICC is proposing changes to 
improve the readability of these sections.
    In addition, for better organization of the subject matter, FICC is 
proposing to move certain paragraphs from one section to another, 
including (i) moving clauses (b) and (d) in current Section 2 of GSD 
Rule 4 and MBSD Rule 4, respectively, to proposed Section 3 of GSD Rule 
4 and MBSD Rule 4 and (ii) moving the last paragraph of current Section 
3 in GSD Rule 4 and MBSD Rule 4 to proposed Section 3b of GSD Rule 4 
and MBSD Rule 4.
    Under the proposed rule change, FICC is also proposing to update 
the cash investment provision in Section 3a of GSD Rule 4 and MBSD Rule 
4 to reflect the Clearing Agency Investment Policy adopted by FICC \25\ 
and to define Clearing Fund Cash as (i) cash deposited by a Netting 
Member or Clearing Member, as applicable, as part of its Actual 
Deposit, (ii) the proceeds of (x) any loans made to FICC secured by the 
pledge by FICC of Eligible Clearing Fund Securities pledged to FICC or 
(y) any sales of Eligible Clearing Fund Securities pledged to FICC, 
(iii) cash receipts from any investment of, repurchase or reverse 
repurchase agreements relating to, or liquidation of, Clearing Fund 
assets, and (iv) cash payments on Eligible Letters of Credit. Lastly, 
FICC is proposing technical changes to correct typographical errors in 
current Section 3 of MBSD Rule 4 and current Section 3b of GSD Rule 4.
---------------------------------------------------------------------------

    \25\ See Securities Exchange Act Release No. 79528 (December 12, 
2016), 81 FR 91232 (December 16, 2016) (SR-FICC-2016-005).
---------------------------------------------------------------------------

Section 4 of GSD Rule 4 and MBSD Rule 4
    Currently, Section 4 of GSD Rule 4 and MBSD Rule 4 address the 
granting of a first priority perfected security interest by each 
Netting Member or Clearing Member, as applicable, in all assets and 
property placed by the member in the possession of FICC (or its agents 
acting on its behalf). FICC is not proposing any substantive changes to 
these sections except for streamlining the provisions for readability 
and clarity, and adding ``Actual Deposit'' as a defined term to refer 
to Eligible Clearing Fund Securities, funds and assets pledged to FICC 
to secure any and all obligations and liabilities of a Netting Member 
or a Clearing Member, as applicable, to FICC.
Section 5 of GSD Rule 4 and MBSD Rule 4
    Currently, Section 5 of GSD Rule 4 and MBSD Rule 4 describe the use 
of each Division's Clearing Fund. FICC is proposing to rename the 
subheading of this section from ``Use of Deposits and Payments'' to 
``Use of Clearing Fund'' to better reflect the purpose of the section.
    Under the proposed rule change, FICC is also proposing changes to 
streamline this section for clarity and readability and to align the 
GSD Rules and MBSD Rules. Specifically, FICC is proposing to delete the 
first paragraph of current Section 5 of GSD Rule 4 and MBSD Rule 4 and 
replace it with clearer language that sets forth the permitted uses of 
each Division's Clearing Fund. Specifically, the proposed Section 5 of 
GSD Rule 4 and MBSD Rule 4 provides that each Division's Clearing Fund 
would only be used by FICC (i) to secure each member's performance of 
obligations to FICC, including, without limitation, each member's 
obligations with respect to any loss allocations as set forth in 
proposed Section 7 of GSD Rule 4 and MBSD Rule 4 and any obligations 
arising from a Cross-Guaranty Agreement pursuant to GSD Rule 41 or MBSD 
Rule 32, as applicable, or a Cross-Margining Agreement pursuant to GSD 
Rule 43, (ii) to provide liquidity to FICC to meet its settlement 
obligations, including, without limitation, through the direct use of 
cash in the GSD Clearing Fund or MBSD Clearing Fund, as applicable, or 
through the pledge or rehypothecation of pledged Eligible Clearing Fund 
Securities in order to secure liquidity, and (iii) for investment as 
set forth in proposed Section 3a of GSD Rule 4 and MBSD Rule 4.
    The current first paragraph of Section 5 of GSD Rule 4 and MBSD 
Rule 4 provides that if FICC pledges, hypothecates, encumbers, borrows, 
or applies any part of the respective Division's Clearing Fund deposits 
to satisfy any liability, obligation, or liquidity requirements for 
more than thirty (30) days, FICC, at the Close of Business on the 30th 
day (or on the first Business Day thereafter) will consider the amount 
used as an actual loss to the respective Division's Clearing Fund and 
immediately allocate such loss in accordance with Section 7 of GSD Rule 
4 or MBSD Rule 4, as applicable. As proposed, FICC would retain this 
provision conceptually but replace it with clearer and streamlined 
language that provides that each time FICC uses any part of the 
respective Division's Clearing Fund for more than 30 calendar days to 
provide liquidity to FICC to meet its settlement obligations, 
including, without limitation, through the direct use of cash in the 
Clearing Fund or through the pledge or rehypothecation of pledged 
Eligible Clearing Fund Securities in order to secure liquidity, FICC, 
at the Close of Business on the 30th calendar day (or on the first 
Business Day thereafter) from the day of such use, would consider the 
amount used but not yet repaid as a loss to the Clearing Fund incurred 
as a result of a Defaulting Member Event and immediately allocate such 
loss in accordance with proposed Section 7 of GSD Rule 4 or MBSD Rule 
4, as applicable.
    The proposed rule change also includes deleting language currently 
in Section 5 of MBSD Rule 4 that limits certain uses by FICC of the 
MBSD Clearing Fund to ``unexpected or unusual'' requirements for funds 
that represent a ``small percentage'' of the MBSD Clearing Fund. FICC 
believes that these limiting phrases (which appear in connection with 
FICC's use of MBSD Clearing Fund to cover losses and liabilities 
incident to its clearance and settlement business outside the context 
of an MBSD Defaulting Member Event as well as to cover certain 
liquidity needs) are vague and imprecise, and should be replaced in 
their entirety. Specifically, FICC is proposing to delete the limiting 
language with respect to FICC's use of MBSD Clearing Fund to cover 
losses and liabilities incident to its clearance and settlement 
business outside of an MBSD Defaulting Member Event so as to not have 
such language be interpreted as impairing FICC's ability to access the 
MBSD Clearing Fund in order to manage non-default losses. FICC is also 
proposing to delete the limiting language with respect to FICC's use of 
MBSD Clearing Fund to cover certain liquidity needs because

[[Page 862]]

the effect of the limitation in this context is confusing and unclear.
    In addition, FICC is proposing to delete the last paragraph in 
current Section 5 of GSD Rule 4 and MBSD Rule 4 because these 
paragraphs address the application of a member's deposits to the 
applicable Clearing Fund to cover the allocation of a loss or liability 
incurred by FICC. These paragraphs would no longer be relevant, 
because, under the proposed Section 7 of GSD Rule 4 and MBSD Rule 4 
(discussed below), FICC would not apply the member's deposit to the 
Clearing Fund unless the member does not satisfy payment of its 
allocated loss amount within the required timeframe. These paragraphs 
also currently include provisions regarding other agreements, such as a 
Cross-Guaranty Agreement, that pertain to a Defaulting Member, and such 
provisions would now be covered by proposed Section 6 of GSD Rule 4 and 
MBSD Rule 4.
Section 6 of GSD Rule 4 and MBSD Rule 4
    Currently, Section 6 of GSD Rule 4 and MBSD Rule 4 are reserved for 
future use. FICC is proposing to use this section for provisions 
relating to the application of deposits to the respective Division's 
Clearing Fund and other amounts held by FICC to a Defaulting Member's 
obligations.
    FICC is proposing to add a subheading of ``Application of Clearing 
Fund Deposits and Other Amounts to Defaulting Members' Obligations'' to 
Section 6 of GSD Rule 4 and MBSD Rule 4. Under the proposed rule 
change, for better organization by subject matter, FICC is also 
proposing to relocate certain provisions to these sections from the 
respective current Section 7 of GSD Rule 4 and MBSD Rule 4, which 
addresses FICC's application of Clearing Fund deposits and other assets 
held by FICC securing a Defaulting Member's obligations to FICC.
    For additional clarity and for consistency with the loss allocation 
rules of the other DTCC Clearing Agencies, FICC proposes to add a 
provision which makes it clear that, if FICC applies a Defaulting 
Member's Clearing Fund deposits, FICC may take any and all actions with 
respect to the Defaulting Member's Actual Deposits, including 
assignment, transfer, and sale of any Eligible Clearing Fund 
Securities, that FICC determines is appropriate.
Sections 7, 7a and 7b of GSD Rule 4 and MBSD Rule 4
    Current Section 7 of GSD Rule 4 and MBSD Rule 4 contains FICC's 
current loss allocation waterfall for losses or liabilities incurred by 
FICC. With respect to any loss or liability incurred by FICC as the 
result of the failure of a Defaulting Member to fulfill its obligations 
to FICC, the loss allocation waterfall for each Division currently 
provides:
    (i) Application of any Clearing Fund deposits and other collateral 
held by FICC securing a Defaulting Member's obligations to FICC and 
additional resources as are applicable to the Defaulting Member.
    (ii) If a loss or liability remains after the application of the 
Defaulting Member's collateral and resources, FICC would apply up to 
25% of FICC's existing retained earnings, or such higher amount as the 
Board of Directors determines.
    (iii) If a loss or liability still remains after the application of 
the retained earnings, FICC would apply the loss or liability to 
members as follows:
    (a) If the remaining loss or liability is attributable to Tier One 
Netting Members or Tier One Members, as applicable, then FICC will 
allocate such loss or liability to Tier One Netting Members or Tier One 
Members, as applicable, by assessing the Required Fund Deposit 
maintained by each such member an amount up to $50,000, in an equal 
basis per Tier One Netting Member or Tier One Member, as applicable.
    (b) If the remaining loss or liability is attributable to Tier Two 
Members, then FICC will allocate such loss or liability to Tier Two 
Members based upon their trading activity with the Defaulting Member 
that resulted in a loss.
    (iv) If there is any loss or liability that still remains after the 
application of (ii) and (iii) above that is attributable to Tier One 
Netting Members or Tier One Members, as applicable, then FICC will 
allocate such loss or liability among Tier One Netting Members or Tier 
One Members, as applicable, ratably based on the amount of each Tier 
One Netting Member's or Tier One Member's Required Fund Deposit and 
based on the average daily level of such deposit over the prior twelve 
(12) months (or such shorter period as may be available if the member 
has not maintained a deposit over such time period).
    Current Section 7(f) of GSD Rule 4 and MBSD Rule 4 also provides 
that Other Losses shall be allocated among Tier One Netting Members or 
Tier One Members, as applicable, ratably in accordance with the 
respective amounts of each Tier One Netting Member's or Tier One 
Member's Required Fund Deposit and based on the average daily level of 
such deposit over the prior twelve (12) months (or such shorter period 
as may be available if the member has not maintained a deposit over 
such time period).
    Currently, pursuant to Section 7(e) of GSD Rule 4, an Inter-Dealer 
Broker Netting Member, or a Non-IDB Broker with respect to activity in 
its Segregated Broker Account, will not be subject to an aggregate 
allocation loss for any single loss-allocation event that exceeds $5 
million. FICC believes that it is appropriate for GSD to retain this 
cap under the proposed rule change because the Inter-Dealer Broker 
Netting Members are required to limit their business as provided in 
Section 8(e) of GSD Rule 3, which would in turn minimize the potential 
losses or liabilities that could be incurred by FICC from Inter-Dealer 
Broker Netting Members.\26\ FICC believes that it is also appropriate 
for GSD to retain this cap under the proposed rule change for Non-IDB 
Brokers because their activity in their respective Segregated Broker 
Accounts would be subject to similar limitations as the Inter-Dealer 
Broker Netting Members. However, FICC is proposing a technical change 
to replace the term ``Segregated Broker Account'' with ``Segregated 
Repo Account,'' which is the correct term defined in GSD Rule 1.
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    \26\ Pursuant to Section 8(e) of GSD Rule 3, an Inter-Dealer 
Broker Netting Member is required to (A) limit its business to 
acting exclusively as a broker, (B) conduct all of its business in 
Repo Transactions with Netting Members, and (C) conduct at least 90 
percent of its business in transactions that are not Repo 
Transactions with Netting Members. If an Inter-Dealer Broker Netting 
Member fails to comply with these requirements, then the Inter-
Dealer Broker Netting Member shall be considered by FICC as a Dealer 
Netting Member. Supra note 4.
---------------------------------------------------------------------------

    Current Section 7(g) of GSD Rule 4 and MBSD Rule 4 further provides 
that if the Required Fund Deposit of the member being allocated the 
loss is not sufficient to satisfy its loss allocation obligation, the 
member is required to deliver to FICC an amount that is necessary to 
eliminate the deficiency by the Close of Business on the next Business 
Day, or by the Close of Business on the Business Day of issuance of the 
notification if so determined by FICC. Under the current Rules, a 
member may elect to terminate its membership, which would limit its 
loss allocation to the amount of its Required Fund Deposit for the 
Business Day on which the notification of such loss allocation is 
provided to the member. If the member does not elect to terminate its 
membership and fails to satisfy its Required Fund Deposit within the 
timeframe specified in the Rules, FICC will cease to act generally with 
regard to such member pursuant to GSD Rules 21 and 22A or MBSD Rules 14

[[Page 863]]

and 17, as applicable, and may take disciplinary action against such 
member pursuant to GSD Rule 48 or MBSD Rule 38, as applicable.
    Current Section 7(h) of GSD Rule 4 and MBSD Rule 4 requires FICC to 
promptly notify members and the Commission of the amount involved and 
the causes if a Remaining Loss or Other Loss occurs. In addition, 
current Section 7(i) of GSD Rule 4 and MBSD Rule 4 also provides that 
any increase in Clearing Fund deposit as required by subsection (f) of 
current Section 2 of GSD Rule 4 or provisions of MBSD Rule 4 regarding 
special charges or other premiums will not be taken into account when 
calculating loss allocation based on a GSD Member's Average Required 
FICC Clearing Fund Deposit amount or an MBSD Member's Average Required 
Fund Deposit amount, as applicable, under current Section 7 of GSD Rule 
4 and MBSD Rule 4.
    Under the proposed rule change, FICC is proposing to rename the 
subheading of Section 7 of GSD Rule 4 and MBSD Rule 4 to ``Loss 
Allocation Waterfall, Off-the-Market Transactions.'' In addition, FICC 
is proposing to restructure its loss allocation waterfall as described 
below.
    For better organization of the subject matter, FICC is proposing to 
move certain paragraphs from one section to another, including (i) 
relocating the last sentence of current Section 7(h) of GSD Rule 4 and 
MBSD Rule 4 regarding recovery of allocated losses or liabilities by 
FICC to the fifth paragraph of proposed Section 7 of GSD Rule 4 and 
MBSD Rule 4, (ii) relocating from current Section 7(a) of GSD Rule 4 
and MBSD Rule 4 provisions which address FICC's application of Clearing 
Fund deposits and other assets held by FICC securing a Defaulting 
Member's obligations to FICC to proposed Section 6 of GSD Rule 4 and 
MBSD Rule 4, (iii) relocating from current Section 7 of GSD Rule 4 to 
proposed Section 6 of GSD Rule 4 the provision regarding FICC's right 
to treat certain payments to an FCO under a Cross-Margining Guaranty as 
a loss to be allocated, (iv) relocating the provisions in current 
Section 7(i) of GSD Rule 4 and MBSD Rule 4 regarding certain increases 
in Clearing Fund deposits not being taken into account when calculating 
loss allocation so that such provisions would come right after the loss 
allocation calculation provision, with an updated reference to proposed 
renumbered Sections 2(d) and 2(e) in GSD Rule 4 and MBSD Rule 4, 
respectively, and (v) relocating the provision regarding withdrawing 
members reapplying to become members in the second paragraph of current 
Section 7(g) of GSD Rule 4 and MBSD Rule 4 to come right after the 
paragraph regarding the election of a Tier One Netting Member or Tier 
One Member, as applicable, to withdraw from membership in proposed 
Section 7 of GSD Rule 4 and MBSD Rule 4. Furthermore, in order to 
enhance readability and clarity, FICC is proposing a number of changes 
to streamline the language in these provisions.
    Under the proposal, Section 7 of GSD Rule 4 and MBSD Rule 4 would 
make clear that the loss allocation waterfall applies to losses and 
liabilities (i) relating to or arising out of a default of a member or 
(ii) otherwise incident to the clearance and settlement business of 
FICC (i.e., non-default losses). The loss allocation waterfall would be 
triggered if FICC incurs a loss or liability relating to or arising out 
of the default of a Defaulting Member that is not satisfied pursuant to 
proposed Section 6 of GSD Rule 4 and MBSD Rule 4, as applicable, (a 
``Defaulting Member Event'') or as a result of a Declared Non-Default 
Loss Event.
    Under proposed Section 7 of GSD Rule 4 and MBSD Rule 4, the loss 
allocation waterfall would begin with a corporate contribution from 
FICC (``Corporate Contribution''), as is the case under the current 
Rules, but in a different form than under the current Section 7 of GSD 
Rule 4 and MBSD Rule 4 described above. Today, Section 7(b) of GSD Rule 
4 and Section 7(c) of MBSD Rule 4 provide that, if FICC incurs any loss 
or liability as the result of the failure of a Defaulting Member to 
fulfill its obligations to FICC, FICC will contribute up to 25% of its 
existing retained earnings (or such higher amount as the Board of 
Directors shall determine), to such loss or liability; however, no 
corporate contribution from FICC is currently required for losses 
resulting other than those from Member impairments. Under the proposal, 
FICC would add a proposed new Section 7a to GSD Rule 4 and MBSD Rule 4 
with a subheading of ``Corporate Contribution'' and define FICC's 
Corporate Contribution with respect to any loss allocation pursuant to 
proposed Section 7 of GSD Rule 4 or MBSD Rule 4, whether arising out of 
or relating to a Defaulting Member Event or a Declared Non-Default Loss 
Event, as an amount that is equal to fifty (50) percent of the amount 
calculated by FICC in respect of its General Business Risk Capital 
Requirement as of the end of the calendar quarter immediately preceding 
the Event Period.\27\ The proposed rule change would specify that 
FICC's General Business Risk Capital Requirement, as defined in FICC's 
Clearing Agency Policy on Capital Requirements,\28\ is, at a minimum, 
equal to the regulatory capital that FICC is required to maintain in 
compliance with Rule 17Ad-22(e)(15) under the Act.\29\
---------------------------------------------------------------------------

    \27\ Supra note 7.
    \28\ Supra note 8.
    \29\ Supra note 9.
---------------------------------------------------------------------------

    As proposed, if FICC applies the Corporate Contribution to a loss 
or liability arising out of or relating to one or more Defaulting 
Member Events or Declared Non-Default Loss Events relating to an Event 
Period, then for any subsequent Event Periods that occur during the two 
hundred fifty (250) Business Days thereafter,\30\ the Corporate 
Contribution would be reduced to the remaining unused portion of the 
Corporate Contribution amount that was applied for the first Event 
Period. Proposed Section 7a of both GSD Rule 4 and MBSD Rule 4 would 
require FICC to notify members of any such reduction to the Corporate 
Contribution.
---------------------------------------------------------------------------

    \30\ Supra note 11.
---------------------------------------------------------------------------

    Proposed Section 7a to GSD Rule 4 and MBSD Rule 4 would also make 
clear that there would be one FICC Corporate Contribution, the amount 
of which would be available to both Divisions and would be applied 
against a loss or liability in either Division in the order in which 
such loss or liability occurs, i.e., FICC would not have two separate 
Corporate Contributions, one for each Division. As proposed, in the 
event of a loss or liability relating to an Event Period, whether 
arising out of or relating to a Defaulting Member Event or a Declared 
Non-Default Loss Event, attributable to only one Division, the 
Corporate Contribution would be applied to that Division up to the 
amount then available. Under the proposal, if a loss or liability 
relating to an Event Period, whether arising out of or relating to a 
Defaulting Member Event or a Declared Non-Default Loss Event, occurs 
simultaneously at both Divisions, the Corporate Contribution would be 
applied to the respective Divisions in the same proportion that the 
aggregate Average RFDs of all members in that Division bears to the 
aggregate Average RFDs of all members in both Divisions.\31\
---------------------------------------------------------------------------

    \31\ Supra note 12.
---------------------------------------------------------------------------

    Currently, the Rules do not require FICC to contribute its retained 
earnings to losses and liabilities other than those from member 
defaults. Under the proposal, FICC would expand the application of its 
corporate contribution

[[Page 864]]

beyond losses and liabilities as the result of the failure of a 
Defaulting Member to fulfill its obligations to FICC. The proposed 
Corporate Contribution would apply to losses or liabilities relating to 
or arising out of Defaulting Member Events and Declared Non-Default 
Loss Events, and would be a mandatory loss contribution by FICC prior 
to any allocation of the loss among the applicable Division's members.
    Current Section 7(b) of GSD Rule 4 and Section 7(c) of MBSD Rule 4 
provide FICC the option to contribute amounts higher than the specified 
percentage of retained earnings as determined by the Board of 
Directors, to any loss or liability incurred by FICC as the result of 
the failure of a Defaulting Member to fulfill its obligations to FICC. 
This option would be retained and expanded under the proposal to also 
cover non-default losses. Proposed Section 7a of GSD Rule 4 and MBSD 
Rule 4 would provide that nothing in the Rules would prevent FICC from 
voluntarily applying amounts greater than the Corporate Contribution 
against any FICC loss or liability, whether a Defaulting Member Event 
or a Declared Non-Default Loss Event, if the Board of Directors, in its 
sole discretion, believes such to be appropriate under the factual 
situation existing at the time.
    Proposed Section 7 of GSD Rule 4 and MBSD Rule 4 would provide that 
FICC shall apply the Corporate Contribution to losses and liabilities 
that arise out of or relate to one or more Defaulting Member Events 
and/or (ii) Declared Non-Default Loss Events that occur within an Event 
Period. The proposed rule change also provides that if losses and 
liabilities with respect to such Event Period remain unsatisfied 
following application of the Corporate Contribution, FICC would 
allocate such losses and liabilities to members, as described below.
    As proposed, Section 7 of GSD Rule 4 and MBSD Rule 4 would retain 
the differentiation in allocating losses to Tier One Netting Members or 
Tier One Members, as applicable, and Tier Two Members. Specifically, as 
is the case today, losses or liabilities that arise out of or relate to 
one or more Defaulting Member Events would be attributable to Tier One 
Netting Members or Tier One Members, as applicable, and Tier Two 
Members, while losses or liabilities that arise out of or relate to one 
or more Declared Non-Default Loss Events would only be attributable to 
Tier One Netting Members or Tier One Members, as applicable. Tier Two 
Members would not be subject to loss allocation with respect to 
Declared Non-Default Loss Events.
    Under the proposal, FICC would delete the provision in current 
Section 7(h) of GSD Rule 4 and MBSD Rule 4 that requires FICC to 
promptly notify members and the Commission of the amounts involved and 
the causes if a Remaining Loss or Other Loss occurs because such 
notification would no longer be necessary under the proposed rule 
change. Under the proposed rule change, FICC would notify members 
subject to loss allocation of the amounts being allocated to them in 
one or more Loss Allocation Notices for both Defaulting Member Events 
and Declared Non-Default Loss Events. As such, in order to conform to 
the proposed rule change, FICC is proposing to eliminate the 
notification to members regarding the amounts involved and the causes 
if a Remaining Loss or Other Loss occurs that is required under current 
Section 7(h) of GSD Rule 4 and MBSD Rule 4. FICC is also proposing to 
delete the notification to the Commission regarding the amounts 
involved and the causes if a Remaining Loss or Other Loss occurs as 
required in the same section. While as a practical matter, FICC would 
notify the Commission of a decision to loss allocate, FICC does not 
believe such notification needs to be specified in the Rules.
    In addition, FICC is proposing to clarify the provision related to 
Off-the-Market Transactions so that it is clear that loss or liability 
of FICC in connection with the close-out or liquidation of an Off-the-
Market Transaction in the portfolio of a Defaulting Member would be 
allocated to the Member that was the counterparty to such transaction.
    Tier One Netting Members/Tier One Members:
    For Tier One Netting Members or Tier One Members, as applicable, 
proposed Section 7 of GSD Rule 4 and MBSD Rule 4 would establish the 
concept of an ``Event Period'' to provide for a clear and transparent 
way of handling multiple loss events occurring in a period of ten (10) 
Business Days, which would be grouped into an Event Period.\32\ As 
stated above, both Defaulting Member Events or Declared Non-Default 
Loss Events could occur within the same Event Period.
---------------------------------------------------------------------------

    \32\ Supra note 14.
---------------------------------------------------------------------------

    Under the proposal, an Event Period with respect to a Defaulting 
Member Event would begin on the day FICC notifies members that it has 
ceased to act for a Defaulting Member (or the next Business Day, if 
such day is not a Business Day). In the case of a Declared Non-Default 
Loss Event, an Event Period would begin on the day that FICC notifies 
members of the determination by the Board of Directors that the 
applicable loss or liability incident to the clearance and settlement 
business of FICC may be a significant and substantial loss or liability 
that may materially impair the ability of FICC to provide clearance and 
settlement services in an orderly manner and will potentially generate 
losses to be mutualized among Tier One Netting Members or Tier One 
Members, as applicable, in order to ensure that FICC may continue to 
offer clearance and settlement services in an orderly manner (or the 
next Business Day, if such day is not a Business Day). If a subsequent 
Defaulting Member Event or Declared Non-Default Loss Event occurs 
during an Event Period, any losses or liabilities arising out of or 
relating to any such subsequent event would be resolved as losses or 
liabilities that are part of the same Event Period, without extending 
the duration of such Event Period.
    The proposed rule change to Section 7 of GSD Rule 4 and MBSD Rule 4 
would clarify that all Tier One Netting Members or Tier One Members, as 
applicable, would be subject to loss allocation for losses and 
liabilities relating to or arising out of a Declared Non-Default Loss 
Event; however, in the case of losses and liabilities relating to or 
arising out of a Defaulting Member Event, only non-defaulting Tier One 
Netting Members or Tier One Members, as applicable, would be subject to 
loss allocation. In addition, FICC is proposing to clarify that after a 
first round of loss allocations with respect to an Event Period, only 
Tier One Netting Members or Tier One Members, as applicable, that have 
not submitted a Loss Allocation Withdrawal Notice in accordance with 
proposed Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, would 
be subject to further loss allocations with respect to that Event 
Period. FICC is also proposing that FICC would notify Tier One Netting 
Members or Tier One Members, as applicable, subject to loss allocation 
of the amounts being allocated to them (``Loss Allocation Notice'') in 
successive rounds of loss allocations.
    Under the proposed rule change, a loss allocation ``round'' would 
mean a series of loss allocations relating to an Event Period, the 
aggregate amount of which is limited by the round cap. When the 
aggregate amount of losses allocated in a round equals the round cap, 
any additional losses relating to the applicable Event Period would be 
allocated in one or more subsequent rounds, in each case subject to a 
round cap for that round. FICC may continue

[[Page 865]]

the loss allocation process in successive rounds until all losses from 
the Event Period are allocated among Tier One Netting Members or Tier 
One Members, as applicable, that have not submitted a Loss Allocation 
Withdrawal Notice in accordance with proposed Section 7b of GSD Rule 4 
or MBSD Rule 4.
    As proposed, each loss allocation would be communicated to the Tier 
One Netting Members or Tier One Members, as applicable, by the issuance 
of a Loss Allocation Notice. Each Loss Allocation Notice would specify 
the relevant Event Period and the round to which it relates. The first 
Loss Allocation Notice in any first, second, or subsequent round would 
expressly state that such Loss Allocation Notice reflects the beginning 
of the first, second, or subsequent round, as the case may be, and that 
each Tier One Netting Member or Tier One Member, as applicable, in that 
round has five (5) Business Days from the issuance of such first Loss 
Allocation Notice for the round to notify FICC of its election to 
withdraw from membership with GSD or MBSD, as applicable, pursuant to 
proposed Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, and 
thereby benefit from its Loss Allocation Cap.\33\
---------------------------------------------------------------------------

    \33\ Supra note 16.
---------------------------------------------------------------------------

    Proposed Section 7 of GSD Rule 4 and MBSD Rule 4 would also retain 
the requirement of loss allocation among Tier One Netting Members or 
Tier One Members, as applicable, if a loss or liability remains after 
the application of the Corporate Contribution, as described above. In 
contrast to the current Section 7 where FICC would assess the Required 
Fund Deposits of Tier One Netting Members or Tier One Members, as 
applicable, to allocate losses, under the proposal, FICC would require 
Tier One Netting Members or Tier One Members, as applicable, to pay 
their loss allocation amounts (leaving their Required Fund Deposits 
intact).\34\ Loss allocation obligations would continue to be 
calculated based upon a Tier One Netting Member's or Tier One Member's, 
as applicable, pro rata share of losses and liabilities (although the 
pro rata share would be calculated differently than it is today), and 
Tier One Netting Members or Tier One Members, as applicable, would 
still retain the ability to voluntarily withdraw from membership and 
cap their loss allocation obligation (although the loss allocation 
obligation would also be calculated differently than it is today).
---------------------------------------------------------------------------

    \34\ FICC believes that shifting from the two-step methodology 
of applying the respective Division's Clearing Fund and then 
requiring members to immediately replenish it to requiring direct 
payment would increase efficiency, while preserving the right to 
charge the member's Clearing Fund deposits in the event the member 
does not timely pay. Such a failure to pay would trigger recourse to 
the Clearing Fund deposits of the member under proposed Section 6 of 
GSD Rule 4 or MBSD Rule 4, as applicable. In addition, this change 
would provide greater stability for FICC in times of stress by 
allowing FICC to retain the respective Division's Clearing Fund, its 
critical pre-funded resource, while charging loss allocations.
---------------------------------------------------------------------------

    As proposed, each such member's pro rata share of losses and 
liabilities to be allocated in any round would be equal to (i) the 
member's Average RFD, divided by (ii) the sum of the Average RFD 
amounts of all members subject to loss allocation in such round. Each 
such member would have a maximum payment obligation with respect to any 
loss allocation round that would be equal to the greater of (x) its 
Required Fund Deposit on the first day of the applicable Event Period 
or (y) its Average RFD (such amount would be each member's ``Loss 
Allocation Cap''). Therefore, the sum of the Loss Allocation Caps of 
the members subject to loss allocation would constitute the maximum 
amount that FICC would be permitted to allocate in each round. FICC 
would retain the loss allocation limit of $5 million for Inter-Dealer 
Broker Netting Members, or Non-IDB Brokers with respect to activities 
in their Segregated Broker Accounts, as discussed above.
    As proposed, Section 7 of GSD Rule 4 and MBSD Rule 4, would also 
provide that, to the extent that a Tier One Netting Member's or Tier 
One Member's, as applicable, Loss Allocation Cap exceeds such member's 
Required Fund Deposit on the first day of the applicable Event Period, 
FICC may, in its discretion, retain any excess amounts on deposit from 
the member, up to the Loss Allocation Cap of the Tier One Netting 
Member or Tier One Member, as applicable.
    As proposed, Tier One Netting Members or Tier One Members, as 
applicable, would have two (2) Business Days after FICC issues a first 
round Loss Allocation Notice to pay the amount specified in any such 
notice.\35\ On a subsequent round (i.e., if the first round did not 
cover the entire loss of the Event Period because FICC was only able to 
allocate up to the round cap), these members would also have two (2) 
Business Days after notice by FICC to pay their loss allocation amounts 
(again subject to their Loss Allocation Caps), unless the members have 
notified (or will timely notify) FICC of their election to withdraw 
from membership with respect to a prior loss allocation round.
---------------------------------------------------------------------------

    \35\ Supra note 19.
---------------------------------------------------------------------------

    Under the proposal, if a Tier One Netting Member or Tier One 
Member, as applicable, fails to make its required payment in respect of 
a Loss Allocation Notice by the time such payment is due, FICC would 
have the right to proceed against such member as a Defaulting Member 
that has failed to satisfy an obligation in accordance with proposed 
Section 6 of GSD Rule 4 or MBSD Rule 4 described above. Members who 
wish to withdraw from membership would be required to comply with the 
requirements in proposed Section 7b of GSD Rule 4 and MBSD Rule 4, 
described further below. Specifically, proposed Section 7 of GSD Rule 4 
and MBSD Rule 4 would provide that if, after notifying FICC of its 
election to withdraw from membership pursuant to proposed Section 7b of 
GSD Rule 4 or MBSD Rule 4, as applicable, the Tier One Netting Member 
or Tier One Member, as applicable, fails to comply with the provisions 
of proposed Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, its 
notice of withdrawal would be deemed void and any further losses 
resulting from the applicable Event Period may be allocated against it 
as if it had not given such notice.
    FICC is proposing to delete the provisions in the current GSD Rule 
4 and MBSD Rule 4 that require FICC to assess the Required Fund Deposit 
maintained by each Tier One Netting Member or Tier One Member, as 
applicable, an amount up to $50,000, in an equal basis per such member, 
before allocating losses to Tier One Netting Members or Tier One 
Members, as applicable, ratably, in accordance with each such member's 
Required Fund Deposit and Average Required FICC Clearing Fund Deposit 
or Average Required Clearing Fund Deposit, as applicable. FICC believes 
that in the event of a loss or liability, this assessment is unlikely 
to alleviate the need for loss mutualization and creates an unnecessary 
administrative burden for each Division. FICC believes that moving 
straight to the loss mutualization described herein would be more 
practical. This proposed change would also streamline each Division's 
loss allocation waterfall processes and align such processes with those 
of the other DTCC Clearing Agencies.
    Tier Two Members:
    FICC is not proposing any substantive change to the provisions 
regarding Tier Two Members in current Section 7 of GSD Rule 4 and MBSD 
Rule 4, except to (i) add a subheading of ``Tier Two Members'' in the 
beginning of these provisions for ease of identification and (ii) add a 
paragraph that makes it clear that if a Tier Two Member fails to make

[[Page 866]]

its required payment in respect of a Loss Allocation Notice by the time 
such payment is due, FICC would have the right to proceed against such 
member as a Defaulting Member that has failed to satisfy an obligation 
in accordance with proposed Section 6 of GSD Rule 4 or MBSD Rule 4 
described above, consistent with the proposed change regarding Tier One 
Netting Members or Tier One Members, as applicable.
    Withdrawal from Membership:
    Proposed Section 7b of GSD Rule 4 and MBSD Rule 4 would include the 
provisions regarding withdrawal from membership currently covered by 
Section 7(g) of GSD Rule 4 and MBSD Rule 4. FICC believes that 
relocating the provisions on withdrawal from membership as it pertains 
to loss allocation, so that it comes right after the section on the 
loss allocation waterfall, would provide for the better organization of 
GSD Rule 4 and MBSD Rule 4. As proposed, the subheading for Section 7b 
of GSD Rule 4 and MBSD Rule 4 would read ``Withdrawal Following Loss 
Allocation.''
    Currently, Section 7(g) of GSD Rule 4 and MBSD Rule 4 provides that 
a member may, pursuant to current Section 13 of GSD Rule 3 or MBSD Rule 
3, notify FICC by the Close of Business on the Business Day on which a 
payment in an amount necessary to cover losses allocated to such member 
after the application of its Required Fund Deposit is due, of its 
election to terminate its membership and thereby avail itself of a cap 
on loss allocation, which is currently its Required Fund Deposit as 
fixed on the Business Day the pro rata charge loss allocation 
notification is provided to such member.
    As stated above, under the proposed rule change, Section 7 of GSD 
Rule 4 and MBSD Rule 4 would provide that a Tier One Netting Member or 
a Tier One Member, as applicable, who wishes to withdraw from 
membership in respect of a loss allocation must provide notice of its 
election to withdraw (``Loss Allocation Withdrawal Notice'') within 
five (5) Business Days from the issuance of the first Loss Allocation 
Notice in any round.\36\ In order to avail itself of its Loss 
Allocation Cap, such member would need to follow the requirements in 
proposed Section 7b of GSD Rule 4 and MBSD Rule 4, as applicable, which 
would provide that such member must: (i) Specify in its Loss Allocation 
Withdrawal Notice an effective date for withdrawal from membership, 
which date shall not be prior to the scheduled final settlement date of 
any remaining obligations owed by the member to FICC, unless otherwise 
approved by FICC, and (ii) as of the time of such member's submission 
of the Loss Allocation Withdrawal Notice, cease submitting transactions 
to FICC for processing, clearance or settlement, unless otherwise 
approved by FICC.
---------------------------------------------------------------------------

    \36\ Supra note 16.
---------------------------------------------------------------------------

    FICC is proposing to include a sentence in proposed Section 7b of 
GSD Rule 4 and MBSD Rule 4 to make it clear that if the Tier One 
Netting Member or Tier One Member, as applicable, fails to comply with 
the requirements set forth in that section, its Loss Allocation 
Withdrawal Notice will be deemed void, and such member will remain 
subject to further loss allocations pursuant to proposed Section 7 of 
GSD Rule 4 and MBSD Rule 4 as if it had not given such notice.
    For better organization of the subject matter, FICC is also 
proposing to move the provision that covers members' obligations to 
eliminate any deficiency in their Required Fund Deposits from the last 
sentence in the first paragraph of current Section 7(g) of GSD Rule 4 
and MBSD Rule 4 to proposed Section 9 of GSD Rule 4 and MBSD Rule 4.
Section 8
    As proposed, Section 8 of GSD Rule 4 and MBSD Rule 4 would cover 
the provisions on the return of a member's Clearing Fund deposit that 
are currently covered by Section 10 of GSD Rule 4 and MBSD Rule 4. 
Proposed Section 8's subheading would be ``Return of Members' Clearing 
Fund Deposits.''
    FICC is proposing changes to streamline and enhance the clarity and 
readability of this section, including adding language to clarify that 
a member's obligations to FICC would include both matured as well as 
contingent obligations, but is otherwise retaining the substantive 
provisions of this section.
Section 9
    FICC is proposing to renumber Section 8 of GSD Rule 4 and MBSD Rule 
4, which addresses the timing of members' payment of the respective 
Division's Clearing Fund. Under the proposal, this section would be 
renumbered as Section 9 of GSD Rule 4 and MBSD Rule 4 and retitled to 
``Initial Required Fund Deposit and Changes in Members' Required Fund 
Deposits'' to better reflect the subject matter of this section.
    Currently, Section 8 of GSD Rule 4 and MBSD Rule 4 requires members 
to satisfy any increase in their Required Fund Deposit requirement 
within such time as FICC requires. FICC is proposing to clarify that at 
the time the increase becomes effective, the member's obligations to 
FICC will be determined in accordance with the increased Required Fund 
Deposit whether or not the member has satisfied such increased amount. 
FICC is also proposing to add language to clarify that (i) if FICC 
applies a GSD Netting Member's or an MBSD Clearing Member's Clearing 
Fund deposits as permitted pursuant to GSD Rule 4 or MBSD Rule 4, as 
applicable, FICC may take any and all actions with respect to the GSD 
Netting Member's or MBSD Clearing Member's Actual Deposit, including 
assignment, transfer, and sale of any Eligible Clearing Fund 
Securities, that FICC determines is appropriate, and (ii) if such 
application results in any deficiency in the GSD Netting Member's or 
MBSD Clearing Member's, as applicable, Required Fund Deposit, such 
member shall immediately replenish it. These clarifications are 
consistent with the Divisions' rights as set forth in current Sections 
4 and 11 of GSD Rule 4 and current Sections 4 and 11 of MBSD Rule 4. In 
addition, the provisions in clause (ii) of the previous sentence is 
consistent with the requirements in current Section 1 of GSD Rule 4 and 
MBSD Rule 4 that a member must maintain its Required Fund Deposit.
    As discussed above, for better organization of the subject matter, 
FICC is proposing to move the provision that covers members' 
obligations to eliminate any deficiency in their Required Fund Deposits 
from the last sentence in the first paragraph of current Section 7(g) 
of GSD Rule 4 and MBSD Rule 4 to proposed Section 9 of GSD Rule 4 and 
MBSD Rule 4.
Section 10
    Currently, Section 9 of GSD Rule 4 and MBSD Rule 4 addresses 
situations where a member has excess on deposit in the Clearing Fund 
(i.e., amounts above its Required Fund Deposit). The current provision 
provides that FICC will notify a member of any Excess Clearing Fund 
Deposit as FICC determines from time to time. Upon the request of a 
member, FICC will return an excess amount requested by a member that 
follows the formats and timeframe established by FICC for such request. 
The current provision makes clear that FICC may, in its discretion, 
withhold any or all of a member's Excess Clearing Fund Deposit (i) if 
the member has an outstanding payment obligation to FICC, (ii) if FICC 
determines that the member's anticipated activity over the next 90 
calendar days may reasonably be expected to be materially different 
than the prior 90 calendar days, or (iii) if the

[[Page 867]]

member has been placed on the Watch List. Section 9 also makes clear 
that the return of an Excess Clearing Fund Deposit to any member is 
subject to (i) such return of Excess Clearing Fund Deposit not being 
done in a manner that would cause the member to violate any other 
section of the Rules, (ii) such return not reducing the amount of the 
member's Cross-Guaranty Repayment Deposit to the Clearing Fund below 
the amount required to be maintained by the member pursuant to GSD Rule 
41 or MBSD Rule 32, as applicable, and (iii) with respect to GSD 
Members only, such return not reducing the amount of a GSD Member's 
Cross-Margining Repayment Deposit to the Clearing Fund below the amount 
required to be maintained by the GSD Member pursuant to GSD Rule 43.
    FICC is proposing to renumber Section 9 as Section 10 for both GSD 
Rule 4 and MBSD Rule 4 and to retitle its subheading to ``Excess 
Clearing Fund Deposits'' to better reflect the subject matter of the 
provisions. FICC is not proposing any changes to this section except to 
streamline and clarify the provisions as well as to align GSD Rule 4 
and MBSD Rule 4, including adding a sentence to clarify that nothing in 
this section limits FICC's rights under Section 7 of GSD Rule 3 or 
Section 6 of MBSD Rule 3, as applicable.
Section 11
    Current Section 11 of GSD Rule 4 and MBSD Rule 4 provides that FICC 
has certain rights with respect to the Clearing Fund. FICC is proposing 
to add a sentence which would make it clear that GSD Rule 4 or MBSD 
Rule 4, as applicable, would govern in the event of any conflict or 
inconsistency between such rule and any agreement between FICC and any 
member. FICC believes that this proposed change would facilitate 
members' understanding of the Rules and their obligations thereunder. 
It would also align the Rules with the Rules and Procedures of NSCC so 
as to provide consistent treatment for firms that are members of both 
FICC and NSCC.\37\ Furthermore, in order to enhance the readability and 
clarity, FICC is proposing a number of changes to streamline the 
language in this section.
---------------------------------------------------------------------------

    \37\ See Section 12 of Rule 4 in NSCC's Rules and Procedures, 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------

(ii) Other Proposed Rule Changes
    FICC is proposing changes to GSD Rule 1 (Definitions), GSD Rule 3 
(Ongoing Membership Requirements), GSD Rule 3A (Sponsoring Members and 
Sponsored Members), GSD Rule 3B (Centrally Cleared Institutional 
Triparty Service), GSD Rule 13 (Funds-Only Settlement), GSD Rule 18 
(Special Provisions for Repo Transactions), GSD Rule 21A (Wind-Down of 
a Netting Member), GSD Rule 22B (Corporation Default), GSD Rule 41 
(Cross Guaranty Agreements), GSD Rule 43 (Cross-Margining 
Arrangements), GSD Board Interpretations and Statements of Policy, and 
GSD Interpretive Guidance with Respect to Watch List Consequences. FICC 
is also proposing changes to MBSD Rule 1 (Definitions), MBSD Rule 3 
(Ongoing Membership Requirements), MBSD Rule 5 (Trade Comparison), MBSD 
Rule 11 (Cash Settlement), MBSD Rule 17A (Corporation Default), MBSD 
Rule 32 (Cross Guaranty Agreements), and MBSD Interpretive Guidance 
with Respect to Watch List Consequences. FICC is proposing changes to 
these Rules in order to conform them with the proposed changes to GSD 
Rule 4 and MBSD Rule 4, as applicable, as well as to make certain 
technical changes to these Rules, as further described below.
Adding Defined Terms
    Specifically, FICC is proposing to add the following defined terms 
to GSD Rule 1, in alphabetical order: Actual Deposit, Average RFD, CCIT 
Member Termination Date, CCIT Member Voluntary Termination Notice, 
Clearing Fund Cash, Corporate Contribution, Declared Non-Default Loss 
Event, Defaulting Member Event, Event Period, Excess Clearing Fund 
Deposit, Former Sponsored Members, Lender, Loss Allocation Cap, Loss 
Allocation Notice, Loss Allocation Withdrawal Notice, Sponsored Member 
Termination Date, Sponsored Member Voluntary Termination Notice, 
Sponsoring Member Termination Date, Sponsoring Member Voluntary 
Termination Notice, Termination Date, and Voluntary Termination Notice.
    FICC is also proposing to add the following defined terms to MBSD 
Rule 1, in alphabetical order: Actual Deposit, Average RFD, Clearing 
Fund Cash, Corporate Contribution, Declared Non-Default Loss Event, 
Defaulting Member Event, Event Period, Excess Clearing Fund Deposit, 
Lender, Loss Allocation Cap, Loss Allocation Notice, Loss Allocation 
Withdrawal Notice, Termination Date, and Voluntary Termination Notice.
Technical Changes
    In addition, FICC is proposing technical changes (i) to delete the 
defined term ``The Corporation'' in GSD Rule 1 and replace it with 
``Corporation'' in GSD Rule 1, (ii) to correct cross-references in 
Section 8 of MBSD Rule 5 and the definition of ``Legal Risk'' in GSD 
Rule 1, (iii) to update references to sections that would be changed 
under this proposal in Section 12 of GSD Rule 3, Sections 10 and 12(a) 
of GSD Rule 3A, Section 3(f) of GSD Rule 18, GSD Rule 21A, Sections 
3(a), 3(b) and 4 of GSD Rule 41, Section 6 of GSD Rule 43, GSD 
Interpretive Guidance with Respect to Watch List Consequences, Sections 
11, 14, and 15 of MBSD Rule 3, Section 3(b) of MBSD Rule 32, and MBSD 
Interpretive Guidance with Respect to Watch List Consequences, (iv) to 
update the reference to a subheading that would be changed under this 
proposal in Section 7 of GSD Rule 3B, and (v) to delete a reference to 
the Cross-Margining Agreement between FICC and NYPC that is no longer 
in effect. FICC believes that these proposed technical changes would 
ensure the Rules remain clear and accurate, which would in turn allow 
Members to readily understand their obligations under the Rules.
Voluntary Termination
    FICC is also proposing changes to the voluntary termination 
provisions in GSD Rule 3, GSD Rule 3A, GSD Rule 3B, and MBSD Rule 3 in 
order to ensure that termination provisions in the GSD Rules and MBSD 
Rules, whether voluntary or in response to a loss allocation, are 
consistent with one another to the extent appropriate.
    Currently, the voluntary termination provisions in GSD Rule 3, GSD 
Rule 3A, GSD Rule 3B, and MBSD Rule 3 generally provide that a member 
may elect to terminate its membership by providing FICC with 10 days 
written notice of such termination. Such termination will not be 
effective until accepted by FICC, which shall be evidenced by a notice 
to FICC's members announcing the member's termination and the effective 
date of the termination, and that the terminating member will no longer 
be eligible to submit transactions to FICC as of the date of 
termination. This provision also provides that a member's voluntary 
termination of membership shall not affect its obligations to FICC.
    Where appropriate, FICC is proposing changes to align the voluntary 
termination provisions in Section 13 of GSD Rule 3, Sections 2(i) and 
3(e) of GSD Rule 3A, Section 6 of GSD Rule 3B, and Section 14 of MBSD 
Rule 3 with the proposed new Section 7b of GSD Rule 4 and MBSD Rule 4, 
given that they all address termination of membership. Specifically, in 
Section 13 of GSD Rule 3, FICC is proposing that when a GSD

[[Page 868]]

Member elects to voluntarily terminate its membership by providing FICC 
a written notice of such termination (``Voluntary Termination 
Notice''), the GSD Member must specify in its Voluntary Termination 
Notice an effective date of its withdrawal from membership 
(``Termination Date''); provided, however, if the GSD Member is 
terminating its membership in GSD (i.e., not terminating its membership 
just in the Netting System), the Termination Date shall not be prior to 
the scheduled final settlement date of any remaining obligation owed by 
the GSD Member to FICC as of the time such Voluntary Termination Notice 
is submitted to FICC, unless otherwise approved by FICC.
    The proposed change to Section 13 of GSD Rule 3 would also provide 
that if any trade is submitted to FICC either by the withdrawing GSD 
Member or its authorized submitter that is scheduled to settle on or 
after the Termination Date, the GSD Member's Voluntary Termination 
Notice would be deemed void and the GSD Member would remain subject to 
the GSD Rules as if it had not given such notice. Furthermore, FICC is 
proposing to add a sentence to Section 13 of GSD Rule 3 to refer GSD 
Members to Section 8 of GSD Rule 4 regarding provisions on the return 
of a GSD Member's Clearing Fund deposit and to specify that if an Event 
Period were to occur after a Tier One Netting Member has submitted its 
Voluntary Termination Notice but prior to the Termination Date, in 
order for such Tier One Netting Member to benefit from its Loss 
Allocation Cap pursuant to Section 7 of GSD Rule 4, the Tier One 
Netting Member would need to comply with the provisions of Section 7b 
of GSD Rule 4 and submit a Loss Allocation Withdrawal Notice, which 
notice, upon submission, would supersede and void any pending Voluntary 
Termination Notice previously submitted by the Tier One Netting Member.
    Parallel changes are also being proposed to Section 2(i) of GSD 
Rule 3A and Section 14 of MBSD Rule 3 with additional language in 
Section 2(i) of GSD Rule 3A and Section 14 of MBSD Rule 3 making it 
clear that the acceptance by FICC of a member's Voluntary Termination 
Notice shall be no later than ten (10) Business Days after the receipt 
of such notice from the member, in order to provide certainty to 
members as well as to align these sections with the current Section 13 
of GSD Rule 3.
    With respect to Section 3(e) of GSD Rule 3A and Section 6 of GSD 
Rule 3B, changes similar to the ones described above in the previous 
paragraph are also being proposed for Sponsored Members and CCIT 
Members, except there would be no references to the return of a 
member's Clearing Fund deposits and to Loss Allocation Caps because 
they would not apply to these member types. In addition, FICC is 
proposing a technical change in Section 6 of GSD Rule 3B to reflect a 
defined term that would be changed under this proposal.
Other MBSD Proposed Rule Changes
    FICC is proposing to delete Section 15 of MBSD Rule 3 because FICC 
believes that this section is akin to a loss allocation provision and 
therefore would no longer be necessary under the proposed rule change, 
as the scenarios envisioned by Section 15 of MBSD Rule 3 would be 
governed by the proposed loss allocation provisions in MBSD Rule 4.
Other GSD Proposed Rule Changes
    Under the proposal, Section 12(c) of GSD Rule 3A would also be 
revised to incorporate the concept of the Loss Allocation Cap and to 
reference the applicable proposed sections in GSD Rule 4 that would 
apply when a Sponsoring Member elects to terminate its status as a 
Sponsoring Member.
    FICC is also proposing to delete an Interpretation of the Board of 
Directors of the Government Securities Clearing Corporation (the 
predecessor to GSD), which currently clarifies certain provisions of 
GSD Rule 4 and the extent to which the GSD Clearing Fund and other 
required deposits of GSD Netting Members may be applied to a loss or 
liability incurred by FICC. FICC is proposing this deletion because 
this interpretation would no longer be necessary following the proposed 
rule change. This is because the proposed rule change to GSD Rule 4 
would cover the extent to which the GSD Clearing Fund and other 
collateral or assets of GSD Netting Members would be applied to a loss 
or liability incurred by FICC.
Other GSD Proposed Rule Changes and MBSD Proposed Rule Changes
    FICC is proposing changes to Section 11 of GSD Rule 4 and MBSD Rule 
4. Specifically, FICC is proposing to replace ``letters of credit'' 
with ``Eligible Letters of Credit,'' which is already a defined term in 
the Rules. In addition, FICC is proposing to specify that a reference 
to 30 days means 30 calendar days.
    FICC is proposing to delete ``Remaining Loss'' and ``Other Loss'' 
in Sections 12(a) and 12(b) of GSD Rule 3A, Section 5 of GSD Rule 13, 
Section 4 of GSD Rule 41, Section 6 of GSD Rule 43, Section 9(o) of 
MBSD Rule 11, and Section 4 of MBSD Rule 32 because these terms would 
no longer be used under the proposed GSD Rule 4 and MBSD Rule 4, and to 
add clarifying language that conforms to the proposed changes to GSD 
Rule 4 and MBSD Rule 4.
    In addition, FICC is proposing changes to GSD Rule 22B (Corporation 
Default) and MBSD Rule 17A (Corporation Default). FICC is proposing to 
relocate the interpretational parenthetical in each rule to come right 
after the reference to GSD Rule 22A and MBSD Rule 17. FICC is proposing 
this change because, in the event of a Corporation Default, the 
portfolio of each GSD Member or MBSD Member, as applicable, would be 
closed out in the same way as the portfolio of a GSD Defaulting Member 
or MBSD Defaulting Member, i.e., by applying the close out procedures 
of GSD Rule 22A (Procedures for When the Corporation Ceases to Act) or 
MBSD Rule 17 (Procedures for When the Corporation Ceases to Act), as 
applicable. In addition, in the proposed GSD Rule 22B and MBSD Rule 
17A, FICC is proposing to add a reference to the loss allocation 
provisions of GSD Rule 4 and MBSD Rule 4 and delete references to 
specific sections of GSD Rule 4 and MBSD Rule 4, because those sections 
are being modified under the proposed rule change.
Member Outreach
    Beginning in August 2017, FICC conducted outreach to Members in 
order to provide them with advance notice of the proposed changes. As 
of the date of this filing, no written comments relating to the 
proposed changes have been received in response to this outreach. The 
Commission will be notified of any written comments received.
Implementation Timeframe
    Pending Commission approval, FICC expects to implement this 
proposal promptly. Members would be advised of the implementation date 
of this proposal through issuance of a FICC Important Notice.
2. Statutory Basis
    FICC believes that the proposed rule change is consistent with the 
requirements of the Act, and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, FICC believes 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \38\ and Rules 17Ad-22(e)(13) and 17Ad-

[[Page 869]]

22(e)(23)(i),\39\ each as promulgated under the Act, for the reasons 
described below.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78q-1(b)(3)(F).
    \39\ 17 CFR 240.17Ad-22(e)(13) and (e)(23)(i).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the Rules be designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions and to assure the safeguarding of securities 
and funds which are in the custody or control of each Division or for 
which it is responsible.\40\ The proposed rule changes to (1) modify 
the calculation and application of FICC's corporate contribution, (2) 
introduce an Event Period, (3) introduce the concept of ``rounds'' (and 
accompanying Loss Allocation Notices) and apply this concept to the 
timing of loss allocation payments and the member withdrawal process in 
connection with the loss allocation process, and (4) implement a 
revised ``look-back'' period to calculate a member's loss allocation 
obligation and its Loss Allocation Cap, taken together, are intended to 
enhance the overall resiliency of each Division's loss allocation 
process.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    By modifying the calculation of FICC's corporate contribution, FICC 
would apply a mandatory fixed percentage of its General Business Risk 
Capital Requirements (as compared to the current Rules which provide 
for ``up to'' a percentage of retained earnings), which would provide 
greater transparency and accessibility to members as to how much FICC 
would contribute in the event of a loss or liability. By modifying the 
application of FICC's corporate contribution to apply to Declared Non-
Default Loss Events, in addition to Defaulting Member Events, on a 
mandatory basis, FICC would expand the application of its corporate 
contribution beyond losses and liabilities from member defaults, which 
would better align the interests of FICC with those of its respective 
Division's members by stipulating a mandatory application of the 
Corporate Contribution to a Declared Non-Default Loss Event prior to 
any allocation of the loss among Tier One Netting Members or Tier One 
Members, as applicable. Taken together, these proposed rule changes 
would enhance the overall resiliency of each Division's loss allocation 
process by enhancing the calculation and application of FICC's 
Corporate Contribution, which is one of the key elements of each 
Division's loss allocation process. Moreover, by providing greater 
transparency and accessibility to members, as stated above, the 
proposed rule changes regarding the Corporate Contribution, including 
the proposed replenishment period and proposed allocation of FICC 
Corporate Contribution between Divisions, would allow members to better 
assess the adequacy of each Division's loss allocation process.
    By introducing the concept of an Event Period, FICC would be able 
to group Defaulting Member Events and Declared Non-Default Loss Events 
occurring in a period of ten (10) Business Days for purposes of 
allocating losses to members. FICC believes that the Event Period would 
provide a defined structure for the loss allocation process to 
encompass potential sequential Defaulting Member Events or Declared 
Non-Default Loss Events that are likely to be closely linked to an 
initial event and/or market dislocation episode. Having this structure 
would enhance the overall resiliency of FICC's loss allocation process 
because FICC would be better equipped to address losses that may arise 
from multiple Defaulting Member Events and/or Declared Non-Default Loss 
Events that arise in quick succession. Moreover, the proposed Event 
Period structure would provide certainty for members concerning their 
maximum exposure to mutualized losses with respect to such events.
    By introducing the concept of ``rounds'' (and accompanying Loss 
Allocation Notices) and applying this concept to the timing of loss 
allocation payments and the member withdrawal process in connection 
with the loss allocation process, FICC would (i) set forth a defined 
amount that it would allocate to members during each round (i.e., the 
round cap), (ii) advise members of loss allocation obligation 
information as well as round information through the issuance of Loss 
Allocation Notices, and (iii) provide members with the option to limit 
their loss allocation exposure after the issuance of the first Loss 
Allocation Notice in each round. These proposed rule changes would 
enhance the overall resiliency of FICC's loss allocation process 
because they would enable FICC to continue the loss allocation process 
in successive rounds until all of FICC's losses are allocated and 
enable FICC to identify continuing members for purposes of calculating 
subsequent loss allocation obligations in successive rounds. Moreover, 
the proposed rule changes would define for members a clear manner and 
process in which they could cap their loss allocation exposure to FICC.
    By implementing a revised ``look-back'' period to calculate a 
member's loss allocation obligations and its Loss Allocation Cap, FICC 
would be able to capture a full calendar quarter of the member's 
activities and smooth out the impact from any abnormalities and/or 
arbitrariness that may have occurred. By determining a member's loss 
allocation obligations and its Loss Allocation Cap based on the greater 
of its Required Fund Deposit or the average thereof over a look-back 
period, FICC would be able to calculate a member's pro rata share of 
losses and liabilities based on the amount of risk that the member 
brings to FICC. These proposed rule changes would enhance the overall 
resiliency of each Division's loss allocation process because they 
would align a member's loss allocation obligation and its Loss 
Allocation Cap with the amount of risk that the member brings to FICC.
    Taken together, the foregoing proposed rule changes would establish 
a stronger (for all the reasons discussed above) and clearer loss 
allocation process for each Division, which FICC believes would allow 
each Division to take timely action to address losses. The ability to 
timely address losses would allow each Division to continue to meet its 
clearance and settlement obligations, especially in circumstances that 
may involve a series of substantially contemporaneous loss events. 
Therefore, FICC believes that these proposed rule changes would promote 
the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.
    By deleting certain vague and imprecise limiting language that 
could be interpreted as impairing FICC's ability to access the MBSD 
Clearing Fund to cover losses and liabilities incident to its clearance 
and settlement business outside the context of an MBSD Defaulting 
Member Event, as well as to cover certain liquidity needs, the proposed 
rule change to amend FICC's permitted use of MBSD Clearing Fund would 
enhance FICC's ability to ensure that it can continue its operations 
and clearance settlement services in an orderly manner in the event 
that it would be necessary or appropriate for FICC to access MBSD 
Clearing Fund deposits to address losses, liabilities or liquidity 
needs to meet its settlement obligations. Therefore, FICC believes that 
this proposed rule change would promote the prompt and accurate 
clearance and settlement of securities transactions, consistent with 
Section 17A(b)(3)(F) of the Act.
    Rule 17Ad-22(e)(13) under the Act requires, in part, that FICC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure each

[[Page 870]]

Division has the authority and operational capacity to take timely 
action to contain losses and continue to meet its obligations.\41\ As 
described above, the proposed rule changes to (1) modify the 
calculation and application of FICC's corporate contribution, (2) 
introduce an Event Period, (3) introduce the concept of ``rounds'' (and 
accompanying Loss Allocation Notices) and apply this concept to the 
timing of loss allocation payments and the member withdrawal process in 
connection with the loss allocation process, and (4) implement a 
revised ``look-back'' period to calculate a member's loss allocation 
obligation and its Loss Allocation Cap, taken together, are designed to 
enhance the resiliency of each Division's loss allocation process. 
Having a resilient loss allocation process would help ensure that each 
Division can effectively and timely address losses relating to or 
arising out of either the default of one or more members or one or more 
non-default loss events, which in turn would help each Division contain 
losses and continue to meet its clearance and settlement obligations. 
Therefore, FICC believes that the proposed rule changes to enhance the 
resiliency of each Division's loss allocation process are consistent 
with Rule 17Ad-22(e)(13) under the Act.
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23)(i) under the Act requires FICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to publicly disclose all relevant rules and 
material procedures, including key aspects of each Division's default 
rules and procedures.\42\ The proposed rule changes to (i) align the 
loss allocation rules of the DTCC Clearing Agencies, (ii) improve the 
overall transparency and accessibility of the provisions in the Rules 
governing loss allocation and (iii) make conforming and technical 
changes, would not only ensure that each Division's loss allocation 
rules are, to the extent practicable and appropriate, consistent with 
the loss allocation rules of other DTCC Clearing Agencies, but also 
would help to ensure that each Division's loss allocation rules are 
transparent and clear to members. Aligning the loss allocation rules of 
the DTCC Clearing Agencies would provide consistent treatment, to the 
extent practicable and appropriate, especially for firms that are 
participants of two or more DTCC Clearing Agencies. Having transparent 
and clear loss allocation rules would enable members to better 
understand the key aspects of each Division's default rules and 
procedures and provide members with increased predictability and 
certainty regarding their exposures and obligations. As such, FICC 
believes that the proposed rule changes to align the loss allocation 
rules of the DTCC Clearing Agencies as well as to improve the overall 
transparency and accessibility of each Division's loss allocation rules 
are consistent with Rule 17Ad-22(e)(23)(i) under the Act.
---------------------------------------------------------------------------

    \42\ 17 CFR 240.17Ad-22(e)(23)(i).
---------------------------------------------------------------------------

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

    FICC does not believe that the proposed rule changes to enhance the 
resiliency of each Division's loss allocation process would impact 
competition.\43\ As described above, the proposed rule changes to (1) 
modify the calculation and application of FICC's corporate 
contribution, (2) introduce an Event Period, (3) introduce the concept 
of ``rounds'' (and accompanying Loss Allocation Notices) and apply this 
concept to the timing of loss allocation payments and the member 
withdrawal process in connection with the loss allocation process, and 
(4) implement a revised ``look-back'' period to calculate a member's 
loss allocation obligation and its Loss Allocation Cap, taken together, 
are intended to enhance the overall resiliency of each Division's loss 
allocation process, and would apply equally to all members. While the 
proposed rule changes would amend the manner in which FICC's corporate 
contribution and loss allocation are calculated and applied, such 
proposed rule changes would maintain FICC's current core loss 
allocation waterfall in the case of a loss relating to or arising out 
of the default of a member for whom FICC has ceased to act following 
application of the defaulting member's resources, i.e., FICC's 
corporate contribution and loss allocation among members. With respect 
to a loss or liability arising from a non-default loss event, the 
proposed rule changes clarify FICC's contribution to such loss and 
liability, but, as with losses and liabilities arising from a member 
default event, the proposed rule changes would maintain the loss 
mutualization requirement under the current GSD Rules and MBSD Rules. 
While the calculation of the loss obligations associated with non-
default losses would change under the proposal, the FICC Divisions 
would maintain this aspect of the loss allocation waterfall (i.e., loss 
mutualization among members for non-default losses). Based on the 
foregoing, FICC believes that these proposed rule changes to enhance 
the resiliency of each Division's loss allocation process would not 
have any impact on competition.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    FICC does not believe the proposed rule change to delete certain 
vague and imprecise limiting language regarding FICC's use of MBSD 
Clearing Fund would impact competition.\44\ This proposed rule change 
would enhance FICC's ability to ensure that it can continue its 
operations and clearance and settlement services in an orderly manner 
in the event that it would be necessary or appropriate for FICC to 
access MBSD Clearing Fund deposits to address losses, liabilities or 
liquidity needs to meet its settlement obligations. In the event that 
it would be necessary or appropriate for FICC to access MBSD Clearing 
Fund deposits, FICC's use of MBSD Clearing Fund deposits would remain 
subject to the parameters in the proposed rule that limit FICC's use of 
MBSD Clearing Fund, i.e., (A) to secure each MBSD Member's performance 
of obligations to FICC, (B) to provide liquidity to FICC to meet its 
settlement obligations, and (C) for certain investments. FICC does not 
believe that FICC's utilization of MBSD Clearing Fund under these 
parameters would impact competition. Specifically, FICC does not 
believe that using MBSD Clearing Fund to secure each MBSD Member's 
performance of obligations to FICC and for certain investments would 
have an impact on the MBSD Members because the fund and/or investments 
are still being held by FICC. With respect to FICC's use of MBSD 
Clearing Fund pursuant to parameter (B), FICC believes that there may 
be an impact on MBSD Members if FICC uses the MBSD Clearing Fund for 
more than 30 calendar days. This is because FICC would then consider 
the amount of MBSD Clearing Fund used but not yet repaid as a loss to 
the MBSD Clearing Fund incurred as a result of a Defaulting Member 
Event and immediately allocate such loss in accordance with the 
proposal. However, because loss allocation among the MBSD Members would 
be based on the Average RFDs of those MBSD Members, any loss allocation 
among MBSD Members would affect MBSD Members in proportion to the 
amount of risks they bring to FICC, as represented by their Average 
RFDs. Based on the foregoing, FICC does not believe that the proposed 
deletion of the limiting language regarding FICC's use of MBSD Clearing 
Fund would have any impact on competition.
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

    FICC also does not believe that the proposed rule changes to (i) 
align the

[[Page 871]]

loss allocation rules of the DTCC Clearing Agencies, (ii) increase the 
transparency and accessibility of provisions in the Rules governing 
loss allocation, and (iii) make conforming and technical changes, would 
impact competition.\45\ These changes would apply equally to all 
members. Alignment of the loss allocation rules of the DTCC Clearing 
Agencies are intended to increase the consistency of the Rules with the 
rules of other DTCC Clearing Agencies in order to provide consistent 
treatment, to the extent practicable and appropriate, especially for 
firms that are participants of two or more DTCC Clearing Agencies. 
Having transparent and accessible provisions in the Rules governing 
loss allocation are intended to improve the readability and clarity of 
the Rules regarding the loss allocation process. Making conforming and 
technical changes to ensure the Rules remain clear and accurate would 
facilitate members' understanding of the Rules and their obligations 
thereunder. As such, FICC believes that these proposed rule changes 
would not have any impact on competition.
---------------------------------------------------------------------------

    \45\ Id.
---------------------------------------------------------------------------

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

    Written comments relating to this 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 such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

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 [email protected]. Please include 
File Number SR-FICC-2017-022 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-2017-022. 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 website (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 website viewing and printing in 
the Commission's Public Reference Room, 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 the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2017-022 and should be submitted on 
or before January 29, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
---------------------------------------------------------------------------

    \46\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00075 Filed 1-5-18; 8:45 am]
 BILLING CODE 8011-01-P


