[Federal Register Volume 83, Number 151 (Monday, August 6, 2018)]
[Notices]
[Pages 38413-38428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16707]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83744; File No. SR-FICC-2017-805]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Amendment No. 1 to an Advance Notice To Adopt a 
Recovery & Wind-Down Plan and Related Rules

July 31, 2018.
    On December 18, 2017, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-FICC-2017-805 (``Advance Notice'') 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 (``Clearing Supervision Act'') and 
Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 
(``Act'').\1\ The

[[Page 38414]]

notice of filing and extension of the review period of the Advance 
Notice was published for comment in the Federal Register on January 30, 
2018.\2\
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    \1\ 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), 
respectively. On December 18, 2017, FICC filed the Advance Notice as 
a proposed rule change (SR-FICC-2017-021) with the Commission 
pursuant to Section 19(b)(1) of the Act and Rule 19b-4 thereunder 
(``Proposed Rule Change''). (17 CFR 240.19b-4 and 17 CFR 240.19b-4, 
respectively.) The Proposed Rule Change was published in the Federal 
Register on January 8, 2018. See Securities Exchange Act Release No. 
82431 (January 2, 2018), 83 FR 871 (January 8, 2018) (SR-FICC-2017-
021). On February 8, 2018, the Commission designated a longer period 
within which to approve, disapprove, or institute proceedings to 
determine whether to approve or disapprove the Proposed Rule Change. 
See Securities Exchange Act Release No. 82669 (February 8, 2018), 83 
FR 6653 (February 14, 2018) (SR-DTC-2017-021; SR-FICC-2017-021; SR-
NSCC-2017-017). On March 20, 2018, the Commission instituted 
proceedings to determine whether to approve or disapprove the 
Proposed Rule Change. See Securities Exchange Act Release No. 82913 
(March 20, 2018), 83 FR 12997 (March 26, 2018) (SR-FICC-2017-021). 
On June 25, 2018, the Commission designated a longer period for 
Commission action on the proceedings to determine whether to approve 
or disapprove the Proposed Rule Change. Therefore, September 5, 2018 
is the date by which the Commission should either approve or 
disapprove the Proposed Rule Change. See Securities Exchange Act 
Release No. 83509 (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR-
DTC-2017-021; SR-FICC-2017-021; SR-NSCC-2017-017). On June 28, 2018, 
FICC filed Amendment No. 1 to the Proposed Rule Change. See 
Securities Exchange Act Release No. 83630 (July 13, 2018), 83 FR 
34213 (July 19, 2018) (SR-FICC-2017-021). As of the date of this 
release, the Commission has not received any comments on the 
Proposed Rule Change.
    \2\ Securities Exchange Act Release No. 82580 (January 24, 
2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-805). Pursuant to 
Section 806(e)(1)(H) of the Clearing Supervision Act, the Commission 
may extend the review period of an advance notice for an additional 
60 days, if the changes proposed in the advance notice raise novel 
or complex issues, subject to the Commission providing the clearing 
agency with prompt written notice of the extension. 12 U.S.C. 
5465(e)(1)(H). The Commission found that the Advance Notice raised 
novel and complex issues and, accordingly, extended the review 
period of the Advance Notice for an additional 60 days until April 
17, 2018, pursuant to Section 806(e)(1)(H). Id.
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    On April 10, 2018, the Commission required additional information 
from FICC pursuant to Section 806(e)(1)(D) of the Clearing Supervision 
Act, which tolled the Commission's period of review of the Advance 
Notice.\3\ On June 28, 2018, FICC filed Amendment No. 1 to the Advance 
Notice to amend and replace in its entirety the Advance Notice as 
originally submitted on December 18, 2017.\4\ On July 6, 2018, the 
Commission received a response to its request for additional 
information in consideration of the Advance Notice, which added a 
further 60-days to the review period pursuant to Section 806(e)(1)(E) 
and (G) of the Clearing Supervision Act.\5\
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    \3\ 12 U.S.C. 5465(e)(1)(D); see Memorandum from the Office of 
Clearance and Settlement Supervision, Division of Trading and 
Markets, titled ``Commission's Request for Additional Information,'' 
available at https://www.sec.gov/rules/sro/ficc-an.htm.
    \4\ To promote the public availability and transparency of its 
post-notice amendment, FICC submitted a copy of Amendment No. 1 
through the Commission's electronic public comment letter mechanism. 
Accordingly, Amendment No. 1 has been posted on the Commission's 
website at https://www.sec.gov/rules/sro/ficc-an.htm and thus been 
publicly available since June 29, 2018.
    \5\ 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the 
Office of Clearance and Settlement Supervision, Division of Trading 
and Markets, titled ``Response to the Commission's Request for 
Additional Information,'' available at https://www.sec.gov/rules/sro/ficc-an.htm.
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    The Advance Notice, as amended by Amendment No. 1, is described in 
Items I and II below, which Items have been prepared by FICC. The 
Commission is publishing this notice to solicit comments on the Advance 
Notice, as amended by Amendment No. 1, from interested persons.

I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    The Advance Notice of FICC proposes to adopt the Recovery & Wind-
down Plan of FICC (``R&W Plan'' or ``Plan''). The R&W Plan would be 
maintained by FICC in compliance with Rule 17Ad-22(e)(3)(ii) under the 
Act by providing plans for the recovery and orderly wind-down of FICC 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses, as described below.\6\
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    \6\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The Advance Notice would also propose to (1) amend FICC's 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') in 
order to (a) adopt Rule 22D (Wind-down of the Corporation) and Rule 50 
(Market Disruption and Force Majeure), and (b) make conforming changes 
to Rule 3A (Sponsoring Members and Sponsored Members), Rule 3B 
(Centrally Cleared Institutional Triparty Service) and Rule 13 (Funds-
Only Settlement) related to the adoption of these Proposed Rules to the 
GSD Rules; (2) amend FICC's Mortgage-Backed Securities Division 
(``MBSD,'' and, together with GSD, the ``Divisions'') Clearing Rules 
(``MBSD Rules'') in order to (a) adopt Rule 17B (Wind-down of the 
Corporation) and Rule 40 (Market Disruption and Force Majeure); and (b) 
make conforming changes to Rule 3A (Cash Settlement Bank Members) 
related to the adoption of these Proposed Rules to the MBSD Rules; and 
(3) amend Rule 1 of the Electronic Pool Netting (``EPN'') Rules of MBSD 
(``EPN Rules'') in order to provide that EPN Users, as defined therein, 
are bound by proposed Rule 17B (Wind-down of the Corporation) and 
proposed Rule 40 (Market Disruption and Force Majeure) to be adopted to 
the MBSD Rules.\7\ Each of the proposed rules is referred to herein as 
a ``Proposed Rule,'' and are collectively referred to as the ``Proposed 
Rules.''
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    \7\ The GSD Rules and the MBSD Rules are referred to 
collectively herein as the ``Rules.'' Capitalized terms not defined 
herein are defined in the Rules. The Rules and the EPN Rules are 
available at http://www.dtcc.com/legal/rules-and-procedures.
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    The Proposed Rules are designed to (1) facilitate the 
implementation of the R&W Plan when necessary and, in particular, allow 
FICC to effectuate its strategy for winding down and transferring its 
business; (2) provide Members and Limited Members with transparency 
around critical provisions of the R&W Plan that relate to their rights, 
responsibilities and obligations; \8\ and (3) provide FICC with the 
legal basis to implement those provisions of the R&W Plan when 
necessary, as described below.
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    \8\ References herein to ``Members'' refer to GSD Netting 
Members and MBSD Clearing Members. References herein to ``Limited 
Members'' refer to participants of GSD or MBSD other than GSD 
Netting Members and MBSD Clearing Members, including, for example, 
GSD Comparison-Only Members, GSD Sponsored Members, GSD CCIT 
Members, and MBSD EPN Users.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the Advance Notice 
and discussed any comments it received on the Advance Notice. The text 
of these statements may be examined at the places specified in Item IV 
below. The clearing agency has prepared summaries, set forth in 
sections A and B below, of the most significant aspects of such 
statements.

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

    While FICC has not solicited or received any written comments 
relating to this proposal, FICC has conducted outreach to Members in 
order to provide them with notice of the proposal. FICC will notify the 
Commission of any written comments received by FICC.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Description of Amendment No. 1
    This filing constitutes Amendment No. 1 (``Amendment'') to the 
Advance Notice (also referred to below as the ``Original Filing'') 
previously filed by FICC.\9\ FICC is amending the proposed R&W Plan and 
the Original Filing in order to clarify certain matters and make minor 
technical and conforming changes to the R&W Plan, as described below 
and as marked on Exhibit 4 hereto. To the extent such changes to the 
Plan require changes to the Original

[[Page 38415]]

Filing, the information provided under ``Description of Proposed 
Changes'' in the Original Filing has been amended and is restated in 
its entirety below. Other sections of the Original Filing are unchanged 
and are restated in their entity for convenience.
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    \9\ See Securities Exchange Act Release No. 82580 (January 24, 
2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-805).
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    First, this Amendment would clarify the meaning of the terms 
``cease to act,'' ``Member default,'' ``Defaulting Member,'' and 
``Member Default Losses'' as such terms are used in the Plan. This 
Amendment would also make conforming changes as necessary to reflect 
the uses of these terms.
    Second, this Amendment would clarify that actions and tools 
described in the Plan that are available in one phase of the Crisis 
Continuum may be used in subsequent phases of the Crisis Continuum when 
appropriate to address the applicable situation. This Amendment would 
also clarify that the allocation of losses resulting from a Member 
default would be applied when provided for, and in accordance with, 
Rule 4 of the GSD Rules and the MBSD Rules, as applicable.
    Third, this Amendment would clarify that the Recovery Corridor (as 
defined therein) is not a ``sub-phase'' of the recovery phase. Rather, 
the Recovery Corridor is a period of time that would occur toward the 
end of the Member default phase, when indicators are that FICC may 
transition into the recovery phase. Thus, the Recovery Corridor 
precedes the recovery phase within the Crisis Continuum.
    Fourth, this Amendment would make revisions to address the 
allocation of losses resulting from a Member default in order to more 
closely conform such statements to the changes proposed by the Loss 
Allocation Filing, as defined below.
    Fifth, this Amendment would clarify the notifications that FICC 
would be required to make under the proposed GSD Rule 50 and MBSD Rule 
40 (Market Disruption and Force Majeure).
    Finally, this Amendment would make minor, technical and conforming 
revisions to correct typographical errors and to simplify descriptions. 
For example, such revisions would use lower case for terms that are not 
defined therein, and would use upper case for terms that are defined. 
The Amendment would also simplify certain descriptions by removing 
extraneous words and statements that are repetitive. These minor, 
technical revisions would not alter the substance of the proposal.
Description of Proposed Changes
    FICC is proposing to adopt the R&W Plan to be used by the Board and 
management of FICC in the event FICC encounters scenarios that could 
potentially prevent it from being able to provide its critical services 
as a going concern. The R&W Plan would identify (i) the recovery tools 
available to FICC to address the risks of (a) uncovered losses or 
liquidity shortfalls resulting from the default of one or more Members, 
and (b) losses arising from non-default events, such as damage to its 
physical assets, a cyber-attack, or custody and investment losses, and 
(ii) the strategy for implementation of such tools. The R&W Plan would 
also establish the strategy and framework for the orderly wind-down of 
FICC and the transfer of its business in the remote event the 
implementation of the available recovery tools does not successfully 
return FICC to financial viability.
    As discussed in greater detail below, the R&W Plan would provide, 
among other matters, (i) an overview of the business of FICC and its 
parent, The Depository Trust & Clearing Corporation (``DTCC''); (ii) an 
analysis of FICC's intercompany arrangements and an existing link to 
another financial market infrastructures (``FMIs''); (iii) a 
description of FICC's services, and the criteria used to determine 
which services are considered critical; (iv) a description of the FICC 
and DTCC governance structure; (v) a description of the governance 
around the overall recovery and wind-down program; (vi) a discussion of 
tools available to FICC to mitigate credit/market and liquidity risks, 
including recovery indicators and triggers, and the governance around 
management of a stress event along a ``Crisis Continuum'' timeline; 
(vii) a discussion of potential non-default losses and the resources 
available to FICC to address such losses, including recovery triggers 
and tools to mitigate such losses; (viii) an analysis of the recovery 
tools' characteristics, including how they are comprehensive, 
effective, and transparent, how the tools provide appropriate 
incentives to Members to, among other things, control and monitor the 
risks they may present to FICC, and how FICC seeks to minimize the 
negative consequences of executing its recovery tools; and (ix) the 
framework and approach for the orderly wind-down and transfer of FICC's 
business, including an estimate of the time and costs to effect a 
recovery or orderly wind-down of FICC.
    The R&W Plan would be structured as a roadmap, and would identify 
and describe the tools that FICC may use to effect a recovery from the 
events and scenarios described therein. Certain recovery tools that 
would be identified in the R&W Plan are based in the Rules (including 
the Proposed Rules) and, as such, descriptions of those tools would 
include descriptions of, and reference to, the applicable Rules and any 
related internal policies and procedures. Other recovery tools that 
would be identified in the R&W Plan are based in contractual 
arrangements to which FICC is a party, including, for example, existing 
committed or pre-arranged liquidity arrangements. Further, the R&W Plan 
would state that FICC may develop further supporting internal 
guidelines and materials that may provide operationally for matters 
described in the Plan, and that such documents would be supplemental 
and subordinate to the Plan.
    Key factors considered in developing the R&W Plan and the types of 
tools available to FICC were its governance structure and the nature of 
the markets within which FICC operates. As a result of these 
considerations, many of the tools available to FICC that would be 
described in the R&W Plan are FICC's existing, business-as-usual risk 
management and Member default management tools, which would continue to 
be applied in scenarios of increasing stress. In addition to these 
existing, business-as-usual tools, the R&W Plan would describe FICC's 
other principal recovery tools, which include, for example, (i) 
identifying, monitoring and managing general business risk and holding 
sufficient liquid net assets funded by equity (``LNA'') to cover 
potential general business losses pursuant to the Clearing Agency 
Policy on Capital Requirements (``Capital Policy''),\10\ (ii) 
maintaining the Clearing Agency Capital Replenishment Plan 
(``Replenishment Plan'') as a viable plan for the replenishment of 
capital should FICC's equity fall close to or below the amount being 
held pursuant to the Capital Policy,\11\ and (iii) the process for the 
allocation of losses among Members, as provided in Rule 4 of the GSD 
Rules and Rule 4 of the MBSD Rules.\12\ The

[[Page 38416]]

R&W Plan would provide governance around the selection and 
implementation of the recovery tool or tools most relevant to mitigate 
a stress scenario and any applicable loss or liquidity shortfall.
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    \10\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
    \11\ See id.
    \12\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD 
Rule 4 (Clearing Fund and Loss Allocation), supra note 7. FICC is 
proposing changes to Rule 4 regarding allocation of losses in a 
separate filing submitted simultaneously with the Original Filing. 
See Securities Exchange Act Release Nos. 82431 (January 2, 2018), 83 
FR 871 (January 8, 2018) (SR-FICC-2017-021) and 82580 (January 24, 
2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-805) 
(collectively referred to herein as the ``Loss Allocation Filing''). 
FICC has submitted an amendment to the Loss Allocation Filing. A 
copy of the amendment to the Loss Allocation Filing is available at 
http://www.dtcc.com/legal/sec-rule-filings.aspx. FICC expects the 
Commission to review both proposals, as amended, together, and, as 
such, the proposal described in this filing anticipates the approval 
and implementation of those proposed changes to the Rules.
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    The development of the R&W Plan is facilitated by the Office of 
Recovery & Resolution Planning (``R&R Team'') of DTCC.\13\ The R&R Team 
reports to the DTCC Management Committee (``Management Committee'') and 
is responsible for maintaining the R&W Plan and for the development and 
ongoing maintenance of the overall recovery and wind-down planning 
process. The Board, or such committees as may be delegated authority by 
the Board from time to time pursuant to its charter, would review and 
approve the R&W Plan biennially, and would also review and approve any 
changes that are proposed to the R&W Plan outside of the biennial 
review.
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    \13\ DTCC operates on a shared services model with respect to 
FICC and its other subsidiaries. Most corporate functions are 
established and managed on an enterprise-wide basis pursuant to 
intercompany agreements under which it is generally DTCC that 
provides a relevant service to a subsidiary, including FICC.
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    As discussed in greater detail below, the Proposed Rules would 
define the procedures that may be employed in the event of FICC's wind-
down and would provide for FICC's authority to take certain actions on 
the occurrence of a ``Market Disruption Event,'' as defined therein. 
Significantly, the Proposed Rules would provide Members and Limited 
Members with transparency and certainty with respect to these matters. 
The Proposed Rules would facilitate the implementation of the R&W Plan, 
particularly FICC's strategy for winding down and transferring its 
business, and would provide FICC with the legal basis to implement 
those aspects of the R&W Plan.
FICC R&W Plan
    The R&W Plan is intended to be used by the Board and FICC's 
management in the event FICC encounters scenarios that could 
potentially prevent it from being able to provide its critical services 
as a going concern. The R&W Plan would be structured to provide a 
roadmap, define the strategy, and identify the tools available to FICC 
to either (i) recover in the event it experiences losses that exceed 
its prefunded resources (such strategies and tools referred to herein 
as the ``Recovery Plan'') or (ii) wind-down its business in a manner 
designed to permit the continuation of its critical services in the 
event that such recovery efforts are not successful (such strategies 
and tools referred to herein as the ``Wind-down Plan''). The 
description of the R&W Plan below is intended to highlight the purpose 
and expected effects of the material aspects of the R&W Plan, and to 
provide Members and Limited Members with appropriate transparency into 
these features.
Business Overview, Critical Services, and Governance
    The introduction to the R&W Plan would identify the document's 
purpose and its regulatory background, and would outline a summary of 
the Plan. The stated purpose of the R&W Plan is that it is to be used 
by the Board and FICC management in the event FICC encounters scenarios 
that could potentially prevent it from being able to provide its 
critical services as a going concern. The R&W Plan would be maintained 
by FICC in compliance with Rule 17Ad-22(e)(3)(ii) under the Act \14\ by 
providing plans for the recovery and orderly wind-down of FICC.
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    \14\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The R&W Plan would describe DTCC's business profile, provide a 
summary of the services of FICC as offered by each of the Divisions, 
and identify the intercompany arrangements and links between FICC and 
other entities, most notably a link between GSD and Chicago Mercantile 
Exchange Inc. (``CME''), which is also an FMI. This overview section 
would provide a context for the R&W Plan by describing FICC's business, 
organizational structure and critical links to other entities. By 
providing this context, this section would facilitate the analysis of 
the potential impact of utilizing the recovery tools set forth in later 
sections of the Recovery Plan, and the analysis of the factors that 
would be addressed in implementing the Wind-down Plan.
    DTCC is a user-owned and user-governed holding company and is the 
parent company of FICC and its affiliates, The Depository Trust Company 
(``DTC'') and National Securities Clearing Corporation (``NSCC'', and, 
together with FICC and DTC, the ``Clearing Agencies''). The Plan would 
describe how corporate support services are provided to FICC from DTCC 
and DTCC's other subsidiaries through intercompany agreements under a 
shared services model.
    The Plan would provide a description of the critical contractual 
and operational arrangements between FICC and other legal entities, 
including the cross-margining agreement between GSD and CME, which is 
also an FMI.\15\ Pursuant to this arrangement, GSD offsets each cross-
margining participant's residual margin amount (based on related 
positions) at GSD against the offsetting residual margin amounts of the 
participant (or its affiliate) at CME. GSD and CME may then reduce the 
amount of collateral that they collect to reflect the offsets between 
the cross-margining participant's positions at GSD and its (or its 
affiliate's) positions at CME. This section of the Plan, identifying 
and briefly describing FICC's established links, would provide a 
mapping of critical connections and dependencies that may need to be 
relied on or otherwise addressed in connection with the implementation 
of either the Recovery Plan or the Wind-down Plan.
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    \15\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_cme_crossmargin_agreement.pdf. See also GSD Rule 43 
(Cross-Margining Arrangements), supra note 7.
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    The Plan would define the criteria for classifying certain of 
FICC's services as ``critical,'' and would identify those critical 
services and the rationale for their classification. This section would 
provide an analysis of the potential systemic impact from a service 
disruption, and is important for evaluating how the recovery tools and 
the wind-down strategy would facilitate and provide for the 
continuation of FICC's critical services to the markets it serves. The 
criteria that would be used to identify an FICC service or function as 
critical would include consideration as to (1) whether there is a lack 
of alternative providers or products; (2) whether failure of the 
service could impact FICC's ability to perform its central counterparty 
services through either Division; (3) whether failure of the service 
could impact FICC's ability to perform its multilateral netting 
services through either Division and, as such, could impact the volume 
of transactions; (4) whether failure of the service could impact FICC's 
ability to perform its book-entry delivery and settlement services 
through either Division and, as such, could impact transaction costs; 
(5) whether failure of the service could impact FICC's ability to 
perform its cash payment processing services through either Division 
and, as such, could impact the flow of liquidity in the U.S. financial 
markets; and (6) whether the service is interconnected with other 
participants and processes within the U.S. financial system, for 
example, with other FMIs, settlement

[[Page 38417]]

banks, and broker-dealers. The Plan would then list each of those 
services, functions or activities that FICC has identified as 
``critical'' based on the applicability of these six criteria. GSD's 
critical services would include, for example, its Real-Time Trade 
Matching (``RTTM[reg]'') service,\16\ its services related to netting 
and settlement of submitted trades for Netting Members,\17\ the Auction 
Takedown service,\18\ and the Repurchase Agreement Netting Service.\19\ 
MBSD's critical services would include, for example, its RTTM[reg] 
service,\20\ its netting service for to-be-announced (``TBA'') 
transactions,\21\ its Electronic Pool Notification service,\22\ and its 
pool netting and settlement.\23\ The R&W Plan would also include a non-
exhaustive list of FICC services that are not deemed critical.
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    \16\ See GSD Rule 5 (Comparison System), GSD Rule 6A (Bilateral 
Comparison), GSD Rule 6B (Demand Comparison), and GSD Rule 6C 
(Locked-In Comparison), supra note 7.
    \17\ See GSD Rule 11 (Netting System), GSD Rule 12 (Securities 
Settlement), and GSD Rule 13 (Funds-Only Settlement), supra note 7.
    \18\ See GSD Rule 6C (Locked-In Comparison) and GSD Rule 17 
(Netting and Settlement of Netting-Eligible Auction Purchases), 
supra note 7.
    \19\ See GSD Rule 7 (Repo Transactions), GSD Rule 11 (Netting 
System), GSD Rule 18 (Special Provisions for Repo Transactions), GSD 
Rule 19 (Special Provisions for Brokered Repo Transactions), and GSD 
Rule 20 (Special Provisions for GCF Repo Transactions), supra note 
7.
    \20\ See MBSD Rule 5 (Trade Comparison), supra note 7.
    \21\ See MBSD Rule 6 (TBA Netting), supra note 7.
    \22\ See EPN Rules, supra note 7.
    \23\ See MBSD Rule 8 (Pool Netting System) and MBSD Rule 9 (Pool 
Settlement with the Corporation), supra note 7.
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    The evaluation of which services provided by FICC are deemed 
critical is important for purposes of determining how the R&W Plan 
would facilitate the continuity of those services. As discussed further 
below, while FICC's Wind-down Plan would provide for the transfer of 
all critical services to a transferee in the event FICC's wind-down is 
implemented, it would anticipate that any non-critical services that 
are ancillary and beneficial to a critical service, or that otherwise 
have substantial user demand from the continuing membership, would also 
be transferred.
    The Plan would describe the governance structure of both DTCC and 
FICC. This section of the Plan would identify the ownership and 
governance model of these entities at both the Board of Directors and 
management levels. The Plan would state that the stages of escalation 
required to manage recovery under the Recovery Plan or to invoke FICC's 
wind-down under the Wind-down Plan would range from relevant business 
line managers up to the Board through FICC's governance structure. The 
Plan would then identify the parties responsible for certain activities 
under both the Recovery Plan and the Wind-down Plan, and would describe 
their respective roles. The Plan would identify the Risk Committee of 
the Board (``Board Risk Committee'') as being responsible for oversight 
of risk management activities at FICC, which include focusing on both 
oversight of risk management systems and processes designed to identify 
and manage various risks faced by FICC, and, due to FICC's critical 
role in the markets in which it operates, oversight of FICC's efforts 
to mitigate systemic risks that could impact those markets and the 
broader financial system.\24\ The Plan would identify the DTCC 
Management Risk Committee (``Management Risk Committee'') as primarily 
responsible for general, day-to-day risk management through delegated 
authority from the Board Risk Committee. The Plan would state that the 
Management Risk Committee has delegated specific day-to-day risk 
management, including management of risks addressed through margining 
systems and related activities, to the DTCC Group Chief Risk Office 
(``GCRO''), which works with staff within the DTCC Financial Risk 
Management group. Finally, the Plan would describe the role of the 
Management Committee, which provides overall direction for all aspects 
of FICC's business, technology, and operations and the functional areas 
that support these activities.
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    \24\ The charter of the Board Risk Committee is available at 
http://www.dtcc.com/~/media/Files/Downloads/legal/policy-and-
compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
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    The Plan would describe the governance of recovery efforts in 
response to both default losses and non-default losses under the 
Recovery Plan, identifying the groups responsible for those recovery 
efforts. Specifically, the Plan would state that the Management Risk 
Committee provides oversight of actions relating to the default of a 
Member, which would be reported and escalated to it through the GCRO, 
and the Management Committee provides oversight of actions relating to 
non-default events that could result in a loss, which would be reported 
and escalated to it from the DTCC Chief Financial Officer (``CFO'') and 
the DTCC Treasury group that reports to the CFO, and from other 
relevant subject matter experts based on the nature and circumstances 
of the non-default event.\25\ More generally, the Plan would state that 
the type of loss and the nature and circumstances of the events that 
lead to the loss would dictate the components of governance to address 
that loss, including the escalation path to authorize those actions. As 
described further below, both the Recovery Plan and the Wind-down Plan 
would describe the governance of escalations, decisions, and actions 
under each of those plans.
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    \25\ The Plan would state that these groups would be involved to 
address how to mitigate the financial impact of non-default losses, 
and in recommending mitigating actions, the Management Committee 
would consider information and recommendations from relevant subject 
matter experts based on the nature and circumstances of the non-
default event. Any necessary operational response to these events, 
however, would be managed in accordance with applicable incident 
response/business continuity process; for example, processes 
established by the DTCC Technology Risk Management group would be 
followed in response to a cyber event.
---------------------------------------------------------------------------

    Finally, the Plan would describe the role of the R&R Team in 
managing the overall recovery and wind-down program and plans for each 
of the Clearing Agencies.
FICC Recovery Plan
    The Recovery Plan is intended to be a roadmap of those actions that 
FICC may employ across both Divisions to monitor and, as needed, 
stabilize its financial condition. As each event that could lead to a 
financial loss could be unique in its circumstances, the Recovery Plan 
would not be prescriptive and would permit FICC to maintain flexibility 
in its use of identified tools and in the sequence in which such tools 
are used, subject to any conditions in the Rules or the contractual 
arrangement on which such tool is based. FICC's Recovery Plan would 
consist of (1) a description of the risk management surveillance, 
tools, and governance that FICC would employ across evolving stress 
scenarios that it may face as it transitions through a ``Crisis 
Continuum,'' described below; (2) a description of FICC's risk of 
losses that may result from non-default events, and the financial 
resources and recovery tools available to FICC to manage those risks 
and any resulting losses; and (3) an evaluation of the characteristics 
of the recovery tools that may be used in response to either default 
losses or non-default losses, as described in greater detail below. In 
all cases, FICC would act in accordance with the Rules, within the 
governance structure described in the R&W Plan, and in accordance with 
applicable regulatory oversight to address each situation in order to 
best protect FICC, the Members, and the markets in which it operates.
    Managing Member Default Losses and Liquidity Needs Through the 
Crisis Continuum. The Recovery Plan would

[[Page 38418]]

describe the risk management surveillance, tools, and governance that 
FICC may employ across an increasing stress environment, which is 
referred to as the ``Crisis Continuum.'' This description would 
identify those tools that can be employed to mitigate losses, and 
mitigate or minimize liquidity needs, as the market environment becomes 
increasingly stressed. The phases of the Crisis Continuum would include 
(1) a stable market phase, (2) a stress market phase, (3) a phase 
commencing with FICC's decision to cease to act for a Member or 
Affiliated Family of Members (referred to in the Plan as the ``Member 
default phase''),\26\ and (4) a recovery phase. This section of the 
Recovery Plan would address conditions and circumstances relating to 
FICC's decision to cease to act for a Member pursuant to the applicable 
Rules.\27\ In the Plan, the term ``cease to act'' and the actions that 
lead to such decision are used within the context of each Division's 
Rules, in particular Rules 21 and 22 of the GSD Rules and Rules 14 and 
16 of the MBSD Rules.\28\ Further, for ease of reference, the R&W Plan 
would, for purposes of the Plan, use the term ``Member default'' to 
refer to the event or events that precipitate FICC ceasing to act for a 
Member or an Affiliated Family, would use the term ``Defaulting 
Member'' to refer to a Member for which NSCC has ceased to act, and 
would use the term ``Member Default Losses'' to refer to losses that 
arise out of or relate to the Member default (including any losses that 
arise from liquidation of that Member's portfolio), and to distinguish 
such losses from those that arise out of the business or other events 
not related to a Member default, which are separately addressed in the 
Plan.
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    \26\ The Plan would define an ``Affiliated Family'' of Members 
as a number of affiliated entities that are all Members of either 
GSD or MBSD.
    \27\ See GSD Rule 21 (Restrictions on Access to Services) and 
MBSD Rule 14 (Restrictions on Access to Services), supra note 7.
    \28\ See GSD Rules 21 (Restrictions on Access to Services) and 
22 (Insolvency of a Member), and MBSD Rules 14 (Restrictions on 
Access to Services) and 16 (Insolvency of a Member), supra note 7.
---------------------------------------------------------------------------

    The Recovery Plan would provide context to its roadmap through this 
Crisis Continuum by describing FICC's ongoing management of credit, 
market and liquidity risk across the Divisions, and its existing 
process for measuring and reporting its risks as they align with 
established thresholds for its tolerance of those risks. The Recovery 
Plan would discuss the management of credit/market risk and liquidity 
exposures together, because the tools that address these risks can be 
deployed either separately or in a coordinated approach in order to 
address both exposures. FICC manages these risk exposures collectively 
to limit their overall impact on FICC and the memberships of the 
Divisions. As part of its market risk management strategy, FICC manages 
its credit exposure to Members by determining the appropriate required 
deposits to the GSD and MBSD Clearing Fund and monitoring its 
sufficiency, as provided for in the applicable Rules.\29\ FICC manages 
its liquidity risks with an objective of maintaining sufficient 
resources to be able to fulfill obligations that have been guaranteed 
by FICC in the event of a Member default that presents the largest 
aggregate liquidity exposure to FICC over the settlement cycle.\30\
---------------------------------------------------------------------------

    \29\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD 
Rule 4 (Clearing Fund and Loss Allocation), supra note 7. Because 
GSD and MBSD do not maintain a guaranty fund separate and apart from 
the Clearing Fund they collect from Members, FICC monitors its 
credit exposure to its Members by managing the market risks of each 
Member's unsettled portfolio through the collection of each 
Division's Clearing Fund. The aggregate of all Members' Required 
Clearing Fund deposits to each of GSD or MBSD comprises that 
Division's Clearing Fund that represents FICC's prefunded resources 
to address uncovered loss exposures as provided in each Division's 
proposed Rule 4. Therefore, FICC's market risk management strategy 
for both Divisions is designed to comply with Rule 17Ad-22(e)(4) 
under the Act, where these risks are referred to as ``credit 
risks.'' See also 17 CFR 240.17Ad-22(e)(4).
    \30\ FICC's liquidity risk management strategy, including the 
manner in which FICC utilizes its liquidity tools, is described in 
the Clearing Agency Liquidity Risk Management Framework. See 
Securities Exchange Act Release Nos. 80489 (April 19, 2017), 82 FR 
19120 (April 25, 2017) (SR-DTC-2017-004, SR-NSCC-2017-005, SR-FICC-
2017-008); 81194 (July 24, 2017), 82 FR 35241 (July 28, 2017) (SR-
DTC-2017-004, SR-NSCC-2017-005, SR-FICC-2017-008).
---------------------------------------------------------------------------

    The Recovery Plan would outline the metrics and indicators that 
FICC has developed to evaluate a stress situation against established 
risk tolerance thresholds. Each risk mitigation tool identified in the 
Recovery Plan would include a description of the escalation thresholds 
that allow for effective and timely reporting to the appropriate 
internal management staff and committees, or to the Board. The Recovery 
Plan would make clear that these tools and escalation protocols would 
be calibrated across each phase of the Crisis Continuum. The Recovery 
Plan would also establish that FICC would retain the flexibility to 
deploy such tools either separately or in a coordinated approach, and 
to use other alternatives to these actions and tools as necessitated by 
the circumstances of a particular Member default in accordance with the 
applicable Rules. Therefore, the Recovery Plan would both provide FICC 
with a roadmap to follow within each phase of the Crisis Continuum, and 
would permit it to adjust its risk management measures to address the 
unique circumstances of each event.
    The Recovery Plan would describe the conditions that mark each 
phase of the Crisis Continuum, and would identify actions that FICC 
could take as it transitions through each phase in order to both 
prevent losses from materializing through active risk management, and 
to restore the financial health of FICC during a period of stress.
    The stable market phase of the Crisis Continuum would describe 
active risk management activities in the normal course of business. 
These activities would include (1) routine monitoring of margin 
adequacy through daily review of back testing and stress testing 
results that review the adequacy of the margin calculations for each of 
GSD and MBSD, and escalation of those results to internal and Board 
committees; \31\ and (2) routine monitoring of liquidity adequacy 
through review of daily liquidity studies that measure sufficiency of 
available liquidity resources to meet cash settlement obligations of 
the Member that would generate the largest aggregate payment 
obligation.\32\
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    \31\ FICC's stress testing practices are described in the 
Clearing Agency Stress Testing Framework (Market Risk). See 
Securities Exchange Act Release Nos. 80485 (April 19, 2017), 82 FR 
19131 (April 25, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-NSCC-
2017-006); 81192 (July 24, 2017), 82 FR 35245 (July 28, 2017) (SR-
DTC-2017-005, SR-FICC-2017-009, SR-NSCC-2017-006).
    \32\ See supra note 30.
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    The Recovery Plan would describe some of the indicators of the 
stress market phase of the Crisis Continuum, which would include, for 
example, volatility in market prices of certain assets where there is 
increased uncertainty among market participants about the fundamental 
value of those assets. This phase would involve general market 
stresses, when no Member default would be imminent. Within the 
description of this phase, the Recovery Plan would provide that FICC 
may take targeted, routine risk management measures as necessary and as 
permitted by the Rules.
    Within the Member default phase of the Crisis Continuum, the 
Recovery Plan would provide a roadmap for the existing procedures that 
FICC would follow in the event of a Member default and any decision by 
FICC to cease to act for that Member.\33\ The Recovery Plan

[[Page 38419]]

would provide that the objectives of FICC's actions upon a Member or 
Affiliated Family default are to (1) minimize losses and market 
exposure of the affected Members and the applicable Division's non-
Defaulting Members; and (2), to the extent practicable, minimize 
disturbances to the affected markets. The Recovery Plan would describe 
tools, actions, and related governance for both market risk monitoring 
and liquidity risk monitoring through this phase. For example, in 
connection with managing its market risk during this phase, FICC would, 
pursuant to the applicable Division's Rules, (1) monitor and assess the 
adequacy of the GSD and MBSD Clearing Fund resources; (2), when 
necessary and appropriate pursuant to the applicable Division's Rules, 
assess and collect additional margin requirements; and (3) follow its 
operational procedures to liquidate the Defaulting Member's portfolio. 
Management of liquidity risk through this phase would involve ongoing 
monitoring of the adequacy of FICC's liquidity resources, and the 
Recovery Plan would identify certain actions FICC may deploy as it 
deems necessary to mitigate a potential liquidity shortfall, which 
would include, for example, adjusting its strategy for closing out the 
Defaulting Member's portfolio or seeking additional liquidity 
resources. The Recovery Plan would state that, throughout this phase, 
relevant information would be escalated and reported to both internal 
management committees and the Board Risk Committee.
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    \33\ See GSD Rule 21 (Restrictions on Access to Services), GSD 
Rule 22A (Procedures for When the Corporation Ceases to Act), MBSD 
Rule 14 (Restrictions on Access to Services), and MBSD Rule 17 
(Procedures for When the Corporation Ceases to Act), supra note 7.
---------------------------------------------------------------------------

    The Recovery Plan would also identify financial resources available 
to FICC, pursuant to the Rules, to address losses arising out of a 
Member default. Specifically, GSD Rule 4 and MBSD Rule 4, as each are 
proposed to be amended by the Loss Allocation Filing, would provide 
that losses remaining after application of the Defaulting Member's 
resources be satisfied first by applying a ``Corporate Contribution,'' 
and then, if necessary, by allocating remaining losses among the 
membership in accordance with such GSD Rule 4 and MBSD Rule 4, as 
applicable.\34\
---------------------------------------------------------------------------

    \34\ See supra note 12. The Loss Allocation Filing proposes to 
amend GSD Rule 4 and MBSD Rule 4 to define the amount FICC would 
contribute to address a loss resulting from either a Member default 
or a non-default event as the ``Corporate Contribution.'' This 
amount would be 50 percent (50%) of the ``General Business Risk 
Capital Requirement,'' which is calculated pursuant to the Capital 
Policy and is an amount sufficient to cover potential general 
business losses so that FICC can continue operations and services as 
a going concern if those losses materialize, in compliance with Rule 
17Ad-22(e)(15) under the Act. See also supra note 10; 17 CFR 
240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    In order to provide for an effective and timely recovery, the 
Recovery Plan would describe the period of time that would occur near 
the end of the Member default phase, during which FICC may experience 
stress events or observe early warning indicators that allow it to 
evaluate its options and prepare for the recovery phase (referred to in 
the Plan as the ``Recovery Corridor''). The Recovery Plan would then 
describe the recovery phase of the Crisis Continuum, which would begin 
on the date that FICC issues the first Loss Allocation Notice of the 
second loss allocation round with respect to a given ``Event Period.'' 
\35\ The recovery phase would describe actions that FICC may take to 
avoid entering into a wind-down of its business.
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    \35\ The Loss Allocation Filing proposes to amend Rule 4 to 
introduce the concept of an ``Event Period'' as the ten (10) 
Business Days beginning on (i) with respect to a Member default, the 
day on which NSCC notifies Members that it has ceased to act for a 
Member under the Rules, or (ii) with respect to a non-default loss, 
the day that NSCC notifies Members of the determination by the Board 
that there is a non-default loss event, as described in greater 
detail in that filing. The proposed GSD Rule 4 and MBSD Rule 4 would 
define a ``round'' as a series of loss allocations relating to an 
Event Period, and would provide that the first Loss Allocation 
Notice in a first, second, or subsequent round shall expressly state 
that such notice reflects the beginning of a first, second, or 
subsequent round. The maximum allocable loss amount of a round is 
equal to the sum of the ``Loss Allocation Caps'' (as defined in the 
proposed GSD Rule 4 and MBSD Rule 4) of those Members included in 
the round. See supra note 12.
---------------------------------------------------------------------------

    FICC expects that significant deterioration of liquidity resources 
would cause it to enter the Recovery Corridor. As such, the Plan would 
describe the actions FICC may take at this stage aimed at replenishing 
those resources. Recovery Corridor indicators may include, for example, 
a rapid and material change in market prices or substantial intraday 
activity volume by the Member that subsequently defaults, neither of 
which are mitigated by intraday margin calls, or subsequent defaults by 
other Members or Affiliated Families during a compressed time period. 
Throughout the Recovery Corridor, FICC would monitor the adequacy of 
the Divisions' respective resources and the expected timing of 
replenishment of those resources, and would do so through the 
monitoring of certain corridor indicator metrics.
    The majority of the corridor indicators, as identified in the 
Recovery Plan, relate directly to conditions that may require either 
Division to adjust its strategy for hedging and liquidating a 
Defaulting Member's portfolio, and any such changes would include an 
assessment of the status of the corridor indicators. Corridor 
indicators would include, for example, effectiveness and speed of 
FICC's efforts to close out the portfolio of the Defaulting Member, and 
an impediment to the availability of its financial resources. For each 
corridor indicator, the Recovery Plan would identify (1) measures of 
the indicator, (2) evaluations of the status of the indicator, (3) 
metrics for determining the status of the deterioration or improvement 
of the indicator, and (4) ``Corridor Actions,'' which are steps that 
may be taken to improve the status of the indicator,\36\ as well as 
management escalations required to authorize those steps. Because FICC 
has never experienced the default of multiple Members, it has not, 
historically, measured the deterioration or improvements metrics of the 
corridor indicators. As such, these metrics were chosen based on the 
business judgment of FICC management.
---------------------------------------------------------------------------

    \36\ The Corridor Actions that would be identified in the Plan 
are indicative, but not prescriptive; therefore, if FICC needs to 
consider alternative actions due to the applicable facts and 
circumstances, the escalation of those alternative actions would 
follow the same escalation protocol identified in the Plan for the 
Corridor Indicator to which the action relates.
---------------------------------------------------------------------------

    The Recovery Plan would also describe the reporting and escalation 
of the status of the corridor indicators throughout the Recovery 
Corridor. Significant deterioration of a corridor indicator, as 
measured by the metrics set out in the Recovery Plan, would be 
escalated to the Board. FICC management would review the corridor 
indicators and the related metrics at least annually, and would modify 
these metrics as necessary in light of observations from simulations of 
Member defaults and other analyses. Any proposed modifications would be 
reviewed by the Management Risk Committee and the Board Risk Committee. 
The Recovery Plan would estimate that FICC may remain in the Recovery 
Corridor between one day and two weeks. This estimate is based on 
historical data observed in past Member defaults, the results of 
simulations of Member defaults, and periodic liquidity analyses 
conducted by FICC. The actual length of a Recovery Corridor would vary 
based on actual market conditions observed at the time, and FICC would 
expect the Recovery Corridor to be shorter in market conditions of 
increased stress.
    The Recovery Plan would outline steps by which FICC may allocate 
its losses, which would occur when and in

[[Page 38420]]

the order provided in the amended GSD Rule 4 and MBSD Rule 4, as 
applicable.\37\ The Recovery Plan would also identify tools that may be 
used to address foreseeable shortfalls of FICC's liquidity resources 
following a Member default, and would provide that these tools may be 
used as appropriate during the Crisis Continuum to address liquidity 
shortfalls if they arise. The goal in managing FICC's qualified 
liquidity resources is to maximize resource availability in an evolving 
stress situation, to maintain flexibility in the order and use of 
sources of liquidity, and to repay any third party lenders of liquidity 
in a timely manner. Additional voluntary or uncommitted tools to 
address potential liquidity shortfalls, for example uncommitted bank 
loans, which may supplement FICC's other liquid resources described 
herein, would also be identified in the Recovery Plan. The Recovery 
Plan would state that, due to the extreme nature of a stress event that 
would cause FICC to consider the use of these liquidity tools, the 
availability and capacity of these liquidity tools, and the willingness 
of counterparties to lend, cannot be accurately predicted and are 
dependent on the circumstances of the applicable stress period, 
including market price volatility, actual or perceived disruptions in 
financial markets, the costs to FICC of utilizing these tools, and any 
potential impact on FICC's credit rating.
---------------------------------------------------------------------------

    \37\ As these matters are described in greater detail in the 
Loss Allocation Filing and in the proposed amendments to GSD Rule 4 
and MBSD Rule 4, described therein, reference is made to that filing 
and the details are not repeated here. See supra note 12.
---------------------------------------------------------------------------

    As stated above, the Recovery Plan would state that FICC will have 
entered the recovery phase on the date that it issues the first Loss 
Allocation Notice of the second loss allocation round with respect to a 
given Event Period. The Recovery Plan would provide that, during the 
recovery phase, FICC would continue and, as needed, enhance, the 
monitoring and remedial actions already described in connection with 
previous phases of the Crisis Continuum, and would remain in the 
recovery phase until its financial resources are expected to be or are 
fully replenished, or until the Wind-down Plan is triggered, as 
described below.
    The Recovery Plan would describe governance for the actions and 
tools that may be employed within each phase of the Crisis Continuum, 
which would be dictated by the facts and circumstances applicable to 
the situation being addressed. Such facts and circumstances would be 
measured by the various indicators and metrics applicable to that phase 
of the Crisis Continuum, and would follow the relevant escalation 
protocol that would be described in the Recovery Plan. The Recovery 
Plan would also describe the governance procedures around a decision to 
cease to act for a Member, pursuant to the applicable Division's Rules, 
and around the management and oversight of the subsequent liquidation 
of the Defaulting Member's portfolio. The Recovery Plan would state 
that, overall, FICC would retain flexibility in accordance with each 
Division's Rules, its governance structure, and its regulatory 
oversight, to address a particular situation in order to best protect 
FICC and the Members, and to meet the primary objectives, throughout 
the Crisis Continuum, of minimizing losses and, where consistent and 
practicable, minimizing disturbance to affected markets.
    Non-Default Losses. The Recovery Plan would outline how FICC may 
address losses that result from events other than a Member default. 
While these matters are addressed in greater detail in other documents, 
this section of the Plan would provide a roadmap to those documents and 
an outline for FICC's approach to monitoring and managing losses that 
could result from a non-default event. The Plan would first identify 
some of the risks FICC faces that could lead to these losses, which 
include, for example, the business and profit/loss risks of unexpected 
declines in revenue or growth of expenses; the operational risks of 
disruptions to systems or processes that could lead to large losses, 
including those resulting from, for example, a cyber-attack; and 
custody or investment risks that could lead to financial losses. The 
Recovery Plan would describe FICC's overall strategy for the management 
of these risks, which includes a ``three lines of defense'' approach to 
risk management that allows for comprehensive management of risk across 
the organization.\38\ The Recovery Plan would also describe FICC's 
approach to financial risk and capital management. The Plan would 
identify key aspects of this approach, including, for example, an 
annual budget process, business line performance reviews with 
management, and regular review of capital requirements against LNA. 
These risk management strategies are collectively intended to allow 
FICC to effectively identify, monitor, and manage risks of non-default 
losses.
---------------------------------------------------------------------------

    \38\ This ``three lines of defense'' approach to risk management 
includes (1) a first line of defense comprised of the various 
business lines and functional units that support the products and 
services offered by FICC; (2) a second line of defense comprised of 
control functions that support FICC, including the risk management, 
legal and compliance areas; and (3) a third line of defense, which 
is performed by an internal audit group. The Clearing Agency Risk 
Management Framework includes a description of this ``three lines of 
defense'' approach to risk management, and addresses how FICC 
comprehensively manages various risks, including operational, 
general business, investment, custody, and other risks that arise in 
or are borne by it. See Securities Exchange Act Release No. 81635 
(September 15, 2017), 82 FR 44224 (September 21, 2017) (SR-DTC-2017-
013, SR-FICC-2017-016, SR-NSCC-2017-012). The Clearing Agency 
Operational Risk Management Framework describes the manner in which 
FICC manages operational risks, as defined therein. See Securities 
Exchange Act Release No. 81745 (September 28, 2017), 82 FR 46332 
(October 4, 2017) (SR-DTC-2017-014, SR-FICC-2017-017, SR-NSCC-2017-
013).
---------------------------------------------------------------------------

    The Plan would identify the two categories of financial resources 
FICC maintains to cover losses and expenses arising from non-default 
risks or events as (1) LNA, maintained, monitored, and managed pursuant 
to the Capital Policy, which include (a) amounts held in satisfaction 
of the General Business Risk Capital Requirement,\39\ (b) the Corporate 
Contribution,\40\ and (c) other amounts held in excess of FICC's 
capital requirements pursuant to the Capital Policy; and (2) resources 
available pursuant to the loss allocation provisions of GSD Rule 4 and 
MBSD Rule 4.\41\
---------------------------------------------------------------------------

    \39\ See supra note 34.
    \40\ See supra note 34.
    \41\ See supra note 12.
---------------------------------------------------------------------------

    The Plan would address the process by which the CFO and the DTCC 
Treasury group would determine which available LNA resources are most 
appropriate to cover a loss that is caused by a non-default event. This 
determination involves an evaluation of a number of factors, including 
the current and expected size of the loss, the expected time horizon 
over when the loss or additional expenses would materialize, the 
current and projected available LNA, and the likelihood LNA could be 
successfully replenished pursuant to the Replenishment Plan, if 
triggered.\42\ Finally the Plan would discuss how FICC would apply its 
resources to address losses resulting from a non-default event, 
including the order of resources it would apply if the loss or 
liability exceeds FICC's excess LNA amounts, or is large relative 
thereto, and the Board has declared the event a ``Declared Non-Default 
Loss Event'' pursuant to GSD Rule 4 and MBSD Rule 4.\43\
---------------------------------------------------------------------------

    \42\ See supra note 10.
    \43\ See supra note 12.
---------------------------------------------------------------------------

    The Plan would also describe proposed GSD Rule 50 (Market

[[Page 38421]]

Disruption and Force Majeure) and proposed MBSD Rule 40 (Market 
Disruption and Force Majeure), which FICC is proposing to adopt in the 
GSD Rule and MBSD Rules, respectively. This Proposed Rule would provide 
transparency around how FICC would address extraordinary events that 
may occur outside its control. Specifically, the Proposed Rule would 
define a ``Market Disruption Event'' and the governance around a 
determination that such an event has occurred. The Proposed Rule would 
also describe FICC's authority to take actions during the pendency of a 
Market Disruption Event that it deems appropriate to address such an 
event and facilitate the continuation of its services, if practicable, 
as described in greater detail below.
    The Plan would describe the interaction between the Proposed Rule 
and FICC's existing processes and procedures addressing business 
continuity management and disaster recovery (generally, the ``BCM/DR 
procedures''), making clear that the Proposed Rule is designed to 
support those BCM/DR procedures and to address circumstances that may 
be exogenous to FICC and not necessarily addressed by the BCM/DR 
procedures. Finally, the Plan would describe that, because the 
operation of the Proposed Rule is specific to each applicable Market 
Disruption Event, the Proposed Rule does not define a time limit on its 
application. However, the Plan would note that actions authorized by 
the Proposed Rule would be limited to the pendency of the applicable 
Market Disruption Event, as made clear in the Proposed Rule. Overall, 
the Proposed Rule is designed to mitigate risks caused by Market 
Disruption Events and, thereby, minimize the risk of financial loss 
that may result from such events.
    Recovery Tool Characteristics. The Recovery Plan would describe 
FICC's evaluation of the tools identified within the Recovery Plan, and 
its rationale for concluding that such tools are comprehensive, 
effective, and transparent, and that such tools provide appropriate 
incentives to Members and minimize negative impact on Members and the 
financial system, in compliance with guidance published by the 
Commission in connection with the adoption of Rule 17Ad-22(e)(3)(ii) 
under the Act.\44\ FICC's analysis and the conclusions set forth in 
this section of the Recovery Plan are described in greater detail in 
Item 3(b) of this filing, below.
---------------------------------------------------------------------------

    \44\ Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 
(October 13, 2016) (S7-03-14).
---------------------------------------------------------------------------

FICC Wind-Down Plan
    The Wind-down Plan would provide the framework and strategy for the 
orderly wind-down of FICC if the use of the recovery tools described in 
the Recovery Plan do not successfully return FICC to financial 
viability. While FICC believes that, given the comprehensive nature of 
the recovery tools, such event is extremely unlikely, as described in 
greater detail below, FICC is proposing a wind-down strategy that 
provides for (1) the transfer of FICC's business, assets and 
memberships of both Divisions to another legal entity, (2) such 
transfer being effected in connection with proceedings under Chapter 11 
of the U.S. Federal Bankruptcy Code,\45\ and (3) after effectuating 
this transfer, FICC liquidating any remaining assets in an orderly 
manner in bankruptcy proceedings. FICC believes that the proposed 
transfer approach to a wind-down would meet its objectives of (1) 
assuring that FICC's critical services will be available to the market 
as long as there are Members in good standing, and (2) minimizing 
disruption to the operations of Members and financial markets generally 
that might be caused by FICC's failure.
---------------------------------------------------------------------------

    \45\ 11 U.S.C. 1101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to FICC's Wind-down Plan, the 
Plan would identify the factors that FICC considered in developing this 
approach, including the fact that FICC does not own material assets 
that are unrelated to its clearance and settlement activities. As such, 
a business reorganization or ``bail-in'' of debt approach would be 
unlikely to mitigate significant losses. Additionally, FICC's approach 
was developed in consideration of its critical and unique position in 
the U.S. markets, which precludes any approach that would cause FICC's 
critical services to no longer be available.
    First, the Wind-down Plan would describe the potential scenarios 
that could lead to the wind-down of FICC, and the likelihood of such 
scenarios. The Wind-down Plan would identify the time period leading up 
to a decision to wind-down FICC as the ``Runway Period.'' This period 
would follow the implementation of any recovery tools, as it may take a 
period of time, depending on the severity of the market stress at that 
time, for these tools to be effective or for FICC to realize a loss 
sufficient to cause it to be unable to effectuate settlements and repay 
its obligations.\46\ The Wind-down Plan would identify some of the 
indicators that it has entered this Runway Period, which would include, 
for example, successive Member defaults, significant Member retirements 
thereafter, and FICC's inability to replenish its financial resources 
following the liquidation of the portfolio of the Defaulting Member(s).
---------------------------------------------------------------------------

    \46\ The Wind-down Plan would state that, given FICC's position 
as a user-governed financial market utility, it is possible that 
Members might voluntarily elect to provide additional support during 
the recovery phase leading up to a potential trigger of the Wind-
down Plan, but would also make clear that FICC cannot predict the 
willingness of Members to do so.
---------------------------------------------------------------------------

    The trigger for implementing the Wind-down Plan would be a 
determination by the Board that recovery efforts have not been, or are 
unlikely to be, successful in returning FICC to viability as a going 
concern. As described in the Plan, FICC believes this is an appropriate 
trigger because it is both broad and flexible enough to cover a variety 
of scenarios, and would align incentives of FICC and the Members to 
avoid actions that might undermine FICC's recovery efforts. 
Additionally, this approach takes into account the characteristics of 
FICC's recovery tools and enables the Board to consider (1) the 
presence of indicators of a successful or unsuccessful recovery, and 
(2) potential for knock-on effects of continued iterative application 
of FICC's recovery tools.
    The Wind-down Plan would describe the general objectives of the 
transfer strategy, and would address assumptions regarding the transfer 
of FICC's critical services, business, assets and membership, and the 
assignment of GSD's link with another FMI, to another legal entity that 
is legally, financially, and operationally able to provide FICC's 
critical services to entities that wish to continue their membership 
following the transfer (``Transferee''). The Wind-down Plan would 
provide that the Transferee would be either (1) a third party legal 
entity, which may be an existing or newly established legal entity or a 
bridge entity formed to operate the business on an interim basis to 
enable the business to be transferred subsequently (``Third Party 
Transferee''); or (2) an existing, debt-free failover legal entity 
established ex-ante by DTCC (``Failover Transferee'') to be used as an 
alternative Transferee in the event that no viable or preferable Third 
Party Transferee timely commits to acquire FICC's business. FICC would 
seek to identify the proposed Transferee, and negotiate and enter into

[[Page 38422]]

transfer arrangements during the Runway Period and prior to making any 
filings under Chapter 11 of the U.S. Federal Bankruptcy Code.\47\ As 
stated above, the Wind-down Plan would anticipate that the transfer to 
the Transferee be effected in connection with proceedings under Chapter 
11 of the U.S. Federal Bankruptcy Code, and pursuant to a bankruptcy 
court order under Section 363 of the Bankruptcy Code, such that the 
transfer would be free and clear of claims against, and interests in, 
FICC, except to the extent expressly provided in the court's order.\48\
---------------------------------------------------------------------------

    \47\ See 11 U.S.C. et seq.
    \48\ See id. at 363.
---------------------------------------------------------------------------

    In order to effect a timely transfer of its services and minimize 
the market and operational disruption of such transfer, FICC would 
expect to transfer all of its critical services and any non-critical 
services that are ancillary and beneficial to a critical service, or 
that otherwise have substantial user demand from the continuing 
membership. Following the transfer, the Wind-down Plan would anticipate 
that the Transferee and its continuing membership would determine 
whether to continue to provide any transferred non-critical service on 
an ongoing basis, or terminate the non-critical service following some 
transition period. FICC's Wind-down Plan would anticipate that the 
Transferee would enter into a transition services agreement with DTCC 
so that DTCC would continue to provide the shared services it currently 
provides to FICC, including staffing, infrastructure and operational 
support. The Wind-down Plan would also anticipate the assignment of 
FICC's link arrangements, including its arrangements with clearing 
banks and GSD's cross-margining arrangement with CME, described above, 
to the Transferee.\49\ The Wind-down Plan would provide that Members' 
open positions existing prior to the effective time of the transfer 
would be addressed by the provisions of the proposed Wind-down Rule, as 
defined and described below, and the existing GSD Rule 22B (Corporation 
Default) and MBSD Rule 17 (Corporation Default) (collectively, 
``Corporation Default Rule''), as applicable, and that the Transferee 
would not acquire any pending or open transactions with the transfer of 
the business.\50\ The Wind-down Plan would anticipate that the 
Transferee would accept transactions for processing with a trade date 
from and after the effective time of the transfer.
---------------------------------------------------------------------------

    \49\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding 
agreements, which are generally not assignable by FICC. However, to 
the extent the Transferee adopts rules substantially identical to 
those FICC has in effect prior to the transfer, it would have the 
benefit of any rules-based liquidity funding. The Wind-down Plan 
contemplates that neither of the Divisions' respective Clearing 
Funds would be transferred to the Transferee, as they are not held 
in a bankruptcy remote manner and they are the primary prefunded 
liquidity resource to be accessed in the recovery phase.
    \50\ See supra note 7.
---------------------------------------------------------------------------

    The Wind-down Plan would provide that, following the effectiveness 
of the transfer to the Transferee, the wind-down of FICC would involve 
addressing any residual claims against FICC through the bankruptcy 
process and liquidating the legal entity. As such, and as stated above, 
the Wind-down Plan does not contemplate FICC continuing to provide 
services in any capacity following the transfer time, and any services 
not transferred would be terminated.
    The Wind-down Plan would also identify the key dependencies for the 
effectiveness of the transfer, which include regulatory approvals that 
would permit the Transferee to be legally qualified to provide the 
transferred services from and after the transfer, and approval by the 
applicable bankruptcy court of, among other things, the proposed sale, 
assignments, and transfers to the Transferee.
    The Wind-down Plan would address governance matters related to the 
execution of the transfer of FICC's business and its wind-down. The 
Wind-down Plan would address the duties of the Board to execute the 
wind-down of FICC in conformity with (1) the Rules, (2) the Board's 
fiduciary duties, which mandate that it exercise reasonable business 
judgment in performing these duties, and (3) FICC's regulatory 
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in 
making these decisions, which would include, for example, whether FICC 
could safely stabilize the business and protect its value without 
seeking bankruptcy protection, and FICC's ability to continue to meet 
its regulatory requirements.
    The Wind-down Plan would describe (1) actions FICC or DTCC may take 
to prepare for wind-down in the period before FICC experiences any 
financial distress, (2) actions FICC would take both during the 
recovery phase and the Runway Period to prepare for the execution of 
the Wind-down Plan, and (3) actions FICC would take upon commencement 
of bankruptcy proceedings to effectuate the Wind-down Plan.
    Finally, the Wind-down Plan would include an analysis of the 
estimated time and costs to effectuate the plan, and would provide that 
this estimate be reviewed and approved by the Board annually. In order 
to estimate the length of time it might take to achieve a recovery or 
orderly wind-down of FICC's critical operations, as contemplated by the 
R&W Plan, the Wind-down Plan would include an analysis of the possible 
sequencing and length of time it might take to complete an orderly 
wind-down and transfer of critical operations, as described in earlier 
sections of the R&W Plan. The Wind-down Plan would also include in this 
analysis consideration of other factors, including the time it might 
take to complete any further attempts at recovery under the Recovery 
Plan. The Wind-down Plan would then multiply this estimated length of 
time by FICC's average monthly operating expenses, including 
adjustments to account for changes to FICC's profit and expense profile 
during these circumstances, over the previous twelve months to 
determine the amount of LNA that it should hold to achieve a recovery 
or orderly wind-down of FICC's critical operations. The estimated wind-
down costs would constitute the ``Recovery/Wind-down Capital 
Requirement'' under the Capital Policy.\51\ Under that policy, the 
General Business Risk Capital Requirement is calculated as the greatest 
of three estimated amounts, one of which is this Recovery/Wind-down 
Capital Requirement.\52\
---------------------------------------------------------------------------

    \51\ See supra note 10.
    \52\ See supra note 10.
---------------------------------------------------------------------------

    The R&W Plan is designed as a roadmap, and the types of actions 
that may be taken both leading up to and in connection with 
implementation of the Wind-down Plan would be primarily addressed in 
other supporting documentation referred to therein.
    The Wind-down Plan would address proposed GSD Rule 22D and MBSD 
Rule 17B (Wind-down of the Corporation), which would be adopted to 
facilitate the implementation of the Wind-down Plan, and are discussed 
below.
Proposed Rules
    In connection with the adoption of the R&W Plan, FICC is proposing 
to adopt the Proposed Rules, each described below. The Proposed Rules 
would facilitate the execution of the R&W Plan and would provide 
Members and Limited Members with transparency as to critical aspects of 
the Plan, particularly as they relate to the rights and 
responsibilities of both FICC

[[Page 38423]]

and Members. The Proposed Rules also provide a legal basis to these 
aspects of the Plan.
GSD Rule 22D and MBSD Rule 17B (Wind-Down of the Corporation)
    The proposed GSD Rule 22D and MBSD Rule 17B (collectively, ``Wind-
down Rule'') would be adopted by both Divisions to facilitate the 
execution of the Wind-down Plan. The Wind-down Rule would include a 
proposed set of defined terms that would be applicable only to the 
provisions of this Proposed Rule. The Wind-down Rule would make clear 
that a wind-down of FICC's business would occur (1) after a decision is 
made by the Board, and (2) in connection with the transfer of FICC's 
services to a Transferee, as described therein. Because GSD and MBSD 
are both divisions of FICC, the individual Wind-down Rules are designed 
to work together. A decision by the Board to initiate the Wind-down 
Plan would be pursuant to, and trigger the provisions of, the Wind-down 
Rule of each Division simultaneously. Generally, the proposed Wind-down 
Rule is designed to create clear mechanisms for the transfer of 
Eligible Members, Eligible Limited Members, and Settling Banks (as 
these terms would be defined in the Wind-down Rule), and FICC's 
business in order to provide for continued access to critical services 
and to minimize disruption to the markets in the event the Wind-down 
Plan is initiated.
    Wind-down Trigger. First, the Proposed Rule would make clear that 
the Board is responsible for initiating the Wind-down Plan, and would 
identify the criteria the Board would consider when making this 
determination. As provided for in the Wind-down Plan and in the 
proposed Wind-down Rule, the Board would initiate the Plan if, in the 
exercise of its business judgment and subject to its fiduciary duties, 
it has determined that the execution of the Recovery Plan has not or is 
not likely to restore FICC to viability as a going concern, and the 
implementation of the Wind-down Plan, including the transfer of FICC's 
business, is in the best interests of FICC, Members and Limited Members 
of both Divisions, its shareholders and creditors, and the U.S. 
financial markets.
    Identification of Critical Services; Designation of Dates and Times 
for Specific Actions. The Proposed Rule would provide that, upon making 
a determination to initiate the Wind-down Plan, the Board would 
identify the critical and non-critical services that would be 
transferred to the Transferee at the Transfer Time (as defined below 
and in the Proposed Rule), as well as any non-critical services that 
would not be transferred to the Transferee. The proposed Wind-down Rule 
would establish that any services transferred to the Transferee will 
only be provided by the Transferee as of the Transfer Time, and that 
any non-critical services that are not transferred to the Transferee 
would be terminated at the Transfer Time. The Proposed Rule would also 
provide that the Board would establish (1) an effective time for the 
transfer of FICC's business to a Transferee (``Transfer Time''), (2) 
the last day that transactions may be submitted to either Division for 
processing (``Last Transaction Acceptance Date''), and (3) the last day 
that transactions submitted to either Division will be settled (``Last 
Settlement Date'').
    Treatment of Pending Transactions. The Wind-down Rule would also 
authorize the Board to provide for the settlement of pending 
transactions of either Division prior to the Transfer Time, so long as 
the applicable Division's Corporation Default Rule has not been 
triggered. For example, the Proposed Rule would provide the Board with 
the ability to, if it deems practicable, based on FICC's resources at 
that time, allow pending transactions of either Division to complete 
prior to the transfer of FICC's business to a Transferee. The Board 
would also have the ability to allow Members to only submit trades to 
the applicable Division that would effectively offset pending positions 
or provide that transactions will be processed in accordance with 
special or exception processing procedures. The Proposed Rule is 
designed to enable these actions in order to facilitate settlement of 
pending transactions of the applicable Division and reduce claims 
against FICC that would have to be satisfied after the transfer has 
been effected. If none of these actions are deemed practicable (or if 
the applicable Division's Corporation Default Rule has been triggered 
with respect to a Division), then the provisions of the proposed 
Corporation Default Rule would apply to the treatment of open, pending 
transactions of such Division.
    The Proposed Rule would make clear, however, that neither Division 
would accept any transactions for processing after the Last Transaction 
Acceptance Date or which are designated to settle after the Last 
Settlement Date for such Division. Any transactions to be processed 
and/or settled after the Transfer Time would be required to be 
submitted to the Transferee, and would not be FICC's responsibility.
    Notice Provisions. The proposed Wind-down Rule would provide that, 
upon a decision to implement the Wind-down Plan, FICC would provide its 
Members and Limited Members and its regulators with a notice that 
includes material information relating to the Wind-down Plan and the 
anticipated transfer of the membership of both Divisions and business, 
including, for example, (1) a brief statement of the reasons for the 
decision to implement the Wind-down Plan; (2) identification of the 
Transferee and information regarding the transaction by which the 
transfer of FICC's business would be effected; (3) the Transfer Time, 
Last Transaction Acceptance Date, and Last Settlement Date; and (4) 
identification of Eligible Members and Eligible Limited Members, and 
the critical and non-critical services that would be transferred to the 
Transferee at the Transfer Time, as well as those Non-Eligible Members 
and Non-Eligible Limited Members (as defined in the Proposed Rule), and 
any non-critical services that would not be included in the transfer. 
FICC would also make available the rules and procedures and membership 
agreements of the Transferee.
    Transfer of Membership. The proposed Wind-down Rule would address 
the expected transfer of both Divisions' membership to the Transferee, 
which FICC would seek to effectuate by entering into an arrangement 
with a Failover Transferee, or by using commercially reasonable efforts 
to enter into such an arrangement with a Third Party Transferee. 
Therefore, the Wind-down Rule would provide Members, Limited Members 
and Settling Banks with notice that, in connection with the 
implementation of the Wind-down Plan and with no further action 
required by any party, (1) their membership with the applicable 
Division would transfer to the Transferee, (2) they would become party 
to a membership agreement with such Transferee, and (3) they would have 
all of the rights and be subject to all of the obligations applicable 
to their membership status under the rules of the Transferee. These 
provisions would not apply to any Member or Limited Member that is 
either in default of an obligation to FICC or has provided notice of 
its election to withdraw its membership from the applicable Division. 
Further, the proposed Wind-down Rule would make clear that it would not 
prohibit (1) Members and Limited Members that are not transferred by 
operation of the Wind-down Rule from applying for

[[Page 38424]]

membership with the Transferee, or (2) Members, Limited Members, and 
Settling Banks that would be transferred to the Transferee from 
withdrawing from membership with the Transferee.\53\
---------------------------------------------------------------------------

    \53\ The Members and Limited Members whose membership is 
transferred to the Transferee pursuant to the proposed Wind-down 
Rule would submit transactions to be processed and settled subject 
to the rules and procedures of the Transferee, including any 
applicable margin charges or other financial obligations.
---------------------------------------------------------------------------

    Comparability Period. The proposed automatic mechanism for the 
transfer of both Divisions' memberships is intended to provide the 
membership with continuous access to critical services in the event of 
FICC's wind-down, and to facilitate the continued prompt and accurate 
clearance and settlement of securities transactions. Further to this 
goal, the proposed Wind-down Rule would provide that FICC would enter 
into arrangements with a Failover Transferee, or would use commercially 
reasonable efforts to enter into arrangements with a Third Party 
Transferee, providing that, in either case, with respect to the 
critical services and any non-critical services that are transferred 
from FICC to the Transferee, for at least a period of time to be agreed 
upon (``Comparability Period''), the business transferred from FICC to 
the Transferee would be operated in a manner that is comparable to the 
manner in which the business was previously operated by FICC. 
Specifically, the proposed Wind-down Rule would provide that: (1) The 
rules of the Transferee and terms of membership agreements would be 
comparable in substance and effect to the analogous Rules and 
membership agreements of FICC; (2) the rights and obligations of any 
Members, Limited Members and Settling Banks that are transferred to the 
Transferee would be comparable in substance and effect to their rights 
and obligations as to FICC; and (3) the Transferee would operate the 
transferred business and provide any services that are transferred in a 
comparable manner to which such services were provided by FICC. The 
purpose of these provisions and the intended effect of the proposed 
Wind-down Rule is to facilitate a smooth transition of FICC's business 
to a Transferee and to provide that, for at least the Comparability 
Period, the Transferee (1) would operate the transferred business in a 
manner that is comparable in substance and effect to the manner in 
which the business was operated by FICC, and (2) would not require 
sudden and disruptive changes in the systems, operations and business 
practices of the new members of the Transferee.
    Subordination of Claims Provisions and Miscellaneous Matters. The 
proposed Wind-down Rule would also include a provision addressing the 
subordination of unsecured claims against FICC of its Members and 
Limited Members who fail to participate in FICC's recovery efforts 
(i.e., such firms are delinquent in their obligations to FICC or elect 
to retire from FICC in order to minimize their obligations with respect 
to the allocation of losses, pursuant to the Rules). This provision is 
designed to incentivize Members to participate in FICC's recovery 
efforts.\54\
---------------------------------------------------------------------------

    \54\ Nothing in the proposed Wind-down Rule would seek to 
prevent a Member, Limited Member or Settling Bank that retired its 
membership at either of the Divisions from applying for membership 
with the Transferee. Once its FICC membership is terminated, 
however, such firm would not be able to benefit from the membership 
assignment that would be effected by this proposed Wind-down Rule, 
and it would have to apply for membership directly with the 
Transferee, subject to its membership application and review 
process.
---------------------------------------------------------------------------

    The proposed Wind-down Rule would address other ex-ante matters, 
including provisions providing that its Members, Limited Members and 
Settling Banks (1) will assist and cooperate with FICC to effectuate 
the transfer of FICC's business to a Transferee, (2) consent to the 
provisions of the rule, and (3) grant FICC power of attorney to execute 
and deliver on their behalf documents and instruments that may be 
requested by the Transferee. Finally, the Proposed Rule would include a 
limitation of liability for any actions taken or omitted to be taken by 
FICC pursuant to the Proposed Rule. The purpose of the limitation of 
liability is to facilitate and protect FICC's ability to act 
expeditiously in response to extraordinary events. As noted, such 
limitation of liability would be available only following triggering of 
the Wind-down Plan. In addition, and as a separate matter, the 
limitation of liability provides Members with transparency for the 
unlikely situation when those extraordinary events could occur, as well 
supporting the legal framework within which FICC would take such 
actions. These provisions, collectively, are designed to enable FICC to 
take such acts as the Board determines necessary to effectuate an 
orderly transfer and wind-down of its business should recovery efforts 
prove unsuccessful.
GSD Rule 50 and MBSD Rule 40 (Market Disruption and Force Majeure)
    The proposed GSD Rule 50 and MBSD Rule 40 (Market Disruption and 
Force Majeure) (collectively, ``Force Majeure Rule'') would address 
FICC's authority to take certain actions upon the occurrence, and 
during the pendency, of a ``Market Disruption Event,'' as defined 
therein. Because GSD and MBSD are both divisions of FICC, the 
individual Force Majeure Rules are designed to work together. A 
decision by the Board or management of FICC that a Market Disruption 
Event has occurred in accordance with the Force Majeure Rule would 
trigger the provisions of the Force Majeure Rule of each Division 
simultaneously. The Proposed Rule is designed to clarify FICC's ability 
to take actions to address extraordinary events outside of the control 
of FICC and of the memberships of the Divisions, and to mitigate the 
effect of such events by facilitating the continuity of services (or, 
if deemed necessary, the temporary suspension of services). To that 
end, under the proposed Force Majeure Rule, FICC would be entitled, 
during the pendency of a Market Disruption Event, to (1) suspend the 
provision of any or all services, and (2) take, or refrain from taking, 
or require its Members and Limited Members to take, or refrain from 
taking, any actions it considers appropriate to address, alleviate, or 
mitigate the event and facilitate the continuation of FICC's services 
as may be practicable.
    The proposed Force Majeure Rule would identify the events or 
circumstances that would be considered a ``Market Disruption Event,'' 
including, for example, events that lead to the suspension or 
limitation of trading or banking in the markets in which FICC operates, 
or the unavailability or failure of any material payment, bank 
transfer, wire or securities settlement systems. The proposed Force 
Majeure Rule would define the governance procedures for how FICC would 
determine whether, and how, to implement the provisions of the rule. A 
determination that a Market Disruption Event has occurred would 
generally be made by the Board, but the Proposed Rule would provide for 
limited, interim delegation of authority to a specified officer or 
management committee if the Board would not be able to take timely 
action. In the event such delegated authority is exercised, the 
proposed Force Majeure Rule would require that the Board be convened as 
promptly as practicable, no later than five Business Days after such 
determination has been made, to ratify, modify, or rescind the action. 
The proposed Force Majeure Rule would also provide for prompt 
notification to the Commission, and advance consultation with 
Commission staff, when practicable, including

[[Page 38425]]

notification when an event is no longer continuing and the relevant 
actions are terminated. The Proposed Rule would require Members and 
Limited Members to notify FICC immediately upon becoming aware of a 
Market Disruption Event, and, likewise, would require FICC to notify 
Members and Limited Members if it has triggered the Proposed Rule and 
of actions taken or intended to be taken thereunder.
    Finally, the Proposed Rule would address other related matters, 
including a limitation of liability for any failure or delay in 
performance, in whole or in part, arising out of the Market Disruption 
Event. The purpose of the limitation of liability would be similar to 
the purpose of the analogous provision in the proposed Wind-down Rule, 
which is to facilitate and protect FICC's ability to act expeditiously 
in response to extraordinary events.
Proposed Changes to GSD Rules, MBSD Rules, and EPN Rules
    In order to incorporate the Proposed Rules into the Rules and the 
EPN Rules, FICC is also proposing to amend (1) GSD Rule 3A (Sponsoring 
Members and Sponsored Members), GSD Rule 3B (Centrally Cleared 
Institutional Triparty Service) and GSD Rule 13 (Funds-Only 
Settlement); (2) MBSD Rule 3A (Cash Settlement Bank Members); and (3) 
Rule 1 of the EPN Rules. As shown on Exhibit 5b, these proposed changes 
would clarify that certain types of Limited Members, as identified in 
those rules, would be subject to the Proposed Rules.
Expected Effect on and Management of Risk
    FICC believes the proposal to adopt the R&W Plan and the Proposed 
Rules would enable it to better manage its risks. As described above, 
the Recovery Plan would identify the recovery tools and the risk 
management activities that FICC may use to address risks of uncovered 
losses or shortfalls resulting from a Member default and losses arising 
from non-default events. By creating a framework for its management of 
risks across an evolving stress scenario and providing a roadmap for 
actions it may employ to monitor and, as needed, stabilize its 
financial condition, the Recovery Plan would strengthen FICC's ability 
to manage risk. The Wind-down Plan would also enable FICC to better 
manage its risks by establishing the strategy and framework for its 
orderly wind-down and the transfer of FICC's business when the Wind-
down Plan is triggered. By creating clear mechanisms for the transfer 
of the Divisions' membership and business, the Wind-down Plan would 
facilitate continued access to FICC's critical services and minimize 
market impact of the transfer and enable FICC to better manage risks 
related to its wind-down.
    FICC believes the Proposed Rules would enable it to better manage 
its risks by facilitating, and providing a legal basis for, the 
implementation of critical aspects of the R&W Plan. The Proposed Rules 
would provide Members and Limited Members with transparency around 
those provisions of the R&W Plan that relate to their and FICC's 
rights, responsibilities and obligations. Therefore, FICC believes the 
Proposed Rules would enable it to better manage its risks by providing 
this transparency and creating certainty, to the extent practicable, 
around the occurrence of a Market Disruption Event (as such term is 
defined in the proposed Force Majeure Rule), and around the 
implementation of the Wind-down Plan.
Consistency With the Clearing Supervision Act
    The stated purpose of Title VIII of the Clearing Supervision Act is 
to mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically important financial market utilities and 
strengthening the liquidity of systemically important financial market 
utilities.\55\ Section 805(a)(2) of the Clearing Supervision Act \56\ 
also authorizes the Commission to prescribe risk management standards 
for the payment, clearing, and settlement activities of designated 
clearing entities, like FICC, for which the Commission is the 
supervisory agency. Section 805(b) of the Clearing Supervision Act \57\ 
states that the objectives and principles for risk management standards 
prescribed under Section 805(a) shall be to promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system.
---------------------------------------------------------------------------

    \55\ 12 U.S.C. 5461(b).
    \56\ Id. at 5464(a)(2).
    \57\ Id. at 5464(b).
---------------------------------------------------------------------------

    FICC believes that the proposal is consistent with Section 805(b) 
of the Clearing Supervision Act because it is designed to address each 
of these objectives. The Recovery Plan and the proposed Force Majeure 
Rule would promote robust risk management and would reduce systemic 
risks by providing FICC with a roadmap for actions it may employ to 
monitor and manage its risks, and, as needed, to stabilize its 
financial condition in the event those risks materialize. Further, the 
Recovery Plan would identify the triggers of recovery tools, but would 
not provide that those triggers necessitate the use of those tools. 
Instead, the Recovery Plan would provide that the triggers of these 
tools lead to escalation to an appropriate management body, which would 
have the authority and flexibility to respond appropriately to the 
situation. Essentially, the Recovery Plan and the proposed Force 
Majeure Rule are designed to minimize losses to both FICC and Members 
by giving FICC the ability to determine the most appropriate way to 
address each stress situation. This approach would allow for proper 
evaluation of the situation and the possible impacts of the use of the 
available recovery tools in order to minimize the negative effects of 
the stress situation, and would reduce systemic risks related to the 
implementation of the Recovery Plan and the underlying recovery tools.
    The Wind-down Plan and the proposed Wind-down Rule, which would 
facilitate the implementation of the Wind-down Plan, would promote 
safety and soundness and would support the stability of the broader 
financial system, because they would establish a framework for the 
orderly wind-down of FICC's business and would set forth clear 
mechanics for the transfer of its critical services and the memberships 
of both Divisions. By designing the Wind-down Plan and this Proposed 
Rule to enable the continuity of FICC's critical services and 
membership, FICC believes they would promote safety and soundness and 
would support stability in the broader financial system in the event 
the Wind-down Plan is implemented.
    By assisting FICC to promote robust risk management, promote safety 
and soundness, reduce systemic risks, and support the stability of the 
broader financial system, as described above, FICC believes the 
proposal is consistent with Section 805(b) of the Clearing Supervision 
Act.\58\
---------------------------------------------------------------------------

    \58\ Id.
---------------------------------------------------------------------------

    FICC also believes that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, FICC 
believes that the R&W Plan, each of the Proposed Rules and the other 
proposed changes to the Rules and the EPN Rules are consistent with 
Section 17A(b)(3)(F) of the Act,\59\ the R&W Plan and each of the 
Proposed Rules are consistent with

[[Page 38426]]

Rule 17Ad-22(e)(3)(ii) under the Act,\60\ and the R&W Plan is 
consistent with Rule 17Ad-22(e)(15)(ii) under the Act,\61\ for the 
reasons described below.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78q-1(b)(3)(F).
    \60\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \61\ Id. at 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of FICC 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 FICC or 
for which it is responsible.\62\ The Recovery Plan and the proposed 
Force Majeure Rule would promote the prompt and accurate clearance and 
settlement of securities transactions by providing FICC with a roadmap 
for actions it may employ to mitigate losses, and monitor and, as 
needed, stabilize, its financial condition, which would allow it to 
continue its critical clearance and settlement services in stress 
situations. Further, as described above, the Recovery Plan is designed 
to identify the actions and tools FICC may use to address and minimize 
losses to both FICC and Members. The Recovery Plan and the proposed 
Force Majeure Rule would provide FICC's management and the Board with 
guidance in this regard by identifying the indicators and governance 
around the use and application of such tools to enable them to address 
stress situations in a manner most appropriate for the circumstances. 
Therefore, the Recovery Plan and the proposed Force Majeure Rule would 
also contribute to the safeguarding of securities and funds which are 
in the custody or control of FICC or for which it is responsible by 
enabling actions that would address and minimize losses.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Wind-down Plan and the proposed Wind-down Rule, which would 
facilitate the implementation of the Wind-down Plan, would also promote 
the prompt and accurate clearance and settlement of securities 
transactions and assure the safeguarding of securities and funds which 
are in the custody or control of FICC or for which it is responsible. 
The Wind-down Plan and the proposed Wind-down Rule would collectively 
establish a framework for the transfer and orderly wind-down of FICC's 
business. These proposals would establish clear mechanisms for the 
transfer of FICC's critical services and membership. By doing so, the 
Wind-down Plan and this Proposed Rule are designed to facilitate the 
continuity of FICC's critical services and enable Members and Limited 
Members to maintain access to FICC's services through the transfer of 
its Divisions' memberships in the event the Wind-down Plan is triggered 
by the Board. Therefore, by facilitating the continuity of FICC's 
critical clearance and settlement services, FICC believes the proposals 
would promote the prompt and accurate clearance and settlement of 
securities transactions. Further, by creating a framework for the 
transfer and orderly wind-down of FICC's business, FICC believes the 
proposals would enhance the safeguarding of securities and funds which 
are in the custody or control of FICC or for which it is responsible.
    Finally, the other proposed changes to the Rules and the EPN Rules 
would clarify the application of the Proposed Rules to certain types of 
Limited Members and would enable these Limited Members to readily 
understand their rights and obligations. As such, FICC believes these 
proposed changes would enable Limited Members that are governed by the 
applicable rules to have a better understanding of those rules and, 
thereby, would assist in promoting the prompt and accurate clearance 
and settlement of securities transactions.
    Therefore, FICC believes the R&W Plan, each of the Proposed Rules, 
and the other proposed changes are consistent with the requirements of 
Section 17A(b)(3)(F) of the Act.\63\
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    \63\ Id.
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    Rule 17Ad-22(e)(3)(ii) under the Act requires FICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by the covered clearing agency, which includes plans for the 
recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.\64\ The R&W Plan and each 
of the Proposed Rules are designed to meet the requirements of Rule 
17Ad-22(e)(3)(ii).\65\
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    \64\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \65\ Id.
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    The R&W Plan would be maintained by FICC in compliance with Rule 
17Ad-22(e)(3)(ii) in that it provides plans for the recovery and 
orderly wind-down of FICC necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses, as 
described above.\66\ Specifically, the Recovery Plan would define the 
risk management activities, stress conditions and indicators, and tools 
that FICC may use to address stress scenarios that could eventually 
prevent it from being able to provide its critical services as a going 
concern. Through the framework of the Crisis Continuum, the Recovery 
Plan would address measures that FICC may take to address risks of 
credit losses and liquidity shortfalls, and other losses that could 
arise from a Member default. The Recovery Plan would also address the 
management of general business risks and other non-default risks that 
could lead to losses.
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    \66\ Id.
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    The Wind-down Plan would be triggered by a determination by the 
Board that recovery efforts have not been, or are unlikely to be, 
successful in returning FICC to viability as a going concern. Once 
triggered, the Wind-down Plan would set forth clear mechanisms for the 
transfer of the memberships of both Divisions and FICC's business, and 
would be designed to facilitate continued access to FICC's critical 
services and to minimize market impact of the transfer. By establishing 
the framework and strategy for the execution of the transfer and wind-
down of FICC in order to facilitate continuous access to FICC's 
critical services, the Wind-down Plan establishes a plan for the 
orderly wind-down of FICC. Therefore, FICC believes the R&W Plan would 
provide plans for the recovery and orderly wind-down of the covered 
clearing agency necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses, and, as such, 
meets the requirements of Rule 17Ad-22(e)(3)(ii).\67\
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    \67\ Id.
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    As described in greater detail above, the Proposed Rules are 
designed to facilitate the execution of the R&W Plan, provide Members 
and Limited Members with transparency regarding the material provisions 
of the Plan, and provide FICC with a legal basis for implementation of 
those provisions. As such, FICC also believes the Proposed Rules meet 
the requirements of Rule 17Ad-22(e)(3)(ii).\68\
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    \68\ Id.
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    FICC has evaluated the recovery tools that would be identified in 
the Recovery Plan and has determined that these tools are 
comprehensive, effective, and transparent, and that such tools provide 
appropriate incentives to Members to manage the risks they present. The 
recovery tools, as outlined in the Recovery Plan and in the proposed 
Force Majeure Rule, provide FICC with a comprehensive set of options to 
address its material risks and support the resiliency of its critical 
services under a range of stress scenarios. FICC

[[Page 38427]]

also believes the recovery tools are effective, as FICC has both legal 
basis and operational capability to execute these tools in a timely and 
reliable manner. Many of the recovery tools are provided for in the 
Rules; Members are bound by the Rules through their membership 
agreements with FICC, and the Rules are adopted pursuant to a framework 
established by Rule 19b-4 under the Act,\69\ providing a legal basis 
for the recovery tools found therein. Other recovery tools have legal 
basis in contractual arrangements to which FICC is a party, as 
described above. Further, as many of the tools are embedded in FICC's 
ongoing risk management practices or are embedded into its predefined 
default-management procedures, FICC is able to execute these tools, in 
most cases, when needed and without material operational or 
organizational delay.
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    \69\ Id. at 240.19b-4.
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    The majority of the recovery tools are also transparent, as they 
are, or are proposed to be, included in the Rules, which are publicly 
available. FICC believes the recovery tools also provide appropriate 
incentives to Members, as they are designed to control the amount of 
risk they present to FICC's clearance and settlement system. Members' 
financial obligations to FICC, particularly their required deposits to 
the applicable Division's Clearing Fund, are measured by the risk posed 
by the Members' activity in FICC's systems, which incentivizes them to 
manage that risk which would correspond to lower financial obligations. 
Finally, FICC's Recovery Plan provides for a continuous evaluation of 
the systemic consequences of executing its recovery tools, with the 
goal of minimizing their negative impact. The Recovery Plan would 
outline various indicators over a timeline of increasing stress, the 
Crisis Continuum, with escalation triggers to FICC management or the 
Board, as appropriate. This approach would allow for timely evaluation 
of the situation and the possible impacts of the use of a recovery tool 
in order to minimize the negative effects of the stress scenario. 
Therefore, FICC believes that the recovery tools that would be 
identified and described in its Recovery Plan, including the authority 
provided to it in the proposed Force Majeure Rule, would meet the 
criteria identified within guidance published by the Commission in 
connection with the adoption of Rule 17Ad-22(e)(3)(ii).\70\
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    \70\ Supra note 44.
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    Therefore, FICC believes the R&W Plan and each of the Proposed 
Rules are consistent with Rule 17Ad-22(e)(3)(ii).\71\
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    \71\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(ii) under the Act requires FICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify, monitor, and manage its general 
business risk and hold sufficient LNA to cover potential general 
business losses so that FICC can continue operations and services as a 
going concern if those losses materialize, including by holding LNA 
equal to the greater of either (x) six months of the covered clearing 
agency's current operating expenses, or (y) the amount determined by 
the board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency.\72\ While the Capital Policy addresses how FICC holds LNA in 
compliance with these requirements, the Wind-down Plan would include an 
analysis that would estimate the amount of time and the costs to 
achieve a recovery or orderly wind-down of FICC's critical operations 
and services, and would provide that the Board review and approve this 
analysis and estimation annually. The Wind-down Plan would also provide 
that the estimate would be the ``Recovery/Wind-down Capital 
Requirement'' under the Capital Policy. Under that policy, the General 
Business Risk Capital Requirement, which is the sufficient amount of 
LNA that FICC should hold to cover potential general business losses so 
that it can continue operations and services as a going concern if 
those losses materialize, is calculated as the greatest of three 
estimated amounts, one of which is this Recovery/Wind-down Capital 
Requirement. Therefore, FICC believes the R&W Plan, as it interrelates 
with the Capital Policy, is consistent with Rule 17Ad-
22(e)(15)(ii).\73\
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    \72\ Id. at 240.17Ad-22(e)(15)(ii).
    \73\ Id.
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III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    A proposed change may be implemented in less than 60 days from the 
date the advance notice is filed, or the date further information 
requested by the Commission is received, if the Commission notifies the 
clearing agency in writing that it does not object to the proposed 
change and authorizes the clearing agency to implement the proposed 
change on an earlier date, subject to any conditions imposed by the 
Commission.
    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    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. 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-2017-805 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-2017-805. 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 Advance Notice that are filed with the 
Commission, and all written communications relating to the Advance 
Notice between the Commission and any person, other than those that may 
be withheld from the public in accordance with the provisions of 5 
U.S.C. 552, will be available for 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

[[Page 38428]]

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-2017-805 and should be submitted on 
or before August 21, 2018.

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16707 Filed 8-3-18; 8:45 am]
 BILLING CODE 8011-01-P


