[Federal Register Volume 84, Number 79 (Wednesday, April 24, 2019)]
[Notices]
[Pages 17204-17207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08204]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85686; File No. SR-FICC-2019-002]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Include References to Uniform Mortgage-Backed Securities

April 18, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 9,

[[Page 17205]]

2019, Fixed Income Clearing Corporation (``FICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by the clearing agency. FICC filed the proposed rule change 
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(4)(i) 
thereunder.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4).
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to the FICC 
Government Securities Division (``GSD'') Rulebook, the Methodology 
Document--GSD Initial Market Risk Margin Model (the ``GSD Methodology 
Document,'' together with the GSD Rulebook, the ``GSD Rules''), the 
FICC Mortgage-Backed Securities Division (``MBSD'') Clearing Rules, and 
the Methodology and Model Operations Document--MBSD Quantitative Risk 
Model (the ``MBSD Methodology Document,'' together with the MBSD 
Clearing Rules, the ``MBSD Rules'') to include references, as described 
below, to a new type of mortgage-backed securities, referred to as 
uniform mortgage-backed securities (``UMBS''), issued by the Federal 
National Mortgage Association (``Fannie Mae'') and the Federal Home 
Loan Mortgage Corporation (``Freddie Mac'').\5\ The proposed changes 
would not require any changes to FICC's systems nor would the changes 
impact the rights and obligations of GSD Netting Members and MBSD 
Clearing Members (collectively, ``Members''). FICC would treat UMBS in 
the same manner that it currently treats Fannie Mae securities and 
Freddie Mac securities from an operational and risk management 
perspective.
---------------------------------------------------------------------------

    \5\ Terms not defined herein are defined in the GSD Rulebook, 
available at http://dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf, or the MBSD Clearing Rules, available at http://
dtcc.com/~/media/Files/Downloads/legal/rules/ficc_mbsd_rules.pdf, as 
applicable.
---------------------------------------------------------------------------

    Specifically, FICC is proposing to (1) amend the GSD Rulebook and 
the MBSD Clearing Rules to apply the current haircut for Fannie Mae 
securities and Freddie Mac securities to the proposed UMBS for purposes 
of satisfying Required Fund Deposit amounts, (2) amend the GSD Rulebook 
to apply the current Pricing Rate for CCIT Transactions backed by 
Fannie Mae securities and Freddie Mac securities to CCIT Transactions 
backed by UMBS, and (3) amend the GSD Methodology Document and MBSD 
Methodology Document to include references to UMBS. FICC is requesting 
confidential treatment of the GSD Methodology Document and the MBSD 
Methodology Document, and has filed these documents separately with the 
Commission.\6\ The proposed changes are described below.
---------------------------------------------------------------------------

    \6\ See 17 CFR 240-24b-2.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

1. Purpose
    FICC is proposing to (1) amend the GSD Rulebook and the MBSD 
Clearing Rules to apply the current haircut for Fannie Mae securities 
and Freddie Mac securities to the proposed UMBS for purposes of 
satisfying Required Fund Deposit amounts, (2) amend the GSD Rulebook to 
apply the Pricing Rate for CCIT Transactions backed by Fannie Mae 
securities and Freddie Mac securities to CCIT Transactions backed by 
UMBS, and (3) amend the GSD Methodology Document and MBSD Methodology 
Document to include references to UMBS because UMBS will be included in 
MBSD's TBA \7\ product line and will be eligible collateral for GSD's 
GCF Repo Transactions \8\ backed by mortgage-backed securities. The 
proposed changes would not require any changes to FICC's systems nor 
would the changes impact the rights and obligations of Members. FICC 
would treat UMBS in the same manner that it currently treats Fannie Mae 
securities and Freddie Mac securities from an operational and risk 
management perspective.
---------------------------------------------------------------------------

    \7\ Pursuant to the MBSD Clearing Rules, the term ``TBA'' means 
a contract for the purchase or sale of a mortgage-backed security to 
be delivered at an agreed-upon future date because as of the 
transaction date, the seller has not yet identified certain terms of 
the contract, such as the pool number and number of pools, to the 
buyer. See MBSD Rule 1, supra note 5.
    \8\ Pursuant to the GSD Rulebook, the term ``GCF Repo 
Transaction'' means a Repo Transaction involving Generic CUSIP 
Numbers the data on which are submitted to FICC on a Locked-In-Trade 
basis pursuant to the provisions of GSD Rule 6C, for netting and 
settlement by FICC pursuant to the provisions of GSD Rule 20. See 
GSD Rule 1, supra note 5.
---------------------------------------------------------------------------

(i) Background
    Under the direction of the Federal Housing Finance Agency 
(``FHFA''), Fannie Mae and Freddie Mac will create a new mortgage-
backed security pursuant to an initiative referred to as the single 
security initiative (``Single Security Initiative'').\9\
---------------------------------------------------------------------------

    \9\ See ``Uniform Mortgage-Backed Security,'' 84 FR 7793 (March 
5, 2019) (to be codified at 12 CFR 1248); ``Single Security 
Initiative and Common Securitization Platform,'' FHFA, available at 
https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Securitization-Infrastructure.aspx; ``Single Security Initiative and 
Common Securitization Platform,'' Fannie Mae, available at http://fanniemae.com/portal/funding-the-market/single-security/index.html 
(``Fannie Mae website''); and ``Single Security Initiative and the 
Common Securitization Platform,'' Freddie Mac, available at http://www.freddiemac.com/mbs/html/single_security_csp.html (``Freddie Mac 
website'').
---------------------------------------------------------------------------

    Pursuant to the FHFA's proposed rule and final rule, respectively, 
and the information that has been publicly made available on the FHFA, 
Fannie Mae and Freddie Mac websites, the stated goals of the Single 
Security Initiative are to (i) bring additional liquidity and 
fungibility to the TBA market; and (ii) to reduce or eliminate the 
trading disparities that exist today between Fannie Mae's and Freddie 
Mac's TBA securities.\10\ In connection with the Single Security 
Initiative, FICC understands the following:
---------------------------------------------------------------------------

    \10\ Id. See also ``Uniform Mortgage-Backed Security,'' 83 FR 
46889 (proposed September 17, 2018).
---------------------------------------------------------------------------

     The new mortgage-backed securities, referred to as UMBS, 
will be issued and guaranteed by either Fannie Mae or Freddie Mac, and 
backed by fixed rate 30-year, 20-year, 15-year, or 10-year single 
family mortgage loans.\11\
---------------------------------------------------------------------------

    \11\ See Freddie Mac website, supra note 9.
---------------------------------------------------------------------------

     UMBS will be single-class securities backed by mortgage 
loans purchased by either Freddie Mac or Fannie Mae.\12\
---------------------------------------------------------------------------

    \12\ See 84 FR at 7800; Fannie Mae website, supra note 9.
---------------------------------------------------------------------------

     the key features of UMBS will be the same as those of 
Fannie Mae securities, and as a result, the existing Fannie Mae 
securities will be interchangeable with UMBS.\13\
---------------------------------------------------------------------------

    \13\ See 84 FR at 7800.
---------------------------------------------------------------------------

     Freddie Mac will give market participants the opportunity 
to exchange 45-day Freddie Mac Participation Certificates and Freddie

[[Page 17206]]

Mac Giant Participation Certificates\14\ for comparable UMBS backed by 
the same mortgage loans.\15\
---------------------------------------------------------------------------

    \14\ Freddie Mac refers to its pass-through mortgage-backed 
securities as ``Participation Certificates.'' Freddie Mac Giant 
Participation Certificates are single-class pass-through securities 
that enable investors to manage their portfolios more efficiently by 
consolidating smaller participation certificates into larger giant 
participation certificates. See ``Giant PCs,'' available at http://www.freddiemac.com/mbs/products/giants.html. Introduced in 1988, 
Freddie Mac Giant Participation Certificates are popular with 
dealers and investors because they are an efficient and profitable 
way to aggregate production and investment portfolios. Id.
    \15\ See 83 FR at 46890; Fannie Mae website, supra note 9. The 
opportunity to exchange 45-day Freddie Mac Participation 
Certificates and Freddie Mac Giant Participation Certificates for 
comparable UMBS backed by the same mortgage loans occurs outside of 
FICC. FICC is not involved in any aspect of this exchange process. 
Information on this exchange is available at http://www.freddiemac.com/mbs/exchange/.
---------------------------------------------------------------------------

    Based on the information noted above, FICC will include UMBS in 
MBSD's existing TBA product line (which currently includes Fannie Mae 
securities and Freddie Mac securities) and amend the GSD Rules and the 
MBSD Rules to treat the proposed UMBS in the same manner that it treats 
existing TBA securities. As a result, MBSD Clearing Members will be 
allowed to submit TBA transactions backed by UMBS \16\ and GSD Netting 
Members will be allowed to submit GCF Repo Transactions collateralized 
with UMBS. FICC will implement these changes to give Members the 
ability to clear and settle UMBS as an Eligible Security.
---------------------------------------------------------------------------

    \16\ See GSD Rule 1, Definitions--``Eligible Security,'' and 
MBSD Rule 1, Definitions--``Eligible Security,'' supra note 5.
---------------------------------------------------------------------------

(ii) Proposed Changes
    In order to facilitate the submission of TBA transactions backed by 
UMBS and GCF Repo Transactions collateralized by UMBS, FICC is 
proposing to (1) amend the GSD Rulebook and the MBSD Clearing Rules to 
apply the current haircut for Fannie Mae securities and Freddie Mac 
securities, respectively, to the proposed UMBS used to satisfy Required 
Fund Deposit amounts, (2) amend the GSD Rulebook to apply the current 
Pricing Rate for Fannie Mae securities and Freddie Mac securities to 
CCIT Transactions backed by UMBS, and (3) amend the GSD Methodology 
Document and the MBSD Methodology Document to include references to 
UMBS. The proposed changes are set forth below:

A. Proposed Changes to the GSD Rulebook

    FICC is proposing to amend GSD Rule 1 to include the definition for 
UMBS. This term would be defined as a single-class mortgage-backed 
security backed by fixed-rate mortgage loans on one to four unit 
(single-family) properties issued by either Fannie Mae or Freddie Mac 
which has the same characteristics (such as payment delay, pooling 
prefixes and minimum pool submission amounts) regardless of whether 
Fannie Mae or Freddie Mac is the issuer. FICC is proposing this change 
because this term would be referenced in GSD Rule 3B Section 14(a)(xii) 
and GSD's Schedule of Haircuts for Eligible Clearing Fund Securities.
    FICC is also proposing to amend GSD Rule 3B Section 14(a)(xii) to 
include a reference to UMBS. This section defines the Pricing Rate for 
CCIT MRA transactions backed by U.S. Treasury securities, Non-Mortgage-
Backed U.S. Agency Securities, and Fannie Mae and Freddie Mac mortgage-
backed securities. FICC is proposing to amend this section to add UMBS 
to the references to Fannie Mae and Freddie Mac mortgage-backed 
securities. Due to this change, the calculated Pricing Rate for UMBS 
would be the same as the Pricing Rate for Fannie Mae and Freddie Mac 
mortgage-backed securities.
    FICC is also proposing to amend item 3 entitled ``MBS Pass-
Throughs'' in GSD's Schedule of Haircuts for Eligible Clearing Fund 
Securities to apply the current haircut for Fannie Mae securities and 
Freddie Mac securities to the proposed UMBS.

B. Proposed Changes to the MBSD Clearing Rules

    FICC is proposing to amend MBSD Rule 1 to include the definition 
for UMBS. This term would be defined as a single-class mortgage-backed 
security backed by fixed-rate mortgage loans on one to four unit 
(single-family) properties issued by either Fannie Mae or Freddie Mac 
which has the same characteristics (such as payment delay, pooling 
prefixes and minimum pool submission amounts) regardless of whether 
Fannie Mae or Freddie Mac is the issuer. FICC is proposing this change 
because this term would be referenced in MBSD's Schedule of Haircuts 
for Eligible Clearing Fund Securities.
    FICC is proposing to amend item 3 entitled ``MBS Pass-Throughs'' in 
MBSD's Schedule of Haircuts for Eligible Clearing Fund Securities to 
apply the current haircut for Fannie Mae securities and Freddie Mac 
securities to the proposed UMBS.

C. Proposed Changes to the GSD Methodology Document

    FICC is proposing to amend the GSD Methodology Document to include 
references to UMBS. Given that the FHFA's proposed rule and final rule 
state that the key features of the proposed UMBS would be the same as 
the current Fannie Mae securities,\17\ FICC would treat UMBS in the 
same manner that it treats Fannie Mae securities from a risk management 
perspective--meaning, FICC would calculate a GSD Netting Member's 
Required Fund Deposit amount for GCF Repo Transactions backed by UMBS 
consistent with FICC's current calculation of GCF Repo Transactions 
backed by Fannie Mae securities.
---------------------------------------------------------------------------

    \17\ 83 FR at 46890; 84 FR at 7793.
---------------------------------------------------------------------------

D. Proposed Changes to the MBSD Methodology Document

    FICC is proposing to amend the MSBD Methodology Document to include 
references to UMBS. Given that the FHFA's proposed rule and final rule 
state that the key features of the proposed UMBS would be the same as 
the current Fannie Mae securities.\18\ FICC would treat UMBS in the 
same manner that it treats Fannie Mae securities from a risk management 
perspective--meaning, FICC would calculate a MBSD Clearing Member's 
Required Fund Deposit amount for portfolios that are comprised of UMBS 
in a manner that is consistent with FICC's current calculation for 
portfolios that are comprised of Fannie Mae securities.
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

2. Statutory Basis
    Section 17A(b)(3)(F) of the Act requires, in part, that the GSD 
Rules and MBSD Rules be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\19\ As described 
above, FICC is proposing to (1) amend the GSD Rulebook and the MBSD 
Clearing Rules to apply the current haircut for Fannie Mae securities 
and Freddie Mac securities to the proposed UMBS, (2) amend the GSD 
Rulebook to apply the current Pricing Rate for CCIT Transactions backed 
by Fannie Mae securities and Freddie Mac securities to CCIT 
Transactions backed by UMBS, and (3) amend the GSD Methodology Document 
and MBSD Methodology Document to include references to UMBS.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC believes the proposed rule change would promote the prompt and 
accurate clearance and settlement of securities transactions because 
the

[[Page 17207]]

proposed UMBS would present the same risks to FICC that the existing 
Fannie Mae securities and Freddie Mac securities currently present to 
FICC given that the FHFA, Fannie Mae and Freddie Mac have indicated 
that the key characteristics of UMBS will be the same as Fannie Mae 
securities as described in Item II(A)1 above. As a result, FICC would 
treat UMBS in the same manner that it treats Fannie Mae securities and 
Freddie Mac securities. Specifically, the changes would promote the 
prompt and accurate clearance and settlement of securities because (1) 
the proposed haircut, which would be the same as the haircuts for 
Fannie Mae securities and Freddie Mac securities, would protect FICC 
from the potential decline in the value of UMBS in normal and in 
stressed market conditions, (2) the proposed Pricing Rate for CCIT 
Transactions backed by UMBS would help to ensure that such rate is 
calculated in the same manner as Fannie Mae securities and Freddie Mac 
securities for purposes of a CCIT MRA transaction, and (3) the proposed 
inclusion of UMBS in the GSD Methodology Document and MBSD Methodology 
Document would help to ensure that UMBS is treated in the same manner 
as Fannie Mae securities for risk management purposes. For these 
reasons, FICC believes that the proposed changes are consistent with 
the requirements of the Act, in particular Section 17A(b)(3)(F), cited 
above.
(B) Clearing Agency's Statement on Burden on Competition
    FICC does not believe that the proposed rule changes would have any 
impact, or impose any burden, on competition because, as described in 
Item II(A)1 above, FICC would treat UMBS in the same manner that it 
treats Fannie Mae securities and Freddie Mac securities (i.e., the same 
haircut that is currently applied to Fannie Mae securities and Freddie 
Mac securities would be applied to UMBS; the same CCIT Pricing Rate 
that is currently applied to CCIT Transactions backed by Fannie Mae 
securities and Freddie Mac securities would be applied to CCIT 
Transactions backed by UMBS; and the same risk management that is 
applied to Fannie Mae securities and Freddie Mac securities would be 
applied to UMBS). Given this, FICC's proposed treatment of UMBS would 
not give Members an advantage or a disadvantage if such Members use 
UMBS rather than Fannie Mae securities or Freddie Mac securities (1) 
for purposes of satisfying Required Fund Deposits amounts or (2) to 
back CCIT Transactions. Therefore, FICC does not believe that the 
proposed rule changes would have any impact or impose any burden on 
competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received from Members, Participants, or Others
    FICC has not received or solicited any written comments relating to 
this proposal. FICC will notify the Commission of any written comments 
received by FICC.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \20\ and paragraph (f) of Rule 19b-4 
thereunder.\21\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2019-002 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-FICC-2019-002. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2019-002 and should be submitted on 
or before May 15, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-08204 Filed 4-23-19; 8:45 am]
 BILLING CODE 8011-01-P


