[Federal Register Volume 84, Number 168 (Thursday, August 29, 2019)]
[Notices]
[Pages 45608-45617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18632]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86745; File No. SR-FICC-2019-004]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend the GSD Rulebook To 
Establish a Process To Address Liquidity Needs in Certain Situations in 
the GCF Repo and CCIT Services and Make Other Changes

August 23, 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 August 9, 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.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On August 9, 2019, FICC filed this proposed rule change as 
an advance notice (SR-FICC-2019-801) with the Commission pursuant to 
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 
19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of 
the advance notice is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the FICC 
Government Securities Division (``GSD'') Rulebook (the ``Rules'') \4\ 
to: (i) Establish a new deadline and associated late fees for 
satisfaction of net cash obligations in GCF Repo Transaction \5\ and 
CCIT Transaction \6\ activity (hereinafter ``GCF Repo/CCIT activity'') 
\7\ and remove the current 6 p.m. Collateral Allocation Obligation \8\ 
deadline; (ii) establish a process to provide liquidity to FICC in 
situations where a Netting Member or CCIT Member \9\ with a net cash 
obligation in GCF Repo/CCIT activity, that is otherwise in good 
standing, is either (1) delayed in satisfying or (2) unable to satisfy 
its cash obligation (in whole or in part); and (iii) make a 
clarification, certain technical changes and corrections, all as 
further described below.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
    \5\ ``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 Rule 6C, for 
netting and settlement by FICC pursuant to the provisions of Rule 
20. Rule 1, supra note 4.
    \6\ ``CCIT Transaction'' means a transaction that is processed 
by FICC in the CCIT Service. Because the CCIT Service leverages the 
infrastructure and processes of the GCF Repo Service, a CCIT 
Transaction must be: (i) In a Generic CUSIP Number approved for the 
GCF Repo Service and (ii) between a CCIT Member and a Netting Member 
who participates in the GCF Repo Service where the CCIT Member is 
the cash lender in the transaction. Rule 1, supra note 4.
    \7\ The GCF Repo Service is primarily governed by Rule 20 and 
enables Netting Members to trade general collateral finance 
repurchase agreement transactions based on rate, term, and 
underlying product throughout the day with brokers on a blind basis. 
The CCIT Service is governed by Rule 3B and enables tri-party 
repurchase agreement transactions in GCF Repo Securities between 
Netting Members that participate in the GCF Repo Service and 
institutional cash lenders (other than investment companies 
registered under the Investment Company Act of 1940, as amended). 
Rule 20 and Rule 3B, supra note 4.
    \8\ ``Collateral Allocation Obligation'' means the obligation of 
a Netting Member to allocate securities or cash for the benefit of 
FICC to secure such Member's GCF Net Funds Borrower Position. Rule 
1, supra note 4.
    \9\ ``CCITTM'' means Centrally Cleared Institutional 
Triparty. The terms ``Centrally Cleared Institutional Triparty 
Member'' and ``CCIT Member'' mean a legal entity other than a 
Registered Investment Company approved to participate in the FICC's 
CCIT Service as a cash lender. Rule 1, supra note 4. Eligibility to 
become a CCIT Member is described in Section 2 of Rule 3B. Rule 3B, 
Section 2, supra note 4.

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[[Page 45609]]

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

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

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

1. Purpose
    The proposed rule change would amend the Rules to: (i) Establish a 
new deadline and associated late fees for satisfaction of net cash 
obligations in GCF Repo/CCIT activity and remove the current 6 p.m. 
Collateral Allocation Obligation deadline; (ii) establish a process to 
provide liquidity to FICC in situations where a Netting Member or CCIT 
Member with a net cash obligation in GCF Repo/CCIT activity, that is 
otherwise in good standing, is either (1) delayed in satisfying or (2) 
unable to satisfy its cash obligation (in whole or in part); and (iii) 
make a clarification, certain technical changes and corrections, all as 
further described below.
(i) Proposed Change To Establish a New Deadline and Associated Late 
Fees for Satisfaction of Net Cash Obligations in GCF Repo/CCIT Activity 
and Remove the Current 6 p.m. Collateral Allocation Obligation Deadline
Securities Obligations (Collateral Allocation Obligations)
    The Rules (Section 3 of Rule 20, the Schedule of GCF Timeframes and 
the Fee Structure) currently address a Netting Member's failure to 
satisfy its Collateral Allocation Obligation on a timely basis.\10\ 
Specifically, Section 3 of Rule 20 states that Collateral Allocation 
Obligations must be satisfied by a Netting Member within the timeframes 
established for such by FICC.\11\ The current deadline in the Schedule 
of GCF Timeframes for Netting Member allocation of collateral to 
satisfy securities obligations is 4:30 p.m.\12\ This 4:30 p.m. deadline 
is the first deadline by which Netting Members that have Collateral 
Allocation Obligations must allocate their securities collateral or be 
subject to a late fee of $500 (the late fee is set forth in the Fee 
Structure of the Rules).\13\ In addition, the Schedule of GCF 
Timeframes includes a second deadline of 6 p.m. by which Netting 
Members that have Collateral Allocation Obligations must allocate their 
securities collateral; after 6 p.m., FICC will process such collateral 
allocations on a good faith basis only.\14\ These provisions are 
mirrored in Section 3 of Rule 20, which also references the ``final 
cutoff'' (i.e., the 6 p.m. deadline).\15\ Section 3 of Rule 20 also 
provides FICC's processing of such late allocations is on a good faith 
basis only.\16\ Furthermore, Section 3 of Rule 20 states that Netting 
Members that do not satisfy their Collateral Allocation Obligations by 
the close of the Fedwire Funds Service shall be deemed to have failed 
on such Position (the consequence of which shall be that such Netting 
Member would not be entitled to receive the funds borrowed, but shall 
owe interest on such funds amount).\17\
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    \10\ Rule 20, Section 3, Schedule of GCF Timeframes, and Fee 
Structure, supra note 4. Collateral Allocation Obligations do not 
apply to CCIT Members because they can only be cash lenders in the 
CCIT Transactions.
    \11\ Rule 20, Section 3, supra note 4.
    \12\ Schedule of GCF Timeframes, supra note 4.
    \13\ Fee Structure, supra note 4.
    \14\ Schedule of GCF Timeframes, supra note 4. Today, after 6:00 
p.m., FICC will process collateral allocations on a good faith 
basis, namely if FICC is able to contact both affected Netting 
Members and such Netting Members agree to settle such transaction, 
then FICC and its GCF Clearing Agent Bank will settle such 
transaction.
    \15\ Rule 20, Section 3, supra note 4.
    \16\ Id.
    \17\ Id.
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    With respect to the foregoing regarding allocation of securities 
collateral on a timely basis, FICC proposes to establish 4:30 p.m. as 
the only deadline for Netting Member allocation of collateral.\18\ In 
other words, FICC proposes to remove the current second deadline (i.e., 
6 p.m.) by which Netting Members that have Collateral Allocation 
Obligations must allocate their securities obligations. This proposed 
change would align the deadline for allocating securities obligations 
with the proposed deadline for satisfying cash obligations (i.e., 4:30 
p.m. or one hour after the close of the Fedwire Securities Service 
reversals, if later). Netting Members typically have obligations to 
satisfy outside of FICC after the collateral allocations occur at FICC. 
FICC believes that all parties (including FICC) would benefit from 
securities settlement occurring by 4:30 p.m. This is because the more 
settlements that complete earlier, the more potential operational risk 
is removed from the market. Specifically, there is interconnectivity 
between the GCF Repo market and the tri-party market outside of FICC. 
The securities collateral that is used to settle GCF Repo positions can 
be subsequently used by Netting Members to complete tri-party 
transactions outside of FICC. Therefore, the earlier that securities 
settlement occurs in the GCF Repo Service, the less potential 
operational risk of incomplete tri-party transactions outside of FICC. 
Under the current Rules, the second deadline of 6 p.m. creates an 
environment of later settlement both at FICC and outside of FICC. Even 
though Netting Members are generally abiding by the 4:30 p.m. 
securities allocation deadline, FICC would like to address the 
possibility of later settlement by deleting the 6 p.m. deadline. 
Therefore, by imposing 4:30 p.m. as the only deadline, FICC believes it 
would be lowering potential operational risk in the market that could 
arise if Netting Members chose to avail themselves of the current 6:00 
p.m. deadline. This risk is the risk of disorder if firms are 
attempting to fulfill GCF Repo settlement and tri-party transaction 
settlement at the same time later in the day. Under the proposal, FICC 
would continue to process collateral allocations after the 4:30 p.m. 
deadline on a good faith basis only (like it currently does for 
collateral allocations after the current 6 p.m. deadline). Netting 
Members would remain subject to the $500 late fee if they do not meet 
the 4:30 p.m. deadline unless FICC determines, in its sole discretion, 
that failure to meet this timeframe is not primarily the fault of the 
Netting Member, as currently stated in Section IX of the Fee Structure. 
This determination would be made by FICC Product Management based on 
input from the GCF Clearing Agent Bank, internal FICC Operations staff 
and the Netting Member. The Netting Member would not be charged if the 
lateness is due to the GCF Clearing Agent Bank or FICC.
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    \18\ See Schedule of GCF Timeframes, supra note 4. Currently, 
the Schedule of GCF Timeframes provides that the first deadline for 
collateral allocation is 4:30 p.m. or one hour after the close of 
the securities FedWire, if later. The reference regarding one hour 
after the FedWire close would remain, subject to a correction 
discussed below in Item II(A)1(iii) of this filing.
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Cash Obligations
    The Rules do not currently contain a deadline for a Netting 
Member's or CCIT Member's satisfaction of cash obligations in the GCF 
Repo Service and the CCIT Service. FICC proposes to establish 4:30 p.m. 
(or one hour after the close of the Fedwire Securities Service 
reversals, if later) as the deadline for a ``Net Funds Payor'' (as 
defined by this

[[Page 45610]]

proposed rule change) \19\ to satisfy their cash obligations after 
which a late fee of $500 would be imposed unless FICC determines that 
failure to meet this timeframe is not the fault of the Net Funds Payor. 
This determination would be made by FICC Product Management based on 
input from the GCF Clearing Agent Bank, internal FICC Operations staff 
and the Netting Member. The Net Funds Payor would not be charged if the 
lateness is due to the GCF Clearing Agent Bank or FICC. To encourage 
Netting Members and CCIT Members that are Net Funds Payors to satisfy 
their cash obligations by the 4:30 p.m. deadline, the proposed rule 
change would provide for progressive increases in the amount of the 
late fee for additional late occurrences. Specifically, the late fees 
would apply as follows: (a) $500 for the first occurrence (within 30 
calendar days), (b) $1,000 for the second occurrence (within 30 
calendar days), (c) $2,000 for the third occurrence (within 30 calendar 
days), and (d) $3,000 for the fourth occurrence (within 30 calendar 
days) or additional occurrences (within the 30 calendar days). The 
Rules currently set forth a late fee of $500 for late securities 
settlement. As such, for late cash settlement, FICC is also proposing 
to establish $500 as the initial late fee; however, as described above, 
there would be progressive increases in the amount of the late fee for 
additional late occurrences. FICC derived these amounts by starting 
with the equivalent late fee of $500 that is currently imposed with 
respect to late securities settlement and then increased the late fee 
amounts to provide a disincentive effect.\20\
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    \19\ FICC is proposing to add ``Net Funds Payor'' as a new 
definition as explained in Item II(A)1(iii) below.
    \20\ Because the deadline for cash settlement is newly proposed, 
FICC would like to provide a disincentive for cash lateness and, 
therefore, is proposing fee increases.
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    In addition, FICC proposes to establish additional late fees that 
would be imposed on Netting Members and CCIT Members that are Net Funds 
Payors that fail to make the required payment of cash by the close of 
the Fedwire Funds Service. Specifically, the following additional late 
fees would be imposed if cash obligations are not satisfied by the 
close of the Fedwire Funds Service (unless FICC determines that the 
failure to meet this timeframe is not primarily the fault of the Net 
Funds Payors): \21\ (a) 100 basis points on the unsatisfied cash 
obligation amount for the first occurrence (within 90 calendar 
days),\22\ (b) 200 basis points on the unsatisfied cash obligation 
amount for the second occurrence (within 90 calendar days), (c) 300 
basis points on the unsatisfied cash obligation amount for the third 
occurrence (within 90 calendar days), and (d) 400 basis points on the 
unsatisfied cash obligation amount for the fourth occurrence (within 90 
calendar days) or additional occurrences (within the 90 calendar days). 
As there is no comparative data, FICC believes these amounts in this 
section represent reasonable and scaling incentives for Netting Members 
and CCIT Members that are Net Funds Payors to satisfy their cash 
obligations in a timely manner. The proposed late fees related to the 
4:30 p.m. deadline are in flat dollar amounts whereas the proposed late 
fees related to cash obligations not being satisfied by the close of 
the Fedwire Funds Service are in basis points and based on the amount 
of unsettled cash obligations. FICC has structured its proposal in this 
way because the proposed late fees related to the 4:30 p.m. deadline 
would address lateness whereas the proposed late fee related to cash 
obligations not being satisfied by the close of the Fedwire Funds 
Service would charge for the amount of cash that was not settled.
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    \21\ This determination would be made by FICC Product Management 
based on input from the GCF Clearing Agent Bank, internal FICC 
Operations staff and the Netting Member. The Net Funds Payor would 
not be charged if the lateness is due to the GCF Clearing Agent Bank 
or FICC.
    \22\ The late fee is based on the ACT/360 day count convention, 
where ``ACT'' represents the actual number of days in the period. 
For example, assuming a first occurrence unsatisfied cash obligation 
of $100 million, the late fee would be $100 million * 100/3600000 = 
$2,777.78. This example uses the first occurrence amount. This 
calculation would apply to the rest of the proposed late fees in 
this section.
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(ii) Proposed Change To Establish a Process To Provide Liquidity to 
FICC in Situations Where a Netting Member or CCIT Member With a Net 
Cash Obligation in GCF Repo/CCIT Activity, That is Otherwise in Good 
Standing, is Either (1) Delayed in Satisfying Or (2) Unable To Satisfy 
its Cash Obligation (in Whole or in Part)
Proposed Process
    FICC is proposing to establish a process to address FICC's 
liquidity needs in situations in which a Netting Member or CCIT Member 
that is a Net Funds Payor, that is otherwise in good standing with 
FICC, is delayed or unable to satisfy (either in whole or in part) its 
GCF Repo/CCIT activity cash obligations.\23\ The proposed process would 
not apply if FICC ceases to act for the Netting Member or CCIT Member, 
in which case the close-out rules would apply.\24\ Because settlement 
of GCF Repo/CCIT activity occurs late in the day, having an established 
process to handle a non-default related liquidity need would benefit 
FICC and its members by improving FICC's ability to complete settlement 
and thereby reduce risk to FICC and the industry. This proposal would 
provide FICC with the tools to replace failed settlement with a 
financing transaction with FICC, as further described below.
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    \23\ Such delay could, for example, be due to operational issues 
experienced by the Net Funds Payor. If a Netting Member with a 
collateral obligation does not deliver its securities, FICC 
considers it a fail. However, if a Netting Member or CCIT Member 
with a cash obligation is unable to deliver its cash (and is in good 
standing), FICC intends to employ the proposed process.
    \24\ See Rule 22A, supra note 4.
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    FICC would first evaluate whether to recommend to the Board's Risk 
Committee that FICC cease to act for such Net Funds Payor. FICC would 
consider, but would not be limited to, the following factors in its 
evaluation: (i) The Net Funds Payor's current financial position, (ii) 
the amount of the outstanding payment, (iii) the cause of the late 
payment, (iv) current market conditions, and (v) the size of the 
potential overnight reverse repurchase transactions under the GCF Repo 
Allocation Waterfall MRAs (as defined below) on the GSD membership.\25\
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    \25\ FICC already has the authority to cease to act for a member 
that does not fulfill an obligation to FICC and will continually 
evaluate throughout the proposed process whether FICC will cease to 
act.
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    Pursuant to the proposal, once FICC determines that a Net Funds 
Payor is in good standing with GSD but is experiencing an issue, such 
as an operational issue, that may result in a late payment, partial 
payment or non-payment of its cash obligation on the settlement date, 
the following process would occur:
     In the case where the Net Funds Payor only satisfies part 
of its cash obligation, the GCF Clearing Agent Bank would settle the 
cash it received pursuant to such GCF Clearing Agent Bank's settlement 
algorithm (as is done today). The GCF Clearing Agent Bank has its own 
settlement algorithm, which would allocate the partial amount of cash 
received from the Net Funds Payor among the various Net Funds 
Receivers.\26\
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    \26\ An example of how the satisfaction of a partial cash 
obligation may be allocated among the Net Funds Receivers is 
provided in the third paragraph under ``Example'' in this section of 
this filing.
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     FICC would evaluate whether FICC will provide liquidity 
(in the form of end-of-day borrowing of Clearing Fund cash (``EOD 
Clearing Fund Cash,'' which is a new definition proposed to be added by 
this filing) and/or GCF

[[Page 45611]]

Clearing Agent Bank loans) to satisfy any remaining unsettled cash 
obligation of a Net Funds Payor on a pro rata basis based upon such Net 
Funds Receivers' percentage of the entire remaining amount of the 
unsettled cash obligation.
     FICC would first consider whether its GCF Clearing Agent 
Bank will provide overnight financing. Because FICC's overnight 
financing arrangements with its GCF Clearing Agent Bank are 
uncommitted, such arrangements are subject to the GCF Clearing Agent 
Bank's discretion. Financing extended by the GCF Clearing Agent Bank 
would use such bank's haircut schedule, and Clearing Fund securities 
would be used to satisfy the haircut.\27\ FICC would not set a priority 
between the Clearing Fund cash and the overnight financing arrangements 
from its GCF Clearing Agent Bank (if any) because GSD's decision to use 
either or both resources would be influenced on a case-by-case basis by 
factors such as the specific circumstances, availability of a bank 
loan, market conditions, commercial considerations and ease of 
operational execution.\28\
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    \27\ See Rule 4, Section 5, supra note 4.
    \28\ The specific circumstances that FICC would consider are the 
time of day and the size of the shortfall. Regarding the market 
conditions, FICC would consider whether there are stress events 
occurring in the market. With respect to commercial considerations, 
FICC would consider the current loan rates.
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     FICC's use of EOD Clearing Fund Cash for this situation 
would be subject to certain internal limitations. Specifically, GSD 
would establish a cap on the amount of EOD Clearing Fund Cash that may 
be used for this purpose to the lesser of $1 billion or 20 percent of 
available Clearing Fund Cash. GSD reviewed GCF and CCIT settlement 
activity for the period from July 2, 2018 through February 28, 2019 and 
noted that the average cash amount required across all 71 Members was 
between zero and $23.7 billion. Over this period, there were 27 Members 
with no cash amount required and 18 Members with an average cash amount 
of less than $1 billion. Therefore, FICC believes that the proposed cap 
would provide resources to facilitate settlement for a typical cash 
amount at a level that would not materially impact its liquidity 
resources in the event that there is a simultaneous need for liquidity 
both under the scenario this proposal is seeking to address and another 
Member-related default. GSD would not set a priority between Clearing 
Fund cash and overnight financing by the GCF Clearing Agent Bank (if 
any) because GSD's decision to use either or both resources would be 
influenced on a case-by-case basis by various factors, as described in 
the previous bullet.
     The cash amount that FICC would be able to raise from EOD 
Clearing Fund Cash and/or GCF Clearing Agent Bank loans would be 
applied to unsettled cash obligations of the Net Funds Receivers on a 
pro rata basis. The pro-ration would be based upon the percentage of 
each Net Fund Receiver's unsettled obligation versus the total amount 
of all unsettled obligations.
    For example, assume the unsettled obligations totaled $1 billion 
and the liquidity raised is $800 million. In this case, FICC would 
instruct the GCF Clearing Agent Bank(s) to apply the liquidity amount 
($800 million) to the remaining unsettled GCF Repo/CCIT obligations. 
Assume there are two Net Funds Receivers with unsettled obligations 
(one Netting/CCIT Member is short $600 million and the other is short 
$400 million). In this case, the first Net Funds Receiver would receive 
60 percent of the $800 million ($480 million) and the second Net Funds 
Receiver would receive 40 percent of the $800 million ($320 million). 
The remaining unfunded $200 million would be distributed via overnight 
reverse repurchase transactions.\29\
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    \29\ All pro-ration calculations would be rounded to the nearest 
million unless a smaller denomination is required to complete 
settlement.
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     To the extent that the amount from the application of the 
Clearing Fund cash and overnight financing arrangement (if any) is 
insufficient to cover the outstanding cash obligations, FICC would 
enter into overnight repurchase agreements with Net Funds Receivers 
that are in unsettled Net Funds Receiver Positions. These repos would 
be done pursuant to the ``GCF Repo Allocation Waterfall MRA'' (as 
proposed to be added by this filing) and would be Rules-based.
     FICC would notify each unsettled Net Funds Receiver at the 
GCF Clearing Agent Bank that did not satisfy its cash obligation, and 
each such Net Funds Receiver would be required to enter into an 
overnight reverse repurchase agreement at the applicable Generic CUSIP 
Number with FICC. The amount of such reverse repurchase agreement would 
be at the remaining unsettled amount per Net Funds Receiver. Therefore, 
amounts received by FICC from these overnight reverse repurchase 
agreements would be used to satisfy remaining unsettled cash 
obligations.
     Such reverse repurchase agreements would be entered into 
pursuant to the terms of a 1996 SIFMA Master Repurchase Agreement,\30\ 
which would be incorporated into the Rules, subject to specific changes 
set forth in the Rules. Such reverse repurchase transactions would be 
overnight trades at a market rate.\31\ The associated overnight 
interest of the reverse repurchase agreement would be debited from the 
Net Funds Payor that did not satisfy its cash obligation and credited 
to the affected Net Funds Receivers in the funds-only settlement 
process as a Miscellaneous Adjustment Amount.\32\
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    \30\ The September 1996 Securities Industry and Financial 
Markets Association Master Repurchase Agreement is available at 
http://www.sifma.org/services/standard-forms-and-documentation/mra,-gmra,-msla-and-msftas/.
    \31\ The market rate would be the overnight par weighted average 
rate at the Generic CUSIP Number level.
    \32\ See Rule 13, Section 1(m) and Rule 3B, Section 13(a)(ii), 
supra note 4.
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     Any resulting costs incurred by the Net Funds Receivers 
would be debited from the Net Funds Payor whose shortfall raised the 
need for the reverse repurchase agreement. The Net Funds Receivers 
requesting compensation in this regard would need to submit a formal 
claim to FICC. Upon review and approval by FICC, the Net Funds Receiver 
would receive a credit that would be processed in the funds-only 
settlement process as a Miscellaneous Adjustment Amount.\33\ The debit 
of the Net Funds Payor would be processed in the same way.
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    \33\ Id.
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     Unless FICC has restricted the Member's access to services 
pursuant to Rule 21 or Rule 21A or has ceased to act for the Member 
pursuant to Rule 21 or Rule 21A, the Net Funds Payor shall be permitted 
to continue to submit activity to FICC.
Example
    The following example illustrates the application of the proposed 
rule changes described above:
    Assume that Dealer A has a cash payment obligation for $100 million 
and Dealers B, C, D and E are in GCF Net Funds Receiver Positions for 
$25 million each. Assume further that by 4:30 p.m., Dealer A satisfies 
only $60 million of its cash obligation thereby leaving $40 million 
outstanding. Dealer A would be subject to a late fee of $500.
    The GCF Clearing Agent Bank satisfies transactions based upon its 
own settlement algorithms. As such, assume that the $60 million was 
settled as follows: (i) $25 million was settled with Dealer B, (ii) $10 
million was settled with Dealer C, (iii) $25 million was settled with 
Dealer D, and (iv) $0 was settled with Dealer E.
    As such, $40 million remains unfunded. Assume FICC uses its 
liquidity resources (EOD Clearing Fund

[[Page 45612]]

Cash and financing arrangements with the GCF Clearing Agent Bank (if 
available)) and is only able to raise $30 million. Dealer A would be 
responsible for the financing costs incurred by FICC. The $30 million 
borrowed by FICC would be prorated among the Netting Members in GCF Net 
Funds Receiver Positions that still have unsettled obligations. In this 
example, Dealer C has an unsettled obligation of $15 million and Dealer 
E has an unsettled obligation of $25 million. The proration calculation 
would be the percentage of the dealer's unsettled obligation versus the 
entire unsettled amount. In Dealer C's case, the $15 million unsettled 
amount is 38 percent of the $40 million total unsettled amount and in 
Dealer E's case, the $25 million unsettled amount is 62 percent of the 
$40 million. Dealer C would receive 38 percent of the $30 million that 
was raised by FICC (i.e., $11,400,000), and Dealer E would receive 62 
percent of the $30 million that was raised by FICC (i.e., $18,600,000).
    At this point, $10 million remains unsettled. This is the amount 
that would need to be satisfied using overnight reverse repos under the 
GCF Repo Allocation Waterfall MRA and would be distributed between the 
two remaining unsettled amounts with Dealer C (i.e., $3,600,000) and 
Dealer E (i.e., $6,400,000). FICC would notify these dealers and 
initiate the GCF Repo Allocation Waterfall MRA requirement with each of 
them. Dealer A would be subject to a late fee for failing to settle by 
the close of the Fedwire Funds Service. Such late fee of 100 basis 
points would be calculated based on the $40 million that Dealer A did 
not fund. In addition, the reverse repurchase agreements would be 
overnight trades at a market rate; \34\ the associated overnight 
interest of the reverse repurchase agreement would be debited from 
Dealer A and credited to Dealers C and E in funds-only settlement. If 
Dealers C and/or E incurred any damages from the cost of securing 
alternate financing, FICC would determine if such costs are 
sufficiently demonstrated and would charge Dealer A for such costs to 
the extent that they do not include special, consequential, or punitive 
damages.
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    \34\ Supra note 31.
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    Throughout the foregoing process, Dealer A is subject to 
disciplinary action, up to and including termination of its GSD 
membership. Moreover, FICC retains its right to cease to act for Dealer 
A.
(iii) Clarification, Technical Changes and Corrections
    FICC proposes to make a clarification to Section 3 of Rule 20 by 
adding a descriptive parenthetical regarding net-of-net settlement.
    FICC also proposes to make a technical change to the title of the 
``Schedule of GCF Timeframes,'' which would be amended to ``Schedule of 
GCF Repo Timeframes'' to enhance accuracy. References to ``Schedule of 
GCF Timeframes'' in Section 3 of Rule 20 would also be updated to 
``Schedule of GCF Repo Timeframes.''
    FICC also proposes to make a correction by revising the language in 
``Late Fee Related to GCF Repo Transactions'' in Section IX (Late Fees) 
of the Fee Structure from ``Fedwire reversals'' to ``Fedwire Securities 
Service reversals.'' FICC also proposes to revise ``securities 
FedWire'' to ``Fedwire Securities Service reversals'' in the Schedule 
of GCF Timeframes to be consistent with the proposed change in ``Late 
Fee Related to GCF Repo Transactions'' in Section IX (Late Fees) of the 
Fee Structure. FICC also proposes to revise the title from ``Late Fee 
Related to GCF Repo Transactions'' to ``Late Fees Related to GCF Repo 
Transactions.'' FICC believes these proposed changes would enhance 
consistency, clarity, and accuracy.
    FICC also proposes to update the current references to ``dealer,'' 
``dealers,'' or ``GCF Counterparties (``dealers'')'' in the ``Schedule 
of GCF Timeframes'' and ``Fee Structure'' to ``Netting Member'' or 
``Netting Members'' for additional clarity and consistency because the 
GCF Repo Service is not only available to Dealer Netting Members and 
FICC believes that the references to ``dealers'' may cause confusion.
    In addition, FICC proposes to update the descriptions for 3 p.m. 
and 3:30 p.m. in the Schedule of GCF Timeframes to correct certain 
descriptions that appear to have been reversed in error. Specifically, 
the description for 3 p.m. currently states that collateral allocations 
begin. However, collateral allocations actually begin at 3:30 p.m. and 
therefore, FICC proposes to correct this error by deleting the 
reference to collateral allocations beginning in the 3 p.m. description 
and adding a reference to the 3:30 p.m. description that would state 
that collateral allocations begin. Furthermore, the current 3 p.m. 
description states that notifications by FICC to banks and dealers of 
final positions occurs at this time, which is incorrect. There is not a 
strict established time for notifications by FICC to Members of final 
positions. FICC believes that it is reasonably and fairly implied that 
output would follow the cut-off for trade submission and therefore, 
does not believe the phrase ``notification by FICC to banks and dealers 
of final positions'' is necessary in the Schedule of GCF Timeframes. As 
such, FICC proposes to correct this error by deleting the reference to 
notifications by FICC to banks and dealers of final positions from the 
3 p.m. description.
    Furthermore, in connection with the proposed changes described 
herein, FICC also proposes to revise four relevant defined terms that 
indicate whether a Netting Member's obligation is a cash obligation or 
a securities obligation with respect to GCF Repo/CCIT activity (i.e., 
``GCF Net Funds Borrower Position,'' ``GCF Net Funds Borrower,'' ``GCF 
Net Funds Lender Position,'' and ``GCF Net Funds Lender''). In 
addition, FICC would add two new defined terms (i.e., ``Net Funds Payor 
Position'' and ``Net Funds Receiver Position'') to distinguish the 
foregoing defined terms from a Netting Member's or CCIT Member's after 
net-of-net settlement.\35\
---------------------------------------------------------------------------

    \35\ A Netting Member's or CCIT Member's obligation prior to 
net-of-net settlement describes such Netting Member's or CCIT 
Member's obligation for that particular Business Day. A Netting 
Member's or CCIT Member's obligation after net-of-net settlement 
describes such Netting Member's or CCIT Member's obligation after 
its obligation from the previous Business Day has been netted with 
its obligation for that particular Business Day.
---------------------------------------------------------------------------

    Specifically, there are currently four relevant defined terms that 
indicate whether a Netting Member's obligation is a cash obligation or 
a securities obligation with respect to GCF Repo/CCIT activity. These 
terms are: ``GCF Net Funds Borrower Position,'' \36\ ``GCF Net Funds 
Borrower,'' ``GCF Net Funds Lender Position,'' \37\ and ``GCF Net

[[Page 45613]]

Funds Lender.'' With respect to CCIT Members, which are only permitted 
to initiate transactions as cash lenders for submission to GSD, the 
applicable definitions are ``GCF Net Funds Lender Position'' and ``GCF 
Net Funds Lender.'' The four existing terms represent a Netting 
Member's and CCIT Member's position with respect to GCF Repo/CCIT 
activity that is processed by GSD on a particular Business Day prior to 
net-of-net settlement \38\ and the proposed rule change would add 
language in the definitions of ``GCF Net Funds Borrower Position'' and 
``GCF Net Funds Lender Position'' to make this clear.
---------------------------------------------------------------------------

    \36\ The term ``GCF Net Funds Borrower Position'' means, with 
respect to a particular Generic CUSIP Number, both the amount of 
funds that a Netting Member has borrowed as the net result of its 
outstanding GCF Repo Transactions and CCIT Transactions and the 
equivalent amount of Eligible Netting Securities and/or cash that 
such Netting Member is obligated, pursuant to Rule 20, to allocate 
to the Corporation to secure such borrowing (such Netting Member 
holding a GCF Net Funds Borrower Position, a ``GCF Net Funds 
Borrower''). See Rule 1, supra note 4.
    \37\ The term ``GCF Net Funds Lender Position'' means, with 
respect to a particular Generic CUSIP Number, both the amount of 
funds that a Netting Member or CCIT Member has lent as the result of 
its outstanding GCF Repo Transactions or its outstanding CCIT 
Transactions, as applicable, and the equivalent amount of Eligible 
Netting Securities and/or cash that such Netting Member or CCIT 
Member, as applicable, is entitled, pursuant to Rule 20, to be 
allocated for its benefit to secure such loan (such Netting Member 
or CCIT Member holding a GCF Net Funds Lender Position, a ``GCF Net 
Funds Lender''). See Rule 1, supra note 4.
    \38\ Net-of-net settlement is described in Section 3 of Rule 20 
and the proposal would add a parenthetical to clarify that such 
applicable paragraph in this section refers to net-of-net 
settlement, as described further below.
---------------------------------------------------------------------------

    To distinguish the foregoing from a Netting Member's or CCIT 
Member's position after net-of-net settlement, FICC proposes to amend 
Rule 1 (Definitions) to add two new defined terms, ``Net Funds Payor 
Position'' and ``Net Funds Receiver Position'' with two additional 
defined terms embedded within these definitions, ``Net Funds Payor'' 
and ``Net Funds Receiver,'' respectively. These defined terms would 
represent a Netting Member's and CCIT Member's, as applicable, position 
in GCF Repo/CCIT activity as a result of net-of-net settlement. 
Specifically, as a result of net-of-net settlement, a Netting Member or 
CCIT Member may be either in a cash debit position (i.e., in a ``Net 
Funds Payor Position'' or a ``Net Funds Payor'') or cash credit 
position (i.e., in a ``Net Funds Receiver Position'' or a ``Net Funds 
Receiver'').\39\
---------------------------------------------------------------------------

    \39\ Even though CCIT Members can only initiate cash lending 
transactions, they could be Net Funds Receivers. For example, assume 
that on Monday, a CCIT Member entered into a CCIT Transaction to 
lend $125 million and on Tuesday, the same CCIT Member entered into 
a CCIT Transaction to lend $50 million in the same Generic CUSIP 
Number. On Tuesday, after net-of-net settlement, the CCIT Member 
would be in a Net Funds Receiver Position of $75 million.
---------------------------------------------------------------------------

(iv) Implementation Timeframe
    Subject to the approval of this proposed rule change and no 
objection to the related advance notice filing (the ``Advance Notice 
Filing'') \40\ by the Commission, FICC would implement the proposed 
changes no later than 60 days after the later of the approval of the 
proposed rule change and no objection to the Advance Notice Filing by 
the Commission. FICC would announce the effective date of the proposed 
changes by Important Notice posted to its website.
---------------------------------------------------------------------------

    \40\ Supra note 3.
---------------------------------------------------------------------------

2. Statutory Basis
    FICC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, FICC believes 
that the proposed rule change is consistent with Sections 17A(b)(3)(F) 
and 17A(b)(3)(D) of the Act \41\ and Rule 17Ad-22(e)(7)(i), (ii), and 
(viii),\42\ as promulgated under the Act, for the reasons described 
below.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78q-1(b)(3)(D) and (F).
    \42\ 17 CFR 240.17Ad-22(e)(7)(i), (ii), and (viii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the Rules be designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions.\43\ FICC believes that the proposed rule 
changes described in Item II(A)1(i) of this filing regarding the 
establishment of a new deadline and associated late fees and the 
removal of a current deadline would help promote the prompt and 
accurate clearance and settlement of securities transactions.\44\ FICC 
believes that the proposed rule changes would incent Netting Members 
and CCIT Members to meet their settlement obligations on a more timely 
basis and thereby better enable FICC to settle on a timely basis. As 
described above, under the current Rules, the second deadline of 6 p.m. 
creates an environment of later settlement both at FICC and outside of 
FICC. Even though Netting Members are generally abiding by the 4:30 
p.m. securities allocation deadline, FICC would like to address the 
possibility of later settlement by deleting the 6 p.m. deadline. FICC 
believes that the proposed removal of the 6 p.m. deadline for 
satisfaction of Collateral Allocation Obligations would also incent 
members to satisfy their securities obligations earlier in the day 
because after the 4:30 p.m. deadline, FICC would process Collateral 
Allocation Obligations on a good faith basis only. As such, FICC 
believes imposing 4:30 p.m. as the only deadline would help enable FICC 
to complete settlement on a more timely basis. In addition, as noted 
above, Netting Members typically have obligations to satisfy outside of 
FICC after the collateral allocations occur at FICC. As described 
above, specifically, there is interconnectivity between the GCF Repo 
market and the tri-party market outside of FICC. The securities 
collateral that is used to settle GCF Repo positions can be 
subsequently used by Netting Members to complete tri-party transactions 
outside of FICC. Therefore, FICC believes that the earlier that 
securities settlement occurs in the GCF Repo Service, the less 
potential operational risk of incomplete tri-party transactions outside 
of FICC. By imposing 4:30 p.m. as the only deadline, FICC believes it 
would be lowering potential operational risk in the market that could 
arise if Netting Members chose to avail themselves of the current 6 
p.m. deadline. This risk is the risk of disorder if firms are 
attempting to fulfill settlement and tri-party transaction settlement 
at the same time later in the day. As such, FICC believes that timely 
settlement at FICC would help with the timely completion of onward 
processing outside FICC. Therefore, FICC believes that these proposed 
changes are designed to help promote the prompt and accurate clearance 
and settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\45\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78q-1(b)(3)(F).
    \44\ Id.
    \45\ Id.
---------------------------------------------------------------------------

    FICC also believes that the proposed rule changes to make a 
clarification, technical changes and corrections described in Item 
II(A)1(iii) of this filing are designed to provide technical accuracy 
and additional clarity to Members, which would then help Members to 
better understand the functioning of the Rules and thereby are designed 
to help promote the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act.\46\
---------------------------------------------------------------------------

    \46\ Id.
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the Rules be designed 
to assure the safeguarding of securities and funds which are in the 
custody or control of FICC or for which it is responsible, consistent 
with Section 17A(b)(3)(F) of the Act.\47\ FICC believes that the 
proposed changes described in Item II(A)1(ii) above to establish a 
process to provide liquidity to FICC in situations where a Netting 
Member or CCIT Member with a net cash obligation in GCF Repo/CCIT 
activity, that is otherwise in good standing, is either (1) delayed in 
satisfying or (2) unable to satisfy its cash obligation (in whole or in 
part) would help assure the safeguarding of securities and funds which 
are in the custody or control of FICC or for which it is responsible, 
consistent with Section 17A(b)(3)(F) of the Act.\48\ This is because 
the proposed rule changes would provide a process for FICC to raise 
liquidity to complete settlement. By enabling FICC to complete 
settlement, FICC and its members would be less likely to be faced with 
the uncertainty of unsettled obligations and the risks related thereto.

[[Page 45614]]

As such, FICC believes that these proposed rule changes are designed to 
assure the safeguarding of securities and funds which are in the 
custody or control of FICC or for which it is responsible, consistent 
with Section 17A(b)(3)(F) of the Act.\49\
---------------------------------------------------------------------------

    \47\ Id.
    \48\ Id.
    \49\ Id.
---------------------------------------------------------------------------

    Section 17A(b)(3)(D) of the Act, which requires, in part, that the 
Rules provide for the equitable allocation of reasonable dues, fees, 
and other charges among participants.\50\ As described above, FICC 
proposes to establish (1) late fees for Net Funds Payors that do not 
satisfy their cash obligations by the proposed deadline of 4:30 p.m. 
and (2) additional late fees for Net Funds Payors that do not satisfy 
their cash obligations by the close of the Fedwire Funds Service. FICC 
believes these proposed changes to establish late fees for satisfaction 
of net cash obligations in GCF Repo/CCIT activity is consistent with 
Section 17A(b)(3)(D) of the Act.\51\
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78q-1(b)(3)(D).
    \51\ Id.
---------------------------------------------------------------------------

    As described above, FICC would establish an initial late fee of 
$500 for Net Funds Payors that do not satisfy their cash obligations by 
the proposed deadline of 4:30 p.m. To encourage Netting Members and 
CCIT Members that are Net Funds Payors to satisfy their cash 
obligations by the proposed 4:30 p.m. deadline, FICC would also 
establish progressive increases in the amount of the late fee for 
additional late occurrences (i.e., $1,000 for the second occurrence 
(within 30 calendar days), $2,000 for the third occurrence (within 30 
calendar days), and $3,0000 for the fourth occurrence (within 30 
calendar days) or additional occurrences (within the 30 calendar 
days)). FICC believes these proposed late fees for failure to satisfy 
cash obligations by the proposed deadline of 4:30 p.m. would provide 
for the equitable allocation of reasonable fees among participants. 
Specifically, FICC believes these proposed late fees are equitably 
allocated because they would apply to all Net Funds Payors that do not 
satisfy their cash obligations by the proposed deadline of 4:30 p.m. 
FICC also believes that the proposed initial late fee for late cash 
settlement of $500 is reasonable because it would be aligned with the 
current late fee of $500 for late securities settlement. FICC derived 
the initial late fee for late cash settlement from the late fee of $500 
that is currently imposed for late securities settlement. FICC also 
believes that the progressive increases in the amount of the late fee 
for additional late occurrences are reasonable because FICC believes 
these progressive increases would encourage Net Funds Payors to satisfy 
their cash obligations by the proposed 4:30 p.m. deadline and would 
provide a disincentive for cash lateness. Furthermore, Net Funds Payor 
would not be charged the proposed late fee if the lateness is due to 
the GCF Clearing Agent Bank or FICC. As such, FICC believes these 
proposed late fees for Net Funds Payors that do not satisfy their cash 
obligations by the proposed deadline of 4:30 p.m. are consistent with 
Section 17A(b)(3)(D) of the Act.\52\
---------------------------------------------------------------------------

    \52\ Id.
---------------------------------------------------------------------------

    In addition, as described above, FICC proposes to establish 
additional late fees that would be imposed on Net Funds Payors that 
fail to make the required payment of cash by the close of the Fedwire 
Funds Service. Specifically, FICC proposes to establish the following 
additional late fees: (i) 100 Basis points on the unsatisfied cash 
obligation amount for the first occurrence (within 90 calendar days), 
(ii) 200 basis points on the unsatisfied cash obligation amount for the 
second occurrence (within 90 calendar days), (iii) 300 basis points on 
the unsatisfied cash obligation amount for the third occurrence (within 
90 calendar days), and (iv) 400 basis points on the unsatisfied cash 
obligation amount for the fourth occurrence (within 90 days) or 
additional occurrences (within the 90 calendar days). FICC believes 
these proposed changes to establish additional late fees for failure to 
make the required payment of cash by the close of the Fedwire Funds 
Service would provide for the equitable allocation of reasonable fees 
among participants because the proposal would apply to all Net Funds 
Payors that have failed to make such cash payment by the close of the 
Fedwire Funds Service. FICC also believes these proposed additional 
late fees are reasonable. Specifically, FICC believes that, as there is 
no comparative data, these proposed additional late fees represent 
reasonable and scaling incentives for Net Funds Payors to satisfy their 
cash obligations in a timely manner. Furthermore, Net Funds Payors 
would not be charged the proposed additional fee if the lateness is due 
to the GCF Clearing Bank or FICC. Also, these proposed additional late 
fees are in basis points and applied to the amount of the unsettled 
cash obligations in order to charge for the amount of cash that was not 
settled. As such, FICC believes these proposed late fees for Net Funds 
Payors that fail to make the required payment of cash by the close of 
the Fedwire Funds Service are consistent with Section 17A(b)(3)(D) of 
the Act.\53\
---------------------------------------------------------------------------

    \53\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(i) requires FICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively measure, monitor, and manage the liquidity risk 
that arises in or is borne by the covered clearing agency, including 
measuring, monitoring, and managing its settlement and funding flows on 
an ongoing and timely basis, and its use of intraday liquidity by 
maintaining sufficient liquid resources to effect same-day settlement 
of payment obligations in the event of a default of the participant 
family that would generate the largest aggregate payment obligation for 
the covered clearing agency in extreme but plausible market 
conditions.\54\ FICC believes that the proposal would be consistent 
with Rule 17Ad-22(e)(7)(i) because the GCF Repo Allocation Waterfall 
MRA would help FICC maintain sufficient liquid resources to settle the 
same-day cash obligations of a Netting Member or CCIT Member that is 
otherwise in good standing with FICC but (i) is delayed in satisfying 
its cash obligation related to its GCF Repo/CCIT activity or (ii) does 
not fulfill, or only partially fulfills, such cash obligation.\55\ FICC 
believes that the proposal would be consistent with Rule 17Ad-
22(e)(7)(i) because the GCF Repo Allocation Waterfall MRA would be 
sized based on the actual liquidity need which would help FICC maintain 
sufficient liquid resources to settle the cash obligations of a Netting 
Member.\56\ The GCF Repo Allocation Waterfall MRA would be a committed 
arrangement that would be available to avoid unwinding, revoking, or 
delaying same-day settlement obligations. All transactions entered into 
pursuant to the GCF Allocation Waterfall MRA are designed to be readily 
available to meet the cash obligations owed to non-defaulting Netting 
Members in instances where existing resources (i) may not be readily 
available after 4:30 p.m. to permit timely settlement or (ii) are 
maintained primarily to settle the outstanding transactions in the 
event of a default of a Member and its entire affiliated family.
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17Ad-22(e)(7)(i).
    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(ii) requires FICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively measure, monitor, and manage the liquidity risk 
that arises in or is borne by the covered clearing agency,

[[Page 45615]]

including measuring, monitoring, and managing its settlement and 
funding flows on an ongoing and timely basis, and its use of intraday 
liquidity by holding qualifying liquid resources \57\ sufficient to 
meet the minimum liquidity resource requirement under Rule 17Ad-
22(e)(7)(i) in each relevant currency for which the covered clearing 
agency has payment obligations owed to clearing Members.\58\ FICC 
believes that the proposed rule change would be consistent with Rule 
17Ad-22(e)(7)(ii) because the GCF Repo Allocation Waterfall MRA would 
be a committed arrangement,\59\ and all transactions entered into 
pursuant to the GCF Repo Allocation Waterfall MRA are designed to be 
readily available to meet the cash obligations owed to Netting 
Members.\60\
---------------------------------------------------------------------------

    \57\ ``Qualifying liquid resources'' means, for any covered 
clearing agency, the following, in each relevant currency: (i) Cash 
held either at the central bank of issue or at creditworthy 
commercial banks; (ii) Assets that are readily available and 
convertible into cash through prearranged funding arrangements, such 
as: (A) Committed arrangements without material adverse change 
provisions, including (1) Lines of credit; (2) Foreign exchange 
swaps; and (3) Repurchase agreements; or (B) Other prearranged 
funding arrangements determined to be highly reliable even in 
extreme but plausible market conditions by the board of directors of 
the covered clearing agency following a review conducted for this 
purpose not less than annually; and (iii) Other assets that are 
readily available and eligible for pledging to (or conducting other 
appropriate forms of transactions with) a relevant central bank, if 
the covered clearing agency has access to routine credit at such 
central bank in a jurisdiction that permits said pledges or other 
transactions by the covered clearing agency. 17 CFR 240.17Ad-
22(a)(14).
    \58\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \59\ See 17 CFR 240.17Ad-22(a)(14).
    \60\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(viii) requires FICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively measure, monitor, and manage the liquidity risk 
that arises in or is borne by the covered clearing agency, including 
measuring, monitoring, and managing its settlement and funding flows on 
an ongoing and timely basis, and its use of intraday liquidity by 
addressing foreseeable liquidity shortfalls that would not be covered 
by the covered clearing agency's liquid resources and seek to avoid 
unwinding, revoking, or delaying the same-day settlement of payment 
obligations.\61\ FICC believes that the proposed rule change would be 
consistent with Rule 17Ad-22(e)(7)(viii) because the GCF Repo 
Allocation Waterfall MRA would be a committed arrangement, and all 
transactions entered into pursuant to the GCF Repo Allocation Waterfall 
MRA are designed to be readily available to settle same-day cash 
obligations owed to non-defaulting Netting Members.\62\
---------------------------------------------------------------------------

    \61\ 17 CFR 240.17Ad-22(e)(7)(viii).
    \62\ Id.
---------------------------------------------------------------------------

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

    FICC believes that the proposed rule changes described in Item 
II(A)1(i) of this filing to establish a new deadline and associated 
late fees for satisfaction of net cash obligations in GCF Repo/CCIT 
activity could impose a burden on competition. Specifically, Members 
that do not meet the applicable deadlines would be subject to late fees 
and this could burden Members with lower operating costs. However, FICC 
does not believe that this would in and of itself create a significant 
burden on competition because FICC believes that Members would need to 
violate the deadlines numerous times for the fees to have a significant 
burden on their operating costs. Whether the proposed basis point fees 
would create a significant burden on competition would depend on the 
financial status of each individual firm and the amount of the fee. 
Regardless of whether the burden on competition resulting from the 
proposed rule changes referenced in this paragraph would be 
significant, FICC believes that such burden on competition would be 
necessary and appropriate in furtherance of the Act.\63\
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Specifically, FICC believes that the proposed rule changes 
described in the previous paragraph would be necessary in furtherance 
of the Act in order to incent Netting Members and CCIT Members, as 
applicable, to meet their obligations on a timely basis.\64\ Timely 
satisfaction of settlement obligations on the part of Members would 
better enable FICC to complete its settlement process in a more timely 
manner and not have FICC and its Members left with the uncertainty of 
unsettled obligations and the risks associated thereto. This, FICC 
believes, would thereby promote the prompt and accurate clearance and 
settlement of securities transactions in furtherance of the Act.\65\
---------------------------------------------------------------------------

    \64\ Id.
    \65\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC also believes that the proposed changes described above would 
be appropriate in furtherance of the Act.\66\ Specifically, the 
proposed changes discussed in the previous paragraph track the GCF 
Repo/CCIT processing day including applicable external deadlines such 
as the close of the Fedwire Funds Service, to which all Netting Members 
and CCIT Members participating in FICC's services are accustomed.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Furthermore, FICC believes that: (i) The proposed late fees for Net 
Funds Payors that do not satisfy their cash obligations by the proposed 
deadline of 4:30 p.m. and (ii) the proposed additional late fees for 
Net Funds Payors that do not satisfy their cash obligations by the 
close of Fedwire Funds Service are appropriate in furtherance of the 
Act because such amounts should serve as a deterrent to lateness in 
settlement and thereby would allow these services to settle timely, 
again promoting the prompt and accurate clearance and settlement of 
securities transactions in furtherance of the Act.\67\ FICC believes 
the progressive increases in the amount of the late fee for both the 
late fee associated with the 4:30 p.m. deadline and the late fees 
associated with the close of the Fedwire Funds Service would provide 
disincentives for cash lateness. With respect to the proposed late fees 
for Net Funds Payors that do not satisfy their cash obligations by the 
proposed 4:30 p.m. deadline, FICC derived these late fees by starting 
with the equivalent late fee of $500 that is currently imposed for late 
securities settlement and then, increased the late fee amounts for each 
additional occurrence. Similarly, with respect to the proposed 
additional late fees for Net Funds Payors that do fail to make the 
required payment of cash by the close of the Fedwire Funds Service, the 
proposed additional late fees would be in basis points, based on the 
amount of the unsettled cash obligations, and would also increase with 
additional occurrences. Therefore, FICC believes these represent 
reasonable and scaling incentives for Net Funds Payors to satisfy their 
cash obligations in a timely manner. As such, FICC believes these 
proposed late fees would better allow these services to settle timely, 
and therefore, promote the prompt and accurate clearance and settlement 
of securities transactions in furtherance of the Act.\68\
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78q-1(b)(3)(F).
    \68\ Id.
---------------------------------------------------------------------------

    In addition, as described above, FICC believes that (i) the 
proposed late fees for Net Funds Payors that do not satisfy their cash 
obligations by the proposed deadline of 4:30 p.m. and (ii) the proposed 
additional late fees for Net Funds Payors that do not satisfy their 
cash obligations by the close of Fedwire Funds Service are appropriate 
in furtherance of the Act because they would provide for the equitable 
allocation of reasonable fees among

[[Page 45616]]

participants, in furtherance of the Act.\69\ As described above, FICC 
believes that these proposed fees provide for the equitable allocation 
of reasonable fees among Net Funds Payors because they would apply to 
all Net Funds Payors and would not be imposed if the lateness is due to 
the GCF Clearing Agent Bank or FICC. Furthermore, FICC believes that 
the proposed fees are reasonable because FICC has structured these 
proposed fees so that the proposed late fees associated with the 4:30 
p.m. deadline would address lateness whereas the proposed additional 
late fees associated with the close of the Fedwire Funds Service would 
charge for the amount of cash that was not settled. For both of these 
proposed fees, Net Funds Payors would not be charged if the lateness is 
due to the GCF Clearing Agent Bank or FICC. As described in greater 
detail above, FICC also believes these proposed late fees would 
encourage Net Funds Payors to satisfy their cash obligations in a 
timely manner. Therefore, FICC believes these proposed late fees are 
appropriate in furtherance of the Act.\70\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78q-1(b)(3)(D) and 15 U.S.C. 78q-1(b)(3)(I).
    \70\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    FICC believes that the proposal to delete the current 6 p.m. 
deadline for Collateral Allocation Obligations (which functions as the 
second deadline for Collateral Allocation Obligations after which such 
allocations are processed by FICC on a good faith basis only \71\) and 
to instead provide that FICC would process such Allocations on a good 
faith basis only after 4:30 p.m. could impose a burden on competition 
because it would remove the option of having additional time. 
Specifically, under the current Rules, Members have an hour and half 
more.
---------------------------------------------------------------------------

    \71\ Rule 20, Section 3 and Schedule of GCF Timeframes, supra 
note 4.
---------------------------------------------------------------------------

    FICC does not believe that this proposed rule change would result 
in a significant burden on competition because Members today are 
generally not availing themselves of the 6 p.m. deadline and most 
allocations are occurring by 4:30 p.m.\72\ Regardless of whether the 
burden on competition resulting from the proposed rule change 
referenced in this paragraph would be significant, FICC believes that 
such burden on competition would be necessary and appropriate in 
furtherance of the Act.\73\ Specifically, FICC believes the proposed 
change to delete the 6 p.m. deadline for Collateral Allocation 
Obligations and process such allocations on a good faith basis only 
from 4:30 p.m. on is necessary in order to further encourage timely 
securities settlement earlier in the processing day. Such timely 
settlement at FICC would enable FICC to better promote the prompt and 
accurate clearance and settlement of securities transactions as 
required by the Act.\74\ In addition, such timely settlement would 
facilitate the processing of securities movements that could occur 
outside of FICC once FICC completes settlement.
---------------------------------------------------------------------------

    \72\ As stated above, it is the risk that Members could use the 
6:00 p.m. deadline that FICC is proposing to eliminate.
    \73\ 15 U.S.C. 78q-1(b)(3)(I).
    \74\ 15 U.S.C. 78q-1(b)(3)(F).
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    FICC also believes that this proposed change would be appropriate 
in furtherance of the Act \75\ because all participating Netting 
Members are subject and accustomed to the 4:30 p.m. deadline today, 
which is the deadline to which the current late fee applies.\76\ As 
such, FICC is already encouraging Netting Members to satisfy their 
Collateral Allocation Obligations by 4:30 p.m. In addition, under the 
proposed rule change, FICC would continue to process such allocations 
after 4:30 p.m., as long as both counterparties can be reached to 
assist FICC in doing so, and FICC would do so after 6 p.m. as well. As 
such, FICC believes that any burden of competition caused by the 
proposed removal of the 6 p.m. deadline and the processing of 
Collateral Allocation Obligations after 4:30 p.m. would be necessary 
and appropriate in furtherance of the Act.\77\
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    \75\ 15 U.S.C. 78q-1(b)(3)(I).
    \76\ Schedule of GCF Timeframes, supra note 4.
    \77\ 15 U.S.C. 78q-1(b)(3)(I).
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    FICC believes that the proposed rule changes described in Item 
II(A)1(ii) of this filing to establish a process to provide liquidity 
to FICC in situations where a Netting Member or CCIT Member with a net 
cash obligation in GCF Repo/CCIT activity, that is otherwise in good 
standing, is either (1) delayed in satisfying or (2) unable to satisfy 
its cash obligation (in whole or in part) could impose a burden on 
competition. Specifically, affected Members that would be required to 
enter into reverse repos with FICC under the proposal could incur 
financing costs and this could negatively affect their operating costs. 
Whether such burden could be significant would depend on the facts 
surrounding each affected Member's circumstances, including the amount 
of the required reverse repo and the associated financing costs and how 
this figure compares to the Member's financial position. Regardless of 
whether the burden on competition is deemed significant, FICC believes 
these proposed rule changes would be necessary and appropriate in 
furtherance of the Act.\78\
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    \78\ Id.
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    Specifically, FICC believes that the proposed rule changes 
referenced in the previous paragraph would be necessary in furtherance 
of the Act because the use of the proposed reverse repo would better 
enable FICC to complete GCF Repo/CCIT settlement.\79\ This is because 
the proposed rule changes would better enable FICC to obtain requisite 
liquidity to complete settlement by the end of the business day by 
establishing a committed, rules-based arrangement that is readily 
available to cover remaining unsettled amounts. As such, the proposed 
rule changes would help FICC to promote the prompt and accurate 
clearance and settlement of securities transactions in furtherance of 
the Act.\80\
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    \79\ Id.
    \80\ 15 U.S.C. 78q-1(b)(3)(F).
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    FICC also believes that the proposed rule changes described in the 
previous paragraph would be appropriate in furtherance of the Act.\81\ 
This is because the amount of the reverse repo for each Netting Member 
and CCIT Member would be limited to the remaining unsettled amount of 
each such Netting Member and CCIT Member; this means that a Netting 
Member and CCIT Member would only need to cover liquidity up to the 
amount of their own outstanding positions. Moreover, employing a 
reverse repo is an effective means for FICC to raise liquidity because 
it would be operationally efficient to require affected Members to hold 
their securities deliveries and thereby provide FICC with the requisite 
liquidity to compete settlement. In addition, any resulting costs 
incurred by FICC and/or Net Funds Receivers from employing the reverse 
repo would be debited from the Net Funds Payor whose shortfall caused 
the liquidity need. The Net Funds Receivers requesting compensation in 
this regard would be required to provide proof of commercially 
reasonable expenses and would need to submit a formal claim to FICC. 
Upon approval by FICC, the Net Funds Receiver would receive a credit 
that would be processed in the Funds-Only Settlement process as a 
Miscellaneous Adjustment Amount and the debit for the Net Funds Payor 
would be processed in the same way. As such, FICC believes that any 
burden on competition imposed by the proposed rule changes referenced 
in the previous

[[Page 45617]]

paragraph would be necessary and appropriate in furtherance of the 
Act.\82\
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    \81\ 15 U.S.C. 78q-1(b)(3)(I).
    \82\ Id.
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    FICC does not believe that the proposed clarification and technical 
changes and corrections described in Item II(A)1(iii) of this filing 
would impose a burden on competition because these are all non-
substantive clarifying changes and corrections that would not change or 
affect Members' substantive rights or obligations.

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

    Written comments relating to the proposed rule changes have not 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2019-004 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-2019-004. 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-2019-004 and should be submitted on 
or before September 19, 2019.
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    \83\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\83\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18632 Filed 8-28-19; 8:45 am]
BILLING CODE 8011-01-P


