[Federal Register Volume 86, Number 15 (Tuesday, January 26, 2021)]
[Notices]
[Pages 7159-7164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01587]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90948; File No. SR-FICC-2020-015]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Include Same-Day Settling 
Trades in the Risk Management, Novation, Guarantee, and Settlement 
Services of the Government Securities Division's Delivery-Versus-
Payment Service, and Make Other Changes

January 19, 2021.
    On November 19, 2020, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2020-015 (the ``Proposed Rule Change'') to (1) expand FICC's 
provision of central counterparty services to include the start leg of 
certain repurchase agreement (``repo'') transactions, and (2) enable 
participating FICC members to pair-off and settle certain offsetting 
obligations, as described more fully below.\3\ The

[[Page 7160]]

Proposed Rule Change was published for public comment in the Federal 
Register on December 8, 2020,\4\ and the Commission received no comment 
letters regarding the changes proposed therein. For the reasons 
discussed below, the Commission is approving the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On November 19, 2020, FICC also filed the proposals 
contained in the Proposed Rule Change as advance notice SR-FICC-
2020-803 (the ``Advance Notice'') with the Commission pursuant to 
Section 806(e)(1) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act''), 12 U.S.C. 
5465(e)(1), and Rule 19b-4(n)(1)(i) of the Act, 17 CFR 240.19b-
4(n)(1)(i). Notice of filing of the Advance Notice was published in 
the Federal Register on December 29, 2020. Securities Exchange Act 
Release No. 90736 (December 21, 2020), 85 FR 85743 (December 29, 
2020) (File No. SR-FICC-2020-803) (``Notice of Filing''). The 
Commission received no comment letters in response to the Notice of 
Filing.
    \4\ Securities Exchange Act Release No. 90551 (December 2, 
2020), 85 FR 79051 (December 8, 2020) (File No. SR-FICC-2020-015) 
(``Notice'').
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I. Description of the Proposed Rule Change

A. Background

    FICC, through its Government Securities Division (``GSD''), serves 
as a central counterparty (``CCP'') and provider of clearance and 
settlement services for cash-settled U.S. Treasury securities.\5\ Among 
its services, FICC provides real-time trade matching, clearing, risk 
management, and netting for repo transactions in U.S. Treasury 
securities in which all securities delivery obligations are made 
against full payment (``delivery-versus-payment'' or ``DVP'') (the 
``DVP Service'').\6\
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    \5\ FICC is composed of two divisions: GSD and the Mortgage-
Backed Securities Division (``MBSD''). GSD provides real-time trade 
matching, clearing, risk management, and netting for trades in U.S. 
government debt issues. MBSD provides real-time automated trade 
matching, trade confirmation, risk management, netting, and 
electronic pool notification to the mortgage-backed securities 
(``MBS'') market. The Proposed Rule Change deals solely with 
proposed changes to the GSD Rulebook (``Rules''), which are 
available at http://www.dtcc.com/legal/rules-and-procedures.
    \6\ In addition to the DVP Service, FICC also facilitates 
trading other types of repos. FICC's General Collateral Finance 
(``GCF'') Repo[supreg] Service enables members to trade general 
collateral finance repos based on rate, term, and underlying product 
throughout the day on a blind basis. See Rule 20--Special Provisions 
for GCF Repo Transactions, supra note 5. FICC's Centrally Cleared 
Institutional Triparty (``CCIT'') Service enables trading of tri-
party repos between members that participate in the GCF Repo Service 
and members that are institutional cash lenders (other than 
investment companies registered under the Investment Company Act of 
1940, as amended). See Rule 3B--CCIT Service, supra note 5. Unlike 
the DVP Service, the GCF Repo and CCIT Services settle via the 
triparty platform of a clearing bank. The Proposed Rule Change 
proposes changes specific to the DVP Service.
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    DVP repos involve a pair of transactions between two parties. The 
first transaction (the ``Start Leg'') consists of the sale of 
securities, in which one party delivers securities in exchange for the 
other party's delivery of cash. The second transaction (the ``End 
Leg'') occurs on a date after that of the Start Leg and consists of the 
repurchase of securities, in which the obligations to deliver cash and 
securities are the reverse of the Start Leg. The parties agree to the 
terms of the trade, including the specific securities, principal 
amount, interest rate, haircut, and date of maturity (i.e., either 
overnight or term).
    A DVP repo that is scheduled to start one or more business days 
after the submission of trade details to FICC is a ``forward starting'' 
repo. A DVP repo that is scheduled to start on the same business day as 
trade details are submitted to FICC is a ``same-day starting'' repo. 
For forward starting repos, FICC acts as CCP for both the Start Leg and 
the End Leg. However, since the inception of the DVP Service, for same-
day starting repos, FICC generally has acted as CCP for the End Leg 
only.\7\ Although FICC does not currently novate the Start Leg of same-
day starting repos, FICC collects margin from the parties for the End 
Leg on the scheduled settlement date of the Start Leg.\8\ Currently, 
the parties to a same-day starting repo settle the Start Leg 
bilaterally outside of FICC.
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    \7\ There is one limited scenario in which FICC currently acts 
as CCP for the Start Leg of a brokered same-day starting repo. 
Specifically, if the Start Leg fails to settle on its original 
scheduled settlement date, FICC currently assumes responsibility for 
settlement of the Start Leg on the evening of the original scheduled 
settlement date. See Notice, supra note 4 at 79052.
    \8\ See Notice, supra note 4 at 79052, 58.
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    The first step in the clearance and settlement process of a DVP 
repo is for the parties to submit the trade details to FICC.\9\ Upon 
receipt, FICC validates the trade details in a procedure referred to in 
FICC's Rules as ``Trade Comparison,'' which culminates in the legally 
binding and enforceable contract between FICC and the parties to the 
trade.\10\ There are different types of Trade Comparisons, depending on 
which entity submits the trade details to FICC, and the procedures, 
timing, and other applicable operational arrangements vary depending on 
the type. For example, a Bilateral Comparison occurs when the 
individual FICC members that are the parties to a trade each submit 
trade details to FICC.\11\ A Demand Comparison occurs when an Inter-
Dealer Broker (``IDB'') or qualifying non-IDB repo broker \12\ (each, a 
``Repo Broker'') submits trade details to FICC on behalf of both 
parties to a trade.\13\
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    \9\ Trade details may be submitted to FICC by, or on behalf of, 
a member in a form, manner, and timeframe prescribed by FICC's 
Rules. See Rule 5--Comparison System, supra note 5.
    \10\ Id.
    \11\ See Rule 6A--Bilateral Comparison, supra note 5.
    \12\ For purposes of the Proposed Rule Change, both IDBs and 
non-IDB repo brokers are FICC members. A qualifying non-IDB repo 
broker is one that FICC has determined: (1) Operates as a broker 
with regard to activity in a segregated repo account, and (2) agrees 
and participates in FICC's repo netting service in the same manner 
as an IDB that participates in the service. See Rule 1--Definitions, 
supra note 5.
    \13\ See Rule 6B--Demand Comparison, supra note 5.
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    FICC generally novates and guarantees settlement of a trade upon 
Trade Comparison.\14\ Additionally, on a daily basis, FICC aggregates 
and matches a member's offsetting obligations resulting from the 
member's trades, thereby netting the member's total daily settlement 
obligations.\15\ In the DVP Service, such netting takes place the night 
before the scheduled settlement date of whichever leg of the repo would 
settle on the following business day.\16\
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    \14\ See Rule 5--Comparison System, supra note 5.
    \15\ See Rule 11--Netting System, supra note 5.
    \16\ See Notice, supra note 4 at 79054-55.
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    Trades that settle bilaterally outside of FICC do not have the 
benefit of FICC's CCP services, and therefore, such trades can be 
subject to greater risk of settlement fails.\17\ Moreover, trades 
facilitated by a Repo Broker that settle outside of FICC require 
multiple bilateral securities movements between the parties to the 
trade and the Repo Broker. The greater the number of bilateral 
securities movements involved in trade settlement, the greater the 
potential for operational risk resulting in settlement fails. If the 
Start Leg of a DVP repo submitted by a Repo Broker fails to settle on 
the original scheduled settlement date, FICC currently steps in that 
evening as CCP and assumes responsibility for settling the trade.\18\ 
This process may involve FICC receiving securities from the failing 
party or netting the settlement obligations arising from the Start Leg 
against those of the End Leg of the same or another repo. FICC states 
that although its current process of centralizing the settlement of 
such failed Start Legs decreases further

[[Page 7161]]

settlement risk, the current process is operationally inefficient 
because it does not eliminate the multiple securities movements that 
give rise to the risk of settlement fails.\19\
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    \17\ There are several risk factors inherent to trades that 
clear bilaterally as opposed to trades that clear through a CCP. For 
example, the credit risk associated with bilaterally cleared trades 
remains with the original counterparties, who might not utilize 
robust and transparent margin requirements, multilateral netting, 
emergency liquidity and loss sharing arrangements, or other risk 
mitigation measures. See U.S. Department of the Treasury Report, A 
Financial System That Creates Economic Opportunities: Capital 
Markets at 78, 81 (October 2017), available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf; Joint Staff Report: The U.S. 
Treasury Market at 55 (October 15, 2014), available at https://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2014.pdf; Treasury Market 
Practices Group, White Paper on Clearing and Settlement in the 
Secondary Market for U.S. Treasury Securities at 2-4 (July 11, 
2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf.
    \18\ See Section 5, Rule 19--Special Provisions for Brokered 
Repo Transactions, supra note 5.
    \19\ See Notice, supra note 4 at 79052-53.
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B. Proposed Same-Day Settling Service

    FICC states that its members have expressed an interest in FICC 
acting as CCP for the Start Leg of same-day starting repos.\20\ FICC 
proposes to modify its Rules to include the Start Leg of same-day 
starting repos in the risk management, novation, guarantee, and 
settlement services of the DVP Service (the ``Same-Day Settling 
Service''). Upon Trade Comparison, FICC would act as CCP for the Start 
Leg of same-day starting repos, which would settle on the same business 
day. FICC's margin collection with respect to the trade would not 
change from the current process. After FICC's novation, if the Start 
Leg were to fail, the parties' obligations to and from FICC would go 
through the netting process that evening, and FICC would continue to 
apply the margin amounts collected with respect to the trade towards 
FICC's risk management of the End Leg.
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    \20\ See Notice, supra note 4 at 79052.
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    FICC believes that the Same-Day Starting Service could increase 
settlement efficiencies and decrease settlement risk because it would 
eliminate the movement of securities between members by centralizing 
the settlement of the Start Leg of same-day starting repos with 
FICC.\21\ Moreover, for same-day starting repos submitted by Repo 
Brokers, the Same-Day Settling Service would remove the Repo Broker 
from the settlement process by eliminating the multiple bilateral 
securities movements involved in the settlement of the Start Leg.
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    \21\ See Notice, supra note 4 at 79052-53, 58.
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1. Voluntary for Repo Brokers; Mandatory for Other Members
    FICC proposes to make participation in the proposed Same-Day 
Settling Service voluntary for Repo Brokers. Repo Brokers often provide 
a suite of services to their clients, including facilitating the 
bilateral settlement of the Start Leg of same-day starting repos. FICC 
states that a requirement on Repo Brokers to participate in the Same-
Day Settling Service could disrupt the current service offerings from 
Repo Brokers to their clients.\22\ Since Repo Brokers submit trade 
details to FICC on behalf of both parties to a trade, a Repo Broker 
opting out of the Same-Day Settling Service would simply result in 
settlement of the Start Leg bilaterally outside of FICC, as is done 
currently. FICC believes that providing optionality would allow Repo 
Brokers and their clients to determine whether a Repo Broker should 
participate in the Same-Day Settling Service.\23\ For participating 
Repo Brokers, FICC would no longer assume responsibility for a failed 
Start Leg because FICC would already be acting as CCP for the Start Leg 
upon Trade Comparison.
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    \22\ See Notice, supra note 4 at 79054, 58.
    \23\ Id.
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    For FICC's members that are not Repo Brokers, participation in the 
Same-Day Settling Service would be mandatory. Unlike Repo Brokers, 
FICC's individual members submit trade details with respect to their 
own side of a trade only, such that Trade Comparison only occurs after 
FICC validates the trade details submitted by both parties to the 
trade.\24\ Accordingly, if one party to a same-day starting repo could 
choose to opt out of the Same-Day Settling Service, FICC would not be 
able to act as CCP with equal and opposite settlement obligations 
between the two parties. Such trades would, therefore, need to settle 
outside of FICC as they do currently. However, unlike the clients of a 
Repo Broker, such members would not know in advance whether any given 
Start Leg would settle with FICC as CCP or bilaterally outside of FICC. 
By requiring such members to participate in the Same-Day Settling 
Service, members would have certainty that their Compared Trades would 
settle with FICC acting as CCP.
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    \24\ See Rule 6A--Bilateral Comparison, supra note 5.
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2. As-Of Trades
    For purposes of the Proposed Rule Change, same-day starting repos 
would include As-Of Trades,\25\ in which a member submits a DVP repo 
for comparison on the business day after the scheduled settlement date 
for the Start Leg, and the End Leg is the current business day or 
thereafter. FICC states that members occasionally submit As-Of Trades 
due to human or operational errors.\26\ FICC further states that it 
included As-Of Trades in the Proposed Rule Change in order to 
reasonably include as many variations of same-day starting repos as 
possible to ensure that FICC would provide consistent settlement 
processing for all same-day starting repos.\27\
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    \25\ See Rule 1, supra note 5.
    \26\ See Notice, supra note 4 at 79053.
    \27\ Id.
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    Currently, the Start Leg of an As-Of Trade settles outside of FICC. 
An End Leg scheduled to settle on the current business day also settles 
outside of FICC. However, an End Leg scheduled to settle on a date 
after the current business day settles with FICC acting as CCP. FICC 
proposes to act as CCP with respect to both the Start and End Legs of a 
same-day starting repo, regardless of the timing of the respective 
scheduled settlement dates.
3. Settlement at Contract Value or System Value
    As mentioned above, netting in the DVP Service occurs the night 
before the scheduled settlement date. Because settlement of Start Legs 
within the Same-Day Settling Service would occur on the same business 
day as Trade Comparison, such transactions would generally not be 
netted.\28\ Instead, FICC would settle such transactions on a trade-
for-trade basis. Transactions that FICC settles on a trade-for-trade 
basis (i.e., transactions that are not netted) settle at ``Contract 
Value,'' which means the dollar value at which the transaction is to be 
settled on the scheduled settlement date.\29\ Transactions that settle 
on a future date (i.e., transactions that are netted) settle at 
``System Value,'' which includes accrued interest. For consistency with 
the foregoing, FICC proposes to clarify the Rules with respect to the 
Same-Day Settling Service to reflect that any leg of a DVP repo to be 
settled on a trade-for-trade basis would settle at Contract Value, 
whereas any leg to be settled on a future date would settle at System 
Value.\30\
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    \28\ The Start Leg of same-day starting repos would be netted in 
the limited scenario of a brokered repo settlement fail on the 
scheduled settlement date. See supra note 7; Notice, supra note 4 at 
79052.
    \29\ See Rule 1--Definitions, supra note 5.
    \30\ For example, for an overnight repo that is an As-Of Trade, 
both legs would settle at Contract Value because both would settle 
on the date of Trade Comparison and therefore would not be netted. 
For an overnight repo that is a same-day starting repo, the Start 
Leg would settle on the date of Trade Comparison at Contract Value, 
whereas the End Leg would be netted that evening and settle the 
following business day at System Value. For an overnight repo that 
is forward starting (i.e., both legs would settle on dates in the 
future), both legs would be subject to netting and settle at System 
Value. Notice, supra note 4 at 79054.
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4. Late-Day Compared Trades
    FICC states that members occasionally execute same-day starting 
repos after the close of the Fedwire Securities Service (``Fedwire''), 
which is the service that members generally use for settling bilateral 
securities obligations.\31\

[[Page 7162]]

Currently, such trades settle bilaterally between the parties outside 
of FICC, provided that both parties use the same clearing bank for 
settlement. FICC proposes to include such late-day trades in the Same-
Day Settling Service (i.e., FICC proposes to act as CCP for the Start 
Leg) on a reasonable efforts basis, meaning that FICC would attempt to 
contact the parties to the trade and FICC's clearing bank to confirm 
agreement to settle the trade.\32\
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    \31\ The Fedwire is a service provided by the Federal Reserve 
Banks that includes settlement and transfer of DVP securities 
transactions. The Fedwire operates daily from 8:30 a.m. to 3:30 p.m. 
(All times herein are Eastern Time.) See Fedwire and National 
Securities Service, Federal Reserve Bank of New York (March 2015), 
available at https://www.newyorkfed.org/aboutthefed/fedpoint/fed43.html; Fedwire Securities Service, Board of Governors of the 
Federal Reserve System (July 31, 2014), available at https://www.federalreserve.gov/paymentsystems/fedsecs_about.htm.
    \32\ See Notice, supra note 4 at 79056.
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    Specifically, for members that clear at FICC's clearing bank, FICC 
would attempt to settle any same-day starting repos that are compared 
between 3:01 p.m. and 5:00 p.m., provided that (1) FICC is able to 
contact the parties to the trade and FICC's clearing bank, and (2) the 
parties and FICC's clearing bank agree to settle the trade. For members 
that do not clear at FICC's clearing bank, FICC proposes to attempt to 
settle, on a reasonable efforts basis, same-day starting repos that are 
compared during the Fedwire reversal period between 3:01 p.m. and 3:30 
p.m., provided that (1) FICC is able to contact FICC's clearing bank 
and the parties to the trade, (2) FICC's clearing bank and the parties 
to the trade confirm agreement to settle the trade, and (3) FICC's 
clearing bank, the member's clearing bank, and the Federal Reserve Bank 
of New York each permit settlement of the trade.
5. Other Changes to FICC's Rules To Incorporate the Same-Day Settling 
Service
    FICC proposes changes to several Rule provisions to ensure the 
relevant applicability of such provisions to the Same-Day Settling 
Service. FICC proposes to add a newly defined term ``Same-Day Settling 
Trade'' to capture the universe of DVP repos that would be covered by 
the Same-Day Settling Service. FICC proposes to modify the definitions 
of ``Deliver Obligation'' and ``Receive Obligation'' to include 
references to Same-Day Settling Trades. FICC proposes to modify the 
definitions of ``Settlement Value'' and ``System Value'' to contemplate 
that Same-Day Settling Trades could settle at Contract Value or System 
Value, depending on the circumstances of the trade, as described above.
    FICC proposes to incorporate Same-Day Settling Trades into the 
existing Rule provisions governing the Comparison System and Netting 
System. FICC proposes to add Rule provisions addressing eligibility 
requirements for Same-Day Settling Trades to qualify for FICC's 
novation and settlement guarantee. FICC proposes to incorporate Same-
Day Settling Trades into the Rule provisions governing how parties 
satisfy their obligations to FICC, including trades that become 
uncompared or canceled. FICC proposes to incorporate Same-Day Settling 
Trades into the Rule provisions dealing with settlement fails. Finally, 
FICC proposes to include appropriate cross-references to ensure that 
various Rule provisions related to general securities settlement apply 
to Same-Day Settling Trades.

C. Proposed Pair-Off Service

    Settlement fails occur because one party does not have inventory to 
settle with the other party on the scheduled settlement date. 
Currently, a member's obligations that remain unsettled when the 
Fedwire closes go through FICC's overnight netting system for 
settlement the following business day, and the member is subject to 
FICC's fails charge.\33\ In a scenario where a member has offsetting 
unsettled failed obligations in the same security (i.e., separate 
failed obligations to both deliver and receive the same security) after 
the close of the Fedwire, those obligations currently go through the 
overnight netting system for settlement the following day.
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    \33\ See Section 14, Rule 11--Netting System, supra note 5.
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    FICC proposes an optional service for members whereby FICC would 
pair-off a member's offsetting failed securities settlement obligations 
each day, beginning at 3:32 p.m. (shortly after the Fedwire closes) 
until 4:00 p.m. (the ``Pair-Off Service''). Additionally, the member 
would receive either a debit or credit, as applicable, to account for 
any difference in the settlement value of its deliver and receive 
obligations as part of FICC's intraday funds-only settlement (``FOS'') 
process. Therefore, the proposed Pair-Off Service would enable 
participating members to settle their obligations on the day they 
arise, rather than continuing to the next day as unsettled failed 
obligations, as they would under the current practice. Failed 
obligations that remain unsettled overnight present market risk 
exposure to both FICC and the parties to such trades. FICC believes 
that by enabling the earlier settlement of a member's offsetting 
obligations, the proposed Pair-Off Service could reduce such overnight 
market risk.\34\
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    \34\ See Notice, supra note 4 at 79058.
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    FICC proposes to start the Pair-Off Service at approximately 3:32 
p.m., and provide FOS banks with their intraday net FOS figures by 4:00 
p.m. for acknowledgement by 4:30 p.m. Accordingly, FICC proposes to 
change the timing of FOS processing from the current time of 3:15 p.m. 
to 4:30 p.m. to enable FICC to settle any net money differences that 
would arise from the proposed Pair-Off Service.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \35\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. After careful consideration, the 
Commission finds that the Proposed Rule Change is consistent with the 
requirements of the Act and the rules and regulations applicable to 
FICC. In particular, the Commission finds that the Proposed Rule Change 
is consistent with Section 17A(b)(3)(F) \36\ of the Act and Rule 17Ad-
22(e)(21) \37\ thereunder.
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    \35\ 15 U.S.C. 78s(b)(2)(C).
    \36\ 15 U.S.C. 78q-1(b)(3)(F).
    \37\ 17 CFR 240.17Ad-22(e)(21)(i), (ii), and (iii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) \38\ of the Act requires, in part, that the 
rules of a clearing agency, such as FICC, be designed to (1) promote 
the prompt and accurate clearance and settlement of securities 
transactions, (2) assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible, and (3) remove impediments to and perfect the mechanism of 
a national system for the prompt and accurate clearance and settlement 
of securities transactions. The Commission believes that the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) of the Act for the 
reasons stated below.
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
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1. Prompt and Accurate Clearance and Settlement; Remove Impediments and 
Perfect the Mechanism
    As described above in Section I.A., FICC currently acts as CCP for 
only the End Leg of a same-day starting DVP repo transaction. The Start 
Leg currently settles bilaterally outside of FICC

[[Page 7163]]

between the parties to the trade. Trades that settle bilaterally 
outside of FICC are generally exposed to more operational risk and 
consequently may result in more settlement fails than trades which are 
novated and risk-managed by FICC in its role as CCP.\39\ By 
centralizing settlement of the Start Leg of same-day starting repos, 
the Same-Day Settling Service would eliminate the current bilateral 
settlement of securities between the parties.
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    \39\ See supra note 17.
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    Additionally, as discussed above in Section I.A., trades 
facilitated by a Repo Broker that settle outside of FICC require 
multiple bilateral securities movements between the parties to the 
trade and the Repo Broker. The greater the number of bilateral 
securities movements involved in trade settlement, the greater the 
potential for operational risk resulting in settlement fails. FICC 
currently manages the risk of a failed Start Leg for a brokered repo by 
assuming responsibility for trade settlement on the evening of the 
original scheduled settlement date. While this approach decreases 
further settlement risk, it neither prevents the original settlement 
fail nor does it eliminate the multiple bilateral securities movements 
for settling the Start Leg until after a settlement fail. For 
participating Repo Brokers, the Same-Day Settling Service would 
eliminate the bilateral securities movements and the associated risk of 
settlement fails because FICC would novate and guarantee settlement of 
the Start Leg upon Trade Comparison. As a result, the Commission 
believes that the Same-Day Settling Service is designed to improve 
efficiency in the settlement process for brokered DVP repos and thereby 
reduce the risk of settlement fails.
    The Commission believes that the proposed Same-Day Settling Service 
should increase efficiency in FICC's settlement process for DVP repos 
and reduce the operational risk associated with bilateral settlement 
that can lead to settlement fails. Streamlining the settlement process 
for DVP repos and reducing the operational risk that can lead to 
settlement fails should, in turn, (i) promote the prompt and accurate 
clearance and settlement of securities transactions, and (ii) remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions. Accordingly, the Commission believes that the proposed 
Same-Day Settling Service is consistent with Section 17A(b)(3)(F) of 
the Act.\40\
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    \40\ 15 U.S.C. 78q-1(b)(3)(F).
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    Finally, as discussed above in Section I.C., the proposed Pair-Off 
Service would enable participating members to settle their offsetting 
failed securities settlement obligations each day after the Fedwire 
closes. FICC's current process is for such failed obligations to go 
through the evening netting system, with settlement rescheduled for the 
following business day. The Commission believes that the proposed Pair-
Off Service represents a more efficient process for resolving failed 
settlement obligations because settlement would occur on the day they 
arise, rather than continuing as settlement fails to the next business 
day. Streamlining the process for resolving failed securities 
settlement obligations to enable earlier settlement and minimize 
settlement fails should, in turn, (i) promote the prompt and accurate 
clearance and settlement of securities transactions, and (ii) remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions. Accordingly, the Commission finds that the proposed Pair-
Off Service is consistent with Section 17A(b)(3)(F) of the Act.\41\
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    \41\ Id.
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2. Safeguarding of Securities and Funds
    When a CCP novates a trade and takes offsetting and guaranteed 
positions between the two original parties to the trade, the length of 
time from novation to trade settlement may affect the CCP's exposure to 
credit, market, and liquidity risk.\42\ For example, settlement fails 
extend the time to settlement and can thereby present risk to the CCP 
that a member's positions and other resources that the CCP holds 
(generally, the member's margin) decline in market value as the CCP 
considers whether and how it might liquidate, transfer, or otherwise 
dispose of such assets to minimize losses. Settlement fails can also 
affect the amount of liquidity risk a CCP may need to bear for purposes 
of settling an unsettled trade because CCPs may rely on incoming 
payments from some members to facilitate payments to other members.
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    \42\ See, eg., Securities Exchange Act Release No. 78962 
(September 28, 2016), 81 FR 69240 at 69250 (October 5, 2016) (S7-22-
16).
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    As described above, the Proposed Rule Change is designed to reduce 
settlement fails in the DVP repo market. Specifically, as described 
above in Section I.A., FICC currently acts as CCP for only the End Leg 
of a same-day starting DVP repo. Trades that settle bilaterally outside 
of FICC are generally exposed to more operational risk and consequently 
may result in more settlement fails than trades which are novated and 
risk-managed by FICC in its role as CCP.\43\ Additionally, as discussed 
above in Section I.A., trades facilitated by a Repo Broker that settle 
outside of FICC require multiple bilateral securities movements between 
the parties to the trade and the Repo Broker. The Same-Day Settling 
Service would eliminate the current bilateral settlement of securities 
between the parties and thereby reduce the risk of settlement fails.
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    \43\ See supra note 17.
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    Finally, as discussed above in Section I.C., the proposed Pair-Off 
Service would enable participating members to settle their offsetting 
failed securities settlement obligations each day after the Fedwire 
closes as opposed to allowing such failed obligations to go through the 
evening netting system, with settlement rescheduled for the following 
business day. Failed obligations that remain unsettled overnight 
present market risk exposure to both FICC and the parties to such 
trades. By enabling the earlier settlement of a member's offsetting 
obligations, the proposed Pair-Off Service could reduce such overnight 
market risk.
    For the reasons stated above, the Commission believes that FICC 
designed the proposed Same-Day Settling Service and Pair-Off Service to 
limit the occurrence and effects of settlement fails, and thereby, 
reduce FICC's exposure to the associated credit, market, and liquidity 
risks. Reducing such risks would help FICC assure the safeguarding of 
securities and funds which are in its custody or control. Accordingly, 
the Commision believes the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act.\44\
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    \44\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(21)

    Rule 17Ad-22(e)(21) under the Act requires each covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to be efficient and effective in 
meeting the requirements of its participants and the markets it serves, 
and have the covered clearing agency's management regularly review the 
efficiency and effectiveness of its (i) clearing and settlement 
arrangements, (ii) operating structure, including risk management 
policies, procedures and systems, and (iii) scope of products cleared 
or settled.\45\
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    \45\ 17 CFR 240.17Ad-22(e)(21).

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[[Page 7164]]

    As discussed above in Section I.B, the proposed Same-Day Settling 
Service would eliminate bilateral settlements between the parties to 
the Start Leg of a DVP repo and allow FICC to settle both the Start and 
End Legs of a DVP Repo. In that regard, the proposed Same-Day Settling 
Service represents a more efficient and effective settlement process 
than FICC's current process, which generally includes bilateral 
settlement of the Start Leg. FICC designed the Same-Day Settling 
Service in response to requests from its members, to mitigate the 
operational risk that can result in settlement fails. As discussed 
above, if not contained, settlement fails can spread to other market 
participants and undermine the liquidity of a well-functioning 
market.\46\ In contrast, reducing the occurrence of settlement fails 
(and their resultant effects) would strengthen broader market 
liquidity. Therefore, by reducing the risk of settlement fails, the 
proposal would benefit FICC's members when it results in transactions 
that settle on time that might have otherwise failed, with lower 
overall transaction costs. Accordingly, the Commission believes that 
adopting the proposed Same-Day Settling Service would be consistent 
with Rule 17Ad-22(e)(21) \47\ because the proposal would broaden the 
scope of the DVP Service to include the Start Leg of same-day starting 
repos in a manner designed to be efficient and effective in reducing 
settlement fails to the benefit of FICC's members and the broader DVP 
repo market.
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    \46\ Additionally, when a FICC member fails to meet its 
settlement obligations, the member incurs FICC's fails charge, which 
could further impact the member's liquidity. See Section 14, Rule 
11--Netting System, supra note 5.
    \47\ 17 CFR 240.17Ad-22(e)(21).
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    Moreover, as discussed above in Section I.C, the proposed Pair-Off 
Service would enable participating members to settle their offsetting 
failed securities settlement obligations each day, shortly after the 
Fedwire closes. Under FICC's current process, such failed obligations 
go through the evening netting system, with settlement rescheduled for 
the following business day. The proposed Pair-Off Service represents a 
more efficient process for resolving failed settlement obligations 
because settlement would occur on the day the obligations arise, rather 
than continuing as settlement fails to the next business day. As 
discussed above, failed obligations that remain unsettled overnight 
present market risk exposure to both FICC and the parties to such 
trades. By enabling earlier settlement of a member's offsetting 
obligations, the proposed Pair-Off Service could reduce such overnight 
market risk. Accordingly, the Commission believes that adopting the 
proposed Pair-Off Service would be consistent with Rule 17Ad-22(e)(21) 
\48\ because the proposal would enable the earlier settlement of a 
member's offsetting failed obligations in a manner designed to be 
efficient and effective in reducing overnight market risk to the 
benefit of FICC's members.
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    \48\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \49\ and 
the rules and regulations promulgated thereunder.
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    \49\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\50\ that Proposed Rule Change SR-FICC-2020-015, be, and hereby is, 
Approved.\51\
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    \50\ 15 U.S.C. 78s(b)(2).
    \51\ In approving the Proposed Rule Change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01587 Filed 1-25-21; 8:45 am]
BILLING CODE 8011-01-P


