[Federal Register Volume 75, Number 229 (Tuesday, November 30, 2010)]
[Notices]
[Pages 74110-74117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30034]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63361; File No. SR-FICC-2010-09]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change To Introduce Cross-Margining 
of Certain Positions Cleared at the Fixed Income Clearing Corporation 
and Certain Positions Cleared at New York Portfolio Clearing, LLC

November 23, 2010.
    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 November 12, 2010, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared primarily by FICC. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would allow FICC to offer cross-margining 
of certain positions cleared at its Government Securities Division 
(``GSD'') and certain positions cleared at New York Portfolio Clearing, 
LLC (``NYPC''). The proposed rule change also would make certain other 
related changes to GSD's rules.

[[Page 74111]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FICC 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. FICC has prepared summaries, set forth in sections (A), 
(B) and (C) below, of the most significant aspects of these 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by FICC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to: (i) Introduce cross-
margining of certain positions cleared at the GSD and of certain 
positions cleared at NYPC and (ii) make certain other changes to the 
GSD Rules as set forth below.\4\
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    \4\ The specific language of the proposed provision can be found 
at http://www.dtcc.com/downloads/legal/rule_filings/2010/ficc/2010-09.pdf.
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    NYPC has applied for registration with the Commodity Futures 
Trading Commission (``CFTC'') as a derivatives clearing organization 
(``DCO'') pursuant to Section 5b of the Commodity Exchange Act and Part 
39 of the Regulations of the CFTC.\5\ FICC would not implement the 
proposed rule change until NYPC obtains such registration. Upon 
registration as a DCO, NYPC proposes initially to clear U.S. dollar-
denominated interest rate futures contracts.
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    \5\ NYPC's DCO application may be viewed on the CFTC's Web site: 
http://www.cftc.gov/IndustryOversight/IndustryFilings/index.htm.
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    The proposed rule change would allow certain GSD Members to combine 
their positions at the GSD with their positions or those of certain 
permitted affiliates cleared at NYPC, within a single margin portfolio 
(``Margin Portfolio'').
1. Cross-Margining With NYPC
Background
    Currently, the GSD maintains a clearing fund (``Clearing Fund'') 
comprised of deposits of cash and eligible securities from its members 
(each a ``GSD Member'') to provide liquidity and satisfy any losses 
that might otherwise be incurred as a result of a GSD Member's default 
and the subsequent close out of its positions. The amount of a GSD 
Member's required deposit to the Clearing Fund (``Required Fund 
Deposit'') is calculated with reference to several factors relating to 
an analysis of the possible losses associated with the GSD Member's 
positions. Currently, this analysis is performed with respect to the 
GSD Member's positions in a particular account.
Proposed Cross-Margining With NYPC
    The cross-margining arrangement with NYPC contemplated herein 
(``NYPC Arrangement'') is to be distinguished from the cross-margining 
arrangement currently conducted between the Chicago Mercantile Exchange 
(``CME'') and FICC (``CME Arrangement''). In the CME Arrangement, each 
of FICC and CME holds and manages its own positions and collateral, and 
independently determines the amount of margin that it will make 
available for cross-margining, referred to as the ``residual margin 
amount,'' that remains after each of FICC and CME conducts its own 
internal offsets. FICC then computes the amount by which the cross-
margining participant's margin requirement can be reduced at each 
clearing organization (``cross-margining reduction'') by comparing the 
participant's positions and the related margin requirements at FICC as 
against those at CME. FICC offsets each cross-margining participant's 
residual margin amount based on related positions at FICC against the 
offsetting residual margin amounts of the participant or its affiliate 
at CME. FICC and CME may then reduce the amount of collateral that they 
collect to reflect the offsets between the cross-margining 
participant's positions at FICC and its or its affiliate's positions at 
CME.
    Under the proposed NYPC Arrangement, a member of FICC that is also 
an NYPC clearing member (``Joint Clearing Member'') could, at the 
discretion of NYPC and FICC, and in accordance with the provisions of 
the GSD and NYPC Rules, elect to have its margin requirement with 
respect to eligible positions in its proprietary account at NYPC and 
its margin requirement with respect to eligible positions at FICC 
calculated by taking into consideration the net risk of such eligible 
positions at both clearing organizations. In addition, an affiliate of 
a member of FICC that is a clearing member of NYPC (``Permitted Margin 
Affiliate'') could agree to have its positions and margin at NYPC 
margined together with eligible positions of the FICC member.
    The NYPC Arrangement would allow (i) Joint Clearing Members and 
(ii) members of FICC and their Permitted Margin Affiliates to have 
their margin requirements for FICC and NYPC positions determined on a 
combined basis, with FICC and NYPC each having a security interest in 
such members' margin deposits and other collateral to secure such 
members' obligations to FICC and NYPC.
    The following types of FICC members would not be eligible to 
participate in the NYPC Arrangement in order to allow FICC to maintain 
segregation of certain business or member types that are treated 
differently for purposes of loss allocation: (i) GSD Sponsored Members, 
(ii) Inter-Dealer Broker Netting Members and (iii) Dealer Netting 
Members with respect to their segregated brokered accounts. In 
addition, in order for a Banking Netting Member to combine its accounts 
into a Margin Portfolio with any other accounts, it would have to 
demonstrate to the satisfaction of FICC and NYPC that doing so would 
comply with the regulatory requirements applicable to the Bank Netting 
Member.
    In order to distinguish between the CME Arrangement and the NYPC 
Arrangement, FICC is proposing to amend the definition of ``Cross-
Margining Agreement'' in the GSD Rules, which would be defined as an 
agreement entered into between FICC and one or more FCOs (as defined in 
GSD Rule 1) pursuant to which a Cross-Margining Participant, at the 
discretion of FICC and in accordance with the provisions of the GSD 
Rules, could elect to have its Required Fund Deposit with respect to 
Eligible Positions at FICC, and its or its Permitted Margin 
Affiliate's, if applicable, margin requirements with respect to 
Eligible Positions at such FCO(s), calculated either (i) by taking into 
consideration the net risk of such Eligible Positions at each of the 
clearing organizations or (ii) as if such positions were in a single 
portfolio. Therefore, the CME Arrangement would fall into clause (i) of 
the definition whereas the NYPC Arrangement would fall into clause 
(ii). Conforming changes would be made to GSD Rule 1, Definitions, 
relating to cross-margining. GSD Rule 43, Cross-Margining Arrangements, 
also would be amended to add provisions regarding single-portfolio 
margining (i.e., the proposed NYPC Arrangement). To implement this 
proposal, FICC and NYPC would enter into a cross-margining agreement 
(``NYPC Agreement''), which would be appended to the GSD Rules and made 
a part thereof.
    Pursuant to the NYPC Agreement, and consistent with previous 
approvals of cross-margining arrangements involving

[[Page 74112]]

DCOs, cross-margining with certain NYPC positions would be limited to 
positions carried in proprietary accounts of clearing members of NYPC. 
Customers of NYPC clearing members would not be permitted to 
participate in the cross-margining arrangement. Participation in the 
NYPC Arrangement would be voluntary. Participants and their Permitted 
Margin Affiliates would be required to execute the requisite cross-
margining participant agreements (the Joint Member or Affiliated Member 
version, as applicable), which are exhibits to the NYPC Agreement.
    FICC would be responsible for performing the margin calculations in 
its capacity as the Administrator under the terms of the NYPC 
Agreement. Specifically, FICC would determine the combined FICC 
Clearing Fund and NYPC Original Margin \6\ requirement for each 
participant. FICC would calculate those requirements using a Value-at-
Risk (``VaR'') methodology, with a 99 percent confidence level and a 3-
day liquidation period for cash positions and a 1-day liquidation 
period for futures positions. In addition, each cross-margining 
participant's one-pot margin requirement would be subject to a daily 
back test, and a ``coverage component'' would be applied and charged to 
the participant in the event that the back test reflects insufficient 
coverage. The one-pot margin requirement for each participant would 
then be allocated between FICC and NYPC in proportion to the clearing 
organizations' respective ``stand-alone'' margin requirements--in other 
words, an amount reflecting the ratio of what each clearing 
organization would have required from that participant if it was not 
participating in the cross-margining program (``Constituent Margin 
Ratio''). The NYPC Agreement provides that either FICC or NYPC could, 
at any time, require additional margin to be deposited by a participant 
above what is calculated under the NYPC Agreement based upon the 
financial condition of the participant, unusual market conditions or 
other special circumstances. The standards that FICC proposes to use 
for these purposes are the standards currently contained in the GSD 
Rules, so that notwithstanding the calculation of a member's Clearing 
Fund requirement pursuant to the NYPC Agreement, FICC would still 
retain the rights contained within the GSD Rules to charge additional 
Clearing Fund under the circumstances specified in the GSD Rules. For 
example, the GSD Rules currently contain a provision providing that if 
a Dealer Netting Member falls below its minimum financial requirement 
it shall be required to post additional Clearing Fund equal to the 
greater of (i) $1 million or (ii) 25 percent of its Required Fund 
Deposit.
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    \6\ Original Margin is the NYPC equivalent of the Clearing Fund.
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    FICC would utilize the same VaR engine for futures and cash 
positions. Under this method, the prior 250 days of historical 
information for futures positions and the prior 252 days of historical 
information for cash positions, including prices, spreads and market 
variables such as Treasury zero-coupon yields and London Interbank 
Offered Rate curves, are used to simulate the market environments in 
the forthcoming 1 day for futures positions and the forthcoming 3 days 
for cash positions. Projected portfolio profits and losses are 
calculated assuming these simulated environments will actually be 
realized. These simulations would be used to calculate VaR. Historical 
simulation is a continuation of the FICC margin methodology.
    With respect to the confidence level, FICC currently utilizes 
extreme value theory to determine the 99th percentile of loss 
distribution. Upon implementation of the FICC-NYPC one-pot margining, 
FICC would utilize a front-weighting mechanism to determine the 99th 
percentile of loss distribution. This front-weighting mechanism would 
place more emphasis on more recent observations. Additionally, FICC's 
VaR engine would be enhanced to accommodate more securities; this means 
that certain CUSIPs which are now considered to be ``non-priceable'' 
(because, for example, of a lack of historical information regarding 
the security) and subject to a ``haircut'' requirement (i.e., fixed 
percentage charge) where offsets are not permitted, would be treated as 
``priceable'' and therefore included in the core VaR calculation.
    Based on preliminary analyses, FICC expects that the FICC VaR 
component of the Clearing Fund requirement may be reduced by as much as 
approximately 20 percent for common FICC-NYPC members as a result of 
the NYPC Arrangement. FICC has performed backtesting analysis to verify 
that there will be sufficient coverage after the FICC-NYPC cross-
margining reductions are applied. Moreover, an independent firm has 
performed backtesting analysis of the FICC-NYPC one-pot methodology, as 
well as FICC's and NYPC's stand-alone methodologies. Both such analyses 
demonstrated that the VaR methodologies provide coverage at the 99th 
confidence level.
    In the event of the insolvency or default of a member that 
participates in the NYPC Arrangement, the positions in such 
participant's one-pot portfolio including, where applicable, the 
positions of its Permitted Margin Affiliate at NYPC, would be 
liquidated by FICC and NYPC as a single portfolio and the liquidation 
proceeds would be applied to the defaulting participant's obligations 
to FICC and NYPC in accordance with the provisions of the NYPC 
Agreement.
    The NYPC Agreement provides for the sharing of losses by FICC and 
NYPC in the event that the one-pot portfolio margin deposits of a 
defaulting participant would not be sufficient to cover the losses 
resulting from the liquidation of that participant's trades and 
positions:
    <bullet> If either clearing organization had a net loss (``worse-
off party''), and the other had a net gain (``better-off party'') that 
is equal to or exceeds the worse-off party's net loss, then the better-
off party pays the worse-off party the amount of the latter's net loss. 
In this scenario, one clearing organization's gain would extinguish the 
entire loss of the other clearing organization.
    <bullet> If either clearing organization had a net loss (``worse-
off party'') and the other clearing organization had a net gain 
(``better-off party'') that is less than or equal to the worse-off 
party's net loss, then the better-off party would pay the worse-off 
party an amount equal to the net gain. Thereafter, if such payment did 
not extinguish the net loss of the worse-off party, the better-off 
party would pay the worse-off party an amount equal to the lesser of: 
(i) The amount necessary to ensure that the net loss of each clearing 
organization is in proportion to the Constituent Margin Ratio or (ii) 
the better-off party's ``Maximum Transfer Payment'' less the better-off 
party's net gain. The ``Maximum Transfer Payment'' would be defined 
with respect to each clearing organization to mean an amount equal to 
the product of (i) the sum of the margin reductions of the clearing 
organizations and (ii) the other clearing organization's Constituent 
Margin Ratio--in other words, the amount by which the other clearing 
organization reduced its margin requirements in reliance on the cross-
margining arrangement. In this scenario, one clearing organization's 
gain does not completely extinguish the entire loss of the other 
clearing organization, and the better-off clearing organization would 
be required to make an additional payment to the worse-off clearing 
organization. This potential additional payment would be capped as 
described in this paragraph.

[[Page 74113]]

    <bullet> If either clearing organization had a net loss, and the 
other had the same net loss, a smaller net loss, or no net loss, then:
    [cir] In the event that the net losses of the clearing 
organizations were in proportion to the Constituent Margin Ratio, no 
payment would be made.
    [cir] In the event that the net losses of the clearing 
organizations were not in proportion to the Constituent Margin Ratio, 
then the clearing organization that had a net loss which was less than 
its proportionate share of the total net losses incurred by the 
clearing organizations (``better-off party'') would pay the other 
clearing organization (``worse-off party'') an amount equal to the 
lesser of: (i) The better-off party's Maximum Transfer Payment or (ii) 
the amount necessary to ensure that the clearing organizations' 
respective net losses were allocated between them in proportion to the 
Constituent Margin Ratio.
    <bullet> If FICC had a net gain after making a payment as described 
above, FICC would pay to NYPC the amount of any deficiency in the 
defaulting member's customer segregated funds accounts or, if 
applicable, such defaulting member's Permitted Margin Affiliate held at 
NYPC up to the amount of FICC's net gain.
    <bullet> If FICC received a payment under the Netting Contract and 
Limited Cross-Guaranty (``Cross-Guaranty Agreement'') to which it is a 
party (i.e., because FICC had a net loss), and NYPC had a net loss, 
FICC would share the cross-guaranty payment with NYPC pro rata, where 
such pro rata share is determined by comparing the ratio of NYPC's net 
loss to the sum of FICC's and NYPC's net losses.\7\ This allocation is 
appropriate because the ``single pot'' combines FICC and NYPC 
proprietary positions into a unified portfolio that would be margined 
and liquidated as a single unit. This requirement would not apply after 
NYPC becomes a party to the Cross-Guaranty Agreement. The GSD Rules 
would further provide that in the event of a close out of a cross-
margining participant under the NYPC Agreement, FICC would offset its 
liquidation results first with NYPC because the liquidation will 
essentially be of a single portfolio and then present its results for 
purposes of the Cross-Guaranty Agreement.
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    \7\ The other parties to the Cross-Guaranty Agreement are The 
Depository Trust Company, National Securities Clearing Corporation 
and The Options Clearing Corporation.
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    The GSD Rules would further provide that FICC would offset its 
liquidation results in the event of a close out of a cross-margining 
participant in the NYPC Agreement first with NYPC because the 
liquidation would essentially be of a single Margin Portfolio and then 
would present its results for purposes of the multilateral Cross-
Guaranty Agreement.
2. Other GSD Proposed Rule Changes
    The proposed rule filing would allow FICC to permit margining of 
positions held in accounts of an affiliate of a member within GSD, akin 
to the inter-affiliate margining in the CME Arrangement and the 
proposed NYPC Arrangement. Thus, as in those arrangements, if a GSD 
member defaults, its GSD Clearing Fund deposits, cash settlement 
amounts and other available collateral would be available to FICC to 
cover the member's default, as would the GSD Clearing Fund deposits and 
available collateral of any Permitted Margin Affiliate with which it 
cross-margins.
Loss Allocation
    Under the current loss allocation methodology in GSD Rule 4, 
Clearing Fund and Loss Allocation, GSD allocates losses first to the 
most recent counterparties of a defaulting member. The proposed changes 
to GSD Rule 4 would delete this step in the loss allocation methodology 
in order to achieve a more equitable result. Instead, any loss 
allocation would first be made against the retained earnings of FICC 
attributable to GSD in an amount up to 25 percent of FICC's retained 
earnings or such higher amount as may be approved by the Board of 
Directors of FICC.
    If a loss still remained, GSD would divide the loss between the 
FICC Tier 1 Netting Members and the FICC Tier 2 Netting Members. ``Tier 
One Netting Member'' and ``Tier Two Netting Member'' have been 
introduced in the GSD Rules to reflect two different categories which 
have been designated as such by FICC for loss allocation purposes. 
Currently, only investment companies registered under the Investment 
Company Act of 1940, as amended, would qualify as Tier 2 Netting 
Members. Tier 2 Netting Members would only be subject to loss to the 
extent they traded with the defaulting members, due to regulatory 
requirements applicable to them.
    Tier 1 Netting Members would be allocated the loss applicable to 
them first by assessing the Clearing Fund deposit of each such member 
in the amount of up to $50,000, equally. If a loss remains, Tier 1 
Netting Members would be assessed ratably in accordance with the 
respective amounts of their Required Fund Deposits based on the average 
daily amount of the member's Required Fund Deposit over the prior 
twelve months. Consistent with the current Rules, GSD members that are 
acting as Inter-Dealer Brokers would be limited to a loss allocation of 
$5 million in respect of their inter-dealer broker activity.
Margin Calculation--Intraday Margin Calls
    In order to facilitate the NYPC Arrangement, GSD is proposing to 
adopt the futures clearing house convention of calculating Clearing 
Fund requirements twice per day. GSD would retain its regular 
calculation and call as set out in the GSD Rules. An additional daily 
intra-day calculation and call (``Intraday Supplemental Clearing Fund 
Deposit'') would be made subject to a threshold that would be 
identified in FICC's risk management procedures. In addition, the GSD 
would process a mark-to-market pass-through twice per day, instead of 
the current practice of once daily. The second collection and pass-
through of mark-to-market amounts would include a limited set of 
components to be defined in FICC's risk management procedures. All 
mark-to-market debits would be collected in full. FICC would pay out 
mark-to-market credits only after any intra-day Clearing Fund deficit 
is met.
    Since GSD would be recalculating and margining a GSD Member's 
exposure intra-day, the margin calculation methodology set forth in GSD 
Rule 4, Clearing Fund and Loss Allocation, would be revised to 
eliminate the Margin Requirement Differential component of the FICC 
Clearing Fund calculation. In addition, GSD Rule 4 would be revised to 
provide that in the case of a Margin Portfolio that contains accounts 
of a Permitted Margin Affiliate, FICC would apply the highest VaR 
confidence level applicable to the GSD Member or the Permitted Margin 
Affiliate. Application of a higher VaR confidence levels would result 
in a higher margin rate. Consistent with current GSD Rules, a minimum 
Required Fund Deposit of $5 million would apply to a member that 
maintains broker accounts.
Consolidated Funds-Only Settlement
    The funds-only settlement process at GSD currently requires a 
member to appoint a settling bank that will settle the member's net 
debit or net credit amount due to or from the division by way of the 
National Settlement Service of the Board of Governors of the Federal 
Reserve System (``NSS''). Any funds-only settling bank that would 
settle for a member that is also an NYPC member or that would settle 
for a member and a Permitted Margin Affiliate that is an

[[Page 74114]]

NYPC member would have its net-net credit or debit balances at each 
clearing corporation, other than balances with respect to futures 
positions of a ``customer'' as such term is defined in CFTC Regulation 
1.3(k), aggregated and netted for operational convenience and would pay 
or be paid such netted amount. The proposed rule change makes clear 
that, notwithstanding the consolidated settlement, the member would 
remain obligated to GSD for the full amount of its funds-only 
settlement amount.
Submission of Locked-in Trades From NYPC
    The current GSD Rules allow for submission of ``locked-in trades'' 
(i.e., trades that are deemed compared when the data on the trade is 
received from a single source) submitted by a locked-in trade source on 
behalf of a GSD Member. Currently, designated locked-in trade sources 
are Federal Reserve Banks on behalf of the Treasury Department, Freddie 
Mac and GCF-Authorized Inter-Dealer Brokers for GCF Repo transactions. 
Under the proposed rule change, GSD Rule 6C, Locked-In Comparison, 
would be amended to include NYPC as an additional locked-in trade 
source. This would be necessary because there would be futures 
transactions cleared by NYPC that would proceed to physical delivery. 
NYPC would submit the trade data as a locked-in trade source for 
processing through FICC, identifying the GSD Member that had authorized 
FICC to accept the locked-in trade from NYPC. Once these transactions 
are submitted to FICC, they would no longer be futures but rather would 
be in the form of buy-sells eligible for processing by GSD. As would be 
the case with other locked-in trade submissions accepted by FICC, the 
GSD Member designated in the trade information would have executed FICC 
documentation evidencing to FICC its authorization of NYPC.
Deletion of Category 1/Category 2 Distinction
    The proposed rule change would delete the legacy characterization 
of certain types of members as either ``Category 1'' or ``Category 2'', 
a distinction that currently applies to Dealer Netting Members, Futures 
Commission Merchant Netting Members and Inter-Dealer Broker Netting 
Members at GSD. Historically, the two categories were used to margin 
lower capitalized members (i.e., Category 2) at a higher rate. With the 
adoption of the VaR margin methodology, this distinction is no longer 
necessary. Rather than margin Netting Members at higher rates solely 
due to a single static capitalization threshold, FICC is able, by use 
of the VaR margin methodology, to margin Netting Members at a higher 
rate by applying a higher confidence level against any Netting Member 
which, regardless of size, FICC believes may pose a higher risk.
    With the deletion of the Category 1/Category 2 distinction, Section 
1 of GSD Rule 13, Funds-Only Settlement, is proposed to be changed to 
provide that all Netting Members could receive forward mark adjustment 
payments, subject to FICC's general discretion to withhold credits that 
would be otherwise due to a distressed Netting Member.
Amendment of CME Agreement
    The proposed NYPC Arrangement would necessitate an amendment to the 
CME Agreement to clarify that the NYPC Arrangement would take priority 
over the CME Arrangement when determining residual FICC positions that 
would be available for cross-margining with the CME. In addition, when 
calculating and presenting liquidation results under the CME Agreement, 
the amendment would provide that FICC's liquidation results would 
include FICC's liquidation results in combination with NYPC's 
liquidation results because the NYPC Agreement would provide for a 
right of first offset between FICC and NYPC. The CME Agreement showing 
the proposed changes was filed as an attachment to the proposed rule 
change as part of Exhibit 5.
3. Summary of Other Proposed Changes to Rule Text
    In GSD Rule 1, Definitions, the following definitions are proposed 
to be added, revised or deleted:
    The terms ``Broker Account'' and ``Dealer Account'' would be added 
to the text of the GSD Rules. A ``Broker Account'' is an account that 
is maintained by an inter-dealer broker netting member, or a segregated 
broker account of a netting member that is a not an inter-dealer broker 
netting member. An account that is not a Broker Account is referred to 
as a Dealer Account.
    ``Coverage Charge'' would be revised to refer to the additional 
charge with respect to the member's Required Fund Deposit (rather that 
its VaR Charge) which brings the member's coverage to a targeted 
confidence level.
    ``Current Net Settlement Positions'' would be corrected to clarify 
its current intent, that it is calculated with respect to a certain 
Business Day and not necessarily on that day, since it may be 
calculated after market close on the day prior to its application 
(i.e., before or after midnight between the close of business one day 
and the open of business on the next day).
    ``Excess Capital Differential'' would be corrected to refer to the 
amount by which a member's VaR Charge exceeds its Excess Capital, 
instead of by reference to the amount by which its required Clearing 
Fund deposit exceeds its Excess Capital.
    ``Excess Capital Premium Calculation Amount'' would be deleted 
because, with the introduction of VaR methodology, the calculation is 
no longer applicable. The terms ``Excess Capital Differential'' and 
``Excess Capital Ratio'' would be amended to delete archaic references 
to ``Excess Capital Premium Calculation Amount'' and to refer instead 
to the comparison of a member's capital calculation to its VaR Charge. 
In addition, the text of Section 14 of GSD Rule 3 would be amended to 
provide that the Excess Capital Premium charge applies to any type of 
entity that is a GSD Netting Member rather than limiting its 
applicability to only the specified types formerly identified in the 
text.
    ``Excess Capital Ratio'' would be amended to mean the quotient 
resulting from dividing the amount of a member's VaR Charge by its 
Excess Net Capital.
    ``GSD Margin Group'' would be added to refer to the GSD Accounts 
within a Margin Portfolio.
    ``Margin Portfolio'' would be added to refer to the positions 
designated by the member as grouped for cross-margining, subject to the 
rules set forth in GSD Rule 4. Dealer Accounts and Broker Accounts 
could not be combined in a common Margin Portfolio. A Sponsoring Member 
Omnibus Account could not be combined with any other Accounts.
    ``Unadjusted GSD Margin Portfolio Amount'' would be added to define 
the amount calculated by GSD with regard to a Margin Portfolio, before 
application of premiums, maximums or minimums. It includes the VaR 
Charge and the Coverage Charge for GSD. In the case of a cross-
margining participant of GSD, the Unadjusted GSD Margin Portfolio 
Amount also would include the cross-margining reduction, if any.
    The terms ``Category 2 Gross Margin Amount'', ``Margin Adjustment 
Amount'', ``Repo Volatility Factor'' and ``Revised Gross Margin 
Amount'' would be deleted from GSD Rule 1 since they are no longer used 
elsewhere in the GSD Rules. The Schedule of Repo Volatility Factors 
would be deleted because it is no longer applicable.
    In Section 2 of GSD Rule 3, Ongoing Membership Requirements, the

[[Page 74115]]

requirement that GCF counterparties submit information relating to the 
composition of their NFE-related accounts, would be amended to require 
the submission of such information periodically, rather than on a 
quarterly basis. GSD currently requires this information every other 
month and by this change, FICC could institute periodic reporting on a 
schedule that is appropriate at such time, in response to current 
conditions.
    In Section 9 of GSD Rule 4, Clearing Fund and Loss Allocation, 
concerning the return of excess deposits and payments, FICC's 
discretion to withhold the return of excess Clearing Fund to a member 
that has an outstanding payment obligation to FICC would be changed to 
refer to FICC's determination that the member's anticipated 
transactions or obligations in the near future (rather than specifying 
over the next 90 calendar days, as in the current text) may reasonably 
be expected to be materially different than those of the recent past 
rather than the 90 prior calendar days, as in the current text.
    In addition, technical and clarifying changes are proposed to be 
made to the rules and cross-references to rule sections contained 
throughout. The rules have been reviewed by FICC and proposed to be 
corrected as needed to reflect the correct rule section references as 
originally intended.
    The proposed rule change to permit cross-margining of positions 
held at FICC and NYPC may increase the available offsets among 
positions held at FICC and NYPC, thereby allowing a more efficient use 
of participant collateral and promoting efficiencies in the fixed 
income securities marketplace. The proposed rule change is therefore 
consistent with the Securities Exchange Act of 1934, as amended, and 
the rules and regulations promulgated thereunder because it supports 
the prompt and accurate clearance and settlement of securities 
transactions.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change would have any 
negative impact, or impose any burden, on competition. To the contrary, 
FICC believes NYPC would be a powerful catalyst for competition by 
offering all FICC members as well as other futures exchanges and DCOs 
an equal opportunity to benefit from the innovative efficiencies of 
``one-pot'' portfolio margining. FICC states that, because of these 
unique and groundbreaking open access policies, NYPC would set a new 
industry standard as the most fair, open and accessible DCO in the 
market.
    The NYPC Arrangement has been structured in a way that access to, 
and the benefits of, the ``single pot'' are provided to other futures 
exchanges and DCOs on fair and reasonable terms as described below. The 
proposed single pot is required to be accessed by other futures 
exchanges and DCOs via NYPC.\8\ As described below, this is done to 
ensure the uniformity and consistency of risk methodologies and risk 
management, to simplify and standardize operational requirements for 
new participants and to maximize the effectiveness of the one-pot 
arrangement.
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    \8\ Section 16 of the NYPC Agreement provides that FICC 
covenants and agrees that, during the term of the NYPC Agreement: 
(i) NYPC-cleared contracts shall have priority for margin offset 
purposes over any other cross-margining agreement; (ii) FICC will 
not enter into any other cross-margining agreement if such agreement 
would adversely affect the priority of NYPC and FICC under the NYPC 
Agreement with respect to available assets; and (iii) FICC will not, 
without the prior written consent of NYPC, amend the CME Agreement, 
if such further amendment would adversely affect NYPC's right to 
cross-margin positions in eligible products prior to any cross-
margining of CME positions with FICC-cleared contracts or adversely 
affect the priority of NYPC and FICC under the NYPC Agreement with 
respect to available assets.
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    The proposed one-pot cross-margining method would allow members to 
post margin based on the net risk of their aggregate positions across 
asset classes, thereby releasing excess capital into the economy for 
more efficient use. By linking positions in fixed income securities 
held at FICC with interest rate products traded on NYSE Liffe U.S. and 
other designated contract markets (``DCMs''), the proposal between FICC 
and NYPC has the potential to create a substantial pool of highly 
correlated assets that are capable of being cross-margined. This pool 
will deepen as more DCOs and DCMs join NYPC, creating the potential for 
even greater margin and risk offsets.
    NYPC will initially clear certain contracts transacted on NYSE 
Liffe U.S. NYPC will clear for additional DCMs that are interested in 
clearing through NYPC as soon as it is feasible for NYPC do so. Such 
additional DCMs will be treated in the same way as NYSE Liffe US, i.e., 
they must: (i) Be eligible under the rules of NYPC, (ii) contribute to 
NYPC's guaranty fund, (iii) demonstrate that they have the operational 
and technical ability to clear through NYPC and (iv) enter into a 
clearing services agreement with NYPC.
    Moreover, NYPC has also committed to admit other DCOs as limited 
purpose participants as soon as it is feasible, thereby allowing such 
DCOs to participate in the one-pot margining arrangement with FICC 
through their limited purpose membership in NYPC.\9\ Such DCOs will be 
required to satisfy pre-defined, objective criteria set forth in NYPC's 
rules.\10\ In particular, such DCOs must: (i) Submit trades subject to 
the limited purpose participant agreement between NYPC and each DCO 
that would otherwise be cleared by the DCO to NYPC, with NYPC acting as 
central counterparty and DCO with respect to such trades,\11\ (ii) be 
eligible under the rules of NYPC and agree to be bound by the NYPC 
rules,\12\ (iii) contribute to NYPC's guaranty fund,\13\ (iv) provide 
clearing services to unaffiliated markets on a ``horizontal'' basis 
(i.e., not limit their provision of clearing services on a vertical 
basis to a single market or limited number of markets) \14\ and (v) 
agree to participate using the uniform risk methodology and risk 
management policies, systems and procedures that have been adopted by 
FICC and NYPC for implementation and administration of the NYPC 
Arrangement.\15\ Reasonable clearing fees will be allocated between 
NYPC and the limited purpose participant DCO as may be agreed by NYPC 
and the DCO, taking into account factors such as the cost of services 
(including capital expenditures incurred by NYPC), technology that may 
be contributed by the limited purpose participant, the volume of 
transactions, and such other factors as may be relevant.
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    \9\ See NYPC Agreement, Section 14.
    \10\ NYPC's rules can be viewed as part of NYPC's DCO 
registration application on the CFTC's Web site (http://www.cftc.gov), as well as on NYPC's Web site (http://www.nypclear.com).
    \11\ See NYPC Rule 801(b)(1).
    \12\ See NYPC Rule 801(b)(2).
    \13\ Pursuant to NYPC Rule 801(b)(3), limited purpose 
participants will be required to make a contribution to the NYPC 
guaranty fund in form and substance similar to and in an amount not 
less than the NYSE guaranty, which will initially consist of a 
$50,000,000 guaranty secured by $25,000,000 in cash during the first 
year of NYPC's operations.
    \14\ See NYPC Rule 801(c)(1)(i).
    \15\ See NYPC Rule 801(c)(1)(ii).
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    As a basic structure, FICC and NYPC anticipate that the limited 
purpose participant agreement will encompass the foregoing requirements 
for limited purpose membership contained in NYPC's rules. Because each 
DCO could present different operational issues, terms beyond the basic 
rules provisions will be discussed on a case-by-case basis and 
reflected in the respective limited purpose participant agreement 
accordingly. FICC and NYPC envision that a possible structure for DCO 
limited purpose participation could be an omnibus account, with the DCO 
limited

[[Page 74116]]

purpose participant essentially acting as a processing agent for its 
clearing members vis-a-vis NYPC with respect to the submission of 
eligible positions of the DCO's clearing members to NYPC for purposes 
of inclusion in the one-pot arrangement with FICC. In order for their 
eligible positions to be included in the single pot, clearing members 
of the DCO limited purpose participant would need to authorize the DCO 
to submit their positions to NYPC. Under such a structure, the DCO 
would be responsible for fulfilling all margin and guaranty fund 
requirements associated with the activity in the omnibus account.
    With respect to both the clearance of trades for unaffiliated DCMs 
and the admission of DCOs as limited purpose participants, NYPC has 
committed that it will complete the substantial operational effort of 
admitting and integrating another DCM or DCO as soon as feasible, but 
no later than 24 months from the start of operations. FICC states that 
this provision is necessary to the effective implementation of the one-
pot cross-margining methodology and that this narrow window of time is 
required to allow for refinement and enhancement of certain systems 
post go-live, to allow time for the possible simultaneous integration 
with multiple major clearing members so that fair market access is 
assured, and to allow time for the completion of the material 
operational challenge of connecting and integrating with the separate 
technologies of other DCMs and/or DCOs. However, this period does not 
preclude NYPC from engaging in discussions with other DCMs and DCOs 
immediately, and NYPC is currently, in fact, having such discussions 
with interested parties. NYPC anticipates that it will be able to 
complete the integration of additional DCMs and/or DCOs in advance of 
that two-year period.
    DCMs and DCOs will be required to contribute to the NYPC guaranty 
fund in the same manner as NYSE Euronext has done. This provision is 
designed to ensure that the financial resources supporting NYPC remain 
robust as the risks of new DCMs and/or DCOs are introduced. As NYPC's 
business grows over time and more participants join NYPC and contribute 
to the guaranty fund, FICC would expect that the contribution from DCMs 
(including NYSE Euronext) and DCOs could be reduced across these 
entities on a pro rata basis as concentration risk is reduced. It 
should be noted that exchange contribution to clearing organization 
default resources is standard practice both in the U.S. and in Europe.
    FICC further believes that the NYPC Arrangement meets the 
competition standard of Section 17A of the Exchange Act, which provides 
that the rules of a clearing agency may not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. The proposed one-pot method of cross-margining 
will allow NYPC to compete in the market for clearing U.S. dollar 
denominated interest rate futures products. NYPC, in turn, will commit 
to provide fair access to all DCMs and DCOs that are interested in 
participating as described above. FICC members and other market 
participants will benefit greatly from the entry of NYPC as a 
competitor in the U.S. futures market via greater competition, 
increased capital and operational efficiencies, and enhanced 
transparency.
    FICC's cross-margining arrangement with NYPC will enable NYPC to 
provide an innovative and highly efficient clearing solution to the 
U.S. futures market, while, at the same time, providing enhanced cross-
margining benefits to FICC members. By their terms, the rules and 
provisions governing the FICC-NYPC proposal would not affect the 
ability of another clearing organization to access NYPC, only the means 
of such access. As stated above, any qualified DCO may access the 
single pot and NYPC will offer the service on non-discriminatory terms 
to all qualified participants. FICC states that these unprecedented 
open access provisions are far superior to the cross-margining 
arrangements offered by any of NYPC's competitors and that there is no 
other clearinghouse in the global futures market that is similarly 
obligated by charter to inter-operate with other DCMs and/or DCOs, 
including, potentially, direct competitors.
    With the recent passage of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the ``Dodd-Frank Act''),\16\ which states that 
``under no circumstances shall a derivatives clearing organization be 
compelled to accept the counterparty credit risk of another clearing 
organization'',\17\ this type of open access clearing for futures 
becomes even more difficult to achieve unless accomplished through 
industry-led initiative. NYPC's unprecedented admission policy sets 
such a new industry standard by both providing market participants with 
a real alternative from the dominant vertical clearing model and 
creating a level playing field that will enable multiple new entrants 
to compete in the U.S. futures market.
---------------------------------------------------------------------------

    \16\ Public Law 111-203 (July 21, 2010). See Dodd-Frank Wall 
Street Reform and Consumer Protection Act Sec.  725(h).
    \17\ See Section 725(h) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    FICC strongly believes that the ability to deliver one-pot margin 
efficiencies depends on FICC's ability to appropriately manage its 
risk, which FICC believes can best be achieved by requiring other DCOs 
to link into NYPC to join the one-pot arrangement. Utilizing NYPC as a 
standardized portal for the one-pot arrangement provides FICC with 
needed assurance, in light of NYPC's contractual obligations to FICC, 
that operational issues and risk methodologies and management are 
understood, uniform and consistent for all participants in the one-pot 
arrangement. Without such a mechanism, this transformative innovation 
could not be delivered to the marketplace in a manner that minimizes 
systemic risk, thereby depriving the U.S. futures market of the most 
promising opportunity it has seen to-date for true competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Prior to submitting this rule filing to the Commission, FICC 
received a letter in 2009 from the ELX Futures Exchange which 
encouraged FICC to reconsider its plan to enter into a relationship 
with NYSE. FICC has also received two letters from NASDAQ OMX in 2010 
questioning the manner in which DTCC determined to enter into the joint 
venture with NYSE to form NYPC, arguing that the venture is contrary to 
DTCC's mission and suggesting that DTCC consider instead an enhanced 
form of ``two-pot'' cross-margining. FICC will notify the Commission of 
any additional written comments.

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 the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and

[[Page 74117]]

arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act and with respect to the following:
    <bullet> The Commission requests comment on all aspects of the 
proposed single pot margining arrangement, including the risk 
management of the combined positions cleared by GSD and NYPC. What 
unique risk management issues does a single pot cross margining 
arrangement raise in comparison with the two pot arrangements 
previously approved by the Commission? Would the VaR margining 
methodology proposed to be used by FICC as the administrator of the 
single-pot margining arrangement adequately measure the risk exposures 
of the positions? Are there other risk management standards or 
requirements that should be established regarding a single-pot 
margining methodology?
    <bullet> The Commission requests comment on the proposed loss 
allocation between FICC and NYPC. Does the loss allocation arrangement, 
in all scenarios, fairly reflect the risks presented by each clearing 
entity? Does it pose any undue risks to either FICC or NYPC or to any 
of their participants? If so, how would those risks be remediated?
    <bullet> The Commission requests comment on the burden on 
competition, if any, that the proposed single pot cross margining 
arrangement may have. Does the proposal to admit other DCOs as limited 
purpose participants of NYPC mitigate any perceived burden on 
competition? If not, why not? Is there a more effective means of 
address concerns related to competition?
    <bullet> The Commission requests comment on the implementation 
timeframe for the single pot margining arrangement and on the potential 
24 month time period before unaffiliated DCOs or DCMs are admitted to 
the cross-margining arrangement. What are commenters' views on the 
proposed time period? Is a shorter or longer time period justified 
based on the operational issues associated with starting the new cross-
margining arrangement?
    <bullet> The Commission requests comment on the proposed guarantee 
fund contribution required of all DCOs (including NYPC) and DCMs. Is a 
sizable guarantee fund contribution needed to assure the safeguarding 
of securities and funds within the cross-margining arrangement? Is a 
higher or lower contribution justified? What is the impact on 
competition of such a requirement?
    Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#3042455c551d535f5d5d555e4443704355531e575f46"><span class="__cf_email__" data-cfemail="9eecebf2fbb3fdf1f3f3fbf0eaeddeedfbfdb0f9f1e8">[email protected]</span></a>. Please include 
File Number SR-FICC-2010-09 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2010-09. This file 
number should be included on the subject line if e-mail 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 Web site (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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549-1090, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of FICC 
and on FICC's Web site at http://dtcc.com/downloads/legal/rule_filings/2010/ficc/2010-09.pdf. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-FICC-2010-09 and should be submitted on or before 
December 21, 2010.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-30034 Filed 11-29-10; 8:45 am]
BILLING CODE 8011-01-P


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