Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 34193 

1 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, 

respectively. Securities Exchange Act Release No. 

82427 (January 2, 2018), 83 FR 854 (January 8, 

2018) (SR–FICC–2017–022). On December 18, 2017, 

FICC filed the Proposed Rule Change as advance 

notice SR–FICC–2017–806 (‘‘Advance Notice’’) with 

the Commission pursuant to Section 806(e)(1) of 

Title VIII of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act entitled the Payment, 

Clearing, and Settlement Supervision Act of 2010 

(‘‘Clearing Supervision Act’’) and Rule 19b– 

4(n)(1)(i) of the Act. (12 U.S.C. 5465(e)(1) and 17 

CFR 240.19b–4(n)(1)(i), respectively.) On January 

30, 2018, the Commission published in the Federal 

Register notice of filing of the Advance Notice. The 

notice also extended the review period for the 

Advance Notice pursuant to Section 806(e)(1)(H) of 

the Clearing Supervision Act. (12 U.S.C. 

5465(e)(1)(H).) See Securities Exchange Act Release 

No. 82583 (January 24, 2018), 83 FR 4358 (January 

30, 2018) (SR–FICC–2017–806). On April 10, 2018, 

the Commission required additional information for 

consideration of the Advance Notice, pursuant to 

Section 806(e)(1)(D) of the Clearing Supervision 

Act, which provided the Commission with an 

additional 60-days in the review period beginning 

on the date that the information requested is 

received by the Commission. (12 U.S.C. 

5465(e)(1)(D).) See Memorandum from the Office of 

Clearance and Settlement Supervision, Division of 

Trading and Markets, titled ‘‘Commission’s Request 

for Additional Information,’’ available at http://

www.sec.gov/rules/sro/ficc-an.shtml. On June 28, 

2018, FICC filed Amendment No. 1 to the Advance 

Notice. To promote the public availability and 

transparency of its post-notice amendment, FICC 

submitted a copy of Amendment No. 1 through the 

Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 to the 

Advance Notice has been posted on the 

Commission’s website at https://www.sec.gov/rules/ 

sro/ficc-an.htm and thus been publicly available 

since June 29, 2018. On July 6, 2018, the 

Commission received the information requested, 

which added an additional 60-days to the review 

period pursuant to Sections 806(e)(1)(E) and (G) of 

the Clearing Supervision Act. (12 U.S.C. 

5465(e)(1)(E) and (G).) See Memorandum from the 

Office of Clearance and Settlement Supervision, 

Division of Trading and Markets, titled ‘‘Response 

to the Commission’s Request for Additional 

Information,’’ available at http://www.sec.gov/ 

rules/sro/ficc-an.shtml. The proposal, as set forth in 

both the Advance Notice and the Proposed Rule 

Change, shall not take effect until all required 

regulatory actions are completed. 

2Securities Exchange Act Release No. 82670 

(February 8, 2018), 83 FR 6626 (February 14, 2018) 

(SR–DTC–2017–022; SR–FICC–2017–022; SR– 

NSCC–2017–018). 

3Securities Exchange Act Release No. 82909 

(March 20, 2018), 83 FR 12990 (March 26, 2018) 

(SR–FICC–2017–022); Securities Exchange Act 

Release No. 83510 (June 25, 2018), 83 FR 30791 

(June 29, 2018) (SR–DTC–2017–022; SR–FICC– 

2017–022; SR–NSCC–2017–018). 

4To promote the public availability and 

transparency of its post-notice amendment, FICC 

submitted a copy of Amendment No. 1 through the 

Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 to the 

Proposed Rule Change has been posted on the 

Commission’s website at https://www.sec.gov/rules/ 

sro/ficc.htm and thus been publicly available since 

June 29, 2018. 

5Capitalized terms not defined herein are defined 

in the GSD Rules, available at http://

www.dtcc.com/∼/media/Files/Downloads/legal/ 

rules/ficc_gov_rules.pdf, and the MBSD Rules, 

available at www.dtcc.com/∼/media/Files/

Downloads/legal/rules/ficc_mbsd_rules.pdf. 

6See Securities Exchange Act Release No. 82427 

(January 2, 2018), 83 FR 854 (January 8, 2018) (SR– 

FICC–2017–022). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83631; File No. SR–FICC– 

2017–022] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Notice of 

Filing of Amendment No. 1 to a 

Proposed Rule Change To Amend the 

Loss Allocation Rules and Make Other 

Changes 

July 13, 2018. 

On December 18, 2017, 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’’) and Rule 

19b–4 thereunder, proposed rule change 

SR–FICC–2017–022 (‘‘Proposed Rule 

Change’’) to amend the loss allocation 

rules and make other changes; the 

Proposed Rule Change was published 

for comment in the Federal Register on 

January 8, 2018.1 On February 8, 2018, 

the Commission designated a longer 

period within which to approve, 

disapprove, or institute proceedings to 

determine whether to approve or 

disapprove the Proposed Rule Change.2

On March 20, 2018, the Commission 

instituted proceedings to determine 

whether to approve or disapprove the 

Proposed Rule Change; on June 25, 

2018, the Commission designated a 

longer period for Commission action on 

the proceedings to determine whether to 

approve or disapprove the Proposed 

Rule Change.3 On June 28, 2018, FICC 

filed Amendment No. 1 to the Proposed 

Rule Change to amend and replace in its 

entirety the Proposed Rule Change as 

originally submitted on December 18, 

2017.4 As of the date of this release, the 

Commission has not received any 

comments on the Proposed Rule 

Change. 

The Proposed Rule Change, as 

amended by Amendment No. 1, is 

described in Items I and II below, which 

Items have been prepared by FICC. The 

Commission is publishing this notice to 

solicit comments on the Proposed Rule 

Change, as amended by Amendment No. 

1, from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

The proposed rule change consists of 

modifications to FICC’s Government 

Securities Division (‘‘GSD’’) Rulebook 

(‘‘GSD Rules’’) and Mortgage-Backed 

Securities Division (‘‘MBSD’’ and, 

together with GSD, the ‘‘Divisions’’ and, 

each, a ‘‘Division’’) Clearing Rules 

(‘‘MBSD Rules,’’ and collectively with 

the GSD Rules, the ‘‘Rules’’) in order to 

amend provisions in the Rules regarding 

loss allocation as well as make other 

changes, as described in greater detail 

below.5

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its filing with the Commission, the 

clearing agency included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item III below. The 

clearing agency has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

(A) Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

1. Purpose 

Description of Amendment No. 1 

This filing constitutes Amendment 

No. 1 (‘‘Amendment’’) to rule filing SR– 

FICC–2017–022 (‘‘Rule Filing’’) 

previously filed by FICC on December 

18, 2017.6 This Amendment amends 

and replaces the Rule Filing in its 

entirety. FICC submits this Amendment 

in order to further clarify the operation 

of the proposed rule changes on loss 

allocation by providing additional 

information and examples. In particular, 

this Amendment would: 

(i) Clarify which Tier One Netting 

Members and Tier One Members would 

be subject to loss allocation with respect 

to Defaulting Member Events (as defined 

below and in the proposed rule change) 

and Declared Non-Default Loss Events 

(as defined below and in the proposed 

rule change) occurring during an Event 

Period (as defined below and in the 

proposed rule change). Specifically, 

pursuant to the Amendment, proposed 

Section 7 of GSD Rule 4 and MBSD Rule 

4 would provide that each Tier One 

Netting Member or Tier One Member, as 

applicable, that is a Tier One Netting 

Member or Tier One Member on the first 

day of an Event Period would be 

obligated to pay its pro rata share of 

losses and liabilities arising out of or 

relating to each Defaulting Member 

Event (other than a Defaulting Member 

Event with respect to which it is the 

Defaulting Member (as defined below 

and in the proposed rule change)) and 

each Declared Non-Default Loss Event 

occurring during the Event Period. 

Proposed Section 7 of GSD Rule 4 and 

MBSD Rule 4 would also make it clear 


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7 GSD is permitted to cease to act for (i) a GSD 

Member pursuant to GSD Rule 21 (Restrictions on 

Access to Services) and GSD Rule 22 (Insolvency 

of a Member), (ii) a Sponsoring Member pursuant 

to Section 14 and Section 16 of GSD Rule 3A 

(Sponsoring Members and Sponsored Members), 

and (iii) a Sponsored Member pursuant to Section 

13 and Section 15 of GSD Rule 3A (Sponsoring 

Members and Sponsored Members). MBSD is 

permitted to cease to act for an MBSD Member 

pursuant to MBSD Rule 14 (Restrictions on Access 

to Services) and MBSD Rule 16 (Insolvency of a 

Member). GSD Rule 22A (Procedures for When the 

Corporation Ceases to Act) and MBSD Rule 17 

(Procedures for When the Corporation Ceases to 

Act) set out the types of actions FICC may take 

when it ceases to act for a member. Supra note 5. 

that any Tier One Netting Member or 

Tier One Member, as applicable, for 

which FICC ceases to act on a nonBusiness Day, triggering an Event Period 

that commences on the next Business 

Day, would be deemed to be a Tier One 

Netting Member or Tier One Member, as 

applicable, on the first day of that Event 

Period. 

(ii) Clarify the obligations and Loss 

Allocation Cap (as defined below and in 

the proposed rule change) of a Tier One 

Netting Member or a Tier One Member, 

as applicable, that withdraws from 

membership in respect of a loss 

allocation round. Specifically, pursuant 

to the Amendment, proposed Section 7b 

of GSD Rule 4 and MBSD Rule 4 would 

provide that the Tier One Netting 

Member or Tier One Member, as 

applicable, would nevertheless remain 

obligated for its pro rata share of losses 

and liabilities with respect to any Event 

Period for which it is otherwise 

obligated under GSD Rule 4 or MBSD 

Rule 4, as applicable; however, its 

aggregate obligation would be limited to 

the amount of its Loss Allocation Cap as 

fixed in the round for which it 

withdrew. 

(iii) Clarify that a member would be 

obligated to FICC for all losses and 

liabilities incurred by FICC arising out 

of or relating to any Defaulting Member 

Event with respect to the member. 

Specifically, pursuant to the 

Amendment, proposed Section 7 of GSD 

Rule 4 and MBSD Rule 4 would provide 

that each member would be obligated to 

FICC for the entire amount of any loss 

or liability incurred by FICC arising out 

of or relating to any Defaulting Member 

Event with respect to such member. 

(iv) Clarify that, although a Defaulting 

Member would not be allocated a 

ratable share of losses and liabilities 

arising out of or relating to its own 

Defaulting Member Event, it would 

remain obligated to FICC for all such 

losses and liabilities. Specifically, 

pursuant to the Amendment, proposed 

Section 7 of GSD Rule 4 and MBSD Rule 

4 would provide that no loss allocation 

under GSD Rule 4 or MBSD Rule 4, as 

applicable, would constitute a waiver of 

any claim FICC may have against a GSD 

Member or MBSD Member, as 

applicable, for any loss or liability to 

which the GSD Member or MBSD 

Member is subject under the GSD Rules 

or MBSD Rules, as applicable, 

including, without limitation, any loss 

or liability to which it may be subject 

under GSD Rule 4 or MBSD Rule 4, as 

applicable. 

In addition, pursuant to the 

Amendment, FICC is making other 

clarifying and technical changes to the 

proposed rule change, as proposed 

herein. 

Nature of the Proposed Change 

The primary purpose of this proposed 

rule change is to amend GSD’s and 

MBSD’s loss allocation rules in order to 

enhance the resiliency of the Divisions’ 

loss allocation processes so that each 

Division can take timely action to 

address multiple loss events that occur 

in succession during a short period of 

time (defined and explained in detail 

below). In connection therewith, the 

proposed rule change would (i) align the 

loss allocation rules of the three clearing 

agencies of The Depository Trust & 

Clearing Corporation (‘‘DTCC’’), namely 

The Depository Trust Company 

(‘‘DTC’’), National Securities Clearing 

Corporation (‘‘NSCC’’), and FICC 

(collectively, the ‘‘DTCC Clearing 

Agencies’’), so as to provide consistent 

treatment, to the extent practicable and 

appropriate, especially for firms that are 

participants of two or more DTCC 

Clearing Agencies, (ii) increase 

transparency and accessibility of the 

loss allocation rules by enhancing their 

readability and clarity, (iii) amend 

language regarding FICC’s use of MBSD 

Clearing Fund, and (iv) make 

conforming and technical changes. 

(i) Background 

Central counterparties (‘‘CCPs’’) play 

a key role in financial markets by 

mitigating counterparty credit risk on 

transactions between market 

participants. CCPs achieve this by 

providing guaranties to participants 

and, as a consequence, are typically 

exposed to credit risks that could lead 

to default losses. In addition, in 

performing its critical functions, a CCP 

could be exposed to non-default losses 

that are otherwise incident to the CCP’s 

clearance and settlement business. 

A CCP’s rulebook should provide a 

complete description of how losses 

would be allocated to participants if the 

size of the losses exceeded the CCP’s 

pre-funded resources. Doing so provides 

for an orderly allocation of losses, and 

potentially allows the CCP to continue 

providing critical services to the market 

and thereby results in significant 

financial stability benefits. In addition, 

a clear description of the loss allocation 

process offers transparency and 

accessibility to the CCP’s participants. 

Current FICC Loss Allocation Process 

As CCPs, FICC’s Divisions’ loss 

allocation processes are key components 

of their respective risk management 

processes. Risk management is the 

foundation of FICC’s ability to guarantee 

settlement in each Division, as well as 

the means by which FICC protects itself 

and its members from the risks inherent 

in the clearance and settlement process. 

FICC’s risk management processes must 

account for the fact that, in certain 

extreme circumstances, the collateral 

and other financial resources that secure 

FICC’s risk exposures may not be 

sufficient to fully cover losses resulting 

from the liquidation of the portfolio of 

a member for whom a Division has 

ceased to act.7

The GSD Rules and the MBSD Rules 

each currently provide for a loss 

allocation process through which both 

FICC (by applying up to 25% of its 

retained earnings in accordance with 

Section 7(b) of GSD Rule 4 and Section 

7(c) of MBSD Rule 4) and its members 

would share in the allocation of a loss 

resulting from the default of a member 

for whom a Division has ceased to act 

pursuant to the Rules. The GSD Rules 

and the MBSD Rules also recognize that 

FICC may incur losses outside the 

context of a defaulting member that are 

otherwise incident to each Division’s 

clearance and settlement business. 

The current GSD and MBSD loss 

allocation rules provide that, in the 

event the Division ceases to act for a 

member, the amounts on deposit to the 

Clearing Fund from the defaulting 

member, along with any other resources 

of, or attributable to, the defaulting 

member that FICC may access under the 

GSD Rules or the MBSD Rules (e.g., 

payments from Cross-Guaranty 

Agreements), are the first source of 

funds the Division would use to cover 

any losses that may result from the 

closeout of the defaulting member’s 

guaranteed positions. If these amounts 

are not sufficient to cover all losses 

incurred, then each Division will apply 

the following available resources, in the 

following loss allocation waterfall order: 

First, as provided in the current 

Section 7(b) of GSD Rule 4 and Section 

7(c) of MBSD Rule 4, FICC’s corporate 

contribution of up to 25 percent of 

FICC’s retained earnings existing at the 

time of the failure of a defaulting 

member to fulfill its obligations to FICC, 


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8 GSD Rule 3B, Section 7 (Loss Allocation 

Obligations of CCIT Members) provides that CCIT 

Members will be allocated losses as Tier Two 

Members and will be responsible for the total 

amount of loss allocated to them. With respect to 

CCIT Members with a Joint Account Submitter, loss 

allocation will be calculated at the Joint Account 

level and then applied pro rata to each CCIT 

Member within the Joint Account based on the 

trade settlement allocation instructions. Supra note 

5. 

9FICC calculates its General Business Risk 

Capital Requirement as the amount equal to the 

greatest of (i) an amount determined based on its 

general business profile, (ii) an amount determined 

based on the time estimated to execute a recovery 

or orderly wind-down of FICC’s critical operations, 

and (iii) an amount determined based on an 

analysis of FICC’s estimated operating expenses for 

a six (6) month period. 

10See Securities Exchange Act Release No. 81105 

(July 7, 2017), 82 FR 32399 (July 13, 2017) (SR– 

FICC–2017–007). 

11 17 CFR 240.17Ad–22(e)(15). 

12The proposed rule change would not require a 

Corporate Contribution with respect to the use of 

each Division’s Clearing Fund as a liquidity 

resource; however, if FICC uses a Division’s 

Clearing Fund as a liquidity resource for more than 

30 calendar days, as set forth in proposed Section 

5 of GSD Rule 4 and MBSD Rule 4, then FICC 

would have to consider the amount used as a loss 

to the respective Division’s Clearing Fund incurred 

as a result of a Defaulting Member Event and 

allocate the loss pursuant to proposed Section 7 of 

Rule 4, which would then require the application 

of FICC’s Corporate Contribution. 

13FICC believes that two hundred and fifth (250) 

Business Days would be a reasonable estimate of 

Continued 

or such greater amount as the Board of 

Directors may determine; and 

Second, if a loss still remains, use of 

the Clearing Fund of the Division and 

assessing the Division’s Members in the 

manner provided in GSD Rule 4 and 

MBSD Rule 4, as the case may be. 

Specifically, FICC will divide the loss 

ratably between Tier One Netting 

Members and Tier Two Members with 

respect to GSD, or between Tier One 

Members and Tier Two Members with 

respect to MBSD, based on original 

counterparty activity with the defaulting 

member. Then the loss allocation 

process applicable to Tier One Netting 

Members or Tier One Members, as 

applicable, and Tier Two Members will 

proceed in the manner provided in GSD 

Rule 4 and MBSD Rule 4, as the case 

may be. 

Specifically, the applicable Division 

will first assess each Tier One Netting 

Member or Tier One Member, as 

applicable, an amount up to $50,000, in 

an equal basis per such member. If a 

loss remains, the Division will allocate 

the remaining loss ratably among Tier 

One Netting Members or Tier One 

Members, as applicable, in accordance 

with the amount of each Tier One 

Netting Member’s or Tier One 

Member’s, as applicable, respective 

average daily Required Fund Deposit 

over the prior twelve (12) months. If a 

Tier One Netting Member or Tier One 

Member, as applicable, did not maintain 

a Required Fund Deposit for twelve (12) 

months, its loss allocation amount will 

be based on its average daily Required 

Fund Deposit over the time period 

during which such member did 

maintain a Required Fund Deposit. 

Pursuant to current Section 7(g) of 

GSD Rule 4 and MBSD Rule 4, if, as a 

result of the Division’s application of 

the Required Fund Deposit of a member, 

a member’s actual Clearing Fund 

deposit is less than its Required Fund 

Deposit, it will be required to eliminate 

such deficiency in order to satisfy its 

Required Fund Deposit amount. In 

addition to losses that may result from 

the closeout of the defaulting member’s 

guaranteed positions, Tier One Netting 

Members or Tier One Members, as 

applicable, can also be assessed for nondefault losses incident to each 

Division’s clearance and settlement 

business, pursuant to current Section 

7(f) of GSD Rule 4 and MBSD Rule 4. 

The Rules of both Divisions currently 

provide that Tier Two Members are only 

subject to loss allocation to the extent 

they traded with the defaulting member 

and their trades resulted in a liquidation 

loss. FICC will assess Tier Two 

Members ratably based on their loss as 

a percentage of the entire remaining loss 

attributable to Tier Two Members.8 Tier 

Two Members are required to pay their 

loss allocation obligations in full and 

replenish their Required Fund Deposits 

as needed and as applicable. The 

current Rule provisions which provide 

for loss allocation of non-default losses 

incident to each Division’s clearance 

and settlement business (i.e., Section 

7(f) of GSD Rule 4 and MBSD Rule 4) 

do not apply to Tier Two Members. 

Overview of the Proposed Rule Changes 

A. Changes To Enhance Resiliency of 

GSD’s and MBSD’s Loss Allocation 

Processes 

In order to enhance the resiliency of 

GSD’s and MBSD’s loss allocation 

processes, FICC proposes to change the 

manner in which each of the aspects of 

the loss allocation waterfall described 

above would be employed. GSD and 

MBSD would retain the current core 

loss allocation process following the 

application of the defaulting member’s 

resources, i.e., first, by applying FICC’s 

corporate contribution, and second, by 

pro rata allocations to Tier One Netting 

Members or Tier One Members, as 

applicable, and Tier Two Members. 

However, GSD and MBSD would clarify 

or adjust certain elements and introduce 

certain new loss allocation concepts, as 

further discussed below. The proposal 

would also retain the types of losses that 

can be allocated to Tier One Netting 

Members or Tier One Members, as 

applicable, and Tier Two Members as 

stated above. In addition, the proposed 

rule change would address the loss 

allocation process as it relates to losses 

arising from or relating to multiple 

default or non-default events in a short 

period of time, also as described below. 

Accordingly, FICC is proposing five 

(5) key changes to enhance each 

Division’s loss allocation process: 

(1) Changing the Calculation and 

Application of FICC’s Corporate 

Contribution 

As stated above, Section 7(b) of GSD 

Rule 4 and Section 7(c) of MBSD Rule 

4 currently provide that FICC will 

contribute up to 25% of its retained 

earnings (or such higher amount as the 

Board of Directors shall determine) to a 

loss or liability that is not satisfied by 

the defaulting member’s Clearing Fund 

deposit. Under the proposal, FICC 

would amend the calculation of its 

corporate contribution from a 

percentage of its retained earnings to a 

mandatory amount equal to 50% of the 

FICC General Business Risk Capital 

Requirement.9 FICC’s General Business 

Risk Capital Requirement, as defined in 

FICC’s Clearing Agency Policy on 

Capital Requirements,10 is, at a 

minimum, equal to the regulatory 

capital that FICC is required to maintain 

in compliance with Rule 17Ad– 

22(e)(15) under the Act.11 The proposed 

Corporate Contribution (as defined 

below and in the proposed rule change) 

would be held in addition to FICC’s 

General Business Risk Capital 

Requirement. 

Currently, the Rules do not require 

FICC to contribute its retained earnings 

to losses and liabilities other than those 

from member defaults. Under the 

proposal, FICC would apply its 

corporate contribution to non-default 

losses as well. The proposed Corporate 

Contribution would apply to losses 

arising from Defaulting Member Events 

and Declared Non-Default Loss Events 

(as such terms are defined below and in 

the proposed rule change), and would 

be a mandatory contribution by FICC 

prior to any allocation of the loss among 

the applicable Division’s members.12 As 

proposed, if the Corporate Contribution 

is fully or partially used against a loss 

or liability relating to an Event Period 

by one or both Divisions, the Corporate 

Contribution would be reduced to the 

remaining unused amount, if any, 

during the following two hundred fifty 

(250) Business Days in order to permit 

FICC to replenish the Corporate 

Contribution.13 To ensure transparency, 


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the time frame that FICC would require to replenish 

the Corporate Contribution by equity in accordance 

with FICC’s Clearing Agency Policy on Capital 

Requirements, including a conservative additional 

period to account for any potential delays and/or 

unknown exigencies in times of distress. 

14FICC believes that if a loss or liability relating 

to an Event Period, whether arising out of or 

relating to a Defaulting Member Event or a Declared 

Non-Default Loss Event, occurs simultaneously at 

both Divisions, allocating the Corporate 

Contribution ratably between the two Divisions 

based on the aggregate Average RFDs of their 

respective members is appropriate because the 

aggregate Average RFDs of all members in a 

Division represent the amount of risks that those 

members bring to FICC over the look-back period 

of seventy (70) Business Days. 

15See Resilience of central counterparties (CCPs): 

Further guidance on the PFMI, issued by the 

Committee on Payments and Market Infrastructures 

and the International Organization of Securities 

Commissions, at 42 (July 2017), available at 

www.bis.org/cpmi/publ/d163.pdf. 

16FICC believes that having a ten (10) Business 

Day Event Period would provide a reasonable 

period of time to encompass potential sequential 

Defaulting Member Events or Declared Non-Default 

Loss Events that are likely to be closely linked to 

an initial event and/or a severe market dislocation 

episode, while still providing appropriate certainty 

for members concerning their maximum exposure 

to mutualized losses with respect to such events. 

17Supra note 7. 

18As discussed below, each Tier One Netting 

Member or Tier One Member, as applicable, that is 

a Tier One Netting Member or Tier One Member on 

the first day of an Event Period would be obligated 

to pay its pro rata share of losses and liabilities 

arising out of or relating to each Defaulting Member 

Event (other than a Defaulting Member Event with 

respect to which it is the Defaulting Member) and 

each Declared Non-Default Loss Event occurring 

during the Event Period. 

all GSD Members and MBSD Members 

would receive notice of any such 

reduction to the Corporate Contribution. 

There would be one FICC Corporate 

Contribution, the amount of which 

would be available to both Divisions 

and would be applied against a loss or 

liability in either Division in the order 

in which such loss or liability occurs, 

i.e., FICC would not have two separate 

Corporate Contributions, one for each 

Division. In the event of a loss or 

liability relating to an Event Period, 

whether arising out of or relating to a 

Defaulting Member Event or a Declared 

Non-Default Loss Event, attributable to 

only one Division, the Corporate 

Contribution would be applied to that 

Division up to the amount then 

available. If a loss or liability relating to 

an Event Period, whether arising out of 

or relating to a Defaulting Member Event 

or a Declared Non-Default Loss Event, 

occurs simultaneously at both Divisions, 

the Corporate Contribution would be 

applied to the respective Divisions in 

the same proportion that the aggregate 

Average RFDs (as defined below and in 

the proposed rule change) of all 

members in that Division bear to the 

aggregate Average RFDs of all members 

in both Divisions.14

As compared to the current approach 

of applying ‘‘up to’’ a percentage of 

retained earnings to defaulting member 

losses, the proposed Corporate 

Contribution would be a fixed 

percentage of FICC’s General Business 

Risk Capital Requirement, which would 

provide greater transparency and 

accessibility to members. The proposed 

Corporate Contribution would apply not 

only towards losses and liabilities 

arising out of or relating to Defaulting 

Member Events but also those arising 

out of or relating to Declared NonDefault Loss Events, which is consistent 

with the current industry guidance that 

‘‘a CCP should identify the amount of its 

own resources to be applied towards 

losses arising from custody and 

investment risk, to bolster confidence 

that participants’ assets are prudently 

safeguarded.’’ 15

Under current Section 7(b) of GSD 

Rule 4 and Section 7(c) of MBSD Rule 

4, FICC has the discretion to contribute 

amounts higher than the specified 

percentage of retained earnings, as 

determined by the Board of Directors, to 

any loss or liability incurred by FICC as 

result of the failure of a Defaulting 

Member to fulfill its obligations to FICC. 

This option would be retained and 

expanded under the proposal so that it 

would be clear that FICC can voluntarily 

apply amounts greater than the 

Corporate Contribution against any loss 

or liability (including non-default 

losses) of the Divisions, if the Board of 

Directors, in its sole discretion, believes 

such to be appropriate under the factual 

situation existing at the time. 

The proposed rule changes relating to 

the calculation and application of 

Corporate Contribution are set forth in 

proposed Sections 7 and 7a of GSD Rule 

4 and Sections 7 and 7a of MBSD Rule 

4, as further described below. 

(2) Introducing an Event Period 

In order to clearly define the 

obligations of each Division and its 

respective Members regarding loss 

allocation and to balance the need to 

manage the risk of sequential loss events 

against members’ need for certainty 

concerning their maximum loss 

allocation exposures, FICC is proposing 

to introduce the concept of an ‘‘Event 

Period’’ to the GSD Rules and the MBSD 

Rules to address the losses and 

liabilities that may arise from or relate 

to multiple Defaulting Member Events 

and/or Declared Non-Default Loss 

Events that arise in quick succession in 

a Division. Specifically, the proposal 

would group Defaulting Member Events 

and Declared Non-Default Loss Events 

occurring in a period of ten (10) 

Business Days (‘‘Event Period’’) for 

purposes of allocating losses to 

Members of the respective Divisions in 

one or more rounds (as described 

below), subject to the limitations of loss 

allocation set forth in the proposed rule 

change and as explained below.16 In the 

case of a loss or liability arising from or 

relating to a Defaulting Member Event, 

an Event Period would begin on the day 

one or both Divisions notify their 

respective members that FICC has 

ceased to act 17 for the GSD Defaulting 

Member and/or the MBSD Defaulting 

Member (or the next Business Day, if 

such day is not a Business Day). In the 

case of a loss or liability arising from or 

relating to a Declared Non-Default Loss 

Event, an Event Period would begin on 

the day that FICC notifies members of 

the respective Divisions of the Declared 

Non-Default Loss Event (or the next 

Business Day, if such day is not a 

Business Day). If a subsequent 

Defaulting Member Event or Declared 

Non-Default Loss Event occurs during 

an Event Period, any losses or liabilities 

arising out of or relating to any such 

subsequent event would be resolved as 

losses or liabilities that are part of the 

same Event Period, without extending 

the duration of such Event Period. An 

Event Period may include both 

Defaulting Member Events and Declared 

Non-Default Loss Events, and there 

would not be separate Event Periods for 

Defaulting Member Events or Declared 

Non-Default Loss Events occurring 

during overlapping ten (10) Business 

Day periods. 

The amount of losses that may be 

allocated by each Division, subject to 

the required Corporate Contribution, 

and to which a Loss Allocation Cap 

would apply for any member that elects 

to withdraw from membership in 

respect of a loss allocation round, would 

include any and all losses from any 

Defaulting Member Events and any 

Declared Non-Default Loss Events 

during the Event Period, regardless of 

the amount of time, during or after the 

Event Period, required for such losses to 

be crystallized and allocated.18

The proposed rule changes relating to 

the implementation of an Event Period 

are set forth in proposed Section 7 of 

GSD Rule 4 and Section 7 of MBSD Rule 

4, as further described below. 

(3) Introducing the Concept of 

‘‘Rounds’’ and Loss Allocation Notice 

Pursuant to the proposed rule change, 

a loss allocation ‘‘round’’ would mean a 

series of loss allocations relating to an 

Event Period, the aggregate amount of 

which is limited by the sum of the Loss 


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Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 34197 

19Pursuant to current Section 7(g) of GSD Rule 

4 and MBSD Rule 4, the time period for a member 

to give notice, pursuant to Section 13 of GSD Rule 

3 and MBSD Rule 3, of its election to terminate its 

membership in GSD or MBSD, as applicable, in 

respect of an allocation arising from any Remaining 

Loss allocated by FICC pursuant to Section 7(d) of 

GSD Rule 4 or Section 7(e) of MBSD Rule 4, as 

applicable, and any Other Loss, is the Close of 

Business on the Business Day on which the loss 

allocation payment is due to FICC. Current Section 

13 of GSD Rule 4 and MBSD Rule 4 requires a 10- 

day notice period. Supra note 5. 

FICC believes that it is appropriate to shorten 

such time period from 10 days to five (5) Business 

Days because FICC needs timely notice of which 

Tier One Netting Members or Tier One Members, 

as applicable, would remain in its membership for 

purpose of calculating the loss allocation for any 

subsequent round. FICC believes that five (5) 

Business Days would provide Tier One Netting 

Members or Tier One Members, as applicable, with 

sufficient time to decide whether to cap their loss 

allocation obligations by withdrawing from their 

membership in GSD or MBSD, as applicable. 

Allocation Caps of affected Tier One 

Netting Members or Tier One Members, 

as applicable (a ‘‘round cap’’). When the 

aggregate amount of losses allocated in 

a round equals the round cap, any 

additional losses relating to the 

applicable Event Period would be 

allocated in one or more subsequent 

rounds, in each case subject to a round 

cap for that round. FICC may continue 

the loss allocation process in successive 

rounds until all losses from the Event 

Period are allocated among Tier One 

Netting Members or Tier One Members, 

as applicable, that have not submitted a 

Loss Allocation Withdrawal Notice (as 

defined below and in the proposed rule 

change) in accordance with proposed 

Section 7b of GSD Rule 4 or MBSD Rule 

4. 

Each loss allocation would be 

communicated to Tier One Netting 

Members or Tier One Members, as 

applicable, by the issuance of a notice 

that advises the Tier One Netting 

Members or Tier One Members, as 

applicable, of the amount being 

allocated to them (‘‘Loss Allocation 

Notice’’). Each Tier One Netting 

Member’s or Tier One Member’s, as 

applicable, pro rata share of losses and 

liabilities to be allocated in any round 

would be equal to (i) the average of its 

Required Fund Deposit for the seventy 

(70) business days preceding the first 

day of the applicable Event Period or 

such shorter period of time that the 

member has been a member (each 

member’s ‘‘Average RFD’’), divided by 

(ii) the sum of Average RFD amounts of 

all members subject to loss allocation in 

such round. 

Each Loss Allocation Notice would 

specify the relevant Event Period and 

the round to which it relates. The first 

Loss Allocation Notice in any first, 

second, or subsequent round would 

expressly state that such Loss Allocation 

Notice reflects the beginning of the first, 

second, or subsequent round, as the case 

may be, and that each Tier One Netting 

Member or Tier One Member, as 

applicable, in that round has five (5) 

Business Days from the issuance of such 

first Loss Allocation Notice for the 

round to notify FICC of its election to 

withdraw from membership with GSD 

or MBSD, as applicable, pursuant to 

proposed Section 7b of GSD Rule 4 or 

MBSD Rule 4, as applicable, and 

thereby benefit from its Loss Allocation 

Cap.19 The ‘‘Loss Allocation Cap’’ of a 

Tier One Netting Member or Tier One 

Member, as applicable, would be equal 

to the greater of (x) its Required Fund 

Deposit on the first day of the applicable 

Event Period and (y) its Average RFD. 

After a first round of loss allocations 

with respect to an Event Period, only 

Tier One Netting Members or Tier One 

Members, as applicable, that have not 

submitted a Loss Allocation Withdrawal 

Notice in accordance with proposed 

Section 7b of GSD Rule 4 or MBSD Rule 

4, as applicable, would be subject to 

further loss allocation with respect to 

that Event Period. 

The amount of any second or 

subsequent round cap may differ from 

the first or preceding round cap because 

there may be fewer Tier One Netting 

Members or Tier One Members, as 

applicable, in a second or subsequent 

round if Tier One Netting Members or 

Tier One Members, as applicable, elect 

to withdraw from membership with 

GSD or MBSD, as applicable, as 

provided in proposed Section 7b of GSD 

Rule 4 or MBSD Rule 4, as applicable, 

following the first Loss Allocation 

Notice in any round. 

For example, for illustrative purposes 

only, after the required Corporate 

Contribution, if FICC has a $5 billion 

loss determined with respect to an 

Event Period and the sum of Loss 

Allocation Caps for all Tier One Netting 

Members or Tier One Members, as 

applicable, subject to the loss allocation 

is $4 billion, the first round would begin 

when FICC issues the first Loss 

Allocation Notice for that Event Period. 

FICC could issue one or more Loss 

Allocation Notices for the first round 

until the sum of losses allocated equals 

$4 billion. Once the $4 billion is 

allocated, the first round would end and 

FICC would need a second round in 

order to allocate the remaining $1 

billion of loss. FICC would then issue a 

Loss Allocation Notice for the $1 billion 

and this notice would be the first Loss 

Allocation Notice for the second round. 

The issuance of the Loss Allocation 

Notice for the $1 billion would begin 

the second round. 

The proposed rule change would link 

the Loss Allocation Cap to a round in 

order to provide Tier One Netting 

Members or Tier One Members, as 

applicable, the option to limit their loss 

allocation exposure at the beginning of 

each round. As proposed and as 

described further below, a Tier One 

Netting Member or Tier One Member, as 

applicable, could limit its loss 

allocation exposure to its Loss 

Allocation Cap by providing notice of 

its election to withdraw from 

membership within five (5) Business 

Days after the issuance of the first Loss 

Allocation Notice in any round. 

The proposed rule changes relating to 

the implementation of ‘‘rounds’’ and 

Loss Allocation Notices are set forth in 

proposed Section 7 of GSD Rule 4 and 

Section 7 of MBSD Rule 4, as further 

described below. 

(4) Implementing a Revised ‘‘LookBack’’ Period To Calculate a Member’s 

Loss Allocation Pro Rata Share and Its 

Loss Allocation Cap 

Currently, the GSD Rules and the 

MBSD Rules calculate a Tier One 

Netting Member’s or a Tier One 

Member’s pro rata share for purposes of 

loss allocation based on the member’s 

average daily Required Fund Deposit 

over the prior twelve (12) months (or 

such shorter period as may be available 

in the case of a member which has not 

maintained a deposit over such time 

period). The Rules currently do not 

anticipate the possibility of more than 

one Defaulting Member Event or 

Declared Non-Default Loss Event in 

quick succession. 

GSD and MBSD are proposing to 

calculate each Tier One Netting 

Member’s or Tier One Member’s, as 

applicable, pro rata share of losses and 

liabilities to be allocated in any round 

(as described above and in the proposed 

rule change) to be equal to (i) the 

member’s Average RFD divided by (ii) 

the sum of Average RFD amounts for all 

members that are subject to loss 

allocation in such round. 

Additionally, as described above and 

in the proposed rule change, if a Tier 

One Netting Member or Tier One 

Member, as applicable, withdraws from 

membership pursuant to proposed 

Section 7b of GSD Rule 4 or MBSD Rule 

4, as applicable, GSD and MBSD are 

proposing that the member’s Loss 

Allocation Cap be equal to the greater of 

(i) its Required Fund Deposit on the first 

day of the applicable Event Period or (ii) 

its Average RFD. 

FICC believes that employing a 

revised look-back period of seventy (70) 


sradovich on DSK3GMQ082PROD with NOTICES
34198 Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 

20Current Section 13 of GSD Rule 3 and MBSD 

Rule 3 requires a member to provide FICC with 10 

days written notice of the member’s termination; 

however, FICC, in its discretion, may accept such 

termination within a shorter notice period. Supra 

note 5. 

21 If a member’s Loss Allocation Cap exceeds the 

member’s then-current Required Fund Deposit, it 

must still cover the excess amount. 

22FICC believes that allowing members two (2) 

Business Days to satisfy their loss allocation 

obligations would provide Members sufficient 

notice to arrange funding, if necessary, while 

allowing FICC to address losses in a timely manner. 

23Supra note 19. 

Business Days instead of twelve (12) 

months to calculate a Tier One Netting 

Member’s or a Tier One Member’s, as 

applicable, loss allocation pro rata share 

and Loss Allocation Cap is appropriate, 

because FICC recognizes that the current 

look-back period of twelve (12) months 

is a very long period during which a 

member’s business strategy and outlook 

could have shifted significantly, 

resulting in material changes to the size 

of its portfolios. A look-back period of 

seventy (70) Business Days would 

minimize that issue yet still would be 

long enough to enable FICC to capture 

a full calendar quarter of such members’ 

activities and smooth out the impact 

from any abnormalities and/or 

arbitrariness that may have occurred. 

The proposed rule changes relating to 

the implementation of the revised lookback period are set forth in proposed 

Section 7 of GSD Rule 4 and Section 7 

of MBSD Rule 4, as further described 

below. 

(5) Capping Withdrawing Members’ 

Loss Allocation Exposure and Related 

Changes 

Currently, pursuant to Section 7(g) of 

GSD Rule 4 and MBSD Rule 4, a 

member can withdraw from 

membership in order to avail itself of a 

cap on loss allocation if the member 

notifies FICC via a written notice, in 

accordance with Section 13 of GSD Rule 

3 or MBSD Rule 3, as applicable, of its 

election to terminate its membership. 

Such notice must be provided by the 

Close of Business on the Business Day 

on which the loss allocation payment is 

due to FICC and, if properly provided to 

FICC, would limit the member’s liability 

for a loss allocation to its Required Fund 

Deposit for the Business Day on which 

the notification of allocation is provided 

to the member.20 As discussed above, 

the proposed rule change would 

continue providing members the 

opportunity to limit their loss allocation 

exposure by offering withdrawal 

options; however, the cap on loss 

allocation would be calculated 

differently and the associated 

withdrawal process would also be 

modified as it relates to withdrawals 

associated with the loss allocation 

process. In particular, the proposed rule 

change would shorten the withdrawal 

notification period from 10 days to five 

(5) Business Days, as further described 

below. 

As proposed, if a member timely 

provides notice of its withdrawal from 

membership in respect of a loss 

allocation round, the maximum amount 

of losses it would be responsible for 

would be its Loss Allocation Cap,21

provided that the member complies 

with the requirements of the withdrawal 

process in proposed Section 7b of GSD 

Rule 4 and Section 7b of MBSD Rule 4. 

Currently, pursuant to Section 7(g) of 

GSD Rule 4 and MBSD Rule 4, if 

notification is provided to a member 

that an allocation has been made against 

the member pursuant to GSD Rule 4 or 

MBSD Rule 4, as applicable, and that 

application of the member’s Required 

Fund Deposit is not sufficient to satisfy 

such obligation to make payment to 

FICC, the member is required to deliver 

to FICC by the Close of Business on the 

next Business Day, or by the Close of 

Business on the Business Day of 

issuance of the notification if so 

determined by FICC, that amount which 

is necessary to eliminate any such 

deficiency, unless the member elects to 

terminate its membership in FICC. To 

increase transparency of the timeframe 

under which FICC would require funds 

from members to satisfy their loss 

allocation obligations, FICC is proposing 

that members would receive two (2) 

Business Days’ notice of a loss 

allocation, and members would be 

required to pay the requisite amount no 

later than the second Business Day 

following issuance of such notice.22

Members would have five (5) Business 

Days 23 from the issuance of the first 

Loss Allocation Notice in any round of 

an Event Period to decide whether to 

withdraw from membership. 

Each round would allow a Tier One 

Netting Member or Tier One Member, as 

applicable, the opportunity to notify 

FICC of its election to withdraw from 

membership after satisfaction of the 

losses allocated in such round. Multiple 

Loss Allocation Notices may be issued 

with respect to each round to allocate 

losses up to the round cap. 

Specifically, the first round and each 

subsequent round of loss allocation 

would allocate losses up to a round cap 

of the aggregate of all Loss Allocation 

Caps of those Tier One Netting Members 

or Tier One Members, as applicable, 

included in the round. If a Tier One 

Netting Member or Tier One Member, as 

applicable, provides notice of its 

election to withdraw from membership, 

it would be subject to loss allocation in 

that round, up to its Loss Allocation 

Cap. If the first round of loss allocation 

does not fully cover FICC’s losses, a 

second round will be noticed to those 

members that did not elect to withdraw 

from membership in the previous 

round; however, as noted above, the 

amount of any second or subsequent 

round cap may differ from the first or 

preceding round cap because there may 

be fewer Tier One Netting Members or 

Tier One Members, as applicable, in a 

second or subsequent round if Tier One 

Netting Members or Tier One Members, 

as applicable, elect to withdraw from 

membership with GSD or MBSD, as 

applicable, as provided in proposed 

Section 7b of GSD Rule 4 or MBSD Rule 

4, as applicable, following the first Loss 

Allocation Notice in any round. 

Pursuant to the proposed rule change, 

in order to avail itself of its Loss 

Allocation Cap, a Tier One Netting 

Member or Tier One Member, as 

applicable, would need to follow the 

requirements in proposed Section 7b of 

GSD Rule 4 or MBSD Rule 4, as 

applicable, which would provide that 

the Tier One Netting Member or Tier 

One Member, as applicable, must: (i) 

Specify in its Loss Allocation 

Withdrawal Notice an effective date of 

withdrawal, which date shall not be 

prior to the scheduled final settlement 

date of any remaining obligations owed 

by the member to FICC, unless 

otherwise approved by FICC, and (ii) as 

of the time of such member’s 

submission of the Loss Allocation 

Withdrawal Notice, cease submitting 

transactions to FICC for processing, 

clearance or settlement, unless 

otherwise approved by FICC. 

As proposed, a Tier One Netting 

Member or a Tier One Member, as 

applicable, that withdraws in 

compliance with proposed Section 7b of 

GSD Rule 4 or MBSD Rule 4, as 

applicable, would remain obligated for 

its pro rata share of losses and liabilities 

with respect to any Event Period for 

which it is otherwise obligated under 

GSD Rule 4 or MBSD Rule 4, as 

applicable; however, its aggregate 

obligation would be limited to the 

amount of its Loss Allocation Cap (as 

fixed in the round for which it 

withdrew). 

The proposed rule changes are 

designed to enable FICC to continue the 

loss allocation process in successive 

rounds until all of FICC’s losses are 

allocated. To the extent that the Loss 

Allocation Cap of a Tier One Netting 

Member or Tier One Member, as 

applicable, exceeds such member’s 


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Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 34199 

24Non-default losses may arise from events such 

as damage to physical assets, a cyber-attack, or 

custody and investment losses. 

25Arguably there is an ambiguity created by the 

first paragraph of Section 7 in both GSD Rule 4 and 

MBSD Rule 4, which suggests that losses or 

liabilities may only be allocated in a member 

default scenario, while Section 5 in both GSD Rule 

4 and MBSD Rule 4 makes it clear that the 

applicable Division’s Clearing Fund may be used to 

satisfy non-default losses. 

26Section 5 of GSD Rule 4 provides that ‘‘The use 

of the Clearing Fund deposits shall be limited to 

satisfaction of losses or liabilities of the Corporation 

. . . otherwise incident to the clearance and 

settlement business of the Corporation . . .’’ Supra 

note 5. 

Section 5 of MBSD Rule 4 provides that ‘‘The use 

of the Clearing Fund deposits and assets and 

property on which the Corporation has a lien on 

shall be limited to satisfaction of losses or liabilities 

of the Corporation . . . otherwise incident to the 

clearance and settlement business of the 

Corporation with respect to losses and liabilities to 

meet unexpected or unusual requirements for funds 

that represent a small percentage of the Clearing 

Fund. . .’’ Supra note 5. 

27Section 7(f) of GSD Rule 4 provides that ‘‘Any 

loss or liability incurred by the Corporation 

incident to its clearance and settlement business 

. . . arising other than from a Remaining Loss 

(hereinafter, an ‘‘Other Loss’’) shall be allocated 

among Tier One Netting Members, ratably, in 

accordance with the respective amounts of their 

Average Required FICC Clearing Fund Deposits. 

Supra note 5. 

Section 7(f) of MBSD Rule 4 provides that ‘‘Any 

loss or liability incurred by the Corporation 

incident to its clearance and settlement business 

. . . arising other than from a Remaining Loss 

(hereinafter, an ‘‘Other Loss’’), shall be allocated 

among Tier One Members, ratably, in accordance 

with the respective amounts of their Average 

Required Clearing Fund Deposits. Supra note 5. 

Required Fund Deposit on the first day 

of an Event Period, FICC may in its 

discretion retain any excess amounts on 

deposit from the member, up to the Loss 

Allocation Cap of a Tier One Netting 

Member or Tier One Member, as 

applicable. 

The proposed rule changes relating to 

capping withdrawing members’ loss 

allocation exposure and related changes 

to the withdrawal process are set forth 

in proposed Sections 7 and 7b of GSD 

Rule 4 and Sections 7 and 7b of MBSD 

Rule 4, as further described below. 

B. Changes To Align Loss Allocation 

Rules 

The proposed rule changes would 

align the loss allocation rules, to the 

extent practicable and appropriate, of 

the three DTCC Clearing Agencies so as 

to provide consistent treatment, 

especially for firms that are participants 

of two or more DTCC Clearing Agencies. 

As proposed, the loss allocation 

waterfall and certain related provisions, 

e.g., returning a former member’s 

Clearing Fund, would be consistent 

across the DTCC Clearing Agencies to 

the extent practicable and appropriate. 

The proposed rule changes of FICC that 

would align loss allocation rules of the 

DTCC Clearing Agencies are set forth in 

proposed Sections 1, 5, 6, 10, and 11 of 

GSD Rule 4 and MBSD Rule 4, as further 

described below. 

C. Clarifying Changes Relating to Loss 

Allocation 

The proposed rule changes are 

intended to make the provisions in the 

Rules governing loss allocation more 

transparent and accessible to members. 

In particular, FICC is proposing the 

following changes relating to loss 

allocation to clarify members’ 

obligations for Declared Non-Default 

Loss Events. 

Aside from losses that FICC might 

face as a result of a Defaulting Member 

Event, FICC could incur non-default 

losses incident to each Division’s 

clearance and settlement business.24

The GSD Rules and the MBSD Rules 

currently permit FICC to apply Clearing 

Fund to non-default losses.25 Section 5 

of GSD Rule 4 and MBSD Rule 4 

provides that the use of Clearing Fund 

deposits is limited to satisfaction of 

losses or liabilities of FICC, which 

includes losses or liabilities that are 

otherwise incident to the operation of 

the clearance and settlement business of 

FICC, although the application of 

Clearing Fund to such losses or 

liabilities is more limited under MBSD 

Rule 4 when compared to GSD Rule 4.26

Section 7(f) of GSD Rule 4 and MBSD 

Rule 4 provides that any loss or liability 

incurred by the Corporation incident to 

its clearance and settlement business 

arising other than from a Remaining 

Loss shall be allocated among Tier One 

Netting Members or Tier One Members, 

as applicable, ratably, in accordance 

with their Average Required Clearing 

Fund Deposits.27

If there is a failure of FICC following 

a non-default loss, such occurrence 

would affect members in much the same 

way as a failure of FICC following a 

Defaulting Member Event. Accordingly, 

FICC is proposing rule changes to 

enhance the provisions relating to nondefault losses by clarifying members’ 

obligations for such losses and aligning 

the non-default loss provisions in the 

GSD Rules and the MBSD Rules. 

Specifically, for both the GSD Rules 

and the MBSD Rules, FICC is proposing 

enhancement of the governance around 

non-default losses that would trigger 

loss allocation to Tier One Netting 

Members or Tier One Members, as 

applicable, by specifying that the Board 

of Directors would have to determine 

that there is a non-default loss that may 

be a significant and substantial loss or 

liability that may materially impair the 

ability of FICC to provide clearance and 

settlement services in an orderly 

manner and will potentially generate 

losses to be mutualized among the Tier 

One Netting Members or Tier One 

Members, as applicable, in order to 

ensure that FICC may continue to offer 

clearance and settlement services in an 

orderly manner. The proposed rule 

change would provide that FICC would 

then be required to promptly notify 

members of this determination (a 

‘‘Declared Non-Default Loss Event’’). In 

addition, FICC is proposing to better 

align the interest of FICC with those of 

its members by stipulating a mandatory 

Corporate Contribution apply to a 

Declared Non-Default Loss Event prior 

to any allocation of the loss among 

members, as described above. 

Additionally, FICC is proposing 

language to clarify members’ obligations 

for Declared Non-Default Loss Events. 

Under the proposal, FICC would 

clarify the Rules of both Divisions to 

make clear that Tier One Netting 

Members or Tier One Members, as 

applicable, are subject to loss allocation 

for non-default losses (i.e., Declared 

Non-Default Loss Events under the 

proposal) and Tier Two Members are 

not subject to loss allocation for nondefault losses. 

The proposed rule changes relating to 

Declared Non-Default Loss Events and 

members’ obligations for such events are 

set forth in proposed Section 7 of GSD 

Rule 4 and Section 7 of MBSD Rule 4, 

as further described below. 

D. Amending Language Regarding 

FICC’s Use of MBSD Clearing Fund 

The proposed rule change would 

delete language currently in Section 5 of 

MBSD Rule 4 that limits certain uses by 

FICC of the MBSD Clearing Fund to 

‘‘unexpected or unusual’’ requirements 

for funds that represent a ‘‘small 

percentage’’ of the MBSD Clearing 

Fund. FICC believes that these limiting 

phrases (which appear in connection 

with FICC’s use of MBSD Clearing Fund 

to cover losses and liabilities incident to 

its clearance and settlement business 

outside the context of an MBSD 

Defaulting Member Event as well as to 

cover certain liquidity needs) are vague 

and imprecise, and should be replaced 

in their entirety. Specifically, FICC is 

proposing to delete the limiting 

language with respect to FICC’s use of 

MBSD Clearing Fund to cover losses 

and liabilities incident to its clearance 

and settlement business outside the 

context of an MBSD Defaulting Member 

Event so as to not have such language 

be interpreted as impairing FICC’s 

ability to access the MBSD Clearing 

Fund in order to manage non-default 

losses. FICC is also proposing to delete 


sradovich on DSK3GMQ082PROD with NOTICES
34200 Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 

28For purposes of this example, FICC has 

assumed that no losses have arisen that apply to 

Tier Two Netting Members, Tier Two Members, or 

CCIT Members. 

29The retained earnings are applied to the 

respective Divisions in the same proportion that the 

losses of that Division bear to the total losses of 

both Divisions. 

30The Corporate Contribution would be applied 

to the respective Divisions in the same proportion 

that the aggregate Average RFDs of all members in 

that Division bear to the aggregate Average RFDs of 

all members in both Divisions. For the purposes of 

this example, FICC has assumed that the aggregate 

Average RFDs of all GSD members is $10 billion 

and the aggregate Average RFDs of all MBSD 

members is $5.2 billion. 

the limiting language with respect to 

FICC’s use of MBSD Clearing Fund to 

cover certain liquidity needs because 

the effect of the limitation in this 

context is confusing and unclear. 

The proposed rule changes relating to 

FICC’s use of MBSD Clearing Fund are 

set forth in proposed Section 5 of MBSD 

Rule 4, as further described below. 

The foregoing changes as well as other 

changes (including a number of 

conforming and technical changes) that 

FICC is proposing in order to improve 

the transparency and accessibility of the 

Rules are described in detail below. 

E. Loss Allocation Waterfall Comparison 

The following example 28 illustrates 

the differences between the current and 

proposed loss allocation provisions: 

Assumptions 

(i) Firms A, B, and X are each a GSD 

Netting Member and an MBSD Clearing 

Member and are referred to as Member 

A, Member B, and Member X, 

respectively. 

(ii) Member A defaults on a Business 

Day (Day 1). On the same day, FICC 

ceases to act for Member A and notifies 

members of the cease to act. After 

liquidating Member A’s portfolio and 

applying Member A’s Clearing Fund 

deposit, FICC has a total loss of $350 

million, with $200 million in GSD and 

$150 million in MBSD. 

(iii) Member X voluntarily retires 

from membership five (5) Business Days 

after FICC ceases to act for Member A 

(Day 6). 

(iv) Member B defaults seven (7) 

Business Days after FICC ceases to act 

for Member A (Day 8). On the same day, 

FICC ceases to act for Member B and 

notifies members of the cease to act. 

After liquidating Member B’s portfolio 

and applying Member B’s Clearing Fund 

deposit, FICC has a total loss of $350 

million, with $200 million in GSD and 

$150 million in MBSD. 

(v) The current FICC loss provisions 

require FICC to contribute up to 25% of 

its retained earnings as a corporate 

contribution. For the purposes of this 

example, it is assumed that FICC will 

contribute 25% of its retained earnings. 

The amount of FICC’s retained earnings 

is $176 million. 

(vi) FICC’s General Business Risk 

Capital Requirement is $98 million. 

Current Loss Allocation 

Under the current loss allocation 

provisions, with respect to the losses 

arising out of Member A’s default, FICC 

will contribute a total of $44 million 

($176 million * 25%) from retained 

earnings,29 with approximately $25 

million ($44 million* ($200 million/ 

$350 million)) for GSD and 

approximately $19 million ($44 

million* ($150 million/$350 million)) 

for MBSD. FICC will then allocate the 

remaining GSD loss of $175 million 

($200 million ¥ $25 million) to GSD 

Tier One Netting Members and the 

remaining MBSD loss of $131 million 

($150 million ¥ $19 million) to MBSD 

Tier One Members. 

With respect to losses arising out of 

Member B’s default, FICC will 

contribute a total of approximately $33 

million (($176 million ¥ $44 million) * 

25%) from retained earnings, with 

approximately $19 million ($33 million 

* ($200 million/$350 million)) for GSD 

and approximately $14 million ($33 

million * ($150 million/$350 million)) 

for MBSD. FICC will then allocate the 

remaining GSD loss of $181 million 

($200 million ¥ $19 million) to GSD 

Tier One Netting Members and the 

remaining MBSD loss of $136 million 

($150 million ¥ $14 million) to MBSD 

Tier One Members. 

Altogether, with respect to losses 

arising out of defaults of Member A and 

Member B, FICC will contribute a total 

of approximately $77 million of retained 

earnings, with approximately $44 

million for GSD and approximately $33 

million for MBSD. FICC will allocate 

losses of $356 million to GSD Tier One 

Netting Members and $267 million to 

MBSD Tier One Members. 

Proposed Loss Allocation 

Under the proposed loss allocation 

provisions, a Defaulting Member Event 

with respect to Member A’s default 

would have occurred on Day One, and 

a Defaulting Member Event with respect 

to Member B’s default would have 

occurred on Day 8. Because the 

Defaulting Member Events occurred 

during a 10-business day period, they 

would be grouped together into an 

Event Period for purposes of allocating 

losses to members. The Event Period 

would begin on the 1st business day and 

end on the 10th business day. 

With respect to losses arising out of 

Member A’s default, FICC would apply 

a Corporate Contribution of $49 million 

($98 million * 50%),30 with 

approximately $32 million ($49 million 

* ($10 billion/$15.2 billion)) for GSD 

and approximately $17 million ($49 

million * ($5.2 billion/$15.2 billion)) for 

MBSD. FICC would then allocate the 

remaining GSD loss of $168 million 

($200 million ¥ $32 million) to GSD 

Tier One Netting Members and the 

remaining MBSD loss of $133 million 

($150 million ¥ $17 million) to MBSD 

Tier One Members. With respect to 

losses arising out of Member B’s default, 

FICC would not apply a Corporate 

Contribution since it would have 

already contributed the maximum 

Corporate Contribution of 50% of its 

General Business Risk Capital 

Requirement. With respect to losses 

arising out of Member B’s default, FICC 

would allocate the GSD loss of $200 

million to GSD Tier One Netting 

Members and the MBSD loss of $150 

million to MBSD Tier One Members. 

Because Member X was a member in 

both Divisions on the first day of the 

Event Period, Member X would be 

subject to loss allocation with respect to 

all events occurring during the Event 

Period, even if the event occurred after 

its retirement. Therefore, Member X 

would be subject to loss allocation with 

respect to Member B’s default. 

Altogether, with respect to losses 

arising out of defaults of Member A and 

Member B, FICC would apply a 

Corporate Contribution of $49 million, 

with approximately $32 million for GSD 

and approximately $17 million for 

MBSD. FICC would allocate losses of 

$368 million to GSD Tier One Netting 

Members and $283 million to MBSD 

Tier One Members. 

The principal differences in the above 

example are due to (i) the proposed 

changes to the calculation and 

application of the Corporate 

Contribution and (ii) the proposed 

introduction of an Event Period. 

(ii) Detailed Description of the Proposed 

Rule Changes Related to Loss Allocation 

A. Proposed Changes to GSD Rule 4 

(Clearing Fund and Loss Allocation) and 

MBSD Rule 4 (Clearing Fund and Loss 

Allocation) 

Overview of GSD Rule 4 and MBSD 

Rule 4 

GSD Rule 4 and MBSD Rule 4 

currently address Clearing Fund 

requirements and loss allocation 

obligations, as well as permissible uses 

of the Clearing Fund. These Rules 

address the various Clearing Fund 

calculations for each Division’s Clearing 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 34201 

31See Securities Exchange Act Release No. 79528 

(December 12, 2016), 81 FR 91232 (December 16, 

2016) (SR–FICC–2016–005). The Clearing Agency 

Investment Policy (the ‘‘Policy’’) governs the 

management, custody, and investment of cash 

deposited to the GSD and MBSD Clearing Funds, 

the proprietary liquid net assets (cash and cash 

equivalents) of FICC and other funds held by FICC. 

The Policy sets forth guiding principles for the 

investment of those funds, which include 

adherence to a conservative investment philosophy 

that places the highest priority on maximizing 

liquidity and avoiding risk, as well as mandating 

the segregation and separation of funds. The Policy 

also addresses the process for evaluating credit 

ratings of counterparties and identifies permitted 

investments within specified parameters. In 

general, assets are required to be held by regulated 

and creditworthy financial institution 

counterparties and invested in financial 

instruments that, with respect to the GSD and 

MBSD Clearing Funds, may include deposits with 

banks, including the Federal Reserve Bank of New 

York, collateralized reverse-repurchase agreements, 

direct obligations of the U.S. government and 

money-market mutual funds. 

Fund and set forth rights, obligations 

and other aspects associated with each 

Division’s Clearing Fund, as well as 

each Division’s loss allocation process. 

GSD Rule 4 and MBSD Rule 4 are each 

currently organized into 12 sections. 

Sections of these Rules that FICC is 

proposing to change are described 

below. 

Section 1 of GSD Rule 4 and MBSD 

Rule 4 

Currently, Section 1 of GSD Rule 4 

and MBSD Rule 4 set forth the 

requirement that each GSD Netting 

Member and each MBSD Clearing 

Member make and maintain a deposit to 

the Clearing Fund at the minimum level 

set forth in the respective Rule 4 and 

note that the timing of such payment is 

set forth in another section of the 

respective Rule 4. Current Section 1 of 

the respective rule also provides that the 

deposits to the Clearing Fund will be 

held by FICC or its designated agents. 

Current Section 1 of MBSD Rule 4 also 

defines the term ‘‘Transaction’’ for 

purposes of MBSD Rule 4 and 

references a Member’s obligation to 

replenish the deficit in its Required 

Fund Deposit if it is charged by FICC 

under certain circumstances. 

FICC is proposing to rename the 

subheading of Section 1 of Rule 4 in 

both the GSD Rules and MBSD Rules 

from ‘‘General’’ to ‘‘Required Fund 

Deposits’’ and to restructure the 

wording of the provisions for clarity and 

readability. 

Under the proposed rule change, 

Section 1 of GSD Rule 4 and Section 1 

of MBSD Rule 4 would continue to have 

the same provisions as they relate to 

Netting Members or Clearing Members, 

as applicable, except for the following: 

(i) The language throughout the sections 

would be reorganized, streamlined and 

clarified, and (ii) language would be 

added regarding additional deposits 

maintained by the Netting Members or 

Clearing Members, as applicable, at 

FICC, and highlight for members that 

such additional deposits would be 

deemed to be part of the Clearing Fund 

and the member’s Actual Deposit (as 

discussed below and as defined in the 

proposed rule change) but would not be 

deemed to be part of the member’s 

Required Fund Deposit. 

The proposed language regarding 

maintenance of a member’s Actual 

Deposit would also make it clear that 

FICC will not be required to segregate 

such deposit, but shall maintain books 

and records concerning the assets that 

constitute each member’s Actual 

Deposit. 

In addition, FICC proposes a technical 

change to update a cross reference in 

Section 1 of GSD Rule 4 and MBSD 

Rule 4. 

Furthermore, in Section 1 of MBSD 

Rule 4, FICC is proposing to move the 

definition of ‘‘Transactions’’ to 

proposed Section 2(a) of MBSD Rule 4, 

where the first usage of ‘‘Transactions’’ 

in MBSD Rule 4 appears. FICC is also 

proposing to delete the last sentence in 

Section 1 of MBSD Rule 4, which 

references a Member’s obligation to 

replenish the deficit in its Required 

Fund Deposit if it is charged by FICC 

under certain circumstances, because it 

would no longer be relevant under the 

proposed rule change to Section 7 of 

MBSD Rule 4, as FICC would require 

members to pay their loss allocation 

amounts instead of charging their 

Required Fund Deposits for Clearing 

Fund losses. 

Section 2 of GSD Rule 4 and MBSD 

Rule 4 

Current Section 2 of GSD Rule 4 and 

MBSD Rule 4 set forth more detailed 

requirements pertaining to members’ 

Required Fund Deposits. FICC is 

proposing to rename the subheadings in 

these sections from ‘‘Required Fund 

Deposit’’ to ‘‘Required Fund Deposit 

Requirements’’ in order to better reflect 

the purpose of this section. 

In addition, FICC is proposing to 

expand the definition of ‘‘Legal Risk’’ in 

both the GSD and MBSD provisions 

(current Section 2(e) of GSD Rule 4 and 

Section 2(f) of MBSD Rule 4) by revising 

the parameters of Legal Risk so that it 

would not be limited to laws applicable 

to a member’s insolvency or bankruptcy, 

as FICC believes that Legal Risk may 

arise outside the context of an 

insolvency or bankruptcy event 

regarding a member, and FICC should 

be permitted to adequately protect itself 

in those non- insolvency/bankruptcy 

circumstances as well. 

For better organization of Rule 4, FICC 

is also proposing to relocate the 

provision on minimum Clearing Fund 

cash requirements (current Section 2(b) 

of GSD Rule 4 and Section 2(d) of MBSD 

Rule 4) to the section in each of GSD 

Rule 4 and MBSD Rule 4 dealing 

specifically with the form of Clearing 

Fund deposits (proposed Section 3 of 

GSD Rule 4 and MBSD Rule 4). This 

would necessitate the re-lettering of the 

provisions in Section 2. In addition, as 

stated above, the provision regarding the 

definition of ‘‘Transactions’’ for 

purposes of MBSD Rule 4 would be 

moved to proposed Section 2(a) from 

current Section 1. 

FICC is proposing technical changes 

to correct typographical errors in 

current Section 2 of GSD Rule 4. 

Sections 3, 3a and 3b of GSD Rule 4 and 

MBSD Rule 4 

Currently, Sections 3, 3a and 3b of 

GSD Rule 4 and MBSD Rule 4 address 

the permissible form of Clearing Fund 

deposits and contain detailed 

requirements regarding each form. FICC 

is proposing changes to improve the 

readability of these sections. 

In addition, for better organization of 

the subject matter, FICC is proposing to 

move certain paragraphs from one 

section to another, including (i) moving 

clauses (b) and (d) in current Section 2 

of GSD Rule 4 and MBSD Rule 4, 

respectively, to proposed Section 3 of 

GSD Rule 4 and MBSD Rule 4 and (ii) 

moving the last paragraph of current 

Section 3 in GSD Rule 4 and MBSD Rule 

4 to proposed Section 3b of GSD Rule 

4 and MBSD Rule 4. 

Under the proposed rule change, FICC 

is also proposing to update the cash 

investment provision in Section 3a of 

GSD Rule 4 and MBSD Rule 4 to reflect 

the Clearing Agency Investment Policy 

adopted by FICC31 and to define 

Clearing Fund Cash as (i) cash deposited 

by a Netting Member or Clearing 

Member, as applicable, as part of its 

Actual Deposit, (ii) the proceeds of (x) 

any loans made to FICC secured by the 

pledge by FICC of Eligible Clearing 

Fund Securities pledged to FICC or (y) 

any sales of Eligible Clearing Fund 

Securities pledged to FICC, (iii) cash 

receipts from any investment of, 

repurchase or reverse repurchase 

agreements relating to, or liquidation of, 

Clearing Fund assets, and (iv) cash 

payments on Eligible Letters of Credit. 

Lastly, FICC is proposing technical 

changes to correct typographical errors 

in current Section 3 of MBSD Rule 4 

and current Section 3b of GSD Rule 4. 


sradovich on DSK3GMQ082PROD with NOTICES
34202 Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 

Section 4 of GSD Rule 4 and MBSD 

Rule 4 

Currently, Section 4 of GSD Rule 4 

and MBSD Rule 4 address the granting 

of a first priority perfected security 

interest by each Netting Member or 

Clearing Member, as applicable, in all 

assets and property placed by the 

member in the possession of FICC (or its 

agents acting on its behalf). FICC is not 

proposing any substantive changes to 

these sections except for streamlining 

the provisions for readability and 

clarity, and adding ‘‘Actual Deposit’’ as 

a defined term to refer to Eligible 

Clearing Fund Securities, funds and 

assets pledged to FICC to secure any and 

all obligations and liabilities of a 

Netting Member or a Clearing Member, 

as applicable, to FICC. 

Section 5 of GSD Rule 4 and MBSD 

Rule 4 

Currently, Section 5 of GSD Rule 4 

and MBSD Rule 4 describe the use of 

each Division’s Clearing Fund. FICC is 

proposing to rename the subheading of 

this section from ‘‘Use of Deposits and 

Payments’’ to ‘‘Use of Clearing Fund’’ to 

better reflect the purpose of the section. 

Under the proposed rule change, FICC 

is also proposing changes to streamline 

this section for clarity and readability 

and to align the GSD Rules and MBSD 

Rules. Specifically, FICC is proposing to 

delete the first paragraph of current 

Section 5 of GSD Rule 4 and MBSD Rule 

4 and replace it with clearer language 

that sets forth the permitted uses of each 

Division’s Clearing Fund. Specifically, 

the proposed Section 5 of GSD Rule 4 

and MBSD Rule 4 provides that each 

Division’s Clearing Fund would only be 

used by FICC (i) to secure each 

member’s performance of obligations to 

FICC, including, without limitation, 

each member’s obligations with respect 

to any loss allocations as set forth in 

proposed Section 7 of GSD Rule 4 and 

MBSD Rule 4 and any obligations 

arising from a Cross-Guaranty 

Agreement pursuant to GSD Rule 41 or 

MBSD Rule 32, as applicable, or a CrossMargining Agreement pursuant to GSD 

Rule 43, (ii) to provide liquidity to FICC 

to meet its settlement obligations, 

including, without limitation, through 

the direct use of cash in the GSD 

Clearing Fund or MBSD Clearing Fund, 

as applicable, or through the pledge or 

rehypothecation of pledged Eligible 

Clearing Fund Securities in order to 

secure liquidity, and (iii) for investment 

as set forth in proposed Section 3a of 

GSD Rule 4 and MBSD Rule 4. 

The current first paragraph of Section 

5 of GSD Rule 4 and MBSD Rule 4 

provides that if FICC pledges, 

hypothecates, encumbers, borrows, or 

applies any part of the respective 

Division’s Clearing Fund deposits to 

satisfy any liability, obligation, or 

liquidity requirements for more than 

thirty (30) days, FICC, at the Close of 

Business on the 30th day (or on the first 

Business Day thereafter) will consider 

the amount used as an actual loss to the 

respective Division’s Clearing Fund and 

immediately allocate such loss in 

accordance with Section 7 of GSD Rule 

4 or MBSD Rule 4, as applicable. As 

proposed, FICC would retain this 

provision conceptually but replace it 

with clearer and streamlined language 

that provides that each time FICC uses 

any part of the respective Division’s 

Clearing Fund for more than 30 calendar 

days to provide liquidity to FICC to 

meet its settlement obligations, 

including, without limitation, through 

the direct use of cash in the Clearing 

Fund or through the pledge or 

rehypothecation of pledged Eligible 

Clearing Fund Securities in order to 

secure liquidity, FICC, at the Close of 

Business on the 30th calendar day (or 

on the first Business Day thereafter) 

from the day of such use, would 

consider the amount used but not yet 

repaid as a loss to the Clearing Fund 

incurred as a result of a Defaulting 

Member Event and immediately allocate 

such loss in accordance with proposed 

Section 7 of GSD Rule 4 or MBSD Rule 

4, as applicable. 

The proposed rule change also 

includes deleting language currently in 

Section 5 of MBSD Rule 4 that limits 

certain uses by FICC of the MBSD 

Clearing Fund to ‘‘unexpected or 

unusual’’ requirements for funds that 

represent a ‘‘small percentage’’ of the 

MBSD Clearing Fund. FICC believes that 

these limiting phrases (which appear in 

connection with FICC’s use of MBSD 

Clearing Fund to cover losses and 

liabilities incident to its clearance and 

settlement business outside the context 

of an MBSD Defaulting Member Event 

as well as to cover certain liquidity 

needs) are vague and imprecise, and 

should be replaced in their entirety. 

Specifically, FICC is proposing to delete 

the limiting language with respect to 

FICC’s use of MBSD Clearing Fund to 

cover losses and liabilities incident to 

its clearance and settlement business 

outside of an MBSD Defaulting Member 

Event so as to not have such language 

be interpreted as impairing FICC’s 

ability to access the MBSD Clearing 

Fund in order to manage non-default 

losses. FICC is also proposing to delete 

the limiting language with respect to 

FICC’s use of MBSD Clearing Fund to 

cover certain liquidity needs because 

the effect of the limitation in this 

context is confusing and unclear. 

In addition, FICC is proposing to 

delete the last paragraph in current 

Section 5 of GSD Rule 4 and MBSD Rule 

4 because these paragraphs address the 

application of a member’s deposits to 

the applicable Clearing Fund to cover 

the allocation of a loss or liability 

incurred by FICC. These paragraphs 

would no longer be relevant, because, 

under the proposed Section 7 of GSD 

Rule 4 and MBSD Rule 4 (discussed 

below), FICC would not apply the 

member’s deposit to the Clearing Fund 

unless the member does not satisfy 

payment of its allocated loss amount 

within the required timeframe. These 

paragraphs also currently include 

provisions regarding other agreements, 

such as a Cross-Guaranty Agreement, 

that pertain to a Defaulting Member, and 

such provisions would now be covered 

by proposed Section 6 of GSD Rule 4 

and MBSD Rule 4. 

Section 6 of GSD Rule 4 and MBSD 

Rule 4 

Currently, Section 6 of GSD Rule 4 

and MBSD Rule 4 are reserved for future 

use. FICC is proposing to use this 

section for provisions relating to the 

application of deposits to the respective 

Division’s Clearing Fund and other 

amounts held by FICC to a Defaulting 

Member’s obligations. 

FICC is proposing to add a 

subheading of ‘‘Application of Clearing 

Fund Deposits and Other Amounts to 

Defaulting Members’ Obligations’’ to 

Section 6 of GSD Rule 4 and MBSD Rule 

4. Under the proposed rule change, for 

better organization by subject matter, 

FICC is also proposing to relocate 

certain provisions to these sections from 

the respective current Section 7 of GSD 

Rule 4 and MBSD Rule 4, which 

addresses FICC’s application of Clearing 

Fund deposits and other assets held by 

FICC securing a Defaulting Member’s 

obligations to FICC. 

For additional clarity and for 

consistency with the loss allocation 

rules of the other DTCC Clearing 

Agencies, FICC proposes to add a 

provision which makes it clear that, if 

FICC applies a Defaulting Member’s 

Clearing Fund deposits, FICC may take 

any and all actions with respect to the 

Defaulting Member’s Actual Deposits, 

including assignment, transfer, and sale 

of any Eligible Clearing Fund Securities, 

that FICC determines is appropriate. 

Sections 7, 7a and 7b of GSD Rule 4 and 

MBSD Rule 4 

Current Section 7 of GSD Rule 4 and 

MBSD Rule 4 contains FICC’s current 

loss allocation waterfall for losses or 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 34203 

32Pursuant to Section 8(e) of GSD Rule 3, an 

Inter-Dealer Broker Netting Member is required to 

(A) limit its business to acting exclusively as a 

broker, (B) conduct all of its business in Repo 

Transactions with Netting Members, and (C) 

conduct at least 90 percent of its business in 

transactions that are not Repo Transactions with 

Netting Members. If an Inter-Dealer Broker Netting 

Member fails to comply with these requirements, 

then the Inter-Dealer Broker Netting Member shall 

be considered by FICC as a Dealer Netting Member. 

Supra note 5. 

liabilities incurred by FICC. With 

respect to any loss or liability incurred 

by FICC as the result of the failure of a 

Defaulting Member to fulfill its 

obligations to FICC, the loss allocation 

waterfall for each Division currently 

provides: 

(i) Application of any Clearing Fund 

deposits and other collateral held by 

FICC securing a Defaulting Member’s 

obligations to FICC and additional 

resources as are applicable to the 

Defaulting Member. 

(ii) If a loss or liability remains after 

the application of the Defaulting 

Member’s collateral and resources, FICC 

would apply up to 25% of FICC’s 

existing retained earnings, or such 

higher amount as the Board of Directors 

determines. 

(iii) If a loss or liability still remains 

after the application of the retained 

earnings, FICC would apply the loss or 

liability to members as follows: 

(a) If the remaining loss or liability is 

attributable to Tier One Netting 

Members or Tier One Members, as 

applicable, then FICC will allocate such 

loss or liability to Tier One Netting 

Members or Tier One Members, as 

applicable, by assessing the Required 

Fund Deposit maintained by each such 

member an amount up to $50,000, in an 

equal basis per Tier One Netting 

Member or Tier One Member, as 

applicable. 

(b) If the remaining loss or liability is 

attributable to Tier Two Members, then 

FICC will allocate such loss or liability 

to Tier Two Members based upon their 

trading activity with the Defaulting 

Member that resulted in a loss. 

(iv) If there is any loss or liability that 

still remains after the application of (ii) 

and (iii) above that is attributable to Tier 

One Netting Members or Tier One 

Members, as applicable, then FICC will 

allocate such loss or liability among Tier 

One Netting Members or Tier One 

Members, as applicable, ratably based 

on the amount of each Tier One Netting 

Member’s or Tier One Member’s 

Required Fund Deposit and based on 

the average daily level of such deposit 

over the prior twelve (12) months (or 

such shorter period as may be available 

if the member has not maintained a 

deposit over such time period). 

Current Section 7(f) of GSD Rule 4 

and MBSD Rule 4 also provides that 

Other Losses shall be allocated among 

Tier One Netting Members or Tier One 

Members, as applicable, ratably in 

accordance with the respective amounts 

of each Tier One Netting Member’s or 

Tier One Member’s Required Fund 

Deposit and based on the average daily 

level of such deposit over the prior 

twelve (12) months (or such shorter 

period as may be available if the 

member has not maintained a deposit 

over such time period). 

Currently, pursuant to Section 7(e) of 

GSD Rule 4, an Inter-Dealer Broker 

Netting Member, or a Non-IDB Repo 

Broker with respect to activity in its 

Segregated Broker Account, will not be 

subject to an aggregate allocation loss 

for any single loss-allocation event that 

exceeds $5 million. FICC believes that it 

is appropriate for GSD to retain this cap 

under the proposed rule change because 

the Inter-Dealer Broker Netting Members 

are required to limit their business as 

provided in Section 8(e) of GSD Rule 3, 

which would in turn minimize the 

potential losses or liabilities that could 

be incurred by FICC from Inter-Dealer 

Broker Netting Members.32 FICC 

believes that it is also appropriate for 

GSD to retain this cap under the 

proposed rule change for Non-IDB Repo 

Brokers because their activity in their 

respective Segregated Broker Accounts 

would be subject to similar limitations 

as the Inter-Dealer Broker Netting 

Members. However, the proposal would 

apply the cap to an Event Period instead 

of a single loss event in order to 

conform with the concept of the Event 

Period under the proposal. FICC 

believes applying the cap to an Event 

Period would continue to reasonably 

represent the risk profiles of the InterDealer Broker Netting Members, and 

Non-IDB Repo Brokers with respect to 

their Segregated Broker Accounts, 

because they submit affirmed trades 

from their systems to GSD, with each 

trade already matched to the 

counterparty that will ultimately deliver 

or receive the securities. Therefore, 

Inter-Dealer Broker Netting Members, 

and Non-IDB Repo Brokers with respect 

to their Segregated Broker Accounts, do 

not generally maintain positions with 

FICC and present minimal risk to FICC. 

FICC is also proposing technical 

changes to replace (i) the term 

‘‘Segregated Broker Account’’ with 

‘‘Segregated Repo Account’’ and (ii) the 

term ‘‘Non-IDB Broker’’ with ‘‘Non-IDB 

Repo Broker,’’ both of which are the 

correct terms defined in GSD Rule 1. 

Current Section 7(g) of GSD Rule 4 

and MBSD Rule 4 further provides that 

if the Required Fund Deposit of the 

member being allocated the loss is not 

sufficient to satisfy its loss allocation 

obligation, the member is required to 

deliver to FICC an amount that is 

necessary to eliminate the deficiency by 

the Close of Business on the next 

Business Day, or by the Close of 

Business on the Business Day of 

issuance of the notification if so 

determined by FICC. Under the current 

Rules, a member may elect to terminate 

its membership, which would limit its 

loss allocation to the amount of its 

Required Fund Deposit for the Business 

Day on which the notification of such 

loss allocation is provided to the 

member. If the member does not elect to 

terminate its membership and fails to 

satisfy its Required Fund Deposit within 

the timeframe specified in the Rules, 

FICC will cease to act generally with 

regard to such member pursuant to GSD 

Rules 21 and 22A or MBSD Rules 14 

and 17, as applicable, and may take 

disciplinary action against such member 

pursuant to GSD Rule 48 or MBSD Rule 

38, as applicable. 

Current Section 7(h) of GSD Rule 4 

and MBSD Rule 4 requires FICC to 

promptly notify members and the 

Commission of the amount involved 

and the causes if a Remaining Loss or 

Other Loss occurs. In addition, current 

Section 7(i) of GSD Rule 4 and MBSD 

Rule 4 also provides that any increase 

in Clearing Fund deposit as required by 

subsection (f) of current Section 2 of 

GSD Rule 4 or provisions of MBSD Rule 

4 regarding special charges or other 

premiums will not be taken into account 

when calculating loss allocation based 

on a GSD Member’s Average Required 

FICC Clearing Fund Deposit amount or 

an MBSD Member’s Average Required 

Fund Deposit amount, as applicable, 

under current Section 7 of GSD Rule 4 

and MBSD Rule 4. 

Under the proposed rule change, FICC 

is proposing to rename the subheading 

of Section 7 of GSD Rule 4 and MBSD 

Rule 4 to ‘‘Loss Allocation Waterfall, 

Off-the-Market Transactions.’’ In 

addition, FICC is proposing to 

restructure its loss allocation waterfall 

as described below. 

For better organization of the subject 

matter, FICC is proposing to move 

certain paragraphs from one section to 

another, including (i) relocating the last 

sentence of current Section 7(h) of GSD 

Rule 4 and MBSD Rule 4 regarding 

recovery of allocated losses or liabilities 

by FICC to the fifth paragraph of 

proposed Section 7 of GSD Rule 4 and 

MBSD Rule 4, (ii) relocating from 

current Section 7(a) of GSD Rule 4 and 

MBSD Rule 4 provisions which address 

FICC’s application of Clearing Fund 

deposits and other assets held by FICC 


sradovich on DSK3GMQ082PROD with NOTICES
34204 Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 

33Current Section 7(g) of GSD Rule 4 provides 

that a Member that elects to terminate its 

membership pursuant to alternative (ii) in Section 

7(g) of GSD Rule 4 in lieu of being liable to pay an 

additional assessment amount above its Required 

Fund Deposit shall not be eligible to re-apply to 

become a Comparison-Only Member or a Netting 

Member unless, prior to submitting such 

application, it makes the payment to FICC provided 

for in alternative (i) in Section 7(g) of GSD Rule 4, 

together with interest on that amount at the average 

of the Federal Funds Rate plus one percent, 

calculated from the date on which the Remaining 

Loss or Other Loss was incurred by FICC until the 

date of such payment. Supra note 5. 

Current Section 7(g) of MBSD Rule 4 provides 

that a Member that elects to terminate its 

membership pursuant to alternative (ii) in Section 

7(g) of MBSD Rule 4 in lieu of being liable to pay 

an additional assessment amount above its 

Required Fund Deposit shall not be eligible to reapply to become a Clearing Member unless, prior 

to submitting such application, it makes the 

payment to FICC provided for in alternative (i) in 

Section 7(g) of MBSD Rule 4, together with interest 

on that amount at the average of the Federal Funds 

Rate plus one percent, calculated from the date on 

which the Remaining Loss or Other Loss was 

incurred by FICC until the date of such payment. 

Supra note 5. 

The condition for re-application was historically 

in the rules of Government Securities Clearing 

Corporation (‘‘GSCC’’) (FICC’s predecessor) to 

solidify GSCC’s membership base and thereby 

discourage members from withdrawing from 

membership during a time of stress solely to avoid 

their loss allocation obligations. This condition was 

later incorporated into the GSD Rules and MBSD 

Rules. In the interest of continuing to encourage 

members to remain in FICC central clearing in order 

to preserve the robustness of the Treasury and 

mortgage-backed securities markets, FICC would 

like to retain this condition for re-application in the 

GSD and MBSD Rules as is. As the provision 

applies to a remote contingency and, without an 

immediate business need, NSCC and DTC would 

prefer not to add this provision at this time. 

34FICC may cease to act for a GSD Member 

pursuant to any of the circumstances set forth under 

GSD Rule 21 (Restrictions on Access to Services) or 

GSD Rule 22 (Insolvency of a Member). Supra note 

5. 

35FICC may cease to act for an MBSD Member 

pursuant to any of the circumstances set forth under 

MBSD Rule 14 (Restrictions on Access to Services) 

or MBSD Rule 16 (Insolvency of a Member). Supra 

note 5. 36Supra note 9. 

securing a Defaulting Member’s 

obligations to FICC to proposed Section 

6 of GSD Rule 4 and MBSD Rule 4, (iii) 

relocating from current Section 7 of GSD 

Rule 4 to proposed Section 6 of GSD 

Rule 4 the provision regarding FICC’s 

right to treat certain payments to an 

FCO under a Cross-Margining Guaranty 

as a loss to be allocated, (iv) relocating 

the provisions in current Section 7(i) of 

GSD Rule 4 and MBSD Rule 4 regarding 

certain increases in Clearing Fund 

deposits not being taken into account 

when calculating loss allocation so that 

such provisions would come right after 

the loss allocation calculation provision, 

with an updated reference to proposed 

renumbered Sections 2(d) and 2(e) in 

GSD Rule 4 and MBSD Rule 4, 

respectively, and (v) relocating the 

provision regarding withdrawing 

members reapplying to become 

members 33 in the second paragraph of 

current Section 7(g) of GSD Rule 4 and 

MBSD Rule 4 to come right after the 

paragraph regarding the election of a 

Tier One Netting Member or Tier One 

Member, as applicable, to withdraw 

from membership in proposed Section 7 

of GSD Rule 4 and MBSD Rule 4. 

Furthermore, in order to enhance 

readability and clarity, FICC is 

proposing a number of changes to 

streamline the language in these 

provisions. 

In Section 7 of GSD Rule 4 and MBSD 

Rule 4, as applicable, FICC is proposing 

to make it clear that no loss allocation 

under proposed GSD Rule 4 or proposed 

MBSD Rule 4, as applicable, would 

constitute a waiver of any claim FICC 

may have against a member for any 

losses or liabilities to which the member 

is subject under the Rules, including, 

without limitation, any loss or liability 

to which it may be subject under 

proposed GSD Rule 4 or proposed 

MBSD Rule 4, as applicable. FICC is 

proposing this change to preserve its 

legal rights and to make it clear to 

members that loss allocation under 

proposed GSD Rule 4 and proposed 

MBSD Rule 4 would not be deemed as 

FICC waiving any claims it may have 

against a member for any losses or 

liabilities to which the member is 

subject under the Rules. 

Under the proposal, Section 7 of GSD 

Rule 4 and MBSD Rule 4 would make 

clear that the loss allocation waterfall 

applies to losses and liabilities (i) 

arising out of or relating to a default of 

a member or (ii) otherwise incident to 

the clearance and settlement business of 

FICC (i.e., non-default losses). The loss 

allocation waterfall would be triggered 

if FICC incurs a loss or liability arising 

out of or relating to a Defaulting 

Member Event or a Declared NonDefault Loss Event. 

As proposed, Section 7 of GSD Rule 

4 and MBSD Rule 4 would provide that, 

for the purposes of GSD Rule 4 or MBSD 

Rule 4, as applicable, the term 

‘‘Defaulting Member’’ would mean a 

GSD Member or MBSD Member, as 

applicable, for which FICC has ceased to 

act pursuant to GSD Rule 21 or GSD 

Rule 22,34 or MBSD Rule 14 or MBSD 

Rule 16,35 as applicable, the term 

‘‘Defaulting Member Event’’ would 

mean the determination by FICC to 

cease to act for a GSD Member or MBSD 

Member, as applicable, pursuant to GSD 

Rule 21 or GSD Rule 22, or MBSD Rule 

14 or MBSD Rule 16, as applicable, and 

the term ‘‘Declared Non-Default Loss 

Event’’ would mean the determination 

by the Board of Directors that a loss or 

liability incident to the clearance and 

settlement business of FICC may be a 

significant and substantial loss or 

liability that may materially impair the 

ability of FICC to provide clearance and 

settlement services in an orderly 

manner and will potentially generate 

losses to be mutualized among members 

in order to ensure that FICC may 

continue to offer clearance and 

settlement services in an orderly 

manner. 

As proposed, each member would be 

obligated to FICC for the entire amount 

of any loss or liability incurred by FICC 

arising out of or relating to any 

Defaulting Member Event with respect 

to such member. Under the proposal, to 

the extent that such loss or liability is 

not satisfied pursuant to proposed 

Section 6 of GSD Rule 4 or MBSD Rule 

4, as applicable, FICC would apply a 

Corporate Contribution thereto and 

charge the remaining amount of such 

loss or liability ratably to other 

members, as provided in proposed 

Section 7 of GSD Rule 4 and MBSD 

Rule 4. 

Under proposed Section 7 of GSD 

Rule 4 and MBSD Rule 4, the loss 

allocation waterfall would begin with a 

corporate contribution from FICC 

(‘‘Corporate Contribution’’), as is the 

case under the current Rules, but in a 

different form than under the current 

Section 7 of GSD Rule 4 and MBSD Rule 

4 described above. Today, Section 7(b) 

of GSD Rule 4 and Section 7(c) of MBSD 

Rule 4 provide that, if FICC incurs any 

loss or liability as the result of the 

failure of a Defaulting Member to fulfill 

its obligations to FICC, FICC will 

contribute up to 25% of its existing 

retained earnings (or such higher 

amount as the Board of Directors shall 

determine), to such loss or liability; 

however, no corporate contribution 

from FICC is currently required for 

losses resulting other than those from 

Member impairments. Under the 

proposal, FICC would add a proposed 

new Section 7a to GSD Rule 4 and 

MBSD Rule 4 with a subheading of 

‘‘Corporate Contribution’’ and define 

FICC’s Corporate Contribution with 

respect to any loss allocation pursuant 

to proposed Section 7 of GSD Rule 4 or 

MBSD Rule 4, whether arising out of or 

relating to a Defaulting Member Event or 

a Declared Non-Default Loss Event, as 

an amount that is equal to fifty (50) 

percent of the amount calculated by 

FICC in respect of its General Business 

Risk Capital Requirement as of the end 

of the calendar quarter immediately 

preceding the Event Period.36 The 

proposed rule change would specify 


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37Supra note 10. 

38Supra note 11. 

39Supra note 13. 

40Supra note 14. 41Supra note 16. 

that FICC’s General Business Risk 

Capital Requirement, as defined in 

FICC’s Clearing Agency Policy on 

Capital Requirements,37 is, at a 

minimum, equal to the regulatory 

capital that FICC is required to maintain 

in compliance with Rule 17Ad– 

22(e)(15) under the Act.38

As proposed, if FICC applies the 

Corporate Contribution to a loss or 

liability arising out of or relating to one 

or more Defaulting Member Events or 

Declared Non-Default Loss Events 

relating to an Event Period, then for any 

subsequent Event Periods that occur 

during the two hundred fifty (250) 

Business Days thereafter,39 the 

Corporate Contribution would be 

reduced to the remaining unused 

portion of the Corporate Contribution 

amount that was applied for the first 

Event Period. Proposed Section 7a of 

both GSD Rule 4 and MBSD Rule 4 

would require FICC to notify members 

of any such reduction to the Corporate 

Contribution. 

Proposed Section 7a to GSD Rule 4 

and MBSD Rule 4 would also make 

clear that there would be one FICC 

Corporate Contribution, the amount of 

which would be available to both 

Divisions and would be applied against 

a loss or liability in either Division in 

the order in which such loss or liability 

occurs, i.e., FICC would not have two 

separate Corporate Contributions, one 

for each Division. As proposed, in the 

event of a loss or liability relating to an 

Event Period, whether arising out of or 

relating to a Defaulting Member Event or 

a Declared Non-Default Loss Event, 

attributable to only one Division, the 

Corporate Contribution would be 

applied to that Division up to the 

amount then available. Under the 

proposal, if a loss or liability relating to 

an Event Period, whether arising out of 

or relating to a Defaulting Member Event 

or a Declared Non-Default Loss Event, 

occurs simultaneously at both Divisions, 

the Corporate Contribution would be 

applied to the respective Divisions in 

the same proportion that the aggregate 

Average RFDs of all members in that 

Division bears to the aggregate Average 

RFDs of all members in both 

Divisions.40

Currently, the Rules do not require 

FICC to contribute its retained earnings 

to losses and liabilities other than those 

from member defaults. Under the 

proposal, FICC would expand the 

application of its corporate contribution 

beyond losses and liabilities as the 

result of the failure of a Defaulting 

Member to fulfill its obligations to FICC. 

The proposed Corporate Contribution 

would apply to losses or liabilities 

relating to or arising out of Defaulting 

Member Events and Declared NonDefault Loss Events, and would be a 

mandatory loss contribution by FICC 

prior to any allocation of the loss among 

the applicable Division’s members. 

Current Section 7(b) of GSD Rule 4 

and Section 7(c) of MBSD Rule 4 

provide FICC the option to contribute 

amounts higher than the specified 

percentage of retained earnings as 

determined by the Board of Directors, to 

any loss or liability incurred by FICC as 

the result of the failure of a Defaulting 

Member to fulfill its obligations to FICC. 

This option would be retained and 

expanded under the proposal to also 

cover non-default losses. Proposed 

Section 7a of GSD Rule 4 and MBSD 

Rule 4 would provide that nothing in 

the Rules would prevent FICC from 

voluntarily applying amounts greater 

than the Corporate Contribution against 

any FICC loss or liability, whether 

arising out of or relating to a Defaulting 

Member Event or a Declared NonDefault Loss Event, if the Board of 

Directors, in its sole discretion, believes 

such to be appropriate under the factual 

situation existing at the time. 

Proposed Section 7 of GSD Rule 4 and 

MBSD Rule 4 would provide that FICC 

shall apply the Corporate Contribution 

to losses and liabilities that arise out of 

or relate to one or more Defaulting 

Member Events and/or (ii) Declared 

Non-Default Loss Events that occur 

within an Event Period. The proposed 

rule change also provides that if losses 

and liabilities with respect to such 

Event Period remain unsatisfied 

following application of the Corporate 

Contribution, FICC would allocate such 

losses and liabilities to members, as 

described below. 

As proposed, Section 7 of GSD Rule 

4 and MBSD Rule 4 would retain the 

differentiation in allocating losses to 

Tier One Netting Members or Tier One 

Members, as applicable, and Tier Two 

Members. Specifically, as is the case 

today, losses or liabilities that arise out 

of or relate to one or more Defaulting 

Member Events would be attributable to 

Tier One Netting Members or Tier One 

Members, as applicable, and Tier Two 

Members, while losses or liabilities that 

arise out of or relate to one or more 

Declared Non-Default Loss Events 

would only be attributable to Tier One 

Netting Members or Tier One Members, 

as applicable. Tier Two Members would 

not be subject to loss allocation with 

respect to Declared Non-Default Loss 

Events. 

Under the proposal, FICC would 

delete the provision in current Section 

7(h) of GSD Rule 4 and MBSD Rule 4 

that requires FICC to promptly notify 

members and the Commission of the 

amounts involved and the causes if a 

Remaining Loss or Other Loss occurs 

because such notification would no 

longer be necessary under the proposed 

rule change. Under the proposed rule 

change, FICC would notify members 

subject to loss allocation of the amounts 

being allocated to them in one or more 

Loss Allocation Notices for both 

Defaulting Member Events and Declared 

Non-Default Loss Events. As such, in 

order to conform to the proposed rule 

change, FICC is proposing to eliminate 

the notification to members regarding 

the amounts involved and the causes if 

a Remaining Loss or Other Loss occurs 

that is required under current Section 

7(h) of GSD Rule 4 and MBSD Rule 4. 

FICC is also proposing to delete the 

notification to the Commission 

regarding the amounts involved and the 

causes if a Remaining Loss or Other 

Loss occurs as required in the same 

section. While as a practical matter, 

FICC would notify the Commission of a 

decision to loss allocate, FICC does not 

believe such notification needs to be 

specified in the Rules. 

In addition, FICC is proposing to 

clarify the provision related to Off-theMarket Transactions so that it is clear 

that loss or liability of FICC in 

connection with the close-out or 

liquidation of an Off-the-Market 

Transaction in the portfolio of a 

Defaulting Member would be allocated 

to the Member that was the counterparty 

to such transaction. 

Tier One Netting Members/Tier One 

Members 

For Tier One Netting Members or Tier 

One Members, as applicable, proposed 

Section 7 of GSD Rule 4 and MBSD Rule 

4 would establish the concept of an 

‘‘Event Period’’ to provide for a clear 

and transparent way of handling 

multiple loss events occurring in a 

period of ten (10) Business Days, which 

would be grouped into an Event 

Period.41 As stated above, both 

Defaulting Member Events or Declared 

Non-Default Loss Events could occur 

within the same Event Period. 

Under the proposal, an Event Period 

with respect to a Defaulting Member 

Event would begin on the day FICC 

notifies members that it has ceased to 

act for the Defaulting Member (or the 

next Business Day, if such day is not a 

Business Day). In the case of a Declared 

Non-Default Loss Event, an Event Period 


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42FICC believes that shifting from the two-step 

methodology of applying the respective Division’s 

Clearing Fund and then requiring members to 

immediately replenish it to requiring direct 

payment would increase efficiency, while 

preserving the right to charge the member’s Clearing 

Fund deposits in the event the member does not 

timely pay. Such a failure to pay would trigger 

recourse to the Clearing Fund deposits of the 

member under proposed Section 6 of GSD Rule 4 

or MBSD Rule 4, as applicable. In addition, this 

change would provide greater stability for FICC in 

times of stress by allowing FICC to retain the 

respective Division’s Clearing Fund, its critical 

prefunded resource, while charging loss allocations. 

FICC believes doing so would allow FICC to cover 

the respective Division’s current credit exposures to 

its Members at all times. By retaining the GSD and 

MBSD Clearing Funds as proposed, FICC could use 

the Clearing Funds to secure the performance 

obligations of Members to their respective Division, 

including their payment obligation for any loss 

allocation, while maintaining access to prefunded 

resources. By being able to manage the respective 

Division’s current credit exposures throughout the 

loss allocation process, FICC would be able to 

continue to provide its critical operations and 

services during what would be expected to be a 

stressful period. 43Supra note 19. 

would begin on the day that FICC 

notifies members of the Declared NonDefault Loss Event (or the next Business 

Day, if such day is not a Business Day). 

If a subsequent Defaulting Member 

Event or Declared Non-Default Loss 

Event occurs during an Event Period, 

any losses or liabilities arising out of or 

relating to any such subsequent event 

would be resolved as losses or liabilities 

that are part of the same Event Period, 

without extending the duration of such 

Event Period. 

Proposed Section 7 of GSD Rule 4 and 

MBSD Rule 4 would also retain the 

requirement of loss allocation among 

Tier One Netting Members or Tier One 

Members, as applicable, if a loss or 

liability remains after the application of 

the Corporate Contribution, as described 

above. In contrast to the current Section 

7 where FICC would assess the Required 

Fund Deposits of Tier One Netting 

Members or Tier One Members, as 

applicable, to allocate losses, under the 

proposal, FICC would require Tier One 

Netting Members or Tier One Members, 

as applicable, to pay their loss 

allocation amounts (leaving their 

Required Fund Deposits intact).42 Loss 

allocation obligations would continue to 

be calculated based upon a Tier One 

Netting Member’s or Tier One 

Member’s, as applicable, pro rata share 

of losses and liabilities (although the 

pro rata share would be calculated 

differently than it is today), and Tier 

One Netting Members or Tier One 

Members, as applicable, would still 

retain the ability to voluntarily 

withdraw from membership and cap 

their loss allocation obligation (although 

the loss allocation obligation would also 

be calculated differently than it is 

today). 

The proposed rule change to Section 

7 of GSD Rule 4 and MBSD Rule 4 

would clarify that each Tier One Netting 

Member or Tier One Member, as 

applicable, that is a Tier One Netting 

Member or Tier One Member on the first 

day of an Event Period would be 

obligated to pay its pro rata share of 

losses and liabilities arising out of or 

relating to each Defaulting Member 

Event (other than a Defaulting Member 

Event with respect to which it is the 

Defaulting Member) and each Declared 

Non-Default Loss Event occurring 

during the Event Period. The proposal 

would make it clear that any Tier One 

Netting Member or Tier One Member, as 

applicable, for which FICC ceases to act 

on a non-Business Day, triggering an 

Event Period that commences on the 

next Business Day, shall be deemed to 

be a Tier One Netting Member or Tier 

One Member, as applicable, on the first 

day of that Event Period. 

Under the proposed rule change, a 

loss allocation ‘‘round’’ would mean a 

series of loss allocations relating to an 

Event Period, the aggregate amount of 

which is limited by the round cap. 

When the aggregate amount of losses 

allocated in a round equals the round 

cap, any additional losses relating to the 

applicable Event Period would be 

allocated in one or more subsequent 

rounds, in each case subject to a round 

cap for that round. FICC may continue 

the loss allocation process in successive 

rounds until all losses from the Event 

Period are allocated among Tier One 

Netting Members or Tier One Members, 

as applicable, that have not submitted a 

Loss Allocation Withdrawal Notice in 

accordance with proposed Section 7b of 

GSD Rule 4 or MBSD Rule 4. 

As proposed, each loss allocation 

would be communicated to the Tier One 

Netting Members or Tier One Members, 

as applicable, by the issuance of a Loss 

Allocation Notice. Under the proposal, 

each Tier One Netting Member’s or Tier 

One Member’s, as applicable, pro rata 

share of losses and liabilities to be 

allocated in any round would be equal 

to (i) the member’s Average RFD 

divided by (ii) the sum of Average RFD 

amounts of all members subject to loss 

allocation in such round. 

Each Loss Allocation Notice would 

specify the relevant Event Period and 

the round to which it relates. The first 

Loss Allocation Notice in any first, 

second, or subsequent round would 

expressly state that such Loss Allocation 

Notice reflects the beginning of the first, 

second, or subsequent round, as the case 

may be, and that each Tier One Netting 

Member or Tier One Member, as 

applicable, in that round has five (5) 

Business Days from the issuance of such 

first Loss Allocation Notice for the 

round to notify FICC of its election to 

withdraw from membership with GSD 

or MBSD, as applicable, pursuant to 

proposed Section 7b of GSD Rule 4 or 

MBSD Rule 4, as applicable, and 

thereby benefit from its Loss Allocation 

Cap.43 As proposed, the ‘‘Loss 

Allocation Cap’’ of a Tier One Netting 

Member or a Tier One Member, as 

applicable, would be equal to the greater 

of (x) its Required Fund Deposit on the 

first day of the applicable Event Period 

and (y) its Average RFD. 

FICC is proposing to clarify that after 

a first round of loss allocation with 

respect to an Event Period, only Tier 

One Netting Members or Tier One 

Members, as applicable, that have not 

submitted a Loss Allocation Withdrawal 

Notice in accordance with proposed 

Section 7b of GSD Rule 4 or MBSD Rule 

4, as applicable, would be subject to 

further loss allocation with respect to 

that Event Period. 

As proposed, each such member’s pro 

rata share of losses and liabilities to be 

allocated in any round would be equal 

to (i) the member’s Average RFD, 

divided by (ii) the sum of the Average 

RFD amounts of all members subject to 

loss allocation in such round. Each such 

member would have a maximum 

payment obligation with respect to any 

loss allocation round that would be 

equal to the greater of (x) its Required 

Fund Deposit on the first day of the 

applicable Event Period or (y) its 

Average RFD (such amount would be 

each member’s ‘‘Loss Allocation Cap’’). 

Therefore, the sum of the Loss 

Allocation Caps of the members subject 

to loss allocation would constitute the 

maximum amount that FICC would be 

permitted to allocate in each round. 

FICC would retain the loss allocation 

limit of $5 million for Inter-Dealer 

Broker Netting Members, or Non-IDB 

Repo Brokers with respect to activities 

in their Segregated Broker Accounts, as 

discussed above. 

As proposed, Section 7 of GSD Rule 

4 and MBSD Rule 4, would also provide 

that, to the extent that a Tier One 

Netting Member’s or Tier One 

Member’s, as applicable, Loss 

Allocation Cap exceeds such member’s 

Required Fund Deposit on the first day 

of the applicable Event Period, FICC 

may, in its discretion, retain any excess 

amounts on deposit from the member, 

up to the Loss Allocation Cap of the Tier 

One Netting Member or Tier One 

Member, as applicable. 


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44Supra note 22. 45Supra note 19. 

As proposed, Tier One Netting 

Members or Tier One Members, as 

applicable, would have two (2) Business 

Days after FICC issues a first round Loss 

Allocation Notice to pay the amount 

specified in any such notice.44 On a 

subsequent round (i.e., if the first round 

did not cover the entire loss of the Event 

Period because FICC was only able to 

allocate up to the round cap), these 

members would also have two (2) 

Business Days after notice by FICC to 

pay their loss allocation amounts (again 

subject to their Loss Allocation Caps), 

unless the members have notified (or 

will timely notify) FICC of their election 

to withdraw from membership with 

respect to a prior loss allocation round. 

Under the proposal, if a Tier One 

Netting Member or Tier One Member, as 

applicable, fails to make its required 

payment in respect of a Loss Allocation 

Notice by the time such payment is due, 

FICC would have the right to proceed 

against such member as a Defaulting 

Member that has failed to satisfy an 

obligation in accordance with proposed 

Section 6 of GSD Rule 4 or MBSD Rule 

4 described above. Members who wish 

to withdraw from membership would be 

required to comply with the 

requirements in proposed Section 7b of 

GSD Rule 4 and MBSD Rule 4, 

described further below. Specifically, 

proposed Section 7 of GSD Rule 4 and 

MBSD Rule 4 would provide that if, 

after notifying FICC of its election to 

withdraw from membership pursuant to 

proposed Section 7b of GSD Rule 4 or 

MBSD Rule 4, as applicable, the Tier 

One Netting Member or Tier One 

Member, as applicable, fails to comply 

with the provisions of proposed Section 

7b of GSD Rule 4 or MBSD Rule 4, as 

applicable, its notice of withdrawal 

would be deemed void and any further 

losses resulting from the applicable 

Event Period may be allocated against it 

as if it had not given such notice. 

FICC is proposing to delete the 

provisions in the current GSD Rule 4 

and MBSD Rule 4 that require FICC to 

assess the Required Fund Deposit 

maintained by each Tier One Netting 

Member or Tier One Member, as 

applicable, an amount up to $50,000, in 

an equal basis per such member, before 

allocating losses to Tier One Netting 

Members or Tier One Members, as 

applicable, ratably, in accordance with 

each such member’s Required Fund 

Deposit and Average Required FICC 

Clearing Fund Deposit or Average 

Required Clearing Fund Deposit, as 

applicable. FICC believes that in the 

event of a loss or liability, this 

assessment is unlikely to alleviate the 

need for loss mutualization and creates 

an unnecessary administrative burden 

for each Division. FICC believes that 

moving straight to the loss 

mutualization described herein would 

be more practical. This proposed change 

would also streamline each Division’s 

loss allocation waterfall processes and 

align such processes with those of the 

other DTCC Clearing Agencies. 

Tier Two Members 

FICC is not proposing any substantive 

change to the provisions regarding Tier 

Two Members in current Section 7 of 

GSD Rule 4 and MBSD Rule 4, except 

to (i) add a subheading of ‘‘Tier Two 

Members’’ in the beginning of these 

provisions for ease of identification and 

(ii) add a paragraph that makes it clear 

that if a Tier Two Member fails to make 

its required payment in respect of a Loss 

Allocation Notice by the time such 

payment is due, FICC would have the 

right to proceed against such member as 

a Defaulting Member that has failed to 

satisfy an obligation in accordance with 

proposed Section 6 of GSD Rule 4 or 

MBSD Rule 4 described above, 

consistent with the proposed change 

regarding Tier One Netting Members or 

Tier One Members, as applicable. 

Withdrawal From Membership 

Proposed Section 7b of GSD Rule 4 

and MBSD Rule 4 would include the 

provisions regarding withdrawal from 

membership currently covered by 

Section 7(g) of GSD Rule 4 and MBSD 

Rule 4. FICC believes that relocating the 

provisions on withdrawal from 

membership as it pertains to loss 

allocation, so that it comes right after 

the section on the loss allocation 

waterfall, would provide for the better 

organization of GSD Rule 4 and MBSD 

Rule 4. As proposed, the subheading for 

Section 7b of GSD Rule 4 and MBSD 

Rule 4 would read ‘‘Withdrawal 

Following Loss Allocation.’’ 

Currently, Section 7(g) of GSD Rule 4 

and MBSD Rule 4 provides that a 

member may, pursuant to current 

Section 13 of GSD Rule 3 or MBSD Rule 

3, notify FICC by the Close of Business 

on the Business Day on which a 

payment in an amount necessary to 

cover losses allocated to such member 

after the application of its Required 

Fund Deposit is due, of its election to 

terminate its membership and thereby 

avail itself of a cap on loss allocation, 

which is currently its Required Fund 

Deposit as fixed on the Business Day the 

pro rata charge loss allocation 

notification is provided to such 

member. 

As stated above, under the proposed 

rule change, Section 7 of GSD Rule 4 

and MBSD Rule 4 would provide that a 

Tier One Netting Member or a Tier One 

Member, as applicable, who wishes to 

withdraw from membership in respect 

of a loss allocation round must provide 

notice of its election to withdraw (‘‘Loss 

Allocation Withdrawal Notice’’) within 

five (5) Business Days from the issuance 

of the first Loss Allocation Notice in any 

round.45 In order to avail itself of its 

Loss Allocation Cap, such member 

would need to follow the requirements 

in proposed Section 7b of GSD Rule 4 

and MBSD Rule 4, as applicable, which 

would provide that such member must: 

(i) Specify in its Loss Allocation 

Withdrawal Notice an effective date for 

withdrawal from membership, which 

date shall not be prior to the scheduled 

final settlement date of any remaining 

obligations owed by the member to 

FICC, unless otherwise approved by 

FICC, and (ii) as of the time of such 

member’s submission of the Loss 

Allocation Withdrawal Notice, cease 

submitting transactions to FICC for 

processing, clearance or settlement, 

unless otherwise approved by FICC. 

Proposed Section 7b of GSD Rule 4 

and MBSD Rule 4 would provide that a 

Tier One Netting Member or a Tier One 

Member, as applicable, that withdraws 

in compliance with the requirements of 

proposed Section 7b of GSD Rule 4 or 

MBSD Rule 4, as applicable, would 

nevertheless remain obligated for its pro 

rata share of losses and liabilities with 

respect to any Event Period for which it 

is otherwise obligated under proposed 

GSD Rule 4 or MBSD Rule 4, as 

applicable; however, the Tier One 

Netting Member’s or Tier One 

Member’s, as applicable, aggregate 

obligation would be limited to the 

amount of its Loss Allocation Cap (as 

fixed in the round for which it 

withdrew). 

FICC is proposing to include a 

sentence in proposed Section 7b of GSD 

Rule 4 and MBSD Rule 4 to make it 

clear that if the Tier One Netting 

Member or Tier One Member, as 

applicable, fails to comply with the 

requirements set forth in that section, its 

Loss Allocation Withdrawal Notice will 

be deemed void, and such member will 

remain subject to further loss allocations 

pursuant to proposed Section 7 of GSD 

Rule 4 and MBSD Rule 4 as if it had not 

given such notice. 

For better organization of the subject 

matter, FICC is also proposing to move 

the provision that covers members’ 

obligations to eliminate any deficiency 

in their Required Fund Deposits from 

the last sentence in the first paragraph 

of current Section 7(g) of GSD Rule 4 


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46See Section 12 of Rule 4 in NSCC’s Rules and 

Procedures, available at http://www.dtcc.com/∼/ 

media/Files/Downloads/legal/rules/nscc_rules.pdf. 

and MBSD Rule 4 to proposed Section 

9 of GSD Rule 4 and MBSD Rule 4. 

Section 8 

As proposed, Section 8 of GSD Rule 

4 and MBSD Rule 4 would cover the 

provisions on the return of a member’s 

Clearing Fund deposit that are currently 

covered by Section 10 of GSD Rule 4 

and MBSD Rule 4. Proposed Section 8’s 

subheading would be ‘‘Return of 

Members’ Clearing Fund Deposits.’’ 

FICC is proposing changes to 

streamline and enhance the clarity and 

readability of this section, including 

adding language to clarify that a 

member’s obligations to FICC would 

include both matured as well as 

contingent obligations, but is otherwise 

retaining the substantive provisions of 

this section. 

Section 9 

FICC is proposing to renumber 

Section 8 of GSD Rule 4 and MBSD Rule 

4, which addresses the timing of 

members’ payment of the respective 

Division’s Clearing Fund. Under the 

proposal, this section would be 

renumbered as Section 9 of GSD Rule 4 

and MBSD Rule 4 and retitled to ‘‘Initial 

Required Fund Deposit and Changes in 

Members’ Required Fund Deposits’’ to 

better reflect the subject matter of this 

section. 

Currently, Section 8 of GSD Rule 4 

and MBSD Rule 4 requires members to 

satisfy any increase in their Required 

Fund Deposit requirement within such 

time as FICC requires. FICC is proposing 

to clarify that at the time the increase 

becomes effective, the member’s 

obligations to FICC will be determined 

in accordance with the increased 

Required Fund Deposit whether or not 

the member has satisfied such increased 

amount. FICC is also proposing to add 

language to clarify that (i) if FICC 

applies a GSD Netting Member’s or an 

MBSD Clearing Member’s Clearing Fund 

deposits as permitted pursuant to GSD 

Rule 4 or MBSD Rule 4, as applicable, 

FICC may take any and all actions with 

respect to the GSD Netting Member’s or 

MBSD Clearing Member’s Actual 

Deposit, including assignment, transfer, 

and sale of any Eligible Clearing Fund 

Securities, that FICC determines is 

appropriate, and (ii) if such application 

results in any deficiency in the GSD 

Netting Member’s or MBSD Clearing 

Member’s, as applicable, Required Fund 

Deposit, such member shall 

immediately replenish it. These 

clarifications are consistent with the 

Divisions’ rights as set forth in current 

Sections 4 and 11 of GSD Rule 4 and 

current Sections 4 and 11 of MBSD Rule 

4. In addition, the provisions in clause 

(ii) of the previous sentence is 

consistent with the requirements in 

current Section 1 of GSD Rule 4 and 

MBSD Rule 4 that a member must 

maintain its Required Fund Deposit. 

As discussed above, for better 

organization of the subject matter, FICC 

is proposing to move the provision that 

covers members’ obligations to 

eliminate any deficiency in their 

Required Fund Deposits from the last 

sentence in the first paragraph of 

current Section 7(g) of GSD Rule 4 and 

MBSD Rule 4 to proposed Section 9 of 

GSD Rule 4 and MBSD Rule 4. 

Section 10 

Currently, Section 9 of GSD Rule 4 

and MBSD Rule 4 addresses situations 

where a member has excess on deposit 

in the Clearing Fund (i.e., amounts 

above its Required Fund Deposit). The 

current provision provides that FICC 

will notify a member of any Excess 

Clearing Fund Deposit as FICC 

determines from time to time. Upon the 

request of a member, FICC will return 

an excess amount requested by a 

member that follows the formats and 

timeframe established by FICC for such 

request. The current provision makes 

clear that FICC may, in its discretion, 

withhold any or all of a member’s 

Excess Clearing Fund Deposit (i) if the 

member has an outstanding payment 

obligation to FICC, (ii) if FICC 

determines that the member’s 

anticipated activity over the next 90 

calendar days may reasonably be 

expected to be materially different than 

the prior 90 calendar days, or (iii) if the 

member has been placed on the Watch 

List. Section 9 also makes clear that the 

return of an Excess Clearing Fund 

Deposit to any member is subject to (i) 

such return of Excess Clearing Fund 

Deposit not being done in a manner that 

would cause the member to violate any 

other section of the Rules, (ii) such 

return not reducing the amount of the 

member’s Cross-Guaranty Repayment 

Deposit to the Clearing Fund below the 

amount required to be maintained by 

the member pursuant to GSD Rule 41 or 

MBSD Rule 32, as applicable, and (iii) 

with respect to GSD Members only, 

such return not reducing the amount of 

a GSD Member’s Cross-Margining 

Repayment Deposit to the Clearing Fund 

below the amount required to be 

maintained by the GSD Member 

pursuant to GSD Rule 43. 

FICC is proposing to renumber 

Section 9 as Section 10 for both GSD 

Rule 4 and MBSD Rule 4 and to retitle 

its subheading to ‘‘Excess Clearing Fund 

Deposits’’ to better reflect the subject 

matter of the provisions. FICC is not 

proposing any changes to this section 

except to streamline and clarify the 

provisions as well as to align GSD Rule 

4 and MBSD Rule 4, including adding 

a sentence to clarify that nothing in this 

section limits FICC’s rights under 

Section 7 of GSD Rule 3 or Section 6 of 

MBSD Rule 3, as applicable. 

Section 11 

Current Section 11 of GSD Rule 4 and 

MBSD Rule 4 provides that FICC has 

certain rights with respect to the 

Clearing Fund. FICC is proposing to add 

a sentence which would make it clear 

that GSD Rule 4 or MBSD Rule 4, as 

applicable, would govern in the event of 

any conflict or inconsistency between 

such rule and any agreement between 

FICC and any member. FICC believes 

that this proposed change would 

facilitate members’ understanding of the 

Rules and their obligations thereunder. 

It would also align the Rules with the 

Rules and Procedures of NSCC so as to 

provide consistent treatment for firms 

that are members of both FICC and 

NSCC.46 Furthermore, in order to 

enhance the readability and clarity, 

FICC is proposing a number of changes 

to streamline the language in this 

section. 

(ii) Other Proposed Rule Changes 

FICC is proposing changes to GSD 

Rule 1 (Definitions), GSD Rule 3 

(Ongoing Membership Requirements), 

GSD Rule 3A (Sponsoring Members and 

Sponsored Members), GSD Rule 3B 

(Centrally Cleared Institutional Triparty 

Service), GSD Rule 13 (Funds-Only 

Settlement), GSD Rule 18 (Special 

Provisions for Repo Transactions), GSD 

Rule 21A (Wind-Down of a Netting 

Member), GSD Rule 22B (Corporation 

Default), GSD Rule 41 (Cross Guaranty 

Agreements), GSD Rule 43 (CrossMargining Arrangements), GSD Board 

Interpretations and Statements of 

Policy, and GSD Interpretive Guidance 

with Respect to Watch List 

Consequences. FICC is also proposing 

changes to MBSD Rule 1 (Definitions), 

MBSD Rule 3 (Ongoing Membership 

Requirements), MBSD Rule 5 (Trade 

Comparison), MBSD Rule 11 (Cash 

Settlement), MBSD Rule 17A 

(Corporation Default), MBSD Rule 32 

(Cross Guaranty Agreements), and 

MBSD Interpretive Guidance with 

Respect to Watch List Consequences. 

FICC is proposing changes to these 

Rules in order to conform them with the 

proposed changes to GSD Rule 4 and 

MBSD Rule 4, as applicable, as well as 


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47Account(s) of a terminating member would 

generally be deactivated before the open of business 

on the Termination Date. 

48Unlike the Voluntary Termination Notice, the 

Loss Allocation Withdrawal Notice as proposed in 

Section 7b of GSD Rule 4 and MBSD Rule 4 does 

not require explicit acceptance by FICC to be 

effective. FICC believes that requiring explicit 

acceptance of the Loss Allocation Withdrawal 

Notice could complicate the loss allocation process 

and potentially result in membership withdrawal 

being delayed as well as detract from the objective 

to have FICC know on a timely basis which 

members would remain subject to the subsequent 

rounds of loss allocation. 

to make certain technical changes to 

these Rules, as further described below. 

Adding Defined Terms 

Specifically, FICC is proposing to add 

the following defined terms to GSD Rule 

1, in alphabetical order: Actual Deposit, 

Average RFD, CCIT Member 

Termination Date, CCIT Member 

Voluntary Termination Notice, Clearing 

Fund Cash, Corporate Contribution, 

Declared Non-Default Loss Event, 

Defaulting Member Event, Event Period, 

Excess Clearing Fund Deposit, Former 

Sponsored Members, Lender, Loss 

Allocation Cap, Loss Allocation Notice, 

Loss Allocation Withdrawal Notice, 

Sponsored Member Termination Date, 

Sponsored Member Voluntary 

Termination Notice, Sponsoring 

Member Termination Date, Sponsoring 

Member Voluntary Termination Notice, 

Termination Date, and Voluntary 

Termination Notice. 

FICC is also proposing to add the 

following defined terms to MBSD Rule 

1, in alphabetical order: Actual Deposit, 

Average RFD, Clearing Fund Cash, 

Corporate Contribution, Declared NonDefault Loss Event, Defaulting Member 

Event, Event Period, Excess Clearing 

Fund Deposit, Lender, Loss Allocation 

Cap, Loss Allocation Notice, Loss 

Allocation Withdrawal Notice, 

Termination Date, and Voluntary 

Termination Notice. 

Technical Changes 

In addition, FICC is proposing 

technical changes (i) to delete the 

defined term ‘‘The Corporation’’ in GSD 

Rule 1 and replace it with 

‘‘Corporation’’ in GSD Rule 1, (ii) to 

correct cross-references in Section 8 of 

MBSD Rule 5 and the definition of 

‘‘Legal Risk’’ in GSD Rule 1, (iii) to 

update references to sections that would 

be changed under this proposal in 

Section 12 of GSD Rule 3, Sections 10 

and 12(a) of GSD Rule 3A, Section 3(f) 

of GSD Rule 18, GSD Rule 21A, Sections 

3(a), 3(b) and 4 of GSD Rule 41, Section 

6 of GSD Rule 43, GSD Interpretive 

Guidance with Respect to Watch List 

Consequences, Sections 11, 14, and 15 

of MBSD Rule 3, Section 3(b) of MBSD 

Rule 32, and MBSD Interpretive 

Guidance with Respect to Watch List 

Consequences, (iv) to update the 

reference to a subheading that would be 

changed under this proposal in Section 

7 of GSD Rule 3B, and (v) to delete a 

reference to the Cross-Margining 

Agreement between FICC and NYPC 

that is no longer in effect. FICC believes 

that these proposed technical changes 

would ensure the Rules remain clear 

and accurate, which would in turn 

allow Members to readily understand 

their obligations under the Rules. 

Voluntary Termination 

FICC is also proposing changes to the 

voluntary termination provisions in 

GSD Rule 3, GSD Rule 3A, GSD Rule 3B, 

and MBSD Rule 3 in order to ensure that 

termination provisions in the GSD Rules 

and MBSD Rules, whether voluntary or 

in response to a loss allocation, are 

consistent with one another to the 

extent appropriate. 

Currently, the voluntary termination 

provisions in GSD Rule 3, GSD Rule 3A, 

GSD Rule 3B, and MBSD Rule 3 

generally provide that a member may 

elect to terminate its membership by 

providing FICC with 10 days written 

notice of such termination. Such 

termination will not be effective until 

accepted by FICC, which shall be no 

later than 10 Business Days after the 

receipt of the notice. FICC’s acceptance 

shall be evidenced by a notice to FICC’s 

members announcing the member’s 

termination and the effective date of the 

termination (‘‘Termination Date’’), and 

that the terminating member will no 

longer be eligible to submit transactions 

to FICC as of the Termination Date.47

This provision also provides that a 

member’s voluntary termination of 

membership shall not affect its 

obligations to FICC. 

Where appropriate, FICC is proposing 

changes to align the voluntary 

termination provisions in Section 13 of 

GSD Rule 3, Sections 2(i) and 3(e) of 

GSD Rule 3A, Section 6 of GSD Rule 3B, 

and Section 14 of MBSD Rule 3 with the 

proposed new Section 7b of GSD Rule 

4 and MBSD Rule 4, given that they all 

address termination of membership. 

Specifically, in Section 13 of GSD Rule 

3, FICC is proposing that when a GSD 

Member elects to voluntarily terminate 

its membership by providing FICC a 

written notice of such termination 

(‘‘Voluntary Termination Notice’’), the 

GSD Member must specify in its 

Voluntary Termination Notice a desired 

date for its withdrawal from 

membership; provided, however, if the 

GSD Member is terminating its 

membership in GSD (i.e., not 

terminating its membership just in the 

Netting System), such date shall not be 

prior to the scheduled final settlement 

date of any remaining obligation owed 

by the GSD Member to FICC as of the 

time such Voluntary Termination Notice 

is submitted to FICC, unless otherwise 

approved by FICC. FICC is proposing to 

delete the provision that requires a 

member to provide FICC with 10 days 

written notice of the member’s 

termination; however, FICC is retaining 

the provision that states termination 

will not be effective until accepted by 

FICC,48 which shall be no later than 10 

Business Days after the receipt of the 

notice. FICC is also retaining the 

provision that states FICC’s acceptance 

shall be evidenced by a notice to FICC’s 

members announcing the member’s 

termination and the Termination Date, 

and that the terminating member will no 

longer be eligible to submit transactions 

to FICC as of the Termination Date. 

As an example, Member A submits a 

Voluntary Termination Notice to GSD 

on April 1st indicating its desired 

termination date is June 15th. GSD 

would accept such termination request 

by issuing a notice to GSD Members 

within 10 Business Days from April 1st; 

such notice would provide that the 

effective date of Member A’s GSD 

membership termination is June 15th. In 

contrast, if Member A submits a 

Voluntary Termination Notice on April 

1st and indicates its desired termination 

date is April 5th, GSD would either (i) 

accept such termination notice by 

issuing a notice to GSD Members on or 

before April 5th, and such notice would 

provide that the effective date of 

Member A’s GSD membership 

termination is April 5th or (ii) if GSD 

requires additional time to process the 

termination, GSD would accept such 

termination notice by issuing notice to 

GSD Members after April 5th but still 

within 10 Business Days from April 1st; 

and such notice would provide that the 

effective date of Member A’s GSD 

membership termination as a date after 

April 5th. 

The proposed change to Section 13 of 

GSD Rule 3 would also provide that if 

any trade is submitted to FICC either by 

the withdrawing GSD Member or its 

authorized submitter that is scheduled 

to settle on or after the Termination 

Date, the GSD Member’s Voluntary 

Termination Notice would be deemed 

void and the GSD Member would 

remain subject to the GSD Rules as if it 

had not given such notice. Furthermore, 

FICC is proposing to add a sentence to 

Section 13 of GSD Rule 3 to refer GSD 

Members to Section 8 of GSD Rule 4 


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49Loss Allocation Caps would not apply to Tier 

Two Netting Members and Tier Two Members 

because the loss allocation obligations of Tier Two 

Netting Members and Tier Two Members are 

already capped to the liquidation losses that 

resulted from their trading activity with the 

Defaulting Member. Tier Two Netting Members and 

Tier Two Members are required to pay their loss 

allocation obligations in full. 

50 15 U.S.C. 78q–1(b)(3)(F). 

51 17 CFR 240.17Ad–22(e)(13) and (e)(23)(i). 

regarding provisions on the return of a 

GSD Member’s Clearing Fund deposit 

and to specify that if an Event Period 

were to occur after a Tier One Netting 

Member has submitted its Voluntary 

Termination Notice but prior to the 

Termination Date, in order for such Tier 

One Netting Member to benefit from its 

Loss Allocation Cap pursuant to Section 

7 of GSD Rule 4, the Tier One Netting 

Member would need to comply with the 

provisions of Section 7b of GSD Rule 4 

and submit a Loss Allocation 

Withdrawal Notice, which notice, upon 

submission, would supersede and void 

any pending Voluntary Termination 

Notice previously submitted by the Tier 

One Netting Member.49 As an example, 

if an Event Period occurs after 

submission of the Voluntary 

Termination Notice by a Tier One 

Netting Member or Tier One Member, as 

applicable, but prior to the Termination 

Date, and the Tier One Netting Member 

or Tier One Member, as applicable, does 

not subsequently submit a Loss 

Allocation Withdrawal Notice as 

proposed in Section 7b of GSD Rule 4 

or MBSD Rule 4, as applicable, then the 

Tier One Netting Member or Tier One 

Member, as applicable, would not 

benefit from its Loss Allocation Cap, 

i.e., the Tier One Netting Member or 

Tier One Member, as applicable, would 

remain obligated for its pro rata share of 

losses and liabilities with respect to any 

Event Period that commenced prior to 

the Termination Date. 

Parallel changes are also being 

proposed to Section 2(i) of GSD Rule 3A 

and Section 14 of MBSD Rule 3 with 

additional language in Section 2(i) of 

GSD Rule 3A and Section 14 of MBSD 

Rule 3 making it clear that the 

acceptance by FICC of a member’s 

Voluntary Termination Notice shall be 

no later than ten (10) Business Days 

after the receipt of such notice from the 

member, in order to provide certainty to 

members as well as to align these 

sections with the current Section 13 of 

GSD Rule 3. 

With respect to Section 3(e) of GSD 

Rule 3A and Section 6 of GSD Rule 3B, 

changes similar to the ones described 

above in the previous paragraph are also 

being proposed for Sponsored Members 

and CCIT Members, except there would 

be no references to the return of a 

member’s Clearing Fund deposits and to 

Loss Allocation Caps because they 

would not apply to these member types. 

In addition, FICC is proposing a 

technical change in Section 6 of GSD 

Rule 3B to reflect a defined term that 

would be changed under this proposal. 

Other MBSD Proposed Rule Changes 

FICC is proposing to delete Section 15 

of MBSD Rule 3 because FICC believes 

that this section is akin to a loss 

allocation provision and therefore 

would no longer be necessary under the 

proposed rule change, as the scenarios 

envisioned by Section 15 of MBSD Rule 

3 would be governed by the proposed 

loss allocation provisions in MBSD 

Rule 4. 

Other GSD Proposed Rule Changes 

Under the proposal, Section 12(c) of 

GSD Rule 3A would also be revised to 

incorporate the concept of the Loss 

Allocation Cap and to reference the 

applicable proposed sections in GSD 

Rule 4 that would apply when a 

Sponsoring Member elects to terminate 

its status as a Sponsoring Member. 

FICC is also proposing to delete an 

Interpretation of the Board of Directors 

of the Government Securities Clearing 

Corporation (the predecessor to GSD), 

which currently clarifies certain 

provisions of GSD Rule 4 and the extent 

to which the GSD Clearing Fund and 

other required deposits of GSD Netting 

Members may be applied to a loss or 

liability incurred by FICC. FICC is 

proposing this deletion because this 

interpretation would no longer be 

necessary following the proposed rule 

change. This is because the proposed 

rule change to GSD Rule 4 would cover 

the extent to which the GSD Clearing 

Fund and other collateral or assets of 

GSD Netting Members would be applied 

to a loss or liability incurred by FICC. 

Other GSD Proposed Rule Changes and 

MBSD Proposed Rule Changes 

FICC is proposing changes to Section 

11 of GSD Rule 4 and MBSD Rule 4. 

Specifically, FICC is proposing to 

replace ‘‘letters of credit’’ with ‘‘Eligible 

Letters of Credit,’’ which is already a 

defined term in the Rules. In addition, 

FICC is proposing to specify that a 

reference to 30 days means 30 calendar 

days. 

FICC is proposing to delete 

‘‘Remaining Loss’’ and ‘‘Other Loss’’ in 

Sections 12(a) and 12(b) of GSD Rule 

3A, Section 5 of GSD Rule 13, Section 

4 of GSD Rule 41, Section 6 of GSD Rule 

43, Section 9(o) of MBSD Rule 11, and 

Section 4 of MBSD Rule 32 because 

these terms would no longer be used 

under the proposed GSD Rule 4 and 

MBSD Rule 4, and to add clarifying 

language that conforms to the proposed 

changes to GSD Rule 4 and MBSD 

Rule 4. 

In addition, FICC is proposing 

changes to GSD Rule 22B (Corporation 

Default) and MBSD Rule 17A 

(Corporation Default). FICC is proposing 

to relocate the interpretational 

parenthetical in each rule to come right 

after the reference to GSD Rule 22A and 

MBSD Rule 17. FICC is proposing this 

change because, in the event of a 

Corporation Default, the portfolio of 

each GSD Member or MBSD Member, as 

applicable, would be closed out in the 

same way as the portfolio of a GSD 

Defaulting Member or MBSD Defaulting 

Member, i.e., by applying the close out 

procedures of GSD Rule 22A 

(Procedures for When the Corporation 

Ceases to Act) or MBSD Rule 17 

(Procedures for When the Corporation 

Ceases to Act), as applicable. In 

addition, in the proposed GSD Rule 22B 

and MBSD Rule 17A, FICC is proposing 

to add a reference to the loss allocation 

provisions of GSD Rule 4 and MBSD 

Rule 4 and delete references to specific 

sections of GSD Rule 4 and MBSD Rule 

4, because those sections are being 

modified under the proposed rule 

change. 

Member Outreach 

Beginning in August 2017, FICC 

conducted outreach to Members in 

order to provide them with advance 

notice of the proposed changes. As of 

the date of this filing, no written 

comments relating to the proposed 

changes have been received in response 

to this outreach. The Commission will 

be notified of any written comments 

received. 

Implementation Timeframe 

Pending Commission approval, FICC 

expects to implement this proposal 

within two (2) Business Days after 

approval. Members would be advised of 

the implementation date of this 

proposal through issuance of a FICC 

Important Notice. 

2. Statutory Basis 

FICC believes that the proposed rule 

change is consistent with the 

requirements of the Act, and the rules 

and regulations thereunder applicable to 

a registered clearing agency. 

Specifically, FICC believes that the 

proposed rule change is consistent with 

Section 17A(b)(3)(F) of the Act 50 and 

Rules 17Ad–22(e)(13) and 17Ad– 

22(e)(23)(i),51 each as promulgated 


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52 15 U.S.C. 78q–1(b)(3)(F). 

under the Act, for the reasons described 

below. 

Section 17A(b)(3)(F) of the Act 

requires that the Rules be designed to 

promote the prompt and accurate 

clearance and settlement of securities 

transactions and to assure the 

safeguarding of securities and funds 

which are in the custody or control of 

each Division or for which it is 

responsible.52 The proposed rule 

changes to (1) modify the calculation 

and application of FICC’s corporate 

contribution, (2) introduce an Event 

Period, (3) introduce the concept of 

‘‘rounds’’ (and accompanying Loss 

Allocation Notices) and apply this 

concept to the timing of loss allocation 

payments and the member withdrawal 

process in connection with the loss 

allocation process, and (4) implement a 

revised ‘‘look-back’’ period to calculate 

a member’s loss allocation obligation 

and its Loss Allocation Cap, taken 

together, are intended to enhance the 

overall resiliency of each Division’s loss 

allocation process. 

By modifying the calculation of 

FICC’s corporate contribution, FICC 

would apply a mandatory fixed 

percentage of its General Business Risk 

Capital Requirement (as compared to 

the current Rules which provide for ‘‘up 

to’’ a percentage of retained earnings), 

which would provide greater 

transparency and accessibility to 

members as to how much FICC would 

contribute in the event of a loss or 

liability. By modifying the application 

of FICC’s corporate contribution to 

apply to Declared Non-Default Loss 

Events, in addition to Defaulting 

Member Events, on a mandatory basis, 

FICC would expand the application of 

its corporate contribution beyond losses 

and liabilities from member defaults, 

which would better align the interests of 

FICC with those of its respective 

Division’s members by stipulating a 

mandatory application of the Corporate 

Contribution to a Declared Non-Default 

Loss Event prior to any allocation of the 

loss among Tier One Netting Members 

or Tier One Members, as applicable. 

Taken together, these proposed rule 

changes would enhance the overall 

resiliency of each Division’s loss 

allocation process by enhancing the 

calculation and application of FICC’s 

Corporate Contribution, which is one of 

the key elements of each Division’s loss 

allocation process. Moreover, by 

providing greater transparency and 

accessibility to members, as stated 

above, the proposed rule changes 

regarding the Corporate Contribution, 

including the proposed replenishment 

period and proposed allocation of FICC 

Corporate Contribution between 

Divisions, would allow members to 

better assess the adequacy of each 

Division’s loss allocation process. 

By introducing the concept of an 

Event Period, FICC would be able to 

group Defaulting Member Events and 

Declared Non-Default Loss Events 

occurring in a period of ten (10) 

Business Days for purposes of allocating 

losses to members. FICC believes that 

the Event Period would provide a 

defined structure for the loss allocation 

process to encompass potential 

sequential Defaulting Member Events or 

Declared Non-Default Loss Events that 

are likely to be closely linked to an 

initial event and/or market dislocation 

episode. Having this structure would 

enhance the overall resiliency of FICC’s 

loss allocation process because FICC 

would be better equipped to address 

losses that may arise from multiple 

Defaulting Member Events and/or 

Declared Non-Default Loss Events that 

arise in quick succession. Moreover, the 

proposed Event Period structure would 

provide certainty for members 

concerning their maximum exposure to 

mutualized losses with respect to such 

events. 

By introducing the concept of 

‘‘rounds’’ (and accompanying Loss 

Allocation Notices) and applying this 

concept to the timing of loss allocation 

payments and the member withdrawal 

process in connection with the loss 

allocation process, FICC would (i) set 

forth a defined amount that it would 

allocate to members during each round 

(i.e., the round cap), (ii) advise members 

of loss allocation obligation information 

as well as round information through 

the issuance of Loss Allocation Notices, 

and (iii) provide members with the 

option to limit their loss allocation 

exposure after the issuance of the first 

Loss Allocation Notice in each round. 

These proposed rule changes would 

enhance the overall resiliency of FICC’s 

loss allocation process because they 

would enable FICC to continue the loss 

allocation process in successive rounds 

until all of FICC’s losses are allocated 

and enable FICC to identify continuing 

members for purposes of calculating 

subsequent loss allocation obligations in 

successive rounds. Moreover, the 

proposed rule changes would define for 

members a clear manner and process in 

which they could cap their loss 

allocation exposure to FICC. 

By implementing a revised ‘‘lookback’’ period to calculate a member’s 

loss allocation obligations and its Loss 

Allocation Cap, FICC would be able to 

capture a full calendar quarter of the 

member’s activities and smooth out the 

impact from any abnormalities and/or 

arbitrariness that may have occurred. By 

determining a member’s loss allocation 

obligations based on the average of its 

Required Fund Deposit over a look-back 

period and its Loss Allocation Cap 

based on the greater of its Required 

Fund Deposit or the average thereof over 

a look-back period, FICC would be able 

to calculate a member’s pro rata share of 

losses and liabilities based on the 

amount of risk that the member brings 

to FICC. These proposed rule changes 

would enhance the overall resiliency of 

each Division’s loss allocation process 

because they would align a member’s 

loss allocation obligation and its Loss 

Allocation Cap with the amount of risk 

that the member brings to FICC. 

Taken together, the foregoing 

proposed rule changes would establish 

a stronger (for all the reasons discussed 

above) and clearer loss allocation 

process for each Division, which FICC 

believes would allow each Division to 

take timely action to address losses. The 

ability to timely address losses would 

allow each Division to continue to meet 

its clearance and settlement obligations, 

especially in circumstances that may 

involve a series of substantially 

contemporaneous loss events. 

Therefore, FICC believes that these 

proposed rule changes would promote 

the prompt and accurate clearance and 

settlement of securities transactions, 

consistent with Section 17A(b)(3)(F) of 

the Act. 

By deleting certain vague and 

imprecise limiting language that could 

be interpreted as impairing FICC’s 

ability to access the MBSD Clearing 

Fund to cover losses and liabilities 

incident to its clearance and settlement 

business outside the context of an 

MBSD Defaulting Member Event, as 

well as to cover certain liquidity needs, 

the proposed rule change to amend 

FICC’s permitted use of MBSD Clearing 

Fund would enhance FICC’s ability to 

ensure that it can continue its 

operations and clearance and settlement 

services in an orderly manner in the 

event that it would be necessary or 

appropriate for FICC to access MBSD 

Clearing Fund deposits to address 

losses, liabilities or liquidity needs to 

meet its settlement obligations. 

Therefore, FICC believes that this 

proposed rule change would promote 

the prompt and accurate clearance and 

settlement of securities transactions, 

consistent with Section 17A(b)(3)(F) of 

the Act. 

Rule 17Ad–22(e)(13) under the Act 

requires, in part, that FICC establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to ensure each 


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34212 Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 

53 17 CFR 240.17Ad–22(e)(13). 

54 17 CFR 240.17Ad–22(e)(23)(i). 55 15 U.S.C. 78q–1(b)(3)(I). 56 Id. 

Division has the authority and 

operational capacity to take timely 

action to contain losses and continue to 

meet its obligations.53 As described 

above, the proposed rule changes to (1) 

modify the calculation and application 

of FICC’s corporate contribution, (2) 

introduce an Event Period, (3) introduce 

the concept of ‘‘rounds’’ (and 

accompanying Loss Allocation Notices) 

and apply this concept to the timing of 

loss allocation payments and the 

member withdrawal process in 

connection with the loss allocation 

process, and (4) implement a revised 

‘‘look-back’’ period to calculate a 

member’s loss allocation obligation and 

its Loss Allocation Cap, taken together, 

are designed to enhance the resiliency 

of each Division’s loss allocation 

process. Having a resilient loss 

allocation process would help ensure 

that each Division can effectively and 

timely address losses relating to or 

arising out of either the default of one 

or more members or one or more nondefault loss events, which in turn would 

help each Division contain losses and 

continue to meet its clearance and 

settlement obligations. Therefore, FICC 

believes that the proposed rule changes 

to enhance the resiliency of each 

Division’s loss allocation process are 

consistent with Rule 17Ad–22(e)(13) 

under the Act. 

Rule 17Ad–22(e)(23)(i) under the Act 

requires FICC to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

publicly disclose all relevant rules and 

material procedures, including key 

aspects of each Division’s default rules 

and procedures.54 The proposed rule 

changes to (i) align the loss allocation 

rules of the DTCC Clearing Agencies, (ii) 

improve the overall transparency and 

accessibility of the provisions in the 

Rules governing loss allocation and (iii) 

make conforming and technical 

changes, would not only ensure that 

each Division’s loss allocation rules are, 

to the extent practicable and 

appropriate, consistent with the loss 

allocation rules of other DTCC Clearing 

Agencies, but also would help to ensure 

that each Division’s loss allocation rules 

are transparent and clear to members. 

Aligning the loss allocation rules of the 

DTCC Clearing Agencies would provide 

consistent treatment, to the extent 

practicable and appropriate, especially 

for firms that are participants of two or 

more DTCC Clearing Agencies. Having 

transparent and clear loss allocation 

rules would enable members to better 

understand the key aspects of each 

Division’s default rules and procedures 

and provide members with increased 

predictability and certainty regarding 

their exposures and obligations. As 

such, FICC believes that the proposed 

rule changes to align the loss allocation 

rules of the DTCC Clearing Agencies as 

well as to improve the overall 

transparency and accessibility of each 

Division’s loss allocation rules are 

consistent with Rule 17Ad–22(e)(23)(i) 

under the Act. 

(B) Clearing Agency’s Statement on 

Burden on Competition 

FICC does not believe that the 

proposed rule changes to enhance the 

resiliency of each Division’s loss 

allocation process would impact 

competition.55 As described above, the 

proposed rule changes to (1) modify the 

calculation and application of FICC’s 

corporate contribution, (2) introduce an 

Event Period, (3) introduce the concept 

of ‘‘rounds’’ (and accompanying Loss 

Allocation Notices) and apply this 

concept to the timing of loss allocation 

payments and the member withdrawal 

process in connection with the loss 

allocation process, and (4) implement a 

revised ‘‘look-back’’ period to calculate 

a member’s loss allocation obligation 

and its Loss Allocation Cap, taken 

together, are intended to enhance the 

overall resiliency of each Division’s loss 

allocation process, and would apply 

equally to all members. While the 

proposed rule changes would amend the 

manner in which FICC’s corporate 

contribution and loss allocation are 

calculated and applied, such proposed 

rule changes would maintain FICC’s 

current core loss allocation waterfall in 

the case of a loss relating to or arising 

out of the default of a member for whom 

FICC has ceased to act following 

application of the defaulting member’s 

resources, i.e., FICC’s corporate 

contribution and loss allocation among 

members. With respect to a loss or 

liability arising from a non-default loss 

event, the proposed rule changes clarify 

FICC’s contribution to such loss and 

liability, but, as with losses and 

liabilities arising from a member default 

event, the proposed rule changes would 

maintain the loss mutualization 

requirement under the current GSD 

Rules and MBSD Rules. While the 

calculation of the loss obligations 

associated with non-default losses 

would change under the proposal, the 

FICC Divisions would maintain this 

aspect of the loss allocation waterfall 

(i.e., loss mutualization among members 

for non-default losses). Based on the 

foregoing, FICC believes that these 

proposed rule changes to enhance the 

resiliency of each Division’s loss 

allocation process would not have any 

impact on competition. 

FICC does not believe the proposed 

rule change to delete certain vague and 

imprecise limiting language regarding 

FICC’s use of MBSD Clearing Fund 

would impact competition.56 This 

proposed rule change would enhance 

FICC’s ability to ensure that it can 

continue its operations and clearance 

and settlement services in an orderly 

manner in the event that it would be 

necessary or appropriate for FICC to 

access MBSD Clearing Fund deposits to 

address losses, liabilities or liquidity 

needs to meet its settlement obligations. 

In the event that it would be necessary 

or appropriate for FICC to access MBSD 

Clearing Fund deposits, FICC’s use of 

MBSD Clearing Fund deposits would 

remain subject to the parameters in the 

proposed rule that limit FICC’s use of 

MBSD Clearing Fund, i.e., (A) to secure 

each MBSD Member’s performance of 

obligations to FICC, (B) to provide 

liquidity to FICC to meet its settlement 

obligations, and (C) for certain 

investments. FICC does not believe that 

FICC’s utilization of MBSD Clearing 

Fund under these parameters would 

impact competition. Specifically, FICC 

does not believe that using MBSD 

Clearing Fund to secure each MBSD 

Member’s performance of obligations to 

FICC and for certain investments would 

have an impact on the MBSD Members 

because the fund and/or investments are 

still being held by FICC. With respect to 

FICC’s use of MBSD Clearing Fund 

pursuant to parameter (B), FICC believes 

that there may be an impact on MBSD 

Members if FICC uses the MBSD 

Clearing Fund for more than 30 calendar 

days. This is because FICC would then 

consider the amount of MBSD Clearing 

Fund used but not yet repaid as a loss 

to the MBSD Clearing Fund incurred as 

a result of a Defaulting Member Event 

and immediately allocate such loss in 

accordance with the proposal. However, 

because loss allocation among the 

MBSD Members would be based on the 

Average RFDs of those MBSD Members, 

any loss allocation among MBSD 

Members would affect MBSD Members 

in proportion to the amount of risks 

they bring to FICC, as represented by 

their Average RFDs. Based on the 

foregoing, FICC does not believe that the 

proposed deletion of the limiting 

language regarding FICC’s use of MBSD 

Clearing Fund would have any impact 

on competition. 

FICC also does not believe that the 

proposed rule changes to (i) align the 


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57 Id. 58 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, 

respectively. On December 18, 2017, FICC filed the 

Proposed Rule Change as advance notice SR–FICC– 

2017–805 (‘‘Advance Notice’’) with the Commission 

pursuant to Section 806(e)(1) of Title VIII of the 

Dodd-Frank Wall Street Reform and Consumer 

Protection Act entitled the Payment, Clearing, and 

Settlement Supervision Act of 2010 (‘‘Clearing 

Supervision Act’’) and Rule 19b–4(n)(1)(i) of the 

Act. (12 U.S.C. 5465(e)(1) and 17 CFR 240.19b– 

4(n)(1)(i), respectively.) On January 30, 2018, the 

Commission published in the Federal Register 

notice of filing of the Advance Notice. The notice 

also extended the review period for the Advance 

Notice pursuant to Section 806(e)(1)(H) of the 

Clearing Supervision Act. (12 U.S.C. 5465(e)(1)(H).) 

See Securities Exchange Act Release No. 82580 

(January 24, 2018), 83 FR 4341 (January 30, 2018) 

(SR–FICC–2017–805). On April 10, 2018, the 

Commission required additional information for 

consideration of the Advance Notice, pursuant to 

Section 806(e)(1)(D) of the Clearing Supervision 

Act, which provided the Commission with an 

additional 60-days in the review period beginning 

on the date that the information requested is 

received by the Commission. (12 U.S.C. 

5465(e)(1)(D).) See Memorandum from the Office of 

Clearance and Settlement Supervision, Division of 

Trading and Markets, titled ‘‘Commission’s Request 

for Additional Information,’’ available at https://

www.sec.gov/rules/sro/ficc-an.htm. On June 28, 

2018, FICC filed Amendment No. 1 to the Advance 

Notice. To promote the public availability and 

transparency of its post-notice amendment, FICC 

submitted a copy of Amendment No. 1 through the 

Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 to the 

Advance Notice has been posted on the 

Commission’s website at https://www.sec.gov/rules/ 

sro/ficc-an.htm and thus been publicly available 

since June 29, 2018. On July 6, 2018, the 

Commission received the information requested, 

which added an additional 60-days to the review 

period pursuant to Sections 806(e)(1)(E) and (G) of 

the Clearing Supervision Act. (12 U.S.C. 

5465(e)(1)(E) and (G).) See Memorandum from the 

Office of Clearance and Settlement Supervision, 

Division of Trading and Markets, titled ‘‘Response 

to the Commission’s Request for Additional 

Information,’’ available at https://www.sec.gov/ 

rules/sro/ficc-an.htm. The proposal, as set forth in 

both the Advance Notice and the Proposed Rule 

Change, shall not take effect until all required 

regulatory actions are completed. 

2Securities Exchange Act Release No. 82431 

(January 2, 2018), 83 FR 871 (January 8, 2018) (SR– 

FICC–2017–021). 

3Securities Exchange Act Release No. 82669 

(February 8, 2018), 83 FR 6653 (February 14, 2018) 

(SR–DTC–2017–021; SR–FICC–2017–021; SR– 

NSCC–2017–017). 

4Securities Exchange Act Release No. 82913 

(March 20, 2018), 83 FR 12997 (March 26, 2018) 

(SR–FICC–2017–021). 

loss allocation rules of the DTCC 

Clearing Agencies, (ii) increase the 

transparency and accessibility of 

provisions in the Rules governing loss 

allocation, and (iii) make conforming 

and technical changes, would impact 

competition.57 These changes would 

apply equally to all members. 

Alignment of the loss allocation rules of 

the DTCC Clearing Agencies are 

intended to increase the consistency of 

the Rules with the rules of other DTCC 

Clearing Agencies in order to provide 

consistent treatment, to the extent 

practicable and appropriate, especially 

for firms that are participants of two or 

more DTCC Clearing Agencies. Having 

transparent and accessible provisions in 

the Rules governing loss allocation are 

intended to improve the readability and 

clarity of the Rules regarding the loss 

allocation process. Making conforming 

and technical changes to ensure the 

Rules remain clear and accurate would 

facilitate members’ understanding of the 

Rules and their obligations thereunder. 

As such, FICC believes that these 

proposed rule changes would not have 

any impact on competition. 

(C) Clearing Agency’s Statement on 

Comments on the Proposed Rule 

Change Received From Members, 

Participants, or Others 

Written comments relating to this 

proposed rule change have not been 

solicited or received. FICC will notify 

the Commission of any written 

comments received by FICC. 

III. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FICC–2017–022 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–FICC–2017–022. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the Proposed Rule 

Change that are filed with the 

Commission, and all written 

communications relating to the 

Proposed Rule Change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of FICC and on DTCC’s website 

(http://dtcc.com/legal/sec-rulefilings.aspx). All comments received 

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–FICC– 

2017–022 and should be submitted on 

or before August 3, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.58

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–15366 Filed 7–18–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83630; File No. SR–FICC– 

2017–021] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Notice of 

Filing of Amendment No. 1 to a 

Proposed Rule Change To Adopt a 

Recovery & Wind-down Plan and 

Related Rules 

July 13, 2018. 

On December 18, 2017, 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’’) and Rule 

19b–4 thereunder, proposed rule change 

SR–FICC–2017–021 (‘‘Proposed Rule 

Change’’) to adopt a recovery and winddown plan and related rules.1 The 

Proposed Rule Change was published 

for comment in the Federal Register on 

January 8, 2018.2 On February 8, 2018, 

the Commission designated a longer 

period within which to approve, 

disapprove, or institute proceedings to 

determine whether to approve or 

disapprove the Proposed Rule Change.3

On March 20, 2018, the Commission 

instituted proceedings to determine 

whether to approve or disapprove the 

Proposed Rule Change.4 On June 25, 

2018, the Commission designated a 

longer period for Commission action on 

the proceedings to determine whether to 


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