Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 15155 

7 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 65899 (Dec. 

6, 2011), 76 FR 77287 (Dec. 12, 2011). A nonsubstantive correction to the notice of the proposed 

rule change was published on December 14, 2011. 

See Securities Exchange Act Release No. 65899A 

(Dec. 12, 2011), 76 FR 77865 (Dec. 14, 2011). 

4Securities Exchange Act Release No. 66124 (Jan. 

10, 2012), 77 FR 2103 (Jan. 13, 2012). 

5Letter from Christopher Killian, Managing 

Director, Securities Industry and Financial Markets 

Association (Dec. 19, 2011). 

6Certain provisions in the current MBSD 

rulebook that reflect processes that will continue 

unchanged after introduction of the CCP services 

are retained in the proposed MBSD rulebook. In 

order to promote uniformity between FICC’s two 

divisions and to increase transparency for common 

members, the new MBSD rulebook follows the 

structure of the Government Securities Division 

rulebook and, where appropriate, the language of 

equivalent provisions mirror each other. 

7The term ‘‘Banks’’ includes Federal Savings 

Associations. 

8The MBSD does not currently have any 

insurance company Clearing Members. Financial 

and other membership requirements for this 

category may be established in a future rule filing. 

9The MBSD currently has two members that do 

not fit into any of the new listed membership types. 

These entities remain members of the MBSD under 

Article III, Rule 1, Section (1)(f) of the MBSD rules 

and remain subject to the MBSD rulebook and all 

ongoing membership requirements. 

also will be available for inspection and 

copying at the principal office of the 

Exchange. All comments received will 

be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

publicly available. All submissions 

should refer to File Number SR–BATS– 

2012–013 and should be submitted on 

or before April 4, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.7

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–6289 Filed 3–12–12; 4:15 pm] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66550; File No. SR–FICC– 

2008–01] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order 

Approving Amended Proposed Rule 

Change to Allow the Mortgage-Backed 

Securities Division To Provide 

Guaranteed Settlement and Central 

Counterparty Services 

March 9, 2012. 

I. Introduction 

On March 12, 2008, the Fixed Income 

Clearing Corporation (‘‘FICC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change (SR–FICC–2008– 

01) pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’) 1 and Rule 19b–4 2

thereunder. On November 21, 2011, 

FICC amended the proposed rule 

change. The amended proposed rule 

change was published for comment in 

the Federal Register on December 12, 

2011.3 On January 10, 2012, the 

Commission extended the time within 

which to take action on the proposed 

rule change to March 9, 2012.4 The 

Commission received one comment on 

the proposed rule change.5 This order 

approves the proposal. 

II. Description 

The proposed rule changes consist of 

modifications to the rules of FICC’s 

MBSD to allow MBSD to provide 

guaranteed settlement and central 

counterparty (‘‘CCP’’) services. These 

modifications necessitated the MBSD to 

draft a new rulebook, which is also part 

of this rule filing.6

A. MBSD Rulebook Changes 

As noted above, the current MBSD 

rulebook will be replaced in its entirety 

by a new proposed rulebook that 

incorporates parts of the current MBSD 

rulebook where appropriate. Set forth 

below is an overview of the significant 

substantive and structural changes to 

the rules. 

1. Definitions 

The MBSD rules will have a revised 

Rule 1, ‘‘Definitions,’’ which will 

include terminology applicable to new 

MBSD processing and procedures. For 

example, terms relevant to pool netting 

have been included (such as ‘‘pool 

deliver obligation’’ and ‘‘pool receive 

obligation’’). Where practical and/or 

applicable, the MBSD rulebook uses 

terms from the current GSD rules, in 

order to harmonize language between 

the Divisions. 

2. Membership 

Rule 2, ‘‘Members’’, Rule 2A, ‘‘Initial 

Membership Requirements,’’ Rule 3, 

‘‘Ongoing Membership Requirements,’’ 

and Rule 3A, ‘‘Cash Settling Bank 

Members,’’ govern membership types, 

member application requirements, and 

ongoing reporting requirements. 

i. Membership Categories 

The new MBSD rules will provide for 

two membership types (as set forth in 

Rule 2): Clearing Members and Cash 

Settling Bank Members. Those entities 

qualifying for clearing membership will 

be guaranteed service members of the 

MBSD—trades submitted by these 

members will be guaranteed at the point 

of comparison, and eligible, as 

applicable, for pool comparison, netting, 

and settlement. Clearing membership 

categories include: (i) Registered brokers 

or dealers; (ii) other registered clearing 

agencies; (iii) registered investment 

companies; (iv) banks 7; (v) government 

securities issuers/government sponsored 

enterprises; (vi) insurance companies; 8

and (vii) unregistered investment pools 

(‘‘UIPs’’).9 In addition, the MBSD will 

have the discretion to make its services 

available to other entity types which it 

deems appropriate subject to the 

approval of the Commission. 

Membership requirements for Cash 

Settling Bank Members are set forth in 

Rule 3A, ‘‘Cash Settling Bank 

Members.’’ These requirements remain 

unchanged from the current MBSD 

rulebook and they mirror the 

requirements of the GSD-equivalent 

members. 

ii. Initial Membership Requirements 

The initial membership requirement 

for the MBSD members mirrors the 

current requirements for the GSD 

netting membership where there is an 

existing identical membership type in 

the GSD rules. The two membership 

categories where there are no GSD 

equivalents are registered investment 

companies and UIPs. In addition to 

standard requirements regarding 

financial and operational responsibility 

applicable to all Clearing Members, 

registered investment companies must 

be registered under the Investment 

Company Act of 1940 and have 

minimum net assets of $100 million. In 

addition to standard requirements 

regarding financial and operational 

responsibility applicable to all Clearing 

Members, UIPs must: 

• Have an investment advisor 

domiciled in the United States and 

registered with the Commission under 

the Investment Advisors Act of 1940; 

and 

• the UIP must have (i) $250 million 

in net assets, or (ii) $100 million in net 

assets and the UIP’s investment advisor 

must advise an existing UIP Clearing 

Member that has assets under 

management of $1.5 billion. 

iii. Ongoing Membership Requirements 

Required membership levels must be 

maintained by all members on an 

ongoing basis as a condition of 


srobinson on DSK4SPTVN1PROD with NOTICES
15156 Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 

10By way of example, under the current GSD 

rules, if a member has a Clearing Fund requirement 

of $11.4 million and excess net capital of $10 

million, its ‘‘ratio’’ is 1.14 (or 114 percent), and the 

applicable collateral premium would be 114 

percent of $1.4 million (which is equal to the 

amount by which the member’s Clearing Fund 

requirement exceeds its excess net capital), or 

$1,596,000. The current GSD rules provide that 

FICC has the right to: (i) Apply a lesser collateral 

premium (including no premium) based on specific 

circumstances (such as a member being subject to 

an unexpected haircut or capital charge that does 

not fundamentally change its risk profile), and (ii) 

return all or a portion of the collateral premium 

amount if it believes that the member’s risk profile 

does not require the maintenance of that amount. 

These rights will be carried over to the proposed 

MBSD rules. 

11The MBSD rules will provide FICC with the 

discretion to increase the confidence level for UIP 

and non-UIP Clearing Members if it determines that 

it is appropriate to do so with respect to a particular 

Clearing Member or Clearing Members generally. 

The MBSD rules will require Clearing Fund 

requirements to each Clearing Member within each 

membership type to be applied on a consistent and 

non-discriminatory basis. See MBSD Proposed Rule 

4 (Clearing Fund and Loss Allocation), Section 2(c). 

12The MBSD rules will provide FICC with the 

discretion to increase the minimum charge if it 

determines that it is appropriate to do so with 

respect to a particular Clearing Member or Clearing 

Members generally. The MBSD rules will require 

Clearing Fund requirements to each Clearing 

Member within each membership type to be 

applied on a consistent and non-discriminatory 

basis. See MBSD Proposed Rule 4 (Clearing Fund 

and Loss Allocation), Section 2(c). 

13An index-based haircut methodology will be 

used for securities with insufficient pricing data. 

membership. Current provisions 

applicable to the GSD netting 

membership under the GSD rules have 

been incorporated to the MBSD rules to 

apply to certain member types. For 

example, the GSD currently assesses a 

premium against any member whose 

Clearing Fund requirement exceeds its 

specified regulatory capital figure.10 The 

MBSD will also apply this premium to 

members. Also, bank, broker-dealer, and 

UIP members of the MBSD will be rated. 

Among other things, financial measures 

relevant to these types of entities will be 

assessed. Any member that receives a 

poor rating may be monitored more 

closely and/or placed on FICC’s internal 

watch list. 

The MBSD will take additional risk 

management measures with respect to 

UIP members. Specifically, the ‘‘value at 

risk’’ (‘‘VaR’’) confidence level for UIP 

members will be set at 99.5%, half a 

percentage higher than the confidence 

level used for a VaR calculation for nonUIP Clearing Members.11 UIP members 

also are required to achieve a qualitative 

assessment rating of at least ‘‘medium’’ 

as part of the initial membership 

requirement. Qualitative assessments 

will be based on such factors as 

management, capital, strategy and risk 

profile, valuation procedures, and 

internal risk management controls. 

Current UIP members that become rated 

less than ‘‘medium’’ may be subject to 

increased Required Fund Deposits and 

may also become subject to revocation 

of membership. Finally, the Clearing 

Fund requirement of UIPs shall be no 

less than $1 million.12

3. Clearing Fund and Loss Allocation 

The conversion of the MBSD to a CCP 

increases the amount of risk for the 

clearing agency. The CCP assumes the 

counterparty credit risk of the other 

Clearing Members which primarily 

includes: (1) The market risk associated 

with liquidating the defaulted Member’s 

portfolio, and (2) the liquidity risk 

associated with maintaining sufficient 

liquid resources to finance the defaulted 

Clearing Member’s scheduled settlement 

obligations. FICC believes that the 

MBSD has established a robust risk 

management framework to manage the 

credit risks from its Clearing Members 

and the credit and liquidity risks 

involved with its payment, clearing, and 

settlement process. 

The MBSD relies on many different 

controls to manage its counterparty risk. 

These controls include: (i) Membership 

standards, (ii) initial and variation 

margins, (iii) back and stress testing, (iv) 

position and risk monitoring, and (v) 

non-margin collateral. The first set of 

controls aims to prevent the CCP from 

conducting business with counterparties 

that have unacceptably high 

probabilities of default. As noted above, 

concurrent with the introduction of CCP 

services, the MBSD will increase its 

minimum financial standard for clearing 

membership eligibility to mirror GSD 

eligibility standards and enhance its risk 

monitoring for UIPs. 

The second line of defense is the 

margins collected from counterparties in 

the form of cash and highly liquid 

government securities in the Clearing 

Fund. The dual purpose of the Clearing 

Fund is to provide readily accessible 

liquidity to facilitate settlement and 

reduce loss-related costs which may be 

incurred in the event of a Clearing 

Member’s insolvency or failure to fulfill 

its contractual obligations to the MBSD. 

Margins are intended to cover possible 

losses between the time of default of a 

counterparty, at which point the CCP 

would inherit its positions, and the 

close-out of these positions through 

selling or hedging. For this purpose, the 

MBSD marks Clearing Member 

portfolios to the market on a daily basis 

and charges variation margins 

accordingly, and establishes initial 

margins to cover a minimum 99th 

percentile of expected possible losses 

that could arise over a 3-day settlement 

period utilizing a VaR-based 

approach.13

In order to further enhance the 

MBSD’s risk framework, the MBSD will 

add two components—the margin 

requirement differential and the 

coverage charge—to the Clearing Fund, 

as well as additional MBSD mark-tomarket items related to the new pool 

netting services. The MBSD also has the 

ability to collect charges above the 

systemically generated Clearing Fund 

charges when it deems it appropriate in 

order to protect FICC and its Clearing 

Members. If any loss were incurred in 

the liquidation of a Clearing Member 

that was not covered by the Clearing 

Member’s Clearing Fund deposit or 

amounts available under the crossguaranty arrangement to which FICC is 

a party, the MBSD would invoke its loss 

allocation process. 

The MBSD uses regular back and 

stress testing to monitor the sufficiency 

of collected margin levels vis-a-vis the 

risk represented by the 99th percentile 

of expected possible losses from 

Clearing Member portfolios and to 

monitor its tail risk exposure that is 

beyond the 99th percentile. If a Clearing 

Member portfolio does not pass a back 

test, additional margin will be collected 

via the coverage charge. Stress tests are 

also used to evaluate margin adequacy. 

The MBSD’s framework reflects stress 

events from the last 10 years as well as 

special stress events outside of the past 

10 years and takes the form of swap rate 

shifts and credit spread shocks that 

reflect market conditions for the 

instruments that the MBSD clears or 

holds as collateral. As described more 

fully below, the MBSD analyzes and 

reviews on an intraday basis certain 

components of the Clearing Fund that 

are recalculated using updated positions 

and prices if there is increased exposure 

in a Clearing Member’s portfolio 

intraday. In addition, the MBSD may at 

its discretion call for additional 

collateral on an intraday basis if 

exposures are in excess of predefined 

thresholds. 

Finally, aside from the risk of loss that 

could be encountered from a Clearing 

Member failure, a central counterparty 

could also face liquidity risk, defined as 

the risk that the central counterparty has 

insufficient financial resources to cover 

a default by a Clearing Member to which 

it has the largest exposure. To that end, 

the MBSD maintains sufficient 

resources to meet its observed liquidity 

risk. The Clearing Fund would be the 

primary source to fulfill the liquidity 

need incurred if MBSD had to complete 


srobinson on DSK4SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 15157 

14The definition of ‘‘VaR Charge’’ (which is 

referred to as ‘‘VaR Component’’ in the current 

rules) is being amended to remove the reference to 

the application of ‘‘minimum amounts’’ to such 

VaR Charge. The MBSD is currently applying a 

minimum 5-basis point charge which will not be 

applicable when the MBSD CCP becomes a CCP 

because of the addition of the other components to 

the overall Clearing Fund calculation. Minimum 

Clearing Fund deposit amounts per Rule 4 remain 

applicable. 

15The Clearing Fund is ‘‘charged’’ when FICC has 

applied the Clearing Fund for more than 30 days 

and is allocating the amount as a loss or for other 

loss allocation purposes. 

16Tier Two members are those that are legally 

prohibited from participating in loss mutualization. 

Currently, only Registered Investment Companies 

qualify as Tier Two members. 

17Brokered trades are done on a ‘‘give-up basis,’’ 

and brokers are thus not considered parties to fullymatched trades. However, for purposes of loss 

allocation, broker members will be subject to loss 

allocation for certain partially-matched trades. 

Brokers are considered Tier One members, and as 

such will be subject to loss mutualization. 

settlement on behalf of the defaulting 

Clearing Member. Other conventional 

funding tools such as loans secured via 

the MBSD clearing banks and/or triparty repo transactions would also be 

used to fulfill the liquidity need, but if 

those were unavailable or insufficient, 

the MBSD would invoke the ‘‘Capped 

Contingency Liquidity Facility,’’ as 

described below, to provide additional 

financing in the event of a Clearing 

Member default. 

Tail risk is one of the risks the MBSD 

has to manage. The MBSD addresses 

this risk through a continuous process 

of: (1) Reviewing margin methodologies 

with stakeholders; (2) analyzing and 

monitoring margin and collateral 

requirements; (3) actively reviewing and 

timely acting on market conditions and 

credit events; (4) reviewing back and 

stress tests, and (5) identifying, 

assessing, and managing risks associated 

with the products and services provided 

by the MBSD and FICC. 

i. Clearing Fund 

The underlying Clearing Fund 

methodology is designed primarily to 

account for market risks associated with 

a Clearing Member’s unsettled portfolio. 

The Clearing Fund model is back tested 

on a monthly basis and periodically 

validated by outside experts. Additional 

charges and premiums may be 

considered to address additional risks 

(i.e., credit, reputation, and legal) or 

non-compliance with the MBSD rules. 

The Clearing Fund is calculated every 

business day for each MBSD Clearing 

Member. 

Clearing Fund requirements will be 

calculated in accordance with the VaR 

model. The Clearing Fund components 

will consist of the VaR charge,14 the 

coverage charge, the margin requirement 

differential charge, and the 

deterministic components charge 

(which will include the mark-to-market 

charges, cash obligation items, and 

accrued principal and interest). The VaR 

methodology will utilize the prior 252 

days of historical information for cash 

positions, including prices, spreads, and 

market variables to simulate the market 

environments in the forthcoming three 

days. Projected portfolio losses are then 

calculated assuming these simulated 

environments actually will be realized. 

The coverage charge is an additional 

charge to bring the Clearing Member’s 

coverage to a targeted confidence level. 

The margin requirement differential 

considers intra-day portfolio variations 

and estimates the potential increased 

risk intra-day and the risk that the next 

margin call will not be satisfied. The 

deterministic risk component combines 

the mark-to-market of the portfolio, gain 

or loss for the difference between the 

original contract value and the 

internally generated netting price 

derived from the to-be-announced 

netting process, principal and interest 

adjustments on failed positions, and 

other miscellaneous cash items. The 

deterministic risk component can result 

in an increase or decrease to a member’s 

total clearing fund requirement. 

In order to further mitigate risk, and 

as part of FICC’s efforts to enhance its 

intraday monitoring capabilities, FICC 

has determined to expand its intraday 

monitoring to recalculate the mark-tomarket elements of the deterministic 

risk component. This component of the 

risk calculations will be updated at least 

hourly using intraday pricing and 

position feeds for FICC members and 

compared against the amounts that were 

previously collected in the Clearing 

Fund. If the exposures increase above 

certain defined thresholds, Risk 

Management staff will be alerted to 

consider additional intraday margin 

calls outside of the formal Clearing 

Fund collection process. These intraday 

margin calls would need to be satisfied 

by the affected members within one 

hour of FICC’s notice. The initial 

thresholds will be based on changes to 

a Clearing Member’s position size, 

composition, and price changes on the 

constituent securities. Qualitative 

factors including, but not limited to, 

Watch List status and internal rating 

will also be considered in the 

application of intraday mark-to-market. 

ii. Use of Payments and Deposits 

FICC is providing additional 

disclosure relating to its use of a 

Clearing Member’s deposits and 

payments to the Clearing Fund for 

temporary financing needs. The 

rulebook also clarifies that whenever the 

Clearing Fund is charged for any reason, 

other than to satisfy a clearing loss 

attributable to a Clearing Member solely 

from that Clearing Member’s Clearing 

Fund deposit, FICC will provide the 

reasons therefore to each Clearing 

Member.15

iii. Loss Allocation 

FICC is introducing a new loss 

allocation methodology for the MBSD. If 

a defaulting Clearing Member’s Clearing 

Fund and any amounts of the defaulting 

member available under a crossguaranty agreement are not sufficient to 

cover losses incurred in the liquidation 

of the defaulting Clearing Member’s 

positions (‘‘Remaining Losses’’), the 

MBSD’s loss allocation methodology 

will be invoked. Under this proposed 

loss allocation methodology, Remaining 

Losses will first be allocated to the 

retained earnings of FICC attributable to 

the MBSD, in the amount of up to 25 

percent of the retained earnings or such 

higher amount as may be approved by 

the Board of Directors of FICC. If a loss 

still remains, MBSD Clearing Members 

are placed into one of two tiers for loss 

allocation purposes: Tier One members 

are subject to loss mutualization, 

whereas Tier Two members are not 

subject to loss mutualization.16 FICC 

will divide the Remaining Losses 

between the Tier One members and Tier 

Two members. The division of 

Remaining Losses is based on the 

amount each solvent Clearing Member 

would have lost or gained if it had 

closed out its original outstanding 

trades with the defaulting Clearing 

Member on a bilateral basis.17 FICC then 

will determine the relevant share of 

each Tier One member’s bilateral losses 

(members with a bilateral liquidation 

profit are ignored) in the total of all 

Clearing Members’ bilateral losses and 

sum these shares to determine the Tier 

One Remaining Loss. Similarly, FICC 

will determine the relative share of each 

Tier Two member’s bilateral loss in the 

total of all Clearing Members’ bilateral 

losses and sum these shares to 

determine the Tier Two Remaining 

Loss. 

Tier One Remaining Losses will be 

allocated to Tier One members first by 

assessing the Required Fund Deposit of 

each such Member in the amount of up 

to $50,000 equally. If a loss remains, 

Tier One members will be assessed 

ratably, in accordance with the 

respective amounts of their Required 

Fund Deposits, based on the average 

daily amount of the Clearing Member’s 

Required Fund Deposit over the prior 


srobinson on DSK4SPTVN1PROD with NOTICES
15158 Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 

18Brokered trades involve a broker intermediary 

between two dealers. Each dealer and broker must 

submit the trade details to the MBSD for trade 

comparison. This means that each dealer submits 

against the broker and the broker submits against 

each dealer. A fully matched trade will be achieved 

when both dealers match against the broker (i.e. all 

submissions discussed above match). With a fully 

matched trade, both dealers assume principal 

status, which results in the broker having no 

settlement obligations with respect to the trade; the 

broker cannot be subject to any loss with respect to 

such trade. A partially matched trade results when 

only one of the two submissions achieves a bilateral 

match versus the broker. The dealer who has 

matched with the broker will have a settlement 

guarantee and is subject to Clearing Fund 

requirements with respect to such trade. If the 

unmatched dealer submits a statement to FICC 

denying the existence of the trade, the broker 

becomes responsible for such trade from a risk 

management perspective and loss allocation. If the 

unmatched dealer does not submit a statement to 

FICC denying the existence of the trade, the dealer 

becomes responsible for the settlement and risk 

management and the broker is released from these 

responsibilities. 

19To illustrate the proposed MBSD Tier One 

(‘‘T1’’)/Tier 2 (‘‘T2’’) loss allocation rules, consider 

an example where the $20 million Clearing Fund 

requirement of an insolvent MBSD member X turns 

out to be insufficient to cover the $30 million 

liquidation loss that the MBSD incurred as a result 

of closing out all of X’s open positions. If X doesn’t 

have any excess collateral, MBSD would need to 

allocate a $10 million remaining loss. 

Assume that X has unsettled trades with three 

Tier One original counterparties (T1A, T1B and 

T1C) and three Tier Two original counterparties 

(T2A, T2B and T2C), all executed directly. Further 

assume that the bilateral liquidation results of X’s 

solvent original counterparties are as follows: T1A: 

$5 million; T1B: ($5 million); T1C: ($15 million); 

T2A: ($20 million); T2B: ($10 million); T2C: $15 

million; Total: ($30 million). Also assume that there 

are no secondary defaults and no off-the-market 

trades. 

Based on these assumptions, the bilateral Tier 

One liquidation losses amount to $20 million ($5 

million attributable to T1B and $15 million 

attributable to T1C), while the bilateral Tier Two 

liquidation losses amount to $30 million ($20 

million attributable to T2A and $10 million 

attributable to T2B). This means that out of a total 

of $50 million bilateral liquidation losses, 40% or 

$20 million can be attributed to Tier One 

counterparties and 60% or $30 million to Tier Two 

counterparties. As a result, the Tier One remaining 

loss would be $4 million (i.e., 40% of the MBSD’s 

$10 million overall remaining loss) and the Tier 

Two remaining loss would be $6 million (i.e., 60% 

of the MBSD’s $10 million overall remaining loss). 

Given that T2A’s and T2B’s bilateral losses 

represent 2⁄3 and 1⁄3 respectively of the Tier Two 

Remaining Loss, T2A’s loss allocation will be $4 

million and T2B’s loss allocation will be $2 million. 

The $4 million Tier One Remaining Loss would 

first be assessed equally to each Tier One member’s 

clearing fund, up to an amount of $50,000 per Tier 

One member. If a loss still remains, the amount is 

allocated among Tier One members, pro-rata based 

on each Tier One member’s average daily level of 

clearing fund over the prior twelve months (or 

shorter period if a member did not maintain a 

clearing fund deposit over the full twelve month 

period). 

The loss allocation results are not impacted by 

whether the defaulting Clearing Member is a Tier 

One or a Tier Two member. 

20Currently, the MBSD recognizes two types of 

trades: (i) ‘‘To be announced’’ (‘‘TBA’’) trades and 

(ii) specified pool trades (‘‘SPTs’’). A TBA is a 

contract for the purchase or sale of agency 

mortgage-backed securities to be delivered at an 

agreed-upon future date; however, the actual pool 

identities and/or the number of pools that will be 

delivered to fulfill the trade obligation or terms of 

the contract are unknown at the time of the trade. 

TBA trades may proceed through the Settlement 

Balance Order engine for netting or may settle on 

a trade-for-trade basis (‘‘TFTD’’). In an SPT contract, 

required pool data, including the pool number to 

be delivered on settlement date, is specified at the 

time of execution. 

Clearing Members may use FICC’s Interactive 

Submission Method, Multiple Batch Submission 

Method, or Single Batch Submission Method to 

submit trade data to the MBSD. 

21Trade data submitted to the MBSD must 

include such identifying information as the MBSD 

may require and must be submitted in the form and 

manner and in accordance with the time schedules 

prescribed by the MBSD rules or otherwise set forth 

by FICC from time to time. The symbol 

corresponding to the name of a Clearing Member 

that is printed, stamped, or written on any form, 

document, or other item issued by the Clearing 

Member pursuant to Rule 5 Section 2 shall be 

deemed to have been adopted by the Clearing 

Member as its signature and shall be valid and 

binding upon the Clearing Member in all respects 

as though it had manually affixed its signature to 

such form document or other item. 

22Comparison is deemed to occur at the point at 

which the MBSD makes available to both of the 

counterparties an output indicating that the trade 

data has been compared. FICC generates the output 

indicating that a trade is compared 

contemporaneous with successful comparison of 

the trade data in FICC’s RTTM system. 

23Because Clearing Members will be required to 

allocate pools via EPN and RTTM in order for pool 

allocations to proceed to pool comparison and 

netting, all MBSD Clearing Members will be 

required to be EPN members. 24Not every compared pool will be included in 

the pool netting system. FICC will determine which 

guaranteed trades would receive maximum benefit 

from pool netting by considering such factors as 

trading velocity and projected netting factor. SPTs 

are not eligible for pool netting under this proposal. 

Pool allocation information (‘‘Pool Instructs’’) 

may be submitted up to the point that pool netting 

is executed. Pool Instructs must bilaterally compare 

(i.e., mandatory comparison pool data submitted by 

the seller must match the mandatory comparison 

pool data submitted by the buyer) in order for the 

Pool Instructs to be eligible for consideration for 

pool netting. Pool Instructs must also be assigned 

by the MBSD to a valid, open TBA position, 

meaning that the trade terms submitted on the Pool 

Instructs must match the trade terms of a TBA 

CUSIP that has a sufficient open position. Only 

compared and assigned Pool Instructs will be 

evaluated for inclusion in pool netting. 

25These obligations include: (i) SPTs, which are 

ineligible for pool netting; (ii) transactions for 

which Clearing Members do not submit allocation 

information for pool netting; and (iii) transactions 

with incomplete pool information on file. 

26The MBSD retains the discretion to re-net fails 

or to conduct pair-offs if it believes that such 

actions are necessary to protect itself or its Clearing 

Members due to market conditions or events. 

twelve months. Tier Two Remaining 

Loss will be allocated to Tier Two 

Clearing Members based on each Tier 

Two member’s original trading activity 

with the Defaulting Member that 

resulted in a loss. Tier Two members 

will only be subject to loss to the extent 

they originally traded with the 

Defaulting Member consistent with 

regulatory requirements applicable to 

the Tier Two members. FICC shall 

assess such loss against the Tier Two 

members ratably based upon their loss 

as a percentage of the entire amount of 

the Tier Two Remaining Loss. Tier Two 

counterparties will be liable for losses 

related to both direct and brokered 

trades 18 including partially-matched 

trades for which the Tier Two member 

did not submit a statement to FICC 

denying the existence of the trade.19

4. Trade Processing 

Under the proposed MBSD rules, each 

Clearing Member will be required to 

submit to the MBSD for processing 

transactions with other Clearing 

Members in all securities that are 

netting-eligible according to MBSD rules 

and procedures.20 Eligible transactions 

will be submitted to FICC’s Real-Time 

Trade Manager (‘‘RTTM’’) system for 

matching purposes.21 FICC will provide 

a trade guarantee for all existing types 

of trades upon comparison of trade 

details submitted by members.22

Additionally, the MBSD will 

introduce ‘‘pool comparison’’ and ‘‘pool 

netting’’ and interpose itself as 

settlement counterparty to certain 

settlement obligations. Specifically, 

after the netting of TBA transactions, 

settlement obligations will be issued 

between Clearing Members and Clearing 

Members will allocate pools for 

settlement through the MBSD’s 

Electronic Pool Notification (‘‘EPN’’) 

Service.23 Clearing Members then will 

submit pool details for those netted TBA 

settlement obligations through the 

RTTM system for pool comparison and 

for consideration for pool netting.24

Upon FICC’s issuance of pool netting 

results to Clearing Members, those pools 

that are netted will be novated; i.e., 

settlement obligations between the 

Clearing Members will be replaced with 

settlement obligations between each 

Clearing Member and FICC. For all other 

transactions, settlement will occur 

outside of FICC between the original 

settlement counterparties and must be 

reported to FICC through a Notification 

of Settlement (‘‘NOS’’).25 Obligations 

that fail to settle will not be re-netted, 

as they are in the GSD.26

5. Settlement 

i. Settlement With FICC as Counterparty 

As stated above, obligations generated 

by the pool netting system will settle 

versus FICC. Clearing Members will be 

required to designate a clearing bank for 

purposes of delivering securities to, and 

receiving securities from, the MBSD in 

satisfaction of settlement obligations. 

All deliveries and receipts of securities 

in satisfaction of pool deliver 

obligations and pool receive obligations 


srobinson on DSK4SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 15159 

27 ‘‘Pool Net Price’’ is defined as the uniform 

price for a pool (expressed in dollars per unit of par 

value), not including accrued interest, established 

by FICC on each business day, based on current 

market information for each eligible security. 

28 ‘‘Clearance Difference Amount’’ is defined as 

the absolute value of the dollar difference between 

the settlement value of a pool deliver obligation or 

a pool receive obligation and the actual value at 

which such pool deliver obligation or pool receive 

obligation was settled. 

29The ‘‘Defined Capped Liquidity Amount’’ is the 

maximum amount that a Clearing Member shall be 

required to fund during a CCLF Event. The Defined 

Capped Liquidity Amount will be established as 

follows: 

(a) For those Clearing Members that are eligible 

for and that have established borrowing privileges 

at the Federal Reserve Discount Window or for 

those Clearing Members who have an affiliate that 

is eligible for and has established borrowing 

privileges at the Federal Reserve Discount Window, 

FICC will conduct a study every six months, or 

such other time period as FICC shall determine 

from time to time as specified in Important Notices 

to Clearing Members, to determine each Clearing 

Member’s largest liquidity requirement for the 

applicable time period based on a Clearing 

Member’s sell positions versus other Clearing 

Members at the family level on a bilateral net basis 

within a TBA CUSIP. Based on the overall study, 

FICC will define an adjustable percentage (the 

initial percentage will be set at 60%), as determined 

by FICC from time to time, and multiply that 

percentage amount against the maximum amount to 

establish each Clearing Member’s Defined Capped 

Liquidity Amount; and 

(b) For those Clearing Members that are ineligible 

for or have not established borrowing privileges at 

the Federal Reserve Discount Window and for those 

Clearing Members that do not have an affiliate that 

is eligible for or has established borrowing 

privileges at the Federal Reserve Discount Window, 

FICC will conduct a study every month or such 

other time period as FICC shall determine from time 

to time as specified in Important Notices to Clearing 

Members, to determine each Clearing Member’s 

largest liquidity requirement for the applicable time 

period based on a Clearing Member’s sell positions 

versus other Clearing Members at the family level 

on a bilateral net basis within a TBA CUSIP. The 

Clearing Member’s largest liquidity requirement for 

the past month, adjusted in each case of a CCLF 

Event to be no greater than the actual pool delivery 

obligation to the defaulting Clearing Member, will 

represent the Clearing Member’s Defined Capped 

Liquidity Amount. Clearing Members in this 

category will have a defined non-adjustable 

percentage amount set to 100%. Clearing Members 

in this category will not be required to finance any 

Remaining Financing Amount. 

(c) 

30Applicable to those Clearing Members that are 

eligible for and that have established borrowing 

privileges at the Federal Reserve Discount Window 

or to those Clearing Members who have an affiliate 

that is eligible for and has established borrowing 

privileges at the Federal Reserve Discount Window. 

will be required to be made against 

simultaneous payment. These securities 

settlement procedures mirror the 

current GSD securities settlement rule. 

ii. Settlement Outside of FICC 

Clearing Members will be required to 

settle trades ineligible for pool netting 

and allocated pools that are not 

processed through the pool netting 

system bilaterally with applicable 

settlement counterparties outside of 

FICC. As noted above, these trades 

remain guaranteed for settlement by 

FICC but are not novated. The 

settlement obligations between the 

Clearing Members are not replaced with 

settlement obligations between each 

Clearing Member and FICC. Clearing 

Members must submit to FICC NOSs on 

the applicable clearance date for each 

transaction. When the MBSD receives 

an NOS from each counterparty to a 

transaction, the MBSD will report 

clearance of the applicable transaction 

back to each Clearing Member. At this 

point, the MBSD will stop collecting 

margin on the transaction and will no 

longer be responsible for principal and 

interest payments. 

iii. Cash Settlement 

Several items have been added to the 

calculation of each Clearing Member’s 

cash settlement obligation, including: 

(a) A ‘‘net pool transaction adjustment 

payment’’ (to reflect the difference 

between the pool net price 27 and a 

settlement price established at the TBA 

level); (b) principal and interest 

payment amounts related to fails; and 

(c) a ‘‘clearance difference amount’’ 28

(to take into account the delivery to 

FICC of mispriced securities by a 

Clearing Member). 

6. Capped Contingency Liquidity 

Facility 

FICC is adding a provision to the 

MBSD rulebook that introduces a 

‘‘Capped Contingency Liquidity 

Facility,’’ which is a procedure designed 

to ensure that the MBSD has sufficient 

liquidity resources to cover the largest 

failure of a family of accounts. This 

facility will only be invoked if FICC 

declares a default or a ‘‘cease to act’’ 

against a Clearing Member and FICC 

does not have the ability to obtain 

sufficient liquidity through its Clearing 

Fund cash deposits and its established 

repurchase agreement arrangements 

(‘‘CCLF Event’’). FICC believes that the 

Capped Contingency Liquidity Facility 

provides Clearing Members with finality 

of settlement and allows firms to 

prepare for and manage their potential 

financing requirements in the event of a 

Clearing Member’s default. Once a CCLF 

Event has been declared, FICC will 

contact Clearing Members that are due 

to deliver obligations to FICC that are 

owed to a defaulting Clearing Member. 

FICC will either cancel the Clearing 

Member’s obligations or instruct the 

Clearing Member to hold the obligations 

(or a portion thereof) and await 

instructions as to when to make these 

deliveries. With respect to the 

obligations subject to financing 

(‘‘Financing Amount’’) up to the 

Clearing Member’s defined liquidity 

contribution cap (‘‘Defined Capped 

Liquidity Amount’’),29 FICC as 

counterparty, will enter into repurchase 

agreements with the Clearing Member 

equal to the Financing Amount 

pursuant to the terms of the deemed 

1996 SIFMA Master Repurchase 

Agreement (without referenced 

annexes). If a liquidity need still exists 

(‘‘Remaining Financing Amount’’), FICC 

will inform Clearing Members that are 

below the Defined Capped Liquidity 

Amount and also inform Clearing 

Members that do not have a delivery 

obligation to the defaulting Clearing 

Member.30 After these Clearing 

Members have been notified, FICC will 

distribute the remaining financing need 

to such Clearing Members on a pro rata 

basis and enter into repurchase 

agreements pursuant to the terms of the 

deemed 1996 SIFMA Master Repurchase 

Agreement (without referenced 

annexes). These transactions would 

remain open until FICC completes the 

liquidation of the underlying obligations 

and a haircut based on market 

conditions will be applied to the 

transactions. 

Once FICC completes the liquidation 

of the underlying obligation, FICC will 

instruct the Clearing Member to deliver 

the securities back to FICC. FICC will 

then close the repurchase transaction 

and deliver the securities to complete 

settlement on the contractual settlement 

date of the liquidating trade. Because 

FICC would be receiving and delivering 

securities on the same day, FICC would 

not have a liquidity need resulting from 

the transaction of a defaulting Clearing 

Member. 

7. Corporation Default 

FICC is adding provisions to the 

MBSD rulebook to make explicit the 

close-out netting of obligations running 

between FICC and its Clearing Members 

in the event that FICC becomes 

insolvent or defaults in its obligations to 

its Clearing Members. FICC represents 

that its Clearing Members have stated 

that the proposed rule changes will 

provide clarity in their application of 

balance sheet netting to their positions 

with FICC under U.S. GAAP in 

accordance with the criteria specified in 

the Financial Accounting Standards 

Board’s Interpretation No. 39, Offsetting 

of Amounts Related to Certain Contracts 

(FIN 39). The firms have stated further 

that the provisions would allow them to 

comply with Basel Accord Standards 

relating to netting. Specifically, firms 

are able to calculate their capital 

requirements on the basis of their net 


srobinson on DSK4SPTVN1PROD with NOTICES
15160 Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 

31TMPG is a group of market participants active 

in the Treasury securities market and sponsored by 

the Federal Reserve Bank of New York. The 

Commission has approved similar rule proposals at 

the GSD. See Securities Exchange Act Release No. 

59802 (Apr. 20, 2009), 74 FR 19248 (Apr. 28, 2009) 

and Securities Exchange Act Release No. 65910 

(Dec. 8, 2011), 76 FR 77861 (Dec. 14, 2011) 

(expanding applicability of the fails charge to 

Agency debt securities transactions). 

32 ‘‘Round robins’’ are a circular series of 

transactions between multiple parties where there 

is no ultimate long and short position to be settled. 

For example, if A sells to B and B sells to C and 

C sells to A, this group of transactions constitutes 

a round robin. In a round robin, there is no 

settlement of securities, but there is satisfaction of 

money across all interested parties. There can be a 

fail in a round robin transaction when a deliver 

obligation arises because the trade submission of 

certain members of the round robin do not match. 

The MBSD will not apply the fails charge to a round 

robin if each affected Clearing Member in the round 

robin provides the MBSD with the required 

information to resolve the trade. 

33FICC is not establishing a minimum charge 

because the MBSD, as counterparty in multiple 

transactions, may owe a net credit to one 

counterparty that is financed by multiple small net 

debits owed to it by multiple counterparties. The 

lack of a threshold minimum charge deviates from 

the TMPG recommendation of a $500 threshold. 

FICC notified Clearing Members of this deviation in 

an Important Notice (MBS 119.11) and received no 

objection. 

34But no later than one hour before the close of 

the Federal Reserve Banks’ Fedwire Funds Service 

if such determination relates to the extension of 

time for settlement and is made on a settlement day. 

credit exposure where they have legally 

enforceable netting arrangements with 

their counterparties, which includes a 

close-out netting provision in the event 

of the default of the counterparty (in 

this case, the division of the clearing 

corporation acting as a central 

counterparty). 

8. Fails Charge 

To encourage market participants to 

resolve fails promptly, FICC is applying 

a fails charge recommended by the 

Treasury Market Practices Group 

(‘‘TMPG’’) that expands the 

applicability of the fails charge to 

settlement of pools versus FICC 

involving failing agency MBS issued or 

guaranteed by Fannie Mae, Freddie Mac 

and Ginnie Mae.31 A fails charge will 

not apply to TBA and pool level ‘‘round 

robins.’’ 32 FICC believes that the fails 

charge will reduce the incidence of 

delivery failures and supporting 

liquidity in these markets. 

The proposed charge will be equal to 

the greater of (a) 0 percent and (b) 2 

percent per annum minus the federal 

funds target rate. The charge accrues 

each calendar day a fail is outstanding. 

The MBSD will not impose a fails 

charge if delivery occurs on either of the 

two business days following the 

contractual settlement date. The MBSD 

will not employ a minimum fail charge 

amount, but, instead, will apply the fails 

charge to any pool for which delivery 

has not occurred within the two 

business day grace period.33 Each 

business day, the MBSD will provide 

reports reflecting fail charge amounts to 

Clearing Members and will generate a 

consolidated monthly report at month 

end. Failing parties with a net debit (i.e., 

the fails charge amounts such party 

owes exceed the fails charge amounts it 

is owed) will be required to pay such 

net amount in respect of those pools 

that have settled the previous month 

and that are reflected in the previous 

month’s consolidated month end report 

by the Class ‘‘B’’ payable date (as 

established by SIFMA guidelines) of the 

month following settlement in 

conjunction with other cash 

movements. The fails charge funds 

received by the MBSD then will be used 

to pay Clearing Members with fail net 

credits. 

The MBSD will implement a rate 

change procedure so that if fails accrue 

at one rate and the rate changes, the fail 

will keep the original accrual and new 

fails calculations will be subject to the 

new rate. When there is a substitution 

of the underlying pool, the fails charge 

will be calculated pursuant to the above 

formula, using (in the formula) the 

federal funds target rate for each day of 

the substitution period beginning on the 

contractual settlement date. 

In the event that the MBSD is the 

failing party because (i) the MBSD 

received Agency MBS issued or 

guaranteed by Fannie Mae, Freddie 

Mac, or Ginnie Mae too late to make 

redelivery or for any other reason or 

(ii) MBSD received a substitution of a 

pool deliver obligation of agency MBS 

issued or guaranteed by Fannie Mae, 

Freddie Mac or Ginnie Mae too late for 

same day redelivery of securities or for 

any other reason, the fails charge will be 

distributed pro-rata to the Clearing 

Members based upon usage of the 

MBSD’s services. 

The MBSD will not guarantee fails 

charge proceeds in the event of a default 

(i.e., if a defaulting Clearing Member 

does not pay its fail charge, Clearing 

Members due to receive fails charge 

proceeds will have those proceeds 

reduced pro-rata by the defaulting 

Clearing Member’s unpaid amount). 

Failure by a Clearing Member to meet its 

obligations in connection with a fails 

charge may be a violation of the MBSD 

rules that is subject to disciplinary 

actions consistent with the MBSD rule 

book. FICC’s Board of Directors (or 

appropriate Committee thereof) will 

retain the right to revoke application of 

the charges if industry events or 

practices warrant such revocation. The 

fails charges will apply to applicable 

transactions entered into on or after the 

date of this order, as well as to 

transactions that were entered into, but 

remain unsettled as of the date of this 

order. For transactions entered into 

prior to, and unsettled as of, the date of 

this order, the fails charge will begin 

accruing on the later of the date of this 

order or the contractual settlement date. 

The following are examples of fails 

scenarios and the applicable fails charge 

in each scenario: 

Example 1: A delivery is contracted to 

occur on settlement date (S), a Tuesday, but 

does not occur until the second business day 

following contractual settlement, Thursday 

(S+2). The Clearing Member would not be 

subject to a fails charge because delivery 

occurs within the two business days 

following the contractual settlement date. 

Example 2: A delivery is contracted to 

occur on settlement date (S), a Tuesday, but 

does not occur until the third business day 

following contractual settlement, Friday 

(S+3). The Clearing Member would be subject 

to a three-day fails charge. 

Example 3: A delivery is contracted to 

occur on settlement date (S), a Wednesday, 

but does not occur until the third business 

day following contractual settlement, 

Monday (S+3). The Clearing Member would 

be subject to a five-day fails charge, as the 

charge accrues on each calendar day in the 

fail period. 

Example 4: A delivery is contracted to 

occur on settlement date (S), May 10th, but 

does not occur until the month following the 

contractual settlement date; it settles on June 

8th. The Clearing Member will not be subject 

to collection of the fails charge in June (the 

month following the contractual settlement 

date) because delivery did not occur in May. 

The participant will be subject to the 

collection of the fails charge in July (on the 

Class ‘‘B’’ payable date) because delivery 

occurred in June. The charge will be 

recalculated for 29 days. 

9. Suspension of Rules in Emergency 

Circumstances 

The MBSD rule regarding suspension 

of its rules in emergency situations is 

being revised to specify that: (i) The rule 

applies to emergency circumstances; 

(ii) an emergency shall exist in the 

judgement of the FICC Board or a FICC 

Officer, which causes the Board or the 

FICC Officer, as applicable, to believe 

that an extension, waiver, or suspension 

of the MBSD rules is necessary for FICC 

to continue to facilitate the prompt and 

accurate clearance and settlement of 

securities transactions; (iii) FICC shall 

notify the Commission of such 

extension, waiver, or suspension of the 

MBSD rules within 2 hours of such 

determination;34 (iv) the written report 

of such extension shall include the 

nature of the emergency, along with the 

other requirements listed in the current 

rules; (v) such written report shall be 

submitted to the Commission no later 


srobinson on DSK4SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 15161 

35 In the event of a close-out of a defaulting 

Clearing Member, broker members will be 

responsible for partially-matched trades for which 

FICC has received a statement denying the 

existence of the trade. 

than three calendar days after the 

implementation of the extension, 

waiver, or suspension of the MBSD 

rules; and (vi) any suspension shall not 

last for more than thirty calendar days 

from the date of the event or events 

giving rise to the suspension unless the 

MBSD submits a proposed rule change 

to the Commission seeking approval of 

a further extension. 

10. Ceasing to Act, Wind-Down 

Members, and Insolvency 

The MBSD’s rules regarding 

restrictions on access to services, 

ceasing to act, winding-down Clearing 

Members, and Clearing Member mirror 

the current GSD rules, conformed to 

apply to the specifics of MBSD 

processing as applicable. For example, 

upon the MBSD ceasing to act for a 

Clearing Member, Clearing Members 

will be required to submit immediate 

NOS so that the MBSD has all necessary 

settlement information with respect to a 

defaulting Clearing Member to affect a 

close-out of such Clearing Member. In 

addition, the MBSD will have the right, 

with respect to specified pool trades, to 

substitute alternate pools as necessary.35

11. DTCC Audit Committee 

While FICC MBSD does not have a 

rule and it is not adding a rule to require 

an audit committee, FICC is governed by 

the DTCC Audit Committee and such 

Committee could not be dismantled 

without a proposed rule change filed 

with the Commission. 

12. Summary of Other Rule Changes 

i. Current MBSD Rules Not Reflected in 

Proposed Rulebook 

The following current MBSD rules are 

not included in the new rulebook: 

• With respect to Article III 

(Participants), in the current MBSD 

rules: Rule 1, ‘‘Requirements Applicable 

to Participants and Limited Purpose 

Participants’’; Section 5, ‘‘Supplemental 

Agreement of Participants and Limited 

Purpose Participants’’; and Section 14 

‘‘Special Provisions Applicable to 

Partnerships’’ are not included in the 

proposed MBSD rules because each of 

these rules is no longer necessary 

because proposed Rule 2A harmonizes 

the MBSD rules with the GSD rules on 

this subject. Rule 1, ‘‘Requirements 

Applicable to Participants and Limited 

Purpose Participants’’ Section 15 

‘‘Special Provisions Applicable to NonDomestic Participants’’ is not included 

in the proposed MBSD rules because as 

with the GSD, the MBSD will be using 

the Netting Agreement for foreign 

members and not the master agreement 

format. Proposed Rule 2A, ‘‘Initial 

Membership Requirements,’’ Section 5, 

‘‘Member Agreement’’ covers the 

provisions of the membership 

agreement generally and thereby serves 

to harmonize the proposed MBSD rules 

with the GSD rules with respect to this 

subject. 

• Rule 3, ‘‘Corporation Declines to 

Act for a Participant or Limited Purpose 

Participant’’ Section 2 ‘‘Other Grounds 

for Ceasing to Act for a Participant or 

Limited Purpose’’ of the current MBSD 

rules is not included in the proposed 

MBSD rules because it is being replaced 

by proposed MBSD Rule 14 

‘‘Restrictions on Access to Services’’ 

and Rule 16 ‘‘Insolvency of a Member’’ 

which cover the same matters and 

harmonize these provisions with those 

in the GSD rules. 

• In an effort to harmonize with the 

GSD rules, Rule 3, ‘‘Corporation 

Declines to Act for a Participant or 

Limited Purpose Participant’’ Section 3 

is not reflected in the proposed MBSD 

Rules. FICC does not believe it is 

necessary to state the current MBSD 

concept in the proposed MBSD rules 

because it would apply regardless of 

whether it is stated in the rules. Rule 3, 

‘‘Corporation Declines to Act for a 

Participant or Limited Purpose 

Participant’’ Sections 5(a) ‘‘Disposition 

of Open Commitments’’ is not included 

in the proposed MBSD rules because 

FICC does not accept Letters of Credit as 

a permissible form of Clearing Fund 

collateral as a routine matter; however, 

FICC reserves the right to accept this 

type of collateral, if needed. In addition, 

the current MBSD rule addresses the 

liquidation of other types of collateral 

posted by the defaulting Clearing 

Member. Under the proposed MBSD 

rule, close-out processes, in general, are 

covered by Rule 17, which has been 

drafted to be harmonized with the 

equivalent GSD Rule to the extent 

possible. Section 5(c) of the current 

MBSD Rule 3 in Article III is not 

reflected in proposed rulebook because 

it addresses non-defaulting Clearing 

Members engaging in the close-out of 

the defaulting Clearing Member’s 

positions, which will be undertaken by 

the MBSD as CCP under the proposed 

rules. 

• Under the section titled ‘‘Schedule 

of Charges Broker Account Group’’ in 

the appendix to the proposed MBSD 

rules, FICC no longer provides hardcopy 

output from microfiche. As a result, the 

reference to this charge is being 

removed. 

ii. New MBSD Rules 

The following rules are being added 

to the MBSD rulebook in connection 

with this filing and have not been 

addressed separately above: 

• Rule 3, Section 6 ‘‘General 

Continuance Standard’’ of the proposed 

MBSD rules includes additional 

language which states that FICC may 

require that increased or modified 

Required Fund Deposits be deposited by 

the Clearing Member on the same 

Business Day on which the FICC 

requests additional assurances from 

such Clearing Member. FICC has always 

interpreted the current rules to permit 

such action; this additional language 

makes this point explicit. 

• Rule 5, ‘‘Trade Comparison’’ 

Section 1 ‘‘General’’ and Section 3 

‘‘Trade Submission Communication 

Methods’’ includes disclosure relating 

to the means by which data may be 

entered and submitted to FICC. Section 

10 ‘‘Modification of Trade Data’’ of this 

rule allows FICC to unilaterally modify 

trade data submitted by Clearing 

Members if FICC becomes aware of any 

changes to the transaction that 

invalidates the original terms upon 

which it was submitted or compared 

and Rule 12 ‘‘Obligations’’ of Section 10 

discusses the point at which trade data 

becomes a settlement obligation. 

• With respect to the computation of 

cash balances under Rule 11, ‘‘Cash 

Settlement,’’ FICC has included a new 

process with respect to fail tracking. Fail 

tracking is an automated process that 

takes place when the actual settlement 

date of a transaction is beyond the 

contract date. An adjustment is made 

when one or more beneficiary dates (i.e., 

certain securities have a record date that 

does not represent the end of the accrual 

period and instead the beneficiary date 

is the actual date the accrual period 

ends) fall between the contract date and 

the settlement date. The adjustment 

results in the payment of funds from the 

message originator to the message 

receiver through the Federal Reserve’s 

National Settlement Service. This 

eliminates a cumbersome manual 

process for tracking and clearing 

adjustments from securities transaction 

counterparties and it impacts all Fedeligible mortgage-backed securities, 

including Freddie Mac, Fannie Mae, 

and Ginnie Mae. 

• With respect to Rule 26, ‘‘Financial 

Reports and Internal Accounting 

Control Reports’’, Section 1 ‘‘Financial 

Reports’’ has been revised to state that 

FICC will: (i) Prepare its financial 

statements in accordance with Generally 

Accepted Accounting Principles; 

(ii) make unaudited financial statements 


srobinson on DSK4SPTVN1PROD with NOTICES
15162 Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 

36See supra note 5. 

37The Commission notes that FICC, consulting 

with market participants and regulators and using 

emergency powers under its rulebook, has 

temporarily provided certain central counterparty 

services in two instances to alleviate liquidity 

pressure on the market: (i) To facilitate the orderly 

liquidation of Lehman Brothers’ positions and 

(ii) to facilitate the orderly liquidation of MF Global 

positions. In both instances, FICC significantly 

reduced the number of deliveries required by 

netting deliver and receive obligations among 

members. 

for the fourth quarter available to its 

Clearing Members within 60 days 

following the close of FICC’s calendar 

year; and (iii) provide a certain level of 

minimum disclosures in its quarterly 

financial statements. This rule has also 

been revised to include Section 2 

‘‘Internal Accounting Control Reports,’’ 

which requires FICC to make internal 

accounting control reports available to 

its Clearing Members. 

• The proposed MBSD rules also 

introduce pool netting fees. Below is a 

description of each fee: 

1. Matched Pool Instruct (‘‘PID’’) (per 

side): When a pool instruct is matched 

resulting from either an instruct or an 

affirmation (with or without pending 

status), a matched fee is charged to both 

sides. 

2. Customer Delivery Request (‘‘CDR’’) 

Pool Instruct Fee: When a pool instruct 

in a matched status is included in the 

net (vs. FICC) a CDR fee is charged at 

the instruct PID level to the Clearing 

Member that submitted the CDR. 

3. Cancel of Matched Pool Instruct: 

This fee is assessed to the Clearing 

Member submitting a unilateral cancel 

on a matched pool instruct. 

4. Pool Obligation: This fee is charged 

to the net long and short Clearing 

Member when a Pool Obligation 

(‘‘POID’’) is created versus FICC. 

5. Post Net Subs: This fee is charged 

to the Clearing Member that submits a 

substitution (the net seller) on a POID 

vs. FICC. 

6. Clearance of Pool vs. FICC: This is 

a fee associated with clearing a POID 

versus FICC. 

7. Financing Charges (Financing costs 

are the costs of carrying positions 

overnight): For each Clearing Member, a 

pass-through charge calculated on a 

percentage of the total of all such costs 

incurred by FICC, allocated by Agency 

product. 

iii. Revised MBSD Rules to Harmonize 

With GSD Rules 

The provisions listed below are 

revised to harmonize them with similar 

provisions in the current GSD rules and 

in some cases updated as appropriate to 

reflect the mortgage-backed securities 

market: 

• Rule 3 Section 12 (Excess Capital 

Premium) 

• Rule 5 Section 10 (Modification of 

Trade Data by the Corporation) 

• Rule 14 (Restrictions on Access to 

Services) 

• Rule 15 (Wind-Down of a Member) 

• Rule 16 (Insolvency of a Member) 

• Rule 17 (Procedures For When the 

Corporation Ceases to Act) (revised for 

the mortgage-backed securities market) 

• Rule 17A (Corporation Default) 

• Rule 18 (Charges for Services 

Rendered) 

• Rule 19 (Bills Rendered) 

• Rule 20 (Admission to Premises of 

the Corporation, Powers of Attorney, 

etc.) 

• Rule 21 (Forms) 

• Rule 22 (Release of Clearing Data) 

• Rule 23 (Lists to be Maintained) 

(revised for the mortgage backedsecurities market) 

• Rule 24 (Signatures) 

• Rule 25 (Insurance) 

• Rule 26 (Financial Reports and 

Internal Accounting Control Reports) 

(revised as explained above) 

• Rule 27 (Rule Changes) 

• Rule 28 (Hearing Procedures) 

• Rule 29 (Governing Law and 

Captions) 

• Rule 30 (Limitations of Liability) 

• Rule 31 (General Provisions) 

• Rule 32 (Cross-Guaranty 

Agreements) 

• Rule 33 (Suspension of Rules in 

Emergency Circumstances) (revised as 

explained above) 

• Rule 34 (Action by the Corporation) 

• Rule 35 (Notices) 

• Rule 36 (Interpretation of Terms) 

• Rule 37 (Interpretation of Rules) 

• Rule 38 (Disciplinary Proceedings) 

• Rule 39 (DTCC Shareholders 

Agreement) 

III. Comments 

The Commission received one 

comment to the proposed rule change, 

from SIFMA.36 The commenter 

supported the proposed rule change, 

stating that the proposed rule change 

would both reduce risk and increase 

efficiency in the mortgage-backed 

security market. The commenter 

believes that the proposed rule change 

would reduce risk because it would 

decrease the number of settlements 

through the pool netting process and as 

a result likely would reduce the number 

of fails in the market. Furthermore, the 

commenter believes the proposed rule 

change would provide for a less risky 

process for the liquidation of positions 

of a defaulting member.37 The 

commenter believes that the proposed 

rule change would increase efficiency 

because as the total number of 

settlements is reduced through pool 

netting, market participants likely 

would have to deal with fewer 

settlement-related issues, such as pool 

notifications, resolution disputes, and 

fails, for which they currently dedicate 

significant time and resources. 

IV. Discussion 

The Commission has carefully 

considered the proposed rule change 

and the comment thereto and the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder. 

The Commission agrees with the 

commenter that the proposed rule 

change likely will reduce risk and 

promote efficiency in the mortgagebacked security market by reducing the 

number of settlements that are 

performed and as a result reducing the 

number of settlement-related risks and 

costs that confront counterparties. The 

Commission also believes that the FICC 

guarantee and the provision of CCP 

services will reduce risks of bilateral 

counterparty default. The Commission 

believes that these changes are 

consistent with the Exchange Act, 

including Section 17A, because they 

should help facilitate the prompt and 

accurate clearance and settlement of 

securities transactions and help assure 

the safeguarding of securities and funds 

under FICC’s control or for which FICC 

is responsible. In particular, the 

Commission believes that these changes 

to the MBSD’s rules should result in a 

more efficient system of settlement for 

the mortgage-backed security market. 

The Commission also notes that the 

MBSD marks Clearing Member 

portfolios to the market on a daily basis 

and charges variation margins 

accordingly, and establishes initial 

margins designed to cover a minimum 

99th percentile of expected possible 

losses that could arise over a 3-day 

settlement period utilizing a VaR-based 

approach. In addition, in order to 

further enhance the MBSD’s risk 

framework, the MBSD will add two 

components—the margin requirement 

differential and the coverage charge—to 

the Clearing Fund, as well as additional 

MBSD mark-to-market items related to 

the new pool netting services. 

Furthermore, the MBSD uses regular 

back and stress testing to monitor the 

sufficiency of collected margin levels 

vis-a-vis the risk represented by the 99th 

percentile of expected possible losses 

from Clearing Member portfolios and to 

monitor its tail risk exposure that is 

beyond the 99th percentile. The 

Commission believes these steps 

should, consistent with Section 


srobinson on DSK4SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Notices 15163 

38 15 U.S.C. 78q–1(b)(3)(A). 

39 15 U.S.C. 78q–1. 

40 In approving the proposed rule change, the 

Commission considered the proposal’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3For a detailed description of the Investor 

Support Program as originally implemented, see 

Securities Exchange Act Release No. 63270 

(November 8, 2010), 75 FR 69489 (November 12, 

2010) (NASDAQ–2010–141) (notice of filing and 

immediate effectiveness) (the ‘‘ISP Filing’’). See also 

Securities Exchange Act Release Nos. 63414 

(December 2, 2010), 75 FR 76505 (December 8, 

2010) (NASDAQ–2010–153) (notice of filing and 

immediate effectiveness); 63628 (January 3, 2011), 

76 FR 1201 (January 7, 2011) (NASDAQ–2010–154) 

(notice of filing and immediate effectiveness); 

63891 (February 11, 2011), 76 FR 9384 (February 

17, 2011) (NASDAQ–2011–022) (notice of filing and 

immediate effectiveness); 64050 (March 8, 2011), 76 

FR 13694 (March 14, 2011) (SR–NASDAQ–2011– 

034); 65717 (November 9, 2011), 76 FR 70784 

(November 15, 2011) (SR–NASDAQ–2011–150) 

(notice of filing and immediate effectiveness). 

4The Commission has recently expressed its 

concern that a significant percentage of the orders 

of individual investors are executed at over the 

counter (‘‘OTC’’) markets, that is, at off-exchange 

markets; and that a significant percentage of the 

orders of institutional investors are executed in 

dark pools. Securities Exchange Act Release No. 

61358 (January 14, 2010), 75 FR 3594 (January 21, 

2010) (Concept Release on Equity Market Structure, 

‘‘Concept Release’’). In the Concept Release, the 

Commission has recognized the strong policy 

preference under the Act in favor of price 

transparency and displayed markets. The 

Commission published the Concept Release to 

invite public comment on a wide range of market 

structure issues, including high frequency trading 

and un-displayed, or ‘‘dark,’’ liquidity. See also 

Mary L. Schapiro, Strengthening Our Equity Market 

Structure (Speech at the Economic Club of New 

York, Sept. 7, 2010) (‘‘Schapiro Speech,’’ available 

on the Commission Web site) (comments of 

Commission Chairman on what she viewed as a 

troubling trend of reduced participation in the 

equity markets by individual investors, and that 

nearly 30 percent of volume in U.S.-listed equities 

is executed in venues that do not display their 

liquidity or make it generally available to the 

public). 

17A(b)(3)(A) of the Exchange Act,38

facilitate the prompt and accurate 

clearance and settlement of securities 

transactions and the safeguarding of 

securities and funds under FICC’s 

custody or control or for which FICC is 

responsible. 

V. Conclusion 

On the basis of the foregoing, the 

Commission finds that the amended 

proposed rule change is consistent with 

the requirements of the Exchange Act 

and in particular Section 17A of the 

Exchange Act and the rules and 

regulations thereunder.39

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act, 

that the proposed rule change (File No. 

SR–FICC–2008–01) be, and hereby is, 

approved.40

By the Commission. 

Dated: March 9, 2012. 

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–6187 Filed 3–13–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66544; File No. SR– 

NASDAQ–2012–032] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Modify 

NASDAQ’s Investor Support Program 

March 8, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on February 

27, 2012, The NASDAQ Stock Market 

LLC (‘‘NASDAQ’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by NASDAQ. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASDAQ proposes to modify the 

Investor Support Program (the ‘‘ISP’’) 

under Rule 7014 to introduce an 

additional method for members to earn 

an enhanced rebate under the ISP. 

NASDAQ will implement the proposed 

change on March 1, 2012. The text of 

the proposed rule change is available at 

http://nasdaq.cchwallstreet.com/, at 

NASDAQ’s principal office, and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASDAQ included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. 

NASDAQ has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

NASDAQ is proposing to modify the 

Investor Support Program (the ‘‘ISP’’) 

under Rule 7014 to introduce an 

additional method for members to earn 

an enhanced rebate under the ISP. The 

ISP enables NASDAQ members to earn 

a monthly fee credit for providing 

additional liquidity to NASDAQ and 

increasing the NASDAQ-traded volume 

of what are generally considered to be 

retail and institutional investor orders 

in exchange-traded securities (‘‘targeted 

liquidity’’).3 The goal of the ISP is to 

incentivize members to provide such 

targeted liquidity to the NASDAQ 

Market Center.4 The Exchange noted in 

the ISP Filing that maintaining and 

increasing the proportion of orders in 

exchange-listed securities executed on a 

registered exchange (rather than relying 

on any of the available off-exchange 

execution methods) would help raise 

investors’ confidence in the fairness of 

their transactions and would benefit all 

investors by deepening NASDAQ’s 

liquidity pool, supporting the quality of 

price discovery, promoting market 

transparency and improving investor 

protection. 

Without modifying any existing 

aspects of the ISP, the Exchange now 

proposes to provide an additional 

method for members to qualify for an 

ISP rebate that includes a new criterion 

focused on liquidity provision through 

Public Customer Orders in the NASDAQ 

Options Market. The change recognizes 

the extent to which members that 

represent retail and/or institutional 

investors are active in trading both cash 

equities and options on behalf of such 

customers. In fact, to an increasing 

extent the customers that such members 

represent simultaneously trade different 

asset classes within a single investment 

strategy. NASDAQ also notes that cash 

equities and options markets are linked, 

with liquidity and trading patterns on 

one market affecting those on the other. 

Accordingly, pricing incentives that 

encourage market participant activity in 

both markets recognize that activity in 

the options markets also supports price 

discovery and liquidity provision in the 

NASDAQ Market Center. The NASDAQ 

Market Center fee schedule for order 

execution and routing in Rule 7018 

already recognizes the convergence 

between cash equities and options 

trading through liquidity provider 

rebate tiers available to members active 

in both the NASDAQ Market Center and 

the NASDAQ Options Market. 

Participants in the ISP are required to 

designate specific NASDAQ order entry 


srobinson on DSK4SPTVN1PROD with NOTICES