Document ID: SEC-2017-1129-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2017-07-06T04:00Z

[Federal Register Volume 82, Number 128 (Thursday, July 6, 2017)]
[Notices]
[Pages 31356-31364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14145]

[[Page 31356]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81054; File No. SR-FICC-2017-802]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of No Objection to Advance Notice Filing To Implement the Capped 
Contingency Liquidity Facility in the Government Securities Division 
Rulebook

June 29, 2017.
    Fixed Income Clearing Corporation (``FICC'') filed with the U.S. 
Securities and Exchange Commission (``Commission'') on March 1, 2017 
the advance notice SR-FICC-2017-802 (``Advance Notice'') 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'') \1\ 
and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 
(``Exchange Act'').\2\ The Advance Notice was published for comment in 
the Federal Register on March 15, 2017.\3\ The Commission received no 
comments to the Advance Notice, and it received four comment letters to 
the related Proposed Rule Change.\4\ To the extent that comments to the 
Proposed Rule Change are relevant to the Advance Notice, they are 
discussed below.\5\ This publication serves as notice of no objection 
to the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight 
Council designated FICC a systemically important financial market 
utility on July 18, 2012. See Financial Stability Oversight Council 
2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, FICC is 
required to comply with the Payment, Clearing and Settlement 
Supervision Act and file advance notices with the Commission. See 12 
U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Securities Exchange Act Release No. 80191 (March 9, 2017), 
82 FR 13876 (March 15, 2017) (SR-FICC-2017-802) (``Notice''). FICC 
also filed a related proposed rule change (SR-FICC-2017-002) 
(``Proposed Rule Change'') with the Commission pursuant to Section 
19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, seeking 
approval of changes to its rules necessary to implement the Advance 
Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. The 
Proposed Rule Change was published in the Federal Register on March 
20, 2017. Securities Exchange Act Release No. 80234 (March 14, 
2017), 82 FR 14401 (March 20, 2017) (SR-FICC-2017-002). On April 25, 
2017, the Commission designated a longer period within which to 
approve the Proposed Rule Change, disapprove the Proposed Rule 
Change, or institute proceedings to determine whether to approve or 
disapprove the Proposed Rule Change. See Securities Exchange Act 
Release No. 80524 (April 25, 2017), 82 FR 20685 (May 3, 2017). On 
May 30, 2017, the Commission issued an order instituting proceedings 
to determine whether to approve or disapprove the Proposed Rule 
Change. See Securities Exchange Act Release No. 34-80812 (May 30, 
2017), 82 FR 25642 (June 2, 2017) (SR-FICC-2017-002). The order 
instituting proceedings extended the Commission's period to review 
the Proposed Rule Change and re-opened the comment period until June 
23, 2017.
    \4\ See letter from Robert E. Pooler Jr. Chief Financial 
Officer, Ronin Capital LLC (``Ronin''), dated April 10, 2017, to 
Robert W. Errett, Deputy Secretary, Commission (``Ronin Letter I''); 
letter from Alan B. Levy, Managing Director, Industrial and 
Commercial Bank of China Financial Services LLC (``ICBC''), Philip 
Vandermause, Director, Aardvark Securities LLC, David Rutter, Chief 
Executive Officer, LiquidityEdge LLC, Robert Pooler, Chief Financial 
Officer, Ronin Capital LLC, Jason Manumaleuna, Chief Financial 
Officer and EVP, Rosenthal Collins Group LLC, and Scott Skyrm, 
Managing Director, Wedbush Securities Inc. (``ICBC Letter''); letter 
from Timothy J. Cuddihy, Managing Director, FICC, dated March 8, 
2017, to Robert W. Errett, Deputy Secretary, Commission (``FICC 
Letter''); and letter from Robert E. Pooler Jr., Chief Financial 
Officer, Ronin, dated June 19, 2017, to Robert W. Errett, Deputy 
Secretary, Commission (``Ronin Letter II''), available at https://www.sec.gov/comments/sr-ficc-2017-002/ficc2017002.htm.
    \5\ Because the proposal contained in the Advance Notice was 
also filed as the Proposed Rule Change, see supra note 3, the 
Commission is considering any comment received on the Proposed Rule 
Change also to be a comment on the Advance Notice.
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I. Description of the Advance Notice

    FICC's current liquidity resources for its Government Securities 
Division (``GSD'') \6\ consist of (i) cash in GSD's clearing fund; (ii) 
cash that can be obtained by entering into uncommitted repo 
transactions using securities in the clearing fund; (iii) cash that can 
be obtained by entering into uncommitted repo transactions using the 
securities that were destined for delivery to the defaulting Netting 
Member; and (iv) uncommitted bank loans.\7\ With this Advance Notice, 
FICC proposes to amend its GSD Rulebook (``GSD Rules'') \8\ to 
establish a rules-based, committed liquidity resource (i.e., the Capped 
Contingency Liquidity Facility[supreg] (``CCLF'')) as an additional 
liquidity resource designed to provide FICC with a committed liquidity 
resource to meet its cash settlement obligations in the event of a 
default of the GSD Netting Member or family of affiliated Netting 
Members (``Affiliated Family'') to which FICC has the largest exposure 
in extreme but plausible market conditions.\9\
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    \6\ FICC operates two divisions--GSD and the Mortgage-Backed 
Securities Division (``MBSD''). GSD provides trade comparison, 
netting, risk management, settlement and central counterparty 
services for the U.S. government securities market, while MBSD 
provides the same services for the U.S. mortgage-backed securities 
market. Because GSD and MBSD are separate divisions of FICC, each 
division maintains its own rules, members, margin from their 
respective members, Clearing Fund, and liquid resources.
    \7\ See Notice, 82 at 13878.
    \8\ GSD Rules, available at www.dtcc.com/legal/rules-and-procedures.aspx.
    \9\ As defined in the GSD Rules, the term ``Netting Member'' 
means a GSD member that is a member of the GSD Comparison System and 
the Netting System. Id.
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A. Overview of the Proposal

    CCLF would be invoked only if FICC declared a ``CCLF Event,'' which 
would occur only if FICC ceased to act for a Netting Member in 
accordance to GSD Rule 22A (referred to as a ``default'') and, 
subsequent to such default, FICC determined that its other, above-
described liquidity resources could not generate sufficient cash to 
satisfy FICC's payment obligations to the non-defaulting Netting 
Members. Once FICC declares a CCLF Event, each Netting Member could be 
called upon to enter into repurchase transactions with FICC (``CCLF 
Transactions'') up to a pre-determined capped dollar amount, as 
described below.
1. Declaration of a CCLF Event
    Following a default, FICC would first obtain liquidity through its 
other available non-CCLF liquidity resources. If FICC determined that 
these sources of liquidity would be insufficient to meet FICC's payment 
obligations to its non-defaulting Netting Members, FICC would declare a 
CCLF Event. FICC would notify all Netting Members of FICC's need to 
make such a declaration and enter into CCLF Transactions, as necessary, 
by issuing an Important Notice.
2. CCLF Transactions
    Upon declaring a CCLF Event, FICC would meet its liquidity need by 
initiating CCLF Transactions with non-defaulting Netting Members. The 
original transaction that created FICC's initial obligation to pay cash 
to the now Direct Affected Member, and the Direct Affected Member's 
initial obligation to deliver securities to FICC, would be deemed 
satisfied by entry into the CCLF Transaction, and such settlement would 
be final.
    Each CCLF Transaction would be governed by the terms of the 
September 1996 Securities Industry and Financial Markets Association 
Master Repurchase Agreement,\10\ which would be

[[Page 31357]]

incorporated by reference into the GSD Rules as a master repurchase 
agreement between FICC as seller and each Netting Member as buyer, with 
certain modifications as outlined in the GSD Rules (``CCLF MRA'').
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    \10\ The September 1996 Securities Industry and Financial 
Markets Association Master Repurchase Agreement (``SIFMA MRA'') is 
available at http://www.sifma.org/services/standard-forms-and-documentation/mra,-gmra,-msla-and-msftas/. The SIFMA MRA would be 
incorporated by reference into the GSD Rules without referenced 
annexes, other than Annex VII (Transactions Involving Registered 
Investment Companies) which would be applicable to any Netting 
Member that is a registered investment company. FICC represents 
that, at the time of filing the Advance Notice, there were no 
registered investment companies that are also GSD Netting Members.
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    To initiate CCLF Transactions with non-defaulting Netting Members, 
FICC would identify the non-defaulting Netting Members that are 
obligated to deliver securities destined for the defaulting Netting 
Member (``Direct Affected Members'') and FICC's cash payment obligation 
to such Direct Affected Members that FICC would need to finance through 
CCLF to cover the defaulting Netting Member's failure to deliver the 
cash payment (the ``Financing Amount''). FICC would notify each Direct 
Affected Member of the Direct Affected Member's Financing Amount and 
whether such Direct Affected Member should deliver to FICC or suppress 
any securities that were destined for the defaulting Netting Member. 
FICC would then initiate CCLF Transactions with each Direct Affected 
Member for the Direct Affected Member's purchase of the securities 
(``Financed Securities'') that were destined for the defaulting Netting 
Member.\11\ The aggregate purchase price of the CCLF Transactions with 
the Direct Affected Member could equal but never exceed the Direct 
Affected Member's maximum funding obligation (``Individual Total 
Amount'').\12\
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    \11\ FICC states that it would have the authority to initiate 
CCLF Transactions with respect to any securities that are in the 
Direct Affected Member's portfolio which are bound to the defaulting 
Netting Member.
    \12\ The sizing of each Direct Affected Member's Individual 
Total Amount is described below in Section I.B.
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    If any Direct Affected Member's Financing Amount exceeds its 
Individual Total Amount (``Remaining Financing Amount''), FICC would 
advise the following categories of Netting Members (collectively, 
``Affected members'') that FICC intends to initiate CCLF Transactions 
with them for the Remaining Financing Amount: (i) All other Direct 
Affected Members with a Financing Amount less than its Individual Total 
Amount; and (ii) each Netting Member that has not otherwise entered 
into CCLF Transactions with FICC (``Indirect Affected Members'').
    FICC states that the order in which FICC would enter into CCLF 
Transactions for the Remaining Financing Amount would be based upon the 
Affected Members that have the most funding available within their 
Individual Total Amounts.\13\ No Affected Member would be obligated to 
enter into CCLF Transactions greater than its Individual Total Amount.
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    \13\ See Notice, 82 at 13878.
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    After receiving approval from FICC's Board of Directors to do so, 
FICC would engage its investment advisor during a CCLF Event to 
minimize liquidation losses on the Financed Securities through hedging, 
strategic dispositions, or other investment transactions as determined 
by FICC under relevant market conditions. Once FICC liquidates the 
underlying securities by selling them to a new buyer (``Liquidating 
Trade''), FICC would instruct the Affected Member to close the CCLF 
Transaction by delivering the Financed Securities to FICC in order to 
complete settlement of the Liquidating Trade. FICC would attempt to 
unwind the CCLF Transactions in the order it entered into the 
Liquidating Trades. Each CCLF Transaction would remain open until the 
earlier of (i) such time that FICC liquidates the Affected Member's 
Financed Securities; (ii) such time that FICC obtains liquidity through 
its available liquid resources; or (iii) 30 or 60 calendar days after 
entry into the CCLF Transaction for U.S. government bonds and mortgage-
backed securities, respectively.

B. CCLF Sizing and Allocation

    According to FICC, its overall liquidity need during a CCLF Event 
would be determined by the cash settlement obligations presented by the 
default of a Netting Member and its Affiliated Family, as described 
below. An additional amount (``Liquidity Buffer'') would be added to 
account for both changes in Netting Members' cash settlement 
obligations that may not be observed during the six-month look-back 
period during which CCLF would be sized, and the possibility that the 
defaulting Netting Member is the largest CCLF contributor. FICC 
believes that its proposal would allocate FICC's observed liquidity 
need during a CCLF Event among all Netting Members based on their 
historical settlement activity, but states that Netting Members that 
present the highest cash settlement obligations would be required to 
maintain higher CCLF funding obligations.\14\
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    \14\ Id. at 13878-79.
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    The steps that FICC would take to size its overall liquidity need 
during a CCLF event and then size and allocate each Netting Member's 
CCLF contribution requirement are described below.
Step 1: CCLF Sizing
(A) Historical Cover 1 Liquidity Requirement
    FICC's historical liquidity need for the six-month look-back period 
would be equal to the largest liquidity need generated by an Affiliated 
Family during the preceding six-month period. The amount would be 
determined by calculating the largest sum of an Affiliated Family's 
obligation to receive GSD eligible securities plus the net dollar 
amount of its Funds-Only Settlement Amount \15\ (collectively, the 
``Historical Cover 1 Liquidity Requirement''). FICC believes that it is 
appropriate to calculate the Historical Cover 1 Liquidity Requirement 
in this manner because the default of such an Affiliated Family would 
generate the largest liquidity need for FICC.\16\
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    \15\ According to FICC, the Funds-Only Settlement Amount 
reflects the amount that FICC collects and passes to the contra-side 
once FICC marks the securities in a Netting Member's portfolio to 
the current market value. FICC states that this amount is the 
difference between the contract value and the current market value 
of a Netting Member's GSD portfolio. FICC states that it would 
consider this amount when calculating the Historical Cover 1 
Liquidity Requirement because in the event that an Affiliated Family 
defaults, the Funds-Only Settlement Amount would also reflect the 
cash obligation to non-defaulting Netting Members. See Notice, 82 at 
13879.
    \16\ Id.
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(B) Liquidity Buffer
    According to FICC, it is cognizant that the Historical Cover 1 
Liquidity Requirement would not account for changes in a Netting 
Member's current trading behavior, which could result in a liquidity 
need greater than the Historical Cover 1 Liquidity Requirement. To 
account for this potential shortfall, FICC proposes to add a Liquidity 
Buffer as an additional amount to the Historical Cover 1 Liquidity 
Requirement, which would help to better anticipate GSD's total 
liquidity need during a CCLF Event.
    FICC states that the Liquidity Buffer would initially be 20 percent 
of the Historical Cover 1 Liquidity Requirement (and between 20 to 30 
percent thereafter), subject to a minimum amount of $15 billion.\17\ 
FICC believes that 20 to 30 percent of the Historical Cover 1 Liquidity 
Requirement is appropriate based on its analysis and statistical 
measurement of the variance of its daily liquidity need

[[Page 31358]]

throughout 2015 and 2016.\18\ FICC also believes that the $15 billion 
minimum dollar amount is necessary to cover changes in a Netting 
Member's trading activity that could exceed the amount that is implied 
by such statistical measurement.\19\
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    \17\ See Notice, 82 at 13879. For example, if the Historical 
Cover 1 Liquidity Requirement was $100 billion, the Liquidity Buffer 
initially would be $20 billion ($100 billion x 0.20), for a total of 
$120 billion in potential liquidity resources.
    \18\ According to FICC, it uses a statistical measurement called 
the ``coefficient of variation,'' which is calculated as the 
standard deviation divided by the mean, to quantify the variance of 
Affiliated Families' daily liquidity needs. Id. FICC states that 
this is a typical approach used to compare variability across 
different data sets. FICC states that it will use the coefficient of 
variation to set the Liquidity Buffer by quantifying the variance of 
each Affiliated Family's daily liquidity need. Id. FICC believes 
that a Liquidity Buffer of 20 to 30 percent, subject to a minimum of 
$15 billion, would be an appropriate Liquidity Buffer because FICC 
found that, throughout 2015 and 2016, the coefficient of variation 
ranged from an average of 15 to 19 percent for Affiliated Families 
with liquidity needs above $50 billion, and an average of 18 to 21 
percent for Affiliated Families with liquidity needs above $35 
billion. Id.
    \19\ Id.
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    FICC would have the discretion to adjust the Liquidity Buffer, 
within the range of 20 to 30 percent of the Historical Cover 1 
Liquidity Requirement, based on its analysis of the stability of the 
Historical Cover 1 Liquidity Requirement over various time horizons. 
According to FICC, this would help ensure that its liquidity resources 
are sufficient under a wide range of potential market scenarios that 
may lead to a change in a Netting Member's trading behavior. FICC also 
states that it would analyze the trading behavior of Netting Members 
that present larger liquidity needs than the majority of the Netting 
Members, as described below.\20\
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    \20\ Id.
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(C) Aggregate Total Amount
    FICC's anticipated total liquidity need during a CCLF Event (i.e., 
the sum of the Historical Cover 1 Liquidity Requirement plus the 
Liquidity Buffer) would be referred to as the ``Aggregate Total 
Amount.'' The Aggregate Total Amount initially would be set to the 
Historical Cover 1 Liquidity Requirement plus the greater of 20 percent 
of the Historical Cover 1 Liquidity Requirement or $15 billion.
Step 2: Allocation of the Aggregate Total Amount Among Netting Members
(A) Allocation of the Aggregate Regular Amount Among Netting Members
    The Aggregate Total Amount would be allocated among Netting Members 
in order to arrive at each Netting Member's Individual Total Amount. 
FICC would take a tiered approach in its allocation of the Aggregate 
Total Amount. First, FICC would determine the portion of the Aggregate 
Total Amount that should be allocated among all Netting Members 
(``Aggregate Regular Amount''), which FICC states initially would be 
set at $15 billion.\21\ FICC believes that this amount is appropriate 
because the average Netting Member's liquidity need from 2015 to 2016 
was approximately $7 billion, with a majority of Netting Members having 
liquidity needs less than $15 billion.\22\ Based on that analysis, FICC 
believes that the $15 billion Aggregate Regular Amount should capture 
the liquidity needs of a majority of the Netting Members.\23\
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    \21\ Id.
    \22\ According to FICC, from 2015 to 2016, 59 percent of all 
Netting Members presented average liquidity needs between $0 to $5 
billion, 78 percent of all Netting Members presented average 
liquidity needs between $0 and $10 billion, and 85 percent of all 
Netting Members presented average liquidity needs between $0 and $15 
billion. Id.
    \23\ Id.
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    Second, as discussed in more detail below, after allocating the $15 
billion Aggregate Regular Amount, FICC would allocate the remainder of 
the Aggregate Total Amount (``Aggregate Supplemental Amount'') among 
Netting Members that incurred liquidity needs above the Aggregate 
Regular Amount within the six-month look-back period. For example, a 
Netting Member with a $7 billion peak daily liquidity need would only 
contribute to the $15 billion Aggregate Regular Amount, based on the 
calculation described below. Meanwhile, a Netting Member with a $45 
billion Aggregate Regular Amount would contribute towards the $15 
billion Aggregate Regular Amount and the Aggregate Supplemental Amount, 
as described below. FICC believes that this tiered approach reflects a 
reasonable, fair, and transparent balance between FICC's need for 
sufficient liquidity resources and the burdens of the funding 
obligations on each Netting Member's management of its own 
liquidity.\24\
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    \24\ Id.
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    Under the proposal, the Aggregate Regular Amount would be allocated 
among all Netting Members, but Netting Members with larger Receive 
Obligations \25\ would be required to contribute a larger amount. FICC 
believes that this approach is appropriate because a defaulting Netting 
Member's Receive Obligations are the primary cash settlement 
obligations that FICC would have to satisfy as a result of the default 
of an Affiliated Family. However, FICC also believes that, because FICC 
guarantees both sides of a GSD Transaction and all Netting Members 
benefit from FICC's risk mitigation practices, some portion of the 
Aggregate Regular Amount should be allocated based on Netting Members' 
aggregate Deliver Obligations \26\ as well.\27\ As a result, FICC 
proposes to allocate the Aggregate Regular Amount based on a scaling 
factor. Given that the Aggregate Regular Amount would be initially 
sized at $15 billion and would cover approximately 80 percent of 
Netting Members' observed liquidity needs, FICC proposes to set the 
scaling factor in the range of 65 to 85 percent to the value of Netting 
Members' Receive Obligations, and in the range of 15 to 35 percent to 
the value of Netting Members' Deliver Obligations.\28\
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    \25\ ``Receive Obligation'' means a Netting Member's obligation 
to receive eligible netting securities from FICC at the appropriate 
settlement value, either in satisfaction of all or a part of a Net 
Long Position, or to implement a collateral substitution in 
connection with a Repo Transaction with a right of substitution. GSD 
Rules, supra note 8.
    \26\ ``Deliver Obligation'' means a Netting Member's obligation 
to deliver eligible netting securities to FICC at the appropriate 
settlement value either in satisfaction of all or a part of a Net 
Short Position or to implement a collateral substitution in 
connection with a Repo Transaction with a right of substitution. GSD 
Rules, supra note 8.
    \27\ See Notice, 82 at 13880.
    \28\ Id.
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    FICC states that it would initially assign a 20 percent weighting 
percentage to a Netting Member's aggregate peak Deliver Obligations 
(``Deliver Scaling Factor'') and the remaining percentage difference, 
80 percent in this case, to a Netting Member's aggregate peak Receive 
Obligations (``Receive Scaling Factor'').\29\ FICC would have the 
discretion to adjust these scaling factors based on a quarterly 
analysis that would, in part, assess Netting Members' observed 
liquidity needs that are at or below $15 billion. FICC believes that 
this assessment would help ensure that the Aggregate Regular Amount 
would be appropriately allocated across all Netting Members.\30\
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    \29\ For example, assume that a Netting Member's peak Receive 
and Deliver Obligations represent 5 and 3 percent, respectively, of 
the sum of all Netting Members' peak Receive and Deliver 
Obligations. The Netting Member's portion of the Aggregate Regular 
Amount (``Individual Regular Amount'') would be $600 million ($15 
billion * 0.80 Receive Scaling Factor * 0.05 Peak Receive Obligation 
Percentage), plus $90 million ($15 billion * 0.20 Deliver Scaling 
Factor * 0.03 Peak Deliver Obligation Percentage), for a total of 
$690 million.
    \30\ See Notice, 82 at 13882.
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(B) FICC's Allocation of the Aggregate Supplemental Amount Among 
Netting Members
    The remainder of the Aggregate Total Amount (i.e., the Aggregate 
Supplemental Amount) would be allocated among Netting Members that

[[Page 31359]]

present liquidity needs greater than $15 billion using Liquidity Tiers. 
As described in greater detail in the Notice, the specific allocation 
of the Aggregate Supplemental Amount to each Liquidity Tier would be 
based on the frequency that Netting Members generated liquidity needs 
within each Liquidity Tier, relative to the other Liquidity Tiers.\31\ 
More specifically, once the Aggregate Supplemental Amount is divided 
among the Liquidity Tiers, the amount within each Liquidity Tier would 
be allocated among the applicable Netting Members, based on the 
relative frequency that a Netting Member generated liquidity needs 
within each Liquidity Tier.\32\ FICC explains that this allocation 
would result in a larger proportion of the Aggregate Supplemental 
Amount being borne by those Netting Members who present the highest 
liquidity needs.\33\
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    \31\ See Notice, 82 at 13880-81.
    \32\ For example, if the Aggregate Supplemental Amount is $50 
billion and Tier 1 has a relative frequency weighting of 33 percent, 
all Netting Members that have generated liquidity needs that fall 
within Tier 1 would collectively fund $16.5 billion ($50 billion * 
0.33) of the Supplemental Amount. Each Netting Member in that tier 
would be responsible for contributing toward the $16.5 billion, 
based on the relative frequency that the member generated liquidity 
needs within that tier.
    \33\ See Notice, 82 at 13882.
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    The sum of a Netting Member's allocation across all Liquidity Tiers 
would be such Netting Member's Individual Supplemental Amount. FICC 
would add each Netting Member's Individual Supplemental Amount (if any) 
to its Individual Regular Amount to arrive at such Netting Member's 
Individual Total Amount.

C. FICC's Ongoing Assessment of the Sufficiency of CCLF

    As described above, the Aggregate Total Amount and each Netting 
Member's Individual Total Amount (i.e., each Netting Member's 
allocation of the Aggregate Total Amount) would initially be calculated 
using a six-month look-back period that FICC would reset every six 
months (``reset period''). FICC states that, on a quarterly basis, FICC 
would assess the following parameters used to calculate the Aggregate 
Total Amount (and could consider changes to such parameters if 
necessary and appropriate):
     The largest peak daily liquidity of an Affiliated Family;
     the Liquidity Buffer;
     the Aggregate Regular Amount;
     the Aggregate Supplemental Amount;
     the Deliver Scaling Factor and the Receive Scaling Factor 
used to allocate the Aggregate Regular Amount;
     the increments for the Liquidity Tiers; and
     the length of the look-back period and the reset period 
for the Aggregate Total Amount.\34\
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    \34\ See Notice, 82 at 13881.
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    FICC represents that, in the event that any changes to the above-
referenced parameters result in an increase in a Netting Member's 
Individual Total Amount, such increase would be effective as of the 
next bi-annual reset.\35\
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    \35\ See Notice, 82 at 13881-82.
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    Additionally, on a daily basis, FICC would examine the Aggregate 
Total Amount to ensure that it is sufficient to satisfy FICC's 
liquidity needs. If FICC determines that the Aggregate Total Amount is 
insufficient to satisfy its liquidity needs, FICC would have the 
discretion to change the length of the six-month look-back period, the 
reset period, or otherwise increase the Aggregate Total Amount.
    Any increase in the Aggregate Total Amount resulting from FICC's 
quarterly assessments or FICC's daily monitoring would be subject to 
approval from FICC management, as described in the Notice.\36\ 
Increases to a Netting Member's Individual Total Amount as a result of 
its daily monitoring would not be effective until ten business days 
after FICC issues an Important Notice regarding the increase. 
Reductions to the Aggregate Total Amount would be reflected at the 
conclusion of the reset period.
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    \36\ Id. at 13882.
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D. Implementation of the Proposed Changes and Required Attestation From 
Each Netting Member

    The CCLF proposal would become operative 12 months after the later 
date of the Commission's no objection of this Advance Notice and its 
approval of the related Proposed Rule Change. FICC represents that, 
during this 12-month period, it would periodically provide each Netting 
Member with estimated Individual Total Amounts. FICC states that the 
delayed implementation and the estimated Individual Total Amounts are 
designed to give Netting Members the opportunity to assess the impact 
that the CCLF proposal would have on their business profile.\37\
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    \37\ See Notice, 82 at 13883.
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    FICC states that, as of the implementation date and annually 
thereafter, FICC would require that each Netting Member attest that it 
incorporated its Individual Total Amount into its liquidity plans.\38\ 
This required attestation, which would be from an authorized officer of 
the Netting Member or otherwise in form and substance satisfactory to 
FICC, would certify that (i) such officer has read and understands the 
GSD Rules, including the CCLF rules; (ii) the Netting Member's 
Individual Total Amount has been incorporated into the Netting Member's 
liquidity planning; \39\ (iii) the Netting Member acknowledges and 
agrees that its Individual Total Amount may be changed at the 
conclusion of any reset period or otherwise upon ten business days' 
Notice; (iv) the Netting Member will incorporate any changes to its 
Individual Total Amount into its liquidity planning; and (v) the 
Netting Member will continually reassess its liquidity plans and 
related operational plans, including in the event of any changes to 
such Netting Member's Individual Total Amount, to ensure such Netting 
Member's ability to meet its Individual Total Amount. FICC states that 
it may require any Netting Member to provide FICC with a new 
certification in the foregoing form at any time, including upon a 
change to a Netting Member's Individual Total Amount or in the event 
that a Netting Member undergoes a change in its corporate 
structure.\40\
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    \38\ See Notice, 82 at 13882.
    \39\ According to FICC, the attestation would not refer to the 
actual dollar amount that has been allocated as the Individual Total 
Amount. FICC explains that each Netting Member's Individual Total 
Amount would be made available to such Member via GSD's access 
controlled portal Web site. Id.
    \40\ Id.
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    On a quarterly basis, FICC would conduct due diligence to assess 
each Netting Member's ability to meet its Individual Total Amount. This 
due diligence would include a review of all information that the 
Netting Member has provided FICC in connection with its ongoing 
reporting obligations pursuant to the GSD Rules and a review of other 
publicly available information. FICC also would test its operational 
procedures for invoking a CCLF Event, and Netting Members would be 
required to participate in such tests. If a Netting Member failed to 
participate in such testing when required by FICC, FICC would be 
permitted to take disciplinary measures as set forth in GSD Rule 3, 
Section 7.\41\
---------------------------------------------------------------------------

    \41\ GSD Rules, supra note 8.
---------------------------------------------------------------------------

E. Liquidity Funding Reports Provided to Netting Members

    On each business day, FICC would make a liquidity funding report 
available to each Netting Member that would include (i) the Netting 
Member's Individual Total Amount, Individual Regular Amount and, if 
applicable, its Individual Supplemental Amount; (ii)

[[Page 31360]]

FICC's Aggregate Total Amount, Aggregate Regular Amount and Aggregate 
Supplemental Amount; and (iii) FICC's regulatory liquidity requirements 
as of the prior business day. The liquidity funding report would be 
provided for informational purposes only.

II. Summary of Comments Received

    The Commission received four comment letters in response to the 
proposal. Three comment letters--Ronin Letters I and II and the ICBC 
Letter--objected to the proposal.\42\ One comment letter from FICC 
responded to the objections raised by Ronin.\43\
---------------------------------------------------------------------------

    \42\ See Ronin Letter I, Ronin Letter II, and ICBC Letter.
    \43\ See FICC Letter. The Ronin Letter II and the ICBC Letter 
(with Ronin as a co-signatory) raised the same substantive issues as 
the Ronin Letter I. Accordingly, the Commission considers the FICC 
Letter to be responsive to the Ronin Letters I and II and the ICBC 
Letter.
---------------------------------------------------------------------------

A. Objecting Comments

    In both of its comment letters, Ronin argues that the cost of 
complying with the CCLF could impose a disproportionately negative 
economic impact on smaller Netting Members, which could potentially 
force smaller Netting Members to clear through larger Netting Members 
or leave GSD (as well as create a barrier to entry for prospective new 
Netting Members).\44\ Ronin argues that a reduced Netting Member 
population resulting from these increased costs could, in turn, lead to 
larger problems, such as: (1) Increasing the size of FICC's exposure to 
those Netting Members that generate the largest liquidity needs for 
FICC (because some of the departed Netting Members could become 
customers of, and clear their transactions through, such remaining 
Netting Members); (2) increasing Netting Member concentration risk at 
FICC due to the reduced overall population of Netting Members following 
the implementation of the CCLF; and (3) increasing systemic risk 
because of the increased exposure and concentration risks described 
above.\45\
---------------------------------------------------------------------------

    \44\ Ronin Letter I at 2; Ronin Letter II at 1-5. For example, 
Ronin notes that it would have to pay for access to a committed line 
of credit each year to have sufficient resources to attest that it 
can meet its CCLF contribution requirement. Ronin Letter I at 5; 
Ronin Letter II at 3. Ronin asserts that obtaining such a line of 
credit is not only ``economically disadvantageous'' but also 
``creates a dependency on an external entity which could prove to be 
an existential threat'' (i.e., the inability of non-bank Netting 
Members to secure a committed line of credit at a reasonable rate 
could cause such members to exit FICC). Ronin Letter II at 3 . In 
contrast, Ronin suggests that larger Netting Members with access to 
the Federal Reserve Discount Window (and resulting ability to easily 
borrow funds using U.S. government debt as collateral) would not 
necessarily have to pay for such credit lines and could merely 
inform FICC that they are ``good for [the CCLF contribution 
requirement].'' Ronin Letter I at 5. Ronin argues that FICC has 
``failed to recognize this differential impact as a threat to GSD 
member diversity.'' Ronin Letter II at 3.
    \45\ Ronin Letter I at 1-9; Ronin Letter II at 1-5. Ronin also 
argues that the Proposed Rule Change would place an unfair and 
anticompetitive burden on smaller Netting Members and such members 
do not present any settlement risk to FICC. Ronin Letter I at 2, 5-
7; Ronin Letter II at 1-5. Regarding burden, Ronin argues that the 
cost of obtaining the resources necessary to meet FICC's CCLF 
contribution requirements could force some smaller non-bank Netting 
Members to leave GSD or reduce the amount of U.S. Treasury 
securities transactions they clear through FICC. Ronin Letter I at 
2, 5-7; Ronin Letter II at 3-4. Moreover, Ronin suggests that the 
proposal is unfair because the default of a smaller Netting Member 
(whose liquidity needs are covered by the liquidity available to 
FICC in the GSD clearing fund) would not present settlement risk to 
FICC. Specifically, Ronin notes that, for the period of March 31, 
2016 to March 31, 2017, the peak liquidity need of 53 of the 103 GSD 
Netting Members did not exceed the amount of cash in the GSD 
clearing fund. Ronin Letter II at 3. In addition, Ronin argues that 
the CCLF would impose an unfair burden by forcing smaller Netting 
Members to subsidize the ``outsized liquidity risks'' posed by the 
largest Netting Members. Ronin Letter I at 2; Ronin Letter II at 2-
3.
    These issues are relevant to the Commission's review and 
evaluation of the Proposed Rule Change, which is conducted under the 
Exchange Act, but not to the Commission's evaluation of the Advance 
Notice, which, as discussed below in Section III, is conducted under 
the Clearing Supervision Act and generally considers whether the 
proposal will mitigate systemic risk and promote financial 
stability. Accordingly, these concerns will be addressed in the 
Commission's review of the related Proposed Rule Change, as 
applicable, under the Exchange Act.
---------------------------------------------------------------------------

    Similarly, Ronin and the ICBC Letter argue that the proposal would 
result in harmful consequences to smaller Netting Members and other 
industry participants.\46\ Specifically, the ICBC Letter argues that 
the Proposal could force smaller Netting Members to exit the clearing 
business or terminate their membership with FICC due to the cost of 
CCLF funding obligations, thereby: (1) Increasing market concentration; 
(2) increasing FICC's credit exposure to its largest participant 
families; and (3) driving smaller Netting Members to clear transactions 
bilaterally instead of through a central counterparty.\47\
---------------------------------------------------------------------------

    \46\ Ronin Letter II at 4-5; ICBC Letter at 2-7.
    \47\ Ronin Letter II at 4-5; ICBC Letter at 2-6. Like Ronin, the 
ICBC Letter also argues that increased costs to Netting Members from 
the CCLF could inhibit competition by forcing smaller Netting 
Members to exit the clearing business or terminate their membership 
with FICC. ICBC Letter at 2-4. As discussed above, see supra note 
19, this concern will be addressed in the Commission's review of the 
related Proposed Rule Change, as applicable under the Exchange Act.
---------------------------------------------------------------------------

    Although Ronin and the ICBC Letter acknowledges that FICC, as a 
registered clearing agency, is required to maintain sufficient 
financial resources to withstand a default by the largest participant 
family to which FICC has exposure in ``extreme but plausible 
conditions,'' \48\ Ronin and the ICBC letter argue that the scenario 
that CCLF is designed to address is not ``plausible'' because U.S. 
government securities are riskless assets that would not suffer from a 
liquidity shortage, even amidst a financial crisis similar to that in 
2008.\49\ Moreover, the ICBC Letter argues that the CCLF is unnecessary 
because FICC's current risk models are ``time proven.'' \50\ Finally, 
Ronin argues that if FICC were truly interested in mitigating liquidity 
risk, a hard cap could be placed on the maximum liquidity exposure 
allowable for each Netting Member.\51\
---------------------------------------------------------------------------

    \48\ Ronin Letter II at 4-5; ICBC Letter at 1-2.
    \49\ Ronin Letter II at 4-5; ICBC Letter at 3.
    \50\ ICBC Letter at 3.
    \51\ Ronin Letter II at 4.
---------------------------------------------------------------------------

    Ronin and the ICBC Letter also raise potential systemic risk 
concerns by stating that the CCLF could: (1) Cause FICC members to 
reduce their balance sheets devoted to the U.S. government securities 
markets, which would have broad negative effects on markets and 
taxpayers; \52\ (2) negatively impact traders with hedged positions, 
potentially resulting in inefficient pricing and an increased 
likelihood of disruptions in the U.S. government securities 
markets.\53\ The ICBC Letter raises additional systemic risk concerns, 
stating that CCLF could: (1) Result in FICC's refusal to clear certain 
trades, thereby increasing the burden on the Bank of New York 
(``BONY''), the only private bank that clears a large portion of U.S. 
government securities; \54\ and (2) effectively drain liquidity from 
other markets by requiring more liquidity to be available to FICC than 
is necessary.\55\
---------------------------------------------------------------------------

    \52\ Id. at 1, 4; Ronin Letter II at 3.
    \53\ ICBC Letter at 4.
    \54\ Id. at 2, 5.
    \55\ Id. at 5; Ronin Letter II at 4.
---------------------------------------------------------------------------

B. Supporting Comment

    The FICC Letter written in support of the proposal primarily 
responds to Ronin's assertions. In response to Ronin's concerns 
regarding the potential economic impacts on smaller non-bank Netting 
Members, FICC states that the CCLF was designed to minimize the burden 
on smaller Netting Members and achieve a fair and appropriate 
allocation of liquidity burdens.\56\ Specifically, FICC notes that it 
structured the CCLF so that: (1) Each Netting Member's CCLF requirement 
would be a function of the peak liquidity risk that each Netting 
Member's activity presents to GSD; (2) the allocation of the CCLF 
requirement to each Netting Member would be a

[[Page 31361]]

``fraction'' of the Netting Member's peak liquidity exposure that it 
presents to GSD; \57\ and (3) the proposal would fairly allocate higher 
CCLF requirements to Netting Members that generate higher liquidity 
needs.\58\ FICC further notes that, since CCLF contributions would be a 
function of the peak liquidity exposure that each Netting Member 
presents to FICC, each Netting Member would be able to reduce its CCLF 
contribution by altering its trading activity.\59\
---------------------------------------------------------------------------

    \56\ FICC Letter at 3-4.
    \57\ Id. at 3. FICC notes that, on average, a Netting Member's 
CCLF requirement would be less than 2.5 percent of their respective 
peak liquidity need, with the smallest Netting Members having a CCLF 
contribution requirement of approximately 1.5 percent of their peak 
liquidity need. Id. at 4-5.
    \58\ Id. at 3-4. FICC notes that the Aggregate Regular Amount 
(proposed to be sized at $15 billion) would be applied to all 
Netting Members on a pro-rata basis, while the Aggregate 
Supplemental Amount, which would make up approximately 80 percent of 
the Aggregate Total Amount, would only apply to the Netting Members 
generating the largest liquidity needs (i.e., in excess of $15 
billion). Id. at 4.
    \59\ Id. at 3, 7.
---------------------------------------------------------------------------

    In response to Ronin's assertion that the CCLF could promote 
concentration and systemic risk, FICC argues that the proposal would 
actually reduce systemic risk. FICC notes that it plays a critical role 
for the clearance and settlement of securities transactions in the 
U.S., and, in that role, it assumes risk by guaranteeing the settlement 
of the transactions it clears.\60\ By providing FICC with committed 
liquidity to meet its cash settlement obligations to non-defaulting 
members during extreme market stress, FICC asserts that the CCLF would 
promote settlement finality to all Netting Members, regardless of size, 
and the safety and soundness of the securities settlement system, 
thereby reducing systemic risk.\61\
---------------------------------------------------------------------------

    \60\ Id. at 7-8.
    \61\ Id.
---------------------------------------------------------------------------

    Finally, in response to Ronin's concern that the CCLF could cause 
FICC's liquidity needs to grow, FICC notes that in its outreach to 
Netting Members over the past two years, bilateral meetings with 
individual Netting Members, and testing designed to evaluate the impact 
that changes to a Netting Member's trading behavior could have on the 
Historical Cover 1 Liquidity Requirement, FICC has found opportunities 
for Netting Members to reduce their CCLF requirements and, as a result, 
decrease the Historical Cover 1 Liquidity Requirement.\62\ 
Specifically, FICC notes that during its test period, which spanned 
from December 1, 2016 to January 31, 2017, 35 participating Netting 
Members voluntarily adjusted their settlement behavior and settlement 
patterns to identify opportunities to reduce their CCLF 
requirements.\63\ According to FICC, the test resulted in an 
approximate $5 billion reduction in GSD's peak Historical Cover 1 
Liquidity Requirement, highlighting that growth of the Historical Cover 
1 Liquidity Requirement could be limited under the proposal.\64\
---------------------------------------------------------------------------

    \62\ Id. at 8-9.
    \63\ Id. at 9-10.
    \64\ Id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive: to 
mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically important financial market utilities 
(``FMUs'') and strengthening the liquidity of systemically important 
FMUs.\65\ Section 805(a)(2) of the Clearing Supervision Act \66\ 
authorizes the Commission to prescribe risk management standards for 
the payment, clearing, and settlement activities of designated clearing 
entities and financial institutions engaged in designated activities 
for which it is the supervisory agency or the appropriate financial 
regulator. Section 805(b) of the Clearing Supervision Act \67\ states 
that the objectives and principles for the risk management standards 
prescribed under Section 805(a) shall be to:
---------------------------------------------------------------------------

    \65\ See 12 U.S.C. 5461(b).
    \66\ 12 U.S.C. 5464(a)(2).
    \67\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act \68\ and Section 17A of the 
Exchange Act (``Rule 17Ad-22'').\69\ Rule 17Ad-22 requires registered 
clearing agencies to establish, implement, maintain, and enforce 
written policies and procedures that are reasonably designed to meet 
certain minimum requirements for their operations and risk management 
practices on an ongoing basis.\70\ Therefore, it is appropriate for the 
Commission to review changes proposed in advance notices against both 
the objectives and principles of these risk management standards, as 
described in Section 805(b) of the Clearing Supervision Act and Rule 
17Ad-22.\71\
---------------------------------------------------------------------------

    \68\ 12 U.S.C. 5464(a)(2).
    \69\ See 17 CFR 240.17Ad-22.
    \70\ Id.
    \71\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the changes proposed in the Advance 
Notice are consistent with the objectives and principles described in 
Section 805(b) of the Clearing Supervision Act.\72\ Specifically, the 
Commission believes that the proposal is designed to promote robust 
risk management by reducing the risk that FICC could not meet its cash 
settlement obligations to non-defaulting Netting Members during a 
default. As described above, the CCLF would be designed to provide 
sufficient liquidity to cover the peak cash settlement obligations of 
the family of affiliated Netting Members that would generate the 
highest liquidity need for FICC. It also would include an additional 
Liquidity Buffer to account for unexpected trading behavior that could 
increase GSD's Historical Cover 1 Liquidity Requirement or a situation 
in which a Netting Member with a large CCLF contribution defaults and 
cannot meet its CCLF requirement.
---------------------------------------------------------------------------

    \72\ Id.
---------------------------------------------------------------------------

    The Commission also believes that the proposal is designed to 
reduce systemic risk and support the stability of the broader financial 
system. As FICC noted, the CCLF is expected to promote settlement 
finality, as well as safety and soundness of the securities settlement 
system, by providing FICC with needed liquidity in the event that it 
experiences severe liquidity pressure from a Netting Member default and 
by mitigating the risk that reverse repo participants do not receive 
their cash back in the event of a default of a Netting Member (who, 
during the normal course of business, would be obligated to supply such 
cash).\73\ Given FICC's importance to the financial system,\74\ the 
Commission believes that FICC's ability to settle GSD transactions 
during such an event could contribute to reducing systemic risks and 
supporting the stability of the broader financial system. The 
Commission also believes that the CCLF could support the stability of 
the broader financial system by providing Netting Members with a pre-
determined and capped potential CCLF contribution, which could allow 
Netting Members to better measure, manage, and control their exposures 
to FICC.
---------------------------------------------------------------------------

    \73\ See FICC Letter at 7-8.
    \74\ See 12 U.S.C. 5463.
---------------------------------------------------------------------------

    As noted above, both Ronin and the ICBC Letter express a concern 
that the increased costs associated with the

[[Page 31362]]

CCLF could potentially force some Netting Members to leave FICC. These 
commenters argue that a reduced Netting Member population resulting 
from these increased costs could, in turn, lead to larger problems, 
such as: (1) Increasing the size of FICC's exposure to those Netting 
Members that generate the largest liquidity needs for FICC (because 
some of the departed Netting Members could become customers of, and 
clear their transactions through, such remaining Netting Members); (2) 
increasing Netting Member concentration risk at FICC due to the reduced 
overall population of Netting Members following the implementation of 
the CCLF; and (3) increasing systemic risk because of the increased 
exposure and concentration risks described above.
    In addition, Ronin and the ICBC Letter state their view that the 
expected costs of the CCLF could discourage market participants from 
centrally clearing their repo transactions through FICC, encouraging 
them to execute and manage their repo activity in the bilateral market 
instead of through a central counterparty. The ICBC Letter similarly 
argues that increased costs, due to the CCLF, for traders with hedged 
positions could cause such traders to reduce market activity, which 
could lead to reduced liquidity, inefficient pricing, and an increased 
likelihood of disruptions in the U.S. government securities markets.
    The Commission notes that the concerns expressed above by Ronin and 
the ICBC Letter are based upon a number of implicit but also specific 
assumptions. As discussed immediately below, the Commission does not 
believe that the basis for these assumptions is clear and, therefore, 
the Commission is not persuaded that the proposal is inconsistent with 
Section 805(b) of the Clearing Supervision Act.
    First, the magnitude of the stated concerns regarding potential 
reductions in GSD's Netting Member population, with resultant increases 
in liquidity demands for FICC, concentration risk, and systemic risk 
are based upon certain assumptions regarding how existing Netting 
Members may participate in the cleared repo market following 
implementation of the CCLF. For example, the concern that the most 
significant liquidity demands generated by particular Netting Members 
could increase because of the CCLF is based upon an assumption that 
departing Netting Members would choose to become customers of, and 
clear their repo transactions through, the remaining Netting Members 
that present the largest liquidity demands for FICC. However, neither 
Ronin nor the ICBC Letter explain why this outcome is more likely than 
alternative outcomes, such as departing Netting Members distributing 
their activity across the breadth of remaining Netting Members that 
present both large and small liquidity demands for FICC. For FICC's 
Cover 1 Liquidity Requirement to have increased under such a scenario, 
not only would a departed Netting Member need to have cleared through 
the remaining Netting Member that generated FICC's Cover 1 Liquidity 
Requirement, but it also would need to have contributed to that Netting 
Member having generated FICC's Cover 1 Liquidity Requirement.
    The Commission notes that even granting the underlying assumptions 
implied by Ronin and the ICBC Letter, the extent to which increases in 
the largest liquidity demands for FICC would implicate systemic risk 
concerns could be mitigated by features of the CCLF. As the Commission 
understands from the proposal and the FICC Letter, the amount of 
committed resources available under CCLF would, by design, support 
FICC's ability to meet liquidity obligations in the event of a default 
of the participant family that would generate the largest aggregate 
payment obligation.\75\ In other words, the amount of liquidity 
resources available to FICC under the CCLF would be scaled to FICC's 
largest liquidity demand, so that even if there were increased 
concentration and higher liquidity demands, the CCLF would continue to 
mitigate liquidity risks associated with the default of the participant 
or participant family that presented the largest liquidity need.
---------------------------------------------------------------------------

    \75\ FICC Letter at 4.
---------------------------------------------------------------------------

    Second, the stated concerns regarding incentives for market 
participants to choose not to centrally clear their repo transactions 
through FICC and, instead, execute and manage their repo activity in 
the bilateral market are based upon certain assumptions regarding how 
market participants would consider the relative costs and benefits of 
engaging in cleared repo transactions at FICC versus bilateral repo 
transactions. For example, the ICBC Letter argues that moving to 
bilateral repo transactions would be somewhat less efficient than 
continuing to clear repo transactions at FICC, but that it would be 
materially less expensive.\76\ However, this conclusion assumes that 
market participants would be willing to forgo certain benefits of 
FICC's central clearing process (e.g., centralized netting, reduction 
of exposures, and the elimination of the need to maintain multiple risk 
management and operational relationships with a multitude of 
counterparties), when moving to bilateral repo transactions, to avoid 
incurring the cost of committing to provide liquidity to FICC under the 
CCLF. The ICBC Letter provides no data or evidence to suggest that 
bilateral clearing would ultimately prove more attractive to firms than 
central clearing at FICC, after accounting for the benefits of central 
clearing, even if the CCLF is implemented. Accordingly, the Commission 
is not persuaded that the proposal is inconsistent with Section 805(b) 
of the Clearing Supervision Act.
---------------------------------------------------------------------------

    \76\ ICBC Letter at 3.
---------------------------------------------------------------------------

    Separately, the Commission also notes, as it understands from the 
proposal and the FICC Letter, that the CCLF would require each Netting 
Member to contribute to the CCLF only a ``fraction'' of the peak 
liquidity exposure that they present to GSD.\77\ Moreover, FICC has 
taken steps to enable all Netting Members to manage their commitments 
under the CCLF. For example, by establishing Netting Members' 
Individual Total Amounts through a tiered and proportionate approach, 
most Netting Members \78\ would likely only be required to contribute 
their respective pro-rata amounts towards the first $15 billion of the 
Aggregate Total Amount. Also, the proposal would not require Netting 
Members to hold or provide to FICC their CCLF contribution (i.e., their 
Individual Total Amount) prior to a CCLF Event.\79\ Rather, the 
proposal would require Netting Members to attest to their ability to 
meet their CCLF requirement should FICC declare a CCLF event. Although 
Netting Members may incur some costs in securing their CCLF resources, 
the Commission believes, in light of the benefits that would arise from 
implementing the CCLF, that those additional costs do not cause the 
proposal to be inconsistent with Section 805(b) of the Clearing 
Supervision Act.
---------------------------------------------------------------------------

    \77\ FICC Letter at 3.
    \78\ As noted above, from 2015 to 2016, FICC observed that 85 
percent of Netting Members had liquidity needs of $15 billion or 
less.
    \79\ As Ronin notes, a Netting Member could pay for access to a 
committed line of credit to have sufficient resources to attest that 
it can meet its CCLF contribution requirement. Ronin Letter at 5.
---------------------------------------------------------------------------

    The ICBC Letter also raises the concern that the CCLF could 
transfer risk from FICC to BONY, the only private bank that acts as a 
tri-party custodian to a large portion of U.S. government securities, 
if FICC chooses to limit its risk by refusing to clear trades following 
a default. The Commission notes, however, that, as

[[Page 31363]]

proposed, the CCLF does not contemplate the refusal to clear trades 
following the default of a Netting Member, nor does FICC impose trading 
limits on Netting Members.\80\ Instead, the CCLF is designed to provide 
additional liquidity resources as FICC's liquidity needs increase, so 
that FICC can meet its settlement obligations and continue its 
clearance and settlement operations. In addition, the Commission notes 
that the ICBC Letter's concern regarding transferred risk to BONY is 
based upon the assumption that the proposal could encourage market 
participants to move their repo transactions away from central clearing 
through FICC to the bilateral repo market. As already discussed above, 
the Commission does not believe the basis for this assumption is clear.
---------------------------------------------------------------------------

    \80\ The Commission also notes that Ronin, in the Ronin Letter 
II, recommended that, as an alternative approach to the CCLF, FICC 
could impose a hard cap on the maximum liquidity exposure allowable 
for each Netting Member. As an initial matter, the Commission notes 
that this comment suggests an approach not provided for in the 
proposal submitted to the Commission. In addition, the Commission 
notes that the commenter has not explained or demonstrated how the 
absence of a hard cap would cause the proposal to be inconsistent 
with the Clearing Supervision Act.
---------------------------------------------------------------------------

    For these reasons, the Commission believes that the proposal is 
consistent with Section 805(b) of the Clearing Supervision Act.

B. Consistency With Exchange Act Rule 17Ad-22

    The Commission believes that the proposed changes associated with 
the CCLF are consistent with the requirements of Rule 17Ad-22(e)(7) 
under the Exchange Act, which requires FICC to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to effectively measure, monitor, and manage liquidity risk 
that arises in or is borne by FICC, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity.\81\
---------------------------------------------------------------------------

    \81\ 17 CFR 240.17Ad-22(e)(7). Although the commenters discuss 
the proposal in the context of Rule 17Ad-22(b)(3), the Commission 
has analyzed the proposal under Rule 17Ad-22(e)(7). As noted in the 
Commission's adoption of Rule 17Ad-22(e), while Rule 17Ad-22(e) may 
overlap with some requirements in Rule 17Ad-22(b), it is not 
inconsistent with Rule 17Ad-22(b) and, as a general matter, includes 
requirements intended to supplement the more general requirements in 
Rule 17Ad-22(b). See Securities Exchange Act Release No. 78961 
(September 28, 2016), 81 FR 70786 (October 13, 2016).
---------------------------------------------------------------------------

    Specifically, Rule 17Ad-22(e)(7)(i) requires policies and 
procedures for maintaining sufficient liquid resources to effect same-
day settlement of payment obligations in the event of a default of the 
participant family that would generate the largest aggregate payment 
obligation for the covered clearing agency in extreme but plausible 
market conditions.\82\ As described above, the CCLF would be a rules-
based, committed repo facility, designed to provide FICC with a 
liquidity resource in the event that FICC's other liquidity resources 
prove insufficient during a Netting Member default. Moreover, the CCLF 
would be sized to meet GSD's peak liquidity need during the prior six 
months, plus an additional Liquidity Buffer.
---------------------------------------------------------------------------

    \82\ 17 CFR 240.17Ad-22(e)(7)(i).
---------------------------------------------------------------------------

    The ICBC Letter argues, as summarized above, that FICC's current 
risk models are ``time proven'' and the scenario the CCLF is intended 
to address (i.e., an inability to access liquidity via the U.S. 
government securities repo market) is implausible. To support this 
position, the ICBC Letter cites to the 2008 financial crisis, in which 
the repo market continued to function. Ronin also notes that, for the 
period of March 31, 2016 to March 31, 2017, the peak liquidity need of 
53 of the 103 GSD Netting Members did not exceed the amount of cash in 
the GSD clearing fund. In response, the Commission first notes that the 
2008 financial crisis did not entail a default by a Netting Member that 
generated the largest liquidity demand on FICC and, therefore, the 
comparison that the ICBC Letter seeks to draw with the proposal is not 
clearly applicable. In addition, the Commission believes that extreme 
but plausible scenarios are not necessarily limited to only those 
events that have actually happened in the past, but could also include 
events that could potentially occur in the future. Moreover, the 
Commission notes that the ``time proven'' FICC risk models highlighted 
in the ICBC Letter are risk models that relate to market risk, whereas 
the CCLF is designed to address liquidity risk--a separate category of 
risk. Similarly, in response to Ronin's claim regarding the sufficiency 
of the cash component to the GSD clearing fund to cover the peak 
liquidity need of 53 of 103 GSD Netting Members over the given period, 
the Commission notes that the GSD clearing fund is calculated and 
collected to address market risk, not liquidity risk. The Commission 
also notes that the composition of the clearing fund, including the 
cash component, varies over time. Thus, the Commission believes that 
the proposal is reasonably designed to help FICC effectively measure, 
monitor, and manage liquidity risk by helping FICC maintain sufficient 
qualifying liquid resources to settle the cash obligations of the GSD 
participant family that would generate the largest liquidity need in 
extreme but plausible market conditions, consistent with Rule 17Ad-
22(e)(7)(i).
    Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires policies and 
procedures for holding qualifying liquid resources sufficient to 
satisfy payment obligations owed to clearing members.\83\ Rule 17Ad-
22(a)(14) of the Exchange Act defines ``qualifying liquid resources'' 
to include, among other things, committed repo agreements without 
material adverse change provisions, that are readily available and 
convertible into cash.\84\ As described above, the proposed CCLF is 
designed to provide FICC with a committed repo facility to help ensure 
that FICC has sufficient, readily-available liquid resources to meet 
the cash settlement obligations of the family of affiliated Netting 
Members generating the largest liquidity need. Therefore, the 
Commission believes that the proposal is consistent with Rule 17Ad-
22(e)(7)(ii).
---------------------------------------------------------------------------

    \83\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \84\ 17 CFR 240.17Ad-22(a)(14).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(iv) under the Exchange Act requires policies and 
procedures for undertaking due diligence to confirm that FICC has a 
reasonable basis to believe each of its liquidity providers, whether or 
not such liquidity provider is a clearing member, has: (a) Sufficient 
information to understand and manage the liquidity provider's liquidity 
risks; and (b) the capacity to perform as required under its 
commitments to provide liquidity.\85\ As described above in Section 
II.D.3, FICC would require GSD Netting Members to attest that they have 
accounted for their potential Individual Total Amount, and FICC has had 
discussions with Netting Members regarding ways Netting Members, 
regardless of size or access to bank affiliates, can meet this 
requirement.\86\ Moreover, FICC proposes to conduct due diligence on a 
quarterly basis to assess each Netting Member's ability to meet its 
Individual Total Amount. According to FICC, this due diligence would 
include a review of all information that the Netting Member provided 
FICC in connection with its ongoing reporting requirements, as well as 
a review of other publicly available information.
---------------------------------------------------------------------------

    \85\ 17 CFR 240.17Ad-22(e)(7)(iv).
    \86\ See FICC Letter at 9.
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    Ronin's assertion that certain Netting Members could merely submit 
an attestation declaring that they ``are good

[[Page 31364]]

for'' their CCLF contribution \87\ fails to account for the fact that 
the proposal also requires FICC to conduct its own due diligence. 
Specifically, FICC would confirm that Netting Members have sufficient 
information to understand and manage their liquidity risks and to meet 
its commitments to provide liquidity. Therefore, the Commission 
believes that the proposal is consistent with Rule 17Ad-22(e)(7)(iv).
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    \87\ Ronin Letter at 2.
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    Finally, Rule 17Ad-22(e)(7)(v) under the Exchange Act requires 
policies and procedures for maintaining and testing with each liquidity 
provider, to the extent practicable, FICC's procedures and operational 
capacity for accessing its relevant liquid resources. As described 
above, under the proposal, FICC would test its operational procedures 
for invoking a CCLF Event and require Netting Members to participate in 
such tests. Therefore, the Commission believes that the proposal is 
consistent with Rule 17Ad-22(e)(7)(v).

IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\88\ that the Commission DOES NOT OBJECT to 
advance notice SR-FICC-2017-802 and that FICC hereby is AUTHORIZED to 
implement the change as of the date of this notice or the date of an 
order by the Commission approving proposed rule change SR-FICC-2017-002 
that reflects the changes that are consistent with this Advance Notice, 
whichever is later.
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    \88\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2017-14145 Filed 7-5-17; 8:45 am]
 BILLING CODE 8011-01-P