Document ID: SEC-2019-0393-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2019-04-04T04:00Z

[Federal Register Volume 84, Number 65 (Thursday, April 4, 2019)]
[Notices]
[Pages 13328-13332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06527]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85470; File No. SR-FICC-2018-013]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change To Expand Sponsoring Member 
Eligibility in the Government Securities Division Rulebook and Make 
Other Changes

March 29, 2019.

I. Introduction

    On December 13, 2018, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2018-013 to expand sponsoring member eligibility and make other 
changes.\3\ The proposed rule change was published for comment in the 
Federal Register on December 31, 2018.\4\ On February 14, 2019, 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 and reopened the period for comment on the proposed rule 
change.\5\ The Commission received five comment letters to the proposed 
rule change,\6\ including a response letter from FICC. For the reasons 
discussed below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 13, 2018, FICC also filed the proposal contained 
in the proposed rule change as advance notice SR-FICC-2018-802 with 
the Commission pursuant to Section 806(e)(1) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act''), 12 U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i) of 
the Act, 17 CFR 240.19b-4(n)(1)(i). As of February 11, 2019, 
pursuant to Section 806(e)(1) of the Clearing Supervision Act, the 
advance notice was deemed to not have been objected to by the 
Commission. 12 U.S.C. 5465(e)(1); see Memorandum, Division of 
Trading and Markets, U.S. Securities and Exchange Commission, to 
File No. SR-FICC-2018-802, available at https://www.sec.gov/rules/sro/ficc-an/2019/ficc-2018-802-memo-deemed-approved.pdf.
    \4\ Securities Exchange Act Release No. 84951 (December 21, 
2018), 83 FR 67801 (December 31, 2018) (SR-FICC-2018-013) 
(``Notice'').
    \5\ Securities Exchange Act Release No. 85137 (February 14, 
2019), 84 FR 5523 (February 21, 2019) (SR-FICC-2018-013).
    \6\ See letter from Robert E. Pooler, Jr., Chief Financial 
Officer, Ronin Capital, LLC, dated January 18, 2019, to Brent J. 
Fields, Secretary, Commission (``Ronin Letter''); letter from James 
Tabacchi, Chairman, Independent Dealer and Trade Association, dated 
January 22, 2019, to Brent J. Fields, Secretary, Commission (``IDTA 
Letter''); letter from Robert Toomey, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated January 22, 2019, to Brent J. Fields, Secretary, 
Commission (``SIFMA Letter''); letter from Stephen John Berger, 
Managing Director, Government & Regulatory Policy, Citadel, dated 
January 30, 2019, to Brent J. Fields, Secretary, Commission 
(``Citadel Letter''); and letter from Murray Pozmanter, Managing 
Director, DTCC, dated February 4, 2019, to Brent J. Fields, 
Secretary, Commission (``FICC Response Letter''). See comments on 
the proposed rule change (SR-FICC-2018-013), available at https://www.sec.gov/comments/sr-ficc-2018-013/srficc2018013.htm. Because the 
proposal contained in the proposed rule change was also filed as an 
advance notice, supra note 3, the Commission is considering all 
public comments received on the proposal regardless of whether the 
comments were submitted to the advance notice or the proposed rule 
change.
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II. Description of the Proposed Rule Change

    FICC proposes to amend the FICC Government Securities Division 
(``GSD'') Rulebook (``Rules'') \7\ to (i) allow a broader group of GSD 
Netting Members \8\ to participate in FICC as Sponsoring Members,\9\ 
(ii) allow Sponsored Members to transact with Netting Members that are 
not the Sponsoring Member through a certain omnibus account maintained 
by the Sponsoring Member, and (iii) make certain conforming and 
technical changes.
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    \7\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf.
    \8\ The term ``Netting Member'' is defined in FICC's GSD Rule 1 
as a Member of FICC's Comparison System (i.e., the system of 
reporting, validating, and matching the long and short sides of 
securities trades to ensure that the details of such trades are in 
agreement between the parties) and FICC's Netting System (i.e., the 
system for aggregating and matching offsetting obligations resulting 
from trades).
    \9\ ``Sponsoring Membership'' is an existing program that allows 
well-capitalized bank members to sponsor their eligible clients into 
GSD Membership. Sponsored membership at GSD offers eligible clients 
the ability to lend cash or eligible collateral via FICC-cleared 
deliver-versus payment repo throughout the day. Sponsoring Member 
banks facilitate their sponsored clients' GSD trading activity and 
act as processing agents on their behalf for all operational 
functions, including trade submission and settlement with FICC.
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A. The Proposed Expansion of Sponsored Member Eligibility

    FICC proposes to broaden the group of GSD Netting Members that may 
participate in FICC as Sponsoring Members. Currently, GSD Bank Netting 
Members that are well-capitalized with at least $5 billion in equity 
capital are permitted to serve as Sponsoring Members (``Category 1 
Sponsoring Members'') and sponsor certain institutional firms into GSD 
membership as Sponsored Members.\10\ A Sponsoring Member is permitted 
to submit to FICC for comparison, novation, and netting certain types 
of eligible transactions between itself and its Sponsored Members 
(``Sponsored Member Trades'').\11\ For operational and administrative 
purposes, FICC interacts solely with the Sponsoring Member as agent for 
purposes of the day-to-day satisfaction of its Sponsored Members' 
obligations to FICC, including the Sponsored Members' securities and 
funds-only settlement obligations.\12\
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    \10\ Notice, 83 FR at 67802; Rule 3A, Section 2, supra note 7.
    \11\ Notice, 83 FR at 67802. FICC requires the Sponsoring Member 
to establish an omnibus account at FICC for all of its Sponsored 
Members' FICC-cleared activity (``Sponsoring Member Omnibus 
Account''), which is separate from the Sponsoring Member's regular 
netting account. Rule 1; Rule 3A, Section 10, supra note 7.
    \12\ Notice, 83 FR at 67802; see Rule 3A, Sections 5, 6, 7, 8 
and 9, supra note 7.
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    FICC proposes to add a second category of Netting Members eligible 
to become Sponsoring Members. This second category would include 
Netting Members that are Tier One Netting Members (``Category 2 
Sponsoring Members''),\13\ except for Inter-Dealer Broker (``IDB'') 
Netting Members and Non-IDB Repo Brokers with respect to activity in 
their segregated repo accounts.\14\ Category 2 Sponsoring Members could 
include, for example, dealer Netting Members, Futures Commission 
Merchant Netting Members, and foreign Netting Members.\15\
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    \13\ The term ``Tier One Netting Member'' is designated in 
FICC's GSD Rule 2A, supra note 7, as a non-registered investment 
company Netting Member.
    \14\ Notice, 83 FR at 67802.
    \15\ Id.

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[[Page 13329]]

    FICC stated that it did not include IDB Netting Members and Non-IDB 
Repo Brokers as a $5 million cap applies to their respective loss 
allocation obligations to FICC under Rule 4, Section 7, which does not 
apply to other types of Netting Members.\16\ As a Sponsoring Member's 
loss allocation obligations could otherwise exceed $5 million, FICC 
stated that it would not be appropriate to allow either IDB Netting 
Members or Non-IDB Repo Brokers to be eligible to become Category 2 
Sponsoring Members. However, FICC stated that to the extent an IDB 
Netting Member or Non-IDB Repo Broker also has another type of Netting 
Member status with respect to which it is not subject to the loss 
allocation cap described above, such IDB Netting Member or Non-IDB Repo 
Broker could apply to become a Category 2 Sponsoring Member under 
another Netting Member status.\17\
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    \16\ Id. Section 7 of Rule 4, supra note 7, provides that ``an 
Inter-Dealer Broker Netting Member, or a Non-IDB Repo Broker with 
respect to activity in its Segregated Repo Account, shall not be 
subject to an aggregate loss allocation in an amount greater than $5 
million pursuant to this Section 7 for losses and liabilities 
resulting from an Event Period.'' The limit on loss allocation for 
these Members reflects their risk profile.
    \17\ Notice, 83 FR at 67802-03.
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    FICC stated that the minimum financial requirements applicable to 
Category 2 Sponsoring Members would be the same as its otherwise 
applicable financial requirements under Section 4(b) of Rule 2A.\18\ 
However, as compared to Category 1 Sponsoring Members, the proposed 
rule change would provide that FICC could impose greater financial 
requirements on an applicant to become a Category 2 Sponsoring 
Member.\19\ FICC stated that it decided to provide the option to impose 
greater financial requirements as a Category 2 Sponsoring Member may 
have substantially less capital than a Category 1 Sponsoring 
Member.\20\ FICC further stated that its determination as to whether to 
impose such greater financial requirements on a Category 2 Sponsoring 
Member applicant would be based upon the level of the anticipated 
positions and obligations of such applicant, the anticipated risk 
associated with the volume and types of transactions such applicant 
proposes to process through FICC as a Category 2 Sponsoring Member, and 
the overall financial condition of such applicant.\21\ Such a 
determination by FICC to impose increased financial requirements on a 
Category 2 Sponsoring Member applicant would be subject to the approval 
of the FICC Board of Directors in connection with its approval of the 
application of such Category 2 Sponsoring Member.\22\ Once approved, 
FICC would thereafter regularly review a Category 2 Sponsoring Member 
regarding its continued adherence to such increased financial 
requirements.\23\
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    \18\ Notice, 83 FR at 67803.
    \19\ Id.
    \20\ Id.
    \21\ Id.
    \22\ Id.
    \23\ Id.
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    Further, the proposed rule change would also impose an activity 
limit on a Category 2 Sponsoring Member's Sponsored Member activity so 
that a Category 2 Sponsoring Member would only be permitted to novate 
new Sponsored Member activity to FICC to the extent the sum of the 
value at risk charges (``VaR Charges'') \24\ of its Sponsoring Member 
Omnibus Account(s) and its Netting System accounts (``Aggregate VaR 
Charges'') do not exceed its Netting Member Capital,\25\ unless 
otherwise determined by the Corporation in order to promote orderly 
settlement.\26\ FICC stated that it anticipates calculating the ratio 
of a Category 2 Sponsoring Member's Aggregate VaR Charges to its 
Netting Member Capital on at least an hourly basis.\27\ To the extent a 
Category 2 Sponsoring Member's Aggregate VaR Charges exceed its Netting 
Member Capital, the member would not be permitted to submit new 
Sponsored Member activity to FICC until its Netting Member Capital 
equals or exceeds its Aggregate VaR Charges.\28\ FICC stated that it 
anticipates it would provide exceptions in order to promote orderly 
settlement to include, but not be limited to, circumstances in which 
the novation of such activity would have a risk-reducing impact on the 
Category 2 Sponsoring Member's overall FICC-cleared portfolio.\29\
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    \24\ Each Netting Member is required to make margin deposits 
(each, a ``Required Fund Deposit'') to FICC's Clearing Fund. Rule 4, 
supra note 7. A Netting Member's Required Fund Deposit amount is 
comprised of several components, the largest of which is generally 
the VaR Charge. Notice, 83 FR at 67803.
    \25\ The term ``Netting Member Capital'' means net capital, net 
assets, or equity capital as applicable, to a Netting Member based 
on its type of regulation. Rule 1, supra note 7.
    \26\ Notice, 83 FR at 67803.
    \27\ Id.
    \28\ Id.
    \29\ Id.
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    Moreover, FICC stated that to be consistent with its authority 
under Section 7 of Rule 3 (Ongoing Membership Requirements), FICC would 
reserve the right to require each Sponsoring Member, or any Netting 
Member applicant to become such, to furnish to FICC such adequate 
assurances of its financial responsibility and operational capability 
within the meaning of Section 7 of Rule 3 as FICC may at any time or 
from time to time deem necessary or advisable in order to protect FICC 
and its members, to safeguard securities and funds in the custody or 
control of FICC and for which FICC is responsible, or to promote the 
prompt and accurate clearance and settlement of securities 
transactions.\30\ Such a determination by FICC to impose adequate 
assurances on a Sponsoring Member applicant would be subject to the 
approval of the FICC Board of Directors in connection with its approval 
of the application of such Sponsoring Member, and, once approved, FICC 
would thereafter regularly review such Sponsoring Member regarding its 
compliance with such adequate assurances requirements, as 
appropriate.\31\ Any adequate assurances imposed on a Sponsoring Member 
by FICC after its approval would be communicated in writing to the 
Sponsoring Member and FICC would thereafter regularly review such 
Sponsoring Member regarding its compliance with such adequate 
assurances, as appropriate.\32\
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    \30\ Id.
    \31\ Id.
    \32\ Id.
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B. Proposed Addition of an Omnibus Account

    FICC proposes to allow Sponsored Members to transact with Netting 
Members that are not the Sponsoring Member through a certain omnibus 
account maintained by the Sponsoring Member. Currently, Rule 1 defines 
the term ``Sponsored Member Trade'' as ``a transaction between a 
Sponsored Member and its Sponsoring Member . . . .'' \33\ FICC proposes 
to allow a Sponsoring Member to establish one or more Sponsoring Member 
Omnibus Accounts that may contain transactions between a Sponsored 
Member and a Netting Member other than the Sponsoring Member.\34\ A 
Sponsoring Member may use the Omnibus Account in addition to or in lieu 
of an account in which only transactions between a Sponsored Member and 
its Sponsoring Member would be permitted.\35\
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    \33\ Id.; Rule 1, definition of ``Sponsored Member Trade,'' 
supra note 7.
    \34\ Notice, 83 FR at 67804.
    \35\ Id. To the extent a Sponsoring Member elects to establish a 
Sponsoring Member Omnibus Account that may contain transactions 
between a Sponsored Member and a Netting Member other than the 
Sponsoring Member, FICC anticipates calculating the Required Fund 
Deposit for such Sponsoring Member Omnibus Account to be inclusive 
of all transactions submitted into such account, including any 
transactions between a Sponsored Member and a Netting Member other 
than the Sponsoring Member as well as any transactions between a 
Sponsored Member and the Sponsoring Member.

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[[Page 13330]]

C. Conforming and Technical Changes

    FICC proposes conforming and technical changes to its rules. In 
order to conform to expanding the Sponsored Membership eligibility, 
FICC proposes to amend Section 2(e) of Rule 3A by deleting the 
reference to Bank Netting Members and adding language that provides 
that each Sponsoring Member would submit to FICC the reports and 
information required to be submitted for its respective type of Netting 
Member.\36\ FICC also proposes to make a conforming change to the first 
sentence in Section 2(h) of Rule 3A to reference to add the newly 
defined term ``Category 1'' before the first reference to Sponsoring 
Member.\37\
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    \36\ Notice, 83 FR at 67804.
    \37\ Id.
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IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \38\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the proposed rule 
change, the comments received, and FICC's response thereto, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to FICC. In particular, the Commission finds that the 
proposed rule change is consistent with Sections 17A(b)(3)(F) \39\ and 
17A(b)(3)(I) \40\ of the Act and Rule 17Ad-22(e)(18) thereunder.\41\
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    \38\ 15 U.S.C. 78s(b)(2)(C).
    \39\ 15 U.S.C. 78q-1(b)(3)(F).
    \40\ 15 U.S.C. 78q-1(b)(3)(I).
    \41\ 17 CFR 240.17Ad-22(e)(18).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules 
be designed to (i) remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions and (ii) protect investors and the public 
interest.\42\
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    \42\ 15 U.S.C. 78q-1(b)(3)(F).
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    First, the Commission believes the proposed rule change is designed 
to remove impediments to and perfect the mechanism of a national system 
for the prompt and accurate clearance and settlement of securities 
transactions. Specifically, the Commission believes that the expansion 
of the Sponsored Membership program eligibility and addition of an 
Omnibus Account(s) are consistent with Section 17A(b)(3)(F).\43\ As 
described above, eligibility to be a Sponsored Member currently is 
limited to Sponsored Members of Category 1 Sponsoring Members. Entities 
that are not Sponsored Members of a Category 1 Sponsoring Member and 
otherwise engage in the same type of eligible trading activity outside 
of a central counterparty currently do not avail themselves of the 
guaranteed settlement, novation, and independent risk management 
offered by FICC through the Sponsored Membership program. To help 
address this issue, the proposal would expand the Sponsored Membership 
program to include Category 2 Sponsoring Members and allow Sponsored 
Members to transact with Netting Members that are not the Sponsoring 
Member through an Omnibus Account maintained by the Sponsoring Member.
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    \43\ Id.
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    The Commission believes that the proposal's expansion of the 
Sponsored Membership program would help make the risk-reducing benefits 
of central clearing available to a wider range of entity types. In 
turn, increased trading activity through the expanded Sponsored 
Membership program could help (i) lower the risk of diminished 
liquidity in the U.S. repo market caused by a large scale exit of 
participants from the market in a stress scenario (through FICC's 
guaranty of completion of settlement for a greater number of eligible 
transactions); (ii) protect against fire sale risk (through FICC's 
ability to centralize and control the liquidation of a greater portion 
of a failed counterparty's portfolio); and (iii) decrease settlement 
and operational risk (by making a greater number of transactions 
eligible to be netted and subject to guaranteed settlement, novation, 
and independent risk management through FICC).
    Commenters in support of the proposal argued that the proposal 
would enhance the repo market. Specifically, commenters believe that by 
replacing bilateral counterparty exposures with a model where all 
market participants face a central counter party, parties are less 
exposed to a counterparty default.\44\ Additionally, commenters believe 
that increased central clearing could improve trading conditions for 
market participants, as the associated netting benefits can help to 
alleviate dealer balance sheet constraints that negatively impact 
liquidity and lead to increases in volume over time, which should help 
reduce costs.\45\
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    \44\ See Ronin Letter at 5; SIFMA Letter at 2; Citadel Letter at 
1.
    \45\ See Ronin Letter at 4-5; SIFMA Letter at 2; Citadel Letter 
at 1.
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    In addition, one commenter expressed concern that increased 
participation in FICC might not increase liquidity in the inter-dealer 
market as Sponsoring Members could simply match sponsored cash and 
collateral providers internally to take advantage of balance sheet 
relief.\46\ However, the commenter did not argue against the 
Commission's approval of the proposal based on the proposal's potential 
effects on liquidity, as the commenter also acknowledged that increased 
participation in FICC might actually improve liquidity.\47\ 
Additionally, FICC designed, and the commenter acknowledged, the 
proposal is an attempt to provide a potential solution for some of the 
structural inefficiencies that exist in the U.S. Treasury repo 
market.\48\ As such, the proposed rule change is consistent with 
Section 17A(b)(3)(F).\49\
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    \46\ See Ronin Letter at 6-7.
    \47\ See id. at 7.
    \48\ See id.
    \49\ 15 U.S.C. 78q-1(b)(3)(F).
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    Likewise, the Commission believes that the conforming and technical 
changes are consistent with Section 17A(b)(3)(F) by promoting the 
prompt and accurate clearance and settlement of securities 
transactions. The proposed changes would help clarify the Sponsored 
Membership rules.\50\ By proposing changes to the Rules to improve 
clarity, the Commission believes that the proposed changes are designed 
to help GSD members better understand and remain compliant with the 
Rules; thus promoting the prompt and accurate clearance and settlement 
of securities transactions.
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    \50\ Id.
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    Further, the Commission also believes that any flexibility in the 
proposed rule change is consistent with Section 17A(b)(3)(F).\51\ 
Commenters argue that the proposed rule change should specify under 
what qualitative standards Category 2 Sponsoring Members would be 
evaluated and what additional financial requirements and assurances 
FICC could impose on them.\52\ FICC stated that it believes it is 
appropriate to evaluate all Category 2 Sponsoring Member applicants on 
a case-by-case basis as applicants can vary widely in terms of their 
organizational structures, capitalizations, and the nature and

[[Page 13331]]

volume of activity they are interested in centrally clearing through 
FICC.\53\
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    \51\ Id.
    \52\ See IDTA Letter at 2-5.
    \53\ See FICC Response Letter at 4-6.
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    In expanding Sponsored Membership, FICC must account for the risk 
of Category 2 Sponsoring Members and their Sponsored Members defaulting 
to FICC. As the entities eligible for Category 2 Sponsoring Membership 
are diverse, the Commission believes that flexibility in reviewing 
applicants on a case-by-case basis would help FICC account for this 
default risk.
    Similarly, a commenter thought that the proposed rule change, as 
described in the Notice, should be clarified regarding how the types of 
transactions that can be included in a Sponsoring Member's Omnibus 
Account would work operationally.\54\ In explaining how operationally a 
Sponsoring Member's Omnibus Account would work FICC stated that (i) 
while each Sponsored Member's activity is assigned a separate VaR 
Charge, the positions of a Sponsored Member's activity (x) between 
itself and its Sponsoring Member and (y) between itself and another 
Netting Member (in a Sponsoring Member Omnibus Account) would be 
netted; and (ii) FICC would allow a Sponsoring Member to establish a 
Sponsoring Member Omnibus Account that could contain activity between 
Sponsored Members and Netting Members other than Sponsoring 
Members.\55\ The Commission believes that the (i) rule text and (ii) 
FICC's description of a Sponsoring Member's Omnibus Account are 
consistent with providing the clarity required for GSD members to 
understand the Rules, as amended by the proposed rule change.
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    \54\ See IDTA Letter at 3-5.
    \55\ See FICC Response Letter at 6-7.
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    Second, the Commission believes that the proposed rule change is 
designed to protect investors and the public interest. Specifically, 
the Commission believes that the expansion of the Sponsored Membership 
program and addition of an Omnibus Account(s) are consistent with 
protecting investors and the public interest. By expanding the types of 
entities that are eligible to participate and thereby benefit from 
FICC's guaranteed settlement, novation, and independent risk 
management, the proposal would help mitigate the risk of a large scale 
exit by such firms from the U.S. repo market in a stress scenario and, 
thus, help lower the risk of a liquidity drain in such a scenario. 
Specifically, the Office of Financial Research's U.S. Money Market Fund 
Monitor shows that a previous expansion of the Sponsoring Member 
Program lead to exponential growth in incremental cash investment from 
money market funds in FICC.\56\ Likewise, by providing central clearing 
to a greater number of Sponsored Member trades, the proposal would help 
enable FICC to centralize and control the liquidation of a greater 
number of such positions in the event of a Sponsored Member or 
Sponsoring Member's default. Doing so would help protect against the 
risk that an uncoordinated liquidation of the positions by multiple 
counterparties to the defaulting member would cause a fire sale of 
positions that negatively impacts the counterparties, FICC, and 
potentially the broader financial system.
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    \56\ See FICC Response Letter at 8.
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    One commenter requested greater information than FICC provided in 
the Notice regarding whether the proposed rule change would benefit the 
market.\57\ Specifically, the commenter stated that the actual impact 
of the proposed rule change is unknown and the proposed rule change 
could increase concentration risk at FICC.\58\ The Commission believes 
the proposed rule change is designed to protect investors and the 
public interest as expanding the Sponsored Membership program would 
include independent risk management designed to help account for any 
increased concentration risk. While the actual impact of the proposed 
rule change cannot be known, prior expansion of the Sponsored 
Membership program provides insight into the likely effect of future 
expansions of the program. Specifically, prior expansion has led to 
exponential growth in incremental cash investment in FICC.\59\ 
Similarly, although the greater activity in a Sponsoring Member Account 
would likely increase the exposure to FICC from a Netting Member 
default, FICC would help account for this risk by individually 
margining each Sponsored Member.
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    \57\ See IDTA Letter at 3-5.
    \58\ See id.
    \59\ See FICC Response Letter at 8.
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    By better enabling FICC to remove impediments to and perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions and protect investors and the 
public interest, as described above, the Commission finds that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act.\60\
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    \60\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Section 17A(b)(3)(I) of the Exchange Act

    Section 17A(b)(3)(I) of the Exchange Act requires that the rules of 
a clearing agency do not impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Exchange Act.\61\ 
As discussed above, FICC is proposing a number of changes to expand the 
Sponsored Membership program. The proposed changes are designed to (i) 
remove impediments to and perfect the mechanism of a national system 
for the prompt and accurate clearance and settlement of securities 
transactions and (ii) protect investors and the public interest, 
consistent with Section 17A(b)(3)(F) of the Exchange Act.\62\
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    \61\ 15 U.S.C. 78q-1(b)(3)(I).
    \62\ See 15 U.S.C. 78q-1(b)(3)(F).
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    A commenter expressed concerns about the ability of Netting Members 
that are not affiliated with a bank to participate as Sponsoring 
Members due to VaR margin requirements.\63\ Specifically, separate VaR 
charges for each Sponsored Member will likely limit wide adoption of 
Sponsored Membership to those Netting Members that have a low cost of 
capital.\64\ Likewise, the commenter expressed concern that expanding 
Sponsored Membership might increase the Capped Contingency Liquidity 
Facility (``CCLF'') \65\ responsibilities of other Netting Members if 
the liquidity needs of the largest Netting Members grow 
substantially.\66\ Conversely, one Commenter supported the proposed 
framework of risk management outlined in the proposal as appropriate to 
ensure proper risk controls and integrity with the FICC 
environment.\67\
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    \63\ See Ronin Letter at 6.
    \64\ Id.
    \65\ CCLF is a rules-based, member-funded, committed repo 
facility designed to ensure that FICC has sufficient liquid 
resources to satisfy its cash settlement obligations in the event of 
the default of the participant family that would generate FICC's 
largest aggregate payment obligation. Rule 22A, Section 2a, supra 
note 7. FICC designed the CCLF funding obligations to be generally 
proportionate to the liquidity needs that members present to FICC. 
See Securities Exchange Act Release No. 82090 (November 15, 2017), 
82 FR 55427 (November 21, 2017) (SR-FICC-2017-002) (``CCLF Approval 
Order'').
    \66\ See Ronin Letter at 6.
    \67\ See SIFMA Letter at 1.
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    The Commission understands that the impact of the cost of meeting a 
margin or CCLF requirement would depend, in part, on each Netting 
Member's specific business model and that some Netting Members could 
satisfy the increase at a lower cost than others. For example, when the 
Commission originally approved the CCLF, the Commission's approval was 
based in part on the Commission's belief that FICC appropriately sought 
to mitigate the relative burdens on Netting Members that present 
relatively less liquidity risk

[[Page 13332]]

to FICC by only requiring them to contribute their allotted share of 
the Aggregate Regular Amount, which is allocated among all Netting 
Members, but Netting Members with larger obligations are required to 
contribute a larger amount.\68\
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    \68\ See CCLF Approval Order, 82 FR at 55430.
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    As a result, the Commission believes that any competitive burden 
imposed by the proposed changes would not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.\69\
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    \69\ 15 U.S.C. 78q-1(b)(3)(I).
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    FICC proposes that while it would provide a netting benefit to a 
Sponsoring Member's offsetting positions at FICC, FICC would 
individually margin each Sponsored Member as FICC novates and 
guarantees the settlement of each Sponsored Member's position. 
Likewise, to the extent the CCLF were to potentially increase as a 
result of Sponsored Member activity, the CCLF is designed so that 
requirements are in proportion to the liquidity exposure that each 
Netting Member presents to GSD. It is necessary for FICC to collect 
margin requirements and impose liquidity requirements to help ensure 
FICC can complete settlement in the event of a Netting Member default. 
Similarly, it is appropriate to assess individual members VaR Charges 
and CCLF requirement based upon the guarantee and liquidity risks that 
FICC assumes based upon the member's position.
    Therefore, the Commission believes that the proposed rule change is 
consistent with Section 17A(b)(3)(I) of the Exchange Act, as the 
proposal would not impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.\70\
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    \70\ 15 U.S.C. 78q-1(b)(3)(I).
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A. Consistency With Rule 17Ad-22(e)(18) of the Exchange Act

    Rule 17Ad-22(e)(18) under the Act requires that FICC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to establish objective, risk-based, and publicly 
disclosed criteria for participation, which permit fair and open access 
by direct and, where relevant, indirect participants and other 
financial market utilities, require participants to have sufficient 
financial resources and robust operational capacity to meet obligations 
arising from participation in the clearing agency, and monitor 
compliance with such participation requirements on an ongoing 
basis.\71\
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    \71\ 17 CFR 240.17Ad-22(e)(18).
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    As described above, the proposed rule change would expand the 
Sponsored Membership program eligibility. The proposed rule change to 
expand Sponsoring Member eligibility would establish objective, risk-
based, and publicly disclosed criteria for additional types of Netting 
Members to participate in FICC as Sponsoring Members. As described 
above, FICC could impose greater financial requirements on an applicant 
to become a Category 2 Sponsoring Member as they may have substantially 
less capital than a Category 1 Sponsoring Member. Likewise, the 
proposed rule change would also impose an activity limit on a Category 
2 Sponsoring Member's Sponsored Member activity. Moreover, FICC would 
reserve the right to require each Sponsoring Member, or any Netting 
Member applicant to become such, to furnish to FICC such adequate 
assurances of its financial responsibility and operational capability. 
Each of these proposed changes would assist FICC in requiring Netting 
Members to have sufficient financial resources and robust operational 
capacity to meet obligations arising from participation in the clearing 
agency.
    As described above, commenters argued that the proposed rule change 
should specify under what qualitative standards Category 2 Sponsoring 
Members would be evaluated and what additional financial requirements 
and assurances FICC could impose on them.\72\ FICC stated that it 
believes it is appropriate to evaluate all Category 2 Sponsoring Member 
applicants on a case-by-case basis as applicants can vary widely in 
terms of their organization structures, capitalizations, and the nature 
and volume of activity they are interested in centrally clearing 
through FICC.\73\
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    \72\ See Ronin Letter at 5; SIFMA Letter at 2-3.
    \73\ See FICC Response Letter at 4-6.
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    The Commission believes that the limited discretion in the publicly 
disclosed criteria for participation is consistent with Rule 17Ad-
22(e)(18) as it is design to help ensure sufficient financial resources 
and robust operational capacity by Netting Members. In expanding 
Sponsored Membership, FICC must account for the risk of Category 2 
Sponsoring Members and their Sponsored Members defaulting to FICC. As 
the entities eligible for Category 2 Sponsoring Membership are diverse, 
the Commission believes that flexibility in reviewing applicants on a 
case-by-case basis would help FICC account for this default risk. 
Therefore, the Commission finds that the proposal is consistent Rule 
17Ad-22(e)(18) under the Act

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \74\ and 
the rules and regulations promulgated thereunder.
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    \74\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\75\ that proposed rule change SR-FICC-2018-013, be, and hereby is, 
approved.\76\
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    \75\ 15 U.S.C. 78s(b)(2).
    \76\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\77\
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    \77\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06527 Filed 4-3-19; 8:45 am]
 BILLING CODE 8011-01-P