Document ID: SEC-2017-0850-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2017-05-24T04:00Z

[Federal Register Volume 82, Number 99 (Wednesday, May 24, 2017)]
[Notices]
[Pages 23852-23864]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-10584]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80716; File No. SR-FICC-2017-012]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change to the Mortgage-Backed 
Securities Division Clearing Rules Regarding Fixed Income Clearing 
Corporation's (1) Time of Novation, (2) Treatment of Itself as the 
Settlement Counterparty for Certain Transaction Types, and (3) Proposal 
To Implement New Processes To Promote Operational Efficiencies for Its 
Clearing Members

May 18, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on May 15, 2017, Fixed Income Clearing Corporation (``FICC'' 
or the ``Corporation'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
clearing agency. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to the Mortgage-
Backed Securities Division (``MBSD'') Clearing Rules (``MBSD Rules'') 
of FICC.\3\ In connection with this proposed rule change, FICC is 
proposing to (1) move the time that FICC treats itself as the 
settlement counterparty for SBO-Destined Trades \4\ to the time of 
trade comparison, which is earlier in the lifecycle of the trade,\5\ 
(2) move the time that FICC novates and treats itself as the settlement 
counterparty for Trade-for-Trade Transactions \6\ to the time of trade

[[Page 23853]]

comparison, which is earlier in the lifecycle of the trade, (3) novate 
and establish itself as the settlement counterparty at the time of 
trade comparison for Specified Pool Trades,\7\ and (4) guarantee and 
novate trades with stipulations (``Stipulated Trades''), a proposed new 
trade type, at the time of trade comparison and treat FICC as the 
settlement counterparty at such time.\8\
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    \3\ Capitalized terms used and not otherwise defined shall have 
the meaning assigned to such terms in the MBSD Rules or the FICC 
MBSD EPN Rules, as applicable, available at http://www.dtcc.com/en/legal/rules-and-procedures.
    \4\ Pursuant to the MBSD Rules, the term ``SBO-Destined Trade'' 
means a TBA transaction in the Clearing System intended for TBA 
Netting in accordance with the provisions of the MBSD Rules. See 
MBSD Rule 1, supra note 3.
    \5\ FICC currently novates SBO-Destined Trades at trade 
comparison. No changes are being proposed to the time that novation 
occurs.
    \6\ Pursuant to the MBSD Rules, the term ``Trade-for-Trade 
Transaction'' means a TBA Transaction submitted to the Corporation 
not intended for TBA Netting in accordance with the provisions of 
the MBSD Rules. See MBSD Rule 1, supra note 3.
    \7\ Pursuant to the MBSD Rules, the term ``Specified Pool 
Trade'' means a trade in which all required pool data, including the 
pool number to be delivered on the Contractual Settlement Date, are 
agreed upon by Members at the time of execution. See MBSD Rule 1, 
supra note 3.
    \8\ For the avoidance of doubt, no changes are being proposed to 
FICC's trade guarantee (other than with respect to adding Stipulated 
Trades, the proposed new trade type, to the trade types guaranteed 
by FICC). FICC will continue to guarantee SBO-Destined Trades, 
Specified Pool Trades and Trade-for-Trade Transactions at trade 
comparison.
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    In connection with these changes, FICC is also proposing new 
processes that would promote operational efficiencies for MBSD Clearing 
Members.\9\ These processes include the following: (1) Eliminating the 
Notification of Settlement \10\ process, (2) establishing a process 
(referred to as the ``Do Not Allocate'' (``DNA'') process) that would 
permit offset among SBON Trades \11\ and Trade-for-Trade Transactions, 
(3) establishing a secondary process for pool netting (referred to as 
the ``Expanded Pool Netting'' process), (4) eliminating the ``give-up'' 
process for Brokered Transactions,\12\ and (5) amending the components 
of the Cash Settlement \13\ calculation.
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    \9\ Pursuant to the MBSD Rules, the term ``Clearing Member'' 
means any entity admitted into membership pursuant to Rule 2A. See 
MBSD Rule 1, supra note 3.
    \10\ Pursuant to the MBSD Rules, the term ``Notification of 
Settlement'' means an instruction submitted to the Corporation by a 
purchasing or selling Clearing Member pursuant to the MBSD Rules 
reflecting settlement of an SBO Trade, Trade-for-Trade Transaction 
or Specified Pool Trade. See MBSD Rule 1, supra note 3.
    \11\ Pursuant to this proposed rule change, FICC is proposing to 
amend the term ``SBON Trade'' to refer to a trade that Clearing 
Members settle directly with FICC. This proposed term is further 
described in section II.(A)1.II.H.1. of this proposed rule change.
    \12\ Pursuant to the MBSD Rules, the term ``Brokered 
Transaction'' means any ``give-up'' transaction calling for the 
delivery of an Eligible Security the data on which has been 
submitted to the Corporation by Members, to which transaction a 
Broker is a party. See MBSD Rule 1, supra note 3.
    \13\ Pursuant to the MBSD Rules, the term ``Cash Settlement'' 
refers to the payment each Business Day by the Corporation to a 
Member or by a Member to the Corporation pursuant to Rule 11. See 
MBSD Rule 1, supra note 3.
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    In addition, FICC would modify its Real-Time Trade Matching 
(``RTTM'') system to permit the submission of SBO-Destined Trades in 
all trade size amounts. This change would occur systemically in the 
RTTM system. MBSD's trade size submission requirements are not 
reflected in the MBSD Rules. As a result, this change would not require 
changes to the MBSD Rules.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    FICC currently processes SBO-Destined Trades, Specified Pool Trades 
and Trade-for-Trade Transactions.\14\ For each of these trade types, 
FICC guarantees the settlement of such transactions at the time of 
trade comparison regardless of whether such transactions are (1) 
novated and settled versus FICC or (2) settled bilaterally between 
Clearing Members.\15\ In connection with this guarantee, the buying 
Clearing Member and the selling Clearing Member counterparties are 
contractually bound, with FICC acting as a third-party guarantor in the 
event that either Clearing Member fails to meet its settlement 
obligations.
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    \14\ FICC also processes Option Contracts, however, these 
transactions are not the subject of this filing and no changes are 
being proposed in connection with this trade type.
    \15\ See MBSD Rule 5, supra note 3.
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    In addition to its guarantee, FICC also currently novates certain 
transactions--meaning that, the legal obligations that exist between 
Clearing Member counterparties are terminated and such obligations are 
replaced with new obligations to deliver securities to and receive 
securities from FICC. While FICC guarantees all SBO-Destined Trades, 
Specified Pool Trades and Trade-for-Trade Transactions at trade 
comparison,\16\ currently, FICC novates and treats itself as the 
settlement counterparty for SBO-Destined Trades and Trade-for-Trade 
Transactions at different points during the lifecycle of each trade 
type.
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    \16\ Id.
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    More specifically, under the current MBSD Rules, FICC novates SBO-
Destined Trades at the time of trade comparison, however, FICC does not 
treat itself as the settlement counterparty for purposes of processing 
and settlement until after the Pool Netting \17\ process is complete 
and FICC has established Pool Receive Obligations \18\ or Pool Deliver 
Obligations,\19\ as applicable, for each Clearing Member that has 
entered into an SBO-Destined Trade.\20\ With respect to Trade-for-Trade 
Transactions, FICC does not novate such transactions or treat itself as 
the settlement counterparty for purposes of netting, processing, and 
settlement until the Pool Netting process is complete \21\ and each 
Clearing Member that has entered into a Trade-for-Trade Transaction 
receives its Pool Receive Obligations or Pool Deliver Obligations, as 
applicable. For Specified Pool Transactions, FICC does not novate 
Specified Pool Trades or treat itself as the settlement counterparty 
during any point of the trade lifecycle.
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    \17\ Pursuant to the MBSD Rules, the term ``Pool Netting'' means 
the service provided to Clearing Members, as applicable, and the 
operations carried out by the Corporation in the course of providing 
such service in accordance with Rule 8. See MBSD Rule 1, supra note 
3.
    \18\ Pursuant to the MBSD Rules, the term ``Pool Receive 
Obligation'' means a Clearing Member's obligation to receive 
Eligible Securities from the Corporation at the appropriate 
Settlement Value either in satisfaction of all or part of a Pool Net 
Long Position. See MBSD Rule 1, supra note 3.
    \19\ Pursuant to the MBSD Rules, the term ``Pool Deliver 
Obligation'' means a Clearing Member's obligation to deliver 
Eligible Securities to the Corporation at the appropriate Settlement 
Value either in satisfaction of all or part of a Pool Net Short 
Position. See MBSD Rule 1, supra note 3.
    \20\ See MBSD Rule 1, supra note 3.
    \21\ Id. FICC does not novate and does not become the settlement 
counterparty to Trade-for-Trade Transactions that do not enter the 
Pool Netting system. Instead, these transactions are required to 
settle among the Clearing Member counterparties outside of FICC.
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    In connection with this proposed rule change, FICC's overarching 
goal is to novate and treat itself as the settlement counterparty to 
all Transactions \22\ (other than Option Contracts \23\) at the

[[Page 23854]]

time of trade comparison. Specifically, FICC is proposing to (1) move 
the time that FICC treats itself as the settlement counterparty for 
SBO-Destined Trades to the time of trade comparison, which is earlier 
in the lifecycle of the trade, (2) move the time that FICC novates and 
treats itself as the settlement counterparty for Trade-for-Trade 
Transactions to the time of trade comparison, which is earlier in the 
lifecycle of the trade, (3) novate and establish itself as the 
settlement counterparty at the time of trade comparison for Specified 
Pool Trades, and (4) guarantee and novate Stipulated Trades at the time 
of trade comparison and treat FICC as the settlement counterparty at 
such time. These changes would not create any new material risk for 
FICC because FICC guarantees the settlement of all Transactions at 
trade comparison \24\ and no changes (other than the proposed inclusion 
of Stipulated Trades) are being proposed in connection with the timing 
or substance of FICC's guarantee.
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    \22\ Pursuant to the MBSD Rules, the term ``Transaction'' means 
a trade that is eligible for processing by the Corporation in 
accordance with the MBSD Rules. See MBSD Rule 1, supra note 3.
    \23\ Pursuant to the MBSD Rules, the term ``Option Contract'' 
means an option to sell or buy a specified amount of Eligible 
Securities by or on a specified date to or from the other party to 
the contract against payment of the Strike Price. Upon exercise, a 
``Call Option Contract'' entitles the purchaser to buy, and 
obligates the seller (writer) to sell, Eligible Securities for the 
Strike Price, whereas a ``Put Option Contract'' entitles the 
purchaser to sell, and obligates the seller (writer) to buy, 
Eligible Securities for the Strike Price. See MBSD Rule 1, supra 
note 3.
    \24\ See MBSD Rule 5, supra note 3.
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    In order to achieve the above-referenced changes, FICC is also 
proposing to make certain operational changes that would create 
efficiencies for Clearing Members. These changes include: (1) 
Eliminating the Notification of Settlement process, (2) establishing 
the DNA process, (3) establishing the Expanded Pool Netting process, 
(4) eliminating the ``give-up'' process for Brokered Transactions, and 
(5) amending the components of the Cash Settlement calculation. In 
addition, FICC would modify its RTTM system to permit the submission of 
SBO-Destined Trades in all trade size amounts. These changes would not 
create any new material risk for FICC because these changes would be 
designed to enhance operational efficiencies while not materially 
affecting risk management processes.

I. MBSD Processing--Overview

MBSD's Current Trade Comparison and Netting Processes

    MBSD processes (1) to-be-announced (``TBA'') transactions (``TBA 
Transactions''), which are trades for which the actual identities of 
and/or the number of pools underlying each trade are unknown at the 
time of trade execution and (2) Specified Pool Trades, which are trades 
for which all pool data is agreed upon by the Clearing Members at the 
time of execution. TBA Transactions are comprised of (i) SBO-Destined 
Trades, (ii) Trade-for-Trade Transactions and (iii) Option Contracts.
    MBSD's Trade Comparison \25\ system and TBA Netting \26\ system 
form the basis of all of its other services. All Compared Trades \27\ 
are risk managed by MBSD, but the remainder of their respective 
lifecycles differ according to their trade type.
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    \25\ Pursuant to the MBSD Rules, the term ``Trade Comparison'' 
means the service provided to Clearing Members and the operations 
carried out by the Corporation in the course of providing such 
service, in accordance with MBSD Rule 5. See MBSD Rule 1, supra note 
3.
    \26\ Pursuant to the MBSD Rules, the term ``TBA Netting'' means 
the service provided to Clearing Members, as applicable, and the 
operations carried out by the Corporation in the course of providing 
such service in accordance with MBSD Rule 6. See MBSD Rule 1, supra 
note 3.
    \27\ Pursuant to the MBSD Rules, the term ``Compared Trade'' 
means a trade the data on which has been compared or deemed compared 
pursuant to Rule 5 or Rule 7, as applicable. See MBSD Rule 1, supra 
note 3.
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    The first step of MBSD's clearance and settlement process is trade 
comparison, which consists of the reporting, validating and matching by 
FICC of both sides of a Transaction to ensure that the details of the 
trades are in agreement between the parties.\28\ Trade data is entered 
into the RTTM system by all parties and once the trade is deemed 
compared, FICC guarantees the settlement of the trade, provided that 
the trade meets the requirements of the MBSD Rules and was entered into 
in good faith.\29\ With respect to SBO-Destined Trades, upon trade 
comparison such trades are also novated to FICC.\30\ This novation 
consists of the termination of the deliver, receive and related payment 
obligations between Clearing Members and their replacement with 
identical obligations to and from FICC.\31\ With respect to Trade-for-
Trade Transactions, novation does not occur at the time of trade 
comparison; FICC only guarantees the settlement of such Transactions 
upon trade comparison.\32\ Although FICC guarantees the obligations of 
Specified Pool Trade counterparties to deliver, receive and make 
payment for securities that satisfy the same generic criteria as the 
securities underlying Specified Pool Trades upon trade comparison, FICC 
does not novate such trades.\33\
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    \28\ See MBSD Rule 5, supra note 3.
    \29\ See MBSD Rule 5 Section 8, supra note 3.
    \30\ See MBSD Rule 5 Section 13, supra note 3.
    \31\ Id.
    \32\ Id.
    \33\ See MBSD Rule 5 Section 12, supra note 3.
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    Next, MBSD employs two netting processes to reduce settlement 
obligations as well as the number of securities and the amount of cash 
that must be exchanged to settle certain Transactions. The netting 
processes occur through the TBA Netting system and the Pool Netting 
system.\34\
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    \34\ See MBSD Rules 6, 7 and 8, supra note 3.
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    The TBA Netting system is used to net SBO-Destined Trades that have 
compared and are eligible for the TBA Netting system.\35\ Three days 
before the established contractual settlement day (referred to as ``72-
Hour Day''),\36\ TBA Netting for the applicable class occurs. On this 
date, all compared SBO-Destined Trades within the class that have been 
designated for the TBA Netting process are netted within and across 
counterparties. Even though FICC has become the legal counterparty for 
each SBO-Destined Trade upon trade comparison, TBA Netting occurs as 
though each SBO-Destined Trade is with the Original Contra-Side 
Member.\37\ The net positions created by the TBA Netting process are 
referred to as the settlement balance order positions (``SBO 
positions''), which constitute settlement obligations against which 
Clearing Members will submit pool information (``Pool Instructs'') for 
the Pool Netting process.\38\
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    \35\ Trade-for-Trade Transactions are not netted through the TBA 
Netting system, however, like the SBO positions, do constitute TBA 
settlement obligations against which Pool Instructs may be 
submitted. Specified Pool Trades are also not netted through the TBA 
Netting system, nor do such trades enter the Pool Netting system. 
See MBSD Rules 6 and 8, supra note 3.
    \36\ MBSD performs the TBA Netting process four times per month, 
corresponding to each of the four primary settlement classes and 
dates established by the Securities Industry Financial Markets 
Association (``SIFMA''). SIFMA publishes a calendar that specifies 
one settlement date per month for four different product classes 
(known as Classes A, B, C and D) that are used to categorize the 
various types of TBA securities. These product classes and the 
associated settlement dates are recognized by the industry, and they 
provide the foundation for MBSD's TBA Netting process.
    \37\ Pursuant to the MBSD Rules, the term ``Original Contra-Side 
Member'' means a Member with whom a Member has entered into a 
contract for the purchase or sale of an Eligible Security or an 
Option Contract. See MBSD Rule 1, supra note 3.
    \38\ See MBSD Rule 6, supra note 3.
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    Two business days prior to the established settlement date of the 
TBA settlement obligations (known as ``48-Hour Day''), Clearing Members 
that have an obligation to deliver pools (``Pool Sellers'') must notify 
their counterparties (``Pool Buyers'') through MBSD's EPN Service \39\ 
of the pools that

[[Page 23855]]

such Pool Sellers intend to allocate in satisfaction of their SBO 
positions and/or Trade-for-Trade Transactions.\40\ With respect to 
Trade-for-Trade Transactions, the relevant counterparty is the Original 
Contra-Side Member. With respect to SBO-Destined Trades, although MBSD 
is the legal counterparty, Clearing Members are directed to treat a 
designated SBO Contra-Side Member \41\ as their counterparty. In 
addition, Clearing Members are also required to submit Pool Instructs 
on the 48-Hour Day to MBSD through its RTTM system for Pool Comparison 
\42\ (which is a prerequisite to Pool Netting).\43\ The pools must be 
bilaterally matched by each counterparty to the trade. Any pool 
allocations deemed compared at this stage (provided that neither 
Clearing Member has cancelled the submitted allocation) are processed 
through the Pool Netting system.\44\ On the business day before the 
contractual settlement date (``24-Hour Day''), pool netting takes 
place. The Pool Netting system reduces the number of pool settlements 
by netting Pool Instructs stemming from SBO Trades \45\ and Trade-for-
Trade Transactions to arrive at a single net position per counterparty 
in a particular pool number for next-day delivery date.\46\
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    \39\ MBSD's electronic pool notification service (the ``EPN 
Service'') provides Clearing Members with the ability to 
electronically communicate pool information to MBSD, as described in 
the proposed rule changes. See MBSD Rule 1, supra note 3. FICC 
recognizes that the term ``EPN'' as used in connection with the 
``EPN Service'' also reflects the acronym of ``Expanded Pool 
Netting.'' With this is mind, FICC wishes to clarify that the EPN 
Service and the Expanded Pool Netting process are not associated 
with one another. As described above, the EPN Service is MBSD's 
electronic pool notification service, which is used by Clearing 
Members to electronically communicate pool information to MBSD as 
described in this proposed rule change. Expanded Pool Netting would 
be a secondary pool netting process that FICC is proposing to 
establish as described in this proposed rule change.
    \40\ Pool allocations occur for all TBA Obligations, whether 
established on 72-Hour Day through the TBA Netting process or 
established upon comparison when the Trade-for-Trade Transaction was 
submitted. Pool allocations are not performed for Specified Pool 
Trades because the pool that is to be delivered in connection with 
such trade is specified upon submission.
    \41\ Pursuant to the MBSD Rules, the term ``SBO Contra-Side 
Member'' means the Member with whom a Member is directed by the 
Corporation to settle an SBO Trade. An ``SBON Contra-Side Member'' 
is an SBO Contra-Side Member that is not an Original Contra-Side 
Member with respect to such SBO Trade. An ``SBOO Contra-Side 
Member'' is an SBO Contra-Side Member that is also an Original 
Contra-Side Member with respect to such SBO Trade. See MBSD Rule, 
supra note 3
    \42\ Pursuant to the MBSD Rules, the term ``Pool Comparison'' 
means the service provided to Clearing Members, as applicable, and 
the operations carried out by the Corporation in the course of 
providing such service, in accordance with Rule 7. See MBSD Rule 1, 
supra note 3.
    \43\ As with the EPN Service allocation process described above, 
Clearing Members submit Pool Instructs against all of their TBA 
Obligations regardless of whether the TBA Obligation stems from the 
TBA Netting process or the TBA Obligation is established upon 
comparison when the Trade-for-Trade Transaction was submitted.
    \44\ See MBSD Rule 8, supra note 3.
    \45\ Pursuant to the MBSD Rules, the term ``SBO Trade'' means a 
settlement balance order that offsets an SBO Net Open Position 
pursuant to the MBSD Rules. A Member which has one or more ``Long 
SBO Trades'' in a particular CUSIP number is a net purchaser with 
respect to that CUSIP number, as the case may be; a Member which has 
one or more ``Short SBO Trades'' is a net seller. An SBO Trade may 
be either an SBON Trade or an SBOO Trade. See MBSD Rule 1, supra 
note 3.
    \46\ A Clearing Member's ``counterparty'' for purposes of 
notifications, netting and processing as described in this paragraph 
is the SBO Contra-Side Member or the Original Contra-Side Member for 
SBO-Destined Trades and Trade-for-Trade Transactions, respectively. 
See MBSD Rule 6, supra note 3.
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    On each business day, MBSD makes available to each Clearing Member 
a Report \47\ to enable such Clearing Member to settle its Pool Net 
Settlement Positions \48\ on that business day. At the time that the 
Report is made available, all deliver, receive and related payment 
obligations between Clearing Members that were created by compared 
pools that comprise a Pool Net Settlement Position or Positions are 
terminated and replaced by the Pool Deliver Obligations, Pool Receive 
Obligations, and related payment obligations to and from FICC.\49\ Each 
Clearing Member then provides appropriate instructions to its clearing 
bank to deliver to MBSD, and/or to receive from MBSD, Eligible 
Securities against payment or receipt at the appropriate settlement 
value.
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    \47\ Pursuant to the MBSD Rules, the term ``Report'' means any 
document, record, or other output prepared by the Corporation and 
made available to a Member in any format (including, but not limited 
to, machine-readable and print-image formats) or medium (including, 
but not limited to, print copy, magnetic tape, video display 
terminal, and interactive message formats) that provides information 
to such Member with regard to the services provided by, or the 
operations of, the Corporation. See MBSD Rule 1, supra note 3.
    \48\ Pursuant to the MBSD Rules, the term ``Pool Net Settlement 
Position'' means either a Pool Net Short Position or a Pool Net Long 
Position, as the context requires. See MBSD Rule 1, supra note 3.
    \49\ Id.
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    Certain obligations among Clearing Members settle outside of FICC--
meaning that, Clearing Members are required to settle such obligations 
directly with their applicable settlement counterparties.\50\ These 
obligations include (1) Pool Instructs that are not included in Pool 
Netting (either because they are ineligible or because they do not meet 
selection criteria for inclusion) and (2) Specified Pool Trades, which 
are not eligible for Pool Netting. Clearing Members must report that an 
obligation has settled bilaterally with their applicable settlement 
counterparties to FICC by submitting a Notification of Settlement to 
MBSD for pool settlements relating to all trade types, with the 
exception of Option Contracts.\51\ This is required because MBSD will 
not know which pools actually have settled directly between Clearing 
Members unless it receives a separate notification. Once the mandatory 
details on the Notification of Settlement instructions submitted by 
both Clearing Members are compared, the associated obligation is deemed 
to have settled and will therefore no longer be subject to MBSD's risk 
management.
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    \50\ See MBSD Rule 5 Section 12 and MBSD Rule 8 Section 2, supra 
note 3.
    \51\ See MBSD Rule 10, supra note 3.
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II. MBSD Processing--Proposed Changes

A. FICC's Proposed Change To Novate All Transactions (Other Than Option 
Contracts) and Treat Itself as the Settlement Counterparty for All Such 
Transactions at Trade Comparison

    MBSD is proposing to novate all Transactions (except Option 
Contracts) at the time of trade comparison. This means that, upon trade 
comparison, the deliver, receive and related payment obligations 
between the Clearing Members with respect to SBO-Destined Trades and 
Trade-for-Trade Transactions would terminate and be replaced by 
identical obligations to and from FICC (i.e., FICC would become the 
buyer to every seller and the seller to every buyer). A similar process 
would occur for Specified Pool Trades and Stipulated Trades, except 
that, for those trades, the existing deliver, receive and related 
payment obligations would be terminated and replaced with obligations 
to deliver, receive and make payment for securities that satisfy the 
same generic criteria (such as coupon rate, maturity, agency, and 
product) as the securities underlying the Specified Pool Trades or 
Stipulated Trades. FICC would not novate or guarantee the obligations 
to deliver the particular securities underlying Specified Pool Trades 
or securities that contain the particular stipulations set forth in 
Stipulated Trades. In addition, FICC is proposing to treat itself as 
the settlement counterparty throughout the lifecycle of the trade for 
netting, processing and settlement purposes.\52\ These changes are 
described in detail below.
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    \52\ Upon trade comparison, Clearing Members would receive a 
notification through the RTTM system establishing FICC as each 
party's novated and settlement counterparty.
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1. SBO-Destined Trades
    Currently, MBSD novates SBO-Destined Trades at the time of trade 
comparison, however, FICC does not treat itself as the settlement 
counterparty for netting and processing purposes until after the Pool 
Netting process is complete and FICC has established Pool Receive 
Obligations or Pool Deliver Obligations, as applicable,

[[Page 23856]]

for each Clearing Member that has entered into an SBO-Destined Trade. 
As a result, Clearing Members are directed to (1) allocate pools 
through the EPN Service to designated SBO Contra-Side Members and (2) 
submit Pool Instructs through the RTTM system.\53\
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    \53\ See MBSD Rule 7, supra note 3.
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    MBSD is proposing to treat itself as settlement counterparty for 
netting and processing purposes, at the time of trade comparison. SBO-
Destined Trades would proceed to the TBA Netting process as they do 
today; however, the SBO positions that result from the TBA Netting 
process would reflect FICC as the settlement counterparty. Thus, 
Clearing Members would no longer be directed to settle with a 
designated SBO Contra-Side Member,\54\ but with FICC. On 48-Hour Day, 
Clearing Members that are Pool Sellers would notify MBSD (rather than 
their designated SBO Contra-Side Member) through the EPN Service of the 
allocated pools. FICC would then submit corresponding notifications to 
Clearing Members that are Pool Buyers. Pool Instructs (as defined 
above) would continue to be submitted to MBSD on 48-Hour Day through 
FICC's RTTM system. In an effort to create operational efficiencies, 
FICC is proposing to amend its MBSD Rules to provide that, if a 
Clearing Member does not submit its Pool Instructs by the established 
deadline, FICC would determine and apply the Pool Instructs for that 
Clearing Member. Such determination would be based on the allocated 
pools that the Clearing Member has submitted through the EPN Service. 
As a result of this proposed change, all pools would be compared and 
FICC would no longer require Clearing Members to settle uncompared 
pools directly with their applicable settlement counterparties (i.e., 
outside of FICC).
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    \54\ FICC would eliminate its calculation for determining the 
Settlement Value of SBON Trades and SBOO Trades. The MBSD Rules 
refer to the calculation as ``CUSIP Average Price'' or ``CAP'' for 
SBON Trades and ``Firm CUSIP Average Price'' or ``FCAP'' for SBOO 
Trades. See MBSD Rule 6, supra note 3.
---------------------------------------------------------------------------

    In addition to the above, FICC is also proposing to eliminate the 
trade size restriction for SBO-Destined Trades. Currently, SBO-Destined 
Trades are only eligible for the TBA Netting process if such trades 
details are submitted through the RTTM system in multiple amounts of 
one million with the minimum set at one million. FICC is proposing to 
remove this restriction from the RTTM system. As a result, Clearing 
Members would be permitted to submit SBO-Destined Trades in any trade 
size. MBSD's trade size restrictions are not reflected in the MBSD 
Rules, thus the proposed change would not necessitate any changes to 
the MBSD Rules.
    For the avoidance of doubt, FICC is not proposing to change the 
trade size restrictions for Trade-for-Trade Transactions and Specified 
Pool Trades.
2. Trade-for-Trade Transactions
    Currently, FICC does not novate Trade-for-Trade Transactions or 
treat itself as settlement counterparty for purposes of netting, 
processing, and settlement until, in each case, the Pool Netting 
process is complete and each Clearing Member receives their Pool 
Receive Obligation or Pool Deliver Obligations, as applicable, from 
FICC.\55\ As a result, Clearing Members are required to allocate pools 
to their original counterparty through the EPN Service and submit Pool 
Instructs through the RTTM system. Once Pool Netting is complete, the 
deliver, receive and related payment obligations between Clearing 
Members that were created by compared pools that comprise a Pool Net 
Settlement Position are terminated and replaced by Pool Deliver 
Obligations, Pool Receive Obligations, and related payment obligations 
to and from FICC.\56\
---------------------------------------------------------------------------

    \55\ See MBSD Rule 8 Section 4, supra note 3.
    \56\ See MBSD Rule 8 Section 6, supra note 3.
---------------------------------------------------------------------------

    FICC is proposing to novate Trade-for-Trade Transactions at trade 
comparison and treat itself as settlement counterparty, at that time, 
for purposes of processing and settlement. Similar to the process with 
SBO-Destined Trades, Clearing Members with an obligation to deliver 
pools would notify MBSD (rather than their original counterparty) 
through the EPN Service and FICC would submit corresponding 
notifications to Clearing Members that are Pool Buyers. Clearing 
Members would continue to be required to submit Pool Instructs. In the 
event that Pool Instructs are not submitted by the established 
deadline, FICC would determine Pool Instructs for that Clearing Member.
3. Specified Pool Trades
    Currently, FICC does not novate Specified Pool Trades during any 
point of the trade lifecycle (though, upon Trade Comparison of 
Specified Pool Trades, FICC guarantees the obligation to deliver, 
receive and pay for securities that satisfy the same generic criteria 
as the securities underlying the Specified Pool Trades).\57\ Specified 
Pool Trades are eligible for neither the TBA Netting process nor the 
Pool Netting process. In addition, Specified Pool Trades are directly 
settled between the original counterparties.
---------------------------------------------------------------------------

    \57\ See MBSD Rule 5, supra note 3.
---------------------------------------------------------------------------

    FICC is proposing to novate Specified Pool Trades upon Trade 
Comparison. Such novation would be limited to the obligations to 
deliver, receive and make payment for securities satisfying the same 
generic criteria as the securities underlying the Specified Pool 
Trades. As a result, upon Trade Comparison, the existing deliver, 
receive and related payment obligations between Clearing Members under 
Specified Pool Trades would be terminated and replaced with obligations 
to or from FICC to deliver, receive and make payment for securities 
satisfying the same generic criteria as the securities underlying the 
Specified Pool Trades. FICC would not novate the obligation to deliver 
the securities for the particular specified pool.
    Additionally, FICC is proposing to settle Specified Pool Trades 
directly with the Clearing Member party thereto (rather than require 
that counterparties to such trades settle directly with one another). 
No other changes are being proposed with respect to the processing of 
Specified Pool Trades. Such trades would continue to be ineligible for 
the TBA Netting and Pool Netting systems.
4. Stipulated Trades
    FICC is proposing to introduce Stipulated Trades as a new trade 
type that would be eligible for processing by MBSD. A Stipulated Trade 
is a trade in which pools allocated and delivered against the trade 
must satisfy certain conditions (i.e., stipulations) that are agreed 
upon by the parties at the time that the trade was executed.\58\ FICC 
would guarantee and novate Stipulated Trades at Trade Comparison 
provided that such trade meets the requirements of the MBSD Rules and 
was entered into in good faith. Such guarantee and novation would be 
limited to the obligations to deliver, receive and make payment for 
securities satisfying the same generic criteria as the securities 
underlying the Stipulated Trade, but not the obligation to deliver 
securities that contain the particular stipulations contained in the 
Stipulated Trades. At Trade Comparison, the deliver, receive and 
related payment obligations between Clearing Members would be 
terminated and replaced with obligations to deliver, receive and make 
payment for securities satisfying the

[[Page 23857]]

same generic criteria as the securities underlying the Stipulated 
Trades.
---------------------------------------------------------------------------

    \58\ Trades carrying stipulations may reflect terms that include 
but are not limited to the following: Issuance year, issuance month, 
weighted average coupon, weighted average maturity and/or weighted 
average loan age, etc.
---------------------------------------------------------------------------

    Because of the narrow nature of FICC's guarantee and novation, in 
the event of a Clearing Member's default, FICC would only be required 
to deliver, receive or make payment for securities that have the same 
generic terms, such as coupon rate, maturity, agency, and product, as 
the securities that underlay the Stipulated Transaction.
    Clearing Members would be required to allocate Stipulated Trades to 
FICC through the EPN Service. Such allocation would result in the 
creation of pool obligations, which would settle with FICC based on the 
settlement date agreed to as part of the terms of the trade. Similar to 
Specified Pool Trades, Stipulated Trades would be eligible for neither 
the TBA Netting process nor the Pool Netting process.

B. Proposed Change To Eliminate the Notification of Settlement Process

    As described above, the Notification of Settlement process requires 
Clearing Members to notify FICC of obligations that have settled 
directly between Clearing Members and their applicable settlement 
counterparties.\59\ Once both parties to a Transaction submit a 
Notification of Settlement to MBSD through the RTTM system, the 
obligations are no longer subject to MBSD's margin calculation 
process.\60\ Because FICC is proposing to novate and directly settle 
all SBO-Destined Transactions, Trade-for-Trade Transactions and 
Specified Pool Trades, the Notification of Settlement process would be 
eliminated from the MBSD Rules.
---------------------------------------------------------------------------

    \59\ See MBSD Rule 10, supra note 3.
    \60\ See MBSD Rule 4, supra note 3.
---------------------------------------------------------------------------

C. Proposed Change To Establish the DNA Process

    FICC is proposing to establish a process that would give Clearing 
Members the ability to offset Trade-for-Trade Transactions \61\ and/or 
SBON Trades.\62\ This process would be referred to as the ``DNA'' 
process. The purpose of this process is to exclude SBON Trades and 
Trade-for-Trade Transactions from the pool allocation process \63\ and 
securities settlement.
---------------------------------------------------------------------------

    \61\ Specified Pool Trades and Stipulated Trades would not be 
eligible for the proposed Do Not Allocate process because such 
trades are not eligible for the Pool Netting process. See MBSD Rule 
8, supra note 3.
    \62\ The proposed MBSD Rules would use the term ``SBON Trades'' 
to signify obligations that result from the TBA Netting process. 
Such obligations would reflect FICC as the settlement counterparty.
    \63\ As noted above, the pool allocation process requires 
Clearing Members to allocate pools on 48-Hour Day through the EPN 
Service. Pursuant to this proposed change, Clearing Members would 
not be required to allocate pools for obligations that have been 
offset through the Do Not Allocate process.
---------------------------------------------------------------------------

    The Do Not Allocate process would be available to Clearing Members 
at the start of business day on 48-Hour Day through 4:30 p.m. on 24-
Hour Day. During this time, Clearing Members with two or more open TBA 
Obligations \64\ with the same Par Amount,\65\ CUSIP Number \66\ and 
SIFMA designated settlement date would be permitted to offset (i.e., 
``pair-off'') such obligations. In order to initiate the offset, 
Clearing Members would be required to submit a request (``DNA 
Request'') to MBSD through the RTTM system. Upon FICC's validation of 
this request, the obligations would be reduced and the Clearing Member 
would not be required to allocate pools against such obligations. As a 
result, a Clearing Member's overall number of open obligations would be 
reduced.
---------------------------------------------------------------------------

    \64\ Pursuant to the MBSD Rules, the term ``TBA Obligations'' 
means SBO-Destined obligations and, with respect to Trade-for-Trade 
Transactions, settlement obligations generated by the Trade 
Comparison system. See MBSD Rule 1, supra note 3.
    \65\ Pursuant to the MBSD Rules, the term ``Par Amount'' means 
for Trade-for-Trade and SBO Transactions, Option Contracts and Pool 
Deliver and Pool Receive Obligations, the current face value of a 
Security to be delivered on the Contractual Settlement Date. With 
respect to Specified Pool Trades, ``Par Amount'' shall mean the 
original face value of a Security to be delivered on the Contractual 
Settlement Date. See MBSD Rule 1, supra note 3. Pursuant to this 
proposed rule change, FICC is proposing to amend this defined term 
as described in section H. 1.
    \66\ Pursuant to the MBSD Rules, the term ``CUSIP Number'' means 
the Committee on Uniform Securities Identification Procedures 
identifying number for an Eligible Security. See MBSD Rule 1, supra 
note 3.
---------------------------------------------------------------------------

    The proposed Do Not Allocate process would generate Cash Settlement 
credits and debits from the price differential of the resulting 
offsetting obligations. The proposed Cash Settlement obligations are 
described below in section F.
1. Cancellations
    Clearing Members would be permitted to cancel a DNA Request, 
however, such cancellation must be submitted through the RTTM system 
prior to the time that the designated offsetting TBA Obligations have 
settled. Upon FICC's timely receipt of a cancellation request, the 
trades that were previously marked for the Do Not Allocate process 
would reopen and the Clearing Member would be expected to notify MBSD 
through the EPN Service of the pools that such Clearing Member intends 
to allocate to the open obligations.
2. Example of the Do Not Allocate Process
    Assume that the TBA Netting process results in the following:
    Dealer A as seller has a TBA Obligation to FICC in a Fannie Mae 
(``FNMA'') 30-year 3% coupon for a July 2017 settlement (CUSIP Number 
01F030678) with a Par Amount of 100mm.
    Assume that the following Trade-for-Trade Transaction has been 
novated to FICC:
    Dealer A as buyer has a TBA Obligation to FICC in FNMA 30-year 3% 
coupon for a July 2017 settlement (CUSIP Number 01F030678) with a Par 
Amount of 100mm.
    In connection with the above, Dealer A would have the option of 
submitting a DNA Request at anytime between the start of business day 
on 48-Hour Day through 4:30 p.m. on 24-Hour Day. Upon FICC's receipt 
and validation of the DNA Request, FICC would reduce each of Dealer A's 
TBA Obligations in accordance with the DNA Request and reduce the 
overall number of Dealer A's open TBA Obligations.
    In addition, FICC would calculate a Cash Settlement obligation for 
Dealer A (the ``Do Not Allocate Transaction Adjustment Payment'') 
difference between the Settlement Price of the buy and sell TBA 
Obligation transactions multiplied by the contractual quantity.
    In the event that Dealer A cancels its DNA Request, the marked TBA 
Obligations would reopen and Dealer A would be required to allocate 
pools for such obligations.

D. Proposed Change To Establish a Secondary Pool Netting Process--
Expanded Pool Netting

    As described above, the Pool Netting system reduces the number of 
pool settlements by netting Pool Instructs stemming from SBON Trades 
and Trade-for-Trade Transactions to arrive at a single net position per 
counterparty in a particular pool number for next-day delivery 
date.\67\ Prior to the Pool Netting process, Pool Sellers must notify 
their Pool Buyers through MBSD's EPN Service of the pools that will be 
allocated in satisfaction of a TBA Obligation. In accordance with the 
SIFMA Guidelines,\68\ such notifications

[[Page 23858]]

must occur before 3:00 p.m.\69\ on 48-Hour Day. Notifications that take 
place after this time are considered late and the delivery of such 
pools to the related Pool Buyers will be delayed for one additional 
business day.
---------------------------------------------------------------------------

    \67\ A Clearing Member's ``counterparty'' for purposes of 
notifications, netting and processing as described in this paragraph 
is the SBO Contra-Side Member or the Original Contra-Side Member for 
SBO-Destined Trades and Trade-for-Trade Transactions, respectively. 
See MBSD Rule 6, supra note 3.
    \68\ Pursuant to the MBSD Rules, the term ``SIFMA Guidelines'' 
means the guidelines for good delivery of Mortgage-Backed Securities 
as promulgated from time to time by SIFMA. See MBSD Rule 1, supra 
note 3.
    \69\ All times referenced herein are Eastern Time.
---------------------------------------------------------------------------

    In order to capture notifications submitted after 3:00 p.m. on 48-
Hour Day through 4:30 p.m. on 24-Hour Day, FICC is proposing to 
establish an additional netting cycle (referred to as Expanded Pool 
Netting). Similar to the initial Pool Netting process, Expanded Pool 
Netting would result in a reduction in the number of Pool Delivery 
Obligations. As with the existing Pool Netting process, the proposed 
Expanded Pool Netting process would (1) calculate Pool Net Settlement 
Positions in a manner that is consistent with Section 3 of MBSD Rule 8 
and (2) allocate Pool Deliver Obligations and Pool Receive Obligations 
in a manner that is consistent with Section 4 of MBSD Rule 8. The 
Expanded Pool Netting process would occur four times per month in 
accordance with the SIFMA designated settlement date. Pool Net 
Settlement Positions and the resultant Pool Deliver Obligations and 
Pool Receive Obligations would only be provided to Clearing Members 
during such times.
    The proposed Expanded Pool Netting process would generate Cash 
Settlement credits and debits. The proposed Cash Settlement obligations 
are described below in section F.

E. Proposed Change To Eliminate the ``Give-up'' Process for Brokered 
Transactions

    Currently, FICC operates its brokered business on a ``give-up'' 
basis. This means that MBSD discloses (or ``gives-up'') the identity of 
each Dealer \70\ (to a Brokered Transaction) after a period of 
time.\71\ Under the proposed rule change, FICC would eliminate the need 
to disclose Dealers' identities because FICC would novate all Brokered 
Transactions and treat itself as the settlement counterparty once such 
transactions have been Fully Compared.\72\ Thus, the Report that FICC 
issues once a Brokered Transaction has been Fully Compared would refer 
to FICC as settlement counterparty.
---------------------------------------------------------------------------

    \70\ Pursuant to the MBSD Rules, the term ``Dealer'' means a 
Member that is in the business of buying and selling Securities as 
principal, either directly or through a Broker. See MBSD Rule 1, 
supra note 3.
    \71\ See MBSD Rule 5 Section 7, supra note 3.
    \72\ Pursuant to the MBSD Rules, the term ``Fully Compared'' 
means that trade input submitted by a Broker matches trade input 
submitted by each Dealer on whose behalf the Broker is acting in 
accordance with the Net Position Match Mode. See MBSD Rule 1, supra 
note 3.
---------------------------------------------------------------------------

F. Proposed Change to the Cash Settlement Process

    Cash Settlement is a daily process of generating a single net 
credit or debit cash amount at the Aggregated Account \73\ level and 
settling those cash amounts between Clearing Members and MBSD.\74\ 
FICC's proposal to become the settlement counterparty upon trade 
comparison and the proposed Do Not Allocate process would necessitate 
the following changes to the Cash Settlement calculation.
---------------------------------------------------------------------------

    \73\ Pursuant to the MBSD Rules, the term ``Aggregated Account'' 
means either a single Account linked to an aggregate ID or a set of 
Accounts linked to an aggregate ID for the processing of 
Transactions in the Clearing System. Pursuant to the MBSD Rules, 
Members' Cash Settlement obligations and Mark-to-Market requirements 
are calculated on a net basis at the aggregate ID level. See MBSD 
Rule 1, supra note 3.
    \74\ See MBSD Rule 11, supra note 3.
---------------------------------------------------------------------------

    1. FICC is proposing to eliminate the SBO Market Differential \75\ 
because this amount calculates the price difference for SBO positions 
settled among Clearing Members. This amount would no longer be required 
because Clearing Members would settle all SBO-Destined Trades directly 
with FICC.
---------------------------------------------------------------------------

    \75\ Pursuant to the MBSD Rules, the term ``SBO Market 
Differential'' means the amount computed pursuant to the MBSD Rules, 
reflecting the difference between Firm CUSIP Average Prices (in the 
case of an SBO Netted or SBO Net-Out Position) or between the CUSIP 
Average Price and the Firm CUSIP Average Price (in the case of an 
SBON Trade). See MBSD Rule 1, supra note 3.
---------------------------------------------------------------------------

    2. FICC is proposing to add the following components to the Cash 
Settlement calculation:
    a. The proposed TBA Transaction Adjustment Payment would reflect 
the cash differential that would result when calculating the net 
proceeds of the contractual quantity of an SBO-Destined Trade when 
comparing such trade's Settlement Price and the System Price.\76\
---------------------------------------------------------------------------

    \76\ Pursuant to the MBSD Rules, the term ``System Price'' means 
the price for any trade or any Pool Deliver Obligations or Pool 
Receive Obligation not including accrued interest, established by 
the Corporation on each Business Day, based on current market 
information, for each Eligible Security. See MBSD Rule 1, supra note 
3.
---------------------------------------------------------------------------

    The proposed TBA Transaction Adjustment Payment would be an amount 
equal to the difference between the SBO-Destined Trade's Settlement 
Price and the System Price, multiplied by the contractual quantity of 
such trade, and then divided by 100. To differentiate between the buyer 
and seller of the transaction, an indicator of -1 for the buy trade and 
+1 for the sell trade is multiplied by the contractual quantity of such 
trade.
    For example, the TBA Transaction Adjustment Payment for an SBO-
Destined Trade having a contractual quantity of 5,000,000 would be 
calculated as follows:
    Contractual quantity (sell): 5,000,000.
    SBO-Destined Trade--Settlement Price: 100.25.
    System Price: 100.
    Calculation: 1 x 5,000,000 (100.25-100)/100.
    TBA Transaction Adjustment Payment: $12,500 (credit).
    b. The proposed Expanded Pool Net Transaction Adjustment Payment 
would be included in the event that a Clearing Member misses the 
deadline established by FICC for the Pool Netting process. Unlike the 
Pool Netting process, which runs daily, the Expanded Pool Netting 
process would only run four times per month in accordance with the 
SIFMA designated settlement date. As a result, an Expanded Pool Net 
Transaction Adjustment Payment would only occur four times per month. 
The calculation for the Expanded Pool Net Transaction Adjustment 
Payment is the same as the Pool Net Transaction Adjustment Payment.
    The Expanded Pool Net Transaction Adjustment Payment would reflect 
an amount equal to the difference between the System Price and the SBON 
Trade's Settlement Price or Trade-for-Trade Transaction's Settlement 
Price, as applicable, multiplied by the total current face value of the 
pools used to satisfy such obligation, then divided by 100. To 
differentiate between a buy and sell transaction, an indicator of +1 
for a buy trade and -1 for a sell trade would be multiplied by the 
total current face value of the pools used to satisfy the obligation.
    c. The proposed Do Not Allocate Transaction Adjustment Payment 
would reflect the cash differential among TBA Obligations that have 
been offset through the Do Not Allocate process. The proposed Do Not 
Allocate Transaction Adjustment Payment would be an amount equal to the 
difference between the Settlement Price of the buy and sell TBA 
Obligation transactions multiplied by the contractual quantity. To 
differentiate between a buy and sell transaction, an indicator of -1 
for a buy trade and +1 for a sell trade is multiplied by the 
contractual quantity of such trade.
    For example, the Do Not Allocate Transaction Adjustment Payment for 
a 2,000,000 DNA Request would be calculated as follows:
    Contractual quantity: 2,000,000.
    Trade price of buy transaction: 99.
    Trade price of sell transaction: 100.
    Buy calculation: -1 x 2,000,000 x 99 = -$1,980,000.

[[Page 23859]]

    Sell calculation: 1 x 2,000,000 x 100 = $2,000,000.
    Do Not Allocate Transaction Adjustment Payment: $20,000 (credit).
    d. The proposed TBA Reprice Transaction Adjustment Payment would 
reflect the cash differential between the price of a TBA Obligation 
that was not allocated by a Clearing Member by the deadline established 
by FICC and the price of the replacement TBA Obligation that was 
calculated at the System Price.
    The TBA Reprice Transaction Adjustment Payment would be an amount 
equal to the difference between the TBA Obligation's Settlement Price 
and the System Price, multiplied by the unallocated contractual 
quantity, then divided by 100. To differentiate between a buy and sell 
transaction, an indicator of -1 for a sell trade and +1 for a buy trade 
is multiplied by the unallocated pool's contractual quantity.
    For example, the TBA Reprice Transaction Adjustment Payment for a 
TBA Obligation with a contractual quantity of 5,000,000 that was not 
allocated by a Clearing Member by the deadline established by FICC 
would be calculated as follows:
    Contractual quantity (buy): 5,000,000.
    SBON Trade--Settlement Price: 100.
    System Price: 101.
    Calculation: 1 x 5,000,000 (101-100)/100.
    TBA Reprice Transaction Adjustment Payment: $50,000 (credit).
    e. The proposed Variance Transaction Adjustment Payment would 
capture the variance (i.e., difference) \77\ between a TBA Obligation 
and the current face value of the pools allocated in satisfaction of 
such obligation. Specifically, this payment would reflect the cash 
differential calculated between the SBON Trade's Settlement Price or 
the Trade-for-Trade Transaction's Settlement Price, as applicable, and 
the System Price using the variance of the Pool Netting process or the 
Expanded Pool Netting process, as applicable, based on the current face 
value of the pools used in satisfaction of the trade.
---------------------------------------------------------------------------

    \77\ Pursuant to the SIFMA Guidelines, TBA trades are allowed to 
have a variance equal to plus or minus 0.01% of the dollar amount of 
the transaction agreed to by the parties. As a result of this 
guideline, FICC would capture the variance of TBA Obligations and 
the current face value of the pools allocated in satisfaction of 
such obligations.
---------------------------------------------------------------------------

    The Variance Transaction Adjustment Payment would be an amount 
equal to the difference between the SBON Trade's Settlement Price or 
the Trade-for-Trade Transaction's Settlement Price, as applicable, and 
the System Price, multiplied by the difference between the TBA 
Obligation and the allocated pools used in satisfaction of such trade 
and then divided by 100. To differentiate between a buy and sell 
transaction, an indicator of -1 for a buy trade and +1 for a sell trade 
would be multiplied by the total variance amount.
    For example, the Variance Transaction Adjustment Payment for a sell 
transaction that has one million under allocated and one million over 
allocated \78\ would be calculated as follows:
---------------------------------------------------------------------------

    \78\ Id.
---------------------------------------------------------------------------

    Sell trade price: 100.125.
    Good delivery million #1 allocation: 999,895.77.
    Good delivery million #2 allocation: 1,000,007.13.
    System Price: 99.
    Calculation: 1 x (104.23-7.13) x (99-100.125)/100 = 1 x (97.10) x 
(-1.125)/100.
    Variance Transaction Adjustment Payment: $1.09 (debit).
    f. The proposed Factor Update Adjustment Payment would be 
calculated in the event that updated pool factor information is 
released after the clearing bank's settlement of a pool. This update 
would create a cash differential that would require a debit to the 
seller and a credit to the buyer.
    Example:
    Seller A sells Pool 1 FNMA 30yr 3% coupon to Buyer B with a 
contractual settlement date of April 3, 2017, at a price of 100. 
Because the April 2017 factor is unavailable on the contractual 
settlement date, the pool would settle at the clearing bank with a 
settlement amount based on the factor that was released in March 2017.
    Principle--current face value x price.
    Interest--current face value x coupon/360 x settlement date -1.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Current face
                 Original face                        value         Principal       Interest        Net money                     Factor
--------------------------------------------------------------------------------------------------------------------------------------------------------
1,000,000......................................    1,000,000.00    1,000,000.00          166.67    1,000,166.67  1.00 (March).
1,000,000......................................      990,000.00      990,000.00          165.00      990,165.00  0.99 (April).
                                                                                                ----------------
                                                                                                      10,001.65
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Factor Update Adjustment amount: $10,001.65 (i.e., the difference 
between the March 2017 and April 2017 settlement amounts) Since Seller 
A was overpaid for the original settlement, they will be debited to 
reflect the lower factor and Buyer B will be credited.

G. Delayed Implementation of the Proposed Rule Change

    The proposed changes would become effective within 45 Business Days 
after the date of the Commission's approval of this proposed rule 
change. Prior to the effective date, FICC would add a legend to the 
MBSD Rules to state that the specified changes to the MBSD Rules are 
approved but not yet operative and to provide the date such approved 
changes would become operative. The legend would also include the file 
number of the approved proposed rule change and would state that once 
operative, the legend would automatically be removed from the MBSD 
Rules.

H. Detailed Description of the Proposed Changes to the MBSD Rules

1. Proposed Changes to MBSD Rule 1 (Definitions)
    FICC is proposing to delete the terms ``Broker Give-Up Date'' and 
``Broker Give-Up Trade'' because FICC would no longer disclose a 
Dealer's identity on the Report that FICC issues in connection with 
Brokered Transactions.
    FICC is proposing to amend the term ``Brokered Transaction'' to 
delete the reference to ``give-up'' because FICC would no longer 
disclose a Dealer's identity on the Report that FICC issues in 
connection with Brokered Transactions.
    FICC is proposing to amend the term ``Contractual Settlement Date'' 
to add a reference to ``Stipulated Trade,'' which would be a new 
eligible trade type. FICC is also proposing to replace the term ``SBO 
Trade'' with ``SBON Trade.'' The distinction between these two trade 
types would no longer be required because all obligations that result 
from the TBA Netting process would settle with FICC.
    FICC is proposing to delete the term ``CUSIP Average Price'' and 
``CAP'' because this calculation would be

[[Page 23860]]

replaced by the System Price for SBON Trades.
    FICC is proposing to add the new defined term ``Do Not Allocate'' 
to define the process that would allow Clearing Members to offset 
Trade-for-Trade Transactions and/or SBON Trades with the same Par 
Amount, CUSIP Number and established date in the settlement cycle.
    FICC is proposing to add the new defined term ``Do Not Allocate 
Adjustment Payment'' to define the cash differential that would result 
when Trade-for-Trade Transactions and/or SBON Trades are offset through 
the Do Not Allocate process.
    FICC is proposing to amend the term ``EPN Service'' to clarify that 
this service would be used by Clearing Members to electronically 
communicate pool information to FICC in accordance with the MBSD Rules.
    FICC is proposing to add the new defined term ``Expanded Pool Net 
Transaction Adjustment Payment'' to define the cash differential that 
would result from SBON Trades and Trade-for-Trade Transactions, as 
applicable, that would be included in the Expanded Pool Netting 
process.
    FICC is proposing to add the new defined term ``Expanded Pool 
Netting'' to define the netting process that would occur for SBON 
Trades and Trade-for-Trade Transactions that have missed the cut-off 
time for the Pool Netting process.
    FICC is proposing to add the new defined term ``Factor Update 
Adjustment Payment'' to define the cash differential that would result 
when an updated factor is released after Pool Deliver Obligations and 
Pool Receive Obligations have settled.
    FICC is proposing to delete the term ``Firm CUSIP Average Price'' 
and ``FCAP'' because this calculation would be replaced by the System 
Price for SBON Trades.
    FICC is proposing to add the new defined term ``Guaranteed/Novated 
Obligations'' to define FICC's obligation to deliver or receive a 
Security satisfying TBA criteria and the payment related thereto.
    FICC is proposing to delete the term ``Notification of Settlement'' 
because all SBO-Destined Trades, Trade-for-Trade Transactions and 
Specified Pool Trades would settle with FICC, thus the Notification of 
Settlement process would no longer be required.
    FICC is proposing to amend the term ``Novation'' to mean the 
termination of deliver, receive and related payment obligations between 
Clearing Members and the replacement of such with obligations to 
deliver or receive a Security satisfying certain TBA criteria as 
determined by FICC and the payment obligations related thereto.
    FICC is proposing to amend the term ``Par Amount'' to include a 
reference to ``Stipulated Trades,'' which would be a new trade type, 
and replace the term ``SBO Transaction'' with the term ``SBON Trade.''
    FICC is proposing to add the new defined term ``Pool Settlement 
Position'' to define either a Pool Receive Obligation or a Pool Deliver 
Obligation.
    FICC is proposing to add the new defined term ``SBO'' to define the 
settlement balance orders that constitute the net positions of a 
Clearing Member as a result of the TBA Netting process. The resulting 
transactions from this TBA Netting process are identified as SBON 
Trades.
    FICC is proposing to delete the term ``SBO Contra-Side Member'' 
because FICC would no longer direct Clearing Members to settle trades 
with other Clearing Members.
    FICC is proposing to delete the term ``SBO Market Differential'' 
because this term defines the price for SBO-Destined Trades that are 
settled between other Clearing Members. As described above, FICC would 
no longer direct a Clearing Member to settle its SBO obligation with 
another Clearing Member. As a result, the calculation for determining 
the price would no longer be required.
    FICC is proposing to delete the term ``SBO Net-Out Position'' 
because FICC would no longer offset a Clearing Member's purchase and 
sale transactions with another Clearing Member.
    FICC is proposing to delete the term ``SBO Netted Position'' 
because FICC would no longer offset a Clearing Member's purchase and 
sale transactions with another Clearing Member.
    FICC is proposing to amend the term ``SBO Trade'' to refer to SBON 
Trade. This would be defined as a trade that is settled directly with 
FICC.
    FICC is proposing to delete the existing definition of ``SBON 
Trade'' because FICC would no longer direct a Clearing Member to settle 
with another Clearing Member. FICC has redefined this definition as 
referenced above.
    FICC is proposing to delete the term ``SBOO Trade'' because this 
term refers to a trade that FICC directs a Clearing Member to settle 
with another Clearing Member.
    FICC is proposing to amend the term ``Settlement Price'' to (1) 
include a reference to ``Stipulated Trade,'' which would be a new trade 
type, (2) define the System Price as the Settlement Price for SBON 
Trades and (3) remove the reference to SBOO Trades and the related 
calculation for such trades.
    FICC is proposing to amend the term ``Settlement Value'' to include 
a reference to ``Stipulated Trade,'' which would be a new trade type. 
FICC is also proposing to amend this definition to eliminate the 
reference to SBOO Trade, which is a term that FICC is also proposing to 
delete from the MBSD Rules.
    FICC is proposing to add the new defined term ``Stipulated Trade'' 
because it would be a new trade type that Clearing Members would be 
permitted to submit to MBSD.
    FICC is proposing to add the new defined term ``TBA'' or ``To-Be-
Announced'' to define a contract for the purchase or sale of a 
mortgage-backed security to be delivered at an agreed-upon future date 
because as of the transaction date, the seller has not yet identified 
certain terms of the contract, such as the pool number and number of 
pools, to the buyer.
    FICC is proposing to add the new defined term ``TBA Reprice 
Transaction Adjustment Payment.'' This term would provide FICC's cash 
settlement calculation for the repricing of TBA Obligations that have 
not been allocated by the time established by FICC.
    FICC is proposing to add the new defined term ``TBA Transaction 
Adjustment Payment.'' This term would provide FICC's cash settlement 
calculation for SBO-Destined Trades.
    FICC is proposing to amend the term ``Trade-for-Trade Transaction'' 
to state that this transaction type would be eligible for the Pool 
Netting system and the Expanded Pool Netting system.
    FICC is proposing to add the new defined term ``Variance 
Transaction Adjustment Payment.'' This term would provide FICC's cash 
settlement calculation for SIFMA's permitted variances with respect to 
TBA Obligations.
2. Proposed Changes to MBSD Rule 2 (Members)
    FICC is proposing to amend MBSD Rule 2 to delete the reference to 
``Broker Give-Up Trades'' and replace it with ``Brokered Transactions'' 
because a Dealer's identity would no longer be disclosed in the Reports 
that FICC makes available in connection with Brokered Transactions.
3. Proposed Changes to MBSD Rule 4 (Clearing Fund and Loss Allocation) 
Section 1 (General)
    FICC is proposing to amend this section to reflect that the term 
``Transactions'' as used in MBSD Rule 4 would apply to Stipulated 
Trades.

[[Page 23861]]

4. Proposed Changes to MBSD Rule 5 (Trade Comparison)
Proposed Changes to MBSD Rule 5, Section 1 (General)
    FICC is proposing to amend this section to specify the obligations 
that would be guaranteed and novated at Trade Comparison.
Proposed Changes to MBSD Rule 5, Section 2 (General Responsibilities of 
Members in the Trade Comparison System)
    FICC is proposing to delete a paragraph that requires Clearing 
Members to settle certain Transactions directly with their applicable 
settlement counterparties.
Proposed Changes to MBSD Rule 5, Section 7 (Broker Give-Up Trades)
    FICC is proposing to delete this section in its entirety because 
the identities of Dealers to a Brokered Transaction would no longer be 
disclosed in the Reports issued by FICC.
Proposed Changes to MBSD Rule 5, Section 8 (Binding Nature of 
Comparisons)
    FICC is proposing to include a reference to the ``Open Commitment 
Report,'' which is currently a report provided to Clearing Members.
Proposed Changes to MBSD Rule 5, Section 9 (Cancellation and 
Modification of Trade Data by Members)
    FICC is proposing to amend this section to state that trade data 
would be submitted to FICC.
Proposed Changes to MBSD Rule 5, Section 12 (Obligations)
    FICC is proposing to amend this section to state that settlement 
obligations between each buyer and seller, respectively, would be 
established with FICC in connection with SBO-Destined Trades, Trade-
for-Trade Transactions, Specified Pool Trades and Stipulated Trades.
Proposed Changes to MBSD Rule 5, Section 13 (Novation)
    FICC is proposing to amend this section to state the following: (1) 
FICC will guarantee and novate Specified Pool Trades, Stipulated Trades 
and Trade-for-Trade Transactions that meet the requirements of the MBSD 
Rules and have been entered into in good faith; (2) FICC will not 
novate Specified Pool Trades, Stipulated Trades or Trade-for-Trade 
Transactions that are partially compared; (3) To the extent a partially 
compared Specified Pool Trade, Stipulated Trade or Trade-for-Trade 
Transaction becomes Fully Compared, FICC will novate such trade; (4) At 
the time that a Specified Pool Trade, Stipulated Trade or Trade-for-
Trade Transaction is novated to FICC, such trade shall cease to be 
bound by any bilateral agreement between the parties to the trade with 
respect to the deliver, receive and related payment obligations; 
however, if the trade becomes uncompared or is cancelled, such trade 
shall be governed by the bilateral agreement that governs such trade 
prior to the novation.
5. Proposed Changes to MBSD Rule 6 (TBA Netting) Section 1 (Netting)
    FICC is proposing to amend this section to delete the provisions 
that state that FICC would direct Clearing Members to settle SBO Trades 
with their original counterparties or other Clearing Members. FICC is 
also deleting its calculation of the Settlement Price of such trades. 
FICC is proposing amend this section to state that (1) TBA Netting 
would result in SBON Trades, (2) FICC would assign one or more SBON 
Trades to offset SBO Net Open Positions \79\ and (3) the Settlement 
Price for SBON Trades would be the System Price.
---------------------------------------------------------------------------

    \79\ Pursuant to the MBSD Rules, the term ``SBO Net Open 
Position'' means any SBO-Destined Trade that cannot be offset 
pursuant to the MBSD Rules. See MBSD Rule 1, supra note 3.
---------------------------------------------------------------------------

6. Proposed Changes to MBSD Rule 7 (Pool Comparison)
Proposed Changes to MBSD Rule 7, Section 1 (Pool Comparison)
    FICC is proposing to amend this section to state that Clearing 
Members with Stipulated Trades would be required to allocate and submit 
Pool Instructs for Pool Comparison. FICC is also proposing to amend 
this section to state that Clearing Members would be required to notify 
FICC of their pool allocations to satisfy open TBA Obligations and 
Stipulated Trade obligations, and that FICC would submit pool details 
on behalf of Clearing Members that do not submit such pool details by 
the time established by FICC. Because FICC would submit such details on 
behalf of Clearing Members, FICC is proposing to eliminate the 
provision that provides that pool details not submitted by Clearing 
Members would be identified as uncompared. FICC is also proposing to 
clarify that the data submitted by each contra-party would be submitted 
to the Corporation.
Proposed Changes to MBSD Rule 7, Section 2 (Cancellation and 
Modification of Data by Clearing Members)
    In connection with a Clearing Member's request to cancel data, FICC 
is proposing to amend this section to state that data that has been 
submitted by a Clearing Member and affirmed by FICC would be deemed 
compared.
Proposed Changes to MBSD Rule 7, Section 3 (Do Not Allocate Process for 
TBA Obligations)
    FICC is proposing to include this new section to describe the Do 
Not Allocate process. This process would allow Clearing Members that 
have two or more Trade-for-Trade Transactions and/or SBON Trades with 
the same Par Amount, CUSIP Number and established date in the 
settlement cycle to offset such obligations against one another. This 
section would provide the process for initiating a Do Not Allocate 
request and the process for cancelling such request.
Proposed Changes to MBSD Rule 7, Section 4 (Pool Settlement Positions 
for Stipulated Trades)
    FICC is proposing to include this new section to describe Pool 
Settlement Positions, allocation of Pool Deliver Obligations and Pool 
Receive Obligations, and the process for substitutions regarding 
Stipulated Trades
Proposed Changes to MBSD Rule 7, Section 5 (Pool Deliver Obligations 
and Pool Receive Obligations for Specified Pool Trades)
    FICC is proposing to include this new section to describe the Pool 
Deliver Obligations and Pool Receive Obligations for Specified Pool 
Trades.
7. Proposed Changes to MBSD Rule 8 (Pool Netting System)
Proposed Changes to MBSD Rule 8, Section 2 (Eligibility for Pool 
Netting)
    FICC is proposing to refer to this section as ``Section 2A'' rather 
than ``Section 2.'' In addition, FICC is proposing to delete the 
provision that requires pools that are ineligible for the Pool Netting 
process to be settled bilaterally with their settlement counterparties.
Proposed Changes to MBSD Rule 8, Section 2B (Eligibility for Expanded 
Pool Netting)
    FICC is proposing to amend Rule 8 to include new ``Section 2B.'' 
This section would establish a secondary pool netting process formally 
referred to as the Expanded Pool Netting process.

[[Page 23862]]

Proposed Changes to MBSD Rule 8, Section 3 (Calculation of Pool Net 
Settlement Positions)
    FICC is proposing to amend this section to apply the calculation of 
Pool Net Settlement Positions to Eligible Securities processed by the 
Expanded Pool Netting process.
Proposed Changes to MBSD Rule 8, Section 4 (Allocation of Pool Deliver 
and Pool Receive Obligations)
    FICC is proposing to amend this section to establish that Pool 
Deliver Obligations and Pool Receive Obligations would apply to 
Eligible Securities processed by the Expanded Pool Netting process.
Proposed Changes to MBSD Rule 8, Section 6 (Novation of Obligations)
    FICC is proposing to amend this paragraph to state that novation 
would occur with respect to the Pool Deliver Obligations and Pool 
Receive Obligations.
Proposed Changes to MBSD Rule 8, Section 7 (Obligation To Submit SBOO 
and SBON Trades to Pool Netting)
    FICC is proposing to delete the reference to ``SBOO.'' This term 
refers to SBO-Destined Trades that are settled between Clearing Members 
that are not original counterparties to such trades. This term would no 
longer be required because FICC is proposing to treat itself as the 
settlement counterparty to all SBO-Destined Trades. FICC is also 
proposing to amend this section to reflect that Trade-for-Trade 
Transactions would have to be submitted into the Pool Netting system.
8. Proposed Changes to MBSD Rule 10 (Notification of Settlement)
    FICC is proposing to delete this rule because all SBO-Destined 
Trades, Trade-for-Trade Transactions and Specified Pool Trades would 
settle with FICC. As a result, the Notification of Settlement process 
would no longer be required.
9. Proposed Changes to MBSD Rule 11 (Cash Settlement)
    FICC is proposing to delete the ``SBO Market Differential'' 
component and replace it with the term ``TBA Transaction Adjustment 
Payment.'' The term ``SBO-Market Differential'' calculates the price 
for SBO Trades originally among different counterparties as well as SBO 
Trades originally among the same counterparties. This calculation would 
be no longer required because all SBO Trades (referred to in proposed 
rules as ``SBON Trades'') would settle with FICC as the settlement 
counterparty. As a result, FICC is proposing to replace the ``SBO 
Market Differential'' component and replace it with the term 
``Transaction Adjustment Payment.'' This component would calculate an 
SBO-Destined Trade in an amount equal to the difference between such 
trade's Settlement Price and System Price.
    FICC is also proposing to add the following new components to the 
Cash Settlement calculation: (a) TBA Transaction Adjustment Payment, 
(b) Expanded Pool Net Transaction Adjustment Payment, (c) Do Not 
Allocate Transaction Adjustment Payment, (d) TBA Reprice Transaction 
Adjustment Payment, (e) Variance Transaction Adjustment Payment, and 
(f) Factor Update Adjustment Payment.
10. Proposed Changes to MBSD Rule 12 (Fails Charge)
    FICC is proposing to amend this section to state that Clearing 
Members would be responsible for a fails charge if FICC receives an 
allocation of TBA Obligations prior to the established deadline and is 
unable to transmit the notification until after such time.
11. Proposed Changes to MBSD Rule 17 (Procedures for When the 
Corporation Ceases to Act) Section 2 (Action by the Corporation--Close-
Out Procedure)
    FICC is proposing to delete a provision that relates to the 
Notification of Settlement process. FICC is also proposing to amend 
certain provisions that are no longer necessary because FICC has 
specified the obligations that it novates in the proposed definition 
for the term ``Guaranteed/Novated Obligations.''
12. Proposed Changes to MBSD Rule 17A (Corporation Default)
    FICC is proposing to delete the provision that establishes Novation 
for all Compared Trades. This provision is no longer necessary because 
SBO-Destined Trades, Specified Pool Trades, Stipulated Trades and 
Trade-for-Trade Transactions would occur at trade comparison.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Exchange Act requires, in part, that 
the rules of the clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\80\
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC believes that the proposed change to novate Specified Pool 
Trades, Stipulated Trades, and Trade-for-Trade Transactions at trade 
comparison would promote the prompt and accurate clearance and 
settlement of securities transactions as required by Section 
17A(b)(3)(F) of the Exchange Act, because this change would provide 
Clearing Members with legal certainty early in the trading cycle that 
FICC would become the legal counterparty to each Clearing Member (i.e., 
FICC would become the buyer to every seller and the seller to every 
buyer) as set forth in the proposed rule change. The legal certainty 
would enable Clearing Members that submit such transactions to FICC to 
know early in the trade processing cycle that they have only one party 
(that is, FICC) with which to interact following trade comparison. FICC 
believes that this would, in turn, simplify processing for Clearing 
Members and thereby promote the prompt and accurate clearance and 
settlement of securities transactions as required by Section 
17A(b)(3)(F) of the Exchange Act.\81\
---------------------------------------------------------------------------

    \81\ Id.
---------------------------------------------------------------------------

    FICC also believes that the proposed change to establish itself as 
the settlement counterparty to SBO-Destined Trades, Specified Pool 
Trades, Stipulated Trades, and Trade-for-Trade Transactions at trade 
comparison would promote the prompt and accurate clearance and 
settlement of securities transactions as required by Section 
17A(b)(3)(F) of the Exchange Act because all such trades would settle 
directly with FICC. As such, the settlement of all such trades would be 
governed by the MBSD Rules (as opposed to potentially being subject to 
settlement mechanisms outside of FICC). FICC believes that this would 
streamline settlement processing because the MBSD Rules would govern 
all such processing and thereby promote the prompt and accurate 
clearance and settlement of securities transactions as required by 
Section 17A(b)(3)(F) of the Exchange Act.\82\
---------------------------------------------------------------------------

    \82\ Id.
---------------------------------------------------------------------------

    FICC believes that the proposed rule changes associated with 
providing the operational efficiencies to Clearing Members noted in 
this filing would also promote the prompt and accurate clearance and 
settlement of securities transactions as required by Section 
17A(b)(3)(F) of the Exchange Act. These proposed rule changes are as 
follows: (a) The submission of Pool Instructs by Clearing Members would 
become optional because FICC would be permitted to submit on behalf 
Clearing Members, (b) Clearing Members would no longer to be required 
to fulfill Notification of Settlement obligations because all of the 
above-referenced

[[Page 23863]]

transactions would settle with FICC, (c) Clearing Members would have 
the ability to exclude TBA Obligations from the pool allocation 
process, netting and securities settlement through the DNA process, (d) 
Clearing Members would have the ability to have their pools netted by 
the Expanded Pool Netting process in the event that such Clearing 
Members miss the established deadline for the initial Pool Netting 
process, (e) Dealer Netting Members would remain anonymous with the 
elimination of the ``give-up'' process for Brokered Transactions, (f) 
Clearing Members would be allowed to submit SBO-Destined Trades in all 
trade sizes, and (g) Clearing Members would be allowed to submit 
Stipulated Trades as a new trade type. All of these proposed changes 
would either eliminate operational steps on the part of Clearing 
Members (such as, for example, the elimination of the Notification of 
Settlement process where Clearing Members currently have required 
processing obligations) or would enable Clearing Members to take 
advantage of MBSD's processing efficiencies (such as enabling Clearing 
Members to submit SBO-Destined Trades in all trade sizes). FICC 
believes that the elimination of operational steps on the part of 
Clearing Members and the provision of further opportunities for 
Clearing Members to take advantage of MBSD's processing would 
streamline MBSD processing as a whole for Clearing Members and further 
extend the benefits of MBSD's clearance and settlement services to 
Clearing Members, and would thereby promote the prompt and accurate 
clearance and settlement of securities transactions as required by 
Section 17A(b)(3)(F) of the Exchange Act.\83\
---------------------------------------------------------------------------

    \83\ Id.
---------------------------------------------------------------------------

    FICC believes that the proposed changes to the cash settlement 
components, which are necessitated from many of the proposed 
operational efficiencies discussed in this filing, would also promote 
the prompt and accurate clearance and settlement of securities 
transactions as required by Section 17A(b)(3)(F) of the Exchange Act. 
These changes would allow FICC to continue to remain in a cash neutral 
position--neither owing Clearing Members funds nor having a surplus of 
funds on FICC's books and records. By allowing FICC to remain flat with 
respect to cash settlement items, the proposed rule changes would 
maintain the efficiency of MBSD's cash settlement process, which is an 
automated system for the settlement of funds. As such, FICC believes 
that adding the proposed changes to its automated system for funds 
settlement would promote the prompt and accurate clearance and 
settlement of securities transactions as required by Section 
17A(b)(3)(F) of the Exchange Act.\84\
---------------------------------------------------------------------------

    \84\ Id.
---------------------------------------------------------------------------

    For these reasons, FICC believes that the proposed changes are 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to FICC, in particular Section 
17A(b)(3)(F).\85\
---------------------------------------------------------------------------

    \85\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe that the proposed rule changes as described 
in this filing would impose any burden on competition that is not 
necessary or appropriate in furtherance of the Exchange Act.\86\
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    While the proposed rule changes would require Clearing Members to 
make technological changes and thereby incur costs in doing so and this 
could burden the Members competitively, the proposed rules changes have 
been structured to better meet the needs of Clearing Members. 
Specifically, the proposed rule changes would meet Clearing Members' 
needs by:
     Novating Specified Pool Trades, Stipulated Trades, and 
Trade-for-Trade Transactions at trade comparison and thereby providing 
Clearing Members with legal certainty early in the trading cycle that 
FICC would become the legal counterparty to each Clearing Member (i.e., 
FICC would become the buyer to every seller and the seller to every 
buyer) for such trades,
     eliminating operational steps on the part of Clearing 
Members (such as making the submission of Pool Instructs by Clearing 
Members optional, eliminating the ``give-up'' process for Brokered 
Transactions, and eliminating the Notification of Settlement process 
and Clearing Member obligations related thereto) and thereby 
streamlining MBSD processing as a whole for Clearing Members,
     enabling Clearing Members to take advantage of MBSD's 
processing efficiencies (such as, providing Clearing Members with the 
ability to exclude TBA Obligations from the pool allocation process, 
netting and securities settlement through the DNA process, allowing 
Clearing Members to submit SBO-Destined Trades in all trade sizes, and 
allowing Clearing Members to submit Stipulated Trades as a new trade 
type) and thereby further extending the benefits of MBSD's clearance 
and settlement services to Clearing Members,
     structuring the proposed changes to the cash settlement 
process, which are necessitated from many of the proposed operational 
efficiencies discussed in this filing, in a manner that would maintain 
the efficiency of the automated nature of the MBSD cash settlement 
process by calculating debits and credits to Clearing Members as 
applicable (and as has been described in detail in this filing) and 
allowing FICC to remain flat with respect to applicable cash settlement 
items.
    Moreover, FICC believes that the proposed rule changes are 
appropriate in that such changes reflect Clearing Members' feedback. 
Consequently, FICC believes that any burden on competition derived from 
the proposed rule changes would be necessary and appropriate in support 
of the beneficial objectives of the proposed rule changes, which would 
be made in furtherance of the Exchange Act, as described above.
    Additionally, FICC believes that any such burden on competition 
derived from the proposed rule changes would not be significant because 
Clearing Members have requested these changes and were involved in 
developing the business requirements.
    The proposed rule changes would result in the removal of the option 
for Clearing Members to settle trades bilaterally amongst themselves 
because, as has been described in detail in this filing, FICC would 
treat itself as the settlement counterparty to all eligible 
transactions (except Option Contracts). FICC does not believe that this 
would impose a burden on competition. Specifically, FICC believes that 
trades, whether they settle with FICC or another counterparty, must 
settle; FICC does not believe that settling with FICC imposes greater 
costs on Clearing Members than settling outside of FICC. Therefore, 
FICC does not believe that the proposal imposes a burden on competition 
that is not appropriate in furtherance of the Exchange Act because all 
Clearing Members need to settle their trades, and FICC believes that 
there is an absence of any significant costs associated with its 
proposal that Clearing Members settle all Transactions (other than 
Option Contracts) with FICC.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    FICC has not received or solicited any written comments relating to 
this proposal. FICC will notify the

[[Page 23864]]

Commission of any written comments received by FICC.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2017-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-FICC-2017-012. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of FICC and on 
DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FICC-2017-012 and should be 
submitted on or before June 14, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\87\
---------------------------------------------------------------------------

    \87\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10584 Filed 5-23-17; 8:45 am]
BILLING CODE 8011-01-P