Document ID: SEC-2021-0779-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2021-06-01T04:00Z

[Federal Register Volume 86, Number 103 (Tuesday, June 1, 2021)]
[Notices]
[Pages 29334-29348]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-11407]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92014; File No. SR-FICC-2021-003]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Add the Sponsored GC 
Service and Make Other Changes

May 25, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 12, 2021, Fixed Income Clearing Corporation (``FICC'') 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.\3\ 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.
    \3\ On May 12, 2021, FICC filed this proposed rule change as an 
advance notice (SR-FICC-2021-801) with the Commission pursuant to 
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 
19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of 
the advance notice is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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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 FICC 
Government

[[Page 29335]]

Securities Division (``GSD'') Rulebook (``Rules'') \4\ in order to (i) 
add a new service offering, which would allow a Sponsoring Member to 
submit for clearing Repo Transactions with its Sponsored Members on 
securities that are represented by Generic CUSIP Numbers and held under 
a triparty custodial arrangement (the ``Sponsored GC Service''), (ii) 
add language to Rule 3A to allow FICC to recognize, for Capped 
Contingency Liquidity Facility[supreg] (``CCLF'') calculation purposes, 
any offsetting settlement obligations as between a Sponsoring Member's 
netting account and its Sponsoring Member Omnibus Account to ensure 
that a Sponsoring Member's CCLF obligation is calculated in a manner 
that more closely aligns with the liquidity risk associated with 
Sponsored Member Trades, (iii) remove the requirement from Section 2 of 
Rule 3A that a Sponsoring Member provide a quarterly representation to 
FICC that each of its Sponsored Members is a ``qualified institutional 
buyer'' as defined in Rule 144A of the Securities Act of 1933, as 
amended (``Rule 144A''), or is a legal entity that, although not 
organized as an entity specifically listed in paragraph (a)(1)(i) of 
Rule 144A, satisfies the financial requirements necessary to be a 
``qualified institutional buyer'' as specified in that paragraph, and 
(iv) make a clarification, certain corrections, and certain technical 
changes, as described in greater detail below.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
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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
    The purpose of the proposed rule change is to amend the Rules to 
(i) add a new service offering, the Sponsored GC Service, (ii) add 
language to Rule 3A to allow FICC to recognize, for CCLF calculation 
purposes, any offsetting settlement obligations as between a Sponsoring 
Member's netting account and its Sponsoring Member Omnibus Account to 
ensure that a Sponsoring Member's CCLF obligation is calculated in a 
manner that more closely aligns with the liquidity risk associated with 
Sponsored Member Trades, (iii) remove the requirement from Section 2 of 
Rule 3A that a Sponsoring Member provide a quarterly representation to 
FICC that each of its Sponsored Members is a ``qualified institutional 
buyer'' as defined in Rule 144A, or is a legal entity that, although 
not organized as an entity specifically listed in paragraph (a)(1)(i) 
of Rule 144A, satisfies the financial requirements necessary to be a 
``qualified institutional buyer'' as specified in that paragraph, and 
(iv) make a clarification, certain corrections, and certain technical 
changes, as described in greater detail below.
(i) Background
    Under Rule 3A (Sponsoring Members and Sponsored Members), certain 
Netting Members are permitted to sponsor, as Sponsoring Members, 
``qualified institutional buyers'' as defined by Rule 144A, and certain 
legal entities that, although not organized as entities specifically 
listed in paragraph (a)(1)(i) of Rule 144A, satisfy the financial 
requirements necessary to be ``qualified institutional buyers'' as 
specified in that paragraph into FICC/GSD membership.\5\ Under Rule 3A, 
a Sponsoring Member is permitted to submit to FICC for comparison, 
Novation, and netting certain types of eligible delivery versus payment 
(``DVP'') securities transactions (``Sponsored Member Trades'').\6\ A 
Sponsoring Member is required to establish an omnibus account at FICC 
for its Sponsored Members' positions arising from such Sponsored Member 
Trades (``Sponsoring Member Omnibus Account''), which is separate from 
the Sponsoring Member's regular netting accounts.\7\ For operational 
and administrative purposes, FICC interacts solely with the relevant 
Sponsoring Member as processing agent for purposes of the day-to-day 
satisfaction of its Sponsored Members' obligations to or from FICC, 
including their securities and funds-only settlement obligations.\8\
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    \5\ Rule 3A, Section 3(a), supra note 4.
    \6\ Rule 3A, Section 5, supra note 4. The term ``Sponsored 
Member Trade'' means a transaction that satisfies the requirements 
of Section 5 of Rule 3A and that is (a) between a Sponsored Member 
and its Sponsoring Member or (b) between a Sponsored Member and a 
Netting Member. Rule 1, supra note 4.
    \7\ The term ``Sponsoring Member Omnibus Account'' means an 
Account maintained by a Sponsoring Member that contains the activity 
of its Sponsored Members that is submitted to FICC. A Sponsoring 
Member may elect to establish one or more Sponsoring Member Omnibus 
Accounts. Each Sponsoring Member Omnibus Account may contain 
activity within the meaning of clause (a) of the Sponsored Member 
Trade definition or activity within the meaning of clause (b) of 
such definition. The Sponsoring Member Omnibus Account shall be 
separate from the Accounts associated with the Sponsoring Member's 
activity as a Netting Member except as contemplated by Sections 10, 
11 and 12 of Rule 3A and under the Sponsoring Member Guaranty. Rule 
1, supra note 4.
    \8\ Rule 3A, Sections 5, 6(b), 7(a), 8(a), 8(c), 9(a), and 9(c), 
supra note 4.
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    The current Sponsoring Member/Sponsored Member Service (the 
``Service''), which has been in existence since 2005, has seen a steady 
increase in the number of Sponsoring Members, in the number of 
Sponsored Members and in the volume of Sponsored Member Trades over the 
past three years.\9\ One of the main benefits of the Service is that it 
provides Sponsoring Members with the ability to offset on their balance 
sheets their obligations to FICC on Sponsored Member Trades with their 
Sponsored Members against their obligations to FICC on other eligible 
FICC-cleared activity, including trades with other Netting Members.
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    \9\ In March 2017, there was one Sponsoring Member and 1422 
Sponsored Members. See Securities Exchange Act Release No. 80236 
(March 14, 2017), 82 FR 14265 (March 17, 2017) (SR-FICC-2017-003). 
The Service currently has approximately 27 Sponsoring Members and 
approximately 1894 Sponsored Members. As of March 31, 2017, the 
aggregate Purchase Price of outstanding Sponsored Member Trades was 
approximately $32.2 billion. As of March 31, 2021, the aggregate 
Purchase Price of outstanding Sponsored Member Trades was 
approximately $286 billion.
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    In addition, the Service allows Sponsoring Members to take lesser 
capital charges for Repo Transactions with Sponsored Members than would 
be required were such transactions uncleared.
    By alleviating balance sheet and capital constraints on Sponsoring 
Members, the Service allows eligible institutional firms to engage in 
greater activity than may otherwise be feasible, which in turn 
increases the liquidity available in the repo market. Such greater 
liquidity provides stability in the market and additionally increases 
potential returns for investors in both cash provider institutions and 
collateral provider institutions. For example, the increased liquidity 
the Service provides allows investors in institutional firms that act 
as cash provider Sponsored Members to invest more of their cash than 
may otherwise be possible outside of clearing, which in turn allows 
such investors the ability to earn a greater return as a result of 
their institutional

[[Page 29336]]

firms' participation in the Service. Likewise, for investors in 
institutional firms that act as collateral provider Sponsored Members, 
the increased liquidity ensures more consistent financing opportunities 
than may otherwise be available outside of clearing. Such consistent 
access to financing may increase the amount of cash the collateral 
provider institutional firms have to deploy into other investment 
strategies, which in turn allows their investors the opportunity to 
earn a greater return as a result of the institutional firms' 
participation in the Service.
    FICC believes that enabling more repo transactions to clear through 
FICC mitigates the risk of a large-scale exit by institutional firms 
from the U.S. financial market in a stress scenario.\10\ To that point, 
during the recent market volatility in the first quarter of 2020, the 
Service in fact saw its peak volume of approximately $564 billion, 
rather than a decline, and no discernable impact to volumes 
notwithstanding the default of a Netting Member. In addition, no 
Sponsored Members defaulted during that volatile period.
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    \10\ The U.S. financial market experienced such a liquidity 
drain from the repo market in the 2007-2008 financial crisis when 
the bankruptcy of Lehman Brothers gave rise to concerns among cash 
provider institutional firms about the creditworthiness of their 
borrower counterparties. See Ben S. Bernanke, The Courage to Act: A 
Memoir of a Crisis and its Aftermath 397 (2017) (discussing ``the 
paralyzing uncertainty [on the part of repo lenders] about banks' 
financial health'' in 2007 and 2008).
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    In recent years, FICC has taken steps to enable Sponsoring Members 
to submit term (rather than overnight) repo transactions for clearing. 
Specifically, in 2019, the Commission approved rule changes that added 
a new close-out mechanism and adjusted the calculation of certain 
funds-only settlement amounts for Sponsored Member Trades that include 
haircuts.\11\ FICC believes that having more centrally cleared term 
repo transactions would promote the prompt and accurate clearance and 
settlement of securities transactions because more securities 
transactions would benefit from FICC's risk management and guaranty of 
settlement.
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    \11\ See Securities Exchange Act Release No. 88262 (February 21, 
2020), 85 FR 11401 (February 27, 2020) (SR-FICC-2019-007).
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    FICC also believes that enabling more term (rather than overnight) 
repo activity in the Service can serve to help reduce repo rate 
volatility in the market and, in turn, help to avoid events like those 
that occurred in September 2019, when a temporary reduction in 
overnight reverse repo activity by money market funds, including 
through the Service, contributed in part to the repo rate volatility on 
those days.\12\
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    \12\ Gara Afonso et al., Federal Reserve Bank of New York, Staff 
Report No. 918: The Market Events of Mid-September 2019 (March 
2020), available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr918.pdf.
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    Although the aforementioned rule changes have resulted in some 
Sponsoring Members transacting term Repo Transactions with certain of 
their Sponsored Member clients, FICC has received additional feedback 
from several market participants that the Service's current requirement 
that all Sponsored Member Trades be margined exclusively in cash 
through FICC's funds-only settlement process is not conducive to 
certain cash provider Sponsored Member clients, particularly money 
market funds and other mutual funds, being able to transact term Repo 
Transactions with their Sponsoring Members in central clearing. 
Specifically, money market funds and other mutual funds are not 
generally operationally equipped to provide or receive cash margin in 
connection with their term repo activity (either bilaterally or in 
central clearing). These funds depend on transfers of securities to 
maintain required margin, and typically rely on a tri-party repo 
clearing bank to administer the collateral management on such trades. 
In particular, the tri-party repo clearing bank calculates the mark-to-
market change in value of the securities underlying each repo 
transaction and facilitates the transfer of securities necessary to 
ensure the value of the securities equals a specified percentage of the 
outstanding principal amount of the repo transaction.
    In light of this feedback and in order to support more repo 
activity (particularly term repo activity) to be able to be transacted 
in central clearing, FICC is proposing to add the Sponsored GC Service, 
which would allow Sponsoring Members and their Sponsored Member clients 
to execute Repo Transactions with each other on a general collateral 
basis in the same asset classes as are currently eligible for Netting 
Members to transact in through FICC/GSD's existing GCF Repo[supreg] 
Service. Such Repo Transactions would be allowed to settle on the tri-
party repo platform of a Sponsored GC Clearing Agent Bank (as defined 
below) in a similar manner to the way Sponsoring Members and Sponsored 
Members settle tri-party repo transactions with each other outside of 
central clearing, thereby making it more operationally efficient for 
them to transact Repo Transactions (particularly term Repo 
Transactions) with each other through FICC.
(ii) Add a New Service Offering, the Sponsored GC Service
(A) Key Parameters of the Proposed Sponsored GC Service
    As described above, a Sponsoring Member would be permitted to 
submit to FICC for Novation the End Leg of Repo Transactions with its 
Sponsored Member client that would be executed in one of a series of 
new Generic CUSIP Numbers that would be registered with CUSIP Global 
Services by FICC in connection with the proposed Sponsored GC Service 
(each a ``Sponsored GC Trade''). The proposed schedule of securities 
that would be eligible under each of the new Generic CUSIP Numbers that 
would be established for the proposed Sponsored GC Service would be 
identical to the current schedule of securities that are eligible under 
each of the existing Generic CUSIP Numbers that is currently 
established for the GCF Repo Service, including (i) U.S. Treasury 
Securities maturing in ten (10) years or less, (ii) U.S. Treasury 
Securities maturing in thirty (30) years or less, (iii) Non-Mortgage-
Backed U.S. Agency Securities, (iv) Federal National Mortgage 
Association (``Fannie Mae'') and Federal Home Loan Mortgage Corporation 
(``Freddie Mac'') Fixed Rate Mortgage-Backed Securities, (v) Fannie Mae 
and Freddie Mac Adjustable Rate Mortgage-Backed Securities, (vi) 
Government National Mortgage Association (``Ginnie Mae'') Fixed Rate 
Mortgage-Backed Securities, (vii) Ginnie Mae Adjustable Rate Mortgage-
Backed Securities, (viii) U.S. Treasury Inflation-Protected Securities 
(``TIPS'') and (ix) U.S. Treasury Separate Trading of Registered 
Interest and Principal of Securities (``STRIPS'').\13\
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    \13\ FICC has decided to use a new series of Generic CUSIP 
Numbers in connection with the proposed Sponsored GC Service rather 
than utilizing the existing Generic CUSIP Numbers employed for GCF 
Repo Transactions in order to avoid any operational processing 
errors that could otherwise result if a trade intended for the 
proposed Sponsored GC Service was inadvertently processed as a GCF 
Repo Transaction or vice versa. To that end, a trade submitted for 
the proposed Sponsored GC Service would be automatically rejected by 
FICC if not submitted in one of the nine new Generic CUSIP Numbers 
earmarked for the proposed Sponsored GC Service, and a GCF Repo 
Transaction would be rejected by FICC if not submitted in one of the 
nine Generic CUSIP Numbers dedicated to the GCF Repo Service.
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    Consistent with FICC's processing of Repo Transactions in its 
existing GCF Repo Service, each Sponsored GC Trade would be required to 
be fully collateralized with securities eligible under the applicable 
Generic CUSIP Number and/or cash. However, consistent with the existing 
Service,

[[Page 29337]]

Sponsoring Members and Sponsored Members would be permitted to transfer 
a haircut on a Sponsored GC Trade so that the value of the securities 
at the Start Leg (the ``GC Start Leg Market Value'') exceeds 100% of 
the initial principal balance of the Sponsored GC Trade.
    Consistent with the manner in which tri-party repo transactions are 
settled today outside of central clearing, the Start Leg of a Sponsored 
GC Trade would settle on a trade for trade basis on a Sponsored GC 
Clearing Agent Bank's tri-party repo platform between the Sponsoring 
Member and the Sponsored Member. Novation to FICC of the End Leg of a 
Sponsored GC Trade would occur at the time when all of the following 
requirements have been satisfied on a given Business Day: (i) The trade 
data on the Sponsored GC Trade has been submitted to FICC by the 
Sponsoring Member pursuant to Rule 6A by the deadline set forth in the 
proposed new Schedule of Sponsored GC Trade Timeframes, (ii) the data 
on the Sponsored GC Trade has been compared in the Comparison System 
pursuant to Rule 6A, (iii) the Start Leg of the Sponsored GC Trade has 
fully settled at the Sponsored GC Clearing Agent Bank by the deadline 
set forth in the proposed new Schedule of Sponsored GC Trade 
Timeframes, (iv) the Sponsored GC Clearing Agent Bank has, pursuant to 
communication links, formats, timeframes, and deadlines established by 
FICC for such purpose, provided to FICC a report containing such data 
as FICC may require from time to time, including information regarding 
the specific Eligible Securities that were delivered in the settlement 
of the Start Leg of the Sponsored GC Trade (the ``Purchased GC Repo 
Securities''), and (v) FICC determines that the data contained in such 
report matches the data on the Sponsored GC Trade submitted by the 
Sponsoring Member to the Comparison System.
    Accrued repo interest on Sponsored GC Trades would be paid and 
collected by FICC on a daily basis. If on any Business Day, the market 
value of the Purchased GC Repo Securities is less than the GC Start Leg 
Market Value, then the Sponsoring Member or Sponsored Member that 
transferred the securities in the Start Leg (the ``GC Funds Borrower'') 
would be required deliver to FICC (and FICC would be required to 
deliver to the GC Funds Borrower's pre-Novation counterparty) 
additional Eligible Securities that are represented by the same Generic 
CUSIP Number as the Purchased GC Repo Securities (``GC Comparable 
Securities'') and/or cash, such that the market value of the Purchased 
GC Repo Securities (inclusive of the newly transferred securities and 
cash) is at least equal to the GC Start Leg Market Value. If on any 
Business Day, the market value of the Purchased GC Repo Securities is 
greater than the GC Start Leg Market Value, the Sponsoring Member or 
Sponsored Member that received the securities in the start leg (the 
``GC Funds Lender'') would be required to return to FICC (and FICC 
would be required to return to the relevant GC Funds Borrower) 
Purchased GC Repo Securities such that the market value of the 
remaining Purchased GC Repo Securities remains at least equal to the GC 
Start Leg Market Value.
    Such additional securities and/or cash must be delivered within the 
timeframe set forth in the proposed new Schedule of Sponsored GC Trade 
Timeframes. Any securities or cash transferred by the GC Funds Borrower 
pursuant to these requirements would constitute Purchased GC Repo 
Securities, and any Purchased GC Repo Securities transferred by the GC 
Funds Lender pursuant to these requirements would, following such 
transfer, no longer constitute Purchased GC Repo Securities.
    In addition, consistent with the processing of Repo Transactions in 
FICC's existing GCF Repo Service, a GC Funds Borrower would be 
permitted to substitute for Purchased GC Repo Securities, GC Comparable 
Securities and/or cash within the timeframe set forth in the proposed 
new Schedule of Sponsored GC Trade Timeframes.
    In order to facilitate settlement, FICC would direct each GC Funds 
Borrower and GC Funds Lender to make any payment or delivery due to 
FICC in respect of a Sponsored GC Trade (except for certain funds-only 
settlement obligations, as discussed below) directly to the relevant 
Member's pre-Novation counterparty. As a result, each transfer of 
Purchased GC Repo Securities and daily repo interest would be made 
directly between the relevant GC Funds Borrower and GC Funds Lender 
through the tri-party repo platform of a Sponsored GC Clearing Agent 
Bank.\14\
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    \14\ FICC does not believe it is appropriate to require that 
each payment and delivery under a Sponsored GC Trade be made from 
(or to) the Sponsoring Member to (or from) FICC and separately from 
(or to) FICC to (or from) the Sponsored Member because inserting 
FICC in the middle of the payments and deliveries in this fashion 
would require substantial changes in operational processes for both 
Sponsored Members and Sponsoring Members. FICC does not believe such 
operational changes to be necessary in light of the fact that there 
can only be two pre-Novation counterparties involved in the 
settlement of a Sponsored GC Trade (i.e., the Sponsoring Member and 
its Sponsored Member client), as opposed to the multitude of Netting 
Members that may be involved in the settlement of GCF Repo 
Transactions the payment and delivery obligations under which are 
aggregated and netted in FICC's Netting System. For such GCF Repo 
Transactions, insertion of FICC in the middle of the payments and 
deliveries can streamline the settlement process and create 
significant operational efficiencies for Netting Members.
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    To that end, each GC Funds Borrower and GC Funds Lender would agree 
that any such direct payment or delivery discharges FICC's obligation 
to make the same payment or delivery. Otherwise, all legal rights and 
obligations as between FICC and Sponsoring Members, and as between FICC 
and Sponsored Members, would be the same with respect to Sponsored GC 
Trades as with respect to Sponsored Member Trades in the existing 
Service, which is governed by Rule 3A.\15\
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    \15\ Rule 3A, supra note 4.
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(B) Risk Management of Sponsored GC Trades
    Sponsored GC Trades would be risk managed in a similar fashion to 
Sponsored Member Trades in the existing Service.
    To mitigate market risk, the VaR Charge would be calculated for 
each Sponsored Member client individually based on such Sponsored 
Member client's activity in the existing Service, as well as such 
Sponsored Member client's activity in the proposed Sponsored GC 
Service. The VaR Charge for the Sponsoring Member Omnibus Account would 
continue to be the sum of the individual VaR Charges for each Sponsored 
Member client, i.e., the Sponsoring Member Omnibus Account would 
continue to be gross margined.\16\ To facilitate FICC's ability to 
surveil a given Sponsored Member's FICC-cleared activity across its 
Sponsored GC Trades as well as its other Sponsored Member Trades within 
the existing Service, both with the same Sponsoring Member and across 
Sponsoring Members (if applicable), the same symbol would be used to 
identify the Sponsored Member for purposes of trade submission and risk 
management under the proposal.
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    \16\ See Rule 3A, Section 10, supra note 4.
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    In addition, FICC would risk manage the mark-to-market risk 
associated with unaccrued repo interest on a Sponsored GC Trade in the 
same way it manages such risk in the GCF Repo Service, namely through a 
proposed new GC Interest Rate Mark component of funds-only settlement. 
This proposed new mark would be calculated in the same manner as the 
GCF Interest Rate Mark

[[Page 29338]]

is for GCF Repo Transactions.\17\ In light of the application of the 
proposed new GC Interest Rate Mark to Sponsored GC Trades, an Interest 
Adjustment Payment would also be applied to account for overnight use 
of funds by the Sponsoring Member or Sponsored Member, as applicable, 
based on such party's receipt from FICC of a Forward Mark Adjustment 
Payment (reflecting a GC Interest Rate Mark) on the previous Business 
Day.\18\
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    \17\ The term ``GCF Interest Rate Mark'' means, on a particular 
Business Day as regards any GCF Repo Transaction that is not 
scheduled to settle on that day, the product of the principal value 
of the GCF Repo Transaction on the Scheduled Settlement Date for its 
End Leg multiplied by a factor equal to the absolute difference 
between the Repo Rate established by FICC for such Repo Transaction 
and its Contract Repo Rate, and then multiplied by a fraction, the 
numerator of which is the number of calendar days from the current 
day until the Scheduled Settlement Date for the End Leg of the Repo 
Transaction and the denominator of which is 360. If the Repo 
Transaction's Contract Repo Rate is greater than its System Repo 
Rate, then the GCF Interest Rate Mark shall be a positive value for 
the Reverse Repo Party, and a negative value for the Repo Party. If 
the Repo Transaction's Contract Repo Rate is less than its System 
Repo Rate, then the GCF Interest Rate Mark shall be a positive value 
for the Repo Party, and a negative value for the Reverse Repo Party. 
The term ``GCF Interest Rate Mark'' means, as regards a GCF Net 
Settlement Position, the sum of all the GCF Interest Rate Mark 
Payments on each of the GCF Repo Transactions that compose such 
position. Rule 1, supra note 4.
    \18\ No other components of funds-only settlement would be 
necessary to apply to Sponsored GC Trades because, as described 
above, (i) all Sponsored GC Trades would novate after the settlement 
of the Start Legs of such trades (i.e., not during the Forward-
Starting Period), (ii) mark-to-market changes in the value of the 
securities transferred under Sponsored GC Trades would be managed by 
the Sponsored GC Clearing Agent Bank on FICC's behalf (consistent 
with the manner in which GCF Repo Transactions are processed today), 
and (iii) the accrued repo interest on Sponsored GC Trades would be 
passed on a daily basis, as described above.
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    For liquidity risk management, Sponsored Member Trades between a 
Sponsoring Member and its Sponsored Member in the existing Service do 
not independently create liquidity risk for FICC. This is because FICC 
is not required to complete settlement of such Sponsored Member Trades 
in the event that either the Sponsoring Member or Sponsored Member 
defaults. In the event that the Sponsoring Member defaults, Section 
14(c) of Rule 3A permits FICC to close out (rather than settle) the 
Sponsored Member Trades of the defaulter's Sponsored Members.\19\ 
Likewise, if the Sponsored Member defaults, FICC is also not required 
to complete settlement. Rather, under Section 11 of Rule 3A, FICC may 
offset its settlement obligations to the Sponsoring Member against the 
Sponsoring Member's obligations under the Sponsoring Member Guaranty to 
perform on behalf of its defaulted Sponsored Member.\20\
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    \19\ Rule 3A, Section 14(c), supra note 4.
    \20\ Rule 3A, Section 11, supra note 4.
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    As a result, to the extent a Sponsoring Member either (1) runs a 
matched book of Sponsored Members (i.e., enters into offsetting 
Sponsored Member Trades with its own Sponsored Members) or (2) simply 
enters into Sponsored Member Trades without entering into offsetting 
transactions, it does not increase FICC's liquidity risk. By contrast, 
if a Sponsoring Member enters into an offsetting Repo Transaction with 
a third-party Netting Member that is novated to FICC, then that will 
increase FICC's liquidity risk. This is because, unlike in the context 
of Sponsored Member Trades, in the event of the Sponsoring Member's 
default, FICC is required to settle with such third-party Netting 
Member.
    Sponsored GC Trades would impact FICC's liquidity risk similarly to 
Sponsored Member Trades in the existing Service in this regard, in that 
liquidity risk to FICC would only be increased to the extent the 
Sponsoring Member enters into a Repo Transaction with a third-party 
Netting Member (which it may choose to do in order to offset the 
Sponsored GC Trade that it executed with its Sponsored Member). 
Accordingly, FICC proposes to manage the liquidity risk associated with 
Sponsored GC Trades in the same manner that it manages such risk for 
other Sponsored Member Trades. As discussed below in Item II(A)1(iii), 
FICC is proposing to add language to Rule 3A to revise the manner in 
which it calculates a Sponsoring Member's Individual Total Amount for 
purposes of its CCLF obligation, with respect to all Sponsored Member 
Trades, including Sponsored GC Trades, in order to reflect the fact 
that Sponsored Member Trades do not create liquidity risk.
(C) Proposed Rule Changes
    To effectuate the proposed changes described above, FICC would 
revise Rule 1 to add the following new defined terms: (1) GC Collateral 
Return Entitlement, (2) GC Collateral Return Obligation, (3) GC 
Comparable Securities, (4) GC Daily Repo Interest, (5) GC Funds 
Borrower, (6) GC Funds Lender, (7) GC Interest Rate Mark, (8) GC Repo 
Security, (9) GC Start Leg Market Value, (10) Purchased GC Repo 
Securities, (11) Sponsored GC Clearing Agent Bank, and (12) Sponsored 
GC Trade.
    GC Collateral Return Entitlement would mean the entitlement of a 
Sponsoring Member or Sponsored Member, as applicable, to receive the 
Purchased GC Repo Securities (as defined below) in exchange for cash at 
the End Leg of a Sponsored GC Trade.
    GC Collateral Return Obligation would mean the obligation of a 
Sponsoring Member or Sponsored Member, as applicable, to deliver the 
Purchased GC Repo Securities in exchange for cash at the End Leg of a 
Sponsored GC Trade.
    GC Comparable Securities would mean, in relation to a Sponsored GC 
Trade, any GC Repo Securities that are represented by the same Generic 
CUSIP Number as the GC Repo Securities that were transferred in the 
Start Leg of the Sponsored GC Trade, as set forth in the proposed new 
Schedule of GC Comparable Securities.
    GC Daily Repo Interest would mean the daily interest amount that is 
payable under a Sponsored GC Trade.
    GC Funds Borrower would mean a Sponsoring Member or Sponsored 
Member, as applicable, that has a GC Collateral Return Entitlement and 
associated cash payment obligation.
    GC Funds Lender would mean a Sponsoring Member or Sponsored Member, 
as applicable, that has a GC Collateral Return Obligation and 
associated cash payment entitlement.
    GC Interest Rate Mark would mean, on a particular Business Day as 
regards any Sponsored GC Trade where the End Leg is not scheduled to 
settle on that day, the product of the principal value of the Sponsored 
GC Trade on the Scheduled Settlement Date for its End Leg multiplied by 
a factor equal to the absolute difference between the System Repo Rate 
established by FICC for such Sponsored GC Trade and its Contract Repo 
Rate, and then multiplied by a fraction, the numerator of which is the 
number of calendar days from the current day until the Scheduled 
Settlement Date for the End Leg of the Sponsored GC Trade and the 
denominator of which is 360. If the Sponsored GC Trade's Contract Repo 
Rate is greater than its System Repo Rate, then the GC Interest Rate 
Mark would be a positive value for the GC Funds Lender, and a negative 
value for the GC Funds Borrower. If the Sponsored GC Trade's Contract 
Repo Rate is less than its System Repo Rate, then the GC Interest Rate 
Mark would be a positive value for the GC Funds Borrower, and a 
negative value for the GC Funds Lender.
    GC Repo Security would mean an Eligible Security that is only 
eligible for submission to FICC in connection with the comparison and 
Novation of Sponsored GC Trades.

[[Page 29339]]

    GC Start Leg Market Value would mean, in relation to a Sponsored GC 
Trade, the market value of the GC Repo Securities transferred in the 
Start Leg of the Sponsored GC Trade, measured as of the date of the 
settlement of the Start Leg of such Sponsored GC Trade.
    Purchased GC Repo Securities would mean the GC Repo Securities 
transferred by the Sponsoring Member or Sponsored Member, as 
applicable, in settlement of the Start Leg of a Sponsored GC Trade, 
plus all cash and other GC Repo Securities transferred by such 
Sponsoring Member or Sponsored Member pursuant to proposed Sections 
8(b)(ii) and 8(b)(v) of Rule 3A, less any GC Repo Securities or cash 
received by the Sponsoring Member or Sponsored Member pursuant to 
proposed Sections 8(b)(iii) and 8(b)(v) of Rule 3A.
    Sponsored GC Clearing Agent Bank would mean a Clearing Agent Bank 
that has agreed to provide FICC, upon request, under mutually agreeable 
terms, with clearing services for Sponsored GC Trades.
    Sponsored GC Trade would mean, in connection with the Sponsored GC 
Service, a Sponsored Member Trade that is a Repo Transaction between a 
Sponsored Member and its Sponsoring Member involving securities 
represented by a Generic CUSIP Number the data on which are submitted 
to FICC by the Sponsoring Member pursuant to the provisions of Rule 6A, 
for Novation to FICC pursuant to proposed Section 7(b)(ii) of Rule 3A.
    FICC also proposes to revise the following defined terms in Rule 1: 
(1) Eligible Security, (2) End Leg, (3) General Collateral Repo 
Transaction, (4) Generic CUSIP Number, (5) Initial Haircut, (4) 
Interest Adjustment Payment, (5) Sponsored Member Trade, (6) Start Leg, 
(7) Forward Mark Adjustment Payment, and (8) Sponsoring Member Omnibus 
Account, each as described in greater detail below.
    FICC proposes to revise the definition of Eligible Security to 
state that a GC Repo Security would be deemed to be an Eligible 
Security only in connection with a Sponsored GC Trade.
    FICC also proposes to revise the definition of End Leg to include a 
definition applicable to Sponsored GC Trades. As regards a Sponsored GC 
Trade, End Leg would mean the concluding settlement aspects of the 
transaction, involving the retransfer of the Purchased GC Repo 
Securities by the GC Funds Lender and the taking back of such Purchased 
GC Repo Securities by the GC Funds Borrower. Because FICC is revising 
the definition of End Leg to add a definition applicable to Sponsored 
GC Trades, FICC would also revise the first sentence of the current 
definition to state that it does not apply to Sponsored GC Trades by 
adding the phrase ``or a Sponsored GC Trade'' after ``as regards a Repo 
Transaction other than a GCF Repo Transaction (or CCIT Transaction as 
applicable).''
    FICC proposes to revise the definition of General Collateral Repo 
Transaction to state that General Collateral Repo Transaction would 
mean a Repo Transaction, other than a GCF Repo Transaction or Sponsored 
GC Trade (unless the context indicates otherwise), with a Generic CUSIP 
Number.
    FICC also proposes to revise the definition of Generic CUSIP Number 
to state that FICC would use separate Generic CUSIP Numbers for General 
Collateral Repo Transactions, GCF Repo Transactions and Sponsored GC 
Trades.
    FICC also proposes to revise the definition of Initial Haircut to 
include a definition applicable to Sponsored GC Trades. As regards any 
Sponsored GC Trade, Initial Haircut would mean any difference between 
(x) the Contract Value of the Start Leg of the Sponsored GC Trade and 
(y) the GC Start Leg Market Value. Because FICC is revising the 
definition of Initial Haircut to include a definition applicable to 
Sponsored GC Trades, FICC would revise proposed section (i) in the 
definition to state that proposed section (i) would apply to any 
Sponsored Member Trade that is not a Sponsored GC Trade by adding the 
phrase ``that is not a Sponsored GC Trade'' after ``as regards any 
Sponsored Member Trade.''
    FICC also proposes to revise the definition Interest Adjustment 
Payment to include a definition applicable to Sponsored GC Trades. As 
regards a Sponsored GC Trade, Interest Adjustment Payment would mean 
the product of the GC Interest Rate Mark multiplied by the applicable 
Overnight Investment Rate and then multiplied by a fraction, the 
numerator of which is the number of calendar days between the previous 
Business Day and the current Business Day and the denominator of which 
is 360.
    FICC proposes to revise the definition of Sponsored Member Trade to 
include Sponsored GC Trades.
    FICC also proposes to revise the definition of Start Leg to include 
a definition applicable to Sponsored GC Trades. As regards a Sponsored 
GC Trade, Start Leg would mean the initial settlement aspects of the 
Transaction, involving the transfer of GC Repo Securities by the 
Sponsoring Member or Sponsored Member, as applicable, that is the GC 
Funds Borrower and the taking in of such GC Repo Securities by the 
Sponsoring Member or Sponsored Member, as applicable, that is the GC 
Funds Lender. Because FICC is proposing to revise the definition of 
Start Leg to add a definition applicable to Sponsored GC Trades, FICC 
would revise that the first sentence of the current definition to state 
that it does not apply to Sponsored GC Trades by adding the phrase ``or 
a Sponsored GC Trade'' after ``as regards a Repo Transaction other than 
a GCF Repo Transaction.''
    FICC also proposes to revise the definition of Forward Mark 
Adjustment Payment in Rule 1 to state that it would refer to the GC 
Interest Rate Mark with respect to Sponsored GC Trades.
    FICC also proposes to make conforming changes to the definition of 
Sponsoring Member Omnibus Account to state that it may contain all 
types of Sponsored Member Trades. The current definition of Sponsoring 
Member Omnibus Account states that each Sponsoring Member Omnibus 
Account may contain activity within the meaning of clause (a) of the 
Sponsored Member Trade definition or activity within the meaning of 
clause (b) of such definition.
    In addition, FICC proposes to revise the definition of Sponsored GC 
Service in Rule 1 and to revise Section VII (Sponsoring Members) of the 
Fee Structure, as described below.
    FICC proposes to revise the definition of Sponsored GC Service in 
Rule 1 to state that it would mean the service offered by FICC to clear 
tri-party repurchase agreement transactions between Sponsoring Members 
and Sponsored Members, as described in Rule 3A. Currently, the 
definition of Sponsored GC Service states that it means a service to be 
offered by FICC, which has not yet been proposed for and would be 
subject to regulatory approval, to clear tri-party repurchase agreement 
transactions between the Sponsoring Members and Sponsored Members, as 
shall be described in Rule 3A. FICC also proposes to remove the 
footnote in the definition of Sponsored GC Service, which states that 
the Sponsored GC Service shall be the subject of a subsequent rule 
filing with the Commission and that the definition of Sponsored GC 
Service shall be revised upon approval of the subsequent rule filing, 
and at that time the footnote shall sunset.
    FICC also proposes to revise Section VII (Sponsoring Members) of 
the Fee Structure to remove language that states that to the extent 
FICC, in consultation with its Board of Directors, does not implement 
the Sponsored GC Service, all previously collected Sponsored GC

[[Page 29340]]

Pre-Payment Assessments shall be returned to the contributing 
Sponsoring Members in full. FICC also proposes to remove the footnote 
in this section which states that the Sponsored GC Service shall be the 
subject of a subsequent rule filing with the Commission and that 
Section VII of the Fee Structure shall be revised to remove the 
referenced sentence upon approval of the subsequent rule filing, and at 
that time the footnote shall sunset.
    In addition, FICC proposes to revise Rule 3A, Section 5 (Sponsored 
Member Trades) to state that this section does not apply to Sponsored 
GC Trades. Section 5 concerns the types of trades that may be submitted 
as Sponsored Member Trades and discusses the application of Rule 14 
(Forward Trades) and Rule 18 (Special Provisions for Repo Transactions) 
to Sponsored Member Trades. The requirements that Sponsored GC Trades 
must meet would be separately enumerated in Section 7, and the 
provisions of Rules 14 and 18, which only apply to transactions 
eligible for FICC's general netting system, would not apply to such 
Sponsored GC Trades.
    FICC also proposes to revise Rule 3A, Section 6 (Trade Submission 
and the Comparison System) to state that the current Schedule of 
Timeframes would apply to Sponsored Member Trades other than Sponsored 
GC Trades. The proposed new Schedule of Sponsored GC Trade Timeframes 
would apply to Sponsored GC Trades.
    Section 7 (The Netting System, Novation and Guaranty of Settlement) 
of Rule 3A would be revised to create a proposed new paragraph (a). The 
proposed new paragraph (a) would provide that the current provisions of 
Section 7, which would be reorganized as proposed new subparagraphs (i) 
through (iv) of proposed new paragraph (a), apply to Sponsored Member 
Trades other than Sponsored GC Trades. These provisions concern the 
netting and Novation of Sponsored Member Trades. As discussed below, 
different provisions would apply to Sponsored GC Trades.
    Proposed new paragraph (b) of Section 7 would only apply to 
Sponsored GC Trades. Proposed new subparagraph (i) of proposed new 
paragraph (b) of Section 7 would provide that only the End Legs of a 
Sponsored GC Trade may be novated to FICC and that a Sponsored GC Trade 
is permitted (but not required) to have an Initial Haircut. Proposed 
new subparagraph (ii) of proposed new paragraph (b) of Section 7 would 
provide requirements that would have to be satisfied in order for a 
Sponsored GC Trade to be novated on a given Business Day. The following 
requirements would be included: (A) The trade data on the Sponsored GC 
Trade must have been submitted to FICC by the Sponsoring Member 
pursuant to Rule 6A by the deadline set forth in FICC's proposed new 
Schedule of Sponsored GC Trade Timeframes, (B) the data on the 
Sponsored GC Trade must have been compared in the Comparison System 
pursuant to Rule 6A, (C) the Start Leg of the Sponsored GC Trade must 
have fully settled at the Sponsored GC Clearing Agent Bank by the 
deadline set forth in FICC's proposed new Schedule of Sponsored GC 
Trade Timeframes, (D) the Sponsored GC Clearing Agent Bank must have, 
pursuant to communication links, formats, timeframes, and deadlines 
established by FICC for such purpose, provided to FICC a report 
containing such data as FICC may require from time to time, including 
information regarding the specific GC Repo Securities that were 
delivered in settlement of the Start Leg of the Sponsored GC Trade, and 
(E) FICC must determine that the data contained in such report matches 
the data on the Sponsored GC Trade submitted by the Sponsoring Member 
pursuant to Rule 6A. Proposed new subparagraph (iii) of proposed new 
paragraph (b) of Section 7 would state that, on each Business Day, FICC 
would provide each Sponsoring Member with one or more Reports setting 
forth (A) each Sponsored GC Trade, the data on which has been compared 
in the Comparison System and (B) each Sponsored GC Trade, the End Leg 
of which has been novated to FICC. Proposed new subparagraph (iv) of 
proposed new paragraph (b) of Section 7 would require that each 
Sponsoring Member and Sponsored Member acknowledges and agrees that it 
has authorized each relevant Sponsored GC Clearing Agent Bank to 
provide FICC with all information and data as FICC may require or 
request from time to time in order to novate and process Sponsored GC 
Trades.
    Section 8 (Securities Settlement) of Rule 3A would be revised to 
create a new paragraph (a). The proposed new paragraph (a) would 
provide that the bulk of the current provisions of Section 8, which 
would be reorganized as subparagraphs (i) through (vii) of proposed new 
paragraph (a), apply to Sponsored Member Trades other than Sponsored GC 
Trades. Those provisions concern the process for settling Sponsored 
Member Trades. As discussed below, different settlement requirements 
would apply to Sponsored GC Trades.
    Proposed new paragraph (b) of Section 8 would apply only to 
Sponsored GC Trades. Proposed new subparagraph (i) of proposed new 
paragraph (b) of Section 8 would state that GC Collateral Return 
Obligations and cash payment obligations associated with GC Collateral 
Return Entitlements must be satisfied by a GC Funds Lender and GC Funds 
Borrower, respectively, within the timeframes established for such by 
FICC in the proposed new Schedule of Sponsored GC Trade Timeframes. In 
addition, any failure by the GC Funds Borrower to satisfy its cash 
payment obligations associated with GC Collateral Return Entitlements 
within the timeframe established for such by FICC in the proposed new 
Schedule of Sponsored GC Trade Timeframes would subject the GC Funds 
Borrower to a late fee as if such GC Funds Borrower were a Net Funds 
Payor within the meaning of Section IX of the Fee Structure (Late Fee 
Related to GCF Repo Transactions). Proposed new subparagraph (ii) of 
proposed new paragraph (b) of Section 8 would state that if on any 
Business Day, the market value of a GC Funds Borrower's GC Collateral 
Return Entitlement from the previous Business Day (or the current 
Business Day) is less than the GC Start Leg Market Value, then such GC 
Funds Borrower would deliver to FICC (and FICC would deliver to the 
relevant GC Funds Lender) additional GC Comparable Securities and/or 
cash, such that the market value of the GC Funds Borrower's GC 
Collateral Return Entitlement (and the market value of the relevant GC 
Funds Lender's GC Collateral Return Obligation) is at least equal to 
the GC Start Leg Market Value. Such additional securities and/or cash 
must be delivered by the GC Funds Borrower within the timeframe set 
forth in the proposed new Schedule of Sponsored GC Trade Timeframes. 
Proposed new subparagraph (iii) of proposed new paragraph (b) of 
Section 8 would state that if on any Business Day, the market value of 
a GC Funds Lender's GC Collateral Return Obligation from the previous 
Business Day (or the current Business Day) is greater than the GC Start 
Leg Market Value, then such GC Funds Lender would deliver to FICC (and 
FICC would deliver to the relevant GC Funds Borrower) some of the 
Purchased GC Repo Securities, such that the market value of the GC 
Funds Lender's GC Collateral Return Obligation (and the market value of 
the relevant GC Funds Borrower's Collateral Return Entitlement) is at 
least equal to the GC Start Leg Market Value. Such Purchased

[[Page 29341]]

GC Repo Securities must be delivered within the timeframe set forth in 
the proposed new Schedule of Sponsored GC Trade Timeframes. Proposed 
new subparagraph (iv) of proposed new paragraph (b) of Section 8 would 
state that each GC Funds Borrower (or if the repo rate for the relevant 
Sponsored GC Trade is negative, the GC Funds Lender) would, within the 
timeframe set forth in the proposed new Schedule of Sponsored GC Trade 
Timeframes, pay the daily accrued GC Daily Repo Interest to FICC (and 
FICC would pay such GC Daily Repo Interest to the GC Funds Lender or GC 
Funds Borrower, as applicable). Proposed new subparagraph (v) of 
proposed new paragraph (b) of Section 8 would state that a GC Funds 
Borrower may substitute cash and/or GC Comparable Securities for any 
Purchased GC Repo Securities in accordance with the timeframe set forth 
in the proposed new Schedule of Sponsored GC Trade Timeframes. Proposed 
new subparagraph (vi) of proposed new paragraph (b) of Section 8 would 
state that FICC directs each Sponsored Member and Sponsoring Member to 
satisfy any payment or delivery obligation due to FICC, except for any 
obligation to pay a Funds-Only Settlement Amount, by making the 
relevant payment or delivery to an account at the relevant Sponsored GC 
Clearing Agent Bank specified by the pre-Novation counterparty to the 
Sponsored Member or Sponsoring Member, as applicable, in accordance 
with such procedures as the Sponsored GC Clearing Agent Bank may 
specify from time to time. Each Sponsored Member and Sponsoring Member 
that is owed any such payment or delivery from FICC would acknowledge 
and agree that, if the pre-Novation counterparty to such Sponsored GC 
Trade makes the relevant payment or delivery as described in the prior 
sentence, FICC's obligation to make such payment or delivery would be 
discharged and satisfied in full. Proposed new subparagraph (vii) of 
proposed new paragraph (b) of Section 8 would state that the market 
value of all GC Repo Securities would be determined by the relevant 
Sponsored GC Clearing Agent Bank each Business Day.
    In addition, FICC proposes to move language from current Section 
8(a) to proposed new Section 8(c). Proposed new Section 8(c) would 
state that notwithstanding the foregoing and any other activities the 
Sponsoring Member may perform in its capacity as agent for Sponsored 
Members, each Sponsored Member would be principally obligated to FICC 
with respect to all securities settlement obligations under the Rules, 
and the Sponsoring Member would not be a principal under the Rules with 
respect to the settlement obligations of its Sponsored Members. This 
provision would apply to both Sponsored GC Trades as well as other 
kinds of Sponsored Member Trades.
    FICC also proposes to revise Section 9 of Rule 3A to state which 
provisions would apply to Sponsored Member Trades other than Sponsored 
GC Trades, which provisions would apply only to Sponsored GC Trades, 
and which provisions would apply to all Sponsored Member Trades. 
Specifically, FICC proposes to add language to state that Section 9(a) 
applies to Sponsored Member Trades other than Sponsored GC Trades and 
current Sections 9(b), (c), (d), and (e), which would be reorganized as 
proposed new Sections 9(c)(i), (c)(ii), (c)(iii), and (c)(iv), 
respectively, applies to all Sponsored Member Trades. In addition, FICC 
proposes to add a new Section 9(b) to Rule 3A, which would only apply 
to Sponsored GC Trades and would state that each Sponsoring Member and 
Sponsored Member would be obligated to pay to FICC, and/or would be 
entitled to receive from FICC, the following amounts: Forward Mark 
Adjustment Payment and Interest Adjustment Payment. It would also state 
that such amounts would be payable and receivable as though they were 
amounts described in Rule 13.
    FICC proposes to add Section 10(i) to Rule 3A that would state that 
for purposes of applying Rule 4 to a Sponsoring Member Omnibus Account, 
each Sponsored GC Trade would be treated as a GCF Repo Transaction, 
each GC Funds Lender and GC Funds Borrower would be treated as a GCF 
Counterparty, and each Sponsored GC Clearing Agent Bank would be 
treated as a GCF Clearing Agent Bank.
    FICC would also revise Section 4 of Rule 5 (Comparison System) to 
add Sponsored GC Trades. Specifically, Section 4 of Rule 5 would be 
revised to state that GCF Repo Transactions and Sponsored GC Trades 
must be submitted exactly as executed.
    FICC is also proposing to add a new Schedule of Sponsored GC Trade 
Timeframes that would only be applicable to Sponsored GC Trades. The 
proposed new Schedule of Sponsored GC Trade Timeframes would state that 
the time during which reports would be made available with respect to 
end of day Clearing Fund requirements and funds-only settlement 
requirements would be from 10:30 p.m. to 2:00 a.m. In addition, it 
would state that 2:00 p.m. would be the time during which reports would 
be made available with respect to intraday Clearing Fund requirements, 
and intraday funds-only settlement requirements. The proposed new 
Schedule of Sponsored GC Trade Timeframes would also state that at 
10:00 a.m., funds-only settlement debits and credits are executed via 
the Federal Reserve's National Settlement Service and at 4:30 p.m., the 
intraday funds-only settlement debits and credits are executed via the 
Federal Reserve's National Settlement Service.
    The proposed new Schedule of Sponsored GC Trade Timeframes would 
also state that 9:00 a.m. would be the deadline for the GC Funds 
Borrower to satisfy the obligation described in proposed Section 
8(b)(ii) of Rule 3A in accordance with the provisions of proposed 
Section 8(b)(vi) of Rule 3A. It would also state that FICC reserves the 
right to also require a GC Funds Borrower to satisfy the obligation 
described in proposed Section 8(b)(ii) on an intraday basis based on 
the market value of the applicable GC Repo Securities as determined by 
the GC Clearing Agent Bank in accordance with proposed Section 
8(b)(vii) of Rule 3A. It would also state that 12:00 p.m. would be the 
deadline for the GC Funds Borrower (or if the repo rate for the 
relevant Sponsored GC Trade is negative, the GC Funds Lender) to pay to 
FICC the accrued GC Daily Repo Interest as described in proposed 
Section 8(b)(iv) in accordance with the provisions of proposed Section 
8(b)(vi) of Rule 3A (unless the End Leg of the related Sponsored GC 
Trade is due to settle on the same day). The proposed new Schedule of 
Sponsored GC Timeframes would state that any accrued GC Daily Repo 
Interest that is due on the settlement day of the End Leg of the 
related Sponsored GC Trade would be paid in connection with the 
settlement of the End Leg.
    The proposed new Schedule of Sponsored GC Trade Timeframes would 
also state that 5:00 p.m. would be the deadline for final input by the 
Sponsoring Members to FICC of Sponsored GC Trade data. Furthermore, 
5:30 p.m. would be the deadline for (i) full settlement of the Start 
Leg of the Sponsored GC Trade in accordance with proposed Section 
7(b)(ii)(C) of Rule 3A, (ii) substitutions of Purchased GC Repo 
Securities in accordance with proposed Section 8(b)(v) of Rule 3A, and 
(iii) satisfaction of GC Collateral Return Obligations and cash payment 
obligations associated with GC Collateral Return Entitlements by GC 
Funds Lenders and GC Funds Borrowers, respectively, in accordance

[[Page 29342]]

with proposed Section 8(b)(i) of Rule 3A.
    The proposed new Schedule of Sponsored GC Trade Timeframes would 
also state that the time by which a GC Funds Lender would be required 
to deliver any securities to a GC Funds Borrower in connection with 
proposed Section 8(b)(iii) of Rule 3A would be determined by the 
relevant Sponsored GC Clearing Agent Bank. Furthermore, it would state 
that all times may be extended as needed by FICC to (i) address 
operational or other delays that would reasonably prevent members or 
FICC from meeting the deadline or timeframe, as applicable, or (ii) 
allow the FICC time to operationally exercise its existing rights under 
the Rules. In addition, it would state that times applicable to FICC 
are standards and not deadlines and that actual processing times may 
vary slightly, as necessary.
    FICC also proposes to revise the Schedule for the Deletion of Trade 
Data to state which provisions would not apply to Sponsored GC Trades. 
In addition, FICC would also add language to state that trade data on 
Sponsored GC Trades that remain uncompared on a given Business Day 
would pend in the Comparison System until FICC's deadline for final 
input by Sponsoring Members of Sponsored GC Trade data (as provided in 
the Schedule of Sponsored GC Trade Timeframes) on such Business Day. 
FICC would also add language to state that trade data on Sponsored GC 
Trades, which have been compared in the Comparison System pursuant to 
Rule 6A but the Start Legs of which have not fully settled at a 
Sponsored GC Clearing Agent Bank by the deadline set forth in FICC's 
proposed new Schedule of Sponsored GC Trade Timeframes, would be 
deleted from the Comparison System during the same processing cycle as 
the Repo Start Date for such Sponsored GC Trades.
    FICC also proposes to revise the Schedule of Required Data 
Submission Items to state that items (1) and (2) in this schedule would 
not be required for Sponsored Member Trades.
    FICC also proposes to revise the following schedules to exclude 
Sponsored GC Trades: (i) Schedule of Required and Accepted Data 
Submission Items for a Substitution and (ii) Schedule of Required and 
Accepted Data Submission Items for New Securities Collateral.
    In addition, as described above, FICC would add a proposed new 
Schedule of GC Comparable Securities.
(iii) Add Language to Rule 3A To Allow FICC To Recognize, for CCLF 
Calculation Purposes, Any Offsetting Settlement Obligations as Between 
a Sponsoring Member's Netting Account and Its Sponsoring Member Omnibus 
Account To Ensure That a Sponsoring Member's CCLF Obligation Is 
Calculated in a Manner That More Closely Aligns With the Liquidity Risk 
Associated With Sponsored Member Trades
    As described above, Sponsored Member Trades between a Sponsoring 
Member and its Sponsored Member in the existing Service do not 
independently create liquidity risk for FICC. This is because FICC is 
not required to complete settlement of such Sponsored Member Trades in 
the event that either the Sponsoring Member or Sponsored Member 
defaults. In the event that the Sponsoring Member defaults, Section 
14(c) of Rule 3A permits FICC to close out (rather than settle) the 
Sponsored Member Trades of the defaulter's Sponsored Members.\21\ 
Likewise, if the Sponsored Member defaults, FICC is also not required 
to complete settlement. Rather, under Section 11 of Rule 3A, FICC may 
offset its settlement obligations to the Sponsoring Member against the 
Sponsoring Member's obligations under the Sponsoring Member Guaranty to 
perform on behalf of its defaulted Sponsored Member.\22\
---------------------------------------------------------------------------

    \21\ Rule 3A, Section 14(c), supra note 4.
    \22\ Rule 3A, Section 11, supra note 4.
---------------------------------------------------------------------------

    Accordingly, liquidity risk to FICC is only increased to the extent 
the Sponsoring Member enters into a Repo Transaction with a third-party 
Netting Member that is novated to FICC. Such a Repo Transaction creates 
liquidity risk to FICC because, in the event of the Sponsoring Member's 
default, FICC is required to settle with such third-party Netting 
Member.\23\
---------------------------------------------------------------------------

    \23\ As described above, a Sponsored GC Trade would impact 
FICC's liquidity risk similarly to a Sponsored Member Trade in the 
existing Service in this regard, in that liquidity risk to FICC 
would only be increased to the extent the Sponsoring Member enters 
into an offsetting Repo Transaction with a third-party Netting 
Member that is novated to FICC.
---------------------------------------------------------------------------

    In light of this, FICC believes that a Sponsored Member Trade 
should only increase the obligation of a Sponsoring Member with respect 
to FICC's CCLF to the extent the Sponsoring Member offsets that trade 
with a Repo Transaction entered into with a third-party Netting Member 
that is novated to FICC. To the extent a Sponsoring Member either (1) 
enters into an offsetting Sponsored Member Trade with another Sponsored 
Member (i.e., it runs a matched book of Sponsored Member Trades) or (2) 
simply does not enter into an offsetting transaction at all, then the 
Sponsored Member Trade has no effect on FICC's liquidity risk, and so 
should not affect the Sponsoring Member's CCLF obligation.
    Currently, FICC does not impose a CCLF obligation on a Sponsoring 
Member to the extent the Sponsoring Member runs a matched book of 
Sponsored Member Trades. This is because FICC calculates a Sponsoring 
Member's CCLF obligation based on the net settlement obligations of its 
Sponsoring Member Omnibus Account and the net settlement obligations of 
the Sponsoring Member's netting account.\24\ In other words, FICC nets 
all of the positions recorded in the Sponsoring Member's Sponsoring 
Member Omnibus Account, regardless of whether they relate to the same 
Sponsored Member, and separately nets all of the positions in 
Sponsoring Member's netting account. As a result, to the extent a 
Sponsoring Member enters into perfectly offsetting Sponsored Member 
Trades, the settlement obligations of those trades will net out in the 
Sponsoring Member Omnibus Account and in the netting account and 
thereby create no CCLF obligation for the Sponsoring Member.
---------------------------------------------------------------------------

    \24\ See Rule 3A, Section 8(b) and Rule 22A, Section 2a(b), 
supra note 4.
---------------------------------------------------------------------------

    However, currently, if a Sponsoring Member enters into a Sponsored 
Member Trade without entering into an offsetting transaction, it is 
subject to CCLF obligations for the position of its Sponsored Member 
recorded in its Sponsoring Member Omnibus Account as well as its own 
position arising from the Sponsored Member Trade recorded in its 
netting account. This is because, although the positions in the 
Sponsoring Member Omnibus Account and netting account arising from such 
Sponsored Member Trade are perfectly offsetting, FICC does not 
currently net them against each other for CCLF purposes due to the 
current CCLF allocation being calculated at the participant account 
level.\25\
---------------------------------------------------------------------------

    \25\ Consider the following example: A Sponsoring Member sells 
100 shares of CUSIP 123 to a Sponsored Member in a Repo Transaction. 
That transaction will result in the Sponsoring Member's netting 
account being long 100 shares of CUSIP 123 and the Sponsoring 
Member's Sponsoring Member Omnibus Account being short 100 shares of 
CUSIP 123. Under the existing Rules, the Sponsoring Member will have 
a CCLF obligation for both the long position in the netting account 
as well as the short position in the Sponsoring Member Omnibus 
Account even though, as described above, the Sponsored Member Trade 
does not independently create liquidity risk for FICC.
    Although this limitation on offset is consistent with FICC's 
approach of not offsetting the positions of two accounts of the same 
Member for CCLF purposes, there is an important difference between 
Sponsored Member Trades and other FICC repo activity. As discussed 
above, the Service requires that a Sponsoring Member have a 
Sponsoring Member Omnibus Account that is separate from its netting 
account. For all other repo activity, the Member has the option to 
collapse all of its activity into a single participant account in 
order to achieve a similar netting benefit. Sponsoring Members do 
not have that option with respect to their Sponsored Member Trades, 
so FICC believes this proposed change is necessary to ensure that a 
Sponsoring Member's CCLF obligations are calculated in a manner that 
more closely aligns with the liquidity risk associated with 
Sponsored Member Trades.

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[[Page 29343]]

    In order to ensure that a Sponsoring Member's CCLF obligation is 
calculated in a manner that more closely aligns with the liquidity risk 
associated with Sponsored Member Trades, FICC proposes to add language 
to Rule 3A to allow it to recognize, for CCLF calculation purposes, any 
offsetting settlement obligations as between a Sponsoring Member's 
netting account and its Sponsoring Member Omnibus Account. This 
proposed change would ensure that all Sponsored Member Trades, whether 
perfectly offset by other Sponsored Member Trades or not, would be 
recognized for CCLF purposes as not affecting FICC's liquidity risk. 
With respect to Sponsored GC Trades in particular, this proposed change 
would ensure that FICC applies an appropriate CCLF obligation to a 
Sponsoring Member in the event a Sponsored GC Clearing Agent Bank 
allocates to a Sponsored GC Trade a different security than the 
security that underlies an offsetting Sponsored Member Trade.\26\
---------------------------------------------------------------------------

    \26\ For example, a Sponsoring Member may enter into a Sponsored 
GC Trade on a Generic CUSIP Number and an offsetting Sponsored 
Member Trade in a specific CUSIP Number (e.g., CUSIP 123). Although 
CUSIP 123 may be an eligible security under the Generic CUSIP Number 
underlying the Sponsored GC Trade, the Sponsored GC Clearing Agent 
Bank may allocate to the Sponsored GC Trade a different eligible 
CUSIP Number (e.g., CUSIP 456) from the securities eligibility 
schedule. In that situation, the CUSIP 123 and CUSIP 456 positions 
in the Sponsoring Member's netting account and the Sponsoring Member 
Omnibus Account would not offset within the respective account, but 
the proposed change to Section 8(d) of Rule 3A would allow FICC to 
offset the CUSIP 123 and CUSIP 456 positions across the Sponsoring 
Member's netting account and Sponsoring Member Omnibus Account to 
ensure that the CCLF obligation applicable to the Sponsoring Member 
accurately reflects the liquidity risk that its positions create.
---------------------------------------------------------------------------

    Specifically, FICC proposes to add new Section 8(d) to Rule 3A, 
which would state that FICC, when calculating Individual Total Amounts 
\27\ for a Sponsoring Member, may net any offsetting settlement 
obligations across the Sponsoring Member's proprietary positions and 
the positions of its Sponsored Members in its Sponsoring Member Omnibus 
Account(s).
---------------------------------------------------------------------------

    \27\ The Individual Total Amount dictates the maximum amount of 
liquidity a Member must provide under FICC's CCLF. See Rule 22A, 
Section 2a(b), supra note 4.
---------------------------------------------------------------------------

Expected Member Impact
    FICC has conducted a study for the period from January 1, 2021 to 
March 30, 2021 as to the impact on FICC/GSD Netting Members' CCLF 
allocations as a result of recognizing offset between positions in a 
Sponsoring Member's netting account and its Sponsoring Member Omnibus 
Account. The impact of recognition of the offsetting positions as 
between a Sponsoring Member's netting account and its Sponsoring Member 
Omnibus Account relates strictly to the allocation of the total CCLF 
facility amongst the FICC/GSD netting membership, with certain 
Sponsoring Members receiving less allocation of CCLF once the offsets 
between the Sponsoring Member's netting account and the Sponsoring 
Member Omnibus Account are recognized.
(iv) Remove the Requirement from Section 2 of Rule 3A That a Sponsoring 
Member Provide a Quarterly Representation to FICC That Each of Its 
Sponsored Members Is a ``Qualified Institutional Buyer'' as Defined in 
Rule 144A, or Is a Legal Entity That, Although Not Organized as an 
Entity Specifically Listed in Paragraph (a)(1)(i) of Rule 144A, 
Satisfies the Financial Requirements Necessary To Be a ``Qualified 
Institutional Buyer'' as Specified in That Paragraph
    FICC also proposes to remove the requirement from Section 2 of Rule 
3A that a Sponsoring Member provide to FICC a quarterly representation 
that each of its Sponsored Members is a ``qualified institutional 
buyer'' as defined in Rule 144A, or is a legal entity that, although 
not organized as an entity specifically listed in paragraph (a)(1)(i) 
of Rule 144A, satisfies the financial requirements necessary to be a 
``qualified institutional buyer'' as specified in that paragraph.\28\ 
FICC proposes to remove this requirement because Section 3(d) of Rule 
3A separately requires a Sponsoring Member to notify FICC if its 
Sponsored Member is no longer either a ``qualified institutional 
buyer'' as defined in Rule 144A, or a legal entity that, although not 
organized as an entity specifically listed in paragraph (a)(1)(i) of 
Rule 144A, satisfies the financial requirements necessary to be a 
``qualified institutional buyer'' as specified in that paragraph.\29\ 
As such, FICC views the quarterly representation requirement in Section 
2 of Rule 3A to be an overlapping and redundant requirement that 
creates administrative burdens for FICC and for its Sponsoring Members 
that are, in FICC's view, unnecessary.
---------------------------------------------------------------------------

    \28\ Rule 3A, Section 2(d), supra note 4.
    \29\ Rule 3A, Section 3(d), supra note 4.
---------------------------------------------------------------------------

    To effectuate the proposed changes described above, FICC would 
revise Rule 3A to remove Section 2(d).
(v) A Clarification, Certain Corrections, and Certain Technical Changes
    FICC proposes to make a clarification to the Rules. Specifically, 
in the definition of Initial Haircut, FICC proposes to add the phrase 
``, if any,'' after ``absolute value of the dollar difference.''
    FICC also proposes to make certain corrections to the Rules.
    First, FICC proposes to correct the definition of Initial Haircut 
in Rule 1 so that it would be defined, with respect to Sponsored Member 
Trades that are not Sponsored GC Trades, as the absolute dollar 
difference between the Market Value of the Sponsored Member Trade, as 
of the settlement date of the Start Leg, and the Contract Value of the 
Start Leg of the Sponsored Member Trade, instead of the Contract Value 
of the Close Leg (as is currently provided).
    Second, FICC proposes to correct the reference in Rule 3A, Section 
3(a)(ii)(B) to paragraph (a)(1)(i)(H) of Rule 144A instead of paragraph 
(a)(1)(i) of Rule 144A (as is currently provided).
    Third, FICC also proposes to correct a typographical error in 
Section VII (Fee Structure) by revising from the reference to 
Additional Sponsored GC Credit instead of Additional Sponsored GC 
Assessment (as is currently provided).
    FICC also proposes to make certain technical changes, such as 
numbering and renumbering sections and making conforming grammatical 
changes.
    For example, because FICC is removing Section 2(d) of Rule 3A, FICC 
proposes to renumber the subsequent subsections in Rule 3A, Section 2. 
Specifically, FICC proposes to renumber current Sections 2(e), 2(f), 
2(g), 2(h), 2(i), and 2(j) as Sections 2(d), 2(e), 2(f), 2(g), 2(h), 
and 2(i), respectively.
    In addition, Section 7 of Rule 3A, in connection with FICC's 
creation of a proposed new paragraph (a) as described above, FICC 
proposes to renumber current Sections 7(a), 7(b), 7(c) and 7(d) as new 
Sections 7(a)(i), 7(a)(ii), 7(a)(iii) and 7(a)(iv), respectively. In 
addition, in current Sections 8(b) and 8(c), FICC proposes to revise 
the references from Section 7 to Section 7(a) to reflect the proposed 
renumbering of Section 7 described above.
    Likewise, in Section 8 of Rule 3A, in connection with FICC's 
creation of a

[[Page 29344]]

proposed new paragraph (a) as described above, FICC proposes to 
renumber current Sections 8(a), 8(b), 8(c), 8(d), 8(e), 8(f) and 8(g) 
as new Sections 8(a)(i), 8(a)(ii), 8(a)(iii), 8(a)(iv), 8(a)(v), 
8(a)(vi), and 8(a)(vii), respectively. In addition, in current Section 
8(a), FICC proposes to revise the reference from Section 8(c) to 
Section 8(a)(iii) to reflect the proposed renumbering of Section 8 
described above. In current Section 8(f), FICC also proposes to revise 
the reference from subsection (b) to subsection (a)(ii) to reflect the 
proposed renumbering of Section 8 described above.
    In addition, in current Section 9 of Rule 3A, in connection with 
FICC's addition of proposed new paragraph (b) as described above, FICC 
proposes to renumber current Sections 9(b), 9(c), 9(d) and 9(e) as new 
Sections 9(c)(i), 9(c)(ii), 9(c)(iii) and 9(c)(iv), respectively.
    Because FICC is adding Sponsored GC Trades to the definition of 
Sponsored Member Trade as described above, FICC would create new 
sections (a) and (b) and renumber current sections (a) and (b) as 
subsections (i) and (ii) of new section (a). FICC would also revise the 
definition of Same-Day Settling Trade and current Section 8(c) and 
Section 18(a) of Rule 3A to reflect the proposed changes to the 
Sponsored Member Trade definition.
    In addition, in the definition of Initial Haircut, FICC is 
proposing to add section numbers (i) and (ii) to make it clear that 
proposed section (i) of the definition would apply to any Sponsored 
Member Trade that is not a Sponsored GC Trade and proposed section (ii) 
would apply to any Sponsored Member Trade.
    In addition, FICC would also make certain conforming grammatical 
changes. For example, FICC would add a comma and move the word ``and'' 
in the definition of Generic CUSIP Number to reflect the addition of 
Sponsored GC Trades. Similarly, in each of the (i) Schedule of Required 
and Accepted Data Submission Items for a Substitution and (ii) Schedule 
of Required and Accepted Data Submission Items for New Securities 
Collateral, FICC would also add a comma and move the word ``and'' as 
conforming grammatical changes. As another example, FICC would also add 
the word ``or'' in the definition of Sponsored Member Trade to reflect 
the addition of Sponsored GC Trades. In the definition of Initial 
Haircut, FICC would also add the word ``and'' to reflect the addition 
of proposed section (ii). As another example, in Section 18(a) of Rule 
3A, FICC would revise the reference from subsection to subsections to 
reflect the proposed changes to the definition of Sponsored Member 
Trades described above.
2. Statutory Basis
    FICC believes these proposed changes are consistent with the 
requirements of the Act, and the rules and regulations applicable to a 
registered clearing agency. Specifically, FICC believes that the 
proposed changes are consistent with Section 17A(b)(3)(F) of the 
Act,\30\ and Rule 17Ad-22(e)(7),\31\ Rule 17Ad-22(e)(18),\32\ and Rule 
17Ad-22(e)(21)(i),\33\ as promulgated under the Act, for the reasons 
stated below.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ 17 CFR 240.17Ad-22(e)(7).
    \32\ 17 CFR 240.17Ad-22(e)(18).
    \33\ 17 CFR 240.17Ad-22(e)(21)(i).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules 
be designed to (i) remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions, (ii) promote the prompt and accurate clearance 
and settlement of securities transactions, and (iii) in general, to 
protect investors and the public interest.\34\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC believes that the proposed changes described in Item 
II(A)1(ii) above, i.e., to add the Sponsored GC Service, are designed 
to remove certain impediments to and perfect the mechanism of a 
national settlement system for the prompt and accurate clearance and 
settlement of securities transactions. This is because the Sponsored GC 
Service would allow Sponsoring Members and their Sponsored Member 
clients to submit for clearing Repo Transactions that settle on a tri-
party repo platform of a Sponsored GC Clearing Agent Bank in a manner 
consistent with the way Sponsoring Members and their Sponsored Member 
clients settle tri-party repo transactions outside of central clearing. 
In particular, as described above, the existing Service's requirement 
that Sponsored Member Trades be margined exclusively in cash through 
FICC's funds-only settlement process is currently an impediment that 
discourages term repo activity through the Service because money market 
funds and other mutual funds are not generally operationally equipped 
to provide or receive cash margin in connection with their term repo 
activity (either bilaterally or in central clearing). As such, FICC 
believes that adding the Sponsored GC Service would make it more 
operationally efficient for Sponsoring Members and their Sponsored 
Members that are money market funds and other mutual funds to transact 
Repo Transactions (particularly term Repo Transactions) with each other 
through FICC, and thereby, remove the impediment, consistent with 
Section 17A(b)(3)(F) of the Act.\35\
---------------------------------------------------------------------------

    \35\ Id.
---------------------------------------------------------------------------

    FICC also believes the proposed changes described in Item 
II(A)1(ii) above, i.e., to add the Sponsored GC Service, are designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act.\36\ By allowing Sponsoring Members and Sponsored Member clients to 
submit for clearing Repo Transactions that settle on the tri-party repo 
platform of a Sponsored GC Clearing Agent Bank in a manner consistent 
with the way Sponsoring Members and their Sponsored Member clients 
settle tri-party repo transactions outside of central clearing today, 
FICC believes the proposed changes would enable Sponsoring Members to 
submit a greater number of securities transactions to be cleared and 
settled by FICC. In particular, FICC believes Sponsoring Members would 
be able to submit to FICC more term Repo Transactions. FICC's clearance 
and settlement of such term Repo Transactions would promote the prompt 
and accurate clearance and settlement of securities transactions by 
increasing the number of transactions subject to FICC's risk management 
and guaranty of settlement. Therefore, FICC believes that the proposed 
changes described in Item II(A)1(ii) above are designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.\37\
---------------------------------------------------------------------------

    \36\ Id.
    \37\ Id.
---------------------------------------------------------------------------

    FICC also believes that the proposed changes described in Item 
II(A)1(iii) above, i.e., to add language to Rule 3A to enable FICC to 
recognize, for CCLF calculation purposes, any offsetting settlement 
obligations as between a Sponsoring Member's netting account and its 
Sponsoring Member Omnibus Account, are designed to remove certain 
impediments to and perfect the mechanism of a national settlement 
system for the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act.\38\ Currently, as described above, if a Sponsoring Member enters 
into a Sponsored Member Trade that is not perfectly offset by another 
Sponsored Member

[[Page 29345]]

Trade, it is subject to a CCLF obligation for its positions that is in 
excess of the liquidity risk its positions generate. FICC believes that 
this approach to CCLF calculations unnecessarily increases the costs 
for Sponsoring Members and therefore, may be an impediment that 
discourages the submission of Sponsored Member Trades to FICC. With 
this proposed change, FICC would be able to calculate a Sponsoring 
Member's CCLF obligation in a manner that more closely aligns with the 
liquidity risk associated with Sponsored Member Trades and thereby 
removes the aforementioned impediment. As such, FICC believes the 
proposed changes described in Item II(A)1(iii) above are designed to 
remove certain impediments to and perfect the mechanism of a national 
settlement system for the prompt and accurate clearance and settlement 
of securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act.\39\
---------------------------------------------------------------------------

    \38\ Id.
    \39\ Id.
---------------------------------------------------------------------------

    FICC also believes that the proposed changes described in Item 
II(A)1(iii) above, i.e., to add language to Rule 3A to enable FICC to 
recognize, for CCLF calculation purposes, any offsetting settlement 
obligations as between a Sponsoring Member's netting account and its 
Sponsoring Member Omnibus Account, are designed to promote the prompt 
and accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.\40\ As described 
above, if a Sponsoring Member enters into a Sponsored Member Trade 
without another offsetting Sponsored Member Trade, it is subject to a 
CCLF obligation for its positions that is in excess of the liquidity 
risk that its positions generate. With this proposed change, FICC would 
be able to calculate a Sponsoring Member's CCLF obligation in a manner 
that more closely aligns with the liquidity risk associated with 
Sponsored Member Trades and thereby reduce unnecessary costs. FICC 
believes that reducing unnecessary costs could encourage Sponsoring 
Members to submit a greater number of securities transactions to be 
cleared and settled by FICC. FICC's clearance and settlement of a 
greater number of securities transactions would promote the prompt and 
accurate clearance and settlement of securities transactions by 
increasing the number of transactions subject to FICC's risk management 
and guaranty of settlement. Therefore, FICC believes that the proposed 
changes described in Item II(A)1(iii) above are designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.\41\
---------------------------------------------------------------------------

    \40\ Id.
    \41\ Id.
---------------------------------------------------------------------------

    FICC believes the proposed changes described in Item II(A)1(iv) 
above, i.e., to remove the requirement from Section 2 of Rule 3A that a 
Sponsoring Member provide a quarterly representation to FICC that each 
of its Sponsored Members is a ``qualified institutional buyer'' as 
defined in Rule 144A, or is a legal entity that, although not organized 
as an entity specifically listed in paragraph (a)(1)(i) of Rule 144A, 
satisfies the financial requirements necessary to be a ``qualified 
institutional buyer'' as specified in that paragraph, are designed, in 
general, to protect investors and the public interest, consistent with 
Section 17A(b)(3)(F) of the Act.\42\ FICC believes the administrative 
burdens created for FICC and the Sponsoring Members by the quarterly 
representation requirement in Section 2 of Rule 3A is unnecessary 
because it is an overlapping and redundant requirement and does not add 
any substantive benefit. As described above, Section 3(d) of Rule 3A 
separately requires a Sponsoring Member to notify FICC if its Sponsored 
Member is no longer either a ``qualified institutional buyer'' as 
defined in Rule 144A, or a legal entity that, although not organized as 
an entity specifically listed in paragraph (a)(1)(i) of Rule 144A, 
satisfies the financial requirements necessary to be a ``qualified 
institutional buyer'' as specified in that paragraph.\43\ As such, FICC 
believes that removing this overlapping and redundant quarterly 
representation requirement would facilitate the effective and efficient 
operation of FICC and the Service and therefore, would enable FICC to 
better serve its Sponsoring Members. Furthermore, with these proposed 
changes, there would be a clear and singular mechanism for Sponsoring 
Members to notify FICC of a Sponsored Member's failure to satisfy the 
above-described requirement (as opposed to having overlapping and 
redundant requirements that could cause confusion). FICC believes this 
proposed change would enhance clarity and therefore, may enhance 
compliance by the Sponsoring Members with the requirement to notify 
FICC if a Sponsored Member is no longer either a ``qualified 
institutional buyer'' as defined in Rule 144A, or a legal entity that, 
although not organized as an entity specifically listed in paragraph 
(a)(1)(i) of Rule 144A, satisfies the financial requirements necessary 
to be a ``qualified institutional buyer'' as specified in that 
paragraph. Therefore, FICC believes that the proposed changes described 
in Item II(A)1(iv) above, are designed, in general, to protect 
investors and the public interest, consistent with Section 17A(b)(3)(F) 
of the Act.\44\
---------------------------------------------------------------------------

    \42\ Id.
    \43\ Rule 3A, Section 3(d), supra note 4.
    \44\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC believes the proposed clarification, corrections, and 
technical changes described in Item II(A)1(v) above are also designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act, by enhancing clarity and transparency regarding the Service.\45\ 
Having transparent and clear provisions regarding the Service would 
enable Members to better understand the operation of the Service and 
would provide Members with increased predictability and certainty 
regarding their rights and obligations. FICC believes that this 
predictability and certainty regarding their rights and obligations may 
encourage Sponsoring Members to submit a greater number of securities 
transactions to be cleared and settled by FICC. FICC's clearance and 
settlement of such securities transactions would promote the prompt and 
accurate clearance and settlement of securities transactions by 
increasing the number of transactions subject to FICC's risk management 
and guaranty of settlement. Therefore, FICC believes the proposed 
clarification, corrections, and technical changes described in Item 
II(A)1(v) above are designed to promote the prompt and accurate 
clearance and settlement of securities transactions, consistent with 
Section 17A(b)(3)(F) of the Act.\46\
---------------------------------------------------------------------------

    \45\ Id.
    \46\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7) under the Act requires FICC to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to effectively measure, monitor, and manage the 
liquidity risk that arises in or is borne by the covered clearing 
agency, including measuring, monitoring, and managing its settlement 
and funding flows on an ongoing and timely basis, and its use of 
intraday liquidity.\47\ FICC believes that the proposed changes 
described in Item II(A)1(iii) above are consistent with Rule 17Ad-
22(e)(7) because, as described above, all Sponsored Member Trades 
(including Sponsored Member Trades in the existing Service and 
Sponsored GC Trades in the proposed Sponsored GC Service) do not 
independently create a

[[Page 29346]]

liquidity risk. FICC believes the proposed changes described in Item 
II(A)1(iii) above would allow FICC to calculate a Sponsoring Member's 
CCLF obligation in a manner that more closely aligns with the liquidity 
risk associated with Sponsored Member Trades. As such, FICC believes 
that the proposed changes described in Item II(A)1(iii) above are 
reasonably designed to effectively measure, monitor, and manage the 
liquidity risk that arises in or is borne by the covered clearing 
agency, including measuring, monitoring, and managing its settlement 
and funding flows on an ongoing and timely basis, and its use of 
intraday liquidity, consistent with Rule 17Ad-22(e)(7).\48\
---------------------------------------------------------------------------

    \47\ 17 CFR 240.17Ad-22(e)(7).
    \48\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) under the Act requires FICC to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to establish objective, risk-based, and publicly 
disclosed criteria for participation, which permit fair and open access 
by direct, and where relevant, indirect participants and other 
financial market utilities, require participants to have sufficient 
financial resources and robust operational capacity to meet obligations 
arising from participation in the clearing agency, and monitor 
compliance with such participation requirements on an ongoing 
basis.\49\ FICC believes that the proposed changes described in Item 
II(A)1(iv) above would enhance clarity and therefore, may enhance 
compliance by the Sponsoring Members with the requirement to notify 
FICC if a Sponsored Member is no longer either a ``qualified 
institutional buyer'' as defined in Rule 144A, or a legal entity that, 
although not organized as an entity specifically listed in paragraph 
(a)(1)(i) of Rule 144A, satisfies the financial requirements necessary 
to be a ``qualified institutional buyer'' as specified in that 
paragraph. As described above, this requirement is set forth in Section 
3(d) of Rule 3A.\50\ With these proposed changes, there would be a 
clear and singular mechanism for Sponsoring Members to notify FICC of a 
Sponsored Member's failure to satisfy the above-described requirement 
(as opposed to having overlapping and redundant requirements that could 
cause confusion). Therefore, FICC believes the proposed changes 
described in Item II(A)1(iv) above are consistent with Rule 17Ad-
22(e)(18).\51\
---------------------------------------------------------------------------

    \49\ 17 CFR 240.17Ad-22(e)(18).
    \50\ Rule 3A, Section 3(d), supra note 4.
    \51\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(21)(i) under the Act requires FICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to be efficient and effective in meeting the 
requirements of its participants and the markets it serves, and have 
the covered clearing agency's management regularly review the 
efficiency and effectiveness of its clearing and settlement 
arrangements.\52\ FICC believes that the proposed changes described in 
Item II(A)1(ii) above would improve the efficiency and effectiveness of 
FICC's clearing and settlement arrangements by making it more 
operationally efficient for Sponsoring Members and their Sponsored 
Members that are money market funds and other mutual funds to transact 
Repo Transactions (particularly term Repo Transactions) through FICC by 
allowing them to settle such Repo Transactions on the tri-party repo 
platform of a Sponsored GC Clearing Agent Bank in a similar manner to 
the way such Sponsoring Members and Sponsored Members settle tri-party 
repo transactions with each other outside of central clearing. FICC 
also believes that the proposed rule changes described in Item 
II(A)1(iv) above would improve the efficiency and effectiveness of 
FICC's clearing and settlement arrangements by removing the quarterly 
representation requirement of Sponsoring Members under Section 2 of 
Rule 3A, which, as described above, overlaps and is redundant with the 
separate requirement under Section 3(d) of Rule 3A that requires a 
Sponsoring Member to notify FICC if its Sponsored Member is no longer 
either a ``qualified institutional buyer'' as defined in Rule 144A, or 
a legal entity that, although not organized as an entity specifically 
listed in paragraph (a)(1)(i) of Rule 144A.\53\ Therefore, FICC 
believes that the proposed changes described in Items II(A)1(ii) and 
II(A)1(iv) above are consistent with Rule 17Ad-22(e)(21)(i).\54\
---------------------------------------------------------------------------

    \52\ 17 CFR 240.17Ad-22(e)(21)(i).
    \53\ Rule 3A, Section 3(d), supra note 4.
    \54\ 17 CFR 240.17Ad-22(e)(21)(i).
---------------------------------------------------------------------------

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

    FICC believes that the proposed changes described in Item 
II(A)1(ii) above, i.e., to add the Sponsored GC Service, could promote 
competition by allowing a greater variety of institutions to become 
Sponsoring Members and Sponsored Members and could encourage Sponsoring 
Members and Sponsored Members to submit to FICC a greater number and 
variety of transactions, including, in particular, term Repo 
Transactions.
    The proposed changes described in Item II(A)1(ii) above, i.e., to 
add the Sponsored GC Service, which would allow Sponsoring Members and 
their Sponsored Member clients to submit for clearing Repo Transactions 
that settle on a tri-party repo platform of a Sponsored GC Clearing 
Agent Bank in a manner consistent with the way Sponsoring Members and 
their Sponsored Member clients settle tri-party repo transactions 
outside of central clearing today, could promote competition. FICC 
believes this new Sponsored GC Service could encourage more 
institutions to become Sponsoring Members and Sponsored Members. As 
described above, the existing Service's requirement that all Sponsored 
Member Trades be margined exclusively in cash through FICC's funds-only 
settlement process is not conducive to certain cash provider Sponsored 
Members, particularly money market funds and other mutual funds, being 
able to transact Repo Transactions with their Sponsoring Members in 
central clearing. Therefore, FICC believes the proposed changes 
described in Item II(A)1(ii) above could promote competition because 
they could cause Sponsoring Members to accept a greater number of 
Sponsored Members, including those institutions who may not be 
generally operationally equipped to provide or receive cash margin in 
connection with their term repo activity (either bilaterally or in 
central clearing). FICC also believes that the ability to submit for 
clearing Repo Transactions that settle on a tri-party repo platform of 
a Sponsored GC Clearing Agent Bank in a manner consistent with the way 
Sponsoring Members and their Sponsored Member clients settle tri-party 
repo transactions outside of central clearing today may also attract 
more institutions to become Sponsoring Members.
    Furthermore, FICC believes that these proposed changes described in 
Item II(A)1(ii) above may also encourage Sponsoring Members and 
Sponsored Members to submit to FICC a greater number and variety of 
securities transactions, including, in particular, term Repo 
Transactions. As described above, in order to engage in term repo 
activity, money market funds and other mutual funds typically require 
the support of a tri-party repo clearing bank to administer the 
collateral management on such trades. The new Sponsored GC Service 
would allow Sponsoring Members and their Sponsored Member clients to 
submit for clearing Repo Transactions that settle on the tri-party repo 
platform of a Sponsored GC

[[Page 29347]]

Clearing Agent Bank in a manner consistent with the way Sponsoring 
Members and Sponsored Members settle tri-party repo transactions 
outside of central clearing, thereby making it more operationally 
efficient for them to transact Repo Transactions (particularly term 
Repo Transactions) with each other through FICC. Therefore, FICC 
believes these proposed changes described in Item II(A)1(ii) above 
could promote competition because they could encourage Sponsoring 
Members and Sponsored Members to submit to FICC a greater number and 
variety of securities transactions, including term Repo Transactions.
    FICC believes that the proposed changes described in Item 
II(A)1(iii) above could promote competition. FICC believes that the 
proposed changes described in Item II(A)1(iii) above may encourage 
Sponsoring Members and Sponsored Members to submit to FICC a greater 
number of securities transactions. As described above, the proposed 
changes would allow FICC to recognize, for CCLF calculation purposes, 
any offsetting settlement obligations as between a Sponsoring Member's 
netting account and its Sponsoring Member Omnibus Account to ensure 
that a Sponsoring Member's CCLF obligation is calculated in a manner 
that more closely aligns with the liquidity risk associated with 
Sponsored Member Trades. Specifically, as described above, if a 
Sponsoring Member enters into a Sponsored Member Trade without another 
perfectly offsetting Sponsored Member Trade, it is subject to a CCLF 
obligation for its positions that is in excess of the liquidity risk 
that its positions generate. With this proposed change, FICC would be 
able to calculate a Sponsoring Member's CCLF obligation in a manner 
that more closely aligns with the liquidity risk associated with 
Sponsored Member Trades and thereby reduce unnecessary costs. In 
addition, as described above, unlike other Netting Members, Sponsoring 
Members do not have the option to collapse all of their FICC/GSD 
activity into one participant account in order to reap the commensurate 
benefits of offsetting positions for the purposes of reducing their 
CCLF obligations. With the proposed changes described in Item 
II(A)1(iii) above, FICC would be able, for CCLF calculation purposes, 
to recognize the offsetting settlement obligations across the 
Sponsoring Member's netting account and its Sponsoring Member Omnibus 
Account, and therefore, FICC believes these proposed changes may 
encourage more repo activity through the Service. As such, FICC 
believes the proposed changes described in Item II(A)1(iii) above could 
promote competition because they could encourage Sponsoring Members and 
Sponsored Members to submit a greater number of securities transactions 
to be cleared and settled by FICC.
    FICC believes that the proposed changes described in Item 
II(A)1(iv) above could promote competition. FICC believes the proposed 
changes described in Item II(A)1(iv) above could encourage Sponsoring 
Members to sponsor more Sponsored Members and thereby encourage the 
submission of more securities transactions to FICC because it would 
eliminate the administrative burdens on FICC and the Sponsoring Members 
of the overlapping and redundant quarterly representation requirement 
in Section 2 of Rule 3A described above.\55\
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    \55\ Rule 3A, Section 2, supra note 4.
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    FICC does not believe that the proposed changes described in Item 
II(A)1(v) above to make a clarification, certain corrections, and 
certain technical changes would have an impact on competition. The 
proposed changes described in Item II(A)1(v) above would simply provide 
additional clarity, transparency and consistency to the Rules and not 
affect Members' rights and obligations. As such, FICC believes that the 
proposed changes described in Item II(A)1(v) above would not have any 
impact on competition.

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

    FICC reviewed the proposed rule change with Sponsoring Members and 
Sponsored Members in order to benefit from their expertise. Written 
comments relating to this proposed rule change have not been received 
from the Sponsoring Members, Sponsored Members or any other person. 
FICC will notify the 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.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

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 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-2021-003 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-2021-003. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions

[[Page 29348]]

should refer to File Number SR-FICC-2021-003 and should be submitted on 
or before June 22, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\

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    \56\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-11407 Filed 5-28-21; 8:45 am]
BILLING CODE 8011-01-P