Document ID: SEC-2018-0028-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2018-01-08T05:00Z

[Federal Register Volume 83, Number 5 (Monday, January 8, 2018)]
[Notices]
[Pages 871-884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00079]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82431; File No. SR-FICC-2017-021]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change To Adopt a Recovery & Wind-
Down Plan and Related Rules

January 2, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 872]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 18, 2017, 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 December 18, 2017, FICC filed this proposed rule change 
as an advance notice (SR-FICC-2017-805) 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) of 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change of FICC would adopt the Recovery & Wind-
down Plan of FICC (``R&W Plan'' or ``Plan''). The R&W Plan would be 
maintained by FICC in compliance with Rule 17Ad-22(e)(3)(ii) under the 
Act by providing plans for the recovery and orderly wind-down of FICC 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses, as described below.\4\
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    \4\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The proposed rule change would also (1) amend FICC's Government 
Securities Division (``GSD'') Rulebook (``GSD Rules'') in order to (a) 
adopt Rule 22D (Wind-down of the Corporation) and Rule 50 (Market 
Disruption and Force Majeure), and (b) make conforming changes to Rule 
3A (Sponsoring Members and Sponsored Members), Rule 3B (Centrally 
Cleared Institutional Triparty Service) and Rule 13 (Funds-Only 
Settlement) related to the adoption of these Proposed Rules to the GSD 
Rules; (2) amend FICC's Mortgage-Backed Securities Division (``MBSD,'' 
and, together with GSD, the ``Divisions'') Clearing Rules (``MBSD 
Rules'') in order to (a) adopt Rule 17B (Wind-down of the Corporation) 
and Rule 40 (Market Disruption and Force Majeure); and (b) make 
conforming changes to Rule 3A (Cash Settlement Bank Members) related to 
the adoption of these Proposed Rules to the MBSD Rules; and (3) amend 
Rule 1 of the Electronic Pool Netting (``EPN'') Rules of MBSD (``EPN 
Rules'') in order to provide that EPN Users, as defined therein, are 
bound by proposed Rule 17B (Wind-down of the Corporation) and proposed 
Rule 40 (Market Disruption and Force Majeure) to be adopted to the MBSD 
Rules.\5\ Each of the proposed rules is referred to herein as a 
``Proposed Rule,'' and are collectively referred to as the ``Proposed 
Rules.''
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    \5\ The GSD Rules and the MBSD Rules are referred to 
collectively herein as the ``Rules.'' Capitalized terms not defined 
herein are defined in the Rules. The Rules and the EPN Rules are 
available at http://www.dtcc.com/legal/rules-and-procedures.
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    The Proposed Rules are designed to (1) facilitate the 
implementation of the R&W Plan when necessary and, in particular, allow 
FICC to effectuate its strategy for winding down and transferring its 
business; (2) provide Members and Limited Members with transparency 
around critical provisions of the R&W Plan that relate to their rights, 
responsibilities and obligations; \6\ and (3) provide FICC with the 
legal basis to implement those provisions of the R&W Plan when 
necessary, as described below.
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    \6\ References herein to ``Members'' refer to GSD Netting 
Members and MBSD Clearing Members. References herein to ``Limited 
Members'' refer to participants of GSD or MBSD other than GSD 
Netting Members and MBSD Clearing Members, including, for example, 
GSD Comparison-Only Members, GSD Sponsored Members, GSD CCIT 
Members, and MBSD EPN Users.
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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
    FICC is proposing to adopt the R&W Plan to be used by the Board and 
management of FICC in the event FICC encounters scenarios that could 
potentially prevent it from being able to provide its critical services 
as a going concern. The R&W Plan would identify (i) the recovery tools 
available to FICC to address the risks of (a) uncovered losses or 
liquidity shortfalls resulting from the default of one or more Members, 
and (b) losses arising from non-default events, such as damage to its 
physical assets, a cyber-attack, or custody and investment losses, and 
(ii) the strategy for implementation of such tools. The R&W Plan would 
also establish the strategy and framework for the orderly wind-down of 
FICC and the transfer of its business in the remote event the 
implementation of the available recovery tools does not successfully 
return FICC to financial viability.
    As discussed in greater detail below, the R&W Plan would provide, 
among other matters, (i) an overview of the business of FICC and its 
parent, The Depository Trust & Clearing Corporation (``DTCC''); (ii) an 
analysis of FICC's intercompany arrangements and an existing link to 
another financial market infrastructures (``FMIs''); (iii) a 
description of FICC's services, and the criteria used to determine 
which services are considered critical; (iv) a description of the FICC 
and DTCC governance structure; (v) a description of the governance 
around the overall recovery and wind-down program; (vi) a discussion of 
tools available to FICC to mitigate credit/market and liquidity risks, 
including recovery indicators and triggers, and the governance around 
management of a stress event along a ``Crisis Continuum'' timeline; 
(vii) a discussion of potential non-default losses and the resources 
available to FICC to address such losses, including recovery triggers 
and tools to mitigate such losses; (viii) an analysis of the recovery 
tools' characteristics, including how they are comprehensive, 
effective, and transparent, how the tools provide appropriate 
incentives to Members to, among other things, control and monitor the 
risks they may present to FICC, and how FICC seeks to minimize the 
negative consequences of executing its recovery tools; and (ix) the 
framework and approach for the orderly wind-down and transfer of FICC's 
business, including an estimate of the time and costs to effect a 
recovery or orderly wind-down of FICC.
    The R&W Plan would be structured as a roadmap, and would identify 
and describe the tools that FICC may use to effect a recovery from the 
events and scenarios described therein. Certain recovery tools that 
would be identified in the R&W Plan are based in the Rules (including 
the Proposed Rules) and, as such, descriptions of those tools would 
include descriptions of, and reference to, the applicable Rules and any 
related internal policies and procedures. Other recovery tools that 
would be identified in the R&W Plan are based in contractual 
arrangements to which FICC is a party, including, for example, existing 
committed or pre-arranged liquidity arrangements. Further, the R&W Plan 
would state that FICC may

[[Page 873]]

develop further supporting internal guidelines and materials that may 
provide operationally for matters described in the Plan, and that such 
documents would be supplemental and subordinate to the Plan.
    Key factors considered in developing the R&W Plan and the types of 
tools available to FICC were its governance structure and the nature of 
the markets within which FICC operates. As a result of these 
considerations, many of the tools available to FICC that would be 
described in the R&W Plan are FICC's existing, business-as-usual risk 
management and default management tools, which would continue to be 
applied in scenarios of increasing stress. In addition to these 
existing, business-as-usual tools, the R&W Plan would describe FICC's 
other principal recovery tools, which include, for example, (i) 
identifying, monitoring and managing general business risk and holding 
sufficient liquid net assets funded by equity (``LNA'') to cover 
potential general business losses pursuant to the Clearing Agency 
Policy on Capital Requirements (``Capital Policy''),\7\ (ii) 
maintaining the Clearing Agency Capital Replenishment Plan 
(``Replenishment Plan'') as a viable plan for the replenishment of 
capital should FICC's equity fall close to or below the amount being 
held pursuant to the Capital Policy,\8\ and (iii) the process for the 
allocation of losses among Members, as provided in Rule 4 of the GSD 
Rules and Rule 4 of the MBSD Rules.\9\ The R&W Plan would provide 
governance around the selection and implementation of the recovery tool 
or tools most relevant to mitigate a stress scenario and any applicable 
loss or liquidity shortfall.
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    \7\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
    \8\ See id.
    \9\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD 
Rule 4 (Clearing Fund and Loss Allocation), supra note 5. FICC is 
proposing changes to GSD Rule 4 and MBSD Rule 4, and other related 
rules, regarding allocation of losses in a separate filing submitted 
simultaneously with this filing (File Nos. SR-FICC-2017-022 and SR-
FICC-2017-806, referred to collectively herein as the ``Loss 
Allocation Filing''). FICC expects the Commission to review both 
proposals together, and, as such, the proposal described in this 
filing anticipates the approval and implementation of those proposed 
changes to the Rules.
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    The development of the R&W Plan is facilitated by the Office of 
Recovery & Resolution Planning (``R&R Team'') of DTCC.\10\ The R&R Team 
reports to the DTCC Management Committee (``Management Committee'') and 
is responsible for maintaining the R&W Plan and for the development and 
ongoing maintenance of the overall recovery and wind-down planning 
process. The Board, or such committees as may be delegated authority by 
the Board from time to time pursuant to its charter, would review and 
approve the R&W Plan biennially, and would also review and approve any 
changes that are proposed to the R&W Plan outside of the biennial 
review.
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    \10\ DTCC operates on a shared services model with respect to 
FICC and its other subsidiaries. Most corporate functions are 
established and managed on an enterprise-wide basis pursuant to 
intercompany agreements under which it is generally DTCC that 
provides a relevant service to a subsidiary, including FICC.
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    As discussed in greater detail below, the Proposed Rules would 
define the procedures that may be employed in the event of FICC's wind-
down and would provide for FICC's authority to take certain actions on 
the occurrence of a ``Market Disruption Event,'' as defined therein. 
Significantly, the Proposed Rules would provide Members and Limited 
Members with transparency and certainty with respect to these matters. 
The Proposed Rules would facilitate the implementation of the R&W Plan, 
particularly FICC's strategy for winding down and transferring its 
business, and would provide FICC with the legal basis to implement 
those aspects of the R&W Plan.
FICC R&W Plan
    The R&W Plan is intended to be used by the Board and FICC's 
management in the event FICC encounters scenarios that could 
potentially prevent it from being able to provide its critical services 
as a going concern. The R&W Plan would be structured to provide a 
roadmap, define the strategy, and identify the tools available to FICC 
to either (i) recover in the event it experiences losses that exceed 
its prefunded resources (such strategies and tools referred to herein 
as the ``Recovery Plan'') or (ii) wind-down its business in a manner 
designed to permit the continuation of its critical services in the 
event that such recovery efforts are not successful (such strategies 
and tools referred to herein as the ``Wind-down Plan''). The 
description of the R&W Plan below is intended to highlight the purpose 
and expected effects of the material aspects of the R&W Plan, and to 
provide Members and Limited Members with appropriate transparency into 
these features.
Business Overview, Critical Services, and Governance
    The introduction to the R&W Plan would identify the document's 
purpose and its regulatory background, and would outline a summary of 
the Plan. The stated purpose of the R&W Plan is that it is to be used 
by the Board and FICC management in the event FICC encounters scenarios 
that could potentially prevent it from being able to provide its 
critical services as a going concern. The R&W Plan would be maintained 
by FICC in compliance with Rule 17Ad-22(e)(3)(ii) under the Act \11\ by 
providing plans for the recovery and orderly wind-down of FICC.
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    \11\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The R&W Plan would describe DTCC's business profile, provide a 
summary of the services of FICC as offered by each of the Divisions, 
and identify the intercompany arrangements and links between FICC and 
other entities, most notably a link between GSD and Chicago Mercantile 
Exchange Inc. (``CME''), which is also an FMI. This overview section 
would provide a context for the R&W Plan by describing FICC's business, 
organizational structure and critical links to other entities. By 
providing this context, this section would facilitate the analysis of 
the potential impact of utilizing the recovery tools set forth in later 
sections of the Recovery Plan, and the analysis of the factors that 
would be addressed in implementing the Wind-down Plan.
    DTCC is a user-owned and user-governed holding company and is the 
parent company of FICC and its affiliates, The Depository Trust Company 
(``DTC'') and National Securities Clearing Corporation (``NSCC'', and, 
together with FICC and DTC, the ``Clearing Agencies''). The Plan would 
describe how corporate support services are provided to FICC from DTCC 
and DTCC's other subsidiaries through intercompany agreements under a 
shared services model.
    The Plan would provide a description of the critical contractual 
and operational arrangements between FICC and other legal entities, 
including the cross-margining agreement between GSD and CME, which is 
also an FMI.\12\ Pursuant to this arrangement, GSD offsets each cross-
margining participant's residual margin amount (based on related 
positions) at GSD against the offsetting residual margin amounts of the 
participant (or its affiliate) at CME. GSD and CME may then reduce the 
amount of collateral that they collect to reflect the offsets between 
the cross-margining participant's positions at GSD and its (or

[[Page 874]]

its affiliate's) positions at CME. This section of the Plan, 
identifying and briefly describing FICC's established links, would 
provide a mapping of critical connections and dependencies that may 
need to be relied on or otherwise addressed in connection with the 
implementation of either the Recovery Plan or the Wind-down Plan.
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    \12\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_cme_crossmargin_agreement.pdf. See also GSD Rule 43 
(Cross-Margining Arrangements), supra note 5.
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    The Plan would define the criteria for classifying certain of 
FICC's services as ``critical,'' and would identify those critical 
services and the rationale for their classification. This section would 
provide an analysis of the potential systemic impact from a service 
disruption, and is important for evaluating how the recovery tools and 
the wind-down strategy would facilitate and provide for the 
continuation of FICC's critical services to the markets it serves. The 
criteria that would be used to identify an FICC service or function as 
critical would include consideration as to (1) whether there is a lack 
of alternative providers or products; (2) whether failure of the 
service could impact FICC's ability to perform its central counterparty 
services through either Division; (3) whether failure of the service 
could impact FICC's ability to perform its multilateral netting 
services through either Division and, as such, could impact the volume 
of transactions; (4) whether failure of the service could impact FICC's 
ability to perform its book-entry delivery and settlement services 
through either Division and, as such, could impact transaction costs; 
(5) whether failure of the service could impact FICC's ability to 
perform its cash payment processing services through either Division 
and, as such, could impact the flow of liquidity in the U.S. financial 
markets; and (6) whether the service is interconnected with other 
participants and processes within the U.S. financial system, for 
example, with other FMIs, settlement banks, and broker-dealers. The 
Plan would then list each of those services, functions or activities 
that FICC has identified as ``critical'' based on the applicability of 
these six criteria. GSD's critical services would include, for example, 
its Real-Time Trade Matching (``RTTM[supreg]'') service,\13\ its 
services related to netting and settlement of submitted trades for 
Netting Members,\14\ the Auction Takedown service,\15\ and the 
Repurchase Agreement Netting Service.\16\ MBSD's critical services 
would include, for example, its RTTM[supreg] service,\17\ its netting 
service for to-be-announced (``TBA'') transactions,\18\ its Electronic 
Pool Notification service,\19\ and its pool netting and settlement.\20\ 
The R&W Plan would also include a non-exhaustive list of FICC services 
that are not deemed critical.
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    \13\ See GSD Rule 5 (Comparison System), GSD Rule 6A (Bilateral 
Comparison), GSD Rule 6B (Demand Comparison), and GSD Rule 6C 
(Locked-In Comparison), supra note 5.
    \14\ See GSD Rule 11 (Netting System), GSD Rule 12 (Securities 
Settlement), and GSD Rule 13 (Funds-Only Settlement), supra note 5.
    \15\ See GSD Rule 6C (Locked-In Comparison) and GSD Rule 17 
(Netting and Settlement of Netting-Eligible Auction Purchases), 
supra note 5.
    \16\ See GSD Rule 7 (Repo Transactions), GSD Rule 11 (Netting 
System), GSD Rule 18 (Special Provisions for Repo Transactions), GSD 
Rule 19 (Special Provisions for Brokered Repo Transactions), and GSD 
Rule 20 (Special Provisions for GCF Repo Transactions), supra note 
5.
    \17\ See MBSD Rule 5 (Trade Comparison), supra note 5.
    \18\ See MBSD Rule 6 (TBA Netting), supra note 5.
    \19\ See EPN Rules, supra note 5.
    \20\ See MBSD Rule 8 (Pool Netting System) and MBSD Rule 9 (Pool 
Settlement with the Corporation), supra note 5.
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    The evaluation of which services provided by FICC are deemed 
critical is important for purposes of determining how the R&W Plan 
would facilitate the continuity of those services. As discussed further 
below, while FICC's Wind-down Plan would provide for the transfer of 
all critical services to a transferee in the event FICC's wind-down is 
implemented, it would anticipate that any non-critical services that 
are ancillary and beneficial to a critical service, or that otherwise 
have substantial user demand from the continuing membership, would also 
be transferred.
    The Plan would describe the governance structure of both DTCC and 
FICC. This section of the Plan would identify the ownership and 
governance model of these entities at both the Board of Directors and 
management levels. The Plan would state that the stages of escalation 
required to manage recovery under the Recovery Plan or to invoke FICC's 
wind-down under the Wind-down Plan would range from relevant business 
line managers up to the Board through FICC's governance structure. The 
Plan would then identify the parties responsible for certain activities 
under both the Recovery Plan and the Wind-down Plan, and would describe 
their respective roles. The Plan would identify the Risk Committee of 
the Board (``Board Risk Committee'') as being responsible for oversight 
of risk management activities at FICC, which include focusing on both 
oversight of risk management systems and processes designed to identify 
and manage various risks faced by FICC, and, due to FICC's critical 
role in the markets in which it operates, oversight of FICC's efforts 
to mitigate systemic risks that could impact those markets and the 
broader financial system.\21\ The Plan would identify the DTCC 
Management Risk Committee (``Management Risk Committee'') as primarily 
responsible for general, day-to-day risk management through delegated 
authority from the Board Risk Committee. The Plan would state that the 
Management Risk Committee has delegated specific day-to-day risk 
management, including management of risks addressed through margining 
systems and related activities, to the DTCC Group Chief Risk Office 
(``GCRO''), which works with staff within the DTCC Financial Risk 
Management group. Finally, the Plan would describe the role of the 
Management Committee, which provides overall direction for all aspects 
of FICC's business, technology, and operations and the functional areas 
that support these activities.
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    \21\ The charter of the Board Risk Committee is available at 
http://www.dtcc.com/~/media/Files/Downloads/legal/policy-and-
compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
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    The Plan would describe the governance of recovery efforts in 
response to both default losses and non-default losses under the 
Recovery Plan, identifying the groups responsible for those recovery 
efforts. Specifically, the Plan would state that the Management Risk 
Committee provides oversight of actions relating to the default of a 
Member, which would be reported and escalated to it through the GCRO, 
and the Management Committee provides oversight of actions relating to 
non-default events that could result in a loss, which would be reported 
and escalated to it from the DTCC Chief Financial Officer (``CFO'') and 
the DTCC Treasury group that reports to the CFO, and from other 
relevant subject matter experts based on the nature and circumstances 
of the non-default event.\22\ More generally, the Plan would state that 
the type of loss and the nature and circumstances of the events that 
lead to the loss would dictate the components of governance to address 
that loss, including the escalation path to authorize those actions. As 
described further below, both the Recovery Plan

[[Page 875]]

and the Wind-down Plan would describe the governance of escalations, 
decisions, and actions under each of those plans.
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    \22\ The Plan would state that these groups would be involved to 
address how to mitigate the financial impact of non-default losses, 
and in recommending mitigating actions, the Management Committee 
would consider information and recommendations from relevant subject 
matter experts based on the nature and circumstances of the non-
default event. Any necessary operational response to these events, 
however, would be managed in accordance with applicable incident 
response/business continuity process; for example, processes 
established by the DTCC Technology Risk Management group would be 
followed in response to a cyber event.
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    Finally, the Plan would describe the role of the R&R Team in 
managing the overall recovery and wind-down program and plans for each 
of the Clearing Agencies.
FICC Recovery Plan
    The Recovery Plan is intended to be a roadmap of those actions that 
FICC may employ across both Divisions to monitor and, as needed, 
stabilize its financial condition. As each event that could lead to a 
financial loss could be unique in its circumstances, the Recovery Plan 
would not be prescriptive and would permit FICC to maintain flexibility 
in its use of identified tools and in the sequence in which such tools 
are used, subject to any conditions in the Rules or the contractual 
arrangement on which such tool is based. FICC's Recovery Plan would 
consist of (1) a description of the risk management surveillance, 
tools, and governance that FICC would employ across evolving stress 
scenarios that it may face as it transitions through a ``Crisis 
Continuum,'' described below; (2) a description of FICC's risk of 
losses that may result from non-default events, and the financial 
resources and recovery tools available to FICC to manage those risks 
and any resulting losses; and (3) an evaluation of the characteristics 
of the recovery tools that may be used in response to either default 
losses or non-default losses, as described in greater detail below. In 
all cases, FICC would act in accordance with the Rules, within the 
governance structure described in the R&W Plan, and in accordance with 
applicable regulatory oversight to address each situation in order to 
best protect FICC, the Members, and the markets in which it operates.
    Managing Member Default Losses and Liquidity Needs Through the 
Crisis Continuum. The Recovery Plan would describe the risk management 
surveillance, tools, and governance that FICC may employ across an 
increasing stress environment, which is referred to as the ``Crisis 
Continuum.'' This description would identify those tools that can be 
employed to mitigate losses, and mitigate or minimize liquidity needs, 
as the market environment becomes increasingly stressed. The phases of 
the Crisis Continuum would include (1) a stable market phase, (2) a 
stressed market phase, (3) a phase commencing with FICC's decision to 
cease to act for a Member or Affiliated Family of Members,\23\ and (4) 
a recovery phase. This section of the Recovery Plan would address 
conditions and circumstances relating to FICC's decision to cease to 
act for a Member (referred to in the R&W Plan as a ``defaulting 
Member,'' and the event as a ``Member default'') pursuant to the 
applicable Rules.\24\
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    \23\ The Plan would define an ``Affiliated Family'' of Members 
as a number of affiliated entities that are all Members of either 
GSD or MBSD.
    \24\ See GSD Rule 21 (Restrictions on Access to Services) and 
MBSD Rule 14 (Restrictions on Access to Services), supra note 5.
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    The Recovery Plan would provide context to its roadmap through this 
Crisis Continuum by describing FICC's ongoing management of credit, 
market and liquidity risk across the Divisions, and its existing 
process for measuring and reporting its risks as they align with 
established thresholds for its tolerance of those risks. The Recovery 
Plan would discuss the management of credit/market risk and liquidity 
exposures together, because the tools that address these risks can be 
deployed either separately or in a coordinated approach in order to 
address both exposures. FICC manages these risk exposures collectively 
to limit their overall impact on FICC and the memberships of the 
Divisions. As part of its market risk management strategy, FICC manages 
its credit exposure to Members by determining the appropriate required 
deposits to the GSD and MBSD Clearing Fund and monitoring its 
sufficiency, as provided for in the applicable Rules.\25\ FICC manages 
its liquidity risks with an objective of maintaining sufficient 
resources to be able to fulfill obligations that have been guaranteed 
by FICC in the event of a Member default that presents the largest 
aggregate liquidity exposure to FICC over the settlement cycle.\26\
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    \25\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD 
Rule 4 (Clearing Fund and Loss Allocation), supra note 5. FICC's 
market risk management strategy for both Divisions is designed to 
comply with Rule 17Ad-22(e)(4) under the Act, where these risks are 
referred to as ``credit risks.'' See also 17 CFR 240.17Ad-22(e)(4).
    \26\ FICC's liquidity risk management strategy, including the 
manner in which FICC utilizes its liquidity tools, is described in 
the Clearing Agency Liquidity Risk Management Framework. See 
Securities Exchange Act Release Nos. 80489 (April 19, 2017), 82 FR 
19120 (April 25, 2017) (SR-DTC-2017-004, SR-NSCC-2017-005, SR-FICC-
2017-008); 81194 (July 24, 2017), 82 FR 35241 (July 28, 2017) (SR-
DTC-2017-004, SR-NSCC-2017-005, SR-FICC-2017-008).
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    The Recovery Plan would outline the metrics and indicators that 
FICC has developed to evaluate a stress situation against established 
risk tolerance thresholds. Each risk mitigation tool identified in the 
Recovery Plan would include a description of the escalation thresholds 
that allow for effective and timely reporting to the appropriate 
internal management staff and committees, or to the Board. The Recovery 
Plan would make clear that these tools and escalation protocols would 
be calibrated across each phase of the Crisis Continuum. The Recovery 
Plan would also establish that FICC would retain the flexibility to 
deploy such tools either separately or in a coordinated approach, and 
to use other alternatives to these actions and tools as necessitated by 
the circumstances of a particular Member default in accordance with the 
applicable Rules. Therefore, the Recovery Plan would both provide FICC 
with a roadmap to follow within each phase of the Crisis Continuum, and 
would permit it to adjust its risk management measures to address the 
unique circumstances of each event.
    The Recovery Plan would describe the conditions that mark each 
phase of the Crisis Continuum, and would identify actions that FICC 
could take as it transitions through each phase in order to both 
prevent losses from materializing through active risk management, and 
to restore the financial health of FICC during a period of stress.
    The ``stable market phase'' of the Crisis Continuum would describe 
active risk management activities in the normal course of business. 
These activities would include (1) routine monitoring of margin 
adequacy through daily review of back testing and stress testing 
results that review the adequacy of the margin calculations for each of 
GSD and MBSD, and escalation of those results to internal and Board 
committees; \27\ and (2) routine monitoring of liquidity adequacy 
through review of daily liquidity studies that measure sufficiency of 
available liquidity resources to meet cash settlement obligations of 
the Member that would generate the largest aggregate payment 
obligation.\28\
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    \27\ FICC's stress testing practices are described in the 
Clearing Agency Stress Testing Framework (Market Risk). See 
Securities Exchange Act Release Nos. 80485 (April 19, 2017), 82 FR 
19131 (April 25, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-NSCC-
2017-006); 81192 (July 24, 2017), 82 FR 35245 (July 28, 2017) (SR-
DTC-2017-005, SR-FICC-2017-009, SR-NSCC-2017-006).
    \28\ See supra note 26.
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    The Recovery Plan would describe some of the indicators of the 
``stressed market phase'' of the Crisis Continuum, which would include, 
for example, volatility in market prices of certain assets where there 
is increased uncertainty among market participants about the 
fundamental value of those

[[Page 876]]

assets. This phase would involve general market stresses, when no 
Member default would be imminent. Within the description of this phase, 
the Recovery Plan would provide that FICC may take targeted, routine 
risk management measures as necessary and as permitted by the Rules.
    Within the ``Member default phase'' of the Crisis Continuum, the 
Recovery Plan would provide a roadmap for the existing procedures that 
FICC would follow in the event of a Member default and any decision by 
FICC to cease to act for that Member.\29\ The Recovery Plan would 
provide that the objectives of FICC's actions upon a Member or 
Affiliated Family default are to (1) minimize losses and market 
exposure of the affected Members and the applicable Division's non-
defaulting Members; and (2), to the extent practicable, minimize 
disturbances to the affected markets. The Recovery Plan would describe 
tools, actions, and related governance for both market risk monitoring 
and liquidity risk monitoring through this phase. For example, in 
connection with managing its market risk during this phase, FICC would, 
pursuant to the applicable Division's Rules, (1) monitor and assess the 
adequacy of the GSD and MBSD Clearing Fund resources; (2), when 
necessary and appropriate pursuant to the applicable Division's Rules, 
assess and collect additional margin requirements; and (3) follow its 
operational procedures to liquidate the defaulting Member's portfolio. 
Management of liquidity risk through this phase would involve ongoing 
monitoring of the adequacy of FICC's liquidity resources, and the 
Recovery Plan would identify certain actions FICC may deploy as it 
deems necessary to mitigate a potential liquidity shortfall, which 
would include, for example, adjusting its strategy for closing out the 
defaulting Member's portfolio or seeking additional liquidity 
resources. The Recovery Plan would state that, throughout this phase, 
relevant information would be escalated and reported to both internal 
management committees and the Board Risk Committee.
---------------------------------------------------------------------------

    \29\ See GSD Rule 21 (Restrictions on Access to Services), GSD 
Rule 22A (Procedures for When the Corporation Ceases to Act), MBSD 
Rule 14 (Restrictions on Access to Services), and MBSD Rule 17 
(Procedures for When the Corporation Ceases to Act), supra note 5.
---------------------------------------------------------------------------

    The Recovery Plan would also identify financial resources available 
to FICC, pursuant to the Rules, to address losses arising out of a 
Member default. Specifically, GSD Rule 4 and MBSD Rule 4, as each are 
proposed to be amended by the Loss Allocation Filing, would provide 
that losses be satisfied first by applying a ``Corporate 
Contribution,'' and then, if necessary, by allocating remaining losses 
to non-defaulting Members.\30\
---------------------------------------------------------------------------

    \30\ See supra note 9. The Loss Allocation Filing proposes to 
amend GSD Rule 4 and MBSD Rule 4 to define the amount FICC would 
contribute to address a loss resulting from either a Member default 
or a non-default event as the ``Corporate Contribution.'' This 
amount would be 50 percent (50%) of the ``General Business Risk 
Capital Requirement,'' which is calculated pursuant to the Capital 
Policy and is an amount sufficient to cover potential general 
business losses so that FICC can continue operations and services as 
a going concern if those losses materialize, in compliance with Rule 
17Ad-22(e)(15) under the Act. See also supra note 7; 17 CFR 
240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    The ``recovery phase'' of the Crisis Continuum would describe 
actions that FICC may take to avoid entering into a wind-down of its 
business. In order to provide for an effective and timely recovery, the 
Recovery Plan would describe two stages of this phase: (1) A recovery 
corridor, during which FICC may experience stress events or observe 
early warning indicators that allow it to evaluate its options and 
prepare for the recovery phase; and (2) the recovery phase, which would 
begin on the date that FICC issues the first Loss Allocation Notice of 
the second loss allocation round with respect to a given ``Event 
Period.'' \31\
---------------------------------------------------------------------------

    \31\ The Loss Allocation Filing proposes to amend Rule 4 to 
introduce the concept of an ``Event Period'' as the ten (10) 
Business Days beginning on (i) with respect to a Member default, the 
day on which NSCC notifies Members that it has ceased to act for a 
Member under the Rules, or (ii) with respect to a non-default loss, 
the day that NSCC notifies Members of the determination by the Board 
that there is a non-default loss event, as described in greater 
detail in that filing. The proposed GSD Rule 4 and MBSD Rule 4 would 
define a ``round'' as a series of loss allocations relating to an 
Event Period, and would provide that the first Loss Allocation 
Notice in a first, second, or subsequent round shall expressly state 
that such notice reflects the beginning of a first, second, or 
subsequent round. The maximum allocable loss amount of a round is 
equal to the sum of the ``Loss Allocation Caps'' (as defined in the 
proposed GSD Rule 4 and MBSD Rule 4) of those Members included in 
the round. See supra note 9.
---------------------------------------------------------------------------

    FICC expects that significant deterioration of liquidity resources 
would cause it to enter the recovery corridor stage of this phase, and, 
as such, the actions it may take at this stage would be aimed at 
replenishing those resources. Circumstances that could cause it to 
enter the recovery corridor may include, for example, a rapid and 
material change in market prices or substantial intraday activity 
volume by the defaulting Member, neither of which are mitigated by 
intraday margin calls, or subsequent defaults by other Members or 
Affiliated Families during a compressed time period. Throughout the 
recovery corridor, FICC would monitor the adequacy of the Divisions' 
respective resources and the expected timing of replenishment of those 
resources, and would do so through the monitoring of certain metrics 
referred to as ``Corridor Indicators.''
    The majority of the Corridor Indicators, as identified in the 
Recovery Plan, relate directly to conditions that may require either 
Division to adjust its strategy for hedging and liquidating a 
defaulting Member's portfolio, and any such changes would include an 
assessment of the status of the Corridor Indicators. Corridor 
Indicators would include, for example, effectiveness and speed of 
FICC's efforts to close out the portfolio of the defaulting Member, and 
an impediment to the availability of its financial resources. For each 
Corridor Indicator, the Recovery Plan would identify (1) measures of 
the indicator, (2) evaluations of the status of the indicator, (3) 
metrics for determining the status of the deterioration or improvement 
of the indicator, and (4) ``Corridor Actions,'' which are steps that 
may be taken to improve the status of the indicator,\32\ as well as 
management escalations required to authorize those steps. Because FICC 
has never experienced the default of multiple Members, it has not, 
historically, measured the deterioration or improvements metrics of the 
Corridor Indicators. As such, these metrics were chosen based on the 
business judgment of FICC management.
---------------------------------------------------------------------------

    \32\ The Corridor Actions that would be identified in the Plan 
are indicative, but not prescriptive; therefore, if FICC needs to 
consider alternative actions due to the applicable facts and 
circumstances, the escalation of those alternative actions would 
follow the same escalation protocol identified in the Plan for the 
Corridor Indicator to which the action relates.
---------------------------------------------------------------------------

    The Recovery Plan would also describe the reporting and escalation 
of the status of the Corridor Indicators throughout the recovery 
corridor. Significant deterioration of a Corridor Indicator, as 
measured by the metrics set out in the Recovery Plan, would be 
escalated to the Board. FICC management would review the Corridor 
Indicators and the related metrics at least annually, and would modify 
these metrics as necessary in light of observations from simulations of 
Member defaults and other analyses. Any proposed modifications would be 
reviewed by the Management Risk Committee and the Board Risk Committee. 
The Recovery Plan would estimate that FICC may remain in the recovery 
corridor stage between one day and two weeks. This estimate is based on 
historical data observed in past

[[Page 877]]

Member defaults, the results of simulations of Member defaults, and 
periodic liquidity analyses conducted by FICC. The actual length of a 
recovery corridor would vary based on actual market conditions observed 
on the date and time FICC enters the recovery corridor stage of the 
Crisis Continuum, and FICC would expect the recovery corridor to be 
shorter in market conditions of increased stress.
    The Recovery Plan would outline steps by which FICC may allocate 
its losses, and would state that the available tools related to 
allocation of losses would only be used in this and subsequent phases 
of the Crisis Continuum.\33\ The Recovery Plan would also identify 
tools that may be used to address foreseeable shortfalls of FICC's 
liquidity resources following a Member default, and would provide that 
these tools may be used throughout the Crisis Continuum to address 
liquidity shortfalls if they arise. The goal in managing FICC's 
qualified liquidity resources is to maximize resource availability in 
an evolving stress situation, to maintain flexibility in the order and 
use of sources of liquidity, and to repay any third party lenders of 
liquidity in a timely manner. Additional voluntary or uncommitted tools 
to address potential liquidity shortfalls, for example uncommitted bank 
loans, which may supplement FICC's other liquid resources described 
herein, would also be identified in the Recovery Plan. The Recovery 
Plan would state that, due to the extreme nature of a stress event that 
would cause FICC to consider the use of these liquidity tools, the 
availability and capacity of these liquidity tools, and the willingness 
of counterparties to lend, cannot be accurately predicted and are 
dependent on the circumstances of the applicable stress period, 
including market price volatility, actual or perceived disruptions in 
financial markets, the costs to FICC of utilizing these tools, and any 
potential impact on FICC's credit rating.
---------------------------------------------------------------------------

    \33\ As these matters are described in greater detail in the 
Loss Allocation Filing and in the proposed amendments to GSD Rule 4 
and MBSD Rule 4, described therein, reference is made to that filing 
and the details are not repeated here. See supra note 9.
---------------------------------------------------------------------------

    As stated above, the Recovery Plan would state that FICC will have 
entered the recovery phase on the date that it issues the first Loss 
Allocation Notice of the second loss allocation round with respect to a 
given Event Period. The Recovery Plan would provide that, during the 
recovery phase, FICC would continue and, as needed, enhance, the 
monitoring and remedial actions already described in connection with 
previous phases of the Crisis Continuum, and would remain in the 
recovery phase until its financial resources are expected to be or are 
fully replenished, or until the Wind-down Plan is triggered, as 
described below.
    The Recovery Plan would describe governance for the actions and 
tools that may be employed within the Crisis Continuum, which would be 
dictated by the facts and circumstances applicable to the situation 
being addressed. Such facts and circumstances would be measured by the 
Corridor Indicators applicable to that phase of the Crisis Continuum, 
and, in most cases, by the measures and metrics that are assigned to 
those Corridor Indicators, as described above. Each of these indicators 
would have a defined review period and escalation protocol that would 
be described in the Recovery Plan. The Recovery Plan would also 
describe the governance procedures around a decision to cease to act 
for a Member, pursuant to the applicable Division's Rules, and around 
the management and oversight of the subsequent liquidation of the 
defaulting Member's portfolio. The Recovery Plan would state that, 
overall, FICC would retain flexibility in accordance with each 
Division's Rules, its governance structure, and its regulatory 
oversight, to address a particular situation in order to best protect 
FICC and the Members, and to meet the primary objectives, throughout 
the Crisis Continuum, of minimizing losses and, where consistent and 
practicable, minimizing disturbance to affected markets.
    Non-Default Losses. The Recovery Plan would outline how FICC may 
address losses that result from events other than a Member default. 
While these matters are addressed in greater detail in other documents, 
this section of the Plan would provide a roadmap to those documents and 
an outline for FICC's approach to monitoring and managing losses that 
could result from a non-default event. The Plan would first identify 
some of the risks FICC faces that could lead to these losses, which 
include, for example, the business and profit/loss risks of unexpected 
declines in revenue or growth of expenses; the operational risks of 
disruptions to systems or processes that could lead to large losses, 
including those resulting from, for example, a cyber-attack; and 
custody or investment risks that could lead to financial losses. The 
Recovery Plan would describe FICC's overall strategy for the management 
of these risks, which includes a ``three lines of defense'' approach to 
risk management that allows for comprehensive management of risk across 
the organization.\34\ The Recovery Plan would also describe FICC's 
approach to financial risk and capital management. The Plan would 
identify key aspects of this approach, including, for example, an 
annual budget process, business line performance reviews with 
management, and regular review of capital requirements against LNA. 
These risk management strategies are collectively intended to allow 
FICC to effectively identify, monitor, and manage risks of non-default 
losses.
---------------------------------------------------------------------------

    \34\ The Clearing Agency Risk Management Framework includes a 
description of this ``three lines of defense'' approach to risk 
management, and addresses how FICC comprehensively manages various 
risks, including operational, general business, investment, custody, 
and other risks that arise in or are borne by it. See Securities 
Exchange Act Release No. 81635 (September 15, 2017), 82 FR 44224 
(September 21, 2017) (SR-DTC-2017-013, SR-FICC-2017-016, SR-NSCC-
2017-012). The Clearing Agency Operational Risk Management Framework 
describes the manner in which FICC manages operational risks, as 
defined therein. See Securities Exchange Act Release No. 81745 
(September 28, 2017), 82 FR 46332 (October 4, 2017) (SR-DTC-2017-
014, SR-FICC-2017-017, SR-NSCC-2017-013).
---------------------------------------------------------------------------

    The Plan would identify the two categories of financial resources 
FICC maintains to cover losses and expenses arising from non-default 
risks or events as (1) LNA, maintained, monitored, and managed pursuant 
to the Capital Policy, which include (a) amounts held in satisfaction 
of the General Business Risk Capital Requirement,\35\ (b) the Corporate 
Contribution,\36\ and (c) other amounts held in excess of FICC's 
capital requirements pursuant to the Capital Policy; and (2) resources 
available pursuant to the loss allocation provisions of GSD Rule 4 and 
MBSD Rule 4.\37\
---------------------------------------------------------------------------

    \35\ See supra note 30.
    \36\ See supra note 30.
    \37\ See supra note 9.
---------------------------------------------------------------------------

    The Plan would address the process by which the CFO and the DTCC 
Treasury group would determine which available LNA resources are most 
appropriate to cover a loss that is caused by a non-default event. This 
determination involves an evaluation of a number of factors, including 
the current and expected size of the loss, the expected time horizon 
over when the loss or additional expenses would materialize, the 
current and projected available LNA, and the likelihood LNA could be 
successfully replenished pursuant to the Replenishment Plan, if 
triggered.\38\ Finally the Plan would discuss how FICC would apply its 
resources to address losses resulting from a non-default event, 
including the

[[Page 878]]

order of resources it would apply if the loss or liability exceeds 
FICC's excess LNA amounts, or is large relative thereto, and the Board 
has declared the event a ``Declared Non-Default Loss Event'' pursuant 
to GSD Rule 4 and MBSD Rule 4.\39\
---------------------------------------------------------------------------

    \38\ See supra note 7.
    \39\ See supra note 9.
---------------------------------------------------------------------------

    The Plan would also describe proposed GSD Rule 50 (Market 
Disruption and Force Majeure) and proposed MBSD Rule 40 (Market 
Disruption and Force Majeure), which FICC is proposing to adopt in the 
GSD Rule and MBSD Rules, respectively. This Proposed Rule would provide 
transparency around how FICC would address extraordinary events that 
may occur outside its control. Specifically, the Proposed Rule would 
define a ``Market Disruption Event'' and the governance around a 
determination that such an event has occurred. The Proposed Rule would 
also describe FICC's authority to take actions during the pendency of a 
Market Disruption Event that it deems appropriate to address such an 
event and facilitate the continuation of its services, if practicable, 
as described in greater detail below.
    The Plan would describe the interaction between the Proposed Rule 
and FICC's existing processes and procedures addressing business 
continuity management and disaster recovery (generally, the ``BCM/DR 
procedures''), making clear that the Proposed Rule is designed to 
support those BCM/DR procedures and to address circumstances that may 
be exogenous to FICC and not necessarily addressed by the BCM/DR 
procedures. Finally, the Plan would describe that, because the 
operation of the Proposed Rule is specific to each applicable Market 
Disruption Event, the Proposed Rule does not define a time limit on its 
application. However, the Plan would note that actions authorized by 
the Proposed Rule would be limited to the pendency of the applicable 
Market Disruption Event, as made clear in the Proposed Rule. Overall, 
the Proposed Rule is designed to mitigate risks caused by Market 
Disruption Events and, thereby, minimize the risk of financial loss 
that may result from such events.
    Recovery Tool Characteristics. The Recovery Plan would describe 
FICC's evaluation of the tools identified within the Recovery Plan, and 
its rationale for concluding that such tools are comprehensive, 
effective, and transparent, and that such tools provide appropriate 
incentives to Members and minimize negative impact on Members and the 
financial system, in compliance with guidance published by the 
Commission in connection with the adoption of Rule 17Ad-22(e)(3)(ii) 
under the Act.\40\ FICC's analysis and the conclusions set forth in 
this section of the Recovery Plan are described in greater detail in 
Item 3(b) of this filing, below.
---------------------------------------------------------------------------

    \40\ Standards for Covered Clearing Agencies, Securities 
Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 
(October 13, 2016) (S7-03-14).
---------------------------------------------------------------------------

FICC Wind-Down Plan
    The Wind-down Plan would provide the framework and strategy for the 
orderly wind-down of FICC if the use of the recovery tools described in 
the Recovery Plan do not successfully return FICC to financial 
viability. While FICC believes that, given the comprehensive nature of 
the recovery tools, such event is extremely unlikely, as described in 
greater detail below, FICC is proposing a wind-down strategy that 
provides for (1) the transfer of FICC's business, assets and 
memberships of both Divisions to another legal entity, (2) such 
transfer being effected in connection with proceedings under Chapter 11 
of the U.S. Federal Bankruptcy Code,\41\ and (3) after effectuating 
this transfer, FICC liquidating any remaining assets in an orderly 
manner in bankruptcy proceedings. FICC believes that the proposed 
transfer approach to a wind-down would meet its objectives of (1) 
assuring that FICC's critical services will be available to the market 
as long as there are Members in good standing, and (2) minimizing 
disruption to the operations of Members and financial markets generally 
that might be caused by FICC's failure.
---------------------------------------------------------------------------

    \41\ 11 U.S.C. 1101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to FICC's Wind-down Plan, the 
Plan would identify the factors that FICC considered in developing this 
approach, including the fact that FICC does not own material assets 
that are unrelated to its clearance and settlement activities. As such, 
a business reorganization or ``bail-in'' of debt approach would be 
unlikely to mitigate significant losses. Additionally, FICC's approach 
was developed in consideration of its critical and unique position in 
the U.S. markets, which precludes any approach that would cause FICC's 
critical services to no longer be available.
    First, the Wind-down Plan would describe the potential scenarios 
that could lead to the wind-down of FICC, and the likelihood of such 
scenarios. The Wind-down Plan would identify the time period leading up 
to a decision to wind-down FICC as the ``Runway Period.'' This period 
would follow the implementation of any recovery tools, as it may take a 
period of time, depending on the severity of the market stress at that 
time, for these tools to be effective or for FICC to realize a loss 
sufficient to cause it to be unable to effectuate settlements and repay 
its obligations.\42\ The Wind-down Plan would identify some of the 
indicators that it has entered this Runway Period, which would include, 
for example, successive Member defaults, significant Member retirements 
thereafter, and FICC's inability to replenish its financial resources 
following the liquidation of the portfolio of the defaulting Member(s).
---------------------------------------------------------------------------

    \42\ The Wind-down Plan would state that, given FICC's position 
as a user-governed financial market utility, it is possible that 
Members might voluntarily elect to provide additional support during 
the recovery phase leading up to a potential trigger of the Wind-
down Plan, but would also make clear that FICC cannot predict the 
willingness of Members to do so.
---------------------------------------------------------------------------

    The trigger for implementing the Wind-down Plan would be a 
determination by the Board that recovery efforts have not been, or are 
unlikely to be, successful in returning FICC to viability as a going 
concern. As described in the Plan, FICC believes this is an appropriate 
trigger because it is both broad and flexible enough to cover a variety 
of scenarios, and would align incentives of FICC and the Members to 
avoid actions that might undermine FICC's recovery efforts. 
Additionally, this approach takes into account the characteristics of 
FICC's recovery tools and enables the Board to consider (1) the 
presence of indicators of a successful or unsuccessful recovery, and 
(2) potential for knock-on effects of continued iterative application 
of FICC's recovery tools.
    The Wind-down Plan would describe the general objectives of the 
transfer strategy, and would address assumptions regarding the transfer 
of FICC's critical services, business, assets and membership, and the 
assignment of GSD's link with another FMI, to another legal entity that 
is legally, financially, and operationally able to provide FICC's 
critical services to entities that wish to continue their membership 
following the transfer (``Transferee''). The Wind-down Plan would 
provide that the Transferee would be either (1) a third party legal 
entity, which may be an existing or newly established legal entity or a 
bridge entity formed to operate the business on an interim basis to 
enable the business to be transferred subsequently (``Third Party 
Transferee''); or (2) an existing, debt-free failover legal entity 
established ex-ante

[[Page 879]]

by DTCC (``Failover Transferee'') to be used as an alternative 
Transferee in the event that no viable or preferable Third Party 
Transferee timely commits to acquire FICC's business. FICC would seek 
to identify the proposed Transferee, and negotiate and enter into 
transfer arrangements during the Runway Period and prior to making any 
filings under Chapter 11 of the U.S. Federal Bankruptcy Code.\43\ As 
stated above, the Wind-down Plan would anticipate that the transfer to 
the Transferee be effected in connection with proceedings under Chapter 
11 of the U.S. Federal Bankruptcy Code, and pursuant to a bankruptcy 
court order under Section 363 of the Bankruptcy Code, such that the 
transfer would be free and clear of claims against, and interests in, 
FICC, except to the extent expressly provided in the court's order.\44\
---------------------------------------------------------------------------

    \43\ See 11 U.S.C. et seq.
    \44\ See id. at 363.
---------------------------------------------------------------------------

    In order to effect a timely transfer of its services and minimize 
the market and operational disruption of such transfer, FICC would 
expect to transfer all of its critical services and any non-critical 
services that are ancillary and beneficial to a critical service, or 
that otherwise have substantial user demand from the continuing 
membership. Following the transfer, the Wind-down Plan would anticipate 
that the Transferee and its continuing membership would determine 
whether to continue to provide any transferred non-critical service on 
an ongoing basis, or terminate the non-critical service following some 
transition period. FICC's Wind-down Plan would anticipate that the 
Transferee would enter into a transition services agreement with DTCC 
so that DTCC would continue to provide the shared services it currently 
provides to FICC, including staffing, infrastructure and operational 
support. The Wind-down Plan would also anticipate the assignment of 
FICC's link arrangements, including its arrangements with clearing 
banks and GSD's cross-margining arrangement with CME, described above, 
to the Transferee.\45\ The Wind-down Plan would provide that Members' 
open positions existing prior to the effective time of the transfer 
would be addressed by the provisions of the proposed Wind-down Rule, as 
defined and described below, and the existing GSD Rule 22B (Corporation 
Default) and MBSD Rule 17 (Corporation Default) (collectively, 
``Corporation Default Rule''), as applicable, and that the Transferee 
would not acquire any pending or open transactions with the transfer of 
the business.\46\ The Wind-down Plan would anticipate that the 
Transferee would accept transactions for processing with a trade date 
from and after the effective time of the transfer.
---------------------------------------------------------------------------

    \45\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding 
agreements, which are generally not assignable by FICC. However, to 
the extent the Transferee adopts rules substantially identical to 
those FICC has in effect prior to the transfer, it would have the 
benefit of any rules-based liquidity funding. The Wind-down Plan 
contemplates that neither of the Divisions' respective Clearing 
Funds would be transferred to the Transferee, as they are not held 
in a bankruptcy remote manner and they are the primary prefunded 
liquidity resource to be accessed in the recovery phase.
    \46\ See supra note 5.
---------------------------------------------------------------------------

    The Wind-down Plan would provide that, following the effectiveness 
of the transfer to the Transferee, the wind-down of FICC would involve 
addressing any residual claims against FICC through the bankruptcy 
process and liquidating the legal entity. As such, and as stated above, 
the Wind-down Plan does not contemplate FICC continuing to provide 
services in any capacity following the transfer time, and any services 
not transferred would be terminated. The Wind-down Plan would also 
identify the key dependencies for the effectiveness of the transfer, 
which include regulatory approvals that would permit the Transferee to 
be legally qualified to provide the transferred services from and after 
the transfer, and approval by the applicable bankruptcy court of, among 
other things, the proposed sale, assignments, and transfers to the 
Transferee.
    The Wind-down Plan would address governance matters related to the 
execution of the transfer of FICC's business and its wind-down. The 
Wind-down Plan would address the duties of the Board to execute the 
wind-down of FICC in conformity with (1) the Rules, (2) the Board's 
fiduciary duties, which mandate that it exercise reasonable business 
judgment in performing these duties, and (3) FICC's regulatory 
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in 
making these decisions, which would include, for example, whether FICC 
could safely stabilize the business and protect its value without 
seeking bankruptcy protection, and FICC's ability to continue to meet 
its regulatory requirements.
    The Wind-down Plan would describe (1) actions FICC or DTCC may take 
to prepare for wind-down in the period before FICC experiences any 
financial distress, (2) actions FICC would take both during the 
recovery phase and the Runway Period to prepare for the execution of 
the Wind-down Plan, and (3) actions FICC would take upon commencement 
of bankruptcy proceedings to effectuate the Wind-down Plan.
    Finally, the Wind-down Plan would include an analysis of the 
estimated time and costs to effectuate the plan, and would provide that 
this estimate be reviewed and approved by the Board annually. In order 
to estimate the length of time it might take to achieve a recovery or 
orderly wind-down of FICC's critical operations, as contemplated by the 
R&W Plan, the Wind-down Plan would include an analysis of the possible 
sequencing and length of time it might take to complete an orderly 
wind-down and transfer of critical operations, as described in earlier 
sections of the R&W Plan. The Wind-down Plan would also include in this 
analysis consideration of other factors, including the time it might 
take to complete any further attempts at recovery under the Recovery 
Plan. The Wind-down Plan would then multiply this estimated length of 
time by FICC's average monthly operating expenses, including 
adjustments to account for changes to FICC's profit and expense profile 
during these circumstances, over the previous twelve months to 
determine the amount of LNA that it should hold to achieve a recovery 
or orderly wind-down of FICC's critical operations. The estimated wind-
down costs would constitute the ``Recovery/Wind-down Capital 
Requirement'' under the Capital Policy.\47\ Under that policy, the 
General Business Risk Capital Requirement is calculated as the greatest 
of three estimated amounts, one of which is this Recovery/Wind-down 
Capital Requirement.\48\
---------------------------------------------------------------------------

    \47\ See supra note 7.
    \48\ See supra note 7.
---------------------------------------------------------------------------

    The R&W Plan is designed as a roadmap, and the types of actions 
that may be taken both leading up to and in connection with 
implementation of the Wind-down Plan would be primarily addressed in 
other supporting documentation referred to therein.
    The Wind-down Plan would address proposed GSD Rule 22D and MBSD 
Rule 17B (Wind-down of the Corporation), which would be adopted to 
facilitate the implementation of the Wind-down Plan, and are discussed 
below.
Proposed Rules
    In connection with the adoption of the R&W Plan, FICC is proposing 
to adopt the Proposed Rules, each described below. The Proposed Rules

[[Page 880]]

would facilitate the execution of the R&W Plan and would provide 
Members and Limited Members with transparency as to critical aspects of 
the Plan, particularly as they relate to the rights and 
responsibilities of both FICC and Members. The Proposed Rules also 
provide a legal basis to these aspects of the Plan.
GSD Rule 22D and MBSD Rule 17B (Wind-down of the Corporation)
    The proposed GSD Rule 22D and MBSD Rule 17B (collectively, ``Wind-
down Rule'') would be adopted by both Divisions to facilitate the 
execution of the Wind-down Plan. The Wind-down Rule would include a 
proposed set of defined terms that would be applicable only to the 
provisions of this Proposed Rule. The Wind-down Rule would make clear 
that a wind-down of FICC's business would occur (1) after a decision is 
made by the Board, and (2) in connection with the transfer of FICC's 
services to a Transferee, as described therein. Because GSD and MBSD 
are both divisions of FICC, the individual Wind-down Rules are designed 
to work together. A decision by the Board to initiate the Wind-down 
Plan would be pursuant to, and trigger the provisions of, the Wind-down 
Rule of each Division simultaneously. Generally, the proposed Wind-down 
Rule is designed to create clear mechanisms for the transfer of 
Eligible Members, Eligible Limited Members, and Settling Banks (as 
these terms would be defined in the Wind-down Rule), and FICC's 
business in order to provide for continued access to critical services 
and to minimize disruption to the markets in the event the Wind-down 
Plan is initiated.
    Wind-down Trigger. First, the Proposed Rule would make clear that 
the Board is responsible for initiating the Wind-down Plan, and would 
identify the criteria the Board would consider when making this 
determination. As provided for in the Wind-down Plan and in the 
proposed Wind-down Rule, the Board would initiate the Plan if, in the 
exercise of its business judgment and subject to its fiduciary duties, 
it has determined that the execution of the Recovery Plan has not or is 
not likely to restore FICC to viability as a going concern, and the 
implementation of the Wind-down Plan, including the transfer of FICC's 
business, is in the best interests of FICC, Members and Limited Members 
of both Divisions, its shareholders and creditors, and the U.S. 
financial markets.
    Identification of Critical Services; Designation of Dates and Times 
for Specific Actions. The Proposed Rule would provide that, upon making 
a determination to initiate the Wind-down Plan, the Board would 
identify the critical and non-critical services that would be 
transferred to the Transferee at the Transfer Time (as defined below 
and in the Proposed Rule), as well as any non-critical services that 
would not be transferred to the Transferee. The proposed Wind-down Rule 
would establish that any services transferred to the Transferee will 
only be provided by the Transferee as of the Transfer Time, and that 
any non-critical services that are not transferred to the Transferee 
would be terminated at the Transfer Time. The Proposed Rule would also 
provide that the Board would establish (1) an effective time for the 
transfer of FICC's business to a Transferee (``Transfer Time''), (2) 
the last day that transactions may be submitted to either Division for 
processing (``Last Transaction Acceptance Date''), and (3) the last day 
that transactions submitted to either Division will be settled (``Last 
Settlement Date'').
    Treatment of Pending Transactions. The Wind-down Rule would also 
authorize the Board to provide for the settlement of pending 
transactions of either Division prior to the Transfer Time, so long as 
the applicable Division's Corporation Default Rule has not been 
triggered. For example, the Proposed Rule would provide the Board with 
the ability to, if it deems practicable, based on FICC's resources at 
that time, allow pending transactions of either Division to complete 
prior to the transfer of FICC's business to a Transferee. The Board 
would also have the ability to allow Members to only submit trades to 
the applicable Division that would effectively offset pending positions 
or provide that transactions will be processed in accordance with 
special or exception processing procedures. The Proposed Rule is 
designed to enable these actions in order to facilitate settlement of 
pending transactions of the applicable Division and reduce claims 
against FICC that would have to be satisfied after the transfer has 
been effected. If none of these actions are deemed practicable (or if 
the applicable Division's Corporation Default Rule has been triggered 
with respect to a Division), then the provisions of the proposed 
Corporation Default Rule would apply to the treatment of open, pending 
transactions of such Division.
    The Proposed Rule would make clear, however, that neither Division 
would accept any transactions for processing after the Last Transaction 
Acceptance Date or which are designated to settle after the Last 
Settlement Date for such Division. Any transactions to be processed 
and/or settled after the Transfer Time would be required to be 
submitted to the Transferee, and would not be FICC's responsibility.
    Notice Provisions. The proposed Wind-down Rule would provide that, 
upon a decision to implement the Wind-down Plan, FICC would provide its 
Members and Limited Members and its regulators with a notice that 
includes material information relating to the Wind-down Plan and the 
anticipated transfer of the membership of both Divisions and business, 
including, for example, (1) a brief statement of the reasons for the 
decision to implement the Wind-down Plan; (2) identification of the 
Transferee and information regarding the transaction by which the 
transfer of FICC's business would be effected; (3) the Transfer Time, 
Last Transaction Acceptance Date, and Last Settlement Date; and (4) 
identification of Eligible Members and Eligible Limited Members, and 
the critical and non-critical services that would be transferred to the 
Transferee at the Transfer Time, as well as those Non-Eligible Members 
and Non-Eligible Limited Members (as defined in the Proposed Rule), and 
any non-critical services that would not be included in the transfer. 
FICC would also make available the rules and procedures and membership 
agreements of the Transferee.
    Transfer of Membership. The proposed Wind-down Rule would address 
the expected transfer of both Divisions' membership to the Transferee, 
which FICC would seek to effectuate by entering into an arrangement 
with a Failover Transferee, or by using commercially reasonable efforts 
to enter into such an arrangement with a Third Party Transferee. 
Therefore, the Wind-down Rule would provide Members, Limited Members 
and Settling Banks with notice that, in connection with the 
implementation of the Wind-down Plan and with no further action 
required by any party, (1) their membership with the applicable 
Division would transfer to the Transferee, (2) they would become party 
to a membership agreement with such Transferee, and (3) they would have 
all of the rights and be subject to all of the obligations applicable 
to their membership status under the rules of the Transferee. These 
provisions would not apply to any Member or Limited Member that is 
either in default of an obligation to FICC or has provided notice of 
its election to withdraw its membership from the applicable Division. 
Further, the proposed Wind-down Rule would make clear that it

[[Page 881]]

would not prohibit (1) Members and Limited Members that are not 
transferred by operation of the Wind-down Rule from applying for 
membership with the Transferee, or (2) Members, Limited Members, and 
Settling Banks that would be transferred to the Transferee from 
withdrawing from membership with the Transferee.\49\
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    \49\ The Members and Limited Members whose membership is 
transferred to the Transferee pursuant to the proposed Wind-down 
Rule would submit transactions to be processed and settled subject 
to the rules and procedures of the Transferee, including any 
applicable margin charges or other financial obligations.
---------------------------------------------------------------------------

    Comparability Period. The proposed automatic mechanism for the 
transfer of both Divisions' memberships is intended to provide the 
membership with continuous access to critical services in the event of 
FICC's wind-down, and to facilitate the continued prompt and accurate 
clearance and settlement of securities transactions. Further to this 
goal, the proposed Wind-down Rule would provide that FICC would enter 
into arrangements with a Failover Transferee, or would use commercially 
reasonable efforts to enter into arrangements with a Third Party 
Transferee, providing that, in either case, with respect to the 
critical services and any non-critical services that are transferred 
from FICC to the Transferee, for at least a period of time to be agreed 
upon (``Comparability Period''), the business transferred from FICC to 
the Transferee would be operated in a manner that is comparable to the 
manner in which the business was previously operated by FICC. 
Specifically, the proposed Wind-down Rule would provide that: (1) The 
rules of the Transferee and terms of membership agreements would be 
comparable in substance and effect to the analogous Rules and 
membership agreements of FICC; (2) the rights and obligations of any 
Members, Limited Members and Settling Banks that are transferred to the 
Transferee would be comparable in substance and effect to their rights 
and obligations as to FICC; and (3) the Transferee would operate the 
transferred business and provide any services that are transferred in a 
comparable manner to which such services were provided by FICC. The 
purpose of these provisions and the intended effect of the proposed 
Wind-down Rule is to facilitate a smooth transition of FICC's business 
to a Transferee and to provide that, for at least the Comparability 
Period, the Transferee (1) would operate the transferred business in a 
manner that is comparable in substance and effect to the manner in 
which the business was operated by FICC, and (2) would not require 
sudden and disruptive changes in the systems, operations and business 
practices of the new members of the Transferee.
    Subordination of Claims Provisions and Miscellaneous Matters. The 
proposed Wind-down Rule would also include a provision addressing the 
subordination of unsecured claims against FICC of its Members and 
Limited Members who fail to participate in FICC's recovery efforts 
(i.e., such firms are delinquent in their obligations to FICC or elect 
to retire from FICC in order to minimize their obligations with respect 
to the allocation of losses, pursuant to the Rules). This provision is 
designed to incentivize Members to participate in FICC's recovery 
efforts.\50\
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    \50\ Nothing in the proposed Wind-down Rule would seek to 
prevent a Member, Limited Member or Settling Bank that retired its 
membership at either of the Divisions from applying for membership 
with the Transferee. Once its FICC membership is terminated, 
however, such firm would not be able to benefit from the membership 
assignment that would be effected by this proposed Wind-down Rule, 
and it would have to apply for membership directly with the 
Transferee, subject to its membership application and review 
process.
---------------------------------------------------------------------------

    The proposed Wind-down Rule would address other ex-ante matters, 
including provisions providing that its Members, Limited Members and 
Settling Banks (1) will assist and cooperate with FICC to effectuate 
the transfer of FICC's business to a Transferee, (2) consent to the 
provisions of the rule, and (3) grant FICC power of attorney to execute 
and deliver on their behalf documents and instruments that may be 
requested by the Transferee. Finally, the Proposed Rule would include a 
limitation of liability for any actions taken or omitted to be taken by 
FICC pursuant to the Proposed Rule.
GSD Rule 50 and MBSD Rule 40 (Market Disruption and Force Majeure)
    The proposed GSD Rule 50 and MBSD Rule 40 (Market Disruption and 
Force Majeure) (collectively, ``Force Majeure Rule'') would address 
FICC's authority to take certain actions upon the occurrence, and 
during the pendency, of a ``Market Disruption Event,'' as defined 
therein. Because GSD and MBSD are both divisions of FICC, the 
individual Force Majeure Rules are designed to work together. A 
decision by the Board or management of FICC that a Market Disruption 
Event has occurred in accordance with the Force Majeure Rule would 
trigger the provisions of the Force Majeure Rule of each Division 
simultaneously. The Proposed Rule is designed to clarify FICC's ability 
to take actions to address extraordinary events outside of the control 
of FICC and of the memberships of the Divisions, and to mitigate the 
effect of such events by facilitating the continuity of services (or, 
if deemed necessary, the temporary suspension of services). To that 
end, under the proposed Force Majeure Rule, FICC would be entitled, 
during the pendency of a Market Disruption Event, to (1) suspend the 
provision of any or all services, and (2) take, or refrain from taking, 
or require its Members and Limited Members to take, or refrain from 
taking, any actions it considers appropriate to address, alleviate, or 
mitigate the event and facilitate the continuation of FICC's services 
as may be practicable.
    The proposed Force Majeure Rule would identify the events or 
circumstances that would be considered a ``Market Disruption Event,'' 
including, for example, events that lead to the suspension or 
limitation of trading or banking in the markets in which FICC operates, 
or the unavailability or failure of any material payment, bank 
transfer, wire or securities settlement systems. The proposed Force 
Majeure Rule would define the governance procedures for how FICC would 
determine whether, and how, to implement the provisions of the rule. A 
determination that a Market Disruption Event has occurred would 
generally be made by the Board, but the Proposed Rule would provide for 
limited, interim delegation of authority to a specified officer or 
management committee if the Board would not be able to take timely 
action. In the event such delegated authority is exercised, the 
proposed Force Majeure Rule would require that the Board be convened as 
promptly as practicable, no later than five Business Days after such 
determination has been made, to ratify, modify, or rescind the action. 
The proposed Force Majeure Rule would also provide for prompt 
notification to the Commission, and advance consultation with 
Commission staff, when practicable. The Proposed Rule would require 
Members and Limited Members to notify FICC immediately upon becoming 
aware of a Market Disruption Event, and, likewise, would require FICC 
to notify Members and Limited Members if it has triggered the Proposed 
Rule.
    Finally, the Proposed Rule would address other related matters, 
including a limitation of liability for any failure or delay in 
performance, in whole or in part, arising out of the Market Disruption 
Event.
Proposed Changes to GSD Rules, MBSD Rules, and EPN Rules
    In order to incorporate the Proposed Rules into the Rules and the 
EPN Rules,

[[Page 882]]

FICC is also proposing to amend (1) GSD Rule 3A (Sponsoring Members and 
Sponsored Members), GSD Rule 3B (Centrally Cleared Institutional 
Triparty Service) and GSD Rule 13 (Funds-Only Settlement); (2) MBSD 
Rule 3A (Cash Settlement Bank Members); and (3) Rule 1 of the EPN 
Rules. As shown on Exhibit 5b, these proposed changes would clarify 
that certain types of Limited Members, as identified in those rules, 
would be subject to the Proposed Rules.
2. Statutory Basis
    FICC believes that the proposal is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
registered clearing agency. In particular, FICC believes that the R&W 
Plan, each of the Proposed Rules and the other proposed changes to the 
Rules and the EPN Rules are consistent with Section 17A(b)(3)(F) of the 
Act,\51\ the R&W Plan and each of the Proposed Rules are consistent 
with Rule 17Ad-22(e)(3)(ii) under the Act,\52\ and the R&W Plan is 
consistent with Rule 17Ad-22(e)(15)(ii) under the Act,\53\ for the 
reasons described below.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78q-1(b)(3)(F).
    \52\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \53\ Id. at 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of FICC be designed to promote the prompt and accurate clearance and 
settlement of securities transactions, and to assure the safeguarding 
of securities and funds which are in the custody or control of FICC or 
for which it is responsible.\54\ The Recovery Plan and the proposed 
Force Majeure Rule would promote the prompt and accurate clearance and 
settlement of securities transactions by providing FICC with a roadmap 
for actions it may employ to mitigate losses, and monitor and, as 
needed, stabilize, its financial condition, which would allow it to 
continue its critical clearance and settlement services in stress 
situations. Further, as described above, the Recovery Plan is designed 
to identify the actions and tools FICC may use to address and minimize 
losses to both FICC and Members. The Recovery Plan and the proposed 
Force Majeure Rule would provide FICC's management and the Board with 
guidance in this regard by identifying the indicators and governance 
around the use and application of such tools to enable them to address 
stress situations in a manner most appropriate for the circumstances. 
Therefore, the Recovery Plan and the proposed Force Majeure Rule would 
also contribute to the safeguarding of securities and funds which are 
in the custody or control of FICC or for which it is responsible by 
enabling actions that would address and minimize losses.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Wind-down Plan and the proposed Wind-down Rule, which would 
facilitate the implementation of the Wind-down Plan, would also promote 
the prompt and accurate clearance and settlement of securities 
transactions and assure the safeguarding of securities and funds which 
are in the custody or control of FICC or for which it is responsible. 
The Wind-down Plan and the proposed Wind-down Rule would collectively 
establish a framework for the transfer and orderly wind-down of FICC's 
business. These proposals would establish clear mechanisms for the 
transfer of FICC's critical services and membership. By doing so, the 
Wind-down Plan and this Proposed Rule are designed to facilitate the 
continuity of FICC's critical services and enable Members and Limited 
Members to maintain access to FICC's services through the transfer of 
the Divisions' memberships in the event the Wind-down Plan is triggered 
by the Board. Therefore, by facilitating the continuity of FICC's 
critical clearance and settlement services, FICC believes the proposals 
would promote the prompt and accurate clearance and settlement of 
securities transactions. Further, by creating a framework for the 
transfer and orderly wind-down of FICC's business, FICC believes the 
proposals would enhance the safeguarding of securities and funds which 
are in the custody or control of FICC or for which it is responsible.
    Finally, the other proposed changes to the Rules and the EPN Rules 
would clarify the application of the Proposed Rules to certain types of 
Limited Members and would enable these Limited Members to readily 
understand their rights and obligations. As such, FICC believes these 
proposed changes would enable Limited Members that are governed by the 
applicable rules to have a better understanding of those rules and, 
thereby, would assist in promoting the prompt and accurate clearance 
and settlement of securities transactions.
    Therefore, FICC believes the R&W Plan, each of the Proposed Rules, 
and the other proposed changes are consistent with the requirements of 
Section 17A(b)(3)(F) of the Act.\55\
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(3)(ii) under the Act requires FICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by the covered clearing agency, which includes plans for the 
recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.\56\ The R&W Plan and each 
of the Proposed Rules are designed to meet the requirements of Rule 
17Ad-22(e)(3)(ii).\57\
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \57\ Id.
---------------------------------------------------------------------------

    The R&W Plan would be maintained by FICC in compliance with Rule 
17Ad-22(e)(3)(ii) in that it provides plans for the recovery and 
orderly wind-down of FICC necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses, as 
described above.\58\ Specifically, the Recovery Plan would define the 
risk management activities, stress conditions and indicators, and tools 
that FICC may use to address stress scenarios that could eventually 
prevent it from being able to provide its critical services as a going 
concern. Through the framework of the Crisis Continuum, the Recovery 
Plan would address measures that FICC may take to address risks of 
credit losses and liquidity shortfalls, and other losses that could 
arise from a Member default. The Recovery Plan would also address the 
management of general business risks and other non-default risks that 
could lead to losses.
---------------------------------------------------------------------------

    \58\ Id.
---------------------------------------------------------------------------

    The Wind-down Plan would be triggered by a determination by the 
Board that recovery efforts have not been, or are unlikely to be, 
successful in returning FICC to viability as a going concern. Once 
triggered, the Wind-down Plan would set forth clear mechanisms for the 
transfer of the memberships of both Divisions and FICC's business, and 
would be designed to facilitate continued access to FICC's critical 
services and to minimize market impact of the transfer. By establishing 
the framework and strategy for the execution of the transfer and wind-
down of FICC in order to facilitate continuous access to FICC's 
critical services, the Wind-down Plan establishes a plan for the 
orderly wind-down of FICC. Therefore, FICC believes the R&W Plan would 
provide plans for the recovery and orderly wind-down of the covered 
clearing agency necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses, and, as such, 
meets the

[[Page 883]]

requirements of Rule 17Ad-22(e)(3)(ii).\59\
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

    As described in greater detail above, the Proposed Rules are 
designed to facilitate the execution of the R&W Plan, provide Members 
and Limited Members with transparency regarding the material provisions 
of the Plan, and provide FICC with a legal basis for implementation of 
those provisions. As such, FICC also believes the Proposed Rules meet 
the requirements of Rule 17Ad-22(e)(3)(ii).\60\
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

    FICC has evaluated the recovery tools that would be identified in 
the Recovery Plan and has determined that these tools are 
comprehensive, effective, and transparent, and that such tools provide 
appropriate incentives to Members to manage the risks they present. The 
recovery tools, as outlined in the Recovery Plan and in the proposed 
Force Majeure Rule, provide FICC with a comprehensive set of options to 
address its material risks and support the resiliency of its critical 
services under a range of stress scenarios. FICC also believes the 
recovery tools are effective, as FICC has both legal basis and 
operational capability to execute these tools in a timely and reliable 
manner. Many of the recovery tools are provided for in the Rules; 
Members are bound by the Rules through their membership agreements with 
FICC, and the Rules are adopted pursuant to a framework established by 
Rule 19b-4 under the Act,\61\ providing a legal basis for the recovery 
tools found therein. Other recovery tools have legal basis in 
contractual arrangements to which FICC is a party, as described above. 
Further, as many of the tools are embedded in FICC's ongoing risk 
management practices or are embedded into its predefined default-
management procedures, FICC is able to execute these tools, in most 
cases, when needed and without material operational or organizational 
delay.
---------------------------------------------------------------------------

    \61\ Id. at 240.19b-4.
---------------------------------------------------------------------------

    The majority of the recovery tools are also transparent, as they 
are, or are proposed to be, included in the Rules, which are publicly 
available. FICC believes the recovery tools also provide appropriate 
incentives to Members, as they are designed to control the amount of 
risk they present to FICC's clearance and settlement system. Members' 
financial obligations to FICC, particularly their required deposits to 
the applicable Division's Clearing Fund, are measured by the risk posed 
by the Members' activity in FICC's systems, which incentivizes them to 
manage that risk which would correspond to lower financial obligations. 
Finally, FICC's Recovery Plan provides for a continuous evaluation of 
the systemic consequences of executing its recovery tools, with the 
goal of minimizing their negative impact. The Recovery Plan would 
outline various indicators over a timeline of increasing stress, the 
Crisis Continuum, with escalation triggers to FICC management or the 
Board, as appropriate. This approach would allow for timely evaluation 
of the situation and the possible impacts of the use of a recovery tool 
in order to minimize the negative effects of the stress scenario. 
Therefore, FICC believes that the recovery tools that would be 
identified and described in its Recovery Plan, including the authority 
provided to it in the proposed Force Majeure Rule, would meet the 
criteria identified within guidance published by the Commission in 
connection with the adoption of Rule 17Ad-22(e)(3)(ii).\62\
---------------------------------------------------------------------------

    \62\ Supra note 40.
---------------------------------------------------------------------------

    Therefore, FICC believes the R&W Plan and each of the Proposed 
Rules are consistent with Rule 17Ad-22(e)(3)(ii).\63\
---------------------------------------------------------------------------

    \63\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15)(ii) under the Act requires FICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify, monitor, and manage its general 
business risk and hold sufficient LNA to cover potential general 
business losses so that FICC can continue operations and services as a 
going concern if those losses materialize, including by holding LNA 
equal to the greater of either (x) six months of the covered clearing 
agency's current operating expenses, or (y) the amount determined by 
the board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency.\64\ While the Capital Policy addresses how FICC holds LNA in 
compliance with these requirements, the Wind-down Plan would include an 
analysis that would estimate the amount of time and the costs to 
achieve a recovery or orderly wind-down of FICC's critical operations 
and services, and would provide that the Board review and approve this 
analysis and estimation annually. The Wind-down Plan would also provide 
that the estimate would be the ``Recovery/Wind-down Capital 
Requirement'' under the Capital Policy. Under that policy, the General 
Business Risk Capital Requirement, which is the sufficient amount of 
LNA that FICC should hold to cover potential general business losses so 
that it can continue operations and services as a going concern if 
those losses materialize, is calculated as the greatest of three 
estimated amounts, one of which is this Recovery/Wind-down Capital 
Requirement. Therefore, FICC believes the R&W Plan, as it interrelates 
with the Capital Policy, is consistent with Rule 17Ad-
22(e)(15)(ii).\65\
---------------------------------------------------------------------------

    \64\ 17 CFR 240.17Ad-22(e)(15)(ii).
    \65\ Id.
---------------------------------------------------------------------------

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

    FICC does not believe the proposal would have any impact, or impose 
any burden, on competition not necessary or appropriate in furtherance 
of the purpose of the Act.\66\ The proposal would apply uniformly to 
all Members and Limited Members. FICC does not anticipate that the 
proposal would affect its day-to-day operations under normal 
circumstances, or in the management of a typical Member default 
scenario or non-default event. FICC is not proposing to alter the 
standards or requirements for becoming or remaining a Member, or 
otherwise using its services. FICC also does not propose to change 
either Division's methodology for calculation of margin or their 
respective Clearing Fund contributions. The proposal is intended to (1) 
address the risk of loss events and identify the tools and resources 
available to it to withstand and recover from such events, so that it 
can restore normal operations, and (2) provide a framework for its 
orderly wind-down and the transfer of its business in the event those 
recovery tools do not restore FICC to financial viability, as described 
herein.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    The R&W Plan and each of the Proposed Rules have been developed and 
documented in order to satisfy applicable regulatory requirements, as 
discussed above.
    With respect to the Recovery Plan, the proposal generally reflects 
FICC's existing tools and existing internal procedures. Existing tools 
that would have a direct impact on the rights, responsibilities or 
obligations of Members are reflected in the existing Rules or are 
proposed to be included in the Rules. Accordingly, the Recovery Plan 
and the proposed Force Majeure Rule are intended to provide a roadmap, 
define the strategy and identify the tools available to FICC in 
connection with its recovery efforts. By proposing to enhance FICC's 
existing internal management and its regulatory compliance related to 
its recovery efforts, FICC does not believe the Recovery Plan or the 
proposed Force

[[Page 884]]

Majeure Rule would have any impact, or impose any burden, on 
competition.
    With respect to the Wind-down Plan and the proposed Wind-down Rule, 
which facilitate the execution of the Wind-down Plan, the proposal 
would operate to effect the transfer of all eligible Members and 
Limited Members of both Divisions to the Transferee, and would not 
prohibit any market participant from either bidding to become the 
Transferee or from applying for membership with the Transferee. The 
proposal also would not prohibit any Member or Limited Member from 
withdrawing from FICC prior to the Transfer Time, as is permitted under 
the Rules today, or from applying for membership with the Transferee. 
Therefore, as the proposal would treat each similarly situated Member 
identically under the Wind-down Plan and this Proposed Rule, FICC does 
not believe the Wind-down Plan or the proposed Wind-down Rule would 
have any impact, or impose any burden, on competition.
    FICC does not believe that the other proposed changes to the Rules 
and the EPN Rules would have any impact on competition because these 
proposed changes to incorporate the Proposed Rules into the Rules and 
the EPN Rules are technical clarifications, which would not, on their 
own, change FICC's current practices or the rights or obligations of 
the Members or EPN Users.

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

    While FICC has not solicited or received any written comments 
relating to this proposal, FICC has conducted outreach to its Members 
in order to provide them with notice of the proposal. 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 clearing agency 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 [email protected]. Please include 
File Number SR-FICC-2017-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2017-021. 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 
should refer to File Number SR-FICC-2017-021 and should be submitted on 
or before January 29, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\67\
---------------------------------------------------------------------------

    \67\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00079 Filed 1-5-18; 8:45 am]
 BILLING CODE 8011-01-P