Document ID: SEC-2018-1390-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2018-09-04T04:00Z

[Federal Register Volume 83, Number 171 (Tuesday, September 4, 2018)]
[Notices]
[Pages 44942-44955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19055]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83973; File No. SR-FICC-2017-021]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, 
To Adopt a Recovery & Wind-Down Plan and Related Rules

August 28, 2018.
    On December 18, 2017, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2017-021 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder \2\ to adopt a recovery and wind-down plan and related 
rules.\3\ The proposed rule change was published for comment in the 
Federal Register on January 8, 2018.\4\ On February 8, 2018, the 
Commission designated a longer period within which to approve, 
disapprove, or institute proceedings to determine whether to approve or 
disapprove the proposed rule change.\5\ On March 20, 2018, the 
Commission instituted proceedings to determine whether to approve or 
disapprove the proposed rule change.\6\ On June 25, 2018, the

[[Page 44943]]

Commission designated a longer period for Commission action on the 
proceedings to determine whether to approve or disapprove the proposed 
rule change.\7\ On June 28, 2018, FICC filed Amendment No. 1 to the 
proposed rule change to amend and replace in its entirety the proposed 
rule change as originally submitted on December 18, 2017.\8\ The 
Commission did not receive any comments. This order approves the 
proposed rule change, as modified by Amendment No. 1 (hereinafter 
``Proposed Rule Change'').
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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 the proposed rule change as 
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 (``Clearing Supervision Act'') 
and Rule 19b-4(n)(1)(i) of the Act (``Advance Notice''). 12 U.S.C. 
5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), respectively. The Advance 
Notice was published for comment in the Federal Register on January 
30, 2018. In that publication, the Commission also extended the 
review period of the Advance Notice for an additional 60 days, 
pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act. 12 
U.S.C. 5465(e)(1)(H); Securities Exchange Act Release No. 82580 
(January 24, 2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-
805). On April 10, 2018, the Commission required additional 
information from FICC pursuant to Section 806(e)(1)(D) of the 
Clearing Supervision Act, which tolled the Commission's period of 
review of the Advance Notice until 60 days from the date the 
information required by the Commission was received by the 
Commission. 12 U.S.C. 5465(e)(1)(D); see 12 U.S.C. 5465(e)(1)(E)(ii) 
and (G)(ii); see Memorandum from the Office of Clearance and 
Settlement Supervision, Division of Trading and Markets, titled 
``Commission's Request for Additional Information,'' available at 
https://www.sec.gov/rules/sro/ficc-an.htm. On June 28, 2018, FICC 
filed Amendment No. 1 to the Advance Notice to amend and replace in 
its entirety the Advance Notice as originally filed on December 18, 
2017. Securities Exchange Act Release No. 83744 (July 31, 2018), 83 
FR 38413 (August 6, 2018) (SR-FICC-2017-805). FICC submitted a 
courtesy copy of Amendment No. 1 to the Advance Notice through the 
Commission's electronic public comment letter mechanism. 
Accordingly, Amendment No. 1 to the Advance Notice has been publicly 
available on the Commission's website at https://www.sec.gov/rules/sro/ficc-an.htm since June 29, 2018. On July 6, 2018, the Commission 
received a response to its request for additional information in 
consideration of the Advance Notice, which, in turn, added a further 
60-days to the review period pursuant to Section 806(e)(1)(E) and 
(G) of the Clearing Supervision Act. 12 U.S.C. 5465(e)(1)(E) and 
(G); see Memorandum from the Office of Clearance and Settlement 
Supervision, Division of Trading and Markets, titled ``Response to 
the Commission's Request for Additional Information,'' available at 
https://www.sec.gov/rules/sro/ficc-an.htm. The Commission did not 
receive any comments. The proposal, as set forth in both the Advance 
Notice and the proposed rule change, each as modified by Amendment 
No. 1, shall not take effect until all required regulatory actions 
are completed.
    \4\ Securities Exchange Act Release No. 82431 (January 2, 2018), 
83 FR 871 (January 8, 2018) (SR-FICC-2017-021).
    \5\ Securities Exchange Act Release No. 82669 (February 8, 
2018), 83 FR 6653 (February 14, 2018) (SR-DTC-2017-021, SR-FICC-
2017-021, SR-NSCC-2017-017).
    \6\ Securities Exchange Act Release No. 82913 (March 20, 2018), 
83 FR 12997 (March 26, 2018) (SR-FICC-2017-021).
    \7\ Securities Exchange Act Release No. 83509 (June 25, 2018), 
83 FR 30785 (June 29, 2018) (SR-DTC-2017-021, SR-FICC-2017-021, SR-
NSCC-2017-017).
    \8\ Securities Exchange Act Release No. 83630 (July 13, 2018), 
83 FR 34213 (July 19, 2018) (SR-FICC-2017-021). FICC submitted a 
courtesy copy of Amendment No. 1 to the proposed rule change through 
the Commission's electronic public comment letter mechanism. 
Accordingly, Amendment No. 1 to the proposed rule change has been 
publicly available on the Commission's website at https://www.sec.gov/rules/sro/ficc.htm since June 29, 2018.
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I. Description

    In the Proposed Rule Change, FICC proposes to (1) adopt an R&W 
Plan; (2) amend FICC's Government Securities Division (``GSD'') 
Rulebook (``GSD Rules'') 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; (3) 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 (4) amend Rule 1 of the Electronic Pool 
Netting (``EPN'') Rules of MBSD (``EPN Rules'') 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.\9\ 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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    \9\ 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.
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    FICC states that the R&W Plan would be used by the Board of 
Directors of FICC (``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.
    FICC states that 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; \10\ and (3) provide FICC with the 
legal basis to implement those provisions of the R&W Plan when 
necessary.
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    \10\ 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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A. FICC R&W Plan

    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 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''); \11\ 
(ii) an analysis of FICC's intercompany arrangements and an existing 
link to another financial market infrastructure (``FMI''); (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 \12\ risks 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 designed to be 
comprehensive, effective, and transparent, how the tools provide 
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.
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    \11\ 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 R&W 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.
    \12\ FICC states that it uses the term ``credit/market'' risks 
in the R&W Plan because FICC monitors its credit exposure to its 
Members by managing the market risks of each Member's unsettled 
portfolio through the collection of each Division's Clearing Fund. 
See infra note 22.
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    Certain recovery tools that would be identified in the R&W Plan are 
based in the Rules (including the Proposed Rules); therefore, 
descriptions of those tools in the R&W Plan 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 
develop further supporting internal guidelines and materials that may 
provide operational support for matters described in the R&W Plan, and 
that

[[Page 44944]]

such documents would be supplemental and subordinate to the R&W Plan.
    FICC states that 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 Member 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''),\13\ (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,\14\ and (iii) the process for the 
allocation of losses among Members, as provided in GSD Rule 4 (Clearing 
Fund and Loss Allocation) and MBSD Rule 4 (Clearing Fund and Loss 
Allocation).\15\ 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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    \13\ 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).
    \14\ See id.
    \15\ See supra note 9.
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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.\16\ 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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    \16\ 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. FICC 
states that the Proposed Rules are designed to provide Members and 
Limited Members with transparency and certainty with respect to these 
matters. FICC also states that the Proposed Rules are designed to 
facilitate the implementation of the R&W Plan, particularly FICC's 
strategy for winding down and transferring its business, and are 
designed to provide FICC with the legal basis to implement those 
aspects of the R&W Plan.
1. 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 R&W 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 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. FICC states that the 
overview section would provide a context for the R&W Plan by describing 
FICC's business, organizational structure and critical links to other 
entities. FICC also states that 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.
    The R&W 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.\17\ FICC states that this section of the R&W 
Plan, which identifies and briefly describes FICC's established links, 
is designed to 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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    \17\ 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 9.
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    The R&W 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 of 
the R&W Plan would provide an analysis of the potential systemic impact 
from a service disruption, which FICC states 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 (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, therefore, 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 R&W 
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. The R&W Plan would also include a non-exhaustive 
list of FICC services that are not deemed critical.
    FICC states that 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. 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 R&W Plan would describe the governance structure of both DTCC 
and

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FICC. This section of the R&W Plan would identify the ownership and 
governance model of these entities at both the Board and management 
levels. The R&W 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 R&W 
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 R&W 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 as well as oversight of 
FICC's efforts to mitigate systemic risks that could impact those 
markets and the broader financial system.\18\ The R&W 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 R&W 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 R&W 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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    \18\ The DTCC, DTC, NSCC, FICC Risk Committee Charter 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 R&W 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 R&W 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.\19\ More generally, the R&W 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. Both the Recovery Plan and the Wind-down Plan would describe 
the governance of escalations, decisions, and actions under each of 
those plans.
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    \19\ The R&W 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.
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    Finally, the R&W 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.
2. FICC Recovery Plan
    FICC states that 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. FICC also states 
that as each event that could lead to a financial loss could be unique 
in its circumstances, FICC proposes that 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. In 
all cases, FICC states that it 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 to best protect FICC, the Members, and the markets in which 
it operates.
(i) 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 stress market 
phase, (3) a phase commencing with FICC's decision to cease to act for 
a Member or Affiliated Family of Members \20\ (referred to in the R&W 
Plan as the ``Member default phase''), and (4) a recovery phase. In the 
R&W Plan, the term ``cease to act'' and the actions that lead to such 
decision are used within the context of each Division's Rules, in 
particular Rules 21 and 22 of the GSD Rules and Rules 14 and 16 of the 
MBSD Rules.\21\ Further, the R&W Plan would, for purposes of the R&W 
Plan, use the following terms: (1) ``Member default'' to refer to the 
event or events that precipitate FICC ceasing to act for a Member or an 
Affiliated Family; (2) ``Defaulting Member'' to refer to a Member for 
which FICC has ceased to act; and (3) ``Member Default Losses'' to 
refer to losses that arise out of or relate to the Member default 
(including any losses that arise from liquidation of that Member's 
portfolio), and to distinguish such losses from those that arise out of 
the business or other events not related to a Member default, which are 
separately addressed in the R&W Plan.
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    \20\ The R&W Plan would define an ``Affiliated Family'' of 
Members as a number of affiliated entities that are all Members of 
either GSD or MBSD.
    \21\ See GSD Rules 21 (Restrictions on Access to Services) and 
22 (Insolvency of a Member), and MBSD Rules 14 (Restrictions on 
Access to Services) and 16 (Insolvency of a Member), supra note 9.
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    FICC states that 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. 
FICC also states that the Recovery Plan would discuss the management of

[[Page 44946]]

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 states 
that it manages these risk exposures collectively to limit their 
overall impact on FICC and the memberships of the Divisions. FICC 
states that 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.\22\ FICC states 
that it 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.\23\
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    \22\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD 
Rule 4 (Clearing Fund and Loss Allocation), supra note 9. FICC 
states that because GSD and MBSD do not maintain a guaranty fund 
separate and apart from the Clearing Fund they collect from Members, 
FICC monitors its credit exposure to its Members by managing the 
market risks of each Member's unsettled portfolio through the 
collection of each Division's Clearing Fund. The aggregate of all 
Members' Required Clearing Fund deposits to each of GSD or MBSD 
comprises that Division's Clearing Fund that represents FICC's 
prefunded resources to address uncovered loss exposures as provided 
in GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule 4 
(Clearing Fund and Loss Allocation). Therefore, FICC states that its 
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 17 CFR 240.17Ad-22(e)(4).
    \23\ 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 No. 82377 (December 21, 2017), 82 FR 
61617 (December 28, 2017) (SR-DTC-2017-004, SR-FICC-2017-008, SR-
NSCC-2017-005).
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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. FICC states 
that the Recovery Plan is designed to 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, FICC 
states that 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; \24\ 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.\25\
---------------------------------------------------------------------------

    \24\ FICC's stress testing practices are described in the 
Clearing Agency Stress Testing Framework (Market Risk). See 
Securities Exchange Act Release No. 82638 (December 19, 2017), 82 FR 
61082 (December 26, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-
NSCC-2017-006).
    \25\ See supra note 23 (concerning FICC's liquidity risk 
management strategy).
---------------------------------------------------------------------------

    The Recovery Plan would describe some of the indicators of the 
stress 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 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.\26\ 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. 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. 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.
---------------------------------------------------------------------------

    \26\ 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 9.
---------------------------------------------------------------------------

    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 (Clearing Fund and Loss 
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation) 
provides that losses remaining after application of the Defaulting 
Member's resources be satisfied first by applying a Corporate 
Contribution, and then, if necessary, by allocating remaining losses 
among the membership in accordance with GSD Rule 4 (Clearing Fund and 
Loss Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation), 
as applicable.\27\
---------------------------------------------------------------------------

    \27\ See supra note 9. GSD Rule 4 (Clearing Fund and Loss 
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation) 
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 of the General 
Business Risk Capital Requirement, which is calculated pursuant to 
the Capital Policy and, which FICC states 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 an effort to comply with Rule 17Ad-22(e)(15) under 
the Act. See supra note 13 (concerning the Capital Policy); 17 CFR 
240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    In order to provide for an effective and timely recovery, the 
Recovery Plan would describe the period of time that would occur near 
the end of the Member default phase, during which FICC may experience 
stress events or observe early warning indicators that

[[Page 44947]]

allow it to evaluate its options and prepare for the recovery phase 
(referred to in the R&W Plan as the Recovery Corridor). The Recovery 
Plan would then describe the recovery phase of the Crisis Continuum, 
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.\28\ The recovery phase would describe actions that 
FICC may take to avoid entering into a wind-down of its business.
---------------------------------------------------------------------------

    \28\ As provided for in GSD Rule 4 (Clearing Fund and Loss 
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation), the 
``Event Period'' is ten Business Days beginning on (i) with respect 
to a Member default, the day on which FICC 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 FICC notifies Members of the 
determination by the Board that there is a non-default loss event. 
The proposed GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD 
Rule 4 (Clearing Fund and Loss Allocation) define a ``round'' as a 
series of loss allocations relating to an Event Period, and provides 
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 of those Members included in the round. See GSD Rule 
4 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing Fund 
and Loss Allocation), supra note 9.
---------------------------------------------------------------------------

    FICC states that it expects that significant deterioration of 
liquidity resources would cause it to enter the Recovery Corridor. 
Therefore, the R&W Plan would describe the actions FICC may take at 
this stage aimed at replenishing those resources. 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 corridor 
indicator metrics.
    FICC states that 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. 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,\29\ as well as 
management escalations required to authorize those steps. FICC states 
that because FICC has never experienced the default of multiple 
Members, it has not, historically, measured the deterioration or 
improvements metrics of the corridor indicators. Therefore, FICC states 
that these metrics were chosen based on the business judgment of FICC 
management.
---------------------------------------------------------------------------

    \29\ The Corridor Actions that would be identified in the R&W 
Plan are designed to be 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 R&W 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 between one day and two weeks. FICC states that this estimate 
is based on historical data observed in past Member defaults, the 
results of simulations of Member defaults, and periodic liquidity 
analyses conducted by FICC. FICC states that the actual length of a 
Recovery Corridor would vary based on actual market conditions observed 
at the time, 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, which would occur when and in the order provided in GSD 
Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing 
Fund and Loss Allocation), as applicable.\30\ 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 as appropriate during the Crisis 
Continuum to address liquidity shortfalls if they arise. FICC states 
that 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 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.
---------------------------------------------------------------------------

    \30\ See supra note 9.
---------------------------------------------------------------------------

    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.
    The Recovery Plan would describe governance for the actions and 
tools that may be employed within each phase of 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 various indicators and metrics applicable to that phase 
of the Crisis Continuum, and would follow the relevant escalation 
protocols 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.

[[Page 44948]]

(ii) 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 R&W 
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 R&W Plan would first identify some of the 
risks FICC faces that could lead to these losses, which include, for 
example, (1) the business and profit/loss risks of unexpected declines 
in revenue or growth of expenses; (2) 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 (3) 
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.\31\ The Recovery Plan would also describe FICC's 
approach to financial risk and capital management. The R&W 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.
---------------------------------------------------------------------------

    \31\ FICC states that the ``three lines of defense'' approach to 
risk management includes (1) a first line of defense comprised of 
the various business lines and functional units that support the 
products and services offered by FICC; (2) a second line of defense 
comprised of control functions that support FICC, including the risk 
management, legal and compliance areas; and (3) a third line of 
defense, which is performed by an internal audit group. 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. 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. 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 R&W 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,\32\ (b) 
the Corporate Contribution,\33\ 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 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing 
Fund and Loss Allocation).\34\
---------------------------------------------------------------------------

    \32\ See supra note 27.
    \33\ See supra note 27.
    \34\ See supra note 9.
---------------------------------------------------------------------------

    The R&W 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.\35\ Finally the R&W Plan would discuss how FICC would apply 
its resources to address losses resulting from a non-default event, 
including the 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 (Clearing Fund and Loss Allocation) 
and MBSD Rule 4 (Clearing Fund and Loss Allocation).\36\
---------------------------------------------------------------------------

    \35\ See supra note 13 (concerning the Capital Policy).
    \36\ See supra note 9.
---------------------------------------------------------------------------

    The R&W 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. FICC states that this Proposed 
Rule is designed to 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.
    The R&W 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''). FICC states that the intent is to make 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 R&W 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 R&W 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. FICC states that, 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.
(iii) 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 incentives to Members and minimize negative impact 
on Members and the financial system.
3. 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. FICC states that while such event is extremely unlikely, 
given the comprehensive nature of the recovery tools, 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. Bankruptcy Code,\37\ and (3) after 
effectuating this transfer, FICC liquidating any remaining assets in an 
orderly manner in bankruptcy proceedings. FICC states that the proposed 
transfer approach to a wind-down would meet its objectives of

[[Page 44949]]

(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.
---------------------------------------------------------------------------

    \37\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to FICC's Wind-down Plan, the 
R&W 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. 
Therefore, FICC states that a business reorganization or ``bail-in'' of 
debt approach would be unlikely to mitigate significant losses. 
Additionally, FICC states that the proposed 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. FICC states that 
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.\38\ The Wind-down Plan would 
identify some of the indicators that it has entered this Runway Period.
---------------------------------------------------------------------------

    \38\ 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 be designed to 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 R&W Plan, FICC states that 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, FICC states that 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 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. Bankruptcy Code.\39\ 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. Bankruptcy 
Code, and pursuant to a bankruptcy court order under Section 363 of the 
Bankruptcy Code, with the intent that the transfer be free and clear of 
claims against, and interests in, FICC, except to the extent expressly 
provided in the court's order.\40\
---------------------------------------------------------------------------

    \39\ See 11 U.S.C. et seq.
    \40\ See 11 U.S.C. 363.
---------------------------------------------------------------------------

    FICC states that 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.\41\ 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.\42\ 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.
---------------------------------------------------------------------------

    \41\ 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, FICC states that 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.
    \42\ See supra note 9.
---------------------------------------------------------------------------

    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. 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

[[Page 44950]]

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 R&W 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.\43\ 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.\44\
---------------------------------------------------------------------------

    \43\ See supra note 13.
    \44\ See supra note 13.
---------------------------------------------------------------------------

    FICC states that 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, as discussed 
below.

B. Proposed Rules

    In connection with the adoption of the R&W Plan, FICC proposes to 
adopt the Proposed Rules, each of which is described below. FICC states 
that the Proposed Rules are designed to facilitate the execution of the 
R&W Plan and are designed to provide Members and Limited Members with 
transparency as to critical aspects of the R&W Plan, particularly as 
they relate to the rights and responsibilities of both FICC and 
Members. FICC also states that the Proposed Rules are designed to 
provide a legal basis to these aspects of the R&W Plan.
1. GSD Rule 22D and MBSD Rule 17B (Wind-Down of the Corporation)
    FICC states that the proposed GSD Rule 22D and MBSD Rule 17B 
(collectively, ``Wind-down Rule'') are designed 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. FICC states that the Wind-down Rule 
is designed to 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. FICC states that, 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.
(i) Wind-Down Trigger
    First, FICC states that the Proposed Rule is designed to 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 Wind-down 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.
(ii) 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'').
(iii) Treatment of Pending Transactions
    The Wind-down Rule would authorize the Board to provide for the 
settlement of pending transactions of either Division prior to the 
Transfer

[[Page 44951]]

Time, so long as the applicable Division's Corporation Default Rule has 
not been triggered. 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. FICC states that 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.
    FICC states that the Proposed Rule is designed to 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.
(iv) 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.
(v) 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, FICC states that the 
proposed Wind-down Rule is designed to make clear that it 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.\45\
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    \45\ 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.
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(vi) Comparability Period
    FICC states that 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. 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. FICC states that 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.
(vii) Subordination of Claims Provisions and Miscellaneous Matters
    The proposed Wind-down Rule would 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., firms 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). FICC states that this 
provision is designed to incentivize Members to participate in FICC's 
recovery efforts.\46\
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    \46\ 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.
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    The proposed Wind-down Rule would address other ex-ante matters, 
including provisions providing that its

[[Page 44952]]

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.
    FICC states that the purpose of the limitation of liability is to 
facilitate and protect FICC's ability to act expeditiously in response 
to extraordinary events. Such limitation of liability would be 
available only following triggering of the Wind-down Plan. In addition, 
and as a separate matter, FICC states that the limitation of liability 
provides Members with transparency for the unlikely situation when 
those extraordinary events could occur, as well as supporting the legal 
framework within which FICC would take such actions. FICC states that 
these provisions, collectively, are designed to enable FICC to take 
such acts as the Board determines necessary to effectuate an orderly 
transfer and wind-down of its business should recovery efforts prove 
unsuccessful.
2. 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. 
FICC states that 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. 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, including notification when an 
event is no longer continuing and the relevant actions are terminated. 
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 and of actions taken or intended to 
be taken thereunder.
    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. FICC states that the purpose of the limitation of liability 
would be similar to the purpose of the analogous provision in the 
proposed Wind-down Rule, which is to facilitate and protect FICC's 
ability to act expeditiously in response to extraordinary events.
3. Proposed Changes to GSD Rules, MBSD Rules, and EPN Rules
    In order to incorporate the Proposed Rules into the Rules and the 
EPN Rules, FICC proposes 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) EPN Rule 1 
(Definitions). FICC states that these proposed changes are designed to 
clarify that certain types of Limited Members, as identified in those 
rules, would be subject to the Proposed Rules.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \47\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization. After careful review, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to FICC. In particular, 
the Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act,\48\ Rules 17Ad-22(e)(2)(i), (iii), and 
(v) under the Act,\49\ Rule 17Ad-22(e)(3)(ii) under the Act,\50\ and 
Rules 17Ad-22(e)(15)(i) and (ii) under the Act.\51\
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    \47\ 15 U.S.C. 78s(b)(2)(C).
    \48\ 15 U.S.C. 78q-1(b)(3)(F).
    \49\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
    \50\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \51\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that a 
registered clearing agency have rules 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 the clearing agency or for which it is 
responsible.\52\
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    \52\ 15 U.S.C. 78q-1(b)(3)(F).
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    First, the Commission believes that the R&W Plan, generally, is 
designed to help FICC 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 by providing FICC with a roadmap for actions it 
may employ to monitor and manage its risks, and, as needed, to 
stabilize its financial condition in the event those risks materialize. 
Specifically, as described above, the Recovery Plan would establish a 
number of triggers for the potential application of a number of 
recovery tools described in the Recovery Plan. The Commission believes 
that establishing such triggers alongside a

[[Page 44953]]

list of available recovery tools would help FICC to more promptly 
determine when and how it may need to manage a significant stress 
event, and, as needed, stabilize its financial condition.
    Similarly, the Force Majeure Rule is designed to provide a roadmap 
to address extraordinary events that may occur outside of FICC's 
control. Specifically, as described above, the Force Majeure Rule would 
define a Market Disruption Event and provide governance around 
determining when such an event has occurred. The Force Majeure Rule 
also would 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 FICC's 
services, if practicable. By defining a Market Disruption Event and 
providing such governance and authority, the Commission believes that 
the Force Majeure Rule would help FICC improve its ability to identify 
and manage a force majeure event, and, as needed, to stabilize its 
financial condition so that FICC can continue to operate.
    The Commission believes that the Recovery Plan and the Force 
Majeure Rule would allow for a more considered and comprehensive 
evaluation by FICC of a stressed market situation and the ways in which 
FICC could apply available recovery tools in a manner intended to 
minimize the potential negative effects of the stress situation for 
FICC, its membership, and the broader financial system. Therefore, the 
Commission believes that the Recovery Plan and the Force Majeure Rule 
are designed to help FICC 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 by establishing a means for FICC to best 
determine the most appropriate way to address such stress situations in 
an effective manner.
    Second, the Commission believes that the R&W Plan, generally, is 
designed to help FICC 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 by providing a roadmap to wind-down that is 
designed to ensure the availability of FICC's critical services to the 
marketplace, while reducing disruption to the operations of membership 
and financial markets that might be caused by FICC's failure. 
Specifically, as described above, the Wind-down Plan, as facilitated by 
the Wind-down Rule, would provide for the wind-down of FICC's business 
and transfer of membership and critical services if the recovery tools 
do not successfully return FICC to financial viability. Accordingly, 
critical services, such as services that lack alternative providers or 
products; services that the failure of which could impact the volume of 
transactions, transaction costs, or the flow of liquidity in the U.S. 
financial markets; and services that are interconnected with other 
participants and processes within the U.S. financial system would be 
able to continue in an orderly manner while FICC is seeking to wind-
down its services. By designing the Wind-down Plan and the Wind-down 
Rule to enable the continuity of FICC's critical services and 
membership in an orderly manner while FICC is seeking to wind-down its 
services, the Commission believes these proposed changes would help 
FICC 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 in the event the Wind-down Plan is implemented.
    As described above, to incorporate the Proposed Rules into the 
Rules and the EPN Rules, FICC proposes 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) 
EPN Rule 1 (Definitions). These proposed changes would clarify that 
certain types of Limited Members, as identified in those rules, would 
be subject to the Proposed Rules. These proposed changes would help 
these Limited Members readily understand their rights and obligations 
and would help enable Limited Members that are governed by the Proposed 
Rules to have a better understanding of the Proposed Rules. Enhanced 
access to and transparency of these rules would therefore assist such 
parties in understanding, planning for, and reacting in an orderly 
manner to, the implementation by FICC of the R&W Plan. Therefore, the 
Commission believes that these proposed changes to the Rules and the 
EPN Rules would help FICC 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.
    By better enabling FICC 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, as described above, the 
Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act.\53\
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    \53\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Under the 
Act

    Rule 17Ad-22(e)(2)(i) under the Act requires a covered clearing 
agency \54\ to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide for governance 
arrangements that are clear and transparent.\55\ Rule 17Ad-
22(e)(2)(iii) under the Act requires a covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that support the public interest requirements in Section 17A of the Act 
\56\ applicable to clearing agencies, and the objectives of owners and 
participants.\57\ Rule 17Ad-22(e)(2)(v) under the Act requires a 
covered clearing agency to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that specify clear and direct lines of 
responsibility.\58\
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    \54\ A ``covered clearing agency'' means, among other things, a 
clearing agency registered with the Commission under Section 17A of 
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated 
systemically important by the Financial Stability Oversight Counsel 
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461 
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). On July 18, 2012, FSOC 
designated FICC as systemically important. U.S. Department of the 
Treasury, ``FSOC Makes First Designations in Effort to Protect 
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. 
Therefore, FICC is a covered clearing agency.
    \55\ 17 CFR 240.17Ad-22(e)(2)(i).
    \56\ 15 U.S.C. 78q-1.
    \57\ 17 CFR 240.17Ad-22(e)(2)(iii).
    \58\ 17 CFR 240.17Ad-22(e)(2)(v).
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    As described above, the R&W Plan is designed to identify clear 
lines of responsibility concerning the R&W Plan including (1) the 
ongoing development of the R&W Plan; (2) ongoing maintenance of the R&W 
Plan; (3) reviews and approval of the R&W Plan; and (4) the functioning 
and implementation of the R&W Plan. As described above, the R&R Team, 
which reports to the Management Committee, is responsible for 
maintaining the R&W Plan and for the development and ongoing 
maintenance of the overall recovery and wind-down planning process. 
Meanwhile, the Board, or such committees as may be delegated authority 
by the Board from time to time

[[Page 44954]]

pursuant to its charter, would review and approve the R&W Plan 
biennially, and also would review and approve any changes that are 
proposed to the R&W Plan outside of the biennial review. Moreover, the 
R&W Plan would state the stages of escalation required to manage 
recovery under the Recovery Plan or to invoke FICC's wind-down under 
the Wind-down Plan, which would range from relevant business line 
managers up to the Board. The R&W Plan would identify the parties 
responsible for certain activities under both the Recovery Plan and the 
Wind-down Plan, and would describe their respective roles. The R&W Plan 
also would specify the process FICC would take to receive input from 
various parties at FICC, including management committees and the Board.
    In considering the above, the Commission believes that the R&W Plan 
would help contribute to establishing, implementing, maintaining, and 
enforcing written policies and procedures reasonably designed to 
provide for governance arrangements that are clear and transparent 
because it would specify lines of control. The Commission also believes 
that the R&W Plan would help contribute to establishing, implementing, 
maintaining, and enforcing written policies and procedures reasonably 
designed to provide for governance arrangements that support the public 
interest requirements in Section 17A of the Act \59\ applicable to 
clearing agencies, and the objectives of owners and participants 
because the R&W Plan specifies the process FICC would take to receive 
input from various FICC stakeholders. In addition, the Commission 
believes that the R&W Plan would help contribute to establishing, 
implementing, maintaining, and enforcing written policies and 
procedures reasonably designed to provide for governance arrangements 
that specify clear and direct lines of responsibility because it 
specifies who is responsible for the ongoing development, maintenance, 
reviews, approval, functioning, and implementation of the R&W Plan.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    Therefore, the Commission finds that the R&W Plan is consistent 
with Rules 17Ad-22(e)(2)(i), (iii), and (v) under the Act.\60\
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    \60\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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C. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Act

    Rule 17Ad-22(e)(3)(ii) under the Act requires a covered clearing 
agency 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.\61\
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    \61\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    As described above, the R&W Plan's Recovery Plan provides a plan 
for FICC's recovery necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses by 
defining the risk management activities, stress conditions and 
indicators, and tools that FICC may use to address stress scenarios 
that could eventually prevent FICC from being able to provide its 
critical services as a going concern. More specifically, through the 
framework of the Crisis Continuum, which identifies tools that can be 
employed to mitigate losses and mitigate or minimize liquidity needs as 
the market environment becomes increasingly stressed, the Recovery Plan 
would identify measures that FICC may take to manage risks of credit 
losses and liquidity shortfalls, and other losses that could arise from 
a Member default. The Recovery Plan also would address FICC's 
management of general business risks and other non-default risks that 
could lead to losses by identifying potential non-default losses and 
the resources available to FICC to address such losses, including 
recovery triggers and tools to mitigate such losses. Therefore, the 
Commission believes that the R&W Plan's Recovery Plan helps FICC 
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 FICC, which includes a recovery plan 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.
    As described above, the R&W Plan's Wind-down Plan provides a plan 
for orderly wind-down of FICC, which 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 sets forth mechanisms for 
the transfer of the membership of both Divisions and FICC's business, 
and it is designed to maintain continued access to FICC's critical 
services and to minimize market impact of the transfer while FICC is 
seeking to ultimately wind-down its services. Specifically, the Wind-
down Plan would provide for the transfer of FICC's business, assets, 
and membership to another legal entity with such transfer being 
effected in connection with proceedings under Chapter 11 of the U.S. 
Bankruptcy Code.\62\ After effectuating this transfer, FICC would 
liquidate any remaining assets in an orderly manner in bankruptcy 
proceedings.
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    \62\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    Although the Commission is not opining on the Wind-down Plan's 
consistency with the U.S. Bankruptcy Code, in reviewing the proposed 
changes, the Commission believes that FICC's intent to use bankruptcy 
proceedings to achieve an orderly liquidation of assets after any 
transfer of FICC's business appears reasonable, in light of the 
provisions of the Bankruptcy Code that address the liquidation and 
distribution of a debtor's property among creditors and interest 
holders.\63\ Under many circumstances, Section 363 of the Bankruptcy 
Code provides for the sale of property ``free and clear of any interest 
in such property of an entity other than the estate[.]'' \64\ The 
Commission believes that FICC's analysis regarding the applicability of 
these provisions, while not free from doubt, presents a reasonable 
approach to liquidation in light of the circumstances and the available 
alternatives.\65\ Therefore, the Commission believes that the R&W 
Plan's Wind-down Plan helps FICC 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 FICC, which includes a 
wind-down plan necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses.
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    \63\ See, e.g., 11 U.S.C. 363, 726, and 1129(a)(7).
    \64\ See 11 U.S.C. 363(f).
    \65\ The Wind-down Plan would identify certain factors the Board 
may consider in evaluating alternatives, 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.

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[[Page 44955]]

    Therefore, the Commission finds that the R&W Plan is consistent 
with Rule 17Ad-22(e)(3)(ii) under the Act.\66\
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    \66\ 17 CFR 240.17Ad-22(e)(3)(ii).
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D. Consistency With Rules 17Ad-22(e)(15)(i)-(ii) Under the Act

    Rule 17Ad-22(e)(15)(i) under the Act requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage its 
general business risk and hold sufficient liquid net assets funded by 
equity to cover potential general business losses so that the covered 
clearing agency can continue operations and services as a going concern 
if those losses materialize, including by determining the amount of 
liquid net assets funded by equity based upon its general business risk 
profile and the length of time required to achieve a recovery or 
orderly wind-down, as appropriate, of its critical operations and 
services if such action is taken.\67\ Rule 17Ad-22(e)(15)(ii) under the 
Act requires a covered clearing agency to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to identify, monitor, and manage its general business risk and 
hold sufficient liquid net assets funded by equity to cover potential 
general business losses so that the covered clearing agency can 
continue operations and services as a going concern if those losses 
materialize, including by holding liquid net assets funded by equity 
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, as contemplated by the plans established under Rule 17Ad-
22(e)(3)(ii) under the Act,\68\ discussed above.\69\
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    \67\ 17 CFR 240.17Ad-22(e)(15)(i).
    \68\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \69\ 17 CFR 240.17Ad-22(e)(15)(ii).
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    As discussed above, FICC's Capital Policy is designed to address 
how FICC holds LNA in compliance with these requirements,\70\ while the 
Wind-down Plan would include an analysis to estimate the amount of time 
and cost 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 also 
would 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 amount of LNA that FICC 
plans to 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, 
the Commission finds that the R&W Plan is consistent with Rules 17Ad-
22(e)(15)(i) and (ii) under the Act.\71\
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    \70\ Supra note 13.
    \71\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \72\ and the 
rules and regulations thereunder.
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    \72\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\73\ that proposed rule change SR-FICC-2017-021, as modified by 
Amendment No. 1, be, and it hereby is, approved \74\ as of the date of 
this order or the date of a notice by the Commission authorizing FICC 
to implement advance notice SR-FICC-2017-805, as modified by Amendment 
No. 1, whichever is later.
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    \73\ 15 U.S.C. 78s(b)(2).
    \74\ In approving the Proposed Rule Change, the Commission has 
considered the Proposed Rule Change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\75\
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    \75\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19055 Filed 8-31-18; 8:45 am]
 BILLING CODE 8011-01-P