Document ID: SEC-2021-1194-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2021-09-03T04:00Z

[Federal Register Volume 86, Number 169 (Friday, September 3, 2021)]
[Notices]
[Pages 49580-49587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-19046]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92808; File No. SR-FICC-2021-003]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Add the Sponsored GC Service and Make Other Changes

August 30, 2021.
    On May 12, 2021, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-FICC-2021-003 
to amend FICC's Government Securities Division Rulebook \3\ to add a 
new service that expands FICC's existing Sponsored Service.\4\ The 
proposed rule change was

[[Page 49581]]

published for public comment in the Federal Register on June 1, 
2021.\5\ On June 8, 2021, FICC filed Amendment No. 1 to the proposed 
rule change, to correct an erroneous cross reference in the original 
filing.\6\ The proposed rule change, as modified by Amendment No. 1, is 
hereinafter referred to as the ``Proposed Rule Change.'' On June 24, 
2021, the Commission published a notice designating a longer period of 
time for Commission action and a longer period for public comment on 
the Proposed Rule Change.\7\ The Commission received one comment letter 
in support of the Proposed Rule Change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ FICC's Government Securities Division (``GSD'') Rulebook 
(``Rules'') is available at http://www.dtcc.com/legal/rules-and-procedures.
    \4\ FICC also filed the proposals contained in the proposed rule 
change as advance notice SR-FICC-2021-801 with the Commission 
pursuant to Section 806(e)(1) of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Clearing Supervision Act''), 
12 U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i) of the Act, 17 CFR 
240.19b-4(n)(1)(i). Notice of filing of the Advance Notice was 
published for comment in the Federal Register on June 3, 2021. 
Securities Exchange Act Release No. 92019 (May 27, 2021), 86 FR 
29834 (June 3, 2021) (SR-FICC-2021-801).
    \5\ Securities Exchange Act Release No. 92014 (May 25, 2021), 86 
FR 29334 (June 1, 2021) (SR-FICC-2020-003) (``Notice'').
    \6\ Amendment No. 1 made a correction to Exhibit 5 of the 
filing. On June 8, 2021, FICC filed Amendment No. 1 to the advance 
notice to make the same correction as regarding the proposed rule 
change. The advance notice, as modified by Amendment No. 1, is 
hereinafter referred to as the ``Advance Notice.'' On June 11, 2021, 
the Commission, by the Division of Trading and Markets, pursuant to 
delegated authority, requested additional information from FICC 
pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act. 17 
CFR 200.30-3(a)(93); 12 U.S.C. 5465(e)(1)(D). The request for 
information tolled the Commission's period of review of the Advance 
Notice until 60 days from the date of the Commission's receipt of 
the information requested from FICC. See 12 U.S.C. 5465(e)(1)(E)(ii) 
and (G)(ii); see Memorandum from the Office of Clearance and 
Settlement, Division of Trading and Markets, titled ``Commission's 
Request for Additional Information,'' available at https://www.sec.gov/rules/sro/ficc-an/2021/34-92019-memo-ficc.pdf. The 
Commission received the information requested from FICC on July 2, 
2021.
    \7\ Securities Exchange Act Release No. 92185 (June 15, 2021), 
86 FR 33420 (June 24, 2021) (SR-FICC-2021-003).
    \8\ The comment is available at https://www.sec.gov/comments/sr-ficc-2021-003/srficc2021003.htm. Because the proposals contained in 
the Advance Notice and the Proposed Rule Change are the same, the 
Commission considers any public comments received on the proposal as 
applicable to both filings, regardless of whether comments are 
submitted with respect to the Advance Notice or the Proposed Rule 
Change.
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    The Commission is publishing this notice to solicit comments on 
Amendment No. 1 from interested persons and, for the reasons discussed 
below, to approve the Proposed Rule Change on an accelerated basis.

I. Description of the Proposed Rule Change

A. Background

1. FICC Services for Repurchase Agreement (``Repo'') Transactions
    Repos involve a pair of securities transactions between two 
parties. The parties agree to the terms of the trade, including the 
securities, principal amount, interest rate, haircut, and tenor (i.e., 
date of maturity). The first transaction (the ``Start Leg'') consists 
of the sale of securities, in which one party (the ``cash borrower'') 
delivers securities, and in exchange, the other party (the ``cash 
lender'') delivers cash. At the Start Leg, the cash borrower typically 
delivers an amount of securities equal in value to the amount of cash 
received from the cash lender, plus a haircut. Repo durations range 
from one day (``overnight'') to a year or more, but are usually less 
than three months (``term''). The second transaction (the ``End Leg'') 
occurs on a date after that of the Start Leg and consists of the 
repurchase of securities, in which the obligations to deliver cash and 
securities are the reverse of the Start Leg. At the End Leg, the cash 
borrower typically delivers the amount of cash borrowed, plus interest, 
and the cash lender returns the securities.
    FICC serves as CCP and provides clearance and settlement services 
to facilitate both bilateral and tri-party repo transactions. FICC 
facilitates bilateral repos \9\ in which all securities delivery 
obligations are made against full payment (``delivery-versus-payment'' 
or ``DVP'') (the ``DVP Service''). FICC generally novates and 
guarantees settlement of a trade upon validation of the trade details, 
which results in the legally binding and enforceable contract between 
FICC and the parties to the trade.\10\ On a daily basis, FICC 
aggregates and matches a member's offsetting obligations resulting from 
the member's trades, thereby netting the member's total daily 
settlement obligations.\11\
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    \9\ A bilateral repo is one in which the cash lender and cash 
borrower directly exchange cash and securities. In the bilateral 
repo market, the parties specify the securities used as collateral. 
Therefore, a cash lender seeking to obtain a particular security 
would utilize the bilateral repo market.
    \10\ See Rule 5, supra note 3.
    \11\ See Rule 11, supra note 3.
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    FICC facilitates tri-party repos \12\ through its General 
Collateral Finance (``GCF'') Repo[supreg] Service, which enables 
members to trade general collateral finance repos based on rate, term, 
and underlying product throughout the day on a blind basis.\13\ The 
Bank of New York Mellon operates the tri-party platform that 
facilitates trades conducted through the GCF Repo Service. FICC has 
established standardized, generic CUSIP Numbers exclusively for GCF 
Repo processing and to specify the acceptable types of underlying 
Fedwire book-entry eligible collateral, which include U.S. Treasuries, 
U.S. government agency securities, and certain mortgage-backed 
securities.\14\
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    \12\ A tri-party repo is one in which a clearing bank, acting as 
tri-party agent, provides to both the cash lender and the cash 
borrower certain operational, custodial, collateral management, and 
other services. In tri-party repo trading, both parties maintain 
accounts at a clearing bank, which facilitates the payment and 
delivery of cash and securities between the parties' accounts. In 
contrast to the bilateral repo market and its use of specific 
collateral, the tri-party repo market is exclusively for general 
collateral repos, meaning that the parties agree to use any 
securities from a pre-approved basket of acceptable securities as 
collateral. In a general collateral repo, the cash lender is 
indifferent to the particular securities it receives as collateral, 
provided that the securities come from the pre-approved basket of 
acceptable securities.
    \13\ See Rule 20, supra note 3.
    \14\ See Rule 3 (definitions of ``GCF Repo Transaction'' and 
``Generic CUSIP Number'') and Rule 20, Section 2, supra note 3; 
Notice, supra note 5 at 29336.
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2. Sponsored Membership
    In 2005, FICC established the Sponsored Service, allowing eligible 
members to sponsor their clients into a limited form of membership.\15\ 
A Sponsoring Member is permitted to submit to FICC, for comparison, 
novation, and netting, certain eligible securities transactions of its 
Sponsored Members. FICC requires each Sponsoring Member to establish an 
omnibus account at FICC (separate from its regular netting account) for 
Sponsored Member trading activity. Sponsored Members generally have to 
meet the definition of a qualified institutional buyer (``QIB''), as 
defined in Rule 144A \16\ under the Securities Act of 1933.\17\
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    \15\ Securities Exchange Act Release No. 51896 (June 21, 2005), 
70 FR 36981 (June 27, 2005) (SR-FICC-2004-22). See Rule 3A, supra 
note 3.
    \16\ 17 CFR 230.144A.
    \17\ 15 U.S.C. 77a et seq.
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    For operational and administrative purposes, FICC interacts solely 
with the Sponsoring Member as agent for purposes of the day-to-day 
satisfaction of its Sponsored Members' obligations to and from FICC, 
including their securities and funds-only settlement obligations.\18\ 
Sponsoring Members are also responsible for providing FICC with a 
Sponsoring Member Guaranty, whereby the Sponsoring Member guarantees to 
FICC the payment and performance by its Sponsored Members of their 
obligations under the Rules.\19\ Although Sponsored Members are 
principally liable to FICC for their own settlement obligations under 
the Rules, the Sponsoring Member Guaranty requires the Sponsoring 
Member to satisfy those settlement obligations on behalf of a Sponsored 
Member if the

[[Page 49582]]

Sponsored Member defaults and fails to perform its settlement 
obligations.\20\
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    \18\ See Rule 3A, Section 8, supra note 3.
    \19\ See Rule 1 (definition of ``Sponsoring Member Guaranty'') 
and Rule 3A, Section 2(c), supra note 3.
    \20\ Id.
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B. Proposed Sponsored GC Service

    Currently, the Sponsored Service only facilitates trading in 
bilateral DVP repos, not tri-party repos. In the Proposed Rule Change, 
FICC proposes to expand the Sponsored Service to accommodate tri-party 
repo trading, which FICC believes would increase term repo activity 
within the Sponsored Service. FICC states that several market 
participants have indicated that they currently transact tri-party term 
repos outside of central clearing because they are not operationally 
equipped to perform the collateral management and other functions 
associated with term DVP repos.\21\ In particular, money market funds 
and other mutual funds generally prefer to use the tri-party repo 
market because a clearing bank administers collateral management and 
other functions, as described above.\22\
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    \21\ See Notice, supra note 5 at 29336. A key difference between 
the bilateral and tri-party repo markets deals with the operational 
aspects of managing term repos. In the tri-party repo market, a 
clearing bank typically automatically selects securities from the 
cash borrower's account to serve as collateral that satisfies the 
credit and liquidity criteria agreed between the parties. The 
clearing bank delivers securities against the simultaneous delivery 
of cash between the parties' accounts at the clearing bank. The 
clearing bank manages the regular revaluation of collateral, 
variation margining, income payments on the collateral, and 
collateral substitutions. In the bilateral repo market, the parties 
themselves perform such collateral management and other 
administrative functions.
    \22\ See Notice, supra note 5 at 29336.
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    Therefore, FICC proposes to add the Sponsored GC Service, which 
would allow (but not require) Sponsoring Members and their Sponsored 
Members to trade general collateral repos with each other on the tri-
party platform of a Sponsored GC Clearing Agent Bank \23\ (each, a 
``Sponsored GC Trade''). Such general collateral repos would involve 
the same asset classes that are currently available for members using 
the GCF Repo Service.\24\ Consistent with the GCF Repo Service, the 
Sponsored GC Service would also permit cash borrowers to make 
collateral substitutions. Sponsored GC Trades would settle in a manner 
similar to the way Sponsoring Members and Sponsored Members currently 
settle tri-party repos with each other outside of central clearing.
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    \23\ The Bank of New York Mellon operates the tri-party platform 
that would facilitate trades conducted through the Sponsored GC 
Service.
    \24\ FICC would register a new series of Generic CUSIP Numbers 
for the Sponsored GC Service as follows: (i) U.S. Treasury 
Securities maturing in ten (10) years or less, (ii) U.S. Treasury 
Securities maturing in thirty (30) years or less, (iii) Non-
Mortgage-Backed U.S. Agency Securities, (iv) Federal National 
Mortgage Association (``Fannie Mae'') and Federal Home Loan Mortgage 
Corporation (``Freddie Mac'') Fixed Rate Mortgage-Backed Securities, 
(v) Fannie Mae and Freddie Mac Adjustable Rate Mortgage-Backed 
Securities, (vi) Government National Mortgage Association (``Ginnie 
Mae'') Fixed Rate Mortgage-Backed Securities, (vii) Ginnie Mae 
Adjustable Rate Mortgage-Backed Securities, (viii) U.S. Treasury 
Inflation-Protected Securities (``TIPS'') and (ix) U.S. Treasury 
Separate Trading of Registered Interest and Principal of Securities 
(``STRIPS''). The purpose of registering a new series of Generic 
CUSIP Numbers specific to the Sponsored GC Service is to avoid any 
operational processing errors that could otherwise result if a trade 
intended for the Sponsored GC Service was inadvertently processed as 
a GCF Repo transaction or vice versa. Notice, supra note 5 at 29336.
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Sponsored GC Service Structure
    Sponsored GC Trades would only be between a Sponsored Member and 
its Sponsoring Member. FICC would novate only the End Legs of Sponsored 
GC Trades. Consistent with the current settlement process of such tri-
party repos outside of central clearing, the Start Legs of Sponsored GC 
Trades would continue to settle on a trade-for-trade basis on the tri-
party platform of a Sponsored GC Clearing Agent Bank.\25\
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    \25\ FICC does not believe it would be efficient or appropriate 
to novate the Start Legs of Sponsored GC Trades, as that novation 
would unnecessarily complicate an already efficient process by 
requiring the parties to make significant operational and business 
changes to include FICC in the transaction chain. Since Sponsored GC 
Trades would only be between a Sponsored Member and its Sponsoring 
Member on a known (i.e., not blind) basis, all Start Leg obligations 
would settle between a single set of counterparties, negating any 
efficiency or reduced settlement risk that FICC's novation would 
provide. See Notice, supra note 5 at 29337.
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    Accrued repo interest on Sponsored GC Trades would be paid and 
collected by FICC on a daily basis. Additionally, if the market value 
of the securities collateral decreases from its market value at the 
Start Leg, the cash borrower would be required deliver to FICC 
additional securities (and/or cash) such that the market value of the 
total securities collateral remains at least equal to its market value 
at the Start Leg. Conversely, if the market value of the securities 
collateral increases from its market value at the Start Leg, the cash 
lender would be required to deliver to FICC securities (and/or cash) 
such that the market value of the remaining securities collateral 
remains at least equal to its market value at the Start Leg. Such 
additional securities (and/or cash) must be delivered within the 
timeframe set forth in a proposed new schedule of Sponsored GC Trade 
timeframes set forth in the Rules.
    In order to facilitate settlement of securities and cash 
obligations, FICC would direct each party to a Sponsored GC Trade to 
make any payment or delivery due to FICC in respect of a Sponsored GC 
Trade (except for certain funds-only settlement obligations, as 
discussed below) directly to the relevant pre-novation counterparty. As 
a result, each transfer of securities and daily repo interest would be 
made directly between the Sponsored Member and its Sponsoring Member 
via the tri-party repo platform of a Sponsored GC Clearing Agent 
Bank.\26\
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    \26\ FICC similarly does not believe it would be appropriate for 
FICC to be in the transaction chain for each payment and delivery 
under a Sponsored GC Trade because inserting FICC in the middle of 
the payments and deliveries would require substantial changes in 
operational processes for both Sponsored Members and Sponsoring 
Members. FICC does not believe such operational changes are 
necessary since there can only be two pre-novation counterparties 
involved in the settlement of a Sponsored GC Trade (i.e., the 
Sponsoring Member and its Sponsored Member client). See Notice, 
supra note 5 at 29337-38.
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Market Risk Management
    FICC would manage its market risk with respect to Sponsored GC 
Trades similar to the manner in which FICC manages existing trades 
within the Sponsored Service. To mitigate market risk, FICC would 
calculate the Value at Risk (``VaR'') margin component (``VaR Charge'') 
\27\ for each Sponsored Member based on its activity in the Sponsored 
Service, including its activity in the proposed Sponsored GC Service. 
The VaR Charge for the Sponsoring Member's omnibus account for 
Sponsored Member trading activity would continue to be gross-margined 
as the sum of the individual VaR Charges for each Sponsored Member 
client.\28\
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    \27\ Each member's margin consists of a number of applicable 
components. The VaR Charge is typically the largest component of a 
member's margin requirement. The VaR Charge is designed to capture 
the potential market price risk associated with the securities in a 
member's portfolio. The VaR Charge is designed to provide an 
estimate of FICC's projected liquidation losses with respect to a 
defaulted member's portfolio at a 99 percent confidence level. See 
Rule 1 (definition of ``VaR Charge''), supra note 3; Securities 
Exchange Act Release No. 83362 (June 1, 2018), 83 FR 26514 (June 7, 
2018) (SR-FICC-2018-001).
    \28\ See Rule 3A, Section 10, supra note 3.
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    Additionally, FICC would assign a symbol to each Sponsored Member 
to facilitate FICC's ability to surveil the Sponsored Member's activity 
across its Sponsored GC Trades as well as its other Sponsored Member 
Trades within the existing Sponsored Service (both with the same 
Sponsoring Member and across Sponsoring Members, if applicable). In 
addition, FICC would apply certain heightened requirements that apply 
to certain Sponsoring Members within the Sponsored GC Service as 
well.\29\ For example, FICC

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may impose heightened financial requirements on these Sponsoring 
Members based on their anticipated activity and other factors,\30\ and 
FICC may limit such a Sponsoring Member's activity if the sum of the 
VaR Charges of its omnibus and netting accounts exceeds its net 
capital.\31\
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    \29\ Specifically, these restrictions apply to Category 2 
Sponsoring Members, which are other members that meet certain 
financial requirements as compared to Category 1 Sponsoring Members, 
which are bank netting members that are well-capitalized with $5 
billion in equity capital. See Rule 3A, Section 2(a), supra note 3.
    \30\ See Rule 3A, Section 2(b), supra note 3.
    \31\ See Rule 3A, Section 2(h), supra note 3.
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    In addition, FICC would manage the mark-to-market risk associated 
with unaccrued repo interest on a Sponsored GC Trade through a proposed 
new interest rate mark component of funds-only settlement.\32\ FICC 
would also apply an Interest Adjustment Payment to Sponsored GC Trades 
to account for overnight use of funds by the Sponsoring Member or 
Sponsored Member, as applicable, based on such party's receipt from 
FICC of a Forward Mark Adjustment Payment (reflecting a GC Interest 
Rate Mark) on the previous business day.\33\
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    \32\ This GC Interest Rate Mark would be calculated in the same 
manner as the GCF Interest Rate Mark is for GCF Repo transactions. 
For a detailed description of the calculation, see Notice, supra 
note 5 at 29337-38.
    \33\ No other components of funds-only settlement would be 
necessary to apply to Sponsored GC Trades because, as described 
above, (i) all Sponsored GC Trades would novate after the settlement 
of the Start Legs of such trades (i.e., not during the Forward-
Starting Period), (ii) mark-to-market changes in the value of the 
securities transferred under Sponsored GC Trades would be managed by 
the Sponsored GC Clearing Agent Bank on FICC's behalf (consistent 
with the manner in which GCF Repo transactions are currently 
processed), and (iii) the accrued repo interest on Sponsored GC 
Trades would be passed on a daily basis, as described above.
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Liquidity Risk Management
    Currently, trades between a Sponsoring Member and its Sponsored 
Member do not independently create liquidity risk for FICC. Under its 
Rules, if a Sponsoring Member defaults, FICC may close out (that is, 
cash settle) the Sponsored Member trades of the defaulting Sponsoring 
Member.\34\ Similarly, if a Sponsored Member defaults, FICC may offset 
its settlement obligations to the Sponsoring Member against the 
Sponsoring Member's obligations under the Sponsoring Member Guaranty to 
perform on behalf of its defaulting Sponsored Member.\35\ Thus, in both 
default scenarios, FICC bears no liquidity risk.
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    \34\ See Rule 3A, Section 14(c), supra note 3. See also Rule 
22A, Section 2, supra note 3.
    \35\ See Rule 3A, Section 11, supra note 3.
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    As a result, to the extent a Sponsoring Member either (1) runs a 
matched book of Sponsored Member trades (i.e., enters into offsetting 
trades with its own Sponsored Members), or (2) simply enters into 
trades with its Sponsored Member (i.e., without entering into 
offsetting trades), such activities do not increase FICC's liquidity 
risk. FICC bears liquidity risk only when a Sponsoring Member enters 
into an offsetting trade in which a third-party member is the pre-
novation counterparty. In that scenario, FICC is required to settle the 
obligations of a defaulting Sponsoring Member.
    Since Sponsored GC Trades would not involve third-party members, 
such trades would impact FICC's liquidity risk in a similar manner to 
trades between a Sponsoring Member and its Sponsored Member in the 
current Sponsored Service. As a result, FICC proposes to manage the 
liquidity risk associated with Sponsored GC Trades in the same manner 
that it currently manages such risk for other trades between a 
Sponsoring Member and its Sponsored Member.

C. Proposed Changes to Allocations Within the Capped Contingency 
Liquidity Facility (``CCLF'')

1. CCLF Background
    On April 25, 2017, the Commission approved FICC's adoption of the 
Clearing Agency Liquidity Risk Management Framework (``Framework''), 
which broadly describes FICC's liquidity risk management strategy and 
objective to maintain sufficient liquid resources in order to meet the 
potential amount of funding required to settle outstanding transactions 
of a defaulting member (including affiliates) in a timely manner.\36\ 
The Framework identifies, among other things, each of the qualifying 
liquid resources available to FICC, including the CCLF.\37\ The CCLF is 
a rules-based, committed liquidity resource, designed to enable FICC to 
meet its cash settlement obligations in the event of a default of the 
member (including the member's family of affiliated members) to which 
FICC has the largest exposure in extreme but plausible market 
conditions.\38\ FICC would activate the CCLF if, upon a member default, 
FICC determines that its non-CCLF liquidity resources would not 
generate sufficient cash to satisfy FICC's payment obligations to its 
non-defaulting members. In simple terms, a CCLF repo is equivalent to a 
non-defaulting member financing FICC's payment obligation under the 
original trade, thereby providing FICC with time to liquidate the 
securities underlying the original trade. More specifically, upon 
activating the CCLF, members would be called upon to enter into repo 
transactions (as cash lenders) with FICC (as cash borrower) up to a 
pre-determined capped dollar amount, thereby providing FICC with 
sufficient liquidity to meet its payment obligations. For a non-
defaulting member to whom FICC has a payment obligation disrupted by a 
member default, a CCLF repo would extinguish and replace the original 
trade that gave rise to FICC's payment obligation.
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    \36\ See Securities Exchange Act Release No. 80489 (April 19, 
2017), 82 FR 19120 (April 25, 2017) (SR-FICC-2017-008).
    \37\ See id.
    \38\ FICC designed the CCLF to meet the regulatory requirement 
for a covered clearing agency to measure, monitor, and manage its 
liquidity risk by maintaining sufficient liquid resources to effect 
same-day settlement of payment obligations in the event of a default 
of the participant family that would generate the largest aggregate 
payment obligation for the clearing agency in extreme but plausible 
market conditions. 17 CFR 240.17Ad-22(e)(7)(i); see Securities 
Exchange Act Release No. 82090 (November 15, 2017), 82 FR 55427, 
55430 (November 21, 2017) (SR-FICC-2017-002); Rule 22A, Section 2a, 
supra note 3.
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    FICC determines the total size of the CCLF based on FICC's 
potential cash settlement obligations that would result from the 
default of the member (including affiliates) presenting the largest 
liquidity need to FICC over a specified look-back period, plus an 
additional liquidity buffer. In the Proposed Rule Change, FICC does not 
propose to change the method by which it determines the total size of 
the CCLF.
    FICC uses a tiered approach to allocate the total size of the CCLF 
among its members to arrive at the amount of each member's CCLF 
obligation. FICC allocates $15 billion of the total size of the CCLF 
among all members.\39\ FICC allocates the remainder of the total size 
of the CCLF among members that generate liquidity needs above the $15 
billion threshold based on the frequency that such members generate 
daily liquidity needs over $15 billion across supplemental liquidity 
tiers in $5 billion increments. Specifically, FICC calculates a dollar 
amount for the CCLF obligation applicable to each supplemental 
liquidity tier. FICC allocates the CCLF obligation for each 
supplemental liquidity tier to members on a pro-rata basis 
corresponding to the number of times each member generates liquidity

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needs within each supplemental liquidity tier.\40\
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    \39\ FICC has determined that $15 billion is an appropriate 
amount for allocation to all members because the average member's 
liquidity need from 2015-2016 was approximately $7 billion, with a 
majority of members (approximately 85 percent) having liquidity 
needs less than $15 billion. See Securities Exchange Act Release No. 
82090 (November 15, 2017), 82 FR 55427, 55430 (November 21, 2017) 
(SR-FICC-2017-002).
    \40\ For example, a member that generates daily liquidity needs 
in the $15-$20 billion supplemental liquidity tier would incur a 
pro-rata share for the $15-$20 billion supplemental liquidity tier 
only. Another member that generates daily liquidity needs in the 
$20-$25 billion supplemental liquidity tier would incur a pro-rata 
share for both the $15-$20 and $20-$25 billion supplemental 
liquidity tiers. A third member that generates daily liquidity needs 
in the $65-$70 billion supplemental liquidity tier would incur a 
pro-rata share for every supplemental liquidity tier. Each member's 
pro-rata share is based on the frequency with which the member 
generates daily liquidity needs in each supplemental liquidity tier. 
See Securities Exchange Act Release No. 80234 (March 14, 2017), 82 
FR 14401, 14404-05 (March 20, 2017) (SR-FICC-2017-002).
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2. Current CCLF Allocation Methodology for the Sponsored Service
    Currently, FICC does not impose a CCLF obligation on a Sponsoring 
Member to the extent the Sponsoring Member runs a matched book of 
Sponsored Member trades. This is because to determine a Sponsoring 
Member's CCLF obligation, FICC nets all of the positions recorded in 
the Sponsoring Member's omnibus account (regardless of whether they 
relate to the same Sponsored Member) and separately nets all of the 
positions in the Sponsoring Member's netting account.\41\ As a result, 
to the extent a Sponsoring Member enters into perfectly offsetting 
Sponsored Member trades (i.e., the matched book scenario), the 
settlement obligations of those trades net out in the omnibus account 
and the netting account, with no resulting CCLF obligation for the 
Sponsoring Member.
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    \41\ See Rule 3A, Section 8(b) and Rule 22A, Section 2a(b), 
supra note 3.
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    However, if a Sponsoring Member enters into a Sponsored Member 
trade without entering into an offsetting transaction, the Sponsoring 
Member is subject to CCLF obligations for the position of its Sponsored 
Member recorded in its omnibus account as well as its own position 
arising from the Sponsored Member trade recorded in its netting 
account. Although the positions in the Sponsoring Member's omnibus 
account and netting account offset each other, FICC does not currently 
net such positions for CCLF purposes because CCLF allocations are 
determined at the participant account level.\42\ FICC believes the 
foregoing scenario should not contribute to the Sponsoring Member's 
CCLF obligation because, as described above in Section I.B, such 
offsetting obligations do not present liquidity risk to FICC.
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    \42\ This limitation on offset is consistent with FICC's 
approach of not offsetting the positions of two accounts of the same 
member for CCLF purposes. However, FICC notes an important 
difference between Sponsored Member trades and other FICC repo 
activity. See Notice, supra note 5 at 29343. Specifically, as 
mentioned above in Section I.A.2., the Sponsored Service requires a 
Sponsoring Member to maintain an omnibus account that is separate 
from its netting account. In contrast, for all other repo activity, 
members have the option to collapse all of their activity into a 
single participant account in order to achieve a similar netting 
benefit. Sponsoring Members do not have that option with respect to 
their Sponsored Member trades. Therefore, FICC believes this 
proposed change is necessary to ensure that a Sponsoring Member's 
CCLF obligations are calculated in a manner that more closely aligns 
with the liquidity risk associated with Sponsored Member trades. Id.
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3. Proposed CCLF Allocation Methodology for the Sponsored Service
    As described above, trades between a Sponsoring Member and its 
Sponsored Member do not independently create liquidity risk for FICC, 
and therefore, FICC believes that such trades should not affect the 
Sponsoring Member's CCLF obligation. To ensure that a Sponsoring 
Member's CCLF obligation is calculated to reflect the lack of liquidity 
risk to FICC associated with Sponsored Member trades, FICC proposes to 
take into account, for CCLF calculation purposes, any offsetting 
settlement obligations between a Sponsoring Member's netting account 
and its omnibus account. This proposed change would ensure that all 
Sponsored Member trades, whether perfectly offset by other Sponsored 
Member trades (i.e., the matched book scenario) or not, would be 
recognized for CCLF purposes as not affecting FICC's liquidity risk. 
This proposed change would also apply to trades in the new Sponsored GC 
Service.\43\
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    \43\ For Sponsored GC Trades, this proposed change would ensure 
that FICC applies an appropriate CCLF obligation to a Sponsoring 
Member in the event a Sponsored GC Clearing Agent Bank allocates to 
a Sponsored GC Trade a different security than the security that 
underlies an offsetting Sponsored Member Trade. For example, a 
Sponsoring Member may enter into a Sponsored GC Trade on a Generic 
CUSIP Number and a separate offsetting Sponsored Member trade in a 
specific CUSIP Number. Although the specific CUSIP Number might also 
be an eligible security under the Generic CUSIP Number underlying 
the Sponsored GC Trade, the Sponsored GC Clearing Agent Bank could 
allocate to the Sponsored GC Trade a different eligible CUSIP Number 
from the list of eligible securities. FICC's proposed change would 
offset these positions across the Sponsoring Member's netting 
account and omnibus account to ensure that the CCLF obligation 
applicable to the Sponsoring Member accurately reflects the 
liquidity risk associated with those positions.
---------------------------------------------------------------------------

    Although, as noted above, the Proposed Rule Change would not affect 
the method by which FICC determines the total CCLF amount, FICC's 
proposal to net offsetting trades between a Sponsoring Member and its 
Sponsored Member for CCLF calculation purposes would affect the 
allocation of CCLF obligations over $15 billion to other members. 
Specifically, as described above, under the current Rules, if a 
Sponsoring Member enters into a Sponsored Member trade without entering 
into an offsetting transaction, the Sponsoring Member is subject to 
CCLF obligations for the position of its Sponsored Member recorded in 
its omnibus account as well as its own position arising from the 
Sponsored Member trade recorded in its netting account. Under the 
Proposed Rule Change, the Sponsoring Member would not incur CCLF 
obligations for such transactions. Therefore, a Sponsoring Member's 
peak daily liquidity is currently higher than it would be under the 
Proposed Rule Change. This, in turn, may decrease the frequency with 
which a Sponsoring Member's daily peak liquidity reaches into higher 
supplemental liquidity tiers. As a result, the pro-rata allocation of 
CCLF obligations among members with daily peak liquidity in those 
supplemental liquidity tiers would increase.\44\ When fewer members 
generate peak liquidity needs in a supplemental liquidity tier, the 
remaining members that generate peak liquidity in that tier bear a 
larger pro-rata share of the CCLF allocations for that tier.
---------------------------------------------------------------------------

    \44\ However, as stated above, the proposals in the Proposed 
Rule Change would not change FICC's current methodology for 
calculating the total amount of the CCLF.
---------------------------------------------------------------------------

D. Other Proposed Changes

    FICC proposes to remove a provision from the Rules requiring a 
Sponsoring Member to provide FICC with a quarterly representation that 
each of its Sponsored Members is a either a QIB or satisfies the 
financial requirements necessary to be a QIB.\45\ FICC proposes to 
remove this requirement because an existing Rule provision requires a 
Sponsoring Member to attest that a Sponsored Member satisfies the QIB 
requirement at the time of the Sponsored Member's initial 
application,\46\ and another existing Rule provision requires a 
Sponsoring Member to notify FICC if its Sponsored Member no longer 
satisfies the QIB requirement.\47\ Therefore, FICC believes the 
quarterly representation to be an overlapping and redundant requirement 
that creates unnecessary administrative burdens for FICC and for its 
Sponsoring Members.\48\
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    \45\ See Rule 3A, Section 2(d), supra note 3.
    \46\ See Rule 3A, Section 3(b), supra note 3.
    \47\ See Rule 3A, Section 3(d), supra note 3.
    \48\ See Notice, supra note 5 at 29343.
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    FICC also proposes to make certain corrections to the Rules 
regarding the Sponsored Service. First, FICC proposes to change an 
erroneous reference to the

[[Page 49585]]

``Close Leg'' in the Rule 1 definition of Initial Haircut to ``Start 
Leg.'' Second, FICC proposes to clarify the citation to paragraph 
(a)(1)(i)(H) of Rule 144A in Rule 3A, Section 3(a)(ii)(B). 
Additionally, FICC proposes to make several technical and grammatical 
changes to section numbers and cross-references throughout the Rules to 
conform with the new proposed Rule provisions regarding Sponsored GC 
Service.

E. Description of Amendment No. 1

    In Amendment No. 1, FICC updated Exhibit 5 to the Proposed Rule 
Change to correct an erroneous cross reference in the original filing. 
Specifically, Exhibit 5 to the original filing erroneously showed the 
proposed change to Rule 3A, Section 18, subsection (a) to include a 
cross reference to subsections (a)(i) and (a)(ii) of the Sponsored 
Trade definition. Amendment No. 1 corrected Exhibit 5 so that the cross 
reference is to subsections (a)(i) and (b) of the Sponsored Trade 
definition.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \49\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the Proposed Rule 
Change, the Commission finds that the Proposed Rule Change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FICC. In particular, the 
Commission finds that the Proposed Rule Change is consistent with 
Sections 17A(b)(3)(F) \50\ of the Act and Rules 17Ad-22(e)(7), (e)(18), 
and (e)(23) thereunder.\51\
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    \49\ 15 U.S.C. 78s(b)(2)(C).
    \50\ 15 U.S.C. 78q-1(b)(3)(F).
    \51\ 17 CFR 240.17Ad-22(e)(7), (e)(18), and (e)(23).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \52\ requires the rules of a 
clearing agency to, among other things, (i) promote the prompt and 
accurate clearance and settlement of securities transactions, (ii) 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible, and (iii) protect investors and the public interest.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above in Section I.B., FICC's current Sponsored 
Service only facilitates trading in DVP repos, not tri-party repos. 
Certain market participants (e.g., money market funds and other mutual 
funds) have stated that their participation in the Sponsored Service is 
inhibited because they are not operationally equipped to perform the 
collateral management and other functions associated with term DVP 
repos.\53\ FICC proposes to expand the Sponsored Service via the 
Sponsored GC Service to accommodate tri-party repo trading, in which a 
clearing bank administers such collateral management and other 
functions. As a result, FICC expects the proposed Sponsored GC Service 
to increase term repo activity within the Sponsored Service.\54\ By 
enabling Sponsoring Members and their Sponsored Members to engage in 
tri-party term repo transactions with each other, the proposed 
Sponsored GC Service would encourage more term repo trades centrally 
cleared by FICC within the Sponsored Service. Increasing the number of 
trades centrally cleared by FICC would promote the prompt and accurate 
clearance and settlement of securities transactions because securities 
transactions that might otherwise be conducted outside of central 
clearing would benefit from FICC's risk management and guarantee of 
settlement.\55\ Accordingly, FICC's proposal to add the Sponsored GC 
Service is consistent with promoting the prompt and accurate clearance 
and settlement of securities transactions.
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    \53\ See Notice, supra note 5 at 29336.
    \54\ See id. FICC conducted two surveys of its Sponsoring 
Members, the data from which supports FICC's expectation that the 
proposed Sponsored GC Service would increase term repo activity 
within the Sponsored Service. FICC provided the survey data to the 
Commission as part of FICC's response to the Commission's request 
for additional information in connection with the Advance Notice. 
See supra note 6. Pursuant to 17 CFR 240.24b-2, FICC requested 
confidential treatment of its response to the Commission's request 
for additional information.
    \55\ See Letter from Robert Toomey, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association (June 18, 2021) at 2 (commenting on the benefits to 
market participants resulting from the expected increase in greater 
central clearing of tri-party repos via the Sponsored GC Service).
---------------------------------------------------------------------------

    Additionally, as described above in Section I.C., the CCLF is 
designed to provide FICC with sufficient qualifying liquid resources to 
cover the default of the family of affiliated members that would 
generate the largest liquidity need for FICC. The Proposed Rule Change 
would change the allocation of CCLF obligations among FICC's members. 
Specifically, with respect to trades between a Sponsoring Member and 
Sponsored Member, FICC proposes to take into account, for CCLF 
calculation purposes, any offsetting settlement obligations between a 
Sponsoring Member's netting account and its omnibus account. Such 
trades do not independently create liquidity risk for FICC, and 
therefore, should not affect the Sponsoring Member's CCLF obligation. 
Therefore, the Proposed Rule Change would result in the allocation of 
CCLF obligations to FICC's members that more accurately reflect the 
liquidity needs presented to FICC by each member. However, the proposed 
change in CCLF allocation methodology would not change the current 
total overall size of the CCLF. By maintaining the total size of the 
CCLF, FICC should be able to continue to perform its clearance and 
settlement functions with sufficient qualifying liquidity resources for 
FICC to mitigate the losses that the default of the largest affiliated 
family of members could cause, not only to FICC and its non-defaulting 
members, but also to the financial markets more broadly. As such, the 
Proposed Rule Change is consistent with promoting the safeguarding of 
securities and funds in FICC's custody and control, and thereby 
protecting investors and the public interest.
    Finally, as described above in Section I.D., FICC also proposes to 
make certain corrections to the Rules regarding the Sponsored Service, 
as well as several technical and grammatical changes throughout the 
Rules to conform with the new provisions regarding Sponsored GC 
Service. Making corrections and other improvements to clarify the Rules 
helps to ensure that the Rules are accurate and clear to members. 
Members that better understand their rights and obligations regarding 
the Rules are more likely to act in accordance with the Rules, which 
generally promotes the prompt and accurate clearance and settlement of 
securities transactions.
    For the foregoing reasons, the Commission believes that the 
Proposed Rule Change is designed to promote the prompt and accurate 
clearance and settlement of securities transactions, safeguard 
securities and funds that are in the custody or control of FICC, and 
protect investors and the public interest, consistent with Section 
17A(b)(3)(F) of the Exchange Act.\56\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(7)

    Rule 17Ad-22(e)(7) under the Act requires a covered clearing agency 
to establish, implement, maintain, and

[[Page 49586]]

enforce written policies and procedures reasonably designed to 
effectively measure, monitor, and manage the liquidity risk that arises 
in or is borne by the covered clearing agency.\57\ As described above 
in Section I.C., FICC proposes to change the Rules to allow netting, 
for CCLF allocation purposes, of offsetting positions in a Sponsoring 
Member's omnibus account and netting account.
---------------------------------------------------------------------------

    \57\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

    FICC's proposal would not impact FICC's current methodology for 
determining the total amount of the CCLF as a liquidity resource. As 
discussed above in Section II.A., FICC proposes to change the Rules 
regarding CCLF allocation to ensure that a Sponsoring Member's CCLF 
obligation aligns more closely with the actual liquidity risk its 
trading activity presents to FICC. As a result, FICC's proposed CCLF 
allocation methodology represents more efficient liquidity risk 
management than the current methodology. Accordingly, the Commission 
believes that FICC's proposed CCLF allocation methodology is consistent 
with Rule 17Ad-22(e)(7).\58\
---------------------------------------------------------------------------

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

C. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) under the Act requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to establish objective, risk-based, 
and publicly disclosed criteria for participation in the clearing 
agency.\59\ As described above in Section I.D., FICC proposes to remove 
a provision from the Rules requiring a Sponsoring Member to provide 
FICC with a quarterly representation that each of its Sponsored Members 
is a either a QIB or satisfies the financial requirements necessary to 
be a QIB. FICC proposes to remove the quarterly representation 
requirement because existing Rule provisions require Sponsoring Members 
to attest to its Sponsored Member's QIB status \60\ and to notify FICC 
if a Sponsored Member no longer satisfies the QIB requirement.\61\ 
Therefore, the quarterly representation requirement is redundant and 
creates unnecessary administrative burdens for FICC and its Sponsoring 
Members. A redundant requirement that creates unnecessary 
administrative burdens is not an objective, risk-based criterion for 
participation in FICC. Accordingly, the Division believes that FICC's 
proposal to remove the requirement for Sponsoring Members to provide 
FICC with a quarterly representation verifying the QIB status of its 
Sponsored Members is consistent with Rule 17Ad-22(e)(18).\62\
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17Ad-22(e)(18).
    \60\ See Rule 3A, Section 3(b), supra note 3.
    \61\ See Rule 3A, Section 3(d), supra note 3.
    \62\ Id.
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D. Consistency With Rule 17Ad-22(e)(21)

    Rule 17Ad-22(e)(21) under the Act requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to be efficient and effective in 
meeting the requirements of its participants and the markets it serves, 
including the clearing agency's clearing and settlement arrangements 
and the scope of products cleared or settled.\63\ As described above in 
Section I.B., FICC's current Sponsored Service does not accommodate the 
trading of tri-party repos. FICC proposes to expand the Sponsored 
Service to allow tri-party repo trading to meet the needs of market 
participants that currently transact tri-party term repos outside of 
central clearing because they are not operationally equipped to perform 
the collateral management and other functions associated with term DVP 
repos. By expanding the Sponsored Service to facilitate tri-party repo 
trading, FICC seeks to provide a viable option for its members to 
transact term tri-party repos in central clearing. Sponsored GC Trades 
would settle in a manner similar to the way Sponsoring Members and 
Sponsored Members currently settle tri-party repos with each other 
outside of central clearing, thereby making it more operationally 
efficient for the parties to transact term repos with each other using 
FICC as the CCP. The Commission believes that the proposed Sponsored GC 
Service is consistent with Rule 17Ad-22(e)(21) \64\ because it is 
responsive to the requests from FICC's members for the ability to trade 
centrally cleared term tri-party repos in a manner that is efficient 
and effective in meeting the operational requirements of FICC's 
members.
---------------------------------------------------------------------------

    \63\ 17 CFR 240.17Ad-22(e)(21).
    \64\ Id.
---------------------------------------------------------------------------

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 is consistent with the 
Act. Comments may be submitted by any of the following methods:

Electronic Comments

    Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    Send an email to rule-comments@sec.gov. Please include File Number 
SR-FICC-2021-003 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2021-003. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Proposed Rule Change that are filed with 
the Commission, and all written communications relating to the Proposed 
Rule Change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of FICC and FICC's website at 
https://www.dtcc.com/legal.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FICC-2021-003 and should be 
submitted on or before September 24, 2021.

IV. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause, pursuant to Section 
19(b)(2)(C)(iii) of the Act,\65\ to approve the Proposed Rule Change, 
as modified by Amendment No. 1, prior to the thirtieth day after the 
date of publication of Amendment No. 1 in the Federal Register. As 
noted above, in

[[Page 49587]]

Amendment No. 1, FICC updated Exhibit 5 to the Proposed Rule Change to 
correct an erroneous cross reference in the original filing. Amendment 
No. 1 neither modifies the Proposed Rule Change as originally published 
in any substantive manner, nor does Amendment No. 1 affect any rights 
or obligations of FICC or its members. Instead, Amendment No. 1 
corrects a typographical error in the original filing. Accordingly, the 
Commission finds good cause, pursuant to Section 19(b)(2)(C)(iii) of 
the Act,\66\ to approve the Proposed Rule Change, as modified by 
Amendment No. 1, prior to the thirtieth day after the date of 
publication of notice of Amendment No. 1 in the Federal Register.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \66\ Id.
---------------------------------------------------------------------------

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change, as modified by Amendment No. 1, is consistent 
with the requirements of the Act and in particular with the 
requirements of Section 17A of the Act \67\ and the rules and 
regulations promulgated thereunder.
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\68\ that proposed rule change SR-FICC-2021-003, be, and hereby is, 
APPROVED.\69\
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78s(b)(2).
    \69\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\70\
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    \70\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19046 Filed 9-2-21; 8:45 am]
BILLING CODE 8011-01-P