Document ID: SEC-2017-0928-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2017-06-02T04:00Z

[Federal Register Volume 82, Number 105 (Friday, June 2, 2017)]
[Notices]
[Pages 25642-25648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11471]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80812; File No. SR-FICC-2017-002]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Implement the Capped Contingency 
Liquidity Facility in the Government Securities Division Rulebook

May 30, 2017.

I. Introduction

    On March 1, 2017, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2017-002 (``Proposed Rule Change'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ to implement a Capped 
Contingency Liquidity Facility in FICC's Government Securities Division 
Rulebook.\3\ The Proposed Rule Change was published for comment in the 
Federal Register on March 20, 2017.\4\ To date, the Commission has 
received three comment letters to the Proposed Rule Change.\5\ On April 
25, 2017, the Commission designated a longer period within which to 
approve the Proposed Rule Change, disapprove the Proposed Rule Change, 
or institute proceedings to determine whether to approve or disapprove 
the Proposed Rule Change.\6\ This order institutes proceedings under 
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ FICC also filed the Proposed Rule Change as advance notice 
SR-FICC-2017-802 (``Advance Notice'') pursuant to Section 806(e)(1) 
of the Payment, Clearing, and Settlement Supervision Act of 2010, 12 
U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i) under the Act, 17 CFR 
240.19b-4(n)(1)(i). Notice of filing of the Advance Notice was 
published for comment in the Federal Register on March 15, 2017. 
Securities Exchange Act Release No. 80191 (March 9, 2017), 82 FR 
13876 (March 15, 2017) (SR-FICC-2017-802). The Commission extended 
the deadline for its review period of the Advance Notice from April 
30, 2017 to June 29, 2017. Securities Exchange Act Release No. 80520 
(April 25, 2017), 82 FR 20404 (May 1, 2017) (SR-FICC-2017-802). The 
proposal in the Proposed Rule Change and the Advance Notice shall 
not take effect until all regulatory actions required with respect 
to the proposal are completed.
    \4\ Securities Exchange Act Release No. 80234 (March 14, 2017), 
82 FR 14401 (March 20, 2017) (SR-FICC-2017-002).
    \5\ See letter from Robert E. Pooler, Chief Financial Officer, 
Ronin Capital LLC, dated April 10, 2017, to Robert W. Errett, Deputy 
Secretary, Commission; letter from Alan B. Levy, Managing Director, 
Industrial and Commercial Bank of China Financial Services LLC 
(``ICBC''), Philip Vandermause, Director, Aardvark Securities LLC, 
David Rutter, Chief Executive Officer, LiquidityEdge LLC, Robert 
Pooler, Chief Financial Officer, Ronin Capital LLC, Jason 
Manumaleuna, Chief Financial Officer and EVP, Rosenthal Collins 
Group LLC, and Scott Skyrm, Managing Director, Wedbush Securities 
Inc. (``ICBC Letter''); and letter from Timothy J. Cuddihy, Managing 
Director, FICC, dated March 8, 2017, to Robert W. Errett, Deputy 
Secretary, Commission (``FICC Letter''), available at https://www.sec.gov/comments/sr-ficc-2017-002/ficc2017002.htm. Since the 
proposal contained in the Proposed Rule Change was also filed as an 
Advance Notice, Release No. 80191, supra note 3, the Commission is 
considering all public comments received on the proposal regardless 
of whether the comments are submitted to the Proposed Rule Change or 
the Advance Notice.
    \6\ See Securities Exchange Act Release No. 80524 (April 25, 
2017), 82 FR 20685 (May 3, 2017).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    FICC's current liquidity resources for its Government Securities 
Division (``GSD'') \8\ consist of (i) cash in GSD's clearing fund; (ii) 
cash that can be obtained by entering into uncommitted repo 
transactions using securities in the clearing fund; (iii) cash that can 
be obtained by entering into uncommitted repo transactions using the 
securities that were destined for delivery to the defaulting GSD 
member; and (iv) uncommitted bank loans.\9\
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    \8\ FICC operates two divisions--GSD and the Mortgage-Backed 
Securities Division (``MBSD''). GSD provides trade comparison, 
netting, risk management, settlement and central counterparty 
services for the U.S. government securities market, while MBSD 
provides the same services for the U.S. mortgage-backed securities 
market. Because GSD and MBSD are separate divisions of FICC, each 
division maintains its own rules, members, margin from their 
respective members, clearing fund, and liquid resources.
    \9\ See Notice, 82 at 14402.
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    With this Proposed Rule Change, FICC proposes to amend its GSD 
Rulebook (``GSD Rules'') \10\ to establish a rules-based, committed 
liquidity resource (i.e., the Capped Contingency Liquidity 
Facility[supreg] (``CCLF'')) as an additional liquidity resource 
designed to provide FICC with a committed liquidity resource to meet 
its cash settlement obligations in the event of a default of the GSD 
Netting Member or family of affiliated Netting Members (``Affiliated 
Family'') to which FICC has the largest exposure in extreme but 
plausible market conditions.\11\
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    \10\ GSD Rules, available at www.dtcc.com/legal/rules-and-procedures.aspx.
    \11\ As defined in the GSD Rules, the term ``Netting Member'' 
means a GSD member that is a member of the GSD Comparison System and 
the Netting System. Id.
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A. Overview of the Proposal

    CCLF would be invoked only if FICC declared a ``CCLF Event,'' which 
would occur only if FICC ceased to act for a Netting Member in 
accordance to GSD Rule 22A (referred to as a ``default'') and, 
subsequent to such default, FICC determined that its other, above-
described liquidity resources could not generate sufficient cash to 
statisfy FICC's payment obligations to the non-defaulting Netting 
Members. Once FICC declares a CCLF Event, each Netting Member could be 
called upon to enter into repurchase transactions with FICC (``CCLF 
Transactions'') up to a pre-determined capped dollar amount, as 
described below.
1. Declaration of a CCLF Event
    Following a default, FICC would first obtain liquidity through its 
other available non-CCLF liquidity resources.

[[Page 25643]]

If FICC determined that these sources of liquidity would be 
insufficient to meet FICC's payment obligation to its non-defaulting 
Netting Members, FICC would declare a CCLF Event. FICC would notify all 
Netting Members of FICC's need to make such a declaration and enter 
into CCLF Transactions, as necessary, by issuing an Important Notice.
2. CCLF Transactions
    Upon declaring a CCLF Event, FICC would meet its liquidity need by 
initiating CCLF Transactions with non-defaulting Netting Members. The 
Proposed Rule Change would clarify that the original transaction that 
created FICC's initial obligation to pay cash to the now Direct 
Affected Member, and the Direct Affected Member's initial obligation to 
deliver securities to FICC, would be deemed satisfied by entry into the 
CCLF Transaction, and that such settlement would be final.
    Each CCLF Transaction would be governed by the terms of the 
September 1996 Securities Industry and Financial Markets Association 
Master Repurchase Agreement,\12\ which would be incorporated by 
reference into the GSD Rules as a master repurchase agreement between 
FICC as seller and each Netting Member as buyer, with certain 
modifications as outlined in the GSD Rules (``CCLF MRA'').
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    \12\ The September 1996 Securities Industry and Financial 
Markets Association Master Repurchase Agreement (``SIFMA MRA'') is 
available at http://www.sifma.org/services/standard-forms-and-documentation/mra,-gmra,-msla-and-msftas/. The SIFMA MRA would be 
incorporated by reference into the GSD Rules without referenced 
annexes, other than Annex VII (Transactions Involving Registered 
Investment Companies), which would be applicable to any Netting 
Member that is a registered investment company. FICC represents 
that, at the time of filing the Proposed Rule Change, there were no 
registered investment companies that are also GSD Netting Members. 
See Notice, 82 at 14402.
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    To initiate CCLF Transactions with non-defaulting Netting Members, 
FICC would identify the non-defaulting Netting Members that are 
obligated to deliver securities destined for the defaulting Netting 
Member (``Direct Affected Members'') and, in return, would be obligated 
to receive a cash payment. FICC would need to finance those 
transactions through CCLF, in order to cover the defaulting Netting 
Member's failure to deliver the cash payment (``Financing Amount''). 
FICC would notify each Direct Affected Member of the Direct Affected 
Member's Financing Amount and whether such Direct Affected Member 
should deliver to FICC or suppress any securities that were destined 
for the defaulting Netting Member. FICC would then initiate CCLF 
Transactions with each Direct Affected Member for the Direct Affected 
Member's purchase of the securities (``Financed Securities'') that were 
destined for the defaulting Netting Member.\13\ The aggregate purchase 
price of the CCLF Transactions with the Direct Affected Member could 
equal but never exceed the Direct Affected Member's maximum funding 
obligation (``Individual Total Amount'').\14\
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    \13\ FICC states that it would have the authority to initiate 
CCLF Transactions with respect to any securities that are in the 
Direct Affected Member's portfolio which are bound to the defaulting 
Netting Member.
    \14\ The sizing of each Direct Affected Member's Individual 
Total Amount is described below in Section II.B.
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    If any Direct Affected Member's Financing Amount exceeds its 
Individual Total Amount (``Remaining Financing Amount''), FICC would 
advise the following categories of Netting Members (collectively, 
``Affected members'') that FICC intends to initiate CCLF Transactions 
with them for the Remaining Financing Amount: (i) All other Direct 
Affected Members with a Financing Amount less than its Individual Total 
Amount; and (ii) each Netting Member that has not otherwise entered 
into CCLF Transactions with FICC (``Indirect Affected Members'').
    FICC states that the order in which FICC would enter into CCLF 
Transactions for the Remaining Financing Amount would be based upon the 
Affected Members that have the most funding available within their 
Individual Total Amounts.\15\ No Affected Member would be obligated to 
enter into CCLF Transactions greater than its Individual Total Amount.
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    \15\ See Notice, 82 at 14403.
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    After receiving approval from FICC's Board of Directors to do so, 
FICC would engage its investment advisor during a CCLF Event to 
minimize liquidation losses on the Financed Securities through hedging, 
strategic dispositions, or other investment transactions as determined 
by FICC under relevant market conditions. Once FICC liquidates the 
underlying securities by selling them to a new buyer (``Liquidating 
Trade''), FICC would instruct the Affected Member to close the CCLF 
Transaction by delivering the Financed Securities to FICC in order to 
complete settlement of the Liquidating Trade. FICC would attempt to 
unwind the CCLF Transactions in the order it entered into the 
Liquidating Trades. Each CCLF Transaction would remain open until the 
earlier of (i) such time that FICC liquidates the Affected Member's 
Financed Securities; (ii) such time that FICC obtains liquidity through 
its available liquid resources; or (iii) 30 or 60 calendar days after 
entry into the CCLF Transaction for U.S. government bonds and mortgage-
backed securities, respectively.

B. CCLF Sizing and Allocation

    According to FICC, its overall liquidity need during a CCLF Event 
would be determined by the cash settlement obligations presented by the 
default of a Netting Member and its Affiliated Family, as described 
below. An additional amount (``Liquidity Buffer'') would be added to 
account for both changes in Netting Members' cash settlement 
obligations that may not be observed during the six-month look-back 
period during which CCLF would be sized, and the possibility that the 
defaulting Netting Member is the largest CCLF contributor.
    FICC believes that its proposal would allocate FICC's observed 
liquidity need during a CCLF Event among all Netting Members based on 
their historical settlement activity, but states that Netting Members 
that present the highest cash settlement obligations would be required 
to maintain higher CCLF funding obligations.\16\
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    \16\ Id.
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    The steps that FICC would take to size its overall liquidity need 
during a CCLF event and then size and allocate each Netting Member's 
CCLF contribution requirement are described below.
Step 1: CCLF Sizing
(A) Historical Cover 1 Liquidity Requirement
    FICC's historical liquidity need for the six-month look-back period 
would be equal to the largest liquidity need generated by an Affiliated 
Family during the preceding six-month period. The amount which would be 
determined by calculating the largest sum of an Affiliated Family's 
obligation to receive GSD eligible securities, plus the net dollar 
amount of its Funds-Only Settlement Amount \17\ (collectively, the 
``Historical Cover 1 Liquidity Requirement''). FICC believes that it is 
appropriate to calculate the Historical Cover 1 Liquidity Requirement 
in this manner because the default of such an

[[Page 25644]]

Affiliated Family would generate the largest liquidity need for 
FICC.\18\
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    \17\ According to FICC, the Funds-Only Settlement Amount 
reflects the amount that FICC collects and passes to the contra-side 
once FICC marks the securities in a Netting Member's portfolio to 
the current market value. FICC states that this amount is the 
difference between the contract value and the current market value 
of a Netting Member's GSD portfolio. FICC states that it would 
consider this amount when calculating the Historical Cover 1 
Liquidity Requirement because in the event that an Affiliated Family 
defaults, the Funds-Only Settlement Amount would also reflect the 
cash obligation to non-defaulting Netting Members. Id.
    \18\ Id.
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(B) Liquidity Buffer
    According to FICC, it is cognizant that the Historical Cover 1 
Liquidity Requirement would not account for changes in a Netting 
Member's current trading behavior, which could result in a liquidity 
need greater than the Historical Cover 1 Liquidity Requirement. To 
account for this potential shortfall, FICC proposes to add a Liquidity 
Buffer as an additional amount to the Historical Cover 1 Liquidity 
Requirement, which would help to better anticipate GSD's total 
liquidity need during a CCLF Event.
    FICC states that the Liquidity Buffer would initially be 20 percent 
of the Historical Cover 1 Liquidity Requirement (and between 20 to 30 
percent thereafter), subject to a minimum amount of $15 billion.\19\ 
FICC believes that 20 to 30 percent of the Historical Cover 1 Liquidity 
Requirement is appropriate based on its analysis and statistical 
measurement of the variance of its daily liquidity need throughout 2015 
and 2016.\20\ FICC also believes that the $15 billion minimum dollar 
amount is necessary to cover changes in a Netting Member's trading 
activity that could exceed the amount that is implied by such 
statistical measurement.\21\
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    \19\ See Notice, 82 at 14404. For example, if the Historical 
Cover 1 Liquidity Requirement was $100 billion, the Liquidity Buffer 
initially would be $20 billion ($100 billion x 0.20), for a total of 
$120 billion in potential liquidity resources.
    \20\ According to FICC, it uses a statistical measurement called 
the ``coefficient of variation,'' which is calculated as the 
standard deviation divided by the mean, to quantify the variance of 
Affiliated Families' daily liquidity needs. See Notice, 82 at 14403. 
FICC states that this is a typical approach used to compare 
variability across different data sets. Id. FICC states that it will 
use the coefficient of variation to set the Liquidity Buffer by 
quantifying the variance of each Affiliated Family's daily liquidity 
need. Id. FICC believes that a Liquidity Buffer of 20 to 30 percent, 
subject to a minimum of $15 billion, would be an appropriate 
Liquidity Buffer because FICC found that, throughout 2015 and 2016, 
the coefficient of variation ranged from an average of 15 to 19 
percent for Affiliated Families with liquidity needs above $50 
billion, and an average of 18 to 21 percent for Affiliated Families 
with liquidity needs above $35 billion. Id.
    \21\ Id.
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    FICC would have the discretion to adjust the Liquidity Buffer, 
within the range of 20 to 30 percent of the Historical Cover 1 
Liquidity Requirement, based on its analysis of the stability of the 
Historical Cover 1 Liquidity Requirement over various time horizons. 
According to FICC, this would help ensure that its liquidity resources 
are sufficient under a wide range of potential market scenarios that 
may lead to a change in a Netting Member's trading behavior. FICC also 
states that it would analyze the trading behavior of Netting Members 
that present larger liquidity needs than the majority of the Netting 
Members, as described below.\22\
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    \22\ Id.
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(C) Aggregate Total Amount
    FICC's anticipated total liquidity need during a CCLF Event (i.e., 
the sum of the Historical Cover 1 Liquidity Requirement plus the 
Liquidity Buffer) would be referred to as the ``Aggregate Total 
Amount.'' The Aggregate Total Amount initially would be set to the 
Historical Cover 1 Liquidity Requirement plus the greater of 20 percent 
of the Historical Cover 1 Liquidity Requirement or $15 billion.
Step 2: Allocation of the Aggregate Total Amount Among Netting Members
(A) Allocation of the Aggregate Regular Amount Among Netting Members
    The Aggregate Total Amount would be allocated among Netting Members 
in order to arrive at each Netting Member's Individual Total Amount. 
FICC would take a tiered approach in its allocation of the Aggregate 
Total Amount. First, FICC would determine the portion of the Aggregate 
Total Amount that should be allocated among all Netting Members 
(``Aggregate Regular Amount''), which FICC states initially would be 
set at $15 billion.\23\ FICC believes that this amount is appropriate 
because the average Netting Member's liquidity need from 2015 to 2016 
was approximately $7 billion, with a majority of Netting Members having 
liquidity needs less than $15 billion.\24\ Based on that analysis, FICC 
believes that the $15 billion Aggregate Regular Amount should capture 
the liquidity needs of a majority of the Netting Members.\25\
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    \23\ Id.
    \24\ From 2015 to 2016, 59 percent of all Netting Members 
presented average liquidity needs between $0 to $5 billion, 78 
percent of all Netting Members presented average liquidity needs 
between $0 and $10 billion, and 85 percent of all Netting Members 
presented average liquidity needs between $0 and $15 billion. Id.
    \25\ Id.
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    Second, as discussed in more detail below, after allocating the $15 
billion Aggregate Regular Amount, FICC would allocate the remainder of 
the Aggregate Total Amount (``Aggregate Supplemental Amount'') among 
Netting Members that incurred liquidity needs above the Aggregate 
Regular Amount within the six-month look-back period. For example, a 
Netting Member with a $7 billion peak daily liquidity need would only 
contribute to the $15 billion Aggregate Regular Amount, based on the 
calculation described below. Meanwhile a Netting Member with a $45 
billion Aggregate Regular Amount would contribute towards the $15 
billion Aggregate Regular Amount and the Aggregate Supplemental Amount, 
as described below.
    FICC believes that this tiered approach reflects a reasonable, 
fair, and transparent balance between FICC's need for sufficient 
liquidity resources and the burdens of the funding obligations on each 
Netting Member's management of its own liquidity.\26\
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    \26\ Id.
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    Under the proposal, the Aggregate Regular Amount would be allocated 
among all Netting Members, but Netting Members with larger Receive 
Obligations \27\ would be required to contribute a larger amount. FICC 
believes that this approach is appropriate because a defaulting Netting 
Member's Receive Obligations are the primary cash settlement 
obligations that FICC would have to satisfy as a result of the default 
of an Affiliated Family.\28\ However, FICC also believes that, because 
FICC guarantees both sides of a GSD Transaction and all Netting Members 
benefit from FICC's risk mitigation practices, some portion of the 
Aggregate Regular Amount should be allocated based on Netting Members' 
aggregate Deliver Obligations \29\ as well.\30\ As a result, FICC 
proposes to allocate the Aggregate Regular Amount based on a scaling 
factor. Given that the Aggregate Regular Amount would be initially 
sized at $15 billion and would cover approximately 80 percent of 
Netting Members' observed liquidity needs, FICC proposes to set the 
scaling factor in the range of 65 to 85 percent to the value of Netting 
Members' Receive Obligations, and in the range of 15 to 35 percent to 
the value of Netting Members' Deliver Obligations.\31\
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    \27\ ``Receive Obligation'' means a Netting Member's obligation 
to receive eligible netting securities from FICC at the appropriate 
settlement value, either in satisfaction of all or a part of a Net 
Long Position, or to implement a collateral substitution in 
connection with a Repo Transaction with a right of substitution. GSD 
Rules, supra note 10.
    \28\ See Notice, 82 at 14404.
    \29\ ``Deliver Obligation'' means a Netting Member's obligation 
to deliver eligible netting securities to FICC at the appropriate 
settlement value either in satisfaction of all or a part of a Net 
Short Position or to implement a collateral substitution in 
connection with a Repo Transaction with a right of substitution. GSD 
Rules, supra note 10.
    \30\ See Notice, 82 at 14404.
    \31\ See Notice, 82 at 14404.
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    FICC states that it would initially assign a 20 percent weighting

[[Page 25645]]

percentage to a Netting Member's aggregate peak Deliver Obligations 
(``Deliver Scaling Factor'') and the remaining percentage difference, 
80 percent in this case, to a Netting Member's aggregate peak Receive 
Obligations (``Receive Scaling Factor'').\32\ FICC would have the 
discretion to adjust these scaling factors based on a quarterly 
analysis that would, in part, assess Netting Members' observed 
liquidity needs that are at or below $15 billion. FICC believes that 
this assessment would help ensure that the Aggregate Regular Amount 
would be appropriately allocated across all Netting Members.\33\
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    \32\ For example, assume that a Netting Member's peak Receive 
and Deliver Obligations represent 5 and 3 percent, respectively, of 
the sum of all Netting Members' peak Receive and Deliver 
Obligations. The Netting Member's portion of the Aggregate Regular 
Amount (``Individual Regular Amount'') would be $600 million ($15 
billion * 0.80 Receive Scaling Factor * 0.05 Peak Receive Obligation 
Percentage), plus $90 million ($15 billion * 0.20 Deliver Scaling 
Factor * 0.03 Peak Deliver Obligation Percentage), for a total of 
$690 million.
    \33\ See Notice, 82 at 14404.
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(B) FICC's Allocation of the Aggregate Supplemental Amount Among 
Netting Members
    The remainder of the Aggregate Total Amount (i.e., the Aggregate 
Supplemental Amount) would be allocated among Netting Members that 
present liquidity needs greater than $15 billion using Liquidity Tiers. 
As described in greater detail in the Notice, the specific allocation 
of the Aggregate Supplemental Amount to each Liquidity Tier would be 
based on the frequency that Netting Members generated liquidity needs 
within each Liquidity Tier, relative to the other Liquidity Tiers.\34\ 
More specifically, once the Aggregate Supplemental Amount is divided 
among the Liquidity Tiers, the amount within each Liquidity Tier would 
be allocated among the applicable Netting Members, based on the 
relative frequency that a Netting Member generated liquidity needs 
within each Liquidity Tier.\35\ FICC explains that this allocation 
would result in a larger proportion of the Aggregate Supplemental 
Amount being borne by those Netting Members who present the highest 
liquidity needs.\36\
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    \34\ See Notice, 82 at 14404-05.
    \35\ For example, if the Aggregate Supplemental Amount is $50 
billion and Tier 1 has a relative frequency weighting of 33 percent, 
all Netting Members that have generated liquidity needs that fall 
within Tier 1 would collectively fund $16.5 billion ($50 billion * 
0.33) of the Supplemental Amount. Each Netting Member in that tier 
would be responsible for contributing toward the $16.5 billion, 
based on the relative frequency that the member generated liquidity 
needs within that tier.
    \36\ See Notice, 82 at 14404-05.
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    The sum of a Netting Member's allocation across all Liquidity Tiers 
would be such Netting Member's Individual Supplemental Amount. FICC 
would add each Netting Member's Individual Supplemental Amount (if any) 
to its Individual Regular Amount to arrive at such Netting Member's 
Individual Total Amount.

C. FICC's Ongoing Assessment of the Sufficiency of CCLF

    As described above, the Aggregate Total Amount and each Netting 
Member's Individual Total Amount (i.e., each Netting Member's 
allocation of the Aggregate Total Amount) would initially be calculated 
using a six-month look-back period that FICC would reset every six 
months (``reset period''). FICC states that, on a quarterly basis, FICC 
would assess the following parameters used to calculate the Aggregate 
Total Amount (and could consider changes to such parameters, if 
necessary and appropriate):
     The largest peak daily liquidity need of an Affiliated 
Family;
     the Liquidity Buffer;
     the Aggregate Regular Amount;
     the Aggregate Supplemental Amount;
     the Deliver Scaling Factor and the Receive Scaling Factor 
used to allocate the Aggregate Regular Amount;
     the increments for the Liquidity Tiers; and
     the length of the look-back period and the reset period 
for the Aggregate Total Amount.\37\
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    \37\ See Notice, 82 at 14406.
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    FICC represents that, in the event that any changes to the above-
referenced parameters result in an increase in a Netting Member's 
Individual Total Amount, such increase would be effective as of the 
next bi-annual reset.\38\
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    \38\ Id.
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    Additionally, on a daily basis, FICC would examine the Aggregate 
Total Amount to ensure that it is sufficient to satisfy FICC's 
liquidity needs. If FICC determines that the Aggregate Total Amount is 
insufficient to satisfy its liquidity needs, FICC would have the 
discretion to change the length of the six-month look-back period, the 
reset period, or otherwise increase the Aggregate Total Amount.
    Any increase in the Aggregate Total Amount resulting from FICC's 
quarterly assessments or FICC's daily monitoring would be subject to 
approval from FICC management, as described in the Notice.\39\ 
Increases to a Netting Member's Individual Total Amount as a result of 
its daily monitoring would not be effective until ten business days 
after FICC issues an Important Notice regarding the increase. 
Reductions to the Aggregate Total Amount would be reflected at the 
conclusion of the reset period.
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    \39\ Id.
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D. Implementation of the Proposed Changes and Required Attestation From 
Each Netting Member

    The CCLF proposal would become operative 12 months after the later 
date of the Commission's approval of the Proposed Rule Change and the 
Commission's no objection to the related Advance Notice. FICC 
represents that, during this 12-month period, it would periodically 
provide each Netting Member with estimated Individual Total Amounts. 
FICC states that the delayed implementation and the estimated 
Individual Total Amounts are designed to give Netting Members the 
opportunity to assess the impact that the CCLF proposal would have on 
their business profile.\40\
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    \40\ Id.
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    FICC states that, as of the implementation date and annually 
thereafter, FICC would require that each Netting Member attest that it 
incorporated its Individual Total Amount into its liquidity plans.\41\ 
This required attestation, which would be from an authorized officer of 
the Netting Member or otherwise in form and substance satisfactory to 
FICC, would certify that (i) such officer has read and understands the 
GSD Rules, including the CCLF rules; (ii) the Netting Member's 
Individual Total Amount has been incorporated into the Netting Member's 
liquidity planning; \42\ (iii) the Netting Member acknowledges and 
agrees that its Individual Total Amount may be changed at the 
conclusion of any reset period or otherwise upon ten business days' 
Notice; (iv) the Netting Member will incorporate any changes to its 
Individual Total Amount into its liquidity planning; and (v) the 
Netting Member will continually reassess its liquidity plans and 
related operational plans, including in the event of any changes to 
such Netting Member's Individual Total Amount, to ensure such Netting 
Member's ability to meet its Individual Total Amount. FICC states that 
it may require any Netting Member

[[Page 25646]]

to provide FICC with a new certification in the foregoing form at any 
time, including upon a change to a Netting Member's Individual Total 
Amount or in the event that a Netting Member undergoes a change in its 
corporate structure.\43\
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    \41\ Id.
    \42\ According to FICC, the attestation would not refer to the 
actual dollar amount that has been allocated as the Individual Total 
Amount. FICC explains that each Netting Member's Individual Total 
Amount would be made available to such Member via GSD's access 
controlled portal Web site. Id.
    \43\ Id.
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    On a quarterly basis, FICC would conduct due diligence to assess 
each Netting Member's ability to meet its Individual Total Amount. This 
due diligence would include a review of all information that the 
Netting Member has provided FICC in connection with its ongoing 
reporting obligations pursuant to the GSD Rules and a review of other 
publicly available information. FICC also would test its operational 
procedures for invoking a CCLF Event, and Netting Members would be 
required to participate in such tests. If a Netting Member failed to 
participate in such testing when required by FICC, FICC would be 
permitted to take disciplinary measures as set forth in GSD Rule 3, 
Section 7.\44\
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    \44\ GSD Rules, supra note 10.
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E. Liquidity Funding Reports Provided to Netting Members

    On each business day, FICC would make a liquidity funding report 
available to each Netting Member that would include (i) the Netting 
Member's Individual Total Amount, Individual Regular Amount and, if 
applicable, its Individual Supplemental Amount; (ii) FICC's Aggregate 
Total Amount, Aggregate Regular Amount, and Aggregate Supplemental 
Amount; and (iii) FICC's regulatory liquidity requirements as of the 
prior business day. The liquidity funding report would be provided for 
informational purposes only.

II. Summary of Comments Received

    The Commission received three comment letters in response to the 
Proposed Rule Change.\45\ Two comment letters, the Ronin Letter and 
ICBC Letter, objected to the Proposed Rule Change. One comment letter 
from FICC responded to the objections raised by Ronin.
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    \45\ See supra, note 4.
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A. Objecting Comments

    Ronin argues that the Proposed Rule Change would (1) place an 
unfair and anticompetitive burden on smaller Netting Members because 
such members do not present any settlement risk to FICC; (2) cause 
concentration and systemic risk by potentially forcing smaller Netting 
Members to leave GSD (as well as creating a barrier to entry for 
prospective new Netting Members) or clear their trades through larger 
Netting Members; and (3) cause FICC's liquidity needs to grow by 
potentially increasing the size of FICC's largest Netting Members.\46\ 
As an alternative to the Proposed Rule Change, Ronin suggests that FICC 
should instead impose CCLF requirements only on larger Bank Netting 
Members that present FICC with settlement risk.\47\
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    \46\ Ronin Letter at 1-9.
    \47\ Ronin Letter at 7-9.
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    Similarly, ICBC argues that the Proposed Rule Change would result 
in harmful consequences to smaller Netting Members and other industry 
participants.\48\ Specifically, ICBC argues that the Proposed Rule 
Change could force smaller Netting Members to exit the clearing 
business or terminate their membership with FICC due to the cost of 
CCLF funding obligations, thereby (1) increasing market concentration; 
(2) decreasing market competition; (3) increasing FICC's credit 
exposure to its largest participant families; and (4) driving smaller 
Netting Members to clear transactions bilaterally instead of through a 
central counterparty.\49\
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    \48\ ICBC Letter at 2-7.
    \49\ ICBC Letter at 2-6.
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    Although ICBC acknowledges that FICC, as a registered clearing 
agency, is required to maintain sufficient financial resources to 
withstand a default by the largest participant family to which FICC has 
exposure in ``extreme but plausible conditions,'' \50\ ICBC argues that 
the scenario that CCLF is designed to address is not ``plausible'' 
because U.S. government securities are riskless assets that would not 
suffer a from liquidity shortage, even amidst a financial crisis 
similar to that in 2008.\51\ Moreover, ICBC argues that CCLF is 
unnecessary because FICC's current risk models have proven to be 
effective.\52\
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    \50\ ICBC Letter at 1-2.
    \51\ ICBC Letter at 3.
    \52\ Id.
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    ICBC also argues that CCLF could (i) result in FICC's refusal to 
clear certain trades, thereby increasing the burden on the Bank of New 
York, the only private bank that clears a large portion of U.S. 
government securities; \53\ (ii) cause FICC members to reduce their 
balance sheets devoted to the U.S. government securities markets, which 
would have broad negative effects on markets and taxpayers; \54\ (iii) 
negatively impact traders with hedge positions, resulting in negative 
downstream effects on the smooth functioning of the U.S. government 
securities market; \55\ and (iv) effectively drain liquidity from other 
markets by requiring more liquidity to be available to FICC than is 
necessary.\56\
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    \53\ ICBC Letter at 2, 5.
    \54\ ICBC Letter at 3.
    \55\ ICBC Letter at 4.
    \56\ ICBC Letter at 5.
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B. Supporting Comment

    The FICC Letter written in support of the proposal primarily 
responds to Ronin's assertions. In response to Ronin's concerns 
regarding the potential economic impacts on smaller non-bank Netting 
Members, FICC states that CCLF was designed to minimize the burden on 
smaller Netting Members and achieve a fair and appropriate allocation 
of liquidity burdens.\57\ Specifically, FICC notes that it sought to 
structure CCLF so that (1) each Netting Member's CCLF requirement would 
be a function of the liquidity risk that each Netting Member's activity 
presents to GSD; (2) the allocation of the CCLF requirement to each 
Netting Member would be a ``fraction'' of the Netting Member's peak 
liquidity exposure that it presents to GSD; \58\ and (3) the proposal 
would fairly allocate higher CCLF requirements to Netting Members that 
generate higher liquidity needs.\59\ FICC further notes that, since 
CCLF contributions would be a function of the peak liquidity exposure 
that each Netting Member presents to FICC, FICC asserts that each 
Netting Member would be able to reduce its CCLF contribution by 
altering its trading activity.\60\
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    \57\ FICC Letter at 3-4.
    \58\ Id. at 3. FICC represents that the ratio of CCLF 
requirement to Netting Member's peak liquidity need is significantly 
larger, on average, for the top 10 Netting Members compared to all 
other members. Id. at 4.
    \59\ Id. at 3-4. FICC notes that the Aggregate Regular Amount 
(proposed to be sized at $15 billion) would be applied to all 
Netting Members on a pro-rata basis, while the Aggregate 
Supplemental Amount, which would make up approximately 80 percent of 
the Aggregate Total Amount, would only apply to the Netting Members 
generating the largest liquidity needs (i.e., in excess of $15 
billion). Id. at 4.
    \60\ Id. at 3, 7.
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    In response to Ronin's assertion that CCLF could promote 
concentration and systemic risk, FICC argues that the proposal would 
actually reduce systemic risk. Specifically, FICC asserts that, by 
providing FICC with committed liquidity to meet its cash settlement 
obligations to non-defaulting members during extreme market stress, 
CCLF would promote settlement finality and the safety and soundness of 
the securities settlement system, thereby reducing systemic risk, as 
discussed further below.\61\
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    \61\ Id. at 7-8.
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    Finally, in response to Ronin's concern that CCLF could cause 
FICC's liquidity needs to grow, FICC notes that

[[Page 25647]]

in its outreach to Netting Members over the past two years, bilateral 
meetings with individual Netting Members, and testing designed to 
evaluate the impact that changes to a Netting Member's trading behavior 
could have on the Historical Cover 1 Liquidity Requirement, FICC has 
found opportunities for Netting Members to reduce their CCLF 
requirements and, as a result, decrease the Historical Cover 1 
Liquidity Requirement.\62\ Specifically, FICC notes that during its 
test period, which spanned from December 1, 2016 to January 31, 2017, 
35 participating Netting Members voluntarily adjusted their settlement 
behavior and settlement patterns to identify opportunities to reduce 
their CCLF requirements.\63\ According to FICC, the test resulted in an 
approximate $5 billion reduction in FICC's peak Historical Cover 1 
Liquirity Requirement, highlighting that growth of the Historical Cover 
1 Liquidity Requirement could be limited under the proposal.\64\
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    \62\ Id. at 8-9.
    \63\ Id. at 9-10.
    \64\ Id.
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IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \65\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. As noted above, institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide arguments to support the Commission's analysis as to 
whether to approve or disapprove the Proposed Rule Change.
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    \65\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\66\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the Proposed Rule Change's consistency with the Act and the 
rules thereunder. Specifically, the Commission believes that the 
Proposed Rule Change raises questions as to whether it is consistent 
with (i) Section 17A(b)(3)(F) of the Act,\67\ which requires, in part, 
that clearing agency rules be designed to assure the safeguarding of 
securities in the custody or control of the clearing agency and, in 
general, protect investors and the public interest; (ii) Section 
17A(b)(3)(I) of the Act,\68\ which provides that clearing agency rules 
cannot impose a burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act; and (ii) Rule 
17Ad-22(e)(7) under the Act,\69\ which requires FICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively measure, monitor, and manage 
liquidity risk that arises in or is borne by FICC, including measuring, 
monitoring, and managing its settlement and funding flows on an ongoing 
and timely basis, and its use of intraday liquidity.\70\
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    \66\ Id.
    \67\ 15 U.S.C. 78q-1(b)(3)(F).
    \68\ 15 U.S.C. 78q-1(b)(3)(I).
    \69\ 17 CFR 240.17Ad-22(e)(7).
    \70\ Id.
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    Specifically, Rule 17Ad-22(e)(7) requires policies and procedures 
for (i) 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 covered clearing agency in extreme but plausible 
market conditions; \71\ (ii) holding qualifying liquid resources 
sufficient to satisfy payment obligations owed to clearing members; 
\72\ (iii) undertaking due diligence to confirm that FICC has a 
reasonable basis to believe each of its liquidity providers, whether or 
not such liquidity provider is a clearing member, has (a) sufficient 
information to understand and manage the liquidity provider's liquidity 
risks and (b) the capacity to perform as required under its commitments 
to provide liquidity; \73\ and (iv) maintaining and testing with each 
liquidity provider, to the extent practicable, FICC's procedures and 
operational capacity for accessing its relevant liquid resources.\74\
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    \71\ 17 CFR 240.17Ad-22(e)(7)(i).
    \72\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \73\ 17 CFR 240.17Ad-22(e)(7)(iv).
    \74\ 17 CFR 240.17Ad-22(e)(7)(v).
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V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to issues 
raised by the Proposed Rule Change. In particular, the Commission 
invites the written views of interested persons concerning whether the 
Proposed Rule Change is consistent with Sections 17A(b)(3)(F) and 
17A(b)(3)(I) of the Act, Rule 17Ad-22(e)(7) under the Act, cited above, 
or any other provision of the Act, or the rules and regulations 
thereunder. Interested persons are invited to submit written data, 
views, and arguments on or before June 19, 2017. Any person who wishes 
to file a rebuttal to any other person's submission must file that 
rebuttal on or before June 23, 2017. Comments may be submitted by any 
of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2017-002 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2017-002. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the Proposed Rule Change that are 
filed with the Commission, and all written communications relating to 
the Proposed Rule Change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of FICC and on 
DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-FICC-2017-002 and 
should be submitted on or before June 19, 2017. If comments are 
received, any rebuttal comments should be submitted on or before June 
23, 2017.

[[Page 25648]]

    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)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11471 Filed 6-1-17; 8:45 am]
BILLING CODE 8011-01-P