[Federal Register Volume 82, Number 84 (Wednesday, May 3, 2017)]
[Notices]
[Pages 20652-20656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08903]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80546; File No. SR-FICC-2017-803]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of No Objection To Advance Notice Filing To Establish the 
Centrally Cleared Institutional Triparty Service and Make Other Changes

April 27, 2017.
    On March 9, 2017, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-FICC-2017-803 (``Advance Notice'') pursuant to 
Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision 
Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 19b-

[[Page 20653]]

4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 (``Exchange 
Act'').\3\ The Advance Notice was published for comment in the Federal 
Register on April 7, 2017.\4\ Although the Commission received no 
comments to the Advance Notice, it received one comment letter \5\ to 
the Proposed Rule Change in support of the proposal.\6\ This 
publication serves as notice that the Commission does not object to the 
changes set forth in the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight 
Council designated FICC a systemically important financial market 
utility on July 18, 2012. Financial Stability Oversight Council 2012 
Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, FICC is required to 
comply with the Clearing Supervision Act and file advance notices 
with the Commission. 12 U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78s(b)(1).
    \4\ Securities Exchange Act Release No. 80361 (April 3, 2017), 
82 FR 17053 (April 7, 2017) (SR-FICC-2017-803) (``Notice''). FICC 
also filed a proposed rule change with the Commission pursuant to 
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, 
seeking approval of changes to its rules necessary to implement the 
proposal. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. 
The proposed rule change was published for comment in the Federal 
Register on March 30, 2017. Securities Exchange Act Release No. 
80303 (March 24, 2017), 82 FR 15749 (March 30, 2017) (SR-FICC-2017-
803).
    \5\ See letter from Thomas Wipf, Chief Financial Officer, Morgan 
Stanley & Co. LLC, dated April 19, 2017, to Eduardo A. Aleman, 
Assistant Secretary, Commission, available at https://www.sec.gov/comments/sr-ficc-2017-005/ficc2017005.htm.
    \6\ Because the proposal contained in the Advance Notice was 
also filed as the Proposed Rule Change, see supra note 3, the 
Commission is considering any comment received on the Proposed Rule 
Change also to be a comment on the Advance Notice.
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I. Description of the Advance Notice

    Repurchase agreement (``repo'') transactions involve the sale of 
securities along with an agreement to repurchase the securities on a 
later date. Bilateral repo transactions involve a cash lender (e.g., a 
money market mutual fund, pension fund, or other entity with funds 
available for lending) and a cash borrower (typically a broker-dealer, 
hedge fund, or other entity seeking to finance securities that can be 
used to collateralize the loan). In the opening leg of the repo 
transaction, the cash borrower receives cash in exchange for securities 
equal in value to the amount of cash received, plus a haircut. In the 
closing leg of the repo transaction, the cash borrower pays back the 
cash plus interest in exchange for the securities posted as collateral. 
In tri-party repo transactions, a clearing bank tri-party agent 
provides to both the cash lender and the cash borrower certain 
operational, custodial, collateral valuation, and other services to 
facilitate the repo transactions. For example, the tri-party agent may 
facilitate and record the exchange of cash and securities on a book-
entry basis for each of the counterparties to the repo transaction, as 
well as effectuating the collection and transfer of collateral that may 
be required under the terms of the repo transaction. Cash lenders use 
tri-party repos as investments that offer liquidity maximization, 
principal protection, and a small positive return, while cash borrowers 
rely on them as a major source of short-term funding.\7\
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    \7\ See Federal Reserve Bank of New York, Tri-Party Repo 
Infrastructure Reform, https://www.newyorkfed.org/banking/tpr_infr_reform.html (last visited Mar. 6, 2017).
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    FICC currently provides central clearing to a segment of the tri-
party repo market through its general collateral finance repo service 
(``GCF Repo [supreg] Service'').\8\ The GCF Repo Service is available 
to sell-side entities, such as dealers, that enter into tri-party repo 
transactions, in GCF Repo Securities, with each other.\9\
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    \8\ The term ``GCF Repo'' is a registered trademark of FICC. The 
GCF Repo Service is a service offered by FICC to compare, net, and 
settle general collateral repos. Notice, 82 FR at 17053.
    \9\ GCF Repo Securities are securities issued or guaranteed by 
the United States, a U.S. government agency or instrumentality, a 
U.S. government-sponsored corporation (or otherwise approved by 
FICC's Board of Directors), and such securities are only eligible 
for submission to FICC in connection with the comparison, netting 
and/or settlement of repo transactions involving generic CUSIP 
numbers (i.e., identifying numbers established for a category of 
securities, as opposed to a specific security). Notice, 82 FR at 
17053.
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    The Advance Notice is a proposal by FICC to broaden the pool of 
entities that would be eligible to submit tri-party repo transactions 
for central clearing at FICC. Specifically, FICC proposes to amend its 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') \10\ 
to establish the ``Centrally Cleared Institutional Tri-Party Service'' 
or the ``CCITTM Service.'' \11\ The proposed CCIT Service 
would allow the submission of tri-party repo transactions in GCF Repo 
Securities between GSD Netting Members \12\ that participate in the GCF 
Repo Service and institutional counterparties (other than registered 
investment companies (``RICs'') under the Investment Company Act of 
1940, as amended),\13\ where the institutional counterparties are the 
cash lenders in the transactions.
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    \10\ Available at http://www.dtcc.com/legal/rules-and-procedures.
    \11\ CCIT is a trademark of The Depository Trust & Clearing 
Corporation, of which FICC is a subsidiary. FICC defines ``Centrally 
Cleared Institutional Tri-Party Service'' and ``CCIT Service'' as 
``the service offered by the Corporation to clear institutional tri-
party repurchase agreement transactions, as more fully described in 
Rule 3B.'' Proposed GSD Rule 1, Definitions.
    \12\ The term ``Netting Member'' is defined as a member of 
FICC's Comparison System (i.e., the system of reporting, validating, 
and matching the long and short sides of securities trades to ensure 
that the details of such trades are in agreement between the 
parties) and FICC's Netting System (i.e., the system for aggregating 
and matching offsetting obligations resulting from trades). GSD 
Rules, supra note 8.
    \13\ 15 U.S.C. 80a-1 et seq. According to FICC, the legal 
ability of such registered investment companies to participate in 
the proposed CCIT Service is uncertain in light of applicable 
regulatory requirements under the Investment Company Act of 1940 
(including, for example, liquid asset requirements and counterparty 
diversification requirements).
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    To effectuate the proposed CCIT Service, FICC proposes to create a 
new limited service membership category in GSD for institutional cash 
lenders. These new members would be referred to as CCIT members, and 
the GSD membership provisions that apply to the CCIT members would be 
addressed in proposed GSD Rule 3B. These new membership provisions 
include: \14\
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    \14\ For additional discussion of the membership provisions set 
forth in proposed GSD Rule 3B, see also Notice, 82 FR at 17054-64.
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     Membership eligibility criteria, including minimum 
financial requirements, operational capabilities, and opinions of 
counsel;
     joint account ownership, in which one authorized entity 
would act as agent for two or more CCIT Members;
     membership application processes, including document 
provision and disclosure requirements, operational testing 
requirements, reporting requirements, FATCA compliance certification 
requirements,\15\ and the procedures for denying membership;
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    \15\ FATCA is the Foreign Account Tax Compliance Act, 26 U.S.C. 
1471 et seq. FATCA compliance means that an ``. . . FFI [foreign 
financial institution] Member has qualified under such procedures 
promulgated by the Internal Revenue Service . . . to establish 
exemption from withholding under FATCA such that [FICC] would not be 
required to withhold [anything] under FATCA . . . . '' GSD Rules 1, 
supra note 3.
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     membership agreement terms describing rights and 
obligations;
     procedures for the voluntary termination of CCIT 
membership; and
     ongoing membership requirements, including (i) annual 
financial and other disclosure requirements; (ii) operational testing 
requirements and related reporting requirements; (iii) notification of 
GSD rule non-compliance; (iv) penalties for GSD rule non-compliance; 
(v) mandatory assurances in the event that FICC has reason to believe a 
member may fall into GSD rule non-compliance; (vi) requirements to 
comply with applicable tax, money laundering, and sanctions laws; (vii) 
audit provisions allowing FICC to access relevant books and records; 
and (viii) financial/operational monitoring.
    In addition to membership provisions, proposed Rule 3B also would 
set forth the applicable risk management provision relating to the new 
limited

[[Page 20654]]

service membership category, including: \16\
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    \16\ For additional discussion of the risk management provisions 
set forth in proposed GSD Rule 3B, see also Notice, 82 FR at 17055-
64.
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     Non-mutualized loss allocation obligations of CCIT 
members, including FICC's perfected security interest in each CCIT 
member's underlying repo securities;
     a rules-based committed liquidity facility for CCIT 
members, in which CCIT members that have outstanding CCIT transactions 
with a defaulting member would be required to enter into CCIT master 
repurchase agreement transactions with FICC for specified periods of 
time;
     uncommitted liquidity repos between CCIT members and FICC; 
and
     application of certain other GSD Rules (e.g., comparison, 
netting, settlement, default, and other applicable provisions) to CCIT 
members and transactions.
    In addition to the proposed changes to the GSD Rules related to the 
proposed CCIT Service, the Advance Notice also contains other changes 
to the GSD Rules, unrelated to the CCIT proposal. These non-CCIT 
related changes generally are intended to update the GSD Rules and 
provide additional specificity, clarity, and transparency for members 
that rely on them.\17\ These non-CCIT related proposed rule changes 
include the following:
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    \17\ For additional description and explanation of the non-CCIT-
related changes included in the Advance Notice, see Notice, 82 FR at 
17054-64.
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     Clarifying that Comparison-Only Members must conform to 
FICC's operational conditions and requirements; \18\
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    \18\ GSD Members may be either Comparison-Only Members or 
Netting Members. Comparison-Only Members are members of the GSD 
Comparison System, which is the GSD system for reporting, 
validating, and in some cases, matching of securities trades. 
Netting Members are members of both the GSD Comparison System and 
the GSD Netting System, which is the GSD system for aggregating and 
matching offsetting obligations resulting from securities trades. 
Pursuant to GSD Rule 2A, FICC may require an entity to be a 
Comparison-Only Member for a period of time (during which FICC 
assess the entity's operational soundness) before the entity becomes 
eligible to apply for netting membership.
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     clarifying the point of time in which a member is required 
to notify FICC that the member is no longer in compliance with a 
relevant membership qualification and standard;
     providing that a member's written notice of its membership 
termination is not effective until accepted by FICC;
     requiring all GCF Repo transactions to be fully 
collateralized by 9:00 a.m. New York Time;
     prohibiting a member that receives collateral in the GCF 
Repo process from withdrawing the securities or cash collateral 
received;
     specifying the steps that members must take in the event 
of FICC's default so that FICC may determine the net amount owed by or 
to each member;
     reflecting FICC's current practice of annual study and 
evaluation of FICC's internal accounting control system; and
     correcting several grammatical and out-of-date cross-
references.
    In addition to the proposed changes listed above, the Advance 
Notice also includes a proposal for a non-CCIT related rule change that 
would provide FICC with access to the books and records of a RIC 
Netting Member's controlling management. The change is intended to 
enable FICC to determine whether the RIC has sufficient financial 
resources and monitor compliance with FICC's financial requirements on 
an ongoing basis.

II. Discussion of Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive: To 
mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically important financial market utilities and 
strengthening the liquidity of systemically important financial market 
utilities.\19\ Section 805(a)(2) of the Clearing Supervision Act 
authorizes the Commission to prescribe risk management standards for 
the payment, clearing, and settlement activities of designated clearing 
entities and financial institutions engaged in designated activities 
for which it is the Supervisory Agency or the appropriate financial 
regulator.\20\ Section 805(b) of the Clearing Supervision Act \21\ 
states that the objectives and principles for the risk management 
standards prescribed under Section 805(a) shall be to:
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    \19\ 12 U.S.C. 5461(b).
    \20\ 12 U.S.C. 5464(a)(2).
    \21\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act \22\ and Section 17A of the 
Exchange Act (``Clearing Agency Standards'').\23\ The Clearing Agency 
Standards require registered clearing agencies to establish, implement, 
maintain, and enforce written policies and procedures that are 
reasonably designed to meet certain minimum requirements for their 
operations and risk management practices on an ongoing basis.\24\ 
Therefore, it is appropriate for the Commission to review proposed 
changes in advance notices against the objectives and principles of 
these risk management standards as described in Section 805(b) of the 
Clearing Supervision Act and in the Clearing Agency Standards.\25\
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    \22\ 12 U.S.C. 5464(a)(2).
    \23\ See 17 CFR 240.17Ad-22.
    \24\ Id.
    \25\ 12 U.S.C. 5464(b).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    As discussed below, the Commission believes that the changes 
proposed in the Advance Notice are consistent with Section 805(b) of 
the Clearing Supervision Act because they (i) are designed to reduce 
systemic risk, (ii) are designed to support the stability of the 
financial system, (iii) are designed to promote robust risk management, 
and (iv) are consistent with promoting safety and soundness.
    When considering the CCIT Service in its entirety, the Commission 
believes that the proposal could help to reduce systemic risk presented 
by FICC and a tri-party repo market member default, which in turn could 
help support the stability of the broader financial system. The CCIT 
Service would make the risk-reducing benefits of central clearing 
available to a wider range of types of repo transactions while at the 
same time ensuring that FICC is able to effectively manage the 
additional financial risk exposure. For example, as described above, 
the CCIT Service would enable a greater number of tri-party repo 
transactions to be eligible for netting and subject to guaranteed 
settlement, novation, and independent risk management through FICC, 
which would help decrease the settlement and operational risk of such 
transactions relative to those made outside of FICC, enhancing the 
stability of the tri-party repo market. Furthermore, by providing 
central clearing to a greater number of tri-party repo transactions, 
the CCIT Service would permit FICC to centralize and control the 
liquidation of a greater number of such positions in the event of a 
Netting Member's default, which in turn would help protect against the 
risk that an uncoordinated liquidation of the positions by multiple 
counterparties to a defaulting firm would cause a fire sale that 
destabilizes the broader financial system. Therefore, the Commission 
believes that the CCIT Service would help reduce systemic risks and 
support

[[Page 20655]]

the stability of the financial system, consistent with Section 805(b) 
of the Clearing Supervision Act.
    The Commission also believes that the CCIT Service designed by FICC 
is consistent with promoting robust risk management and safety and 
soundness at FICC and to the tri-party repo market. The CCIT Service 
includes certain risk management tools that facilitate FICC's 
management of credit, market, and liquidity risk arising from becoming 
a central counterparty to the new repo positions coming in via CCIT. 
For example, the CCIT Service would provide FICC with a perfected 
security interest in the underlying repo securities of a CCIT 
transaction and a built-in liquidity resource to support CCIT Service 
liquidity demands in the form of repo transactions under the CCIT 
Master Repurchase Agreement (``CCIT MRA'').\26\ Each of these elements 
of the CCIT Service would help FICC manage certain risks presented by 
the potential default of a CCIT member. Specifically, the perfected 
security interest would enable FICC, in the event of a Netting Member's 
default, to access the defaulter's collateral for the purposes of 
managing potential risks, such as credit risk, that may arise from the 
default.
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    \26\ For additional details regarding the CCIT MRA, see Notice, 
82 FR at 17060-61.
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    In addition, the CCIT Service would enable FICC to manage instances 
where a default results in liquidity demands for FICC within the CCIT 
Service that exceed the level of financial resources FICC might 
otherwise have on hand (such as the defaulter's collateral) at the time 
of the default by requiring CCIT Members to engage in repo transactions 
to provide cash as a liquidity resource in such instances. In addition 
to the risk management tools described above, the CCIT Service also 
would establish initial and ongoing financial responsibility and 
operational capacity requirements for CCIT members, as well as 
requirements that would be applicable to Netting Members with respect 
to their participation in the proposed CCIT Service. Collectively, 
these requirements would enable FICC to monitor the likelihood of a 
CCIT member default and limit its counterparty risk by (i) ensuring 
that FICC only takes on exposure to entities that are creditworthy 
counterparties; and (ii) enabling FICC to monitor the ongoing 
capability of these members to perform their obligations to FICC. For 
these reasons, the Commission believes that the CCIT Service would help 
promote robust risk management and safety and soundness at FICC, 
consistent with Section 805(b) of the Clearing Supervision Act.
    In addition, the Commission believes that the CCIT Service is 
consistent with promoting robust risk management and safety and 
soundness to the tri-party repo market. As discussed above, the CCIT 
Service would make the risk-reducing benefits of central clearing 
available to a wider range of types of repo transactions, which would 
help decrease the settlement and operational risk of such transactions 
when made outside of FICC and thereby enhance stability for the tri-
party repo market. Furthermore, the CCIT Service would enable a greater 
number of tri-party repo transactions to be subject to FICC's ability, 
in the event of a Netting Member's default, to centralize and control 
the liquidation of such positions at FICC, which in turn would help 
protect the tri-party repo market against the risk that a liquidation 
of the positions would cause a fire sale that destabilizes the broader 
financial system. Therefore, the Commission believes that the CCIT 
Service would help promote robust risk management and safety and 
soundness to the tri-party repo market, consistent with Section 805(b) 
of the Clearing Supervision Act.

B. Consistency With Rules 17Ad-22(e)(1), (e)(4), and (e)(18)

    The Commission believes that the changes proposed in the Advance 
Notice are consistent with Rule 17Ad-22(e)(1) under the Act.\27\ Rule 
17Ad-22(e)(1) requires, in part, that FICC ``establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to . . . [p]rovide for a well-founded, clear, transparent and 
enforceable legal basis for each aspect of its activities.'' \28\ As 
described above, FICC proposes a number of changes that are unrelated 
to the proposed CCIT Service and designed to make the GSD Rules more 
clear, consistent, and current for members that rely on them. The 
Commission believes that these non-CCIT related changes could make 
FICC's policies and procedures in the GSD Rules more clear, consistent, 
and transparent for members that rely on them, and therefore believes 
that the proposed changes would help support FICC's rules being clear 
and transparent, consistent with Rule 17Ad-22(e)(1), cited above.
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    \27\ 17 CFR 240.17Ad-22(e)(2).
    \28\ Id.
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    The Commission believes that the changes proposed in the Advance 
Notice are consistent with Rule 17Ad-22(e)(4)(iii) under the Act.\29\ 
Rule 17Ad-22(e)(4)(iii) requires, in part, that FICC ``establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to . . . [e]ffectively identify, measure, monitor, 
and manage its credit exposures to participants and those arising from 
[FICC's] payment, clearing, and settlement processes, including by . . 
. maintaining . . . financial resources at the minimum to enable [FICC] 
to cover a wide range of stress scenarios. . . .'' \30\ As discussed 
above, the CCIT Service includes risk management tools, such as the 
perfected security interest and the CCIT MRA liquidity resource. The 
Commission believes that these risk management tools would help 
facilitate FICC's management of credit, market, and liquidity risk that 
would arise from becoming a central counterparty to the new repo 
positions coming in via the proposed CCIT Service. Accordingly, the 
Commission believes that the proposed changes to its policies and 
procedures in the GSD Rules are designed to help effectively manage 
FICC's exposure, including its credit exposure to participants, arising 
from its payment, clearing, and settlement processes for the proposed 
CCIT transactions by providing for financial resources to help cover a 
wide range of foreseeable stress scenarios, consistent with Rule 17Ad-
22(e)(4)(iii), cited above.
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    \29\ 17 CFR 240.17Ad-22(e)(4)(iii).
    \30\ Id.
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    The Commission also believes that the proposal is consistent with 
Rule 17Ad-22(e)(18) under the Act.\31\ Rule 17Ad-22(e)(18) requires, in 
part, that FICC ``establish, implement, maintain and enforce written 
policies and procedures reasonably designed to . . . [e]stablish 
objective, risk-based, and publicly disclosed criteria for 
participation, which . . . require participants to have sufficient 
financial resources and robust operational capacity to meet obligations 
arising from participation in the clearing agency, and monitor 
compliance with such participation requirements on an ongoing basis.'' 
\32\
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    \31\ 17 CFR 240.17Ad-22(e)(18).
    \32\ Id.
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    In connection with the establishment of the proposed CCIT Service, 
FICC would include provisions in the GSD rules to incorporate 
membership standards, requiring, for example, ongoing financial 
responsibility and operational capacity requirements, as well as the 
requirements that would be applicable to Netting Members with respect 
to their participation in the proposed CCIT Service. The

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Commission believes that, by incorporating such requirements, FICC 
would establish in its policies and procedures objective, risk-based, 
and publicly disclosed criteria for participation in the CCIT Service, 
consistent with Rule 17Ad-22(e)(18).
    Similarly, in connection with the proposed non-CCIT related change 
to provide FICC with access to the books and records of a RIC Netting 
Member's controlling management, FICC would be authorized to review the 
financial information of the RIC. Because this would enable FICC to 
determine whether the RIC has sufficient financial resources and 
monitor compliance with FICC's financial requirements on an ongoing 
basis, the Commission believes this requirement is consistent with Rule 
17Ad-22(e)(18).

III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\33\ that the Commission does not object to 
this advance notice proposal (SR-FICC-2017-803) and that FICC is 
authorized to implement the proposal as of the date of this notice or 
the date of an order by the Commission approving a proposed rule change 
that reflects rule changes that are consistent with this advance notice 
proposal (SR-FICC-2017-005), whichever is later.
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    \33\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2017-08903 Filed 5-2-17; 8:45 am]
 BILLING CODE 8011-01-P