[Federal Register Volume 82, Number 223 (Tuesday, November 21, 2017)]
[Notices]
[Pages 55427-55443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25145]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82090; File No. SR-FICC-2017-002]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change To Implement the Capped 
Contingency Liquidity Facility in the Government Securities Division 
Rulebook

November 15, 2017.

I. Introduction

    Fixed Income Clearing Corporation (``FICC'') filed with the U.S. 
Securities and Exchange Commission (``Commission'') on March 1, 2017 
the proposed rule change SR-FICC-2017-002 (``Proposed Rule Change'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule 
Change was published for comment in the Federal Register on March 20, 
2017.\3\ The Commission received five comment letters \4\ to the 
Proposed Rule Change. 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.\5\ 
On May 30, 2017, the Commission issued an order instituting proceedings 
to determine whether to approve or disapprove the Proposed Rule 
Change.\6\ On September 15, 2017, the Commission designated a longer 
period on the proceedings to determine whether to approve or disapprove 
the Proposed Rule Change.\7\ The extension gave the Commission until 
November 15, 2017 to either approve or disapprove the Proposed Rule 
Change and re-opened the comment period until October 6, 2017 for 
initial comments and October 12, 2017 for rebuttal comments. The 
Commission received

[[Page 55428]]

five additional comment letters,\8\ for a total of ten comment letters.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. 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 Exchange 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 Commission issued a 
notice of no objection to the Advance Notice on June 29, 2017. 
Securities Exchange Act Release No. 81054 (June 29, 2017), 82 FR 
31356 (July 6, 2017).
    \3\ Securities Exchange Act Release No. 80234 (March 14, 2017), 
82 FR 14401 (March 20, 2017) (SR-FICC-2017-002) (``Notice'').
    \4\ See letter from Robert E. Pooler Jr., Chief Financial 
Officer, Ronin Capital LLC (``Ronin''), dated April 10, 2017, to 
Robert W. Errett, Deputy Secretary, Commission (``Ronin Letter I''); 
letter from Timothy J. Cuddihy, Managing Director, FICC, dated April 
25, 2017, to Robert W. Errett, Deputy Secretary, Commission (``FICC 
Letter I''); letter from Alan B. Levy, Managing Director, Industrial 
and Commercial Bank of China Financial Services LLC (``ICBC''), 
Philip Vandermause, Director, Aardvark Securities LLC 
(``Aardvark''), David Rutter, Chief Executive Officer, LiquidityEdge 
LLC, Robert Pooler, Chief Financial Officer, Ronin, Jason 
Manumaleuna, Chief Financial Officer and EVP, Rosenthal Collins 
Group LLC (``Rosenthal Collins''), and Scott Skyrm, Managing 
Director, Wedbush Securities Inc. (``Wedbush'') dated May 24, 2017 
(``ICBC Letter I''); letter from Robert E. Pooler Jr., Chief 
Financial Officer, Ronin, dated June 19, 2017, to Robert W. Errett, 
Deputy Secretary, Commission (``Ronin Letter II''); and letter from 
Alan B. Levy, Managing Director, ICBC, Philip Vandermause, Director, 
Aardvark, Robert Pooler, Chief Financial Officer, Ronin, and Scott 
Skyrm, Managing Director, Wedbush, dated June 27, 2017, to Robert W. 
Errett, Deputy Secretary, Commission (``ICBC Letter II'') available 
at https://www.sec.gov/comments/sr-ficc-2017-002/ficc2017002.htm. 
Because the proposal contained in the Proposed Rule Change was also 
filed in the Advance Notice, see supra note 2, the Commission is 
considering all comments received on the proposal regardless of 
whether the comments are submitted to the Proposed Rule Change or 
the Advance Notice.
    \5\ See Securities Exchange Act Release No. 80524 (April 25, 
2017), 82 FR 20685 (May 3, 2017) (SR-FICC-2017-002).
    \6\ See Securities Exchange Act Release No. 80812 (May 30, 
2017), 82 FR 25642 (June 2, 2017) (SR-FICC-2017-002).
    \7\ See Securities Exchange Act Release No. 81638 (September 15, 
2017), 82 FR 44234 (September 21, 2017) (SR-FICC-2017-002) (``OIP 
Extension'').
    \8\ Letter from Robert E. Pooler Jr., Chief Financial Officer, 
Ronin, Alan B. Levy, Managing Director, ICBC, Philip Vandermause, 
Director, Aardvark, and Jason Manumaleuna, Chief Financial Officer 
and EVP, Rosenthal Collins, dated October 6, 2017, to Eduardo 
Aleman, Assistant Secretary, Commission (``Ronin Letter III''); 
letter from Alan B. Levy, Managing Director, ICBC, and Robert 
Pooler, Chief Financial Officer, Ronin, dated October 6, 2017, to 
Eduardo Aleman, Assistant Secretary, Commission (``ICBC Letter 
III''); letter from Timothy J. Cuddihy, Managing Director, FICC, 
dated October 6, 2017, to Robert W. Errett, Deputy Secretary, 
Commission (``FICC Letter II''); letter from Robert E. Pooler Jr., 
Chief Financial Officer, Ronin, and Alan B. Levy, Managing Director, 
ICBC, dated October 12, 2017, to Eduardo Aleman, Assistant 
Secretary, Commission (``Ronin Letter IV''); and letter from 
Theodore Bragg, Vice President--Strategic Planning, Nasdaq, Inc. 
(``Nasdaq''), to Brent J. Fields, Secretary, Commission (``Nasdaq 
Letter'') available at https://www.sec.gov/comments/sr-ficc-2017-002/ficc2017002.htm.
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II. Description of the Proposed Rule Change

    With this Proposed Rule Change, FICC proposes to amend its 
Government Securities Division (``GSD'') \9\ Rulebook (``GSD Rules'') 
\10\ to establish a rules-based, committed liquidity resource (i.e., 
the Capped Contingency Liquidity Facility[supreg] (``CCLF'')). FICC 
states that the CCLF is designed to comply with Rule 17Ad-22(e)(7) 
under the Exchange Act,\11\ by providing FICC with a committed 
liquidity resource to meet its cash settlement obligations in the event 
of a default of the GSD Netting Member \12\ or family of affiliated 
Netting Members (``Affiliated Family'') to which FICC has the largest 
exposure in extreme but plausible market conditions.\13\
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    \9\ 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.
    \10\ Available at www.dtcc.com/legal/rules-and-procedures.aspx.
    \11\ 17 CFR 240.17Ad-22(e)(7). See Section III.C., infra, for 
further discussion of Rule 17Ad-22(e)(7) and other applicable 
Exchange Act provisions.
    \12\ 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. GSD Rules, supra note 10.
    \13\ See Notice, 82 FR at 14402.
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A. Overview of the Proposal

    The CCLF would be invoked only if FICC declared a ``CCLF Event.'' 
FICC would declare a CCLF Event only if FICC ceased to act for a 
Netting Member in accordance with GSD Rule 22A (referred to as a 
``default'') and, subsequent to such default, FICC determined that its 
other liquidity resources could not generate sufficient cash to satisfy 
FICC's payment obligations to the non-defaulting Netting Members.\14\ 
Once FICC declares a CCLF Event, each Netting Member could be called 
upon to enter into repurchase (``repo'') transactions with FICC (``CCLF 
Transactions'') up to a pre-determined capped dollar amount, as 
described below.
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    \14\ FICC's current liquidity resources for GSD consist of (i) 
cash in GSD's clearing fund; (ii) cash that can be obtained by 
entering into uncommitted repurchase (``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 Netting Member; 
and (iv) uncommitted bank loans. See id.
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1. Declaration of a CCLF Event
    Following a default, FICC would first obtain liquidity through its 
other available non-CCLF liquidity resources.\15\ If FICC determined 
that these sources of liquidity would be insufficient to meet FICC's 
payment obligations to its non-defaulting Netting Members, FICC would 
declare a CCLF Event.\16\ 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.\17\
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    \15\ Id.
    \16\ Id.
    \17\ Id.
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2. CCLF Transactions
    Upon declaring a CCLF Event, FICC would meet its liquidity need by 
initiating CCLF Transactions with non-defaulting Netting Members.\18\ 
The CCLF Transaction would replace the original transaction that 
required FICC to pay cash to the non-defaulting Netting Member and, in 
turn, required the non-defaulting Netting Member to deliver securities 
to FICC.\19\ The obligations of that original transaction would be 
deemed satisfied by entering into the CCLF Transaction.\20\
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    \18\ Id.
    \19\ Id.
    \20\ Id.
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    Each CCLF Transaction would be governed by the terms of the 
September 1996 Securities Industry and Financial Markets Association 
Master Repurchase Agreement (``SIFMA MRA''),\21\ 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'').\22\
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    \21\ 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. Notice, 82 at 14402. 
FICC represents that, at the time of filing the Proposed Rule 
Change, there were no registered investment companies that are also 
GSD Netting Members. Id.
    \22\ Id.
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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 FICC's cash payment obligation 
to such Direct Affected Members that FICC would need to finance through 
CCLF to cover the defaulting Netting Member's failure to deliver the 
cash payment (``Financing Amount'').\23\ 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.\24\ FICC would then initiate CCLF Transactions with each Direct 
Affected Member for the Direct Affected Member's purchase of the 
securities that were destined for the defaulting Netting Member 
(``Financed Securities'').\25\ The aggregate purchase price of the CCLF 
Transactions with the Direct Affected Member could equal but never 
exceed the Direct Affected Member's maximum CCLF funding obligation 
(``Individual Total Amount'').\26\
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    \23\ Id.
    \24\ Id.
    \25\ 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 that are bound for delivery to 
the defaulting Netting Member. Id.
    \26\ Id. 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 
for the Remaining Financing Amount with: (i) All other Direct Affected 
Members with a Financing Amount less than their Individual Total 
Amounts; and (ii) each Netting Member that has not otherwise entered 
into CCLF Transactions with FICC (``Indirect Affected Members'').\27\
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    \27\ See Notice, 82 FR at 14402-03.
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    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

[[Page 55429]]

the most funding available within their Individual Total Amounts.\28\ 
No Affected Member would be obligated to enter into CCLF Transactions 
greater than its Individual Total Amount.\29\
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    \28\ See id. at 14403.
    \29\ Id.
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    After receiving approval from FICC's Board of Directors to do so, 
FICC would engage its investment adviser 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.\30\ Once FICC liquidates the 
underlying securities by selling them to a new buyer (``Liquidating 
Trade''), FICC would instruct the Affected Member, including the 
initial Direct Affected Members, to close the CCLF Transaction by 
delivering the Financed Securities to FICC in order to complete 
settlement of the Liquidating Trade.\31\ 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, including the 
initial Direct 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.\32\
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    \30\ Id.
    \31\ Id.
    \32\ Id.
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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.\33\ 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.\34\
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    \33\ Id.
    \34\ Id.
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    The 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.\35\
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    \35\ 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.\36\ The amount 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 (collectively, the 
``Historical Cover 1 Liquidity Requirement'').\37\ FICC believes that 
it is appropriate to calculate the Historical Cover 1 Liquidity 
Requirement in this manner because the default of such an Affiliated 
Family would generate the largest liquidity need for FICC.\38\
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    \36\ Id.
    \37\ 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. Id. FICC states that this amount is the 
difference between the contract value and the current market value 
of a Netting Member's GSD portfolio. Id. 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.
    \38\ 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.\39\ 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.\40\
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    \39\ Id.
    \40\ Id.
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    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.\41\ 
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.\42\ 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.\43\
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    \41\ See id. 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.
    \42\ 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 id. 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.
    \43\ 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.\44\ 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.\45\ 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.\46\
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    \44\ Id.
    \45\ Id.
    \46\ 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.'' \47\ 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.\48\
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    \47\ See Notice, 82 FR at 14403-04.
    \48\ See id. at 14404.

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[[Page 55430]]

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.\49\ 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.\50\ 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.\51\
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    \49\ Id.
    \50\ According to FICC, from 2015 to 2016, 59 percent of all 
Netting Members presented average liquidity needs between $0 and $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.
    \51\ 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 \52\ would be required to contribute a larger amount.\53\ 
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.\54\ 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 \55\ as well.\56\ 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.\57\
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    \52\ ``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 (i.e., an obligation under the GSD Rules to receive 
securities from FICC), or to implement a collateral substitution in 
connection with a Repo Transaction with a right of substitution. GSD 
Rules, supra note 10.
    \53\ See Notice, 82 FR at 14404.
    \54\ Id.
    \55\ ``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 (i.e., an obligation under the GSD Rules to deliver 
securities to FICC) or to implement a collateral substitution in 
connection with a Repo Transaction with a right of substitution. GSD 
Rules, supra note 10.
    \56\ See Notice, 82 FR at 14404.
    \57\ Id.
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    FICC states that it would initially assign a 20 percent weighting 
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'').\58\ 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.\59\ FICC believes 
that this assessment would help ensure that the Aggregate Regular 
Amount would be appropriately allocated across all Netting Members.\60\
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    \58\ 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 peak 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.
    \59\ See Notice, 82 FR at 14404.
    \60\ Id.
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    Second, as discussed in more detail below, after allocating the 
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.\61\ For example, 
a Netting Member with a $7 billion peak daily liquidity need would only 
contribute to the Aggregate Regular Amount, based on the calculation 
described below. Meanwhile a Netting Member with a $45 billion peak 
daily liquidity would contribute towards both the Aggregate Regular 
Amount and the Aggregate Supplemental Amount, as described below.
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    \61\ Id.
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    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.\62\
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    \62\ Id.
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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 across liquidity tiers 
in $5 billion increments (``Liquidity Tiers'').\63\ 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.\64\ 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.\65\ FICC explains that this allocation would result in 
a larger proportion of the Aggregate Supplemental Amount being borne by 
those Netting Members that present the highest liquidity needs.\66\
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    \63\ FICC believes that this increment would appropriately 
distinguish Netting Members that present the highest liquidity needs 
on a frequent basis and allocate more of the Individual Supplemental 
Amount to Netting Members in the top Liquidity Tiers. Id.
    \64\ See Notice, 82 FR at 14404-05.
    \65\ 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.
    \66\ See Notice, 82 FR 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.\67\ 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.\68\
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    \67\ See id. at 14405.
    \68\ Id.

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[[Page 55431]]

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'').\69\ 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:
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    \69\ See id. at 14406.
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     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.\70\
---------------------------------------------------------------------------

    \70\ Id.
---------------------------------------------------------------------------

    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.\71\
---------------------------------------------------------------------------

    \71\ Id.
---------------------------------------------------------------------------

    Additionally, on a daily basis, FICC would examine the Aggregate 
Total Amount to ensure that it is sufficient to satisfy FICC's 
liquidity needs.\72\ 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.\73\
---------------------------------------------------------------------------

    \72\ Id.
    \73\ Id.
---------------------------------------------------------------------------

    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.\74\ 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.\75\ Reductions to the Aggregate Total 
Amount would be reflected at the conclusion of the reset period.\76\
---------------------------------------------------------------------------

    \74\ Id.
    \75\ Id.
    \76\ Id.
---------------------------------------------------------------------------

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 notice of no objection to the related Advance Notice.\77\ 
FICC represents that, during this 12-month period, it would 
periodically provide each Netting Member with estimated Individual 
Total Amounts.\78\ 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.\79\
---------------------------------------------------------------------------

    \77\ Id.
    \78\ Id.
    \79\ Id.
---------------------------------------------------------------------------

    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.\80\ 
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; \81\ (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.\82\ FICC states 
that it may require any Netting Member 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.\83\
---------------------------------------------------------------------------

    \80\ Id.
    \81\ According to FICC, the attestation would not refer to the 
actual dollar amount that has been allocated as the Individual Total 
Amount. Id. 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.
    \82\ Id.
    \83\ Id. at 14406-07.
---------------------------------------------------------------------------

    On a quarterly basis, FICC would conduct due diligence to assess 
each Netting Member's ability to meet its Individual Total Amount.\84\ 
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.\85\ FICC also would test its 
operational procedures for invoking a CCLF Event and Netting Members 
would be required to participate in such tests.\86\ 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.\87\
---------------------------------------------------------------------------

    \84\ Id. at 14407.
    \85\ Id.
    \86\ Id.
    \87\ Id.; GSD Rules, supra note 10.
---------------------------------------------------------------------------

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.\88\ The liquidity funding report would be provided 
for informational purposes only.\89\
---------------------------------------------------------------------------

    \88\ Notice, 82 FR at 14407.
    \89\ Id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act \90\ directs the Commission 
to approve a proposed rule change of a self-regulatory organization if 
it finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization. After carefully considering 
the Proposed Rule Change and all comments received, the Commission 
finds that the Proposed Rule Change is consistent with the Exchange Act 
and the rules and regulations thereunder applicable to FICC.\91\ In 
particular, as discussed

[[Page 55432]]

below, the Commission finds that the Proposed Rule Change is consistent 
with: (1) Section 17A(b)(3)(F) of the Exchange Act,\92\ which requires, 
in part, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions, to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible, and, in general, protect investors and the public 
interest; (2) Section 17A(b)(3)(I) of the Exchange Act, which requires 
that the rules of a clearing agency do not impose any burden on 
competition not necessary or appropriate in furtherance of the Exchange 
Act; \93\ and (3) Rule 17Ad-22(e)(7) under the Exchange Act, which 
requires a covered clearing agency \94\ 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 the covered clearing agency, including 
measuring, monitoring, and managing its settlement and funding flows on 
an ongoing and timely basis, and its use of intraday liquidity.\95\
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78s(b)(2)(C).
    \91\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). The Commission 
addresses comments about economic effects of the Proposed Rule 
Change, including competitive effects, below.
    \92\ 15 U.S.C. 78q-1(b)(3)(F).
    \93\ 15 U.S.C. 78q-1(b)(3)(I).
    \94\ FICC is a ``covered clearing agency'' as defined in 17 CFR 
240.17Ad-22(a)(5) and (a)(6) because FICC was designated 
systemically important by the Financial Stability Oversight Council 
on July 18, 2012, pursuant to the Payment, Clearing, and Settlement 
Supervision Act of 2010 (12 U.S.C. 5461 et seq.). See Financial 
Stability Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \95\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

    The Commission received ten comment letters in response to the 
proposal. Eight comment letters--Ronin Letters I, II, III, and IV; ICBC 
Letters I, II, and III; and the Nasdaq Letter--objected to the Proposed 
Rule Change.\96\ The first comment letter from FICC responded to 
objections raised by Ronin.\97\ The second comment letter from FICC 
responded to both objections raised by Ronin and ICBC in prior comment 
letters and to questions posed by the Commission in the OIP 
Extension.\98\ Ronin Letter IV responds to FICC Letter II.\99\
---------------------------------------------------------------------------

    \96\ See Ronin Letter I, Ronin Letter II, Ronin Letter III, 
Ronin Letter IV, ICBC Letter I, ICBC Letter II, ICBC Letter III, and 
Nasdaq Letter.
    \97\ See FICC Letter I. Ronin Letter II and ICBC Letters I and 
II (both with Ronin as a co-signatory) raised the same substantive 
issues as Ronin Letter I. Accordingly, the Commission considers FICC 
Letter I to be responsive to Ronin Letters I and II and ICBC Letters 
I and II.
    \98\ See FICC Letter II.
    \99\ See Ronin Letter IV.
---------------------------------------------------------------------------

A. Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, in part, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, to assure 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, and, in 
general, protect investors and the public interest.\100\
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the CCLF is designed to provide FICC with 
sufficient qualifying liquid resources to cover the default of the 
family of affiliated GSD Netting Members that would generate the 
largest liquidity need for FICC. Specifically, the CCLF would be sized 
to meet GSD's peak liquidity need during the prior six months, plus an 
additional Liquidity Buffer. FICC would monitor and assess on a daily 
basis the sufficiency of the Aggregate Total Amount and have the 
ability to increase this amount if FICC determines that it is 
insufficient to satisfy FICC's liquidity needs. By providing FICC with 
this additional liquid resource, which is designed to cover GSD's peak 
liquidity need, the proposal would help mitigate the risk that FICC 
would be unable to promptly meet its settlement obligations--
specifically, its obligations to provide cash to non-defaulting Netting 
Members in reverse repo transactions where FICC is the central 
counterparty.
    In addition, given FICC's importance to the financial system as a 
designated systemically important financial market utility,\101\ by 
providing it with an additional liquidity resource to help meet its 
liquidity obligations in the midst of a CCLF Event, the Proposed Rule 
Change is designed to help FICC mitigate losses that a CCLF Event could 
cause not only to FICC and its non-defaulting Netting Members, but also 
to the financial markets more broadly. As such, the Proposed Rule 
Change could help promote the safeguarding of securities and funds in 
FICC's custody and control, and thereby protect investors and the 
public interest.\102\
---------------------------------------------------------------------------

    \101\ See supra note 94.
    \102\ While both Ronin and ICBC raise concerns that the CCLF 
might increase concentration and systemic risks, the commenters 
generally express those concerns as outcomes that would arise as the 
result of negative competitive burdens that the CCLF would impose on 
smaller Netting Members. For example, Ronin and ICBC argue that the 
proposal would likely increase market concentration because smaller 
Netting Members would exit FICC to avoid the burden of CCLF costs. 
See Ronin Letter II at 5; ICBC Letter I at 2. Accordingly, the 
Commission addresses such comments below in the Commission's 
analysis of the proposal's consistency with Section 17A(b)(3)(I) of 
the Exchange Act. 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    For these reasons, the Commission believes that the proposal 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.

B. Section 17A(b)(3)(I) of the Exchange Act

    Section 17A(b)(3)(I) of the Exchange Act requires that the rules of 
a clearing agency do not impose any burden on competition not necessary 
or appropriate in furtherance of the Exchange Act.\103\ This provision 
does not require the Commission to find that a proposed rule change 
represents the least anticompetitive means of achieving the goal. 
Rather, it requires the Commission to balance the competitive 
considerations against other relevant policy goals of the Exchange 
Act.\104\
---------------------------------------------------------------------------

    \103\ 15 U.S.C. 78q-1(b)(3)(I).
    \104\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105 
(D.C. Cir. 1978).
---------------------------------------------------------------------------

    Both Ronin and ICBC argue that the CCLF obligations in the Proposed 
Rule Change would result in negative competitive burdens on FICC's 
smaller Netting Members.\105\ Specifically, Ronin and ICBC argue that 
the cost of complying with the CCLF could impose a disproportionately 
negative economic impact on smaller Netting Members, which could 
potentially force smaller Netting Members to either reduce their 
centrally cleared U.S. Treasury trading activity, clear through larger 
Netting Members, or leave GSD altogether (as well as create a barrier 
to entry for prospective new Netting Members).\106\ Ronin further 
suggests that meeting obligations imposed by the CCLF will be more 
costly for some Netting Members than for others, based on their access 
to credit.\107\ For example, Ronin states that it would have to pay for 
access to a committed line of credit each year to have sufficient 
resources to attest that it

[[Page 55433]]

can meet its CCLF contribution requirement.\108\ Ronin asserts that 
obtaining such a line of credit is not only ``economically 
disadvantageous'' but also ``creates a dependency on an external entity 
which could prove to be an existential threat'' (i.e., the inability of 
non-bank Netting Members to secure a committed line of credit at a 
reasonable rate could cause such members to exit FICC).\109\ In 
contrast, Ronin suggests that larger Netting Members with access to the 
Federal Reserve Discount Window (and resulting ability to easily borrow 
funds using U.S. government debt as collateral) would not necessarily 
have to pay for such credit lines and could merely ``footnote the 
liability at no cost'' or inform FICC that they are ``good for [the 
CCLF contribution requirement].'' \110\ Ronin argues that FICC has 
``failed to recognize this differential impact as a threat to GSD 
member diversity.'' \111\
---------------------------------------------------------------------------

    \105\ See Ronin Letter I, Ronin Letter II, Ronin Letter III, 
Ronin Letter IV, ICBC Letter I, ICBC Letter II, and ICBC Letter III.
    \106\ ICBC Letter I at 2; ICBC Letter III at 2-3; Ronin Letter I 
at 2, 5-7; Ronin Letter II at 3-4; Ronin Letter IV at 7.
    \107\ Ronin Letter I at 2; Ronin Letter II at 1-5; Ronin Letter 
III at 2-4, 6-7; Ronin Letter IV at 6-8.
    \108\ Ronin Letter I at 5; Ronin Letter II at 3; Ronin Letter 
III at 2.
    \109\ Ronin Letter II at 3.
    \110\ Ronin Letter I at 5; Ronin Letter III at 2; Ronin Letter 
IV at 1, 6-7.
    \111\ Ronin Letter II at 3.
---------------------------------------------------------------------------

    Finally, ICBC and Nasdaq suggest that the Commission defer its 
decision on the Proposed Rule Change in order for detailed studies to 
be conducted on the CCLF \112\ and the U.S. Treasury market more 
broadly.\113\ Nasdaq states that further studies should be conducted 
regarding CCLF costs and fees on FICC members as well as the resulting 
incentives and conduct of non-FICC members.\114\ ICBC states that 
studies should be conducted regarding the costs and benefits of CCLF, 
but should consider the effects of the CCLF on U.S. markets as a whole, 
rather than be confined to the narrow question of whether the proposal 
would provide FICC with more liquidity.\115\ ICBC also provides a non-
exhaustive list of questions regarding the broad potential effects of 
the CCLF that such a study should consider.\116\
---------------------------------------------------------------------------

    \112\ See ICBC Letter I at 6; ICBC Letter II at 4; ICBC Letter 
III at 3-4.
    \113\ Nasdaq Letter at 3.
    \114\ Id.
    \115\ See ICBC Letter I at 6; ICBC Letter III at 3-4.
    \116\ Id.
---------------------------------------------------------------------------

    In response to comments regarding the potential economic impacts on 
smaller, non-bank Netting Members, FICC acknowledges that the proposal 
would place a committed funding requirement on Netting Members that 
could increase the cost of participating in GSD.\117\ FICC, however, 
states that the CCLF was designed to minimize the burden on smaller 
Netting Members and achieve a fair and appropriate allocation of 
liquidity burdens.\118\ Specifically, FICC states that it structured 
the CCLF so that: (1) Each Netting Member's CCLF requirement would be a 
function of the peak 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; \119\ and (3) the proposal 
would fairly allocate higher CCLF requirements to Netting Members that 
generate higher liquidity needs.\120\ FICC further states that because 
CCLF contributions would be a function of the peak liquidity exposure 
that each Netting Member presents to FICC, each Netting Member would be 
able to reduce its CCLF contribution by altering its trading 
activity.\121\ Additionally, contrary to Ronin's assertion, FICC states 
that larger Netting Members will be required to hold capital for their 
CCLF obligations, and not simply declare that they ``are good for it.'' 
\122\
---------------------------------------------------------------------------

    \117\ FICC Letter IV at 6.
    \118\ FICC Letter I at 3-4.
    \119\ Id. at 3. FICC notes that, on average, a Netting Member's 
CCLF requirement would be less than 2.5 percent of their respective 
peak liquidity need, with the smallest Netting Members having a CCLF 
contribution requirement of approximately 1.5 percent of their peak 
liquidity need. Id. at 4-5.
    \120\ 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. FICC also notes that by allocating higher CCLF 
obligations to those Netting Members generating the largest 
liquidity needs, the CCLF will incentivize such Netting Members to 
manage their liquidity needs and thereby limit FICC's Historical 
Cover 1 Liquidity Requirement. Id. at 5.
    \121\ Id. at 3, 7.
    \122\ Id. at 5.
---------------------------------------------------------------------------

    As a general matter, the Commission acknowledges that a proposal to 
enhance FICC's access to liquidity resources, such as this proposal, 
would entail costs that would be borne by Netting Members and market 
participants more generally. The proposal is designed to meet the 
liquidity requirements of Rule 17Ad-22(e)(7) under the Exchange 
Act.\123\ And in adopting amendments to that rule, the Commission 
acknowledged that there would be costs associated with compliance, 
either directly from members or through third-party arrangements, and 
that such costs may be passed on to other market participants, 
eventually increasing transaction costs.\124\
---------------------------------------------------------------------------

    \123\ Rule 17Ad-22(e)(7)(i) requires a covered clearing agency, 
such as FICC, to maintaining sufficient liquid resources at the 
minimum, in all relevant currencies, to effect same-day and, where 
appropriate, intraday and multiday settlement of payment obligations 
with a high degree of confidence under a wide range of foreseeable 
stress scenarios that includes, but is not limited to, the default 
of the participant family that would generate the largest aggregate 
payment obligation for the covered clearing agency in extreme but 
plausible market conditions (i.e., ``Cover 1 Requirement''). 17 CFR 
240.17Ad-22(e)(7)(i). Meanwhile, Rule 17Ad-22(e)(7)(ii) requires a 
covered clearing agency, such as FICC, to hold qualifying liquid 
resources sufficient to meet the minimum liquidity resource 
requirement under Rule 17Ad-22(e)(7)(i), including the Cover 1 
Requirement, in each relevant currency for which the covered 
clearing agency has payment obligations owed to clearing members. 17 
CFR 240.17Ad-22(e)(7)(ii).
    \124\ See Securities Exchange Act Release No. 78961 (September 
28, 2016), 81 FR 70786, 70870 (October 13, 2016) (``CCA Standards 
Adopting Release'').
---------------------------------------------------------------------------

    The Commission believes that the Proposed Rule Change was designed 
to recognize and account for the different liquidity needs presented by 
the different Netting Members, while achieving an equitable and 
appropriate allocation of FICC's liquidity need among all Netting 
Members. In order to provide qualifying liquid resources to enable FICC 
to settle the cash obligations of an Affiliated Family that would 
generate the largest aggregate payment obligation for FICC in the event 
of a default, as required by Rule 17Ad-22(e)(7) under the Exchange 
Act,\125\ FICC would require each Netting Member to contribute to the 
CCLF in proportion to the liquidity needs that such Netting Member 
presented to FICC over a six-month look-back period. More specifically, 
each Netting Member would be required to attest that they have 
incorporated into their liquidity planning their respective Individual 
Regular Amount, based on the liquidity need that they individually 
presented to FICC, up to $15 billion, during the six-month look-back 
period. In addition, any Netting Member that presented a liquidity need 
greater than $15 billion during the six-month look-back period also 
would be required to attest that they have incorporated into their 
liquidity planning an Individual Supplemental Amount, in proportion to 
the individual liquidity need that the Netting Member presented above 
$15 billion.
---------------------------------------------------------------------------

    \125\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

    The Commission understands that the allocation and impact of the 
costs of complying with the CCLF would depend in part on each Netting 
Member's specific business activity and that some firms can fulfill 
CCLF obligations at lower cost than others. As a result, establishing a 
liquidity facility

[[Page 55434]]

for FICC could impose a competitive burden on certain groups of Netting 
Members that stand to incur higher relative costs because of the design 
of the facility or the Netting Members' business choices. However, as 
discussed below, the Commission believes that any competitive burden 
imposed by the CCLF would be necessary or appropriate to further the 
purposes of the Exchange Act.\126\
---------------------------------------------------------------------------

    \126\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    ICBC suggests that the CCLF is not necessary to mitigate FICC's 
liquidity risk because FICC's current ``time proven'' risk models are 
sufficient to address such risk.\127\ Similarly, Ronin claims that 
smaller members have presented ``no liquidity risk to FICC'' \128\ 
because, for the period of March 31, 2016 to March 31, 2017, the peak 
liquidity need of 53 of the 103 GSD Netting Members did not exceed the 
amount of cash in the GSD clearing fund.\129\
---------------------------------------------------------------------------

    \127\ ICBC Letter I at 3.
    \128\ Ronin Letter II at 2-3; Ronin Letter IV at 1, 7.
    \129\ Ronin Letter II at 3.
---------------------------------------------------------------------------

    Moreover, both Ronin and ICBC suggest that the burdens on 
competition imposed by the proposal are unnecessary due to 
characteristics of the government securities market and the risk 
profile of U.S. government securities. They suggest that the scenario 
the CCLF is intended to address (i.e., an inability to access liquidity 
via the U.S. government securities repo market) is implausible \130\ 
and that repo transactions in U.S. government securities should be 
exempted from FICC's liquidity requirements because they are a ``flight 
to quality asset.'' \131\ Additionally, Ronin argues that FICC only 
proposed the CCLF to harmonize the GSD Rulebook with the MBSD Rulebook, 
despite the different risk profiles of the underlying products, and 
states that it does not believe that treasuries and mortgage-backed 
securities should share the same liquidity plan.\132\ Ronin suggests 
that FICC's liquidity plan should instead follow the model of NSCC's 
Supplemental Liquidity Deposits (``SLD'') liquidity plan.\133\ Finally, 
Ronin suggests that if FICC were truly interested in mitigating 
liquidity risk, instead of the CCLF, FICC would place a hard cap on the 
maximum liquidity exposure allowable for each Netting Member.\134\
---------------------------------------------------------------------------

    \130\ Ronin Letter II at 4-5; Ronin Letter III at 4-6; Ronin 
Letter IV at 5-6; ICBC Letter I at 3; ICBC Letter II at 4; ICBC 
Letter III at 3.
    \131\ ICBC Letter II at 2.
    \132\ Ronin Letter III at 2.
    \133\ Ronin Letter I at 7; Ronin Letter II at 4; Ronin Letter IV 
at 6-7; see Notice of No Objection to Advance Notice Filing, as 
Modified by Amendment Nos. 1, 2, and 3, to Institute Supplemental 
Liquidity Deposits to Its Clearing Fund Designed to Increase 
Liquidity Resources to Meet Its Liquidity Needs, Securities Exchange 
Act Release No. 34-71000 (Dec. 5, 2013), 78 FR 75400 (Dec. 11, 2013) 
(SR-NSCC-2013-802); Order Approving Proposed Rule Change, as 
Modified by Amendment Nos. 1, 2, and 3, to Institute Supplemental 
Liquidity Deposits to Its Clearing Fund Designed to Increase 
Liquidity Resources to Meet Its Liquidity Needs, Securities Exchange 
Act Release No. 34-70999 (Dec. 5, 2013), 78 FR 75413 (Dec. 11, 2013) 
(SR-NSCC-2013-02) (collectively, ``SLD Rule'').
    \134\ Ronin Letter II at 4.
---------------------------------------------------------------------------

    In response to Ronin's assertion that smaller Netting Members do 
not present liquidity risk to FICC, FICC argues that all Netting 
Members present liquidity risk, which justifies a mutualized liquidity 
program like the CCLF.\135\ FICC further argues that although the peak 
liquidity need of 53 of the 103 GSD Netting Members did not exceed the 
amount of cash in the GSD clearing fund, there were approximately 50 
Netting Members whose peak liquidity needs did exceed the amount of 
cash in the clearing fund, and a failure of one such Netting Member 
could require FICC to access additional liquidity tools.\136\ Because 
all Netting Members present liquidity risk, FICC argues that a 
mutualized liquidity pool, funded by each Netting Member in an amount 
relative to the liquidity risk each Netting Member presents to FICC, is 
warranted.\137\
---------------------------------------------------------------------------

    \135\ FICC Letter I at 6.
    \136\ Id.
    \137\ Id.
---------------------------------------------------------------------------

    FICC disagrees with the comments from Ronin and ICBC suggesting 
that the market conditions that would trigger a CCLF Event are not 
plausible.\138\ Whereas Ronin and ICBC note that the government 
securities markets functioned well during the 2008 crisis and its 
aftermath, FICC responds by highlighting several extraordinary actions 
taken by the Board of Governors of the Federal Reserve System 
(``Federal Reserve'') to support the government securities markets at 
that time, such as: (1) Establishing the Term Auction Facility, Primary 
Dealer Credit Facility, Term Securities Lending Facility, and bilateral 
currency swap agreements with several foreign central banks; (2) 
providing liquidity directly to borrowers and investors in key credit 
markets; (3) expanding its open market operations, lowering longer-term 
interest rates; and (4) purchasing longer-term securities.\139\ FICC 
argues that many of the above-referenced actions may not be available 
to the Federal Reserve in a future crisis; therefore, FICC cannot 
assume that such actions would be available, sufficient, and/or timely 
in ensuring that FICC would be able to meet its liquidity 
requirements.\140\
---------------------------------------------------------------------------

    \138\ See FICC Letter II at 5-6; Ronin Letter II at 2, 4-5; ICBC 
Letter I at 1-3; ICBC Letter II at 1, 4; ICBC Letter III at 3-4; 
Ronin Letter IV at 5-6.
    \139\ FICC Letter II at 3.
    \140\ Id. at 5-6.
---------------------------------------------------------------------------

    In response to Ronin's initial argument that FICC should follow the 
model of NSCC's SLD liquidity plan instead of the CCLF, FICC explains 
that the CCLF is the preferred liquidity plan for FICC's purposes by 
highlighting an important distinction between the two liquidity 
plans.\141\ SLD requires mandated cash deposits from members during the 
normal course of business to meet NSCC's liquidity needs for both 
historical and future liquidity exposure, whereas the CCLF would allow 
FICC to access Netting Member financing on a contingent basis 
only.\142\ Thus, the CCLF would obviate the need for Netting Members to 
pre-fund their CCLF requirements (i.e., Netting Members would only need 
to attest that their liquidity plans enable them to meet CCLF 
obligations during a CCLF Event), reducing the impact on Netting 
Members' balance sheets relative to the alternative of a pre-funded 
liquidity requirement.\143\ Ronin counter-argues that non-bank Netting 
Members would indeed be required to ``pre-fund'' their CCLF obligations 
by obtaining a committed line of credit or utilizing one of the other 
methods FICC recommended.\144\
---------------------------------------------------------------------------

    \141\ FICC Letter I at 5.
    \142\ Id.
    \143\ Id.
    \144\ Ronin Letter IV at 7.
---------------------------------------------------------------------------

    The Commission believes that ICBC's assertion that the CCLF is 
unnecessary because U.S. Treasuries are a ``flight to quality asset'' 
\145\ ignores the fact that FICC is required to comply with Rule 17Ad-
22(e)(7) under the Exchange Act.\146\ That rule requires FICC to have 
policies and procedures for maintaining sufficient qualifying liquid 
resources to effect same-day settlement of payment obligations in the 
event of a default of the participant family with the largest aggregate 
payment obligation in extreme but plausible market conditions.\147\ 
Furthermore, the clearance and settlement of repo transactions in U.S. 
Treasuries are not exempted from FICC's obligations under the Exchange 
Act, or Rule 17Ad-22(e)(7) specifically, to manage its liquidity 
risk.\148\ Thus,

[[Page 55435]]

FICC has an obligation to ensure that it has policies and procedures 
for maintaining sufficient qualifying liquid resources pursuant to Rule 
17Ad-22(e)(7) at all times.\149\ The CCLF would help FICC meet that 
obligation, as it is designed to provide FICC with sufficient 
qualifying liquid resources to meet its settlement obligations in the 
event of the default of the Netting Member that presents FICC with its 
largest liquidity need. In addition, the Commission finds that the 
scenario the CCLF is intended to address (i.e., an inability to access 
liquidity via the U.S. government securities repo market) is plausible 
because plausible scenarios are not necessarily limited to only those 
events that have actually happened in the past, but could also include 
events that could potentially occur in the future, as also discussed in 
Section III.C., below, despite ICBC's and Ronin's assertions to the 
contrary.\150\
---------------------------------------------------------------------------

    \145\ ICBC Letter II at 2.
    \146\ 17 CFR 240.17Ad-22(e)(7).
    \147\ Id.
    \148\ In adopting Rule 17Ad-22(e)(7) under the Exchange Act, the 
Commission noted the potential risks associated with U.S. Treasury 
securities, stating that, ``given the quantity of [U.S. Treasury 
securities] financed by the largest individual dealers, fire-sale 
conditions could materialize if collateral is liquidated in a 
disorderly manner, which could prevent covered clearing agencies 
from meeting payment obligations.'' CCA Standards Adopting Release, 
81 FR at 70872-73.
    \149\ Id.
    \150\ ICBC Letter I at 3; ICBC Letter II at 4; ICBC Letter III 
at 3; Ronin Letter II at 4-5; Ronin Letter III at 4-6; Ronin Letter 
IV at 5-6.
---------------------------------------------------------------------------

    Moreover, the ``time proven'' FICC risk models highlighted by ICBC 
\151\ are risk models that relate to credit and market risk, whereas 
the CCLF is designed to address liquidity risk--a separate category of 
risk. Similarly, in response to Ronin's claim that smaller Netting 
Members pose no liquidity risk to FICC \152\ because the cash component 
to the GSD clearing fund has been sufficient to cover the peak 
liquidity need of 53 of 103 GSD Netting Members over the given 
period,\153\ the Commission notes that the GSD clearing fund is 
calculated and collected to address credit and market risk (i.e., the 
risk that a Netting Member defaults on its financial obligations to 
FICC and the risk of losses to FICC in its liquidation of the defaulted 
Netting Member's trading portfolio arising from movements in market 
prices), not liquidity risk (i.e., the risk that a Netting Member's 
default would prevent FICC from meeting its cash settlement obligations 
when due). Although the clearing fund could be used to help address 
FICC's liquidity needs, it is not designed to do so. Nor is it designed 
to address both FICC's liquidity needs and its exposure to credit and 
market risk simultaneously.\154\ In the event of a Netting Member 
default, which itself could deplete the relevant portion of the 
clearing fund, FICC's resultant liquidity needs could alone exceed the 
amount available in the GSD clearing fund. In addition, the composition 
of the clearing fund, including the cash component, varies over time in 
a manner not related to FICC's liquidity risk exposures.
---------------------------------------------------------------------------

    \151\ ICBC Letter I at 3.
    \152\ Ronin Letter II at 2-3; Ronin Letter IV at 1, 7.
    \153\ Ronin Letter II at 3.
    \154\ This design is consistent with Commission requirements for 
certain clearing agencies, such as FICC, that provide central 
counterparty services. Exchange Act Rule 17Ad-22(e)(4)(v) requires a 
covered clearing agency to ``maintain and enforce written policies 
and procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, 
including by maintaining the financial resources required under 
paragraphs (e)(4)(ii) and (iii) of this section, as applicable, in 
combined or separately maintained clearing or guaranty funds.'' 17 
CFR 240.17Ad-22(e)(4)(v). See also GSD Rule 4, supra, note 10. FICC 
is a covered clearing agency because it has been designated 
systemically important by the Financial Stability Oversight Council. 
See 17 CFR 240.17Ad-22(a)(5).
---------------------------------------------------------------------------

    Furthermore, the cash in FICC's clearing fund may not always be 
sufficient to cover the peak liquidity needs of smaller members, as 
suggested by Ronin.\155\ As a central counterparty, FICC is predicated 
on mutualizing the risks presented by its membership. Because all 
Netting Members present liquidity risk to FICC, FICC has designed the 
proposal so that all Netting Members must contribute to the mutualized 
liquidity resource that is the CCLF. Only requiring larger Netting 
Members to contribute to the CCLF would allow, therefore, certain firms 
to derive the benefits of clearing without incurring the costs 
associated with mitigating the liquidity risk they present.\156\ The 
Commission believes FICC appropriately sought to mitigate the relative 
burdens on Netting Members that present relatively less liquidity risk 
to FICC by only requiring them to contribute their allotted share of 
the Aggregate Regular Amount, which is allocated to all firms. Only 
firms presenting FICC with a liquidity risk greater than $15 billion 
would be required to contribute to the Aggregate Supplemental Amount.
---------------------------------------------------------------------------

    \155\ Ronin Letter II at 2-3; Ronin Letter IV at 1, 7.
    \156\ Based on FICC's public financial disclosures and 
information made available to the Commission in its capacity as 
FICC's supervisory authority, the Commission understands that, when 
comparing the average size of the cash component of the GSD clearing 
fund to the liquidity needs presented by Netting Members, it is 
possible for a Netting Member that would not be subject to the 
Individual Supplemental Amount under the proposal to present 
liquidity needs to FICC in amounts greater than the cash component 
of the GSD clearing fund. See FICC Annual Financial Statements for 
2016 and 2015, available at http://www.dtcc.com/~/media/Files/
Downloads/legal/financials/2016/FICC-Annual-Financial-Statements-
2016-and-2015.pdf.
---------------------------------------------------------------------------

    Ronin argues that FICC should not model this GSD CCLF proposal 
after the similar MBSD rule because Ronin does not believe that 
treasuries and mortgage-backed securities should share the same 
liquidity plan.\157\ However, the two liquidity plans are not 
identical. Because the community of members that participates in MBSD 
is different from the community that participates in GSD, the two 
liquidity plans vary from each other in terms of how the particular 
risks and business models presented by those respective communities are 
treated.\158\ And, given that both MBSD and GSD clear mortgage-backed 
securities transactions, any similarities shared by the two plans are 
not unreasonable. Ultimately, the Commission does not believe that the 
similarity of certain aspects of the Proposed Rule Change to aspects of 
another existing liquidity plan in a separate service line of FICC, in 
and of itself, renders this proposal inconsistent with the Exchange 
Act.
---------------------------------------------------------------------------

    \157\ Ronin Letter III at 2.
    \158\ See Section 2a of Rule 17 of MBSD Rules, available at 
www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_rules.pdf. In particular, Section 2a(c) of Rule 17 groups 
MBSD members into bank and non-bank categories, whereas the Proposed 
Rule Change does not distinguish between bank or non-bank status but 
rather applies the Tier 1 and Tier 2 liquidity need-based categories 
described above. Similarly, Section 2a(b)(v) of Rule 17 describes 
certain obligations that apply to MBSD bank members but not to MBSD 
non-bank members, whereas the Proposed Rule Change does not include 
a similar feature based on Netting Member status as a bank or non-
bank.
---------------------------------------------------------------------------

    Ronin suggests that the imposition of a hard cap on the maximum 
liquidity exposure allowable for each Netting Member ``would directly 
mitigate FICC's liquidity risk and preclude any need for a liquidity 
plan.'' \159\ However, under Section 19(b)(2)(C), if a proposed rule is 
otherwise consistent with the requirements of the Exchange Act and the 
rule and regulations thereunder, the Commission must approve it unless 
the existence of alternatives identified by commenters renders it 
inconsistent with the Act.\160\ Neither Ronin nor any other commenter 
has explained how a hard cap could be implemented by FICC in a way that 
would render the current proposal inconsistent with the Exchange Act. 
Nor does the Commission have a basis to conclude that it would.
---------------------------------------------------------------------------

    \159\ Ronin Letter II at 4.
    \160\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    Ronin states that, assuming a hard cap is ``unpalatable,'' another 
alternative to the CCLF would be for FICC to model a liquidity plan 
based on NSCC's SLD requirements, which excludes smaller

[[Page 55436]]

netting members.\161\ SLD operates in a manner whereby NSCC collects 
mandated cash deposits from its members during the normal course of 
business of an options expiry period \162\ to meet NSCC's liquidity 
needs during, and only during, that period.\163\ In contrast, the CCLF 
would allow FICC to access Netting Member financing on a contingent 
basis, which means that Netting Members would not be required to 
provide FICC with pre-funded resources to meet their potential future 
CCLF obligations, as suggested by Ronin.\164\ Moreover, the CCLF is 
designed to address FICC's liquidity needs at all times, not just 
during discrete, monthly periods.
---------------------------------------------------------------------------

    \161\ Ronin Letter I at 7; Ronin Letter II at 4; Ronin Letter IV 
at 6-7; see SLD Rule, supra note 133.
    \162\ See SLD Rule, supra note 133.
    \163\ FICC Letter I at 5; Ronin Letter IV at 7. See also SLD 
Rule, supra note 133.
    \164\ See Notice, 82 FR at 14408.
---------------------------------------------------------------------------

    In light of these differences, the Commission agrees with FICC that 
the CCLF represents a reasonable method of ensuring that FICC can meet 
its liquidity obligations, and that the possibility of a hard cap or an 
SLD-modeled alternative does not render CCLF inconsistent with the 
Exchange Act.\165\ Moreover, CCLF, like SLD, is designed to place the 
largest funding obligations on members with the largest liquidity 
needs. Specifically, SLD applies to the NSCC Clearing Members that 
present NSCC with the largest liquidity need.\166\ Although all FICC 
GSD Netting Members would have a CCLF obligation, the majority of the 
total CCLF obligation would be borne by the Netting Members that 
present the largest liquidity needs.\167\
---------------------------------------------------------------------------

    \165\ Section 19(b)(2)(C) of the Exchange Act directs the 
Commission to approve a proposed rule change of a self-regulatory 
organization if the change is consistent with the requirements of 
the Exchange Act and the rule and regulations thereunder applicable 
to such organization. 15 U.S.C. 78s(b)(2)(C). Therefore, the 
Commission is required to approve the proposal unless the existence 
of alternatives identified by commenters renders the proposal 
inconsistent with the Exchange Act.
    \166\ See SLD Rule, supra note 133.
    \167\ For example, the Aggregate Supplemental Amount would have 
been approximately 80 percent of the total CCLF obligation, based on 
the six-month look-back period of July 1, 2016 to December 31, 2016. 
Notice, 82 FR at 14405.
---------------------------------------------------------------------------

    Although Ronin argues that in meeting their CCLF obligation, large 
Netting Members that have access to the Federal Reserve Discount Window 
could merely ``footnote the liability at no cost'' or simply state that 
they are ``good for it,'' \168\ the ability of some Netting Members to 
potentially access the Federal Reserve Discount Window as a means of 
funding their CCLF obligations does not render the proposal 
inconsistent with the Exchange Act. FICC has made its central 
counterparty services accessible to a large and diverse population of 
entities, including banks and registered broker-dealers. As such, each 
Netting Member satisfies the obligations of FICC membership (including 
financial risk management obligations) and accesses the benefits of 
central clearing subject to its own specific business model and 
regulatory framework, which can include various means of access to 
funding. Consistent with this general principle, the Proposed Rule 
Change does not prescribe a specific means by which any one Netting 
Member or group of Netting Members must satisfy their CCLF obligation. 
Rather, the proposal provides flexibility to account for FICC's diverse 
membership, enabling Netting Members to apply a funding mechanism that 
fits their specific business needs and regulatory framework.
---------------------------------------------------------------------------

    \168\ Ronin Letter I at 5; Ronin Letter III at 2; Ronin Letter 
IV at 1, 6-7.
---------------------------------------------------------------------------

    Ronin and ICBC also describe several concerns that they believe 
would result from the proposal's impact on competition. ICBC argues 
that the proposal 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: (i) Inhibiting competition; 
(ii) increasing market concentration; (iii) increasing FICC's credit 
exposure to its largest participant families; and (iv) driving smaller 
Netting Members to clear transactions bilaterally instead of through a 
central counterparty.\169\ Similarly, Nasdaq suggests that the costs 
associated with the CCLF would increase the cost of FICC membership, 
which may have an effect on the ``ecosystem'' of the U.S. Treasury 
market.\170\
---------------------------------------------------------------------------

    \169\ ICBC Letter I at 2-6; ICBC Letter III at 2-3. Like Ronin, 
the ICBC Letters I and III also argue that increased costs to 
Netting Members from the CCLF could inhibit competition by forcing 
smaller Netting Members to exit the clearing business or terminate 
their membership with FICC. ICBC Letter I at 2-4; ICBC Letter III at 
3.
    \170\ See Nasdaq Letter at 2-3.
---------------------------------------------------------------------------

    In response to Ronin's concerns that the CCLF could cause a 
reduction in the population of Netting Members clearing through FICC, 
decreasing competition and concentration risk, FICC states that: (i) It 
does not wish to force any Netting Members to clear through larger 
institutions or exit the business as a result of the Proposed Rule 
Change; \171\ and (ii) Ronin merely asserts that such negative results 
``may or could'' happen, without providing substantive support for 
those concerns.\172\ FICC argues that the proposal includes provisions 
that will assist Netting Members in monitoring and managing their 
liquidity risk.\173\ For example, FICC will provide each Netting Member 
with a daily liquidity funding report, and during the 12-month period 
before the CCLF is implemented, FICC will provide Netting Members with 
information (e.g., estimates of their Individual Total Amounts) that 
will allow Netting Members to assess the impact of their CCLF 
requirements and make any changes they deem necessary to lower their 
required contribution amounts.\174\ However, both Ronin and ICBC argue 
that the liquidity funding report would be of little or no use to 
Netting Members because the report would not provide information on 
FICC's future Historical Cover 1 Liquidity Requirement.\175\ FICC 
responds by clarifying that the liquidity funding report would indeed 
provide Netting Members with daily information, including information 
on FICC's Historical Cover 1 Liquidity Requirement, enabling Netting 
Members to monitor their liquidity exposure as well as FICC's 
regulatory liquidity requirements.\176\
---------------------------------------------------------------------------

    \171\ FICC Letter I at 7.
    \172\ FICC Letter II at 6.
    \173\ Id.; Notice, 82 FR at 14407-09.
    \174\ Notice, 82 FR at 14407-09.
    \175\ Ronin Letter IV at 4-5; ICBC Letter III at 3.
    \176\ FICC Letter II at 4.
---------------------------------------------------------------------------

    FICC also suggested a variety of methods for Netting Members to 
comply with their CCLF obligations at a reasonable cost, including: (i) 
Using a one-month term repo arrangement with an overnight reverse repo 
arrangement, which FICC estimates would cost an average of 4 basis 
points (``bps'') (or $40,000 per $100 million of repo notional trade 
amount) annualized; (ii) obtaining other external liquidity 
arrangements; (iii) securing intercompany liquidity agreements; (iv) 
and increasing capital allocation for the contingent exposure.\177\ 
Ronin argues that FICC underestimates the cost of using a one-month 
repo and overnight reverse repo, suggesting that the cost during the 
2008 financial crisis averaged 37 bps, and questioning whether such 
arrangements would even be available during a future financial 
crisis.\178\ Ultimately, FICC states that the CCLF is designed to 
mutualize GSD's liquidity risk, and that all Netting Members should 
support the potential liquidity risk created by their trading 
activity.\179\ FICC believes that CCLF obligations are allocated 
appropriately, and Netting Members are in the best position to monitor 
and manage their liquidity risk

[[Page 55437]]

in a manner that would not cause them to exit FICC or the 
business.\180\
---------------------------------------------------------------------------

    \177\ FICC Letter II at 2-3.
    \178\ Ronin Letter IV at 2-4.
    \179\ FICC Letter II at 6.
    \180\ FICC Letter I at 7.
---------------------------------------------------------------------------

    Ronin and ICBC further argue that the possibility of a reduced 
Netting Member population resulting from the possible costs associated 
with complying with the proposal could, in turn, lead to larger 
problems, such as: (i) Increasing the size of FICC's exposure to those 
Netting Members that generate the largest liquidity needs for FICC 
(because some of the departed Netting Members could become customers 
of, and clear their transactions through, such remaining Netting 
Members); (ii) increasing Netting Member concentration risk at FICC due 
to the reduced overall population of Netting Members following the 
implementation of the CCLF; and (iii) increasing systemic risk because 
of the increased exposure and concentration risks described above.\181\
---------------------------------------------------------------------------

    \181\ ICBC Letter I at 2, 6; ICBC Letter II at 2-3; ICBC Letter 
IV at 3-4; Ronin Letter I at 1-9; Ronin Letter II at 1-5. In 
addition to the commenters' arguments regarding competition, Ronin 
also argued that a separate FICC proposal to expand FICC's Sponsored 
Membership program (Securities Exchange Act Release No. 80563 (May 
1, 2017), 82 FR 21284 (May 5, 2017) (SR-FICC-2017-003)) could 
increase FICC's Historical Cover 1 Liquidity Requirement, and 
thereby ``force smaller Netting Members to subsidize an increasing 
[CCLF] liquidity requirement.'' Ronin Letter I at 6. As stated in 
FICC Letter I, FICC responded to Ronin's concerns regarding the 
expansion of the Sponsored Membership program in a separate response 
letter as part of the notice and comment for that proposal. FICC 
Letter I at 9. See letter from Murray Pozmanter, Managing Director, 
Head of Clearing Agency Services, FICC, dated April 17, 2017, to 
Robert W. Errett, Deputy Secretary, Commission, available at https://www.sec.gov/comments/sr-ficc-2017-003/ficc2017003.htm. In that 
letter, FICC stated its belief that it would be unlikely for 
Sponsored Member activity to increase FICC's Historical Cover 1 
Liquidity Requirement because the Sponsored Membership program is 
generally used to facilitate short-term cash investments. Id. at 4. 
Moreover, the two-tiered CCLF proposal means that only Netting 
Members with liquidity needs beyond $15 billion would be required to 
contribute to an increased Historical Cover 1 Liquidity Requirement 
(i.e., only such larger Netting Members would be subject to 
Individual Supplemental Amounts). Id. at 4-5. The Commission 
approved FICC's proposal to expand its Sponsored Membership program 
on May 1, 2017. See Securities Exchange Act Release No. 80563 (May 
1, 2017), 82 FR 21284 (May 5, 2017) (SR-FICC-2017-003). In that 
approval order, the Commission stated that while Sponsored Members 
would not be required to contribute to the CCLF, those 
responsibilities would be borne by the relevant Sponsoring Member. 
Id. at 21286.
---------------------------------------------------------------------------

    In response to the assertion that the CCLF could increase systemic 
risk by forcing smaller Netting Members to clear their transactions 
through larger Netting Members or exit GSD, FICC argues that the 
proposal would actually reduce systemic risk.\182\ FICC states that it 
plays a critical role for the clearance and settlement of securities 
transactions in the U.S., and, in that role, it assumes risk by 
guaranteeing the settlement of the transactions it clears.\183\ By 
providing FICC with committed liquidity to meet its settlement 
obligations to non-defaulting members during extreme market stress, 
FICC asserts that the CCLF would promote settlement finality to all 
Netting Members, regardless of size, and the safety and soundness of 
the securities settlement system, thereby reducing systemic risk.\184\
---------------------------------------------------------------------------

    \182\ FICC Letter I at 7-8.
    \183\ Id.
    \184\ Id.
---------------------------------------------------------------------------

    ICBC argues that the CCLF could 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.\185\ ICBC 
further argues that the CCLF could cause traders with hedged positions 
to reduce market activity, which could lead to reduced liquidity, 
inefficient pricing, and an increased likelihood of disruptions in the 
U.S. government securities markets.\186\ ICBC raises an additional 
concern that the CCLF could result in FICC's refusal to clear certain 
trades, thereby increasing the burden on The Bank of New York Mellon 
(hereinafter, ``BONY'' as referred to by ICBC), the only private bank 
that clears a large portion of U.S. government securities.\187\ 
Separately, ICBC questions whether the proposal is operationally 
feasible because it does not consider possible limitations that may 
manifest due to certain internal risk and operational requirements that 
BONY could apply in its role as clearing bank for FICC, as well as the 
systemic risks that may potentially result from such operational 
limitations.\188\ Finally, ICBC argues that the CCLF would effectively 
drain liquidity from other markets by requiring more liquidity to be 
available to FICC than is necessary.\189\
---------------------------------------------------------------------------

    \185\ ICBC Letter I at 3; ICBC Letter III at 4.
    \186\ ICBC Letter I at 4; ICBC Letter III at 3.
    \187\ ICBC Letter I at 2, 5; ICBC Letter II at 3.
    \188\ ICBC Letter II at 2-4. The Commission understands ICBC's 
reference to BONY as FICC's clearing bank to mean BONY's role in 
providing both the cash lender and the cash borrower with certain 
operational, custodial, collateral valuation, and other services to 
facilitate the repo transactions. For example, BONY 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 
make the collection and transfer of collateral that may be required 
under the terms of the repo transaction. See Federal Reserve Bank of 
New York, Tri-Party Repo Infrastructure Reform, https://www.newyorkfed.org/medialibrary/media/banking/nyfrb_triparty_whitepaper.pdf (last visited November 10, 2017).
    \189\ ICBC Letter I at 5; ICBC Letter III at 2; see also Ronin 
Letter II at 4.
---------------------------------------------------------------------------

    In response to comments that the CCLF would cause a material 
negative effect on the government securities markets and would drain 
liquidity from the limited amount of liquidity available in the market, 
FICC reiterates that the term repo costs and other suggested actions to 
reduce peak liquidity exposure would enable Netting Members to comply 
with CCLF obligations at a reasonable cost, with no material negative 
effects on the broader government securities market.\190\
---------------------------------------------------------------------------

    \190\ FICC Letter II at 4-5.
---------------------------------------------------------------------------

    Ronin argues that the CCLF would impose an unfair burden by forcing 
smaller Netting Members to subsidize the ``outsized liquidity risks'' 
posed by the largest Netting Members, and that the proposal would do 
nothing to discourage an increase in FICC's Historical Cover 1 
Liquidity Requirement.\191\ Similarly, Ronin argues that CCLF is solely 
designed to protect FICC from the liquidity needs presented by global 
systemically important banks, and not smaller Netting Members.\192\
---------------------------------------------------------------------------

    \191\ Ronin Letter I at 2; Ronin Letter II at 2-3; Ronin Letter 
III at 6; Ronin Letter IV at 1, 7.
    \192\ Ronin Letter I at 2-3.
---------------------------------------------------------------------------

    FICC disagrees with the commenters' assertions that the CCLF would 
require smaller Netting Members to subsidize the ``outsized liquidity 
risks'' posed by the largest Netting Members (i.e., global systemically 
important banks), and that the proposal would do nothing to discourage 
an increase in FICC's Historical Cover 1 Liquidity Requirement. FICC 
argues that the CCLF is appropriately designed so that: (1) Each 
Netting Member's CCLF requirement would be a function of the liquidity 
risk that the Netting Member's trading activity presents to FICC; (2) 
citing supporting data, the allocation of CCLF requirements to each 
Netting Member would be a fraction of the Netting Member's peak 
liquidity exposure that it presents to FICC; and (3) Netting Members 
that generate higher liquidity needs would be allocated higher CCLF 
requirements, thus minimizing the burden on smaller Netting 
Members.\193\ Additionally, FICC argues that bank capital requirements 
force banks to maintain a minimum ratio of capital to assets based on 
the underlying risk exposure of those assets.\194\ Thus, large bank 
Netting Members with high CCLF requirements will have an incentive to 
limit their liquidity needs because they would be required to hold 
capital for their contingent exposure.\195\
---------------------------------------------------------------------------

    \193\ FICC Letter I at 3-4.
    \194\ Id. at 5.
    \195\ Id.

---------------------------------------------------------------------------

[[Page 55438]]

    In response to Ronin's concern that the CCLF could cause FICC's 
liquidity needs to grow, FICC states that 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.\196\ 
Specifically, FICC states that during its test period, which spanned 
from December 1, 2016 to January 31, 2017, participating Netting 
Members voluntarily adjusted their settlement behavior and settlement 
patterns to identify opportunities to reduce their CCLF 
requirements.\197\ According to FICC, the test resulted in an 
approximate $5 billion reduction in GSD's peak Historical Cover 1 
Liquidity Requirement, highlighting that growth of the Historical Cover 
1 Liquidity Requirement could be limited under the proposal.\198\
---------------------------------------------------------------------------

    \196\ Id. at 8-9.
    \197\ Id. at 9-10.
    \198\ Id.
---------------------------------------------------------------------------

    Ronin and ICBC also argue that the proposal does not prescribe 
uniform compliance guidelines.\199\ Ronin adds that the proposal is 
discriminatory because some Netting Members are subject to different 
regulatory authorities that may take opposing positions on the 
permissibility of various CCLF compliance methods.\200\ Ronin and ICBC 
question whether Netting Members would have the ability to change their 
trading behavior to reduce their peak liquidity needs, and thereby, 
reduce their CCLF obligations, despite FICC's claims to the 
contrary.\201\ Specifically, Ronin and ICBC question the utility of the 
daily liquidity report to assist in reducing their liquidity needs 
because the report would not provide information on the peak liquidity 
need generated by the Affiliated Family to which FICC has the largest 
exposure or future settlement obligations.\202\ Similarly, Ronin and 
ICBC assert that the information in the report will have ``limited 
value'' and will ``not [be] particularly useful'' because the report 
will ``tell member firms, after the fact, what its requirement is,'' 
but it will not ``have any forecasting value.'' \203\ Finally, Ronin 
and ICBC argue that changes to Netting Member trading behavior would 
involve burdensome costs,\204\ the proposal would effectively require 
Netting Members to ``pre-fund'' their CCLF requirements,\205\ and 
Netting Member liquidity needs would actually increase during a 
financial crisis, contrary to FICC's assertion.\206\
---------------------------------------------------------------------------

    \199\ ICBC Letter III at 1; Ronin Letter III at 1; Ronin Letter 
IV at 2, 4, 6-7.
    \200\ Ronin Letter III at 2.
    \201\ Id. at 3; ICBC Letter III at 2-3.
    \202\ Ronin Letter III at 2-3; Ronin Letter IV at 5; ICBC Letter 
III at 3.
    \203\ See ICBC Letter III at 3; Ronin Letter III at 2-3.
    \204\ ICBC Letter III at 2-3.
    \205\ Ronin Letter IV at 7.
    \206\ Id. at 5.
---------------------------------------------------------------------------

    In response to comments that the proposal is unduly burdensome 
because it does not prescribe uniform compliance guidelines, FICC 
states that the proposal was specifically designed to not impose 
prescriptive rules regarding compliance methods in order to provide 
each Netting Member with the flexibility to consider methods that best 
suit its specific business, operating model, balance sheet, liquidity 
plan, and ownership structure.\207\ In addition, as mentioned above, 
FICC has suggested a variety of methods for Netting Members to comply 
with their CCLF obligations at a reasonable cost, including using a 
one-month term repo arrangement, obtaining other external liquidity 
arrangements, securing intercompany liquidity agreements, and 
increasing capital allocation for the contingent exposure.\208\
---------------------------------------------------------------------------

    \207\ FICC Letter II at 2-3.
    \208\ Id.
---------------------------------------------------------------------------

    After carefully considering the Proposed Rule Change and all 
comments received, the Commission finds that any aforementioned burden 
imposed by the proposed CCLF are necessary or appropriate in 
furtherance of the purposes of the Exchange Act. First, while the 
Commission acknowledges that the proposal may result in costs to 
Netting Members and other market participants, the proposal is designed 
to help ensure that FICC has sufficient qualifying liquid resources to 
cover the peak cash settlement obligations of the family of affiliated 
Netting Members that would generate the highest liquidity need for FICC 
in extreme but plausible market conditions, as required by Rule 17Ad-
22(e)(7) under the Exchange Act, as discussed below.\209\
---------------------------------------------------------------------------

    \209\ 17 CFR 240.17Ad-22(e)(7). In adopting Rule 17Ad-
22(e)(7)(i) under the Exchange Act, the Commission acknowledged in 
the CCA Standards Adopting Release that, regardless of whether CCAs 
choose to gather liquidity directly from members (e.g., via a 
mechanism such as the CCLF) or instead choose to rely on third-party 
arrangements, the costs of liquidity may be passed on to other 
market participants, eventually increasing transaction costs. CCA 
Standards Adopting Release, 81 FR at 70870. However, compliance with 
Rule 17Ad-22(e)(7)(i) may reduce the procyclicality of the CCA's 
liquidity demands, which may reduce costs to market participants in 
certain situations. Id. Accordingly, while the CCLF would impose 
costs on Netting Members, it does not render the proposal 
inconsistent with Rule 17Ad-22(e)(7)(i), or with the Exchange Act.
---------------------------------------------------------------------------

    Second, the CCLF would allocate FICC's Historical Cover 1 Liquidity 
Requirement in a manner that is efficient in the sense that the CCLF 
allocation mechanism varies Netting Members' liquidity obligations as a 
function of the varying magnitudes of liquidity demands that Netting 
Members present to FICC. More specifically, under the proposal, each 
Netting Member would have a responsibility towards the Aggregate 
Regular Amount (i.e., the first $15 billion of the Aggregate Total 
Amount) in proportion to the respective liquidity needs that they 
presented over the past six months, as described above. The remainder 
of the Aggregate Total Amount would be allocated only to those Netting 
Members that presented liquidity needs above $15 billion,\210\ using a 
tiered approach that requires greater CCLF commitments from Netting 
Members that have historically presented greater liquidity needs. The 
Commission believes these features of the proposal address concerns 
that the CCLF would force smaller Netting Members to subsidize the 
``outsized liquidity risks'' posed by the largest Netting Members. 
Additionally, by placing higher CCLF obligations on Netting Members 
that present greater liquidity needs, the proposal also addresses the 
concerns that the CCLF does nothing to limit the growth of FICC's 
liquidity requirements.
---------------------------------------------------------------------------

    \210\ As noted above, from 2015 to 2016, FICC observed that 85 
percent of Netting Members had liquidity needs of $15 billion or 
less. Notice, 82 FR at 14404.
---------------------------------------------------------------------------

    Third, FICC has designed the proposal to help enable all Netting 
Members to manage their commitments under the CCLF. As described above, 
FICC would provide each Netting Member with a daily report of: (1) The 
Netting Member's Individual Total Amount, Individual Regular Amount 
and, if applicable, its Individual Supplemental Amount; (2) FICC's 
Aggregate Total Amount, Aggregate Regular Amount, and Aggregate 
Supplemental Amount; and (3) FICC's regulatory liquidity requirements 
as of the prior business day. Although Ronin and ICBC dispute the 
usefulness of the report,\211\ the Commission understands that, 
generally, Netting Member's CCLF obligations would not be adjusted 
daily, but rather every six months, based on

[[Page 55439]]

the Netting Member's peak liquidity exposure that it presents to GSD 
and GSD's peak liquidity needs during the prior six-month period. Given 
that the liquidity report would provide this information to Netting 
Members each day, the Commission, believes that the liquidity report is 
designed to help Netting Members anticipate and manage their CCLF 
commitments before a Netting Member's CCLF obligation would change at 
the start of the next six-month period.
---------------------------------------------------------------------------

    \211\ See ICBC Letter III at 3; Ronin Letter III at 2-3.
---------------------------------------------------------------------------

    Additionally, the Commission believes that Netting Members would 
have the flexibility, if necessary, to consider ways in which they 
could adjust their trading behavior to take into account the ability to 
reduce their peak liquidity needs, and thereby, reduce their CCLF 
obligations.\212\ As noted by FICC, because CCLF contributions would be 
a function of each Netting Member's peak liquidity exposure to FICC, 
each Netting Member could reduce its CCLF obligations by altering its 
trading activity.\213\ For example, as noted by FICC, Netting Members 
looking to reduce their peak liquidity exposures could stagger the 
maturities of their repo trades by entering into term repos or modify 
their settlement activity via term repos or forward starting repos 
during peak exposure days that significantly increase their liquidity 
exposure to FICC.\214\ While ICBC and Ronin express concern about the 
potential cost of engaging in such altered trading behavior, as noted 
above, in adopting amendments to Rule 17Ad-22 under the Exchange Act, 
the Commission acknowledged that there would be costs associated with 
gathering the liquidity needed to comply with the Cover 1 Requirement 
of Rule 17Ad-22(e)(7), either directly from members or through third-
party arrangements, and that such costs may be passed on to other 
market participants, eventually increasing transaction costs.\215\ The 
Commission concluded that these costs were justified by the benefits 
related to liquidity risk management.\216\ Here, although Netting 
Members may incur some costs in establishing the ability to meet their 
respective CCLF requirements, each Netting Member would retain 
flexibility in how they secure such resources.
---------------------------------------------------------------------------

    \212\ Ronin Letter III at 3; ICBC Letter III at 2-3.
    \213\ See FICC Letter I at 3,7.
    \214\ See FICC Letter II at 4.
    \215\ CCA Standards Adopting Release, 81 FR at 70786, 70870.
    \216\ Id.
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    Furthermore, regarding Ronin's argument that obtaining a line of 
credit or rolling a one-month term repo to satisfy a CCLF obligation 
is, in effect, pre-funding the CCLF obligation,\217\ the Commission 
disagrees. The proposal would not require Netting Members to hold or 
provide to FICC their CCLF contribution (i.e., their Individual Total 
Amount) prior to a CCLF Event.\218\ Rather, the proposal would require 
Netting Members to attest to their ability to meet their CCLF 
requirement should FICC declare a CCLF Event. While obtaining of a line 
of credit or maintaining a one-month term repo in order for a Netting 
Member to make such an attestation is not costless, it is not the 
equivalent of pre-funding the entire CCLF requirement.
---------------------------------------------------------------------------

    \217\ Ronin Letter IV at 7.
    \218\ As Ronin notes, a Netting Member could pay for access to a 
committed line of credit to have sufficient resources to attest that 
it can meet its CCLF contribution requirement. Ronin Letter I at 5.
---------------------------------------------------------------------------

    In response to Ronin's and ICBC's contention that the attestation 
requirement is unduly burdensome because it does not prescribe uniform 
compliance guidelines,\219\ FICC explained that the attestation 
requirement was designed to afford each Netting Member the flexibility 
to consider methods to meet its CCLF obligations in the manner that 
also best suits its specific business, operating, and regulatory model, 
as well as applicable balance sheet, liquidity plan, and ownership 
structure. As FICC suggests, there are various methods that a Netting 
Member might utilize to fulfill its CCLF requirement, including: (1) 
Accessing the repo agreement market to borrow funds through a one-month 
term repo arrangement; (2) obtaining other external liquidity 
arrangements; (3) securing intercompany liquidity agreements; and (4) 
increasing capital allocation for the contingent exposure.\220\ The 
Commission finds that these suggestions are consistent with the fact 
that FICC has made its central counterparty services accessible to a 
large and diverse population of entities, including banks and 
registered broker-dealers. As such, each Netting Member satisfies the 
obligations of FICC membership (including financial risk management 
obligations) and accesses the benefits of central clearing subject to 
its own specific business model and regulatory framework.
---------------------------------------------------------------------------

    \219\ ICBC Letter III at 1; Ronin Letter III at 1; Ronin Letter 
IV at 2, 4, 6-7.
    \220\ See FICC Letter II at 3.
---------------------------------------------------------------------------

    Nor is the Commission persuaded that the Proposed Rule Change is 
unfairly discriminatory because it does not prescribe uniform 
compliance guidelines. While Ronin is correct that some Netting Members 
are subject to different regulatory authorities, its assertion that 
these authorities may have their own view as to how a Netting Member 
must account for its CCLF obligation is speculative.\221\ Moreover, to 
the extent that this does happen, it is not clear that it will have an 
unfairly discriminatory effect. Rather, given the different potential 
responses, the flexibility in the Proposed Rule Change seems reasonable 
and appropriate.
---------------------------------------------------------------------------

    \221\ Ronin Letter III at 2.
---------------------------------------------------------------------------

    The Commission is also unconvinced by Ronin's argument against the 
feasibility of FICC's suggestion that smaller Netting Members could 
comply with CCLF obligations by using a one-month term repo along with 
an overnight reverse repo.\222\ FICC estimates the cost of such a 
strategy at 4 bps annualized by calculating the spread between one-
month repo and overnight repo between 2012 and 2017.\223\ FICC uses 
this amount to estimate the ongoing costs faced by Netting Members that 
only would be obligated to contribute to the Aggregate Regular Amount. 
Ronin disagreed with the estimates provided by FICC, suggesting that 
the sample period chosen by FICC was a period of low and stable rates 
and the quotes used by FICC to produce its estimate are indicative and 
are not necessarily actionable.\224\ Using the rates provided by FICC, 
Ronin demonstrated an average spread between the one-month repo rate 
and the overnight repo rate of approximately 9.5 bps, with a standard 
deviation of approximately 13 bps, over the twelve months ending on 
September 29, 2017.\225\ To show the impact of transactions costs on 
the costs of FICC's suggested strategy, particularly during periods of 
financial stress, Ronin calculated an average bid-ask spread of 
approximately 37 bps for one-month repo transactions during the period 
between September 16, 2008 and November 14, 2008.\226\
---------------------------------------------------------------------------

    \222\ Ronin Letter IV at 2-4.
    \223\ FICC Letter II at 3.
    \224\ Ronin Letter IV at 2-4.
    \225\ Id.
    \226\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges that the costs of the repo financing 
strategy posed by FICC depends on certain macroeconomic environment and 
financial conditions, and that the difference between the bid price for 
securities to be repurchased in one-month and the ask price for 
securities to be repurchased overnight could be volatile. However, the 
costs of other compliance strategies that do not rely on repo markets 
would also depend on the prevailing macroeconomic and financial 
conditions present. As such, the

[[Page 55440]]

Commission believes that the concerns highlighted by Ronin for this 
purpose are not unique to smaller Netting Members, but instead are 
concerns that all Netting Members would consider in connection with any 
compliance strategy they choose. Furthermore, given FICC's large and 
diverse membership, Netting Members could access funding to satisfy 
CCLF obligations through various means depending on each Netting 
Member's specific business model and regulatory framework. Indeed, FICC 
has suggested several potential options.\227\ The differences in the 
estimated costs of one particular potential option do not necessarily 
imply that the burdens of the CCLF are not necessary or appropriate in 
furtherance of the purposes of the Act, or that such burdens 
disproportionately fall on some Netting Members and not others. 
Similarly, the Commission is unconvinced by Ronin's argument that CCLF 
obligations would be unduly burdensome because a one-month repo and 
overnight reverse repo arrangement might not be widely available during 
a financial crisis. Again, FICC did not suggest that financing option 
as the exclusive option for Netting Members; rather, it is as one of 
several suggested options for Netting Members to comply with CCLF 
obligations.\228\ In addition, and as discussed above, the Commission 
believes that the tiered structured of the CCLF, which requires greater 
CCLF commitments from Netting Members that have historically presented 
greater liquidity needs, is designed to help addresses concerns that 
the CCLF unduly burdens smaller Netting Members.
---------------------------------------------------------------------------

    \227\ See FICC Letter II at 3.
    \228\ See id.
---------------------------------------------------------------------------

    In addition, the concerns expressed by: (i) Ronin and ICBC 
regarding the potential for reductions in centrally cleared U.S. 
Treasury trading activity and barriers to entry for new Netting 
Members; and (ii) ICBC and Nasdaq suggesting that the Commission defer 
its decision on the Proposed Rule Change in order for detailed studies 
to be conducted on the CCLF and the U.S. Treasury market more broadly, 
as described above, are based upon a number of implicit but also 
specific assumptions about Netting Member behavior that the Commission 
finds unpersuasive, as detailed below.
1. Assumptions Regarding Market Participation
    The magnitude of the stated concerns regarding potential reductions 
in GSD's Netting Member population, with resultant increases in 
liquidity demands for FICC, concentration risk, and systemic risk are 
based upon an assumption regarding how existing Netting Members may 
participate in the cleared repo market following implementation of the 
CCLF. The concern that the most significant liquidity demands generated 
by particular Netting Members could increase because of the CCLF is 
based upon an assumption that departing Netting Members would choose to 
become customers of, and clear their repo transactions through, the 
remaining Netting Members that present the largest liquidity demands 
for FICC.
    Notwithstanding this concern, given the multitude of factors (e.g., 
capital requirements, balance-sheet restraints, cost of capital, 
business relations, etc.) that a departing Netting Member would 
consider in seeking to establish a clearing broker relationship with 
any remaining Netting Members, the Commission does not believe that the 
trading activity of departing Netting Members would necessary be 
cleared through the remaining Netting Members that present the largest 
liquidity need. For example, it is conceivable that it would be less 
expensive for departing Netting Members to clear through smaller 
Netting Members because Netting Members might pass the costs associated 
with the Individual Supplemental Amount on to their customers, and 
larger Netting Members might incur higher costs associated with funding 
their Individual Supplemental Amount. Moreover, for FICC's Historical 
Cover 1 Liquidity Requirement to increase under the scenario 
contemplated by Ronin and ICBC, not only would a departed Netting 
Member need to clear through the remaining Netting Member that 
generated FICC's Historical Cover 1 Liquidity Requirement, but it also 
would need to have contributed to that Netting Member having generated 
that Historical Cover 1 Liquidity Requirement.
    Even if the underlying assumption was supported, the extent to 
which increases in the largest liquidity demands for FICC would 
implicate systemic risk concerns would be mitigated by features of the 
CCLF itself: The amount of committed resources available under the CCLF 
is designed to support FICC's ability to meet liquidity obligations in 
the event of a default of the participant family that would generate 
the largest aggregate payment obligation.\229\ In other words, the 
amount of liquidity resources available to FICC under the CCLF would be 
scaled to FICC's largest liquidity demand, so that even if there were 
increased concentration and higher liquidity demands, the CCLF would 
continue to mitigate liquidity risks associated with the default of the 
participant or participant family that presented the largest liquidity 
need.
---------------------------------------------------------------------------

    \229\ FICC Letter I at 4.
---------------------------------------------------------------------------

2. Assumptions Regarding the Cost of Clearing
    The stated concerns regarding incentives for market participants to 
choose not to centrally clear their repo transactions through FICC and, 
instead, execute and manage their repo activity in the bilateral market 
are based upon certain assumptions regarding how market participants 
would consider the relative costs and benefits of engaging in cleared 
repo transactions at FICC versus bilateral repo transactions. ICBC 
argues that moving to bilateral repo transactions would be somewhat 
less efficient than continuing to clear repo transactions at FICC, but 
that it would be materially less expensive.\230\ However, this 
conclusion assumes that market participants would be willing to forgo 
certain benefits of FICC's central clearing process (e.g., centralized 
netting, reduction of exposures, and the elimination of the need to 
maintain multiple risk management and operational relationships with a 
multitude of counterparties), when moving to bilateral repo 
transactions, to avoid incurring the cost of committing to provide 
liquidity to FICC under the CCLF.\231\ Notwithstanding the concern 
raised, the Commission believes that central clearing at FICC would 
remain an attractive option for firms, after considering the above-
described benefits of central clearing, even if the CCLF were 
implemented.\232\
---------------------------------------------------------------------------

    \230\ ICBC Letter I at 3.
    \231\ The Commission notes that registered clearing agencies 
have become an essential part of the infrastructure of the U.S. 
securities markets. CCA Standards Adopting Release, 81 FR at 70849. 
The Commission believes that central clearing generally benefits the 
markets in which it is available. Id.
    \232\ As discussed in Section III.C., below, the Commission 
finds that the proposal is consistent with the liquidity 
requirements of Rule 17Ad-22(e)(7) under the Exchange Act. In 
considering the benefits, costs, and effects on competition, 
efficiency, and capital formation, the Commission expressly 
acknowledged in the CCA Standards Adopting Release that a covered 
clearing agency (``CCA'') might pass incremental costs associated 
with Rule 17Ad-22 compliance on to its members, which might cause 
certain members to choose to terminate their relationships with that 
CCA. CCA Standards Adopting Release, 81 FR at 70862, 65. The 
Commission nonetheless concluded that the costs were justified by 
the benefits relating to liquidity risk management. Id. at 70870. 
Even if CCLF costs drive certain Netting Members to clear their 
transactions bilaterally rather than through FICC, the Commission 
believes the proposal is consistent with Rule 17Ad-22(e)(7) under 
the Exchange Act.

---------------------------------------------------------------------------

[[Page 55441]]

3. Assumptions Regarding the Transfer of Risk
    ICBC raises the concern that the CCLF could transfer risk from FICC 
to BONY, the only private bank that acts as a tri-party custodian to a 
large portion of U.S. government securities, if FICC chooses to limit 
its risk by refusing to clear trades following a default. However, as 
proposed, the CCLF does not contemplate the refusal to clear trades 
following the default of a Netting Member, nor does FICC impose trading 
limits on Netting Members. In addition, the concerns raised by ICBC 
regarding transferred risk to BONY and operational limitations that 
BONY might impose on its customers, respectively, are based upon the 
assumption that the proposal would encourage market participants to 
move their repo transactions away from central clearing at FICC to the 
bilateral repo market. As already discussed above in Section III.B.3, 
the Commission does not believe this assumption is supported.
4. Assumptions Regarding the Impact to U.S. Government Securities 
Markets
    While the Commission acknowledges that the possible exit of traders 
that primarily hold hedged positions could potentially affect the 
liquidity of certain segments of the U.S. government securities 
markets, the argument that these impacts would necessarily result in 
inefficient pricing and an increased likelihood of disruption are not 
persuasive. While hedged positions in U.S. government securities may 
present only limited market risk to FICC, these positions nevertheless 
present liquidity demands. While the CCLF may raise the costs that 
certain market participants incur to hedge the market risks associated 
with providing liquidity, the Commission believes that these costs 
appropriately reflect the liquidity risks that these participants 
present to FICC, as the proposal is designed to be tailored to the 
liquidity risk presented, as described above; thus, it should not 
result in inefficient pricing, as a potential impact on pricing should 
appropriately reflect the relevant liquidity risks.
    Finally, in response to ICBC and Nasdaq's request that the 
Commission defer its decision on the proposal until there are further 
studies on the CCLF \233\ and the broader U.S. Treasury market,\234\ 
the Commission believes that, given the information and evidence 
already made available to the Commission in connection with this 
Proposed Rule Change, including responses to the request for comment in 
the OIP Extension, such studies are not necessary to make a finding 
that the Proposed Rule Change is consistent with the Exchange Act. 
First, in response to ICBC's comment that a review of the proposal 
should not be confined to the narrow question of whether the proposal 
would provide FICC with more liquidity,\235\ the Commission believes 
that it has not conducted such a narrow review in evaluating the 
proposal. To the contrary, as addressed throughout this Section III, 
the Commission has considered whether the proposal is consistent with 
the Exchange Act, including a review of (i) whether the proposal is 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, to assure the safeguarding of securities and 
funds which are in the custody or control of FICC or for which FICC is 
responsible, and, in general, protect investors and the public 
interest, as required by Section 17A(b)(3)(F) of the Exchange Act; 
\236\ (ii) whether the proposal imposes a burden on competition that is 
not necessary or appropriate in furtherance of the Exchange Act, as 
required by Section 17A(b)(3)(I) of the Exchange Act; \237\ (iii) and 
whether the proposal is consistent with the rules and regulations under 
the Exchange Act, such as Rule 17Ad-22(e),\238\ as required by Section 
19(b)(2)(C) of the Exchange Act.\239\ Second, with respect to the list 
of questions suggested by ICBC for further study regarding the broad, 
potential effects of the CCLF,\240\ those questions mirror the concerns 
raised throughout ICBC's three comment letters, which the Commission 
has considered and addressed in this Section III. Third, as early as 
September 18, 2013, FICC's parent company established a standing 
member-based advisory group, the Clearing Agency Liquidity Council 
(``CALC''), including both small and large Netting Members, as a forum 
to discuss liquidity-related matters.\241\ FICC engaged with its 
members, via the CALC, regarding the CCLF proposal throughout its 
design and development process, considering such wide-ranging issues as 
U.S. Treasury market structure dynamics, existing liquidity tools 
available in the market (and to FICC's parent company) to satisfy 
FICC's liquidity requirements, and potential alternative mechanisms 
such as the NSCC SLD and other liquidity plans.\242\ Ultimately, the 
CALC preferred the CCLF to the other options considered.\243\ Fourth, 
FICC conducted bilateral outreach with Netting Members regarding the 
CCLF over the past two years, including the distribution of impact 
studies, a CCLF test-period with certain members, and meetings to 
discuss liquidity drivers.\244\ Fifth, the Commission believes that 
approving the Proposed Rule Change now is appropriate and will not act 
as an impediment to conducting the studies of clearing arrangements and 
incentives in the U.S. Treasury markets as suggested by Nasdaq in its 
comments. In its comments, Nasdaq stated that the Proposed Rule Change 
will impact, perhaps dramatically, the ecosystem that the U.S. Treasury 
Department has already singled out as needing further study and reform 
and therefore the Commission should consider deferring any ruling on 
the Proposed Rule Change.\245\ The kind of study Nasdaq requests is 
broad and beyond the scope of this Proposed Rule Change, and the 
Commission does not believe it is necessary to preclude clearing 
agencies from charging fees or imposing other requirements on their 
members in an effort to comply with rules to which they are currently 
subject, prior to conducting such a wide-ranging study. Finally, 
Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Exchange Act and the rules and regulations thereunder.\246\ The 
Commission believes, for the reasons discussed above and below, that 
the current record is sufficient for the Commission to make such a 
finding, and the absence of further studies does not render the 
Proposed Rule Change inconsistent with the Exchange Act.
---------------------------------------------------------------------------

    \233\ See ICBC Letter I at 6; ICBC Letter II at 4; ICBC Letter 
III at 3-4.
    \234\ Nasdaq Letter at 3.
    \235\ See ICBC Letter I at 6; ICBC Letter III at 3-4.
    \236\ 15 U.S.C. 78q-1(b)(3)(F).
    \237\ 15 U.S.C. 78q-1(b)(3)(I).
    \238\ 17 CFR 240.17Ad-22(e).
    \239\ 15 U.S.C. 78s(b)(2)(C).
    \240\ See ICBC Letter I at 6; ICBC Letter III at 3-4.
    \241\ FICC Letter I at 8.
    \242\ Id.
    \243\ Id.
    \244\ FICC Letter I at 9.
    \245\ See Nasdaq Letter.
---------------------------------------------------------------------------

    For all of the above reasons, Commission believes that the Proposed 
Rule Change is consistent with Section 17A(b)(3)(I) of the Exchange 
Act, as the proposal would not impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.

[[Page 55442]]

C. Exchange Act Rule 17Ad-22(e)(7)

    The Commission believes that the proposed changes associated with 
the CCLF are consistent with the requirements of Rule 17Ad-22(e)(7) 
under the Exchange Act, 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.\247\
---------------------------------------------------------------------------

    \247\ 17 CFR 240.17Ad-22(e)(7). Although the commenters discuss 
the proposal in the context of Rule 17Ad-22(b)(3), the Commission 
has analyzed the proposal under Rule 17Ad-22(e)(7), which includes 
specific requirements related to the management of liquidity risk. 
As noted in the CCA Standards Adopting Release, Rule 17Ad-22(e) 
includes requirements intended to supplement the more general 
requirements in Rule 17Ad-22(b). See CCA Standards Adopting Release, 
81 FR at 70786.
---------------------------------------------------------------------------

    Specifically, Rule 17Ad-22(e)(7)(i) under the Exchange Act requires 
policies and procedures for 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.\248\ As described above, the CCLF 
would be a rules-based, committed repo facility, designed to provide 
FICC with a liquidity resource in the event that FICC's other liquidity 
resources prove insufficient during a Netting Member default. Moreover, 
the CCLF would be sized to meet GSD's peak liquidity need during the 
prior six months, plus an additional Liquidity Buffer.
---------------------------------------------------------------------------

    \248\ 17 CFR 240.17Ad-22(e)(7)(i).
---------------------------------------------------------------------------

    ICBC and Ronin argue, as summarized above, that FICC's current risk 
models are ``time proven'' and the scenario the CCLF is intended to 
address (i.e., an inability to access liquidity via the U.S. government 
securities repo market) is implausible.\249\ To support this position, 
ICBC and Ronin cite to the 2008 financial crisis, in which the repo 
market continued to function.\250\ Ronin also claims that smaller 
Netting Members have presented ``no liquidity risk to FICC'' \251\ 
because, for the period of March 31, 2016 to March 31, 2017, the peak 
liquidity need of 53 of the 103 GSD Netting Members did not exceed the 
amount of cash in the GSD clearing fund.\252\
---------------------------------------------------------------------------

    \249\ ICBC Letter I at 3; ICBC Letter II at 4; ICBC Letter III 
at 3; Ronin Letter II at 4-5; Ronin Letter III at 4-6; Ronin Letter 
IV at 5-6.
    \250\ ICBC Letter I at 2-3; Ronin Letter III at 5; Ronin Letter 
IV at 5-6.
    \251\ Ronin Letter II at 2-3; Ronin Letter IV at 1, 7.
    \252\ Ronin Letter II at 3.
---------------------------------------------------------------------------

    In response, FICC states that the Federal Reserve took several 
extraordinary actions at that time to support the government securities 
markets, such as: (1) Establishing the Term Auction Facility, Primary 
Dealer Credit Facility, Term Securities Lending Facility, and bilateral 
currency swap agreements with several foreign central banks; (2) 
providing liquidity directly to borrowers and investors in key credit 
markets; (3) expanding its open market operations, lowering longer-term 
interest rates; and (4) purchasing longer-term securities.\253\ FICC 
points out that many of the above-referenced actions would not be 
available to the Federal Reserve in a future crisis; therefore, FICC 
cannot assume that such actions would be available, sufficient, and/or 
timely in ensuring that FICC would be able to meet its liquidity 
requirements.\254\ Ronin counters FICC's argument by stating that the 
actions taken by the Federal Reserve after the 2008 crisis dealt with 
supporting the credit markets, which have little to do with U.S. 
Treasuries because they are not a credit product.
---------------------------------------------------------------------------

    \253\ FICC Letter II at 3.
    \254\ Id. at 5-6.
---------------------------------------------------------------------------

    Without taking a position on the performance of the U.S. Treasury 
markets during the 2008 financial crisis as a result of action taken or 
not taken by the Federal Reserve, the Commission believes that Ronin's 
argument fails to consider that extreme but plausible scenarios are not 
necessarily limited to only those events that have actually happened in 
the past, but could also include events that could potentially occur in 
the future. Moreover, the ``time proven'' FICC risk models highlighted 
by ICBC are risk models that relate to market risk (i.e., the risk of 
losses in a Netting Member's trading portfolio arising from movements 
in market prices), whereas the CCLF is designed to address liquidity 
risk (i.e., the risk that a Netting Member's default would prevent FICC 
from meeting its cash settlement obligations when they are due)--a 
separate category of risk that requires its own mitigation measures. 
Similarly, in response to Ronin's claim that smaller members have 
presented ``no liquidity risk to FICC'' \255\ because the cash 
component to the GSD clearing fund has been sufficient to cover the 
peak liquidity need of 53 of 103 GSD Netting Members over the given 
period,\256\ the GSD clearing fund is calculated and collected to 
address market risk, not liquidity risk, as discussed above. Also, 
reliance on the clearing fund exclusively to mitigate all of FICC's 
liquidity risk, including such risk presented by small Netting Members, 
could prove inadequate because the composition of the clearing fund, 
including the cash component, varies over time.
---------------------------------------------------------------------------

    \255\ Id. at 2-3; Ronin Letter IV at 1, 7.
    \256\ Ronin Letter II at 5-6.
---------------------------------------------------------------------------

    For these reasons, the Commission believes that the proposal is 
reasonably designed to help FICC effectively measure, monitor, and 
manage liquidity risk by helping FICC maintain sufficient qualifying 
liquid resources to settle the cash obligations of the GSD participant 
family that would generate the largest liquidity need in extreme but 
plausible market conditions, consistent with Rule 17Ad-22(e)(7)(i) 
under the Exchange Act.
    Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires policies and 
procedures for holding qualifying liquid resources sufficient to 
satisfy payment obligations owed to clearing members.\257\ Rule 17Ad-
22(a)(14) under the Exchange Act defines ``qualifying liquid 
resources'' to include, among other things, committed repo agreements 
without material adverse change provisions, that are readily available 
and convertible into cash.\258\ As described above, the proposed CCLF 
is designed to provide FICC with a committed repo facility to help 
ensure that FICC has sufficient, readily available liquid resources to 
meet the cash settlement obligations of the family of affiliated 
Netting Members generating the largest liquidity need. Therefore, the 
Commission believes that the proposal is consistent with Rule 17Ad-
22(e)(7)(ii) under the Exchange Act.\259\
---------------------------------------------------------------------------

    \257\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \258\ 17 CFR 240.17Ad-22(a)(14).
    \259\ Although Ronin and ICBC raised concerns regarding the cost 
of complying with the CCLF, the Commission, in adopting Rule 17Ad-
22(e)(7)(ii), acknowledged that CCAs could comply with Rule 17Ad-
22(e)(7)(ii) by requiring their members to act as counterparties in 
repurchase agreements, with members bearing the associated costs. 
See Ronin Letter I at 2; Ronin Letter II at 1-5; ICBC Letter I at 2-
4; CCA Standards Adopting Release, 81 FR at 70871.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(iv) under the Exchange Act requires policies and 
procedures for 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

[[Page 55443]]

its commitments to provide liquidity.\260\ As described above in 
Section II.D., FICC would require GSD Netting Members to attest that 
they have accounted for their potential Individual Total Amount, and 
FICC has had discussions with Netting Members regarding ways Netting 
Members, regardless of size or access to bank affiliates, can meet this 
requirement.\261\ Moreover, FICC proposes to conduct due diligence on a 
quarterly basis to assess each Netting Member's ability to meet its 
Individual Total Amount.\262\ According to FICC, this due diligence 
would include a review of all information that the Netting Member 
provided FICC in connection with its ongoing reporting requirements, as 
well as a review of other publicly available information.\263\
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    \260\ 17 CFR 240.17Ad-22(e)(7)(iv). As discussed in the CCA 
Standards Adopting Release, a key benefit of the due diligence 
provisions in Rules 17Ad-22(e)(7)(iv) and (v) is an increased level 
of assurance that liquidity providers would be able to supply 
liquidity on demand, while their costs include costs associated with 
new or updated policies and procedures, and with ongoing monitoring, 
compliance and testing of liquidity resources. CCA Standards 
Adopting Release, 81 FR at 70873.
    \261\ See FICC Letter I at 9.
    \262\ See Notice, 82 FR at 14407-08.
    \263\ Id.
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    Ronin's assertion that certain Netting Members could merely submit 
an attestation declaring that they ``are good for'' their CCLF 
contribution \264\ fails to account for the fact that, as described 
above, FICC would conduct its own due diligence to verify the support 
for each Netting Member's attestation. Specifically, on a quarterly 
basis, FICC would review all of the information that Netting Members 
provide in connection with their ongoing reporting obligations pursuant 
to the GSD Rules, and it would review other publicly available 
information.\265\ Therefore, the Commission believes that the proposal 
is consistent with Rule 17Ad-22(e)(7)(iv) under the Exchange Act.
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    \264\ Ronin Letter I at 5.
    \265\ See Notice, 82 FR at 14407-08.
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    Finally, Rule 17Ad-22(e)(7)(v) under the Exchange Act requires 
policies and procedures for maintaining and testing with each liquidity 
provider, to the extent practicable, FICC's procedures and operational 
capacity for accessing its relevant liquid resources.\266\ As described 
above, under the proposal, FICC would test its operational procedures 
for invoking a CCLF Event and require Netting Members to participate in 
such tests.\267\ Therefore, the Commission believes that the proposal 
is consistent with Rule 17Ad-22(e)(7)(v) under the Exchange Act.
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    \266\ 17 CFR 240.17Ad-22(e)(7)(v).
    \267\ Notice, 82 FR at 14407-08.
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IV. Conclusion

    Based on the foregoing, the Commission finds that the proposal is 
consistent with the requirements of the Exchange Act and in particular 
with the requirements of Section 17A of the Exchange Act and the rules 
and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\268\ that proposed rule change SR-FICC-2017-002 be, and 
it hereby is, APPROVED as of the date of this order.
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    \268\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\269\
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    \269\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-25145 Filed 11-20-17; 8:45 am]
 BILLING CODE 8011-01-P