[Federal Register Volume 84, Number 65 (Thursday, April 4, 2019)]
[Notices]
[Pages 13328-13332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06527]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85470; File No. SR-FICC-2018-013]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change To Expand Sponsoring Member
Eligibility in the Government Securities Division Rulebook and Make
Other Changes
March 29, 2019.
I. Introduction
On December 13, 2018, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2018-013 to expand sponsoring member eligibility and make other
changes.\3\ The proposed rule change was published for comment in the
Federal Register on December 31, 2018.\4\ On February 14, 2019, 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 and reopened the period for comment on the proposed rule
change.\5\ The Commission received five comment letters to the proposed
rule change,\6\ including a response letter from FICC. For the reasons
discussed below, the Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On December 13, 2018, FICC also filed the proposal contained
in the proposed rule change as advance notice SR-FICC-2018-802 with
the Commission pursuant to Section 806(e)(1) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act''), 12 U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i) of
the Act, 17 CFR 240.19b-4(n)(1)(i). As of February 11, 2019,
pursuant to Section 806(e)(1) of the Clearing Supervision Act, the
advance notice was deemed to not have been objected to by the
Commission. 12 U.S.C. 5465(e)(1); see Memorandum, Division of
Trading and Markets, U.S. Securities and Exchange Commission, to
File No. SR-FICC-2018-802, available at https://www.sec.gov/rules/sro/ficc-an/2019/ficc-2018-802-memo-deemed-approved.pdf.
\4\ Securities Exchange Act Release No. 84951 (December 21,
2018), 83 FR 67801 (December 31, 2018) (SR-FICC-2018-013)
(``Notice'').
\5\ Securities Exchange Act Release No. 85137 (February 14,
2019), 84 FR 5523 (February 21, 2019) (SR-FICC-2018-013).
\6\ See letter from Robert E. Pooler, Jr., Chief Financial
Officer, Ronin Capital, LLC, dated January 18, 2019, to Brent J.
Fields, Secretary, Commission (``Ronin Letter''); letter from James
Tabacchi, Chairman, Independent Dealer and Trade Association, dated
January 22, 2019, to Brent J. Fields, Secretary, Commission (``IDTA
Letter''); letter from Robert Toomey, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, dated January 22, 2019, to Brent J. Fields, Secretary,
Commission (``SIFMA Letter''); letter from Stephen John Berger,
Managing Director, Government & Regulatory Policy, Citadel, dated
January 30, 2019, to Brent J. Fields, Secretary, Commission
(``Citadel Letter''); and letter from Murray Pozmanter, Managing
Director, DTCC, dated February 4, 2019, to Brent J. Fields,
Secretary, Commission (``FICC Response Letter''). See comments on
the proposed rule change (SR-FICC-2018-013), available at https://www.sec.gov/comments/sr-ficc-2018-013/srficc2018013.htm. Because the
proposal contained in the proposed rule change was also filed as an
advance notice, supra note 3, the Commission is considering all
public comments received on the proposal regardless of whether the
comments were submitted to the advance notice or the proposed rule
change.
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II. Description of the Proposed Rule Change
FICC proposes to amend the FICC Government Securities Division
(``GSD'') Rulebook (``Rules'') \7\ to (i) allow a broader group of GSD
Netting Members \8\ to participate in FICC as Sponsoring Members,\9\
(ii) allow Sponsored Members to transact with Netting Members that are
not the Sponsoring Member through a certain omnibus account maintained
by the Sponsoring Member, and (iii) make certain conforming and
technical changes.
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\7\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf.
\8\ The term ``Netting Member'' is defined in FICC's GSD Rule 1
as a Member of FICC's Comparison System (i.e., the system of
reporting, validating, and matching the long and short sides of
securities trades to ensure that the details of such trades are in
agreement between the parties) and FICC's Netting System (i.e., the
system for aggregating and matching offsetting obligations resulting
from trades).
\9\ ``Sponsoring Membership'' is an existing program that allows
well-capitalized bank members to sponsor their eligible clients into
GSD Membership. Sponsored membership at GSD offers eligible clients
the ability to lend cash or eligible collateral via FICC-cleared
deliver-versus payment repo throughout the day. Sponsoring Member
banks facilitate their sponsored clients' GSD trading activity and
act as processing agents on their behalf for all operational
functions, including trade submission and settlement with FICC.
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A. The Proposed Expansion of Sponsored Member Eligibility
FICC proposes to broaden the group of GSD Netting Members that may
participate in FICC as Sponsoring Members. Currently, GSD Bank Netting
Members that are well-capitalized with at least $5 billion in equity
capital are permitted to serve as Sponsoring Members (``Category 1
Sponsoring Members'') and sponsor certain institutional firms into GSD
membership as Sponsored Members.\10\ A Sponsoring Member is permitted
to submit to FICC for comparison, novation, and netting certain types
of eligible transactions between itself and its Sponsored Members
(``Sponsored Member Trades'').\11\ For operational and administrative
purposes, FICC interacts solely with the Sponsoring Member as agent for
purposes of the day-to-day satisfaction of its Sponsored Members'
obligations to FICC, including the Sponsored Members' securities and
funds-only settlement obligations.\12\
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\10\ Notice, 83 FR at 67802; Rule 3A, Section 2, supra note 7.
\11\ Notice, 83 FR at 67802. FICC requires the Sponsoring Member
to establish an omnibus account at FICC for all of its Sponsored
Members' FICC-cleared activity (``Sponsoring Member Omnibus
Account''), which is separate from the Sponsoring Member's regular
netting account. Rule 1; Rule 3A, Section 10, supra note 7.
\12\ Notice, 83 FR at 67802; see Rule 3A, Sections 5, 6, 7, 8
and 9, supra note 7.
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FICC proposes to add a second category of Netting Members eligible
to become Sponsoring Members. This second category would include
Netting Members that are Tier One Netting Members (``Category 2
Sponsoring Members''),\13\ except for Inter-Dealer Broker (``IDB'')
Netting Members and Non-IDB Repo Brokers with respect to activity in
their segregated repo accounts.\14\ Category 2 Sponsoring Members could
include, for example, dealer Netting Members, Futures Commission
Merchant Netting Members, and foreign Netting Members.\15\
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\13\ The term ``Tier One Netting Member'' is designated in
FICC's GSD Rule 2A, supra note 7, as a non-registered investment
company Netting Member.
\14\ Notice, 83 FR at 67802.
\15\ Id.
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[[Page 13329]]
FICC stated that it did not include IDB Netting Members and Non-IDB
Repo Brokers as a $5 million cap applies to their respective loss
allocation obligations to FICC under Rule 4, Section 7, which does not
apply to other types of Netting Members.\16\ As a Sponsoring Member's
loss allocation obligations could otherwise exceed $5 million, FICC
stated that it would not be appropriate to allow either IDB Netting
Members or Non-IDB Repo Brokers to be eligible to become Category 2
Sponsoring Members. However, FICC stated that to the extent an IDB
Netting Member or Non-IDB Repo Broker also has another type of Netting
Member status with respect to which it is not subject to the loss
allocation cap described above, such IDB Netting Member or Non-IDB Repo
Broker could apply to become a Category 2 Sponsoring Member under
another Netting Member status.\17\
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\16\ Id. Section 7 of Rule 4, supra note 7, provides that ``an
Inter-Dealer Broker Netting Member, or a Non-IDB Repo Broker with
respect to activity in its Segregated Repo Account, shall not be
subject to an aggregate loss allocation in an amount greater than $5
million pursuant to this Section 7 for losses and liabilities
resulting from an Event Period.'' The limit on loss allocation for
these Members reflects their risk profile.
\17\ Notice, 83 FR at 67802-03.
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FICC stated that the minimum financial requirements applicable to
Category 2 Sponsoring Members would be the same as its otherwise
applicable financial requirements under Section 4(b) of Rule 2A.\18\
However, as compared to Category 1 Sponsoring Members, the proposed
rule change would provide that FICC could impose greater financial
requirements on an applicant to become a Category 2 Sponsoring
Member.\19\ FICC stated that it decided to provide the option to impose
greater financial requirements as a Category 2 Sponsoring Member may
have substantially less capital than a Category 1 Sponsoring
Member.\20\ FICC further stated that its determination as to whether to
impose such greater financial requirements on a Category 2 Sponsoring
Member applicant would be based upon the level of the anticipated
positions and obligations of such applicant, the anticipated risk
associated with the volume and types of transactions such applicant
proposes to process through FICC as a Category 2 Sponsoring Member, and
the overall financial condition of such applicant.\21\ Such a
determination by FICC to impose increased financial requirements on a
Category 2 Sponsoring Member applicant would be subject to the approval
of the FICC Board of Directors in connection with its approval of the
application of such Category 2 Sponsoring Member.\22\ Once approved,
FICC would thereafter regularly review a Category 2 Sponsoring Member
regarding its continued adherence to such increased financial
requirements.\23\
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\18\ Notice, 83 FR at 67803.
\19\ Id.
\20\ Id.
\21\ Id.
\22\ Id.
\23\ Id.
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Further, the proposed rule change would also impose an activity
limit on a Category 2 Sponsoring Member's Sponsored Member activity so
that a Category 2 Sponsoring Member would only be permitted to novate
new Sponsored Member activity to FICC to the extent the sum of the
value at risk charges (``VaR Charges'') \24\ of its Sponsoring Member
Omnibus Account(s) and its Netting System accounts (``Aggregate VaR
Charges'') do not exceed its Netting Member Capital,\25\ unless
otherwise determined by the Corporation in order to promote orderly
settlement.\26\ FICC stated that it anticipates calculating the ratio
of a Category 2 Sponsoring Member's Aggregate VaR Charges to its
Netting Member Capital on at least an hourly basis.\27\ To the extent a
Category 2 Sponsoring Member's Aggregate VaR Charges exceed its Netting
Member Capital, the member would not be permitted to submit new
Sponsored Member activity to FICC until its Netting Member Capital
equals or exceeds its Aggregate VaR Charges.\28\ FICC stated that it
anticipates it would provide exceptions in order to promote orderly
settlement to include, but not be limited to, circumstances in which
the novation of such activity would have a risk-reducing impact on the
Category 2 Sponsoring Member's overall FICC-cleared portfolio.\29\
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\24\ Each Netting Member is required to make margin deposits
(each, a ``Required Fund Deposit'') to FICC's Clearing Fund. Rule 4,
supra note 7. A Netting Member's Required Fund Deposit amount is
comprised of several components, the largest of which is generally
the VaR Charge. Notice, 83 FR at 67803.
\25\ The term ``Netting Member Capital'' means net capital, net
assets, or equity capital as applicable, to a Netting Member based
on its type of regulation. Rule 1, supra note 7.
\26\ Notice, 83 FR at 67803.
\27\ Id.
\28\ Id.
\29\ Id.
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Moreover, FICC stated that to be consistent with its authority
under Section 7 of Rule 3 (Ongoing Membership Requirements), FICC would
reserve the right to require each Sponsoring Member, or any Netting
Member applicant to become such, to furnish to FICC such adequate
assurances of its financial responsibility and operational capability
within the meaning of Section 7 of Rule 3 as FICC may at any time or
from time to time deem necessary or advisable in order to protect FICC
and its members, to safeguard securities and funds in the custody or
control of FICC and for which FICC is responsible, or to promote the
prompt and accurate clearance and settlement of securities
transactions.\30\ Such a determination by FICC to impose adequate
assurances on a Sponsoring Member applicant would be subject to the
approval of the FICC Board of Directors in connection with its approval
of the application of such Sponsoring Member, and, once approved, FICC
would thereafter regularly review such Sponsoring Member regarding its
compliance with such adequate assurances requirements, as
appropriate.\31\ Any adequate assurances imposed on a Sponsoring Member
by FICC after its approval would be communicated in writing to the
Sponsoring Member and FICC would thereafter regularly review such
Sponsoring Member regarding its compliance with such adequate
assurances, as appropriate.\32\
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\30\ Id.
\31\ Id.
\32\ Id.
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B. Proposed Addition of an Omnibus Account
FICC proposes to allow Sponsored Members to transact with Netting
Members that are not the Sponsoring Member through a certain omnibus
account maintained by the Sponsoring Member. Currently, Rule 1 defines
the term ``Sponsored Member Trade'' as ``a transaction between a
Sponsored Member and its Sponsoring Member . . . .'' \33\ FICC proposes
to allow a Sponsoring Member to establish one or more Sponsoring Member
Omnibus Accounts that may contain transactions between a Sponsored
Member and a Netting Member other than the Sponsoring Member.\34\ A
Sponsoring Member may use the Omnibus Account in addition to or in lieu
of an account in which only transactions between a Sponsored Member and
its Sponsoring Member would be permitted.\35\
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\33\ Id.; Rule 1, definition of ``Sponsored Member Trade,''
supra note 7.
\34\ Notice, 83 FR at 67804.
\35\ Id. To the extent a Sponsoring Member elects to establish a
Sponsoring Member Omnibus Account that may contain transactions
between a Sponsored Member and a Netting Member other than the
Sponsoring Member, FICC anticipates calculating the Required Fund
Deposit for such Sponsoring Member Omnibus Account to be inclusive
of all transactions submitted into such account, including any
transactions between a Sponsored Member and a Netting Member other
than the Sponsoring Member as well as any transactions between a
Sponsored Member and the Sponsoring Member.
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[[Page 13330]]
C. Conforming and Technical Changes
FICC proposes conforming and technical changes to its rules. In
order to conform to expanding the Sponsored Membership eligibility,
FICC proposes to amend Section 2(e) of Rule 3A by deleting the
reference to Bank Netting Members and adding language that provides
that each Sponsoring Member would submit to FICC the reports and
information required to be submitted for its respective type of Netting
Member.\36\ FICC also proposes to make a conforming change to the first
sentence in Section 2(h) of Rule 3A to reference to add the newly
defined term ``Category 1'' before the first reference to Sponsoring
Member.\37\
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\36\ Notice, 83 FR at 67804.
\37\ Id.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \38\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the proposed rule
change, the comments received, and FICC's response thereto, the
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to FICC. In particular, the Commission finds that the
proposed rule change is consistent with Sections 17A(b)(3)(F) \39\ and
17A(b)(3)(I) \40\ of the Act and Rule 17Ad-22(e)(18) thereunder.\41\
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\38\ 15 U.S.C. 78s(b)(2)(C).
\39\ 15 U.S.C. 78q-1(b)(3)(F).
\40\ 15 U.S.C. 78q-1(b)(3)(I).
\41\ 17 CFR 240.17Ad-22(e)(18).
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A. Consistency With Section 17A(b)(3)(F)
Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to (i) remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions and (ii) protect investors and the public
interest.\42\
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\42\ 15 U.S.C. 78q-1(b)(3)(F).
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First, the Commission believes the proposed rule change is designed
to remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions. Specifically, the Commission believes that the expansion
of the Sponsored Membership program eligibility and addition of an
Omnibus Account(s) are consistent with Section 17A(b)(3)(F).\43\ As
described above, eligibility to be a Sponsored Member currently is
limited to Sponsored Members of Category 1 Sponsoring Members. Entities
that are not Sponsored Members of a Category 1 Sponsoring Member and
otherwise engage in the same type of eligible trading activity outside
of a central counterparty currently do not avail themselves of the
guaranteed settlement, novation, and independent risk management
offered by FICC through the Sponsored Membership program. To help
address this issue, the proposal would expand the Sponsored Membership
program to include Category 2 Sponsoring Members and allow Sponsored
Members to transact with Netting Members that are not the Sponsoring
Member through an Omnibus Account maintained by the Sponsoring Member.
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\43\ Id.
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The Commission believes that the proposal's expansion of the
Sponsored Membership program would help make the risk-reducing benefits
of central clearing available to a wider range of entity types. In
turn, increased trading activity through the expanded Sponsored
Membership program could help (i) lower the risk of diminished
liquidity in the U.S. repo market caused by a large scale exit of
participants from the market in a stress scenario (through FICC's
guaranty of completion of settlement for a greater number of eligible
transactions); (ii) protect against fire sale risk (through FICC's
ability to centralize and control the liquidation of a greater portion
of a failed counterparty's portfolio); and (iii) decrease settlement
and operational risk (by making a greater number of transactions
eligible to be netted and subject to guaranteed settlement, novation,
and independent risk management through FICC).
Commenters in support of the proposal argued that the proposal
would enhance the repo market. Specifically, commenters believe that by
replacing bilateral counterparty exposures with a model where all
market participants face a central counter party, parties are less
exposed to a counterparty default.\44\ Additionally, commenters believe
that increased central clearing could improve trading conditions for
market participants, as the associated netting benefits can help to
alleviate dealer balance sheet constraints that negatively impact
liquidity and lead to increases in volume over time, which should help
reduce costs.\45\
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\44\ See Ronin Letter at 5; SIFMA Letter at 2; Citadel Letter at
1.
\45\ See Ronin Letter at 4-5; SIFMA Letter at 2; Citadel Letter
at 1.
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In addition, one commenter expressed concern that increased
participation in FICC might not increase liquidity in the inter-dealer
market as Sponsoring Members could simply match sponsored cash and
collateral providers internally to take advantage of balance sheet
relief.\46\ However, the commenter did not argue against the
Commission's approval of the proposal based on the proposal's potential
effects on liquidity, as the commenter also acknowledged that increased
participation in FICC might actually improve liquidity.\47\
Additionally, FICC designed, and the commenter acknowledged, the
proposal is an attempt to provide a potential solution for some of the
structural inefficiencies that exist in the U.S. Treasury repo
market.\48\ As such, the proposed rule change is consistent with
Section 17A(b)(3)(F).\49\
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\46\ See Ronin Letter at 6-7.
\47\ See id. at 7.
\48\ See id.
\49\ 15 U.S.C. 78q-1(b)(3)(F).
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Likewise, the Commission believes that the conforming and technical
changes are consistent with Section 17A(b)(3)(F) by promoting the
prompt and accurate clearance and settlement of securities
transactions. The proposed changes would help clarify the Sponsored
Membership rules.\50\ By proposing changes to the Rules to improve
clarity, the Commission believes that the proposed changes are designed
to help GSD members better understand and remain compliant with the
Rules; thus promoting the prompt and accurate clearance and settlement
of securities transactions.
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\50\ Id.
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Further, the Commission also believes that any flexibility in the
proposed rule change is consistent with Section 17A(b)(3)(F).\51\
Commenters argue that the proposed rule change should specify under
what qualitative standards Category 2 Sponsoring Members would be
evaluated and what additional financial requirements and assurances
FICC could impose on them.\52\ FICC stated that it believes it is
appropriate to evaluate all Category 2 Sponsoring Member applicants on
a case-by-case basis as applicants can vary widely in terms of their
organizational structures, capitalizations, and the nature and
[[Page 13331]]
volume of activity they are interested in centrally clearing through
FICC.\53\
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\51\ Id.
\52\ See IDTA Letter at 2-5.
\53\ See FICC Response Letter at 4-6.
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In expanding Sponsored Membership, FICC must account for the risk
of Category 2 Sponsoring Members and their Sponsored Members defaulting
to FICC. As the entities eligible for Category 2 Sponsoring Membership
are diverse, the Commission believes that flexibility in reviewing
applicants on a case-by-case basis would help FICC account for this
default risk.
Similarly, a commenter thought that the proposed rule change, as
described in the Notice, should be clarified regarding how the types of
transactions that can be included in a Sponsoring Member's Omnibus
Account would work operationally.\54\ In explaining how operationally a
Sponsoring Member's Omnibus Account would work FICC stated that (i)
while each Sponsored Member's activity is assigned a separate VaR
Charge, the positions of a Sponsored Member's activity (x) between
itself and its Sponsoring Member and (y) between itself and another
Netting Member (in a Sponsoring Member Omnibus Account) would be
netted; and (ii) FICC would allow a Sponsoring Member to establish a
Sponsoring Member Omnibus Account that could contain activity between
Sponsored Members and Netting Members other than Sponsoring
Members.\55\ The Commission believes that the (i) rule text and (ii)
FICC's description of a Sponsoring Member's Omnibus Account are
consistent with providing the clarity required for GSD members to
understand the Rules, as amended by the proposed rule change.
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\54\ See IDTA Letter at 3-5.
\55\ See FICC Response Letter at 6-7.
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Second, the Commission believes that the proposed rule change is
designed to protect investors and the public interest. Specifically,
the Commission believes that the expansion of the Sponsored Membership
program and addition of an Omnibus Account(s) are consistent with
protecting investors and the public interest. By expanding the types of
entities that are eligible to participate and thereby benefit from
FICC's guaranteed settlement, novation, and independent risk
management, the proposal would help mitigate the risk of a large scale
exit by such firms from the U.S. repo market in a stress scenario and,
thus, help lower the risk of a liquidity drain in such a scenario.
Specifically, the Office of Financial Research's U.S. Money Market Fund
Monitor shows that a previous expansion of the Sponsoring Member
Program lead to exponential growth in incremental cash investment from
money market funds in FICC.\56\ Likewise, by providing central clearing
to a greater number of Sponsored Member trades, the proposal would help
enable FICC to centralize and control the liquidation of a greater
number of such positions in the event of a Sponsored Member or
Sponsoring Member's default. Doing so would help protect against the
risk that an uncoordinated liquidation of the positions by multiple
counterparties to the defaulting member would cause a fire sale of
positions that negatively impacts the counterparties, FICC, and
potentially the broader financial system.
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\56\ See FICC Response Letter at 8.
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One commenter requested greater information than FICC provided in
the Notice regarding whether the proposed rule change would benefit the
market.\57\ Specifically, the commenter stated that the actual impact
of the proposed rule change is unknown and the proposed rule change
could increase concentration risk at FICC.\58\ The Commission believes
the proposed rule change is designed to protect investors and the
public interest as expanding the Sponsored Membership program would
include independent risk management designed to help account for any
increased concentration risk. While the actual impact of the proposed
rule change cannot be known, prior expansion of the Sponsored
Membership program provides insight into the likely effect of future
expansions of the program. Specifically, prior expansion has led to
exponential growth in incremental cash investment in FICC.\59\
Similarly, although the greater activity in a Sponsoring Member Account
would likely increase the exposure to FICC from a Netting Member
default, FICC would help account for this risk by individually
margining each Sponsored Member.
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\57\ See IDTA Letter at 3-5.
\58\ See id.
\59\ See FICC Response Letter at 8.
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By better enabling FICC to remove impediments to and perfect the
mechanism of a national system for the prompt and accurate clearance
and settlement of securities transactions and protect investors and the
public interest, as described above, the Commission finds that the
proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act.\60\
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\60\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With 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 purposes of the Exchange Act.\61\
As discussed above, FICC is proposing a number of changes to expand the
Sponsored Membership program. The proposed changes are designed to (i)
remove impediments to and perfect the mechanism of a national system
for the prompt and accurate clearance and settlement of securities
transactions and (ii) protect investors and the public interest,
consistent with Section 17A(b)(3)(F) of the Exchange Act.\62\
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\61\ 15 U.S.C. 78q-1(b)(3)(I).
\62\ See 15 U.S.C. 78q-1(b)(3)(F).
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A commenter expressed concerns about the ability of Netting Members
that are not affiliated with a bank to participate as Sponsoring
Members due to VaR margin requirements.\63\ Specifically, separate VaR
charges for each Sponsored Member will likely limit wide adoption of
Sponsored Membership to those Netting Members that have a low cost of
capital.\64\ Likewise, the commenter expressed concern that expanding
Sponsored Membership might increase the Capped Contingency Liquidity
Facility (``CCLF'') \65\ responsibilities of other Netting Members if
the liquidity needs of the largest Netting Members grow
substantially.\66\ Conversely, one Commenter supported the proposed
framework of risk management outlined in the proposal as appropriate to
ensure proper risk controls and integrity with the FICC
environment.\67\
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\63\ See Ronin Letter at 6.
\64\ Id.
\65\ CCLF is a rules-based, member-funded, committed repo
facility designed to ensure that FICC has sufficient liquid
resources to satisfy its cash settlement obligations in the event of
the default of the participant family that would generate FICC's
largest aggregate payment obligation. Rule 22A, Section 2a, supra
note 7. FICC designed the CCLF funding obligations to be generally
proportionate to the liquidity needs that members present to FICC.
See Securities Exchange Act Release No. 82090 (November 15, 2017),
82 FR 55427 (November 21, 2017) (SR-FICC-2017-002) (``CCLF Approval
Order'').
\66\ See Ronin Letter at 6.
\67\ See SIFMA Letter at 1.
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The Commission understands that the impact of the cost of meeting a
margin or CCLF requirement would depend, in part, on each Netting
Member's specific business model and that some Netting Members could
satisfy the increase at a lower cost than others. For example, when the
Commission originally approved the CCLF, the Commission's approval was
based in part on the Commission's belief that FICC appropriately sought
to mitigate the relative burdens on Netting Members that present
relatively less liquidity risk
[[Page 13332]]
to FICC by only requiring them to contribute their allotted share of
the Aggregate Regular Amount, which is allocated among all Netting
Members, but Netting Members with larger obligations are required to
contribute a larger amount.\68\
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\68\ See CCLF Approval Order, 82 FR at 55430.
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As a result, the Commission believes that any competitive burden
imposed by the proposed changes would not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\69\
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\69\ 15 U.S.C. 78q-1(b)(3)(I).
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FICC proposes that while it would provide a netting benefit to a
Sponsoring Member's offsetting positions at FICC, FICC would
individually margin each Sponsored Member as FICC novates and
guarantees the settlement of each Sponsored Member's position.
Likewise, to the extent the CCLF were to potentially increase as a
result of Sponsored Member activity, the CCLF is designed so that
requirements are in proportion to the liquidity exposure that each
Netting Member presents to GSD. It is necessary for FICC to collect
margin requirements and impose liquidity requirements to help ensure
FICC can complete settlement in the event of a Netting Member default.
Similarly, it is appropriate to assess individual members VaR Charges
and CCLF requirement based upon the guarantee and liquidity risks that
FICC assumes based upon the member's position.
Therefore, the 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.\70\
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\70\ 15 U.S.C. 78q-1(b)(3)(I).
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A. Consistency With Rule 17Ad-22(e)(18) of the Exchange Act
Rule 17Ad-22(e)(18) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to establish objective, risk-based, and publicly
disclosed criteria for participation, which permit fair and open access
by direct and, where relevant, indirect participants and other
financial market utilities, require participants to have sufficient
financial resources and robust operational capacity to meet obligations
arising from participation in the clearing agency, and monitor
compliance with such participation requirements on an ongoing
basis.\71\
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\71\ 17 CFR 240.17Ad-22(e)(18).
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As described above, the proposed rule change would expand the
Sponsored Membership program eligibility. The proposed rule change to
expand Sponsoring Member eligibility would establish objective, risk-
based, and publicly disclosed criteria for additional types of Netting
Members to participate in FICC as Sponsoring Members. As described
above, FICC could impose greater financial requirements on an applicant
to become a Category 2 Sponsoring Member as they may have substantially
less capital than a Category 1 Sponsoring Member. Likewise, the
proposed rule change would also impose an activity limit on a Category
2 Sponsoring Member's Sponsored Member activity. Moreover, FICC would
reserve the right to require each Sponsoring Member, or any Netting
Member applicant to become such, to furnish to FICC such adequate
assurances of its financial responsibility and operational capability.
Each of these proposed changes would assist FICC in requiring Netting
Members to have sufficient financial resources and robust operational
capacity to meet obligations arising from participation in the clearing
agency.
As described above, commenters argued that the proposed rule change
should specify under what qualitative standards Category 2 Sponsoring
Members would be evaluated and what additional financial requirements
and assurances FICC could impose on them.\72\ FICC stated that it
believes it is appropriate to evaluate all Category 2 Sponsoring Member
applicants on a case-by-case basis as applicants can vary widely in
terms of their organization structures, capitalizations, and the nature
and volume of activity they are interested in centrally clearing
through FICC.\73\
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\72\ See Ronin Letter at 5; SIFMA Letter at 2-3.
\73\ See FICC Response Letter at 4-6.
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The Commission believes that the limited discretion in the publicly
disclosed criteria for participation is consistent with Rule 17Ad-
22(e)(18) as it is design to help ensure sufficient financial resources
and robust operational capacity by Netting Members. In expanding
Sponsored Membership, FICC must account for the risk of Category 2
Sponsoring Members and their Sponsored Members defaulting to FICC. As
the entities eligible for Category 2 Sponsoring Membership are diverse,
the Commission believes that flexibility in reviewing applicants on a
case-by-case basis would help FICC account for this default risk.
Therefore, the Commission finds that the proposal is consistent Rule
17Ad-22(e)(18) under the Act
V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \74\ and
the rules and regulations promulgated thereunder.
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\74\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\75\ that proposed rule change SR-FICC-2018-013, be, and hereby is,
approved.\76\
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\75\ 15 U.S.C. 78s(b)(2).
\76\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
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\77\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06527 Filed 4-3-19; 8:45 am]
BILLING CODE 8011-01-P