[Federal Register Volume 85, Number 7 (Friday, January 10, 2020)]
[Notices]
[Pages 1354-1362]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00203]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87896; File No. SR-FICC-2019-007]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change Regarding the Close-Out and 
Funds-Only Settlement Processes Associated With the Sponsoring Member/
Sponsored Member Service

January 6, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 27, 2019, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the FICC 
Government Securities Division (``GSD'') Rulebook (``Rules'') \3\ in 
order to facilitate the submission of repurchase transactions 
(``repos'') with a scheduled final settlement date beyond the next 
Business Day after the initial settlement date (``term repo activity'') 
through the Sponsoring Member/Sponsored Member Service (``Service'') 
\4\ by: (i) Providing a mechanism by which a Sponsoring Member may 
cause the termination and liquidation of a Sponsored Member's positions 
arising from Sponsored Member Trades between the Sponsoring Member and 
its Sponsored Member that have been novated to FICC and (ii) revising 
how FICC calculates the funds-only settlement obligations of Sponsored 
Members and Sponsoring Members with respect to Sponsored Member Trades 
that have haircuts \5\ in order to ensure that the calculation does not 
result in a return of the haircuts until final settlement. In addition, 
the proposed rule change would make a correction and certain 
clarifications and conforming changes, as described in greater detail 
below.
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf.
    \4\ This Service is primarily governed by Rule 3A. Supra note 3.
    \5\ The term haircut shall refer to the amount of collateral in 
excess of the value of the cash due to the Sponsored Member client 
at the Close Leg.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend the Rules in 
order to facilitate the submission of term repo activity through the 
Service by: (i) Providing a mechanism by which a Sponsoring Member may 
cause the termination and liquidation of a Sponsored Member's positions 
arising from Sponsored Member Trades between the Sponsoring Member and 
its Sponsored Member that have been novated to FICC and (ii) revising 
how FICC calculates the funds-only settlement obligations of Sponsored 
Members and Sponsoring Members with respect to Sponsored Member Trades 
that have haircuts in order to ensure that the calculation does not 
result in a return of the haircuts until final settlement. In addition, 
the proposed rule change would make a correction and certain 
clarifications and conforming changes, as described in greater detail 
below.
(i) Background
    Under Rule 3A (Sponsoring Members and Sponsored Members), certain 
Netting Members are permitted to sponsor, as ``Sponsoring Members,'' 
qualified institutional buyers as defined by Rule 144A \6\ under the 
Securities Act of 1933, as amended (``Securities Act''),\7\ and certain 
legal entities that, although not organized as entities specifically 
listed in paragraph (a)(1)(i) of Rule 144A under the Securities Act, 
satisfy the financial requirements necessary to be qualified 
institutional buyers as specified in that paragraph (i.e., Sponsored 
Members) into GSD membership.
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    \6\ 17 CFR 230.144A.
    \7\ 15 U.S.C. 77a et seq.
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    Under Rule 3A, a Sponsoring Member is permitted to submit to FICC, 
for comparison, novation, and netting, certain types of eligible 
securities transactions between itself and its Sponsored Members 
(``Sponsored Member Trades'').\8\ The Sponsoring Member is required to 
establish an omnibus account at FICC for its Sponsored Members' 
positions arising from such Sponsored Member Trades (``Sponsoring 
Member Omnibus Account''),\9\ which is separate from the Sponsoring 
Member's regular netting accounts. 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 or from FICC, including their securities and funds-only 
settlement obligations.\10\ Additionally, for operational convenience, 
pursuant to Section 8(b) of Rule 3A,\11\ FICC calculates a single Net 
Settlement

[[Page 1355]]

Obligation and Fail Net Settlement Obligation in each CUSIP for the 
Sponsoring Member Omnibus Account and associated Deliver Obligations 
and Receive Obligations.\12\ Such calculations do not affect the 
Sponsored Member's obligations, which are calculated in accordance with 
Section 7 of Rule 3A \13\ in a manner that is generally consistent with 
how FICC calculates the obligations of other Members.
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    \8\ Rule 1, definition of ``Sponsored Member Trade''; Rule 3A, 
Sections 6(b) and 7(a), supra note 3. In March 2019, the Commission 
approved FICC rule filing SR-FICC-2018-013, Securities Exchange Act 
Release No. 85470 (March 29, 2019), 84 FR 13328 (April 4, 2019), 
which expanded the definition of ``Sponsored Member Trade'' to 
include certain types of eligible securities transactions between a 
Sponsored Member and a Netting Member other than the Sponsoring 
Member. This proposed rule change would apply only to Sponsored 
Member Trades between the Sponsoring Member and its Sponsored 
Member.
    \9\ Rule 1, definition of ``Sponsoring Member Omnibus Account,'' 
supra note 3.
    \10\ Rule 3A, Sections 5, 6, 7, 8, and 9, supra note 3.
    \11\ Rule 3A, Section 8(b), supra note 3.
    \12\ See Rule 3A, Section 7(a), supra note 3.
    \13\ Rule 3A, Section 7, supra note 3.
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    Sponsoring Members are also responsible for providing FICC with a 
Sponsoring Member Guaranty \14\ whereby the Sponsoring Member 
guarantees to FICC the payment and performance by its Sponsored Members 
of their obligations under the Rules.\15\ Although Sponsored Members 
are principally liable to FICC for their own settlement obligations 
under the Rules, the Sponsoring Member Guaranty requires the Sponsoring 
Member to satisfy those settlement obligations on behalf of a Sponsored 
Member if the Sponsored Member defaults and fails to perform its 
settlement obligations.
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    \14\ Section 2(c) of Rule 3A provides: ``Each Netting Member to 
become a Sponsoring Member shall also sign and deliver to [FICC] a 
Sponsoring Member Guaranty . . . .'' A ``Sponsoring Member 
Guaranty'' is defined in Rule 1 as ``a guaranty . . . that a 
Sponsoring Member delivers to [FICC] whereby the Sponsoring Member 
guarantees to [FICC] the payment and performance by its Sponsored 
Members of their obligations under [the] Rules, including, without 
limitation, all of the securities and funds-only settlement 
obligations of its Sponsored Members under [the] Rules.'' Supra note 
3.
    \15\ Rule 3A, Section 2(c), supra note 3.
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    Although Rule 3A currently permits Sponsoring Members to submit 
term repo activity within the Service,\16\ most of the Sponsored Member 
Trades submitted to FICC by Sponsoring Members have a scheduled 
settlement date of the next Business Day after the initial settlement 
date, i.e., overnight repo. FICC believes that certain provisions of 
the Rules discourage the submission of term repo activity within the 
Service, as discussed more fully below.
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    \16\ Rule 3A, Section 5, supra note 3.
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(ii) Proposed Change To Facilitate the Submission of Term Repo Activity 
Through the Service by Providing a Mechanism by Which a Sponsoring 
Member May Cause the Termination and Liquidation of a Sponsored 
Member's Positions Arising From Sponsored Member Trades Between the 
Sponsoring Member and its Sponsored Member That Have Been Novated to 
FICC
(A) Existing Close-Out Framework
    The current Rules allow only FICC to cause the termination and 
liquidation of a Sponsored Member's positions, even though the relevant 
Sponsoring Member is responsible for the Sponsored Member's payment and 
performance in respect of such positions. Rule 22A governs any such 
termination and liquidation by FICC.\17\ That rule provides that, if 
FICC ceases to act for a Member, including a Sponsored Member, FICC 
will close-out the Sponsored Member's positions the same way it would 
close-out the positions of any other Member for which FICC has ceased 
to act: By (i) establishing a Final Net Settlement Position for each 
Eligible Netting Security with a distinct CUSIP equal to the net of all 
outstanding deliver and receive obligations of the Member in respect of 
the security and (ii) taking market action to liquidate such Final Net 
Settlement Position.\18\
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    \17\ Rule 3A, Sections 13(c) and 15(b), supra note 3.
    \18\ Rule 22A, Section 2(b), supra note 3.
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    A Sponsoring Member is required to advise FICC if circumstances 
have arisen that require FICC to cease to act for a Sponsored 
Member.\19\ However, a Sponsoring Member is not unilaterally able to 
cause the termination or liquidation of any Sponsored Member Trades. 
This limitation is inconsistent with other intermediated relationships. 
In the context of those relationships, the clearing member or similar 
intermediary is typically permitted to terminate and liquidate the 
positions of its client that the intermediary guarantees if an event of 
default or other similar circumstance occurs under the customer or 
similar bilateral agreement between the intermediary and the 
client.\20\ The intermediary's ability to cause such termination and 
liquidation is not dependent on a third party's determination that a 
certain circumstance or event has occurred. Rather, the intermediary 
and the client are able to agree bilaterally to the circumstances and 
events that give rise to an event of default allowing the intermediary 
to terminate or liquidate the guaranteed positions.
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    \19\ Rule 3A, Section 15(a), supra note 3.
    \20\ For example, in the context of futures and cleared swaps, a 
futures commission merchant (``FCM'') is generally permitted to 
terminate and liquidate positions that the FCM carries for a 
customer at a derivatives clearing organization (``DCO'') following 
the customer's default by either entering into offsetting positions 
in the FCM's customer account at the DCO or terminating the position 
in the customer account and establishing an identical position in 
the FCM's house account at the DCO. See, e.g., ICE Clear Credit Rule 
304(c), available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf.
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    The inability of a Sponsoring Member to trigger the termination and 
liquidation of a Sponsored Member's positions, particularly term repo 
activity, may result in additional capital requirements for Sponsoring 
Members and their parent organizations under regulatory standards that 
implement the recommendations of the Basel Committee on Banking 
Supervision (the ``BCBS''). This is because, if a Sponsoring Member 
cannot trigger the termination and liquidation of a Sponsored Member's 
positions, it is less able to stop the effective extension of credit to 
the client under the Sponsoring Member Guaranty.\21\ In addition, the 
inability to terminate a Sponsored Member's positions limits the extent 
to which a Sponsoring Member can use certain risk management tools, 
such as cross-defaults or other early warning triggers, that allow a 
Sponsoring Member to close-out the Sponsored Member's positions and 
stem losses before the Sponsored Member becomes subject to insolvency 
proceedings or is unable to pay its debts as they become due.\22\
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    \21\ More specifically, FICC's understanding is that in order 
for a Sponsoring Member subject to capital requirements that 
implement the BCBS standards to apply the favorable capital 
treatment to its obligations under the Sponsoring Member Guaranty 
that it currently applies to bilateral repos, the Sponsoring Member 
must conclude with a well-founded basis that, among other things, it 
will be able to terminate the Sponsored Member Trades subject to the 
Sponsoring Member Guaranty. See, e.g., 12 CFR 3.2, 3.3(e), 217.2, 
217.3(e), 324.2, and 324.3(e). While a lesser standard applies if 
the guaranteed Sponsored Member Trades are limited to overnight 
repos, FICC believes that applying the same termination and 
liquidation mechanism to overnight and term repo activity would help 
to clarify the capital treatment for both types of activity and 
promote consistency across Sponsored Member Trades. Sponsoring 
Members interested in such relief should discuss this matter with 
their regulatory capital experts.
    \22\ A ``cross-default'' is a provision that allows one party to 
exercise default rights if its customer or counterparty defaults 
under another agreement. Other early warning triggers include credit 
rating downgrades, breaches of representations, and covenants 
limiting a party's ability to incur debt or suffer liens on its 
property. If a Sponsoring Member is unable to initiate the 
termination of a Sponsored Member's Sponsored Member Trades, it 
cannot use these ``early warning triggers,'' but must instead wait 
for the occurrence of a circumstance that gives FICC the ability to 
cease to act for the Sponsored Member. By that point, however, the 
Sponsoring Member may have significant uncovered exposure to the 
Sponsored Member.

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[[Page 1356]]

    In addition to giving FICC the exclusive ability to cause the 
termination and liquidation of a Sponsored Member's positions, Rule 22A 
provides for FICC to control such termination and liquidation of a 
Sponsored Member's Final Net Settlement Positions.\23\ When FICC ceases 
to act for a Member, it generally looks to buy, borrow, reverse in, 
sell, lend, or repo out securities, so as to facilitate its ability to 
settle the Final Net Settlement Positions.\24\
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    \23\ Rule 22A, Section 2(b), supra note 3.
    \24\ Id.
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    FICC's control of such termination and liquidation of Sponsored 
Member Trades could expose the Sponsoring Member to certain risks that 
other intermediaries do not typically face. This is because, in the 
event FICC ceases to act for a Sponsored Member under Rule 22A,\25\ the 
Sponsoring Member will generally enter into one or more transactions 
with third parties in order to hedge its performance obligations under 
the Sponsoring Member Guaranty. In most other intermediated 
relationships, the price at which the intermediary hedges or closes out 
the exposure under the customer's defaulted positions typically informs 
the pricing of those positions and thus the amount of the 
intermediary's claim against the customer. However, if FICC, rather 
than the Sponsoring Member, calculates the price of the Sponsored 
Member's positions, there may be differences arising from the timing of 
execution or the type of liquidation or hedging transactions used by 
FICC and/or the use of different pricing sources by FICC, all of which 
could limit the ability of the Sponsoring Member to recover the losses 
it incurs in entering into its hedging transactions.
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    \25\ Rule 22A, supra note 3.
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(B) Proposed Rule Change
    FICC is proposing to amend Rule 3A to add a new Section 18. This 
new section would allow a Sponsoring Member to cause the termination 
and liquidation of a Sponsored Member's positions arising from 
Sponsored Member Trades between the Sponsoring Member and the Sponsored 
Member for which the Sponsoring Member is responsible. The section 
would not, however, limit the ability of FICC to cease to act for a 
Sponsored Member.
    In the event (i) the Sponsoring Member triggers the termination of 
a Sponsored Member's positions or (ii) FICC ceases to act for the 
Sponsored Member and the Sponsoring Member does not continue to perform 
the obligations of the Sponsored Member, both the Sponsored Member's 
positions and the Sponsoring Member's corresponding positions arising 
from the Sponsored Member Trades between the Sponsoring Member and the 
Sponsored Member would be terminated. Thereupon, the Sponsoring Member 
would calculate a net liquidation value of such terminated positions, 
which liquidation value would be paid either to or by the Sponsored 
Member by or to the Sponsoring Member. FICC would not, as a practical 
matter, be involved in such settlement and would not need to take any 
market action because the termination of the Sponsored Member's 
positions and the corresponding Sponsoring Member's positions would 
leave FICC flat. Additionally, the Sponsoring Member would indemnify 
FICC for any claim by a Sponsored Member arising out of the Sponsoring 
Member's calculation of the net liquidation value.
(C) Benefits of the Proposal
    By allowing Sponsoring Members to terminate and liquidate a 
Sponsored Member's positions that arise from Sponsored Member Trades 
between the Sponsored Member and the Sponsoring Member that have been 
novated to FICC, FICC believes that the new Section 18 would align the 
Service to other intermediated relationships and allow Sponsoring 
Members to more effectively manage the risks of Sponsored Member 
Trades, particularly term repo activity. Sponsoring Members and their 
Sponsored Members would be able to agree with one another in their 
bilateral documentation on the circumstances in which the Sponsoring 
Member would be permitted to cause the termination of the Sponsored 
Member's positions. Such agreement would not affect FICC's ability to 
cease to act for a Sponsored Member in accordance with existing Rules 
3A, 21 and 22.\26\
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    \26\ Rules 3A, 21 and 22, supra note 3.
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    FICC believes that providing Sponsoring Members with greater 
ability to manage their risks associated with Sponsored Member Trades 
would allow Sponsoring Members to submit to FICC more Sponsored Member 
Trades, including, in particular, term repo activity. FICC believes 
that having more centrally cleared term repo transactions would promote 
the prompt and accurate clearance and settlement of securities 
transactions because more securities transactions would benefit from 
FICC's risk management and guaranty of settlement.
    Further, FICC believes that allowing the Sponsoring Member to take 
market action would decrease the price risks currently faced by 
Sponsoring Members (as described in the last paragraph of Item 
II(A)1(ii)(A) above) without increasing the litigation risk to FICC 
arising from a Sponsored Member default because the Sponsoring Member 
would indemnify FICC for any losses or expense arising from a Sponsored 
Member's claim related to the Sponsoring Member's calculation of any 
liquidation amount.
(D) Proposed Changes to the Rules
Addition of New Section 18 to Rule 3A (Sponsoring Members and Sponsored 
Members)
    FICC is proposing to add a new Section 18 to Rule 3A, which would 
(i) permit a Sponsoring Member to cause the termination and liquidation 
of a Sponsored Member's positions arising from Sponsored Member Trades 
between the Sponsoring Member and the Sponsored Member and (ii) govern 
how the termination and liquidation would be effectuated. Section 18 
would contain the following subsections.
Subsection (a)
    Subsection (a) would clarify the scope of positions to which 
proposed Section 18 applies. It would state that Section 18 applies 
only to positions arising from Sponsored Member Trades within the 
meaning of subsection (a) of the Sponsored Member Trade definition.\27\ 
Subsection (a) of the Sponsored Member Trade definition \28\ 
encompasses eligible transactions between a Sponsored Member and its 
Sponsoring Member. Sponsored Member Trades that are between a Sponsored 
Member and a third-party Member would not be within the scope of 
Section 18 because, in that instance, there would not be a 
corresponding Sponsoring Member position to terminate.
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    \27\ Rule 1, supra note 3.
    \28\ Id.
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    Subsection (a) would further state that Section 18 would not apply 
if either (i) FICC has ceased to act for the relevant Sponsoring Member 
or (ii) a Corporation Default has occurred. FICC has discretion in the 
event that it ceases to act for a Sponsoring Member to close-out the 
positions of Sponsored Members for which the defaulting Sponsoring 
Member was responsible or to allow them to settle.\29\ If FICC does 
close-out such positions, it will do so in accordance with Rule 
22A.\30\ If a Corporation Default has occurred in

[[Page 1357]]

respect of FICC, each Sponsored Member's positions, and all other 
Members' positions, will be closed out in accordance with the 
provisions of Rule 22B.\31\
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    \29\ Rule 3A, Section 16, supra note 3.
    \30\ Rule 22A, supra note 3.
    \31\ Rule 22B, supra note 3. In September 2018, the Commission 
approved FICC rule filing SR-FICC-2018-008, Securities Exchange Act 
Release No. 84255 (September 21, 2018), 83 FR 48890 (September 27, 
2018), which amended the Rules to clarify that Rule 22B (Corporation 
Default) applies to Sponsored Members.
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Subsection (b)
    Subsection (b) of proposed Section 18 would set out the process by 
which a Sponsoring Member or FICC may cause the termination of a 
Sponsored Member's positions. It would provide that the Sponsoring 
Member or FICC may cause such termination by delivering a notice to 
FICC or the Sponsoring Member, respectively. FICC anticipates that each 
Sponsored Member and Sponsoring Member would agree in the bilateral 
documentation between them as to what circumstances or events give rise 
to the ability of the Sponsoring Member to deliver a notice to FICC 
terminating the Sponsored Member's positions.\32\
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    \32\ It bears noting in this regard that termination of the 
Sponsored Member's positions would not be the exclusive mechanism by 
which a Sponsoring Member may limit its credit risk. Under Section 
2(i) of current Rule 3A, a Sponsoring Member may voluntarily elect 
to terminate its status as a Sponsoring Member in respect of one or 
more Sponsored Members. Such a termination does not affect the 
settlement of the Sponsored Member's existing positions but does 
restrict the ability of the Sponsored Member to have its future 
trades accepted for novation to FICC through such Sponsoring Member. 
The proposed rule change would not affect the functioning of Section 
2(i) or the general ability of a Sponsoring Member and the Sponsored 
Member to agree on the circumstances of when the Sponsoring Member 
may terminate its status as Sponsoring Member for the Sponsored 
Member. Rule 3A, Section 2(i), supra note 3.
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    The notice submitted by a Sponsoring Member to FICC (or vice versa) 
would cause the termination of all of the positions of the Sponsored 
Member that arose from Sponsored Member Trades between the Sponsoring 
Member and the Sponsored Member and that have been novated to FICC. The 
notice would also cause the termination of the corresponding positions 
of the Sponsoring Member (i.e., the positions of the Sponsoring Member 
that arose from Sponsored Member Trades between the Sponsoring Member 
and the Sponsored Member). The effect of such terminations would be to 
leave FICC flat.
    Subsection (b) would also provide that the termination of the 
Sponsored Member's positions (and the Sponsoring Member's corresponding 
positions) would be effected by the Sponsoring Member's establishment 
of a final Net Settlement Position for each Eligible Netting Security 
with a distinct CUSIP number (``Final Net Settlement Position''). This 
provision would align with existing Rule 22A,\33\ which provides for 
FICC to calculate such Final Net Settlement Position when it ceases to 
act for a Member. As under existing Rule 22A,\34\ the Final Net 
Settlement Position would equal the net of all outstanding deliver 
obligations and receive obligations of the Sponsored Member or 
Sponsoring Member with respect to the relevant security.
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    \33\ Rule 22A, supra note 3.
    \34\ Id.
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Subsection (c)
    Subsection (c) of proposed Section 18 would specify how the Final 
Net Settlement Positions established pursuant to subsection (b) would 
be liquidated (i.e., how such positions would be converted into an 
amount payable). It would also provide how the amount payable arising 
from the liquidation of the Final Net Settlement Positions would be 
discharged.
    Subsection (c) would first provide that the Sponsoring Member would 
liquidate the Final Net Settlement Positions established pursuant to 
subsection (b) by establishing (i) a single liquidation amount in 
respect of the Sponsored Member's Final Net Settlement Positions (a 
``Sponsored Member Liquidation Amount'') and (ii) a single liquidation 
amount in respect of the Sponsoring Member's Final Net Settlement 
Positions (a ``Sponsoring Member Liquidation Amount''). The Sponsored 
Member Liquidation Amount would be owed either by FICC to the Sponsored 
Member or by the Sponsored Member to FICC because it would relate to 
the Sponsored Member's Final Net Settlement Positions with FICC, while 
the Sponsoring Member Liquidation Amount would be owed either by FICC 
to the Sponsoring Member or by the Sponsoring Member to FICC because it 
would relate to the Sponsoring Member's Final Net Settlement Positions 
with FICC.
    Because the Final Net Settlement Positions of the Sponsoring Member 
would be identical to, but in the opposite direction of, the Final Net 
Settlement Positions of the Sponsored Member, the Sponsored Member 
Liquidation Amount would equal the Sponsoring Member Liquidation 
Amount. Therefore, if FICC were to owe the Sponsored Member Liquidation 
Amount to the Sponsored Member, the Sponsoring Member would owe the 
Sponsoring Member Liquidation Amount to FICC. By the same token, if the 
Sponsored Member were to owe the Sponsored Member Liquidation Amount to 
FICC, FICC would owe the Sponsoring Member the Sponsoring Member 
Liquidation Amount. In all instances, FICC would owe and be owed the 
same amount of money.
    Subsection (c) would also provide how the Sponsoring Member may 
calculate the Sponsoring Member Liquidation Amount. It would state that 
the Sponsoring Member may calculate the Sponsoring Member Liquidation 
Amount based on prevailing market prices of the relevant securities 
and/or the gains realized and losses incurred by the Sponsoring Member 
in hedging its risk associated with the liquidation of the Sponsoring 
Member's Final Net Settlement Positions. Subsection (c) would further 
clarify that such Sponsoring Member Liquidation Amount may also take 
into account any losses and expenses incurred by the Sponsoring Member 
in connection with the liquidation of the positions. This approach 
would be broadly consistent with how FICC would calculate an amount 
owing by a Member in respect of its Final Net Settlement Positions 
under existing Rule 22A.\35\
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    \35\ Id.
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    Subsection (c) would provide that, if a Sponsored Member 
Liquidation Amount is due to FICC, the Sponsoring Member would be 
obligated to pay such Sponsored Member Liquidation Amount to FICC under 
the Sponsoring Member Guaranty and that this obligation would, 
automatically and without further action, be set off against the 
obligation of FICC to pay the corresponding Sponsoring Member 
Liquidation Amount to the Sponsoring Member. By virtue of such setoff, 
the Sponsored Member's obligation to FICC would be discharged, as would 
FICC's obligation to the Sponsoring Member. The Sponsoring Member 
would, however, have a reimbursement claim against the Sponsored Member 
in an amount equal to the Sponsored Member Liquidation Amount. This 
reimbursement claim would arise as a matter of law by virtue of the 
Sponsoring Member's performance under Sponsoring Member Guaranty, 
though Sponsoring Members and Sponsored Members may specify terms 
related to the reimbursement claim in their bilateral documentation. 
FICC would have no rights or obligations in respect of any such 
reimbursement claim.
    If a Sponsored Member Liquidation Amount were owed by FICC to the 
Sponsored Member, subsection (c) would provide for the Sponsoring 
Member to satisfy that obligation by

[[Page 1358]]

transferring the Sponsored Member Liquidation Amount to the account at 
the Funds-Only Settling Member Bank at which the Sponsoring Member 
maintains Funds-Only Settlement Amounts related to its Sponsored Member 
Omnibus Account. Subsection (c) would state that, to the extent the 
Sponsoring Member makes such a transfer, it will discharge FICC's 
obligation to transfer the Sponsored Member Liquidation Amount to the 
Sponsored Member and the Sponsoring Member's corresponding obligation 
to transfer the Sponsoring Member Liquidation Amount to FICC.
Subsection (d)
    Under existing Rule 22A,\36\ FICC is responsible for the 
liquidation of a Member's Final Net Settlement Positions and 
calculation of an amount owing by or to the Member. Because proposed 
Section 18 would provide for the Sponsoring Member, rather than FICC, 
to liquidate the Sponsored Member's (and the Sponsoring Member's) Final 
Net Settlement Positions and calculate the corresponding amounts owing, 
the Sponsoring Member would be required to indemnify FICC in the event 
the Sponsored Member makes or asserts any claim relating to such 
calculation. Subsection (d) would set forth such indemnity. It would 
provide for the Sponsoring Member to indemnify FICC and its officers, 
directors, employees, shareholders, agents, and Members for any loss, 
liability, or expenses resulting from any claim by a Sponsored Member 
relating to the Sponsoring Member's calculation of the Sponsored Member 
Liquidation Amount or Sponsoring Member Liquidation Amount.
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    \36\ Id.
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Subsection (e)
    Under Section 8(g) of existing Rule 3A,\37\ each Sponsored Member 
grants to FICC a security interest in all assets and property placed by 
the Sponsored Member in the possession of FICC in order to secure the 
obligations of the Sponsored Member to FICC. This security interest 
provides FICC with credit support in the event that it must terminate 
and liquidate the Sponsored Member's positions and assert a claim 
against the Sponsored Member. However, if proposed Section 18 were to 
apply, the obligation of the Sponsored Member to FICC under the 
terminated positions would be discharged via the setoff provided for 
under subsection (c).
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    \37\ Rule 3A, Section 8(g), supra note 3.
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    Subsection (e) of proposed Section 18 would clarify FICC 
acknowledges that a Sponsoring Member may take a security interest in 
FICC's obligations to the Sponsored Member. Such security interest 
would not impose new obligations on FICC, but could allow the 
Sponsoring Member to direct FICC to submit payments due to the 
Sponsored Member to the Sponsoring Member, so that the Sponsoring 
Member can apply such amounts to the Sponsored Member's unsatisfied 
obligations to the Sponsoring Member. Subsection (e) additionally would 
provide that, if Section 18 were to apply, FICC's security interest in 
the Sponsored Member's assets would be subordinated to the Sponsoring 
Member's security interest. As noted above, if Section 18 applied, FICC 
would not need to look to the Sponsored Member or its assets for 
performance in respect of the positions that are terminated under 
Section 18.
(iii) Proposed Change To Facilitate the Submission of Term Repo 
Activity Through the Service by Revising How FICC Calculates the Funds-
Only Settlement Obligations of Sponsored Members and Sponsoring Members 
With Respect to Sponsored Member Trades That Have Haircuts in Order To 
Ensure That Such Calculation Does Not Result in a Return of the 
Haircuts Until Final Settlement
    In light of the intermediary relationship between a Sponsoring 
Member and its Sponsored Member, a Sponsoring Member may choose to post 
to its Sponsored Member client a haircut in order to address regulatory 
and/or investment guideline concerns. Specifically, the regulations 
and/or investment guidelines to which a Sponsored Member is subject may 
require that it receive Eligible Securities worth more than the cash 
that it is due to receive at final settlement of a FICC-cleared reverse 
repo, i.e., a haircut.\38\ Similarly, in some circumstances, a 
Sponsoring Member may choose to collect such haircut from its Sponsored 
Member client at the Start Leg to mitigate its exposure under the 
Sponsoring Member Guaranty. In both situations, FICC's understanding is 
that accounting considerations may favor those postings being 
facilitated through FICC's systems. Specifically, in light of the fact 
that the counterparty on a FICC-cleared trade changes after novation--
and the Sponsoring Member and Sponsored Member thereafter both face 
FICC as principal--having an obligation to receive and/or deliver a 
haircut at final settlement directly to FICC as the post-novation 
counterparty may be favorable for the Sponsoring Member and the 
Sponsored Member from an accounting perspective.\39\
---------------------------------------------------------------------------

    \38\ For example, FICC's understanding is that Investment 
Company Act Rule 5b-3 requires that a repurchase agreement be 
``collateralized fully'' in order for a registered investment 
company to apply favorable regulatory treatment to it. The 
``collateralized fully'' definition requires that the value of the 
securities posted to the investment company at all times equal or 
exceed the repurchase price, plus any loss of interest or 
transaction costs that could be incurred in a default. In light of 
these requirements, FICC understands that many registered investment 
companies require counterparties to post securities with a value 
that is equal to the repurchase price, plus a cushion to cover any 
changes in value of the securities or lost interest or transaction 
costs associated with a counterparty default.
    \39\ Sponsoring Members interested in such relief should discuss 
this matter with their accounting experts.
---------------------------------------------------------------------------

    However, under Rule 13, FICC's standard funds-only settlement 
process involves marking to market twice a day each Business Day all 
positions associated with term repo activity, including any Sponsored 
Member Trade with a Close Leg that is scheduled to occur two or more 
Business Days after the settlement of the Start Leg.\40\ Specifically, 
FICC will calculate a ``Collateral Mark'' equal to the absolute value 
of the difference between (i) a Sponsored Member Trade's Contract Value 
(i.e., the dollar value at which it is due to finally settle) and (ii) 
its Market Value (i.e., FICC's system price of the securities 
underlying the transaction). This Collateral Mark is incorporated into 
the calculation of certain of the Funds-Only Settlement Amounts payable 
under Rule 13.\41\
---------------------------------------------------------------------------

    \40\ Rule 13, supra note 3.
    \41\ Id.
---------------------------------------------------------------------------

    When the Market Value exceeds the Contract Value, the Collateral 
Mark is negative for, and thus payable by, the Member party that has a 
Net Short Position (i.e., the party required to deliver securities at 
final settlement). As a result, under FICC's existing funds-only 
settlement process, a Sponsored Member or Sponsoring Member that has 
received a haircut at the Start Leg of a Sponsored Member Trade would 
be required to transfer an amount of cash equal to that haircut (plus 
or minus any interim mark-to-market movements) on the next Business Day 
after the Start Leg has settled. This would frustrate the purpose of 
the haircut as between the Sponsoring Member and Sponsored Member. 
Specifically, if the haircut is returned before final settlement of a 
Sponsored Member Trade, the party that was supposed to retain the 
haircut for the duration of the trade would cease to be 
overcollateralized, thus defeating the contractual intent of the 
parties.\42\
---------------------------------------------------------------------------

    \42\ Because the Schedule of Timeframes in the Rules provides 
for intraday funds-only settlement amounts to be calculated using 
each Member's positions as of noon on the relevant Business Day, 
FICC's existing funds-only settlement process will not materially 
affect haircuts on overnight Sponsored Member Trades that are 
submitted for clearing in the afternoon. Nonetheless, FICC believes 
that applying the same Funds-Only Settlement calculations to 
overnight and term repo activity would help promote consistency 
across Sponsored Member Trades.

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

[[Page 1359]]

    In order to ensure that haircuts are not returned until final 
settlement, FICC proposes to amend Rule 3A and Rule 1. Specifically, 
FICC proposes to amend Section 9(a) of Rule 3A to provide that, if the 
parties to a Sponsored Member Trade agree for such Sponsored Member 
Trade to have a haircut, then any Funds-Only Settlement Amount 
applicable to such Sponsored Member Trade that includes a Collateral 
Mark would be calculated without regard for the Collateral Mark. Such 
Collateral Mark would be replaced by either a Haircut Deficit or 
Haircut Surplus. A ``Haircut Deficit'' would exist if the amount by 
which the Market Value as of the settlement date of the Start Leg 
exceeded the Contract Value of the Close Leg (the ``Initial Haircut'') 
is greater than the amount by which the Market Value as of the time of 
measurement exceeds the Contract Value of the Close Leg (the ``Current 
Haircut''). Any Haircut Deficit would be payable by the Member party 
with a Net Long Position. A ``Haircut Surplus'' would exist if the 
Current Haircut exceeds the Initial Haircut, and any Haircut Surplus 
would be payable by the Member party with a Net Short Position. FICC 
also proposes to amend Section 9(a) of Rule 3A to make clear that any 
Initial Haircut would be as agreed between the parties to the Sponsored 
Member Trade, and that FICC would not be under any obligation to verify 
the parties' agreement with respect to any Initial Haircut, and its 
calculation of the Initial Haircut would be conclusive and binding on 
the parties.
    For example, if on initial settlement of a Sponsored Member Trade a 
Sponsored Member transferred $98 in cash and received Eligible 
Securities worth $100,\43\ the Initial Haircut for such Sponsored 
Member Trade would be $2 (i.e., Market Value as of the settlement date 
of the Start Leg of $100 minus Contract Value of the Close Leg of $98). 
If on the next Business Day after initial settlement the value of the 
Eligible Securities increases in value to $101, then the Current 
Haircut on the Sponsored Member Trade on such Business Day would be $3 
(i.e., Market Value as of the time of measurement of $101 minus 
Contract Value of the Close Leg of $98), and there would be a Haircut 
Surplus of $1 (i.e., Current Haircut of $3 minus the Initial Haircut of 
$2) that would be owing to FICC by the Sponsored Member, as the Member 
party with the Net Short Position. Similarly, if in the same example, 
the value of the Eligible Securities decreased from $100 to $99 on the 
next Business Day after initial settlement, then the Current Haircut on 
the Sponsored Member Trade on such Business Day would be $1 (i.e., 
Market Value of $99 as of the time of measurement minus Contract Value 
of the Close Leg of $98) and there would be a Haircut Deficit of $1 
(i.e., Initial Haircut of $2 minus the Current Haircut of $1) that 
would be owing to FICC by the Sponsoring Member, as the Member party 
with the Net Long Position.
---------------------------------------------------------------------------

    \43\ For the sake of simplicity, this example excludes accrued 
interest and thus assumes that the amount of cash transferred at 
settlement of the Start Leg equals the amount of cash due to be 
transferred at the Close Leg.
---------------------------------------------------------------------------

    FICC would also revise Rule 1 to add new defined terms; these new 
defined terms are related to the proposed clarifications to Rule 3A 
described in the paragraph above. FICC would add the following new 
defined terms: (i) Current Haircut, (ii) Haircut Deficit, (iii) Haircut 
Surplus and (iv) Initial Haircut.
    FICC believes that the proposed changes to Rule 3A and Rule 1 
described above would allow a Sponsoring Member and its Sponsored 
Member who intend for one of those two parties to remain 
overcollateralized for the duration of a Sponsored Member Trade to 
transfer a haircut between each other and allow such haircut to remain 
with the intended party until final settlement of the Sponsored Member 
Trade.
(iv) Proposed Correction, Clarifications and Conforming Changes
    FICC proposes to make a correction as well as certain 
clarifications and conforming changes to Rule 3A, as further described 
below.
(A) Proposed Clarifications to Sections 8(c) and 9(b) of Rule 3A
    FICC proposes to make certain clarifications to Section 8(c) of 
Rule 3A related to proposed Section 18 described in Item II(A)1(ii) 
above.
    First, FICC is proposing to add a parenthetical to Section 8(c) 
clarifying that the operational netting provisions of Section 8(b) do 
not substantively modify a Sponsored Member's obligations to FICC. As 
noted above, Section 8(b) provides that, for operational convenience, 
FICC calculates a single Net Settlement Position and Fail Net 
Settlement Position in each CUSIP for the Sponsoring Member's 
Sponsoring Member Omnibus Account. Section 8(c), in turn, provides that 
each Sponsored Member shall satisfy its ``allocable portion'' of the 
Deliver Obligations and Receive Obligations established for the 
Sponsoring Member Omnibus Account.
    Neither Section 8(b) nor Section 8(c) modifies the obligations of 
any Sponsored Member; those provisions are simply designed for 
operational convenience. Each Sponsored Member still remains 
responsible for its Deliver Obligations to and Receive Obligations from 
FICC, which are calculated in accordance with Section 7 of Rule 3A. The 
Sponsored Member's ``allocable portion'' of the Deliver Obligations and 
Receive Obligations of the Sponsoring Member Omnibus Account will 
always equal its Deliver Obligations to and Receive Obligations from 
FICC, as calculated under Section 7 of Rule 3A.
    Therefore, in order to eliminate doubt regarding the extent of the 
Sponsored Member's obligations upon a termination and liquidation of a 
Sponsored Member's positions pursuant to proposed Section 18, FICC is 
proposing to add a parenthetical to Section 8(c) to make clear that a 
Sponsored Member's ``allocable portion'' of the obligations established 
for the Sponsoring Member Omnibus Account are the obligations of the 
Sponsored Member, as calculated in Section 7 of Rule 3A.
    FICC is also proposing to add language at the end of Sections 8(c) 
and 9(b) to clarify that, if a Sponsoring Member satisfies the net 
Deliver Obligations and Receive Obligations or the net Funds-Only 
Settlement Amount obligations of its Sponsoring Member Omnibus Account, 
including through the setoff described in proposed Section 18, before 
the Sponsoring Member receives corresponding performance from the 
Sponsored Member, such satisfaction would constitute performance by the 
Sponsoring Member under the Sponsoring Member Guaranty with respect to 
the relevant Sponsored Member's allocable portion of the Sponsoring 
Member Omnibus Account Deliver Obligations and Receive Obligations or 
Funds-Only Settlement Amount obligations.
    If a termination and liquidation under proposed Section 18 were to 
occur, the Sponsoring Member would be required to perform on behalf of 
the Sponsored Member under the Sponsoring Member Guaranty. The 
clarification described above is designed to ensure that, when the 
Sponsoring Member effects such performance, it would be entitled to

[[Page 1360]]

reimbursement from the Sponsored Member.

(B) Proposed Correction, Clarifications and Conforming Changes to 
Section 9 of Rule 3A

    FICC also proposes to make a correction as well as certain 
clarifications and conforming changes to Rule 3A. The proposed 
correction, clarifications and conforming changes are related to the 
clarifications described in Item II(A)1(iii) above with respect to the 
haircut.
    To enhance clarity, FICC proposes to make certain structural 
changes to Rule 3A, Section 9. Specifically, FICC proposes to move 
language from current subsection (b) of Section 9 and make it 
subsection (c). This, in turn, would require conforming changes to re-
letter original Sections 9(c) and 9(d) to 9(d) and 9(e), respectively. 
FICC also proposes to make a conforming grammatical change by deleting 
``such'' and replacing it with ``the'' in the first sentence of 
proposed subsection (c). FICC also proposes to revise proposed Section 
9(c) of Rule 3A to clarify that the Sponsored Member is responsible for 
satisfying the allocable portion of the Funds-Only Settlement Amount 
calculated for the Sponsoring Member Omnibus Account.
2. Statutory Basis
    FICC believes these proposed changes are consistent with the 
requirements of the Act, and the rules and regulations applicable to a 
registered clearing agency. Specifically, FICC believes that the 
proposed changes are consistent with Section 17A(b)(3)(F) of the Act 
\44\ and Rule 17Ad-22(e)(23)(i),\45\ as promulgated under the Act, for 
the reasons stated below.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78q-1(b)(3)(F).
    \45\ 17 CFR 240.17Ad-22(e)(23)(i).
---------------------------------------------------------------------------

    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) promote the prompt and accurate 
clearance and settlement of securities transactions.\46\
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC believes that the proposed changes described in Item 
II(A)1(ii) above, i.e., to facilitate the submission of term repo 
activity through the Service by providing a mechanism by which a 
Sponsoring Member may cause the termination and liquidation of a 
Sponsored Member's positions arising from Sponsored Member Trades 
between the Sponsoring Member and its Sponsored Member that have been 
novated to FICC, are designed to remove certain impediments to and 
perfect the mechanism of a national settlement system for the prompt 
and accurate clearance and settlement of securities transactions. In 
particular, FICC believes that providing a mechanism by which a 
Sponsoring Member may cause the termination and liquidation of a 
Sponsored Member's positions arising from Sponsored Member Trades 
between the Sponsoring Member and its Sponsored Member that have been 
novated to FICC would give Sponsoring Members greater ability to manage 
the risks associated with Sponsored Member Trades, particularly 
Sponsored Member Trades with a scheduled final settlement date beyond 
the next Business Day after the initial settlement date. Such effective 
risk management would reduce the risk of a Sponsoring Member failure, 
which could otherwise disrupt the prompt and accurate clearance and 
settlement of Sponsored Member Trades and other transactions submitted 
to FICC. As described above, the absence of the ability on the part of 
Sponsoring Members to terminate and liquidate such Sponsored Member 
positions is currently an impediment that discourages term repo 
activity within the Service. The proposal to provide Sponsoring Members 
with that ability would remove the impediment, consistent with Section 
17A(b)(3)(F) of the Act.\47\
---------------------------------------------------------------------------

    \47\ Id.
---------------------------------------------------------------------------

    FICC also believes the proposed changes are designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions. By allowing Sponsoring Members to manage risks associated 
with Sponsored Member Trades more effectively, FICC believes the 
proposed changes would enable Sponsoring Members to submit a greater 
number of securities transactions to be cleared and settled by a 
central counterparty. In particular, FICC believes Sponsoring Members 
would be able to submit to FICC more term repo activity. FICC's 
clearance and settlement of such term repo activity would promote the 
prompt and accurate clearance and settlement of securities transactions 
by increasing the number of transactions subject to FICC's risk 
management and guaranty of settlement.
    FICC believes the proposed changes described in Item II(A)1(iii) 
above, i.e., to facilitate the submission of term repo activity through 
the Service by revising how FICC calculates the funds-only settlement 
obligations of Sponsored Members and Sponsoring Members with respect to 
Sponsored Member Trades that have haircuts in order to ensure that such 
calculation does not result in a return of the haircuts until final 
settlement, are designed to promote the prompt and accurate clearance 
and settlement of securities transactions. As described above, FICC 
believes these clarifications would honor the contractual intent of the 
Sponsoring Members and their Sponsored Members to transfer haircuts 
between each other for Sponsored Member Trades. FICC believes that the 
proposed change to the calculation (resulting in the return of haircuts 
at final settlement only) may encourage Sponsoring Members to submit a 
greater number of securities transactions to be cleared and settled by 
FICC, and in particular, term repo activity. As described above, FICC's 
clearance and settlement of such term repo activity would promote the 
prompt and accurate clearance and settlement of securities transactions 
by increasing the number of transactions subject to FICC's risk 
management and guaranty of settlement. Moreover, the current 
calculation of the funds-only settlement obligations of Sponsored 
Members and Sponsoring Members is currently an impediment that 
discourages term repo activity within the Service. The proposal 
described in Item II(A)1(iii) above would remove the impediment, 
consistent with Section 17A(b)(3)(F) of the Act.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    FICC believes the proposed correction, clarifications, and 
conforming changes described in Item II(A)1(iv) above are also designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions by enhancing clarity and transparency regarding 
the Service. Having transparent and clear provisions regarding the 
Service would enable Members to better understand the operation of the 
Service and would provide Members with increased predictability and 
certainty regarding their rights and obligations. FICC believes that 
this increased predictability and certainty regarding their rights and 
obligations may encourage Sponsoring Members to submit a greater number 
of securities transactions to be cleared and settled by FICC, and in 
particular, term repo activity. FICC's clearance and settlement of such 
term repo activity would promote the prompt and accurate clearance and 
settlement of securities transactions by increasing the number of 
transactions subject to FICC's risk management and guaranty of 
settlement. Therefore, FICC believes the proposed correction, 
clarifications, and

[[Page 1361]]

conforming changes described in Item II(A)1(iv) above are designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions.
    Rule 17Ad-22(e)(23)(i) under the Act requires FICC to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to publicly disclose all relevant rules and 
material procedures.\49\ FICC believes that the proposed changes 
described in Item II(A)1(ii) above would establish a clear and 
transparent mechanism by which a Sponsoring Member may terminate and 
liquidate the positions of a Sponsored Member. Having a clear mechanism 
for such termination and liquidation would allow Sponsoring Members and 
Sponsored Members to understand the circumstances in which a Sponsored 
Member's positions may be terminated and liquidated and how such 
termination and liquidation would occur. FICC also believes that the 
proposed rule changes described in Item II(A)1(iii) above would enhance 
clarity and transparency regarding the funds-only settlement 
obligations of Sponsored Members with respect to any term repo 
activity. Specifically, the proposed changes would revise how FICC 
calculates the funds-only settlement obligations of Sponsored Members 
and Sponsoring Members with respect to Sponsored Member Trades that 
have haircuts in order to ensure that such calculation does not result 
in a return of the haircuts until final settlement. FICC believes that 
these proposed changes would provide enhanced clarity to Sponsoring 
Members and Sponsored Members regarding their rights and obligations as 
well as the rights and obligations of FICC. Additionally, the proposed 
correction, clarifications, and conforming changes described in Item 
II(A)1(iv) above would add further clarity to the Rules. FICC believes 
the proposal would ensure that the Rules remain clear and accurate, and 
facilitate Members' understanding of the Rules, and provide Members 
with increased predictability and certainty regarding their 
obligations. As such, FICC believes that these proposed changes are 
consistent with Rule 17Ad-22(e)(23)(i) under the Act.\50\
---------------------------------------------------------------------------

    \49\ 17 CFR 240.17Ad-22(e)(23)(i).
    \50\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed changes in Item II(A)1(ii) above 
could have an impact on competition by promoting and burdening 
competition. The proposal to allow a Sponsoring Member to control the 
termination and liquidation of its Sponsored Member's FICC-cleared 
positions could promote competition by increasing the ability of 
Sponsoring Members to more effectively manage the risks of Sponsored 
Member Trades, particularly Sponsored Member Trades with a scheduled 
final settlement date beyond the next Business Day after the initial 
settlement date. Such increased risk management ability, in turn, could 
cause more institutions to become Sponsoring Members, and existing and 
future Sponsoring Members to accept a greater number and variety of 
Sponsored Members and Sponsored Member Trades, including, in 
particular, term repo activity. FICC also believes the proposed changes 
in Item II(A)1(ii) above could promote competition by allowing 
Sponsoring Members and Sponsored Members to negotiate the circumstances 
in which the Sponsoring Member could cause the termination and 
liquidation of the Sponsored Member's positions. The prospect of 
negotiation could allow Sponsored Members to consider various 
Sponsoring Members and the terms they offer.
    Conversely, the proposed changes described in Item II(A)1(ii) above 
to allow a Sponsoring Member to control the termination and liquidation 
of its Sponsored Member's FICC-cleared positions could burden 
competition by applying a different standard for the termination and 
liquidation of Sponsored Members' FICC-cleared positions than the 
standard that applies to other Members under Rule 22A.\51\ However, 
FICC does not believe that the proposed changes described in Item 
II(A)1(ii) above would result in a significant burden on competition 
because the Sponsored Member would have the ability to negotiate with 
possible Sponsoring Members the circumstances in which the Sponsoring 
Member may effectuate a termination and the methodology it would use in 
calculating the liquidation amount.
---------------------------------------------------------------------------

    \51\ Rule 22A, supra note 3.
---------------------------------------------------------------------------

    Regardless of whether the potential burden on competition discussed 
in the previous paragraph is significant, FICC believes that any burden 
on competition that may be created by these proposed changes would be 
necessary and appropriate in furtherance of the purposes of the Act, as 
permitted by Section 17A(b)(3)(I) of the Act.\52\
---------------------------------------------------------------------------

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

    FICC believes that any burden on competition created by the 
proposed changes described in Item II(A)1(ii) above is necessary in 
furtherance of the purposes of the Act 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) promote 
the prompt and accurate clearance and settlement of securities 
transactions.\53\ Specifically, FICC believes that any burden on 
competition resulting from allowing a Sponsoring Member to control the 
termination and liquidation of its Sponsored Member's FICC-cleared 
positions would be necessary in order to provide Sponsoring Members 
with greater ability to manage the risks associated with Sponsored 
Member Trades, particularly term repo activity. As described in detail 
in Item II(A)2 above, FICC believes that providing Sponsoring Members 
with greater ability to manage the risks associated with Sponsored 
Member Trades, particularly term repo activity, would (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) promote the prompt and accurate clearance and settlement of 
securities transactions. Therefore, FICC believes any burden that is 
created by these proposed changes would be necessary in furtherance of 
the purposes of the Act, as permitted by Section 17A(b)(3)(I) of the 
Act.\54\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78q-1(b)(3)(F).
    \54\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Furthermore, FICC believes that any burden on competition resulting 
from allowing a Sponsoring Member to control the termination and 
liquidation of its Sponsored Member's FICC-cleared positions would be 
appropriate in furtherance of the purposes of the Act, as permitted by 
Section 17A(b)(3)(I) of the Act,\55\ because the proposed changes would 
remove the current impediment whereby the Sponsoring Member is not 
unilaterally able to cause the termination or liquidation of any 
Sponsored Member Trades. As stated above, there is an intermediary 
relationship between a Sponsoring Member and its Sponsored Member, 
including the Sponsoring Member's liability to FICC for the Sponsored 
Member's performance under the Sponsoring Member Guaranty, which does 
not apply to other Members. FICC believes this unique relationship 
warrants the Sponsoring Member having control over the termination and 
liquidation of its Sponsored Member's FICC-cleared positions. Moreover, 
the proposed changes would be more consistent with other intermediated

[[Page 1362]]

relationships where the intermediary is typically permitted to 
terminate and liquidate the positions of its client that the 
intermediary guarantees if an event of default or other similar 
circumstance occurs under the bilateral agreement between the 
intermediary and the client. The current inability to effectuate such 
termination and liquidation is inconsistent with other intermediated 
relationships and discourages term repo activity within the Service. 
The proposed changes would enable the Sponsoring Member to cause the 
termination and liquidation of the Sponsored Member's positions for 
which the Sponsoring Member is responsible, thereby providing it with 
greater ability to manage the risks associated with Sponsored Member 
Trades, particularly term repo activity. Therefore, FICC believes any 
burden that is created by these proposed changes would be appropriate 
in furtherance of the purposes of the Act, as permitted by Section 
17A(b)(3)(I) of the Act.\56\
---------------------------------------------------------------------------

    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    FICC believes that the proposed changes described in Item 
II(A)1(iii) above to facilitate the submission of term repo activity 
through the Service by revising how FICC calculates the funds-only 
settlement obligations of Sponsored Members and Sponsoring Members with 
respect to Sponsored Member Trades with haircuts could promote 
competition. This is because the proposed changes would honor the 
parties' contractual intent (as described in Item II(A)1(iii) above) 
and, thus, encourage more term repo activity within the Service. As 
such, FICC believes that these proposed changes could promote 
competition.
    In addition, FICC does not believe that the proposed correction, 
clarifications, and conforming changes in Item II(A)1(iv) above would 
have an impact on competition. These changes would simply provide 
additional clarity, transparency and consistency to the Rules and not 
affect Members' rights and obligations. As such, FICC believes that 
these proposed changes would not have any impact on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    FICC reviewed the proposed rule change with its Sponsoring Members 
in order to benefit from their expertise. Written comments relating to 
this proposed rule change have not been received from the Sponsoring 
Members or any other person. FICC will notify the Commission of any 
written comments received by FICC.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2019-007 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2019-007. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2019-007 and should be submitted on 
or before January 31, 2020.
---------------------------------------------------------------------------

    \57\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00203 Filed 1-9-20; 8:45 am]
 BILLING CODE 8011-01-P