[Federal Register Volume 86, Number 13 (Friday, January 22, 2021)]
[Notices]
[Pages 6724-6729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01324]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90931; File No. SR-FICC-2020-803]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of No Objection To Advance Notice To Include Same-Day Settling 
Trades in the Risk Management, Novation, Guarantee, and Settlement 
Services of the Government Securities Division's Delivery-Versus-
Payment Service, and Make Other Changes

January 14, 2021.
    On November 19, 2020, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-FICC-2020-803 (``Advance Notice'') pursuant to 
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, entitled Payment, Clearing and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act''),\1\ and Rule 
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'').\3\ In the Advance Notice, FICC proposes to (1) 
expand its provision of central counterparty services to include the 
start leg of certain repurchase agreement (``repo'') transactions, and 
(2) enable participating FICC members to pair-off and settle certain 
offsetting obligations, as described more fully below. The Advance 
Notice was published for public comment in the Federal Register on 
December 29,

[[Page 6725]]

2020,\4\ and the Commission has received no comments regarding the 
changes proposed in the Advance Notice.\5\ This publication serves as 
notice of no objection to the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ Securities Exchange Act Release No. 90736 (December 21, 
2020), 85 FR 85743 (December 29, 2020) (File No. SR-FICC-2020-803) 
(``Notice of Filing'').
    \5\ On November 19, 2020, FICC also filed a related proposed 
rule change (SR-FICC-2020-015) (``Proposed Rule Change'') with the 
Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule 
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4 
respectively. The Proposed Rule Change was published in the Federal 
Register on December 8, 2020. Securities Exchange Act Release No. 
90551 (December 2, 2020), 85 FR 79051 (December 8, 2020). In the 
Proposed Rule Change, FICC seeks approval of proposed changes to its 
rules necessary to implement the Advance Notice. The comment period 
for the related Proposed Rule Change filing closed on December 29, 
2020, and the Commission received no comments. As the proposals 
contained in the Advance Notice were also filed as a proposed rule 
change, all public comments received on the proposal are considered, 
regardless of whether the comments are submitted on the Proposed 
Rule Change or the Advance Notice.
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I. The Advance Notice

A. Background

    FICC, through its Government Securities Division (``GSD''), serves 
as a central counterparty (``CCP'') and provider of clearance and 
settlement services for cash-settled U.S. Treasury securities.\6\ Among 
its services, FICC provides real-time trade matching, clearing, risk 
management, and netting for repo transactions in U.S. Treasury 
securities in which all securities delivery obligations are made 
against full payment (``delivery-versus-payment'' or ``DVP'') (the 
``DVP Service'').\7\
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    \6\ FICC is composed of two divisions: GSD and the Mortgage-
Backed Securities Division (``MBSD''). GSD provides real-time trade 
matching, clearing, risk management, and netting for trades in U.S. 
government debt issues. MBSD provides real-time automated trade 
matching, trade confirmation, risk management, netting, and 
electronic pool notification to the mortgage-backed securities 
(``MBS'') market. The Advance Notice deals solely with proposed 
changes to the GSD Rulebook (``Rules''), which are available at 
http://www.dtcc.com/legal/rules-and-procedures.
    \7\ In addition to the DVP Service, FICC also provides such 
services to facilitate trading other types of repos. FICC's General 
Collateral Finance (``GCF'') Repo[supreg] Service enables members to 
trade general collateral finance repos based on rate, term, and 
underlying product throughout the day on a blind basis. See Rule 
20--Special Provisions for GCF Repo Transactions, supra note 6. 
FICC's Centrally Cleared Institutional Triparty (``CCIT'') Service 
enables trading of tri-party repos between members that participate 
in the GCF Repo Service and members that are institutional cash 
lenders (other than investment companies registered under the 
Investment Company Act of 1940, as amended). See Rule 3B--CCIT 
Service, supra note 6. Unlike the DVP Service, the GCF Repo and CCIT 
Services settle via the triparty platform of a clearing bank. This 
Advance Notice proposes changes specific to the DVP Service.
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    DVP repos involve a pair of transactions between two parties. The 
first transaction (the ``Start Leg'') consists of the sale of 
securities, in which one party delivers securities in exchange for the 
other party's delivery of cash. The second transaction (the ``End 
Leg'') occurs on a date after that of the Start Leg and consists of the 
repurchase of securities, in which the obligations to deliver cash and 
securities are the reverse of the Start Leg. The parties agree to the 
terms of the trade, including the specific securities, principal 
amount, interest rate, haircut, and date of maturity (i.e., either 
overnight or term).
    A DVP repo that is scheduled to start one or more business days 
after the submission of trade details to FICC is a ``forward starting'' 
repo. A DVP repo that is scheduled to start on the same business day as 
trade details are submitted to FICC is a ``same-day starting'' repo. 
For forward starting repos, FICC acts as CCP for both the Start Leg and 
the End Leg. However, since the inception of the DVP Service, for same-
day starting repos, FICC generally has acted as CCP for the End Leg 
only.\8\ Although FICC does not currently novate the Start Leg of same-
day starting repos, FICC collects margin from the parties for the End 
Leg on the scheduled settlement date of the Start Leg.\9\ Currently, 
the parties to a same-day starting repo settle the Start Leg 
bilaterally outside of FICC.
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    \8\ There is one limited scenario in which FICC currently acts 
as CCP for the Start Leg of a brokered same-day starting repo. 
Specifically, if the Start Leg fails to settle on its original 
scheduled settlement date, FICC currently assumes responsibility for 
settlement of the Start Leg on the evening of the original scheduled 
settlement date. See Notice of Filing, supra note 4 at 85744.
    \9\ See Notice of Filing, supra note 4 at 85744, 50.
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    The first step in the clearance and settlement process of a DVP 
repo is for the parties to submit the trade details to FICC.\10\ Upon 
receipt, FICC validates the trade details in a procedure referred to in 
FICC's Rules as ``Trade Comparison,'' which culminates in the legally 
binding and enforceable contract between FICC and the parties to the 
trade.\11\ There are different types of Trade Comparisons, depending on 
which entity submits the trade details to FICC, and the procedures, 
timing, and other applicable operational arrangements vary depending on 
the type. For example, a Bilateral Comparison occurs when the 
individual FICC members that are the parties to a trade each submit 
trade details to FICC.\12\ A Demand Comparison occurs when an Inter-
Dealer Broker (``IDB'') or qualifying non-IDB repo broker \13\ (each, a 
``Repo Broker'') submits trade details to FICC on behalf of both 
parties to a trade.\14\
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    \10\ Trade details may be submitted to FICC by, or on behalf of, 
a member in a form, manner, and timeframe prescribed by FICC's 
Rules. See Rule 5--Comparison System, supra note 6.
    \11\ Id.
    \12\ See Rule 6A--Bilateral Comparison, supra note 6.
    \13\ For purposes of the Advance Notice, both IDBs and non-IDB 
repo brokers are FICC members. A qualifying non-IDB repo broker is 
one that FICC has determined: (1) Operates as a broker with regard 
to activity in a segregated repo account, and (2) agrees and 
participates in FICC's repo netting service in the same manner as an 
IDB that participates in the service. See Rule 1--Definitions, supra 
note 6.
    \14\ See Rule 6B--Demand Comparison, supra note 6.
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    FICC generally novates and guarantees settlement of a trade upon 
Trade Comparison.\15\ Additionally, on a daily basis, FICC aggregates 
and matches a member's offsetting obligations resulting from the 
member's trades, thereby netting the member's total daily settlement 
obligations.\16\ In the DVP Service, such netting takes place the night 
before the scheduled settlement date of whichever leg of the repo would 
settle on the following business day.\17\
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    \15\ See Rule 5--Comparison System, supra note 6.
    \16\ See Rule 11--Netting System, supra note 6.
    \17\ See Notice of Filing, supra note 4 at 85745-46.
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    Trades that settle bilaterally outside of FICC do not have the 
benefit of FICC's CCP services, and therefore, such trades can be 
subject to greater risk of settlement fails.\18\ Moreover, trades 
facilitated by a Repo Broker that settle outside of FICC require 
multiple bilateral securities movements between the parties to the 
trade and the Repo Broker. The greater the number of bilateral 
securities movements involved in trade settlement, the greater the 
potential for operational risk resulting in settlement fails. If the 
Start Leg of a DVP repo submitted by a Repo Broker fails to settle on 
the original scheduled settlement date, FICC currently steps in that 
evening as CCP and assumes

[[Page 6726]]

responsibility for settling the trade.\19\ This process may involve 
FICC receiving securities from the failing party or netting the 
settlement obligations arising from the Start Leg against those of the 
End Leg of the same or another repo. FICC states that although its 
current process of centralizing the settlement of such failed Start 
Legs decreases further settlement risk, the current process is 
operationally inefficient because it does not eliminate the multiple 
securities movements that give rise to the risk of settlement 
fails.\20\
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    \18\ There are several risk factors inherent to trades that 
clear bilaterally as opposed to trades that clear through a CCP. For 
example, the credit risk associated with bilaterally cleared trades 
remains with the original counterparties, who might not utilize 
robust and transparent margin requirements, multilateral netting, 
emergency liquidity and loss sharing arrangements, or other risk 
mitigation measures. See U.S. Department of the Treasury Report, A 
Financial System That Creates Economic Opportunities: Capital 
Markets at 78, 81 (October 2017), available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf; Joint Staff Report: The U.S. 
Treasury Market at 55 (October 15, 2014), available at https://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2014.pdf; Treasury Market 
Practices Group, White Paper on Clearing and Settlement in the 
Secondary Market for U.S. Treasury Securities at 2-4 (July 11, 
2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf.
    \19\ See Section 5, Rule 19--Special Provisions for Brokered 
Repo Transactions, supra note 6.
    \20\ See Notice of Filing, supra note 4 at 85744.
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B. Proposed Same-Day Settling Service

    FICC states that its members have expressed an interest in FICC 
acting as CCP for the Start Leg of same-day starting repos.\21\ In the 
Advance Notice, FICC proposes to modify its Rules to include the Start 
Leg of same-day starting repos in the risk management, novation, 
guarantee, and settlement services of the DVP Service (the ``Same-Day 
Settling Service''). Upon Trade Comparison, FICC would act as CCP for 
the Start Leg of same-day starting repos, which would settle on the 
same business day. FICC's margin collection with respect to the trade 
would not change from the current process. After FICC's novation, if 
the Start Leg were to fail, the parties' obligations to and from FICC 
would go through the netting process that evening, and FICC would 
continue to apply the margin amounts collected with respect to the 
trade towards FICC's risk management of the End Leg.
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    \21\ Id.
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    FICC believes that the Same-Day Starting Service could increase 
settlement efficiencies and decrease settlement risk because it would 
eliminate the movement of securities between members by centralizing 
the settlement of the Start Leg of same-day starting repos with 
FICC.\22\ Moreover, for same-day starting repos submitted by Repo 
Brokers, the Same-Day Settling Service would remove the Repo Broker 
from the settlement process by eliminating the multiple bilateral 
securities movements involved in the settlement of the Start Leg.
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    \22\ See Notice of Filing, supra note 4 at 85744, 49-50.
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1. Voluntary for Repo Brokers; Mandatory for Other Members
    As proposed in the Advance Notice, participation in the proposed 
Same-Day Settling Service would be voluntary for Repo Brokers. Repo 
Brokers often provide a suite of services to their clients, including 
facilitating the bilateral settlement of the Start Leg of same-day 
starting repos. FICC states that a requirement on Repo Brokers to 
participate in the Same-Day Settling Service could disrupt the current 
service offerings from Repo Brokers to their clients.\23\ Since Repo 
Brokers submit trade details to FICC on behalf of both parties to a 
trade, a Repo Broker opting out of the Same-Day Settling Service would 
simply result in settlement of the Start Leg bilaterally outside of 
FICC, as is done currently. FICC believes that providing optionality 
would allow Repo Brokers and their clients to determine whether a Repo 
Broker should participate in the Same-Day Settling Service.\24\ For 
participating Repo Brokers, FICC would no longer assume responsibility 
for a failed Start Leg because FICC would already be acting as CCP for 
the Start Leg upon Trade Comparison.
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    \23\ See Notice of Filing, supra note 4 at 85746.
    \24\ Id.
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    For FICC's members that are not Repo Brokers, participation in the 
Same-Day Settling Service would be mandatory. Unlike Repo Brokers, 
FICC's individual members submit trade details with respect to their 
own side of a trade only, such that Trade Comparison only occurs after 
FICC validates the trade details submitted by both parties to the 
trade.\25\ Accordingly, if one party to a same-day starting repo could 
choose to opt out of the Same-Day Settling Service, FICC would not be 
able to act as CCP with equal and opposite settlement obligations 
between the two parties. Such trades would, therefore, need to settle 
outside of FICC as they do currently. However, unlike the clients of a 
Repo Broker, such members would not know in advance whether any given 
Start Leg would settle with FICC as CCP or bilaterally outside of FICC. 
By requiring such members to participate in the Same-Day Settling 
Service, members would have certainty that their Compared Trades would 
settle with FICC acting as CCP.
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    \25\ See Rule 6A--Bilateral Comparison, supra note 6.
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2. As-Of Trades
    For purposes of the Advance Notice, same-day starting repos would 
include As-Of Trades,\26\ in which a member submits a DVP repo for 
comparison on the business day after the scheduled settlement date for 
the Start Leg, and the End Leg is the current business day or 
thereafter. FICC states that members occasionally submit As-Of Trades 
due to human or operational errors.\27\ FICC further states that it 
included As-Of Trades in the Advance Notice in order to reasonably 
include as many variations of same-day starting repos as possible to 
ensure that FICC would provide consistent settlement processing for all 
same-day starting repos.\28\
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    \26\ See Rule 1, supra note 6.
    \27\ See Notice of Filing, supra note 4 at 85745.
    \28\ Id.
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    Currently, the Start Leg of an As-Of Trade settles outside of FICC. 
An End Leg scheduled to settle on the current business day also settles 
outside of FICC. However, an End Leg scheduled to settle on a date 
after the current business day settles with FICC acting as CCP. As 
proposed in the Advance Notice, FICC would act as CCP with respect to 
both the Start and End Legs of a same-day starting repo, regardless of 
the timing of the respective scheduled settlement dates.
3. Settlement at Contract Value or System Value
    As mentioned above, netting in the DVP Service occurs the night 
before the scheduled settlement date. Because settlement of Start Legs 
within the Same-Day Settling Service would occur on the same business 
day as Trade Comparison, such transactions would generally not be 
netted.\29\ Instead, FICC would settle such transactions on a trade-
for-trade basis. Transactions that FICC settles on a trade-for-trade 
basis (i.e., transactions that are not netted) settle at ``Contract 
Value,'' which means the dollar value at which the transaction is to be 
settled on the scheduled settlement date.\30\ Transactions that settle 
on a future date (i.e., transactions that are netted) settle at 
``System Value,'' which includes accrued interest. For consistency with 
the foregoing, FICC proposes to clarify the Rules with respect to the 
Same-Day Settling Service to reflect that any leg of a DVP repo to be 
settled on a trade-for-trade basis would settle at Contract Value, 
whereas any leg to be settled on a future date would settle at System 
Value.\31\
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    \29\ The Start Leg of same-day starting repos would be netted in 
the limited scenario of a brokered repo settlement fail on the 
scheduled settlement date. See supra note 8; Notice of Filing, supra 
note 4 at 85744.
    \30\ See Rule 1--Definitions, supra note 6.
    \31\ For example, for an overnight repo that is an As-Of Trade, 
both legs would settle at Contract Value because both would settle 
on the date of Trade Comparison and therefore would not be netted. 
For an overnight repo that is a same-day starting repo, the Start 
Leg would settle on the date of Trade Comparison at Contract Value, 
whereas the End Leg would be netted that evening and settle the 
following business day at System Value. For an overnight repo that 
is forward starting (i.e., both legs would settle on dates in the 
future), both legs would be subject to netting and settle at System 
Value. Notice of Filing, supra note 4 at 85746.

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[[Page 6727]]

4. Late-Day Compared Trades
    FICC states that members occasionally execute same-day starting 
repos after the close of the Fedwire Securities Service (``Fedwire''), 
which is the service that members generally use for settling bilateral 
securities obligations.\32\ Currently, such trades settle bilaterally 
between the parties outside of FICC, provided that both parties use the 
same clearing bank for settlement. In the Advance Notice, FICC proposes 
to include such late-day trades in the Same-Day Settling Service (i.e., 
FICC proposes to act as CCP for the Start Leg) on a reasonable efforts 
basis, meaning that FICC would attempt to contact the parties to the 
trade and FICC's clearing bank to confirm agreement to settle the 
trade.\33\
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    \32\ The Fedwire is a service provided by the Federal Reserve 
Banks that includes settlement and transfer of DVP securities 
transactions. The Fedwire operates daily from 8:30 a.m. to 3:30 p.m. 
(All times herein are Eastern Time.) See Fedwire and National 
Securities Service, Federal Reserve Bank of New York (March 2015), 
available at https://www.newyorkfed.org/aboutthefed/fedpoint/fed43.html; Fedwire Securities Service, Board of Governors of the 
Federal Reserve System (July 31, 2014), available at https://www.federalreserve.gov/paymentsystems/fedsecs_about.htm.
    \33\ See Notice of Filing, supra note 4 at 85748.
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    Specifically, for members that clear at FICC's clearing bank, FICC 
would attempt to settle any same-day starting repos that are compared 
between 3:01 p.m. and 5:00 p.m., provided that (1) FICC is able to 
contact the parties to the trade and FICC's clearing bank, and (2) the 
parties and FICC's clearing bank agree to settle the trade. For members 
that do not clear at FICC's clearing bank, FICC proposes to attempt to 
settle, on a reasonable efforts basis, same-day starting repos that are 
compared during the Fedwire reversal period between 3:01 p.m. and 3:30 
p.m., provided that (1) FICC is able to contact FICC's clearing bank 
and the parties to the trade, (2) FICC's clearing bank and the parties 
to the trade confirm agreement to settle the trade, and (3) FICC's 
clearing bank, the member's clearing bank, and the Federal Reserve Bank 
of New York each permit settlement of the trade.
5. Other Changes to FICC's Rules To Incorporate the Same-Day Settling 
Service
    In the Advance Notice, FICC proposes changes to several Rule 
provisions to ensure the relevant applicability of such provisions to 
the Same-Day Settling Service. FICC proposes to add a newly defined 
term ``Same-Day Settling Trade'' to capture the universe of DVP repos 
that would be covered by the Same-Day Settling Service. FICC proposes 
to modify the definitions of ``Deliver Obligation'' and ``Receive 
Obligation'' to include references to Same-Day Settling Trades. FICC 
proposes to modify the definitions of ``Settlement Value'' and ``System 
Value'' to contemplate that Same-Day Settling Trades could settle at 
Contract Value or System Value, depending on the circumstances of the 
trade, as described above.
    FICC proposes to incorporate Same-Day Settling Trades into the 
existing Rule provisions governing the Comparison System and Netting 
System. FICC proposes to add Rule provisions addressing eligibility 
requirements for Same-Day Settling Trades to qualify for FICC's 
novation and settlement guarantee. FICC proposes to incorporate Same-
Day Settling Trades into the Rule provisions governing how parties 
satisfy their obligations to FICC, including trades that become 
uncompared or canceled. FICC proposes to incorporate Same-Day Settling 
Trades into the Rule provisions dealing with settlement fails. Finally, 
FICC proposes to include appropriate cross-references to ensure that 
various Rule provisions related to general securities settlement apply 
to Same-Day Settling Trades.

C. Proposed Pair-Off Service

    Settlement fails occur because one party does not have inventory to 
settle with the other party on the scheduled settlement date. 
Currently, a member's obligations that remain unsettled when the 
Fedwire closes go through FICC's overnight netting system for 
settlement the following business day, and the member is subject to 
FICC's fails charge.\34\ In a scenario where a member has offsetting 
unsettled failed obligations in the same security (i.e., separate 
failed obligations to both deliver and receive the same security) after 
the close of the Fedwire, those obligations currently go through the 
overnight netting system for settlement the following day.
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    \34\ See Section 14, Rule 11--Netting System, supra note 6.
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    In the Advance Notice, FICC proposes an optional service for 
members whereby FICC would pair-off a member's offsetting failed 
securities settlement obligations each day, beginning at 3:32 p.m. 
(shortly after the Fedwire closes) until 4:00 p.m. (the ``Pair-Off 
Service''). Additionally, the member would receive either a debit or 
credit, as applicable, to account for any difference in the settlement 
value of its deliver and receive obligations as part of FICC's intraday 
funds-only settlement (``FOS'') process. Therefore, the proposed Pair-
Off Service would enable participating members to settle their 
obligations on the day they arise, rather than continuing to the next 
day as unsettled failed obligations, as they would under the current 
practice. Failed obligations that remain unsettled overnight present 
market risk exposure to both FICC and the parties to such trades. FICC 
believes that by enabling the earlier settlement of a member's 
offsetting obligations, the proposed Pair-Off Service could reduce such 
overnight market risk.\35\
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    \35\ See Notice of Filing, supra note 4 at 85749-50.
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    FICC proposes to start the Pair-Off Service at approximately 3:32 
p.m., and provide FOS banks with their intraday net FOS figures by 4:00 
p.m. for acknowledgement by 4:30 p.m. Accordingly, FICC proposes to 
change the timing of FOS processing from the current time of 3:15 p.m. 
to 4:30 p.m. to enable FICC to settle any net money differences that 
would arise from the proposed Pair-Off Service.

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: To mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for SIFMUs and 
strengthening the liquidity of SIFMUs.\36\
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    \36\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe regulations containing risk management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency.\37\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a): \38\
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    \37\ 12 U.S.C. 5464(a)(2).
    \38\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk 
management standards may address such areas as

[[Page 6728]]

risk management and default policies and procedures, among others 
areas.\39\
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    \39\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\40\ The Clearing Agency 
Rules require, among other things, each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for its operations and risk management practices on an 
ongoing basis.\41\ As such, it is appropriate for the Commission to 
review advance notices against the Clearing Agency Rules and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act. As 
discussed below, the Commission believes the proposals in the Advance 
Notice are consistent with the objectives and principles described in 
Section 805(b) of the Clearing Supervision Act \42\ and in the Clearing 
Agency Rules, in particular Rule 17Ad-22(e)(21).\43\
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    \40\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). 
See also Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing 
Agency Standards''). FICC is a ``covered clearing agency'' as 
defined in Rule 17Ad-22(a)(5).
    \41\ Id.
    \42\ 12 U.S.C. 5464(b).
    \43\ 17 CFR 240.17Ad-22(e)(21)(i), (ii), and (iii).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the Advance Notice is consistent with 
the stated objectives and principles of Section 805(b) of the Clearing 
Supervision Act because the changes proposed in the Advance Notice are 
consistent with reducing systemic risks, supporting the stability of 
the broader financial system, promoting robust risk management, and 
promoting safety and soundness.\44\
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    \44\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposals in the Advance Notice 
are consistent with the principles of reducing systemic risk and 
supporting the stability of the broader financial system. When a CCP 
novates a trade and takes offsetting and guaranteed positions between 
the two original parties to the trade, the length of time from novation 
to trade settlement may affect the CCP's exposure to credit, market, 
and liquidity risk. For example, settlement fails extend the time to 
settlement and can thereby present risk to the CCP that a member's 
positions and other resources that the CCP holds (generally, the 
member's margin) decline in market value as the CCP considers whether 
and how it might liquidate, transfer, or otherwise dispose of such 
assets to minimize losses. Settlement fails can also affect the amount 
of liquidity risk a CCP may need to bear for purposes of settling an 
unsettled trade because CCPs may rely on incoming payments from some 
members to facilitate payments to other members. For FICC's members, a 
settlement fail on a securities delivery obligation causes the non-
failing party to withhold payment while settlement is rescheduled for 
the following business day and until the trade ultimately settles. In 
the interim, the non-failing party cannot use the securities, which it 
may have already committed to deliver in subsequent trading activity, 
giving rise to the risk of further settlement fails. Also, the failing 
party does not have use of the cash proceeds from the trade. Settlement 
fails can, therefore, undermine the liquidity of a well-functioning 
market, and a member default could lead to the default of other members 
and market participants as well. Settlement fails can therefore be a 
source of systemic risk and instability to the broader market.
    As described above in Section I.A., FICC currently acts as CCP for 
only the End Leg of a same-day starting DVP repo. The Start Leg 
currently settles bilaterally outside of FICC between the parties to 
the trade. Trades that settle bilaterally outside of FICC are generally 
exposed to more operational risk and consequently may result in more 
settlement fails than trades which are novated and risk-managed by FICC 
in its role as CCP.\45\
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    \45\ See supra note 18.
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    By centralizing settlement of the Start Leg of same-day starting 
repos, the proposal would eliminate the current bilateral settlement of 
securities between the parties. Once the Start Leg is subject to FICC's 
settlement guarantee, a settlement fail would be contained between the 
failing party and FICC. Even if the start leg were to fail, FICC's 
margin collection and other risk mitigation measures would be in place 
to protect the non-failing party originally on the other side of the 
trade. The Same-Day Settling Service would thereby likely reduce the 
spread of settlement fails to other market participants. As a result, 
the Commission believes that the Same-Day Settling Service could reduce 
the risk associated with settlement fails in the DVP repo market. More 
broadly, by preventing the spread of settlement fails to other market 
participants, the Same-Day Settling Service also could help reduce 
systemic risk and support the stability of the broader financial 
system.
    Additionally, as discussed above in Section I.A., trades 
facilitated by a Repo Broker that settle outside of FICC require 
multiple bilateral securities movements between the parties to the 
trade and the Repo Broker. The greater the number of bilateral 
securities movements involved in trade settlement, the greater the 
potential for operational risk resulting in settlement fails. FICC 
currently manages the risk of a failed Start Leg for a brokered repo by 
assuming responsibility for trade settlement on the evening of the 
original scheduled settlement date. While this approach decreases 
further settlement risk, it neither prevents the original settlement 
fail nor does it eliminate the multiple bilateral securities movements 
for settling the Start Leg until after a settlement fail. For 
participating Repo Brokers, the Same-Day Settling Service would 
eliminate the bilateral securities movements and the associated risk of 
settlement fails because FICC would novate and guarantee settlement of 
the Start Leg upon Trade Comparison. As a result, the Commission 
believes that the Same-Day Settling Service could improve efficiency in 
the settlement process for brokered DVP repos and thereby reduce the 
risk of settlement fails.
    Finally, as discussed above in Section I.C., the proposed Pair-Off 
Service would enable participating members to settle their offsetting 
failed securities settlement obligations each day after the Fedwire 
closes. FICC's current process is for such failed obligations to go 
through the evening netting system, with settlement rescheduled for the 
following business day. The proposed Pair-Off Service represents a more 
efficient process for resolving failed settlement obligations because 
settlement would occur on the day they arise, rather than continuing as 
settlement fails to the next business day. Moreover, failed obligations 
that remain unsettled overnight present market risk exposure to both 
FICC and the parties to such trades. By enabling the earlier settlement 
of a member's offsetting obligations, the proposed Pair-Off Service 
could reduce such overnight market risk.
    For the reasons discussed above, the Commission believes that the 
proposals in the Advance Notice could minimize the occurrence of 
settlement fails, reduce associated risks, and improve settlement 
efficiency. Accordingly, the Commission believes that the proposals

[[Page 6729]]

in the Advance Notice are consistent with the objectives of reducing 
systemic risks and supporting the stability of the broader financial 
system.\46\
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    \46\ Id.
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    The Commission further believes that FICC's proposals in the 
Advance Notice are consistent with the objectives of promoting robust 
risk management and promoting safety and soundness. First, as discussed 
above in Section I.A., FICC currently acts as CCP for the End Leg of 
same-day starting repos. In that role, FICC risk manages, novates, and 
guarantees settlement of such trades. The proposed Same-Day Settling 
Service would expand FICC's role as CCP to include the Start Leg of 
same-day starting repos, thereby applying FICC's existing risk 
management standards to such trades. The Commission believes that 
extending FICC's existing risk management standards in acting as CCP 
for the Start Leg of same-day settling repos is consistent with the 
objective of promoting robust risk management.\47\
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    \47\ Id.
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    Additionally, as discussed above in Section I.C., the proposed 
Pair-Off Service would enable participating members to settle their 
offsetting failed securities settlement obligations each day, shortly 
after the Fedwire closes. FICC's current process is for such failed 
obligations to go through the evening netting system, with settlement 
rescheduled for the following business day. The proposed Pair-Off 
Service represents a more efficient process for resolving failed 
settlement obligations because settlement would occur on the day they 
arise, rather than continuing as settlement fails to the next business 
day. As discussed above, failed obligations that remain unsettled 
overnight present market risk exposure to both FICC and the parties to 
such trades. By enabling the earlier settlement of a member's 
offsetting obligations for those members who choose to use the service, 
the proposed Pair-Off Service could reduce such overnight market risk 
and protect FICC from sustaining associated losses. Accordingly, the 
Commission believes that adopting the proposed Pair-Off Service is 
consistent with the objectives of promoting robust risk management and 
promoting safety and soundness.\48\
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    \48\ Id.
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B. Consistency With Rule 17Ad-22(e)(21)

    Rule 17Ad-22(e)(21) under the Exchange Act requires each covered 
clearing agency to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to be efficient and 
effective in meeting the requirements of its participants and the 
markets it serves, and have the covered clearing agency's management 
regularly review the efficiency and effectiveness of its (i) clearing 
and settlement arrangements, (ii) operating structure, including risk 
management policies, procedures and systems, and (iii) scope of 
products cleared or settled.\49\
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    \49\ 17 CFR 240.17Ad-22(e)(21).
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    As discussed above in Section I.B, the proposed Same-Day Settling 
Service would eliminate bilateral settlements between the parties to 
the Start Leg of a DVP repo and allow FICC to settle both the Start and 
End Legs of a DVP Repo. In that regard, the proposed Same-Day Settling 
Service represents a more efficient and effective settlement process 
than FICC's current process, which generally includes bilateral 
settlement of the Start Leg. FICC designed the Same-Day Settling 
Service in response to requests from its members, to mitigate the 
operational risk that can result in settlement fails. As discussed 
above, if not contained, settlement fails can spread to other market 
participants and undermine the liquidity of a well-functioning 
market.\50\ In contrast, reducing the occurrence of settlement fails 
(and their resultant effects) would strengthen broader market 
liquidity. Therefore, by reducing the risk of settlement fails, the 
proposal would benefit FICC's members when it results in transactions 
that settle on time that might have otherwise failed, with lower 
overall transaction costs. Accordingly, the Commission believes that 
adopting the proposed Same-Day Settling Service would be consistent 
with Rule 17Ad-22(e)(21) \51\ because the proposal would broaden the 
scope of the DVP Service to include the Start Leg of same-day starting 
repos in a manner designed to be efficient and effective in reducing 
settlement fails to the benefit of FICC's members and the broader DVP 
repo market.
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    \50\ Additionally, when a FICC member fails to meet its 
settlement obligations, the member incurs FICC's fails charge, which 
could further impact the member's liquidity. See Section 14, Rule 
11--Netting System, supra note 6.
    \51\ 17 CFR 240.17Ad-22(e)(21).
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    Moreover, as discussed above in Section I.C, the proposed Pair-Off 
Service would enable participating members to settle their offsetting 
failed securities settlement obligations each day, shortly after the 
Fedwire closes. Under FICC's current process, such failed obligations 
go through the evening netting system, with settlement rescheduled for 
the following business day. The proposed Pair-Off Service represents a 
more efficient process for resolving failed settlement obligations 
because settlement would occur on the day the obligations arise, rather 
than continuing as settlement fails to the next business day. As 
discussed above, failed obligations that remain unsettled overnight 
present market risk exposure to both FICC and the parties to such 
trades. By enabling earlier settlement of a member's offsetting 
obligations, the proposed Pair-Off Service could reduce such overnight 
market risk. Accordingly, the Commission believes that adopting the 
proposed Pair-Off Service would be consistent with Rule 17Ad-22(e)(21) 
\52\ because the proposal would enable the earlier settlement of a 
member's offsetting failed obligations in a manner designed to be 
efficient and effective in reducing overnight market risk to the 
benefit of FICC's members.
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    \52\ Id.
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-FICC-2020-803) and that FICC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-FICC-
2020-015, whichever is later.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01324 Filed 1-21-21; 8:45 am]
BILLING CODE 8011-01-P