[Federal Register Volume 89, Number 124 (Thursday, June 27, 2024)]
[Notices]
[Pages 53670-53672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14067]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100402; File No. SR-FICC-2024-008]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Modify the GSD Rules and MBSD 
Rules To Update Certain Member Requirements Under CCLF

June 21, 2024.

I. Introduction

    On May 8, 2024, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ the proposed rule change SR-FICC-
2024-008 (``Proposed Rule Change'') to amend FICC's Government 
Securities Division (``GSD'') Rulebook (``GSD Rules'') and Mortgage-
Backed Securities Division (``MBSD'') Clearing Rules (``MBSD Rules,'' 
and collectively with the GSD Rules, the ``Rules'') \3\ to update 
certain member requirements concerning FICC's Capped Contingency 
Liquidity Facility (``CCLF''). The proposed rule change was published 
for comment in the Federal Register on May 20, 2024.\4\ The Commission 
has received no comments on the proposed rule change. For the reasons 
discussed below, the Commission is approving the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Terms not defined herein are defined in the GSD Rules and 
MBSD Rules, as applicable, available at www.dtcc.com/legal/rules-and-procedures.
    \4\ See Securities Exchange Act Release No. 100137 (May 14, 
2024), 89 FR 43938 (May 20, 2024) (File No. SR-FICC-2024-008) 
(``Notice of Filing'').
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II. Background

    FICC is a central counterparty (``CCP''), which means it interposes 
itself as the buyer to every seller and seller to every buyer for the 
financial transactions it clears. FICC's GSD provides CCP services for 
the U.S. Government securities market, and FICC's MBSD provides CCP 
services for the U.S. mortgage-backed securities markets.\5\ As such, 
FICC is exposed to the risk that one or more of its members may fail to 
make a payment or to deliver securities.
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    \5\ GSD and MBSD maintain separate sets of rules, margin models, 
and clearing funds.
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    The CCLF is a rules-based committed liquidity resource designed to 
enable FICC to meet its cash settlement obligations in the event of a 
default of the member (including the member's family of affiliated 
members) to which FICC has the largest exposure in extreme but 
plausible market conditions.\6\ FICC would declare a Capped Contingency 
Liquidity Facility Event (``CCLF Event'') to activate the CCLF if, upon 
a member default, FICC determines that its non-CCLF liquidity resources 
would not generate sufficient cash to satisfy FICC's payment 
obligations to its non-defaulting members.\7\ During a CCLF Event, 
members would be called upon to enter into repo transactions (as cash 
lenders) with FICC (as cash borrower) up to a pre-determined capped 
dollar amount, thereby providing FICC with sufficient liquidity to meet 
its payment obligations.\8\ In simple terms, a CCLF repo is equivalent 
to a non-defaulting member financing FICC's payment obligation under 
the original trade, thereby providing FICC with time to liquidate the 
securities underlying the original trade.
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    \6\ FICC designed the CCLF to meet the regulatory requirement 
for a covered clearing agency to measure, monitor, and manage its 
liquidity risk by maintaining sufficient liquid resources to effect 
same-day settlement of payment obligations in the event of a default 
of the participant family that would generate the largest aggregate 
payment obligation for the clearing agency in extreme but plausible 
market conditions. See Securities Exchange Act Release No. 82090 
(Nov. 15, 2017), 82 FR 55427, 55430 (Nov. 21, 2017) (SR-FICC-2017-
002); see 17 CFR 240.17Ad-22(e)(7)(i); GSD Rule 22A, Section 2a, and 
MBSD Rule 17, Section 2a, supra note 3.
    \7\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17, 
Section 2a, supra note 3.
    \8\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17, 
Section 2a, supra note 3.
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    FICC determines the total size of the CCLF based on FICC's 
potential cash settlement obligations that would result from the 
default of the member (including affiliates) presenting the largest 
liquidity need to FICC over a specified look-back period, plus an

[[Page 53671]]

additional liquidity buffer.\9\ FICC uses a tiered approach to allocate 
the total size of the CCLF among its members to arrive at the maximum 
amount of each member's CCLF obligation (referred to at MBSD as the 
``Defined Capped Liquidity Amount'', and at GSD as the ``Individual 
Total Amount'').\10\
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    \9\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17, 
Section 2a, supra note 3.
    \10\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17, 
Section 2a, supra note 3.
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    FICC calculates a dollar amount for the CCLF obligation applicable 
to each supplemental liquidity tier.\11\ FICC allocates the CCLF 
obligation for each supplemental liquidity tier to members on a pro-
rata basis corresponding to the number of times each member generates 
liquidity needs within each supplemental liquidity tier.\12\ However, 
FICC also has the authority to reset a member's CCLF obligation amount 
as FICC determines from time to time, referred to as an ad hoc 
resizing.\13\
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    \11\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17, 
Section 2a, supra note 3.
    \12\ For example, a member that generates daily liquidity needs 
in the $15-$20 billion supplemental liquidity tier would incur a 
pro-rata share for the $15-$20 billion supplemental liquidity tier 
only. Another member that generates daily liquidity needs in the 
$20-$25 billion supplemental liquidity tier would incur a pro-rata 
share for both the $15-$20 and $20-$25 billion supplemental 
liquidity tiers. A third member that generates daily liquidity needs 
in the $65-$70 billion supplemental liquidity tier would incur a 
pro-rata share for every supplemental liquidity tier. Each member's 
pro-rata share is based on the frequency with which the member 
generates daily liquidity needs in each supplemental liquidity tier. 
See Securities Exchange Act Release No. 80234 (Mar. 14, 2017), 82 FR 
14401, 14404-05 (Mar. 20, 2017) (SR-FICC-2017-002); MBSD Rule 17, 
Section 2a, supra note 3; GSD Rule 22A, Section 2a, supra note 3.
    \13\ GSD Rule 22A, Section 2a, supra note 3; MBSD Rule 17, 
Section 2a, supra note 3.
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III. Description of the Proposed Rule Change

    First, FICC proposes to modify the MBSD Rules concerning CCLF to 
require a Clearing Member to provide regular attestations that it has 
incorporated the maximum amount that it could be required to fund 
during a CCLF event into its liquidity plans. FICC also proposes to 
modify the GSD Rules to provide further clarity around GSD's existing 
attestation requirement. Second, FICC proposes to modify both the MBSD 
and GSD Rules to require that a Clearing Member provide certain 
acknowledgements to FICC regarding its understanding of and ability to 
meet its CCLF obligations. Third, FICC proposes to modify MBSD Rules to 
provide Clearing Members with additional clarity and transparency 
regarding the liquidity funding reports provided by FICC to Clearing 
Members concerning their CCLF obligations.

A. Required Attestations

    FICC proposes to modify MBSD Rules to require Clearing Members to 
provide FICC with regular attestations that the Clearing Member has 
incorporated their Defined Capped Liquidity Amount into their liquidity 
plans. Clearing Members must provide these attestations to FICC on at 
least an annual basis or upon demand by FICC. The Required Attestation 
would need to be signed by two of the Clearing Member's officers and 
include certifications that (1) the officers have read and understand 
the MBSD Rules; (2) the Defined Capped Liquidity Amount has been 
incorporated into the Clearing Member's liquidity planning; (3) the 
officers understand the Defined Capped Liquidity Amount may be changed 
by FICC with appropriate notice; (4) such changes to the Defined Capped 
Liquidity Amount will be incorporated by the Clearing Member into its 
liquidity planning; and (5) the Clearing Member shall continuously 
reassess its liquidity plans to ensure the ability to meet the Defined 
Capped Liquidity Amount in the event of a CCLF Event. FICC states that 
the new requirement for MBSD Clearing Members to provide Required 
Attestations will strengthen the CCLF program and is consistent with an 
existing requirement in the GSD Rules for GSD Netting Members.\14\
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    \14\ See Notice of Filing, supra note 4, at 43939.
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    Additionally, FICC would modify the GSD Rules concerning required 
attestations for GSD Netting Members to clarify that the regular 
interval for attestations is on at least an annual basis. FICC states 
that this clarification would align the required regular interval for 
attestations at GSD with the proposed MBSD Rules concerning Required 
Attestations, and that it is consistent with current practice, in which 
GSD Netting Members are required to provide their Required Attestations 
on at least an annual basis.\15\
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    \15\ Id.
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B. CCLF Acknowledgements

    FICC proposes to modify the MBSD Rules and GSD Rules to require 
MBSD Clearing Members and GSD Netting Members to provide written 
acknowledgments to FICC concerning their understanding of and ability 
to meet their CCLF obligations, from time to time, as determined by 
FICC.\16\ FICC states that the proposed modifications would strengthen 
the CCLF program by ensuring MBSD Clearing Members and GSD Members 
understand their CCLF obligations as required by FICC.\17\
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    \16\ One example when such written acknowledgements would be 
required to be provided by MBSD Clearing Members and GSD Netting 
Members to FICC is when a CCLF obligation increased by an amount 
that exceeded certain thresholds established by FICC following an ad 
hoc resizing of the CCLF, as discussed in note 13 supra. In this 
situation, FICC would require a written acknowledgement from MBSD 
Clearing Members and GSD Netting Members confirming their ability to 
meet the increased CCLF obligation. FICC would inform MBSD Clearing 
Members and GSD Netting Members of any such requirements, including 
specific thresholds, by Important Notice. See Notice of Filing, 
supra note 4, at 43939.
    \17\ Id.
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C. Liquidity Funding Report

    FICC proposes to modify the MBSD Rules to provide clarity and 
transparency about the liquidity funding reports FICC currently 
provides each day to MBSD Clearing Members and the information 
contained in those reports. Specifically, FICC proposes to amend the 
MBSD Rules to explicitly state that FICC will provide Clearing Members 
with liquidity funding reports each Business Day that include 
information concerning the Clearing Member's Defined Capped Liquidity 
Amount and other historical CCLF information. As amended, the MBSD 
Rules would state that the information provided in the liquidity 
funding reports by FICC to MBSD Clearing Members is for informational 
purposes only. FICC states that the clarity and transparency provided 
by these proposed modifications to MBSD Rules is consistent with the 
information concerning liquidity funding reports already provided to 
GSD Netting Members under GSD Rules.\18\
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    \18\ Id.
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IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \19\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the Proposed Rule 
Change, the Commission finds that the Proposed Rule Change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FICC. In particular, the 
Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) \20\ of the Act and Rule 17Ad-22(e)(7) each 
promulgated under the Act.\21\
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    \19\ 15 U.S.C. 78s(b)(2)(C).
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 17 CFR 240.17Ad-22(e)(7).

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[[Page 53672]]

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

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency, such as FICC, be designed to, among other things, 
promote the prompt and accurate clearance and settlement of securities 
transactions.\22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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    As stated above in Section II, the CCLF is a key tool in FICC's 
ability to meet its cash settlement obligations in the event of a 
default of the member (including the member's family of affiliated 
members) to which FICC has the largest exposure in extreme but 
plausible market conditions. The Proposed Rule Change would modify the 
Rules by requiring MBSD Clearing Members and GSD Netting Members to 
provide attestations and acknowledgements to FICC that they understand 
their CCLF obligations, incorporate such obligations into their 
liquidity planning, and continually reassess their understating of and 
ability to meet their CCLF obligations.\23\ Requiring attestations on 
at least an annual basis and written acknowledgements from MBSD 
Clearing Members and GSD Netting Members to FICC should enhance the 
overall design and efficacy of the CCLF, which is a key tool in FICC's 
ability to meet its cash settlement obligations in the event of a 
member default and a CCLF event is declared by FICC. The Proposed Rule 
Change should further improve the ability of FICC to rely on the CCLF 
and MBSD Clearing Members and GSD Netting Members as liquidity 
providers during a CCLF event, and, in turn, enable FICC to use the 
CCLF to meet its settlement obligations in the event of a member's 
default.
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    \23\ See Notice of Filing, supra note 4, at 43940.
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    By doing so, the Proposed Rule Change should better ensure that, in 
the event of a member default, FICC's operation of its critical 
clearance and settlement services would not be disrupted because of 
insufficient financial resources. Accordingly, the Commission finds 
that the Proposed Rule Change should help FICC continue providing 
prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.\24\
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
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    Further, the proposed clarifying changes should help to ensure that 
the Rules are clear to MBSD Clearing Members and GSD Netting Members 
concerning their understanding of and obligations during a CCLF Event. 
When members better understand their rights and obligations, members 
are more likely to act in accordance with the Rules, which should 
promote the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section17A(b)(3)(F) of the Act.\25\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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    For these reasons, the Commission believes that the Proposed Rule 
Change is designed to promote the prompt and accurate clearance and 
settlement of securities transactions consistent with Section 
17A(b)(3)(F) of the Act.\26\
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    \26\ Id.
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B. Consistency With Rule 17Ad-22(e)(7)

    Rule 17Ad-22(e)(7) under the Act requires a covered clearing 
agency, such as FICC, to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to effectively 
measure, monitor, and manage the liquidity risk that arises in or is 
borne by the covered clearing agency.\27\ As described above in Section 
II, FICC proposes to modify the Rules to require certain attestations 
and acknowledgements from MBSD Clearing Members and GSD Netting Members 
concerning their CCLF obligations.
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    \27\ 17 CFR 240.17Ad-22(e)(7).
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    The Commission believes that the Proposed Rule Change described 
above is consistent with the requirements of Rule 17Ad-22(e)(7). By 
requiring certain attestations and acknowledgements by MBSD Clearing 
Members and GSD Netting Members, the Proposed Rule Change is designed 
to improve the operation of the CCLF as a reliable form of liquid 
resources upon the default of a member to which FICC has the largest 
exposure in extreme but plausible conditions. Moreover, by requiring 
attestations on at least an annual basis and certifications from two 
officers that the MBSD Clearing Members and GSD Netting Members are 
continually reassessing their CCLF obligations, the Proposed Rule 
Change improves the reliability of the CCLF and enhances due diligence 
of its liquidity providers. Further, requiring written acknowledgements 
from MBSD Clearing Members and GSD Netting Members from time to time 
and following an ad hoc resizing of the CCLF ensures that MBSD Clearing 
Members and GSD Netting Members will continually assess their ability 
to meet their CCLF obligations during a CCLF event, which also improves 
the reliability of the CCLF. As a result, the required attestations and 
written acknowledgements included in the Proposed Rule Change by FICC 
should enhance FICC's ability to measure, monitor, and manage their 
liquidity risk concerning their CCLF obligations.
    For these reasons, the Commission believes that the Proposed Rule 
Change is consistent with Rule 17Ad-22(e)(7) under the Act.\28\
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    \28\ 17 CFR 240.17Ad-22(e)(7).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \29\ and 
the rules and regulations promulgated thereunder.
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    \29\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\30\ that proposed rule change SR-FICC-2024-008, be, and hereby is, 
approved.\31\
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    \30\ 15 U.S.C. 78s(b)(2).
    \31\ In approving the Proposed Rule Change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-14067 Filed 6-26-24; 8:45 am]
BILLING CODE 8011-01-P