[Federal Register Volume 83, Number 139 (Thursday, July 19, 2018)]
[Notices]
[Pages 34213-34227]
[FR Doc No: 2018-15365]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83630; File No. SR-FICC-2017-021]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Adopt
a Recovery & Wind-down Plan and Related Rules

July 13, 2018.
    On December 18, 2017, 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'') and Rule 19b-4 thereunder, proposed rule change SR-FICC-2017-
021 (``Proposed Rule Change'') to adopt a recovery and wind-down plan
and related rules.\1\ The Proposed Rule Change was published for
comment in the Federal Register on January 8, 2018.\2\ On February 8,
2018, the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the Proposed Rule Change.\3\ On March 20, 2018,
the Commission instituted proceedings to determine whether to approve
or disapprove the Proposed Rule Change.\4\ On June 25, 2018, the
Commission designated a longer period for Commission action on the
proceedings to determine whether to

approve or disapprove the Proposed Rule Change.\5\ On June 28, 2018,
FICC filed Amendment No. 1 to the Proposed Rule Change to amend and
replace in its entirety the Proposed Rule Change as originally
submitted on December 18, 2017.\6\ As of the date of this release, the
Commission has not received any comments on the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. On
December 18, 2017, FICC filed the Proposed Rule Change as advance
notice SR-FICC-2017-805 (``Advance Notice'') with the Commission
pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act'') and Rule 19b-4(n)(1)(i) of the Act. (12 U.S.C.
5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), respectively.) On January
30, 2018, the Commission published in the Federal Register notice of
filing of the Advance Notice. The notice also extended the review
period for the Advance Notice pursuant to Section 806(e)(1)(H) of
the Clearing Supervision Act. (12 U.S.C. 5465(e)(1)(H).) See
Securities Exchange Act Release No. 82580 (January 24, 2018), 83 FR
4341 (January 30, 2018) (SR-FICC-2017-805). On April 10, 2018, the
Commission required additional information for consideration of the
Advance Notice, pursuant to Section 806(e)(1)(D) of the Clearing
Supervision Act, which provided the Commission with an additional
60-days in the review period beginning on the date that the
information requested is received by the Commission. (12 U.S.C.
5465(e)(1)(D).) See Memorandum from the Office of Clearance and
Settlement Supervision, Division of Trading and Markets, titled
``Commission's Request for Additional Information,'' available at
https://www.sec.gov/rules/sro/ficc-an.htm. On June 28, 2018, FICC
filed Amendment No. 1 to the Advance Notice. To promote the public
availability and transparency of its post-notice amendment, FICC
submitted a copy of Amendment No. 1 through the Commission's
electronic public comment letter mechanism. Accordingly, Amendment
No. 1 to the Advance Notice has been posted on the Commission's
website at https://www.sec.gov/rules/sro/ficc-an.htm and thus been
publicly available since June 29, 2018. On July 6, 2018, the
Commission received the information requested, which added an
additional 60-days to the review period pursuant to Sections
806(e)(1)(E) and (G) of the Clearing Supervision Act. (12 U.S.C.
5465(e)(1)(E) and (G).) See Memorandum from the Office of Clearance
and Settlement Supervision, Division of Trading and Markets, titled
``Response to the Commission's Request for Additional Information,''
available at https://www.sec.gov/rules/sro/ficc-an.htm. The
proposal, as set forth in both the Advance Notice and the Proposed
Rule Change, shall not take effect until all required regulatory
actions are completed.
    \2\ Securities Exchange Act Release No. 82431 (January 2, 2018),
83 FR 871 (January 8, 2018) (SR-FICC-2017-021).
    \3\ Securities Exchange Act Release No. 82669 (February 8,
2018), 83 FR 6653 (February 14, 2018) (SR-DTC-2017-021; SR-FICC-
2017-021; SR-NSCC-2017-017).
    \4\ Securities Exchange Act Release No. 82913 (March 20, 2018),
83 FR 12997 (March 26, 2018) (SR-FICC-2017-021).
    \5\ Securities Exchange Act Release No. 83509 (June 25, 2018),
83 FR 30785 (June 29, 2018) (SR-DTC-2017-021; SR-FICC-2017-021; SR-
NSCC-2017-017).
    \6\ To promote the public availability and transparency of its
post-notice amendment, FICC submitted a copy of Amendment No. 1
through the Commission's electronic public comment letter mechanism.
Accordingly, Amendment No. 1 to the Proposed Rule Change has been
posted on the Commission's website at https://www.sec.gov/rules/sro/ficc.htm and thus been publicly available since June 29, 2018.
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    The Proposed Rule Change, as amended by Amendment No. 1, is
described in Items I and II below, which Items have been prepared by
FICC. The Commission is publishing this notice to solicit comments on
the Proposed Rule Change, as amended by Amendment No. 1, from
interested persons.

I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    The Proposed Rule Change of FICC proposes to adopt the Recovery &
Wind-down Plan of FICC (``R&W Plan'' or ``Plan''). The R&W Plan would
be maintained by FICC in compliance with Rule 17Ad-22(e)(3)(ii) under
the Act by providing plans for the recovery and orderly wind-down of
FICC necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses, as described below.\7\
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    \7\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The Proposed Rule Change would also propose to (1) amend FICC's
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') in
order to (a) adopt Rule 22D (Wind-down of the Corporation) and Rule 50
(Market Disruption and Force Majeure), and (b) make conforming changes
to Rule 3A (Sponsoring Members and Sponsored Members), Rule 3B
(Centrally Cleared Institutional Triparty Service) and Rule 13 (Funds-
Only Settlement) related to the adoption of these Proposed Rules to the
GSD Rules; (2) amend FICC's Mortgage-Backed Securities Division
(``MBSD,'' and, together with GSD, the ``Divisions'') Clearing Rules
(``MBSD Rules'') in order to (a) adopt Rule 17B (Wind-down of the
Corporation) and Rule 40 (Market Disruption and Force Majeure); and (b)
make conforming changes to Rule 3A (Cash Settlement Bank Members)
related to the adoption of these Proposed Rules to the MBSD Rules; and
(3) amend Rule 1 of the Electronic Pool Netting (``EPN'') Rules of MBSD
(``EPN Rules'') in order to provide that EPN Users, as defined therein,
are bound by proposed Rule 17B (Wind-down of the Corporation) and
proposed Rule 40 (Market Disruption and Force Majeure) to be adopted to
the MBSD Rules.\8\ Each of the proposed rules is referred to herein as
a ``Proposed Rule,'' and are collectively referred to as the ``Proposed
Rules.''
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    \8\ The GSD Rules and the MBSD Rules are referred to
collectively herein as the ``Rules.'' Capitalized terms not defined
herein are defined in the Rules. The Rules and the EPN Rules are
available at http://www.dtcc.com/legal/rules-and-procedures.
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    The Proposed Rules are designed to (1) facilitate the
implementation of the R&W Plan when necessary and, in particular, allow
FICC to effectuate its strategy for winding down and transferring its
business; (2) provide Members and Limited Members with transparency
around critical provisions of the R&W Plan that relate to their rights,
responsibilities and obligations; \9\ and (3) provide FICC with the
legal basis to implement those provisions of the R&W Plan when
necessary, as described below.
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    \9\ References herein to ``Members'' refer to GSD Netting
Members and MBSD Clearing Members. References herein to ``Limited
Members'' refer to participants of GSD or MBSD other than GSD
Netting Members and MBSD Clearing Members, including, for example,
GSD Comparison-Only Members, GSD Sponsored Members, GSD CCIT
Members, and MBSD EPN Users.
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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 III 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
Description of Amendment No. 1
    This filing constitutes Amendment No. 1 (``Amendment'') to the
Proposed Rule Change (also referred to below as the ``Original
Filing'') previously filed by FICC.\10\ FICC is amending the proposed
R&W Plan and the Original Filing in order to clarify certain matters
and make minor technical and conforming changes to the R&W Plan, as
described below and as marked on Exhibit 4 hereto. To the extent such
changes to the Plan require changes to the Original Filing, the
information provided under ``Description of Proposed Changes'' in the
Original Filing has been amended and is restated in its entirety below.
Other sections of the Original Filing are unchanged and are restated in
their entity for convenience.
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    \10\ See Securities Exchange Act Release No. 82580 (January 24,
2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-805).
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    First, this Amendment would clarify the meaning of the terms
``cease to act,'' ``Member default,'' ``Defaulting Member,'' and
``Member Default Losses'' as such terms are used in the Plan. This
Amendment would also make conforming changes as necessary to reflect
the uses of these terms.
    Second, this Amendment would clarify that actions and tools
described in the Plan that are available in one phase of the Crisis
Continuum may be used in subsequent phases of the Crisis Continuum when
appropriate to address the applicable situation. This Amendment would
also clarify that the allocation of losses resulting from a Member
default would be applied when provided for, and in accordance with,
Rule 4 of the GSD Rules and the MBSD Rules, as applicable.
    Third, this Amendment would clarify that the Recovery Corridor (as
defined therein) is not a ``sub-phase'' of the recovery phase. Rather,
the Recovery Corridor is a period of time that would occur toward the
end of the Member default phase, when indicators are that FICC may
transition into the recovery phase. Thus, the Recovery Corridor
precedes the recovery phase within the Crisis Continuum.
    Fourth, this Amendment would make revisions to address the
allocation of losses resulting from a Member default in order to more
closely conform such statements to the changes proposed by the Loss
Allocation Filing, as defined below.
    Fifth, this Amendment would clarify the notifications that FICC
would be required to make under the proposed GSD Rule 50 and MBSD Rule
40 (Market Disruption and Force Majeure).
    Finally, this Amendment would make minor, technical and conforming
revisions to correct typographical errors and to simplify descriptions.
For example, such revisions would use

lower case for terms that are not defined therein, and would use upper
case for terms that are defined. The Amendment would also simplify
certain descriptions by removing extraneous words and statements that
are repetitive. These minor, technical revisions would not alter the
substance of the proposal.
Description of Proposed Changes
    FICC is proposing to adopt the R&W Plan to be used by the Board and
management of FICC in the event FICC encounters scenarios that could
potentially prevent it from being able to provide its critical services
as a going concern. The R&W Plan would identify (i) the recovery tools
available to FICC to address the risks of (a) uncovered losses or
liquidity shortfalls resulting from the default of one or more Members,
and (b) losses arising from non-default events, such as damage to its
physical assets, a cyber-attack, or custody and investment losses, and
(ii) the strategy for implementation of such tools. The R&W Plan would
also establish the strategy and framework for the orderly wind-down of
FICC and the transfer of its business in the remote event the
implementation of the available recovery tools does not successfully
return FICC to financial viability.
    As discussed in greater detail below, the R&W Plan would provide,
among other matters, (i) an overview of the business of FICC and its
parent, The Depository Trust & Clearing Corporation (``DTCC''); (ii) an
analysis of FICC's intercompany arrangements and an existing link to
another financial market infrastructures (``FMIs''); (iii) a
description of FICC's services, and the criteria used to determine
which services are considered critical; (iv) a description of the FICC
and DTCC governance structure; (v) a description of the governance
around the overall recovery and wind-down program; (vi) a discussion of
tools available to FICC to mitigate credit/market and liquidity risks,
including recovery indicators and triggers, and the governance around
management of a stress event along a ``Crisis Continuum'' timeline;
(vii) a discussion of potential non-default losses and the resources
available to FICC to address such losses, including recovery triggers
and tools to mitigate such losses; (viii) an analysis of the recovery
tools' characteristics, including how they are comprehensive,
effective, and transparent, how the tools provide appropriate
incentives to Members to, among other things, control and monitor the
risks they may present to FICC, and how FICC seeks to minimize the
negative consequences of executing its recovery tools; and (ix) the
framework and approach for the orderly wind-down and transfer of FICC's
business, including an estimate of the time and costs to effect a
recovery or orderly wind-down of FICC.
    The R&W Plan would be structured as a roadmap, and would identify
and describe the tools that FICC may use to effect a recovery from the
events and scenarios described therein. Certain recovery tools that
would be identified in the R&W Plan are based in the Rules (including
the Proposed Rules) and, as such, descriptions of those tools would
include descriptions of, and reference to, the applicable Rules and any
related internal policies and procedures. Other recovery tools that
would be identified in the R&W Plan are based in contractual
arrangements to which FICC is a party, including, for example, existing
committed or pre-arranged liquidity arrangements. Further, the R&W Plan
would state that FICC may develop further supporting internal
guidelines and materials that may provide operationally for matters
described in the Plan, and that such documents would be supplemental
and subordinate to the Plan.
    Key factors considered in developing the R&W Plan and the types of
tools available to FICC were its governance structure and the nature of
the markets within which FICC operates. As a result of these
considerations, many of the tools available to FICC that would be
described in the R&W Plan are FICC's existing, business-as-usual risk
management and Member default management tools, which would continue to
be applied in scenarios of increasing stress. In addition to these
existing, business-as-usual tools, the R&W Plan would describe FICC's
other principal recovery tools, which include, for example, (i)
identifying, monitoring and managing general business risk and holding
sufficient liquid net assets funded by equity (``LNA'') to cover
potential general business losses pursuant to the Clearing Agency
Policy on Capital Requirements (``Capital Policy''),\11\ (ii)
maintaining the Clearing Agency Capital Replenishment Plan
(``Replenishment Plan'') as a viable plan for the replenishment of
capital should FICC's equity fall close to or below the amount being
held pursuant to the Capital Policy,\12\ and (iii) the process for the
allocation of losses among Members, as provided in Rule 4 of the GSD
Rules and Rule 4 of the MBSD Rules.\13\ The R&W Plan would provide
governance around the selection and implementation of the recovery tool
or tools most relevant to mitigate a stress scenario and any applicable
loss or liquidity shortfall.
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    \11\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
    \12\ See id.
    \13\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation), supra note 8. FICC is
proposing changes to Rule 4 regarding allocation of losses in a
separate filing submitted simultaneously with the Original Filing.
See Securities Exchange Act Release Nos. 82431 (January 2, 2018), 83
FR 871 (January 8, 2018) (SR-FICC-2017-021) and 82580 (January 24,
2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-805)
(collectively referred to herein as the ``Loss Allocation Filing'').
FICC has submitted an amendment to the Loss Allocation Filing. A
copy of the amendment to the Loss Allocation Filing is available at
http://www.dtcc.com/legal/sec-rule-filings.aspx. FICC expects the
Commission to review both proposals, as amended, together, and, as
such, the proposal described in this filing anticipates the approval
and implementation of those proposed changes to the Rules.
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    The development of the R&W Plan is facilitated by the Office of
Recovery & Resolution Planning (``R&R Team'') of DTCC.\14\ The R&R Team
reports to the DTCC Management Committee (``Management Committee'') and
is responsible for maintaining the R&W Plan and for the development and
ongoing maintenance of the overall recovery and wind-down planning
process. The Board, or such committees as may be delegated authority by
the Board from time to time pursuant to its charter, would review and
approve the R&W Plan biennially, and would also review and approve any
changes that are proposed to the R&W Plan outside of the biennial
review.
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    \14\ DTCC operates on a shared services model with respect to
FICC and its other subsidiaries. Most corporate functions are
established and managed on an enterprise-wide basis pursuant to
intercompany agreements under which it is generally DTCC that
provides a relevant service to a subsidiary, including FICC.
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    As discussed in greater detail below, the Proposed Rules would
define the procedures that may be employed in the event of FICC's wind-
down and would provide for FICC's authority to take certain actions on
the occurrence of a ``Market Disruption Event,'' as defined therein.
Significantly, the Proposed Rules would provide Members and Limited
Members with transparency and certainty with respect to these matters.
The Proposed Rules would facilitate the implementation of the R&W Plan,
particularly FICC's strategy for winding down and transferring its
business, and would provide FICC with the legal basis to implement
those aspects of the R&W Plan.

FICC R&W Plan
    The R&W Plan is intended to be used by the Board and FICC's
management in the event FICC encounters scenarios that could
potentially prevent it from being able to provide its critical services
as a going concern. The R&W Plan would be structured to provide a
roadmap, define the strategy, and identify the tools available to FICC
to either (i) recover in the event it experiences losses that exceed
its prefunded resources (such strategies and tools referred to herein
as the ``Recovery Plan'') or (ii) wind-down its business in a manner
designed to permit the continuation of its critical services in the
event that such recovery efforts are not successful (such strategies
and tools referred to herein as the ``Wind-down Plan''). The
description of the R&W Plan below is intended to highlight the purpose
and expected effects of the material aspects of the R&W Plan, and to
provide Members and Limited Members with appropriate transparency into
these features.
Business Overview, Critical Services, and Governance
    The introduction to the R&W Plan would identify the document's
purpose and its regulatory background, and would outline a summary of
the Plan. The stated purpose of the R&W Plan is that it is to be used
by the Board and FICC management in the event FICC encounters scenarios
that could potentially prevent it from being able to provide its
critical services as a going concern. The R&W Plan would be maintained
by FICC in compliance with Rule 17Ad-22(e)(3)(ii) under the Act \15\ by
providing plans for the recovery and orderly wind-down of FICC.
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    \15\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The R&W Plan would describe DTCC's business profile, provide a
summary of the services of FICC as offered by each of the Divisions,
and identify the intercompany arrangements and links between FICC and
other entities, most notably a link between GSD and Chicago Mercantile
Exchange Inc. (``CME''), which is also an FMI. This overview section
would provide a context for the R&W Plan by describing FICC's business,
organizational structure and critical links to other entities. By
providing this context, this section would facilitate the analysis of
the potential impact of utilizing the recovery tools set forth in later
sections of the Recovery Plan, and the analysis of the factors that
would be addressed in implementing the Wind-down Plan.
    DTCC is a user-owned and user-governed holding company and is the
parent company of FICC and its affiliates, The Depository Trust Company
(``DTC'') and National Securities Clearing Corporation (``NSCC'', and,
together with FICC and DTC, the ``Clearing Agencies''). The Plan would
describe how corporate support services are provided to FICC from DTCC
and DTCC's other subsidiaries through intercompany agreements under a
shared services model.
    The Plan would provide a description of the critical contractual
and operational arrangements between FICC and other legal entities,
including the cross-margining agreement between GSD and CME, which is
also an FMI.\16\ Pursuant to this arrangement, GSD offsets each cross-
margining participant's residual margin amount (based on related
positions) at GSD against the offsetting residual margin amounts of the
participant (or its affiliate) at CME. GSD and CME may then reduce the
amount of collateral that they collect to reflect the offsets between
the cross-margining participant's positions at GSD and its (or its
affiliate's) positions at CME. This section of the Plan, identifying
and briefly describing FICC's established links, would provide a
mapping of critical connections and dependencies that may need to be
relied on or otherwise addressed in connection with the implementation
of either the Recovery Plan or the Wind-down Plan.
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    \16\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_cme_crossmargin_agreement.pdf. See also GSD Rule 43
(Cross-Margining Arrangements), supra note 8.
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    The Plan would define the criteria for classifying certain of
FICC's services as ``critical,'' and would identify those critical
services and the rationale for their classification. This section would
provide an analysis of the potential systemic impact from a service
disruption, and is important for evaluating how the recovery tools and
the wind-down strategy would facilitate and provide for the
continuation of FICC's critical services to the markets it serves. The
criteria that would be used to identify an FICC service or function as
critical would include consideration as to (1) whether there is a lack
of alternative providers or products; (2) whether failure of the
service could impact FICC's ability to perform its central counterparty
services through either Division; (3) whether failure of the service
could impact FICC's ability to perform its multilateral netting
services through either Division and, as such, could impact the volume
of transactions; (4) whether failure of the service could impact FICC's
ability to perform its book-entry delivery and settlement services
through either Division and, as such, could impact transaction costs;
(5) whether failure of the service could impact FICC's ability to
perform its cash payment processing services through either Division
and, as such, could impact the flow of liquidity in the U.S. financial
markets; and (6) whether the service is interconnected with other
participants and processes within the U.S. financial system, for
example, with other FMIs, settlement banks, and broker-dealers. The
Plan would then list each of those services, functions or activities
that FICC has identified as ``critical'' based on the applicability of
these six criteria. GSD's critical services would include, for example,
its Real-Time Trade Matching (``RTTM[supreg]'') service,\17\ its
services related to netting and settlement of submitted trades for
Netting Members,\18\ the Auction Takedown service,\19\ and the
Repurchase Agreement Netting Service.\20\ MBSD's critical services
would include, for example, its RTTM[supreg] service,\21\ its netting
service for to-be-announced (``TBA'') transactions,\22\ its Electronic
Pool Notification service,\23\ and its pool netting and settlement.\24\
The R&W Plan would also include a non-exhaustive list of FICC services
that are not deemed critical.
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    \17\ See GSD Rule 5 (Comparison System), GSD Rule 6A (Bilateral
Comparison), GSD Rule 6B (Demand Comparison), and GSD Rule 6C
(Locked-In Comparison), supra note 8.
    \18\ See GSD Rule 11 (Netting System), GSD Rule 12 (Securities
Settlement), and GSD Rule 13 (Funds-Only Settlement), supra note 8.
    \19\ See GSD Rule 6C (Locked-In Comparison) and GSD Rule 17
(Netting and Settlement of Netting-Eligible Auction Purchases),
supra note 8.
    \20\ See GSD Rule 7 (Repo Transactions), GSD Rule 11 (Netting
System), GSD Rule 18 (Special Provisions for Repo Transactions), GSD
Rule 19 (Special Provisions for Brokered Repo Transactions), and GSD
Rule 20 (Special Provisions for GCF Repo Transactions), supra note
8.
    \21\ See MBSD Rule 5 (Trade Comparison), supra note 8.
    \22\ See MBSD Rule 6 (TBA Netting), supra note 8.
    \23\ See EPN Rules, supra note 8.
    \24\ See MBSD Rule 8 (Pool Netting System) and MBSD Rule 9 (Pool
Settlement with the Corporation), supra note 8.
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    The evaluation of which services provided by FICC are deemed
critical is important for purposes of determining how the R&W Plan
would facilitate the continuity of those services. As discussed further
below, while FICC's Wind-down Plan would provide for the transfer of
all critical services to a transferee in the event FICC's wind-down is
implemented, it would anticipate that any non-critical services

that are ancillary and beneficial to a critical service, or that
otherwise have substantial user demand from the continuing membership,
would also be transferred.
    The Plan would describe the governance structure of both DTCC and
FICC. This section of the Plan would identify the ownership and
governance model of these entities at both the Board of Directors and
management levels. The Plan would state that the stages of escalation
required to manage recovery under the Recovery Plan or to invoke FICC's
wind-down under the Wind-down Plan would range from relevant business
line managers up to the Board through FICC's governance structure. The
Plan would then identify the parties responsible for certain activities
under both the Recovery Plan and the Wind-down Plan, and would describe
their respective roles. The Plan would identify the Risk Committee of
the Board (``Board Risk Committee'') as being responsible for oversight
of risk management activities at FICC, which include focusing on both
oversight of risk management systems and processes designed to identify
and manage various risks faced by FICC, and, due to FICC's critical
role in the markets in which it operates, oversight of FICC's efforts
to mitigate systemic risks that could impact those markets and the
broader financial system.\25\ The Plan would identify the DTCC
Management Risk Committee (``Management Risk Committee'') as primarily
responsible for general, day-to-day risk management through delegated
authority from the Board Risk Committee. The Plan would state that the
Management Risk Committee has delegated specific day-to-day risk
management, including management of risks addressed through margining
systems and related activities, to the DTCC Group Chief Risk Office
(``GCRO''), which works with staff within the DTCC Financial Risk
Management group. Finally, the Plan would describe the role of the
Management Committee, which provides overall direction for all aspects
of FICC's business, technology, and operations and the functional areas
that support these activities.
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    \25\ The charter of the Board Risk Committee is available at
http://www.dtcc.com/~/media/Files/Downloads/legal/policy-and-
compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
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    The Plan would describe the governance of recovery efforts in
response to both default losses and non-default losses under the
Recovery Plan, identifying the groups responsible for those recovery
efforts. Specifically, the Plan would state that the Management Risk
Committee provides oversight of actions relating to the default of a
Member, which would be reported and escalated to it through the GCRO,
and the Management Committee provides oversight of actions relating to
non-default events that could result in a loss, which would be reported
and escalated to it from the DTCC Chief Financial Officer (``CFO'') and
the DTCC Treasury group that reports to the CFO, and from other
relevant subject matter experts based on the nature and circumstances
of the non-default event.\26\ More generally, the Plan would state that
the type of loss and the nature and circumstances of the events that
lead to the loss would dictate the components of governance to address
that loss, including the escalation path to authorize those actions. As
described further below, both the Recovery Plan and the Wind-down Plan
would describe the governance of escalations, decisions, and actions
under each of those plans.
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    \26\ The Plan would state that these groups would be involved to
address how to mitigate the financial impact of non-default losses,
and in recommending mitigating actions, the Management Committee
would consider information and recommendations from relevant subject
matter experts based on the nature and circumstances of the non-
default event. Any necessary operational response to these events,
however, would be managed in accordance with applicable incident
response/business continuity process; for example, processes
established by the DTCC Technology Risk Management group would be
followed in response to a cyber event.
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    Finally, the Plan would describe the role of the R&R Team in
managing the overall recovery and wind-down program and plans for each
of the Clearing Agencies.
FICC Recovery Plan
    The Recovery Plan is intended to be a roadmap of those actions that
FICC may employ across both Divisions to monitor and, as needed,
stabilize its financial condition. As each event that could lead to a
financial loss could be unique in its circumstances, the Recovery Plan
would not be prescriptive and would permit FICC to maintain flexibility
in its use of identified tools and in the sequence in which such tools
are used, subject to any conditions in the Rules or the contractual
arrangement on which such tool is based. FICC's Recovery Plan would
consist of (1) a description of the risk management surveillance,
tools, and governance that FICC would employ across evolving stress
scenarios that it may face as it transitions through a ``Crisis
Continuum,'' described below; (2) a description of FICC's risk of
losses that may result from non-default events, and the financial
resources and recovery tools available to FICC to manage those risks
and any resulting losses; and (3) an evaluation of the characteristics
of the recovery tools that may be used in response to either default
losses or non-default losses, as described in greater detail below. In
all cases, FICC would act in accordance with the Rules, within the
governance structure described in the R&W Plan, and in accordance with
applicable regulatory oversight to address each situation in order to
best protect FICC, the Members, and the markets in which it operates.
    Managing Member Default Losses and Liquidity Needs Through the
Crisis Continuum. The Recovery Plan would describe the risk management
surveillance, tools, and governance that FICC may employ across an
increasing stress environment, which is referred to as the ``Crisis
Continuum.'' This description would identify those tools that can be
employed to mitigate losses, and mitigate or minimize liquidity needs,
as the market environment becomes increasingly stressed. The phases of
the Crisis Continuum would include (1) a stable market phase, (2) a
stress market phase, (3) a phase commencing with FICC's decision to
cease to act for a Member or Affiliated Family of Members (referred to
in the Plan as the ``Member default phase''),\27\ and (4) a recovery
phase. This section of the Recovery Plan would address conditions and
circumstances relating to FICC's decision to cease to act for a Member
pursuant to the applicable Rules.\28\ In the Plan, the term ``cease to
act'' and the actions that lead to such decision are used within the
context of each Division's Rules, in particular Rules 21 and 22 of the
GSD Rules and Rules 14 and 16 of the MBSD Rules.\29\ Further, for ease
of reference, the R&W Plan would, for purposes of the Plan, use the
term ``Member default'' to refer to the event or events that
precipitate FICC ceasing to act for a Member or an Affiliated Family,
would use the term ``Defaulting Member'' to refer to a Member for which
NSCC has ceased to act, and would use the term ``Member Default
Losses'' to refer to losses that arise out of or relate to the Member
default (including any losses that arise from liquidation of that
Member's portfolio), and to distinguish such losses

from those that arise out of the business or other events not related
to a Member default, which are separately addressed in the Plan.
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    \27\ The Plan would define an ``Affiliated Family'' of Members
as a number of affiliated entities that are all Members of either
GSD or MBSD.
    \28\ See GSD Rule 21 (Restrictions on Access to Services) and
MBSD Rule 14 (Restrictions on Access to Services), supra note 8.
    \29\ See GSD Rules 21 (Restrictions on Access to Services) and
22 (Insolvency of a Member), and MBSD Rules 14 (Restrictions on
Access to Services) and 16 (Insolvency of a Member), supra note 8.
---------------------------------------------------------------------------

    The Recovery Plan would provide context to its roadmap through this
Crisis Continuum by describing FICC's ongoing management of credit,
market and liquidity risk across the Divisions, and its existing
process for measuring and reporting its risks as they align with
established thresholds for its tolerance of those risks. The Recovery
Plan would discuss the management of credit/market risk and liquidity
exposures together, because the tools that address these risks can be
deployed either separately or in a coordinated approach in order to
address both exposures. FICC manages these risk exposures collectively
to limit their overall impact on FICC and the memberships of the
Divisions. As part of its market risk management strategy, FICC manages
its credit exposure to Members by determining the appropriate required
deposits to the GSD and MBSD Clearing Fund and monitoring its
sufficiency, as provided for in the applicable Rules.\30\ FICC manages
its liquidity risks with an objective of maintaining sufficient
resources to be able to fulfill obligations that have been guaranteed
by FICC in the event of a Member default that presents the largest
aggregate liquidity exposure to FICC over the settlement cycle.\31\
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    \30\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation), supra note 13. Because
GSD and MBSD do not maintain a guaranty fund separate and apart from
the Clearing Fund they collect from Members, FICC monitors its
credit exposure to its Members by managing the market risks of each
Member's unsettled portfolio through the collection of each
Division's Clearing Fund. The aggregate of all Members' Required
Clearing Fund deposits to each of GSD or MBSD comprises that
Division's Clearing Fund that represents FICC's prefunded resources
to address uncovered loss exposures as provided in each Division's
proposed Rule 4. Therefore, FICC's market risk management strategy
for both Divisions is designed to comply with Rule 17Ad-22(e)(4)
under the Act, where these risks are referred to as ``credit
risks.'' See also 17 CFR 240.17Ad-22(e)(4).
    \31\ FICC's liquidity risk management strategy, including the
manner in which FICC utilizes its liquidity tools, is described in
the Clearing Agency Liquidity Risk Management Framework. See
Securities Exchange Act Release Nos. 80489 (April 19, 2017), 82 FR
19120 (April 25, 2017) (SR-DTC-2017-004, SR-NSCC-2017-005, SR-FICC-
2017-008); 81194 (July 24, 2017), 82 FR 35241 (July 28, 2017) (SR-
DTC-2017-004, SR-NSCC-2017-005, SR-FICC-2017-008).
---------------------------------------------------------------------------

    The Recovery Plan would outline the metrics and indicators that
FICC has developed to evaluate a stress situation against established
risk tolerance thresholds. Each risk mitigation tool identified in the
Recovery Plan would include a description of the escalation thresholds
that allow for effective and timely reporting to the appropriate
internal management staff and committees, or to the Board. The Recovery
Plan would make clear that these tools and escalation protocols would
be calibrated across each phase of the Crisis Continuum. The Recovery
Plan would also establish that FICC would retain the flexibility to
deploy such tools either separately or in a coordinated approach, and
to use other alternatives to these actions and tools as necessitated by
the circumstances of a particular Member default in accordance with the
applicable Rules. Therefore, the Recovery Plan would both provide FICC
with a roadmap to follow within each phase of the Crisis Continuum, and
would permit it to adjust its risk management measures to address the
unique circumstances of each event.
    The Recovery Plan would describe the conditions that mark each
phase of the Crisis Continuum, and would identify actions that FICC
could take as it transitions through each phase in order to both
prevent losses from materializing through active risk management, and
to restore the financial health of FICC during a period of stress.
    The stable market phase of the Crisis Continuum would describe
active risk management activities in the normal course of business.
These activities would include (1) routine monitoring of margin
adequacy through daily review of back testing and stress testing
results that review the adequacy of the margin calculations for each of
GSD and MBSD, and escalation of those results to internal and Board
committees; \32\ and (2) routine monitoring of liquidity adequacy
through review of daily liquidity studies that measure sufficiency of
available liquidity resources to meet cash settlement obligations of
the Member that would generate the largest aggregate payment
obligation.\33\
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    \32\ FICC's stress testing practices are described in the
Clearing Agency Stress Testing Framework (Market Risk). See
Securities Exchange Act Release Nos. 80485 (April 19, 2017), 82 FR
19131 (April 25, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-NSCC-
2017-006); 81192 (July 24, 2017), 82 FR 35245 (July 28, 2017) (SR-
DTC-2017-005, SR-FICC-2017-009, SR-NSCC-2017-006).
    \33\ See supra note 31.
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    The Recovery Plan would describe some of the indicators of the
stress market phase of the Crisis Continuum, which would include, for
example, volatility in market prices of certain assets where there is
increased uncertainty among market participants about the fundamental
value of those assets. This phase would involve general market
stresses, when no Member default would be imminent. Within the
description of this phase, the Recovery Plan would provide that FICC
may take targeted, routine risk management measures as necessary and as
permitted by the Rules.
    Within the Member default phase of the Crisis Continuum, the
Recovery Plan would provide a roadmap for the existing procedures that
FICC would follow in the event of a Member default and any decision by
FICC to cease to act for that Member.\34\ The Recovery Plan would
provide that the objectives of FICC's actions upon a Member or
Affiliated Family default are to (1) minimize losses and market
exposure of the affected Members and the applicable Division's non-
Defaulting Members; and (2), to the extent practicable, minimize
disturbances to the affected markets. The Recovery Plan would describe
tools, actions, and related governance for both market risk monitoring
and liquidity risk monitoring through this phase. For example, in
connection with managing its market risk during this phase, FICC would,
pursuant to the applicable Division's Rules, (1) monitor and assess the
adequacy of the GSD and MBSD Clearing Fund resources; (2), when
necessary and appropriate pursuant to the applicable Division's Rules,
assess and collect additional margin requirements; and (3) follow its
operational procedures to liquidate the Defaulting Member's portfolio.
Management of liquidity risk through this phase would involve ongoing
monitoring of the adequacy of FICC's liquidity resources, and the
Recovery Plan would identify certain actions FICC may deploy as it
deems necessary to mitigate a potential liquidity shortfall, which
would include, for example, adjusting its strategy for closing out the
Defaulting Member's portfolio or seeking additional liquidity
resources. The Recovery Plan would state that, throughout this phase,
relevant information would be escalated and reported to both internal
management committees and the Board Risk Committee.
---------------------------------------------------------------------------

    \34\ See GSD Rule 21 (Restrictions on Access to Services), GSD
Rule 22A (Procedures for When the Corporation Ceases to Act), MBSD
Rule 14 (Restrictions on Access to Services), and MBSD Rule 17
(Procedures for When the Corporation Ceases to Act), supra note 8.
---------------------------------------------------------------------------

    The Recovery Plan would also identify financial resources available
to FICC, pursuant to the Rules, to address losses arising out of a
Member default. Specifically, GSD Rule 4 and MBSD Rule 4, as each are
proposed to be amended by the Loss Allocation Filing,

would provide that losses remaining after application of the Defaulting
Member's resources be satisfied first by applying a ``Corporate
Contribution,'' and then, if necessary, by allocating remaining losses
among the membership in accordance with such GSD Rule 4 and MBSD Rule
4, as applicable.\35\
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    \35\ See supra note 13. The Loss Allocation Filing proposes to
amend GSD Rule 4 and MBSD Rule 4 to define the amount FICC would
contribute to address a loss resulting from either a Member default
or a non-default event as the ``Corporate Contribution.'' This
amount would be 50 percent (50%) of the ``General Business Risk
Capital Requirement,'' which is calculated pursuant to the Capital
Policy and is an amount sufficient to cover potential general
business losses so that FICC can continue operations and services as
a going concern if those losses materialize, in compliance with Rule
17Ad-22(e)(15) under the Act. See also supra note 11; 17 CFR
240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    In order to provide for an effective and timely recovery, the
Recovery Plan would describe the period of time that would occur near
the end of the Member default phase, during which FICC may experience
stress events or observe early warning indicators that allow it to
evaluate its options and prepare for the recovery phase (referred to in
the Plan as the ``Recovery Corridor''). The Recovery Plan would then
describe the recovery phase of the Crisis Continuum, which would begin
on the date that FICC issues the first Loss Allocation Notice of the
second loss allocation round with respect to a given ``Event Period.''
\36\ The recovery phase would describe actions that FICC may take to
avoid entering into a wind-down of its business.
---------------------------------------------------------------------------

    \36\ The Loss Allocation Filing proposes to amend Rule 4 to
introduce the concept of an ``Event Period'' as the ten (10)
Business Days beginning on (i) with respect to a Member default, the
day on which NSCC notifies Members that it has ceased to act for a
Member under the Rules, or (ii) with respect to a non-default loss,
the day that NSCC notifies Members of the determination by the Board
that there is a non-default loss event, as described in greater
detail in that filing. The proposed GSD Rule 4 and MBSD Rule 4 would
define a ``round'' as a series of loss allocations relating to an
Event Period, and would provide that the first Loss Allocation
Notice in a first, second, or subsequent round shall expressly state
that such notice reflects the beginning of a first, second, or
subsequent round. The maximum allocable loss amount of a round is
equal to the sum of the ``Loss Allocation Caps'' (as defined in the
proposed GSD Rule 4 and MBSD Rule 4) of those Members included in
the round. See supra note 13.
---------------------------------------------------------------------------

    FICC expects that significant deterioration of liquidity resources
would cause it to enter the Recovery Corridor. As such, the Plan would
describe the actions FICC may take at this stage aimed at replenishing
those resources. Recovery Corridor indicators may include, for example,
a rapid and material change in market prices or substantial intraday
activity volume by the Member that subsequently defaults, neither of
which are mitigated by intraday margin calls, or subsequent defaults by
other Members or Affiliated Families during a compressed time period.
Throughout the Recovery Corridor, FICC would monitor the adequacy of
the Divisions' respective resources and the expected timing of
replenishment of those resources, and would do so through the
monitoring of certain corridor indicator metrics.
    The majority of the corridor indicators, as identified in the
Recovery Plan, relate directly to conditions that may require either
Division to adjust its strategy for hedging and liquidating a
Defaulting Member's portfolio, and any such changes would include an
assessment of the status of the corridor indicators. Corridor
indicators would include, for example, effectiveness and speed of
FICC's efforts to close out the portfolio of the Defaulting Member, and
an impediment to the availability of its financial resources. For each
corridor indicator, the Recovery Plan would identify (1) measures of
the indicator, (2) evaluations of the status of the indicator, (3)
metrics for determining the status of the deterioration or improvement
of the indicator, and (4) ``Corridor Actions,'' which are steps that
may be taken to improve the status of the indicator,\37\ as well as
management escalations required to authorize those steps. Because FICC
has never experienced the default of multiple Members, it has not,
historically, measured the deterioration or improvements metrics of the
corridor indicators. As such, these metrics were chosen based on the
business judgment of FICC management.
---------------------------------------------------------------------------

    \37\ The Corridor Actions that would be identified in the Plan
are indicative, but not prescriptive; therefore, if FICC needs to
consider alternative actions due to the applicable facts and
circumstances, the escalation of those alternative actions would
follow the same escalation protocol identified in the Plan for the
Corridor Indicator to which the action relates.
---------------------------------------------------------------------------

    The Recovery Plan would also describe the reporting and escalation
of the status of the corridor indicators throughout the Recovery
Corridor. Significant deterioration of a corridor indicator, as
measured by the metrics set out in the Recovery Plan, would be
escalated to the Board. FICC management would review the corridor
indicators and the related metrics at least annually, and would modify
these metrics as necessary in light of observations from simulations of
Member defaults and other analyses. Any proposed modifications would be
reviewed by the Management Risk Committee and the Board Risk Committee.
The Recovery Plan would estimate that FICC may remain in the Recovery
Corridor between one day and two weeks. This estimate is based on
historical data observed in past Member defaults, the results of
simulations of Member defaults, and periodic liquidity analyses
conducted by FICC. The actual length of a Recovery Corridor would vary
based on actual market conditions observed at the time, and FICC would
expect the Recovery Corridor to be shorter in market conditions of
increased stress.
    The Recovery Plan would outline steps by which FICC may allocate
its losses, which would occur when and in the order provided in the
amended GSD Rule 4 and MBSD Rule 4, as applicable.\38\ The Recovery
Plan would also identify tools that may be used to address foreseeable
shortfalls of FICC's liquidity resources following a Member default,
and would provide that these tools may be used as appropriate during
the Crisis Continuum to address liquidity shortfalls if they arise. The
goal in managing FICC's qualified liquidity resources is to maximize
resource availability in an evolving stress situation, to maintain
flexibility in the order and use of sources of liquidity, and to repay
any third party lenders of liquidity in a timely manner. Additional
voluntary or uncommitted tools to address potential liquidity
shortfalls, for example uncommitted bank loans, which may supplement
FICC's other liquid resources described herein, would also be
identified in the Recovery Plan. The Recovery Plan would state that,
due to the extreme nature of a stress event that would cause FICC to
consider the use of these liquidity tools, the availability and
capacity of these liquidity tools, and the willingness of
counterparties to lend, cannot be accurately predicted and are
dependent on the circumstances of the applicable stress period,
including market price volatility, actual or perceived disruptions in
financial markets, the costs to FICC of utilizing these tools, and any
potential impact on FICC's credit rating.
---------------------------------------------------------------------------

    \38\ As these matters are described in greater detail in the
Loss Allocation Filing and in the proposed amendments to GSD Rule 4
and MBSD Rule 4, described therein, reference is made to that filing
and the details are not repeated here. See supra note 13.
---------------------------------------------------------------------------

    As stated above, the Recovery Plan would state that FICC will have
entered the recovery phase on the date that it issues the first Loss
Allocation Notice of the second loss allocation round with respect to a
given Event Period. The Recovery Plan would provide that, during the
recovery phase, FICC would

continue and, as needed, enhance, the monitoring and remedial actions
already described in connection with previous phases of the Crisis
Continuum, and would remain in the recovery phase until its financial
resources are expected to be or are fully replenished, or until the
Wind-down Plan is triggered, as described below.
    The Recovery Plan would describe governance for the actions and
tools that may be employed within each phase of the Crisis Continuum,
which would be dictated by the facts and circumstances applicable to
the situation being addressed. Such facts and circumstances would be
measured by the various indicators and metrics applicable to that phase
of the Crisis Continuum, and would follow the relevant escalation
protocol that would be described in the Recovery Plan. The Recovery
Plan would also describe the governance procedures around a decision to
cease to act for a Member, pursuant to the applicable Division's Rules,
and around the management and oversight of the subsequent liquidation
of the Defaulting Member's portfolio. The Recovery Plan would state
that, overall, FICC would retain flexibility in accordance with each
Division's Rules, its governance structure, and its regulatory
oversight, to address a particular situation in order to best protect
FICC and the Members, and to meet the primary objectives, throughout
the Crisis Continuum, of minimizing losses and, where consistent and
practicable, minimizing disturbance to affected markets.
    Non-Default Losses. The Recovery Plan would outline how FICC may
address losses that result from events other than a Member default.
While these matters are addressed in greater detail in other documents,
this section of the Plan would provide a roadmap to those documents and
an outline for FICC's approach to monitoring and managing losses that
could result from a non-default event. The Plan would first identify
some of the risks FICC faces that could lead to these losses, which
include, for example, the business and profit/loss risks of unexpected
declines in revenue or growth of expenses; the operational risks of
disruptions to systems or processes that could lead to large losses,
including those resulting from, for example, a cyber-attack; and
custody or investment risks that could lead to financial losses. The
Recovery Plan would describe FICC's overall strategy for the management
of these risks, which includes a ``three lines of defense'' approach to
risk management that allows for comprehensive management of risk across
the organization.\39\ The Recovery Plan would also describe FICC's
approach to financial risk and capital management. The Plan would
identify key aspects of this approach, including, for example, an
annual budget process, business line performance reviews with
management, and regular review of capital requirements against LNA.
These risk management strategies are collectively intended to allow
FICC to effectively identify, monitor, and manage risks of non-default
losses.
---------------------------------------------------------------------------

    \39\ This ``three lines of defense'' approach to risk management
includes (1) a first line of defense comprised of the various
business lines and functional units that support the products and
services offered by FICC; (2) a second line of defense comprised of
control functions that support FICC, including the risk management,
legal and compliance areas; and (3) a third line of defense, which
is performed by an internal audit group. The Clearing Agency Risk
Management Framework includes a description of this ``three lines of
defense'' approach to risk management, and addresses how FICC
comprehensively manages various risks, including operational,
general business, investment, custody, and other risks that arise in
or are borne by it. See Securities Exchange Act Release No. 81635
(September 15, 2017), 82 FR 44224 (September 21, 2017) (SR-DTC-2017-
013, SR-FICC-2017-016, SR-NSCC-2017-012). The Clearing Agency
Operational Risk Management Framework describes the manner in which
FICC manages operational risks, as defined therein. See Securities
Exchange Act Release No. 81745 (September 28, 2017), 82 FR 46332
(October 4, 2017) (SR-DTC-2017-014, SR-FICC-2017-017, SR-NSCC-2017-
013).
---------------------------------------------------------------------------

    The Plan would identify the two categories of financial resources
FICC maintains to cover losses and expenses arising from non-default
risks or events as (1) LNA, maintained, monitored, and managed pursuant
to the Capital Policy, which include (a) amounts held in satisfaction
of the General Business Risk Capital Requirement,\40\ (b) the Corporate
Contribution,\41\ and (c) other amounts held in excess of FICC's
capital requirements pursuant to the Capital Policy; and (2) resources
available pursuant to the loss allocation provisions of GSD Rule 4 and
MBSD Rule 4.\42\
---------------------------------------------------------------------------

    \40\ See supra note 35.
    \41\ See supra note 35.
    \42\ See supra note 13.
---------------------------------------------------------------------------

    The Plan would address the process by which the CFO and the DTCC
Treasury group would determine which available LNA resources are most
appropriate to cover a loss that is caused by a non-default event. This
determination involves an evaluation of a number of factors, including
the current and expected size of the loss, the expected time horizon
over when the loss or additional expenses would materialize, the
current and projected available LNA, and the likelihood LNA could be
successfully replenished pursuant to the Replenishment Plan, if
triggered.\43\ Finally the Plan would discuss how FICC would apply its
resources to address losses resulting from a non-default event,
including the order of resources it would apply if the loss or
liability exceeds FICC's excess LNA amounts, or is large relative
thereto, and the Board has declared the event a ``Declared Non-Default
Loss Event'' pursuant to GSD Rule 4 and MBSD Rule 4.\44\
---------------------------------------------------------------------------

    \43\ See supra note 11.
    \44\ See supra note 13.
---------------------------------------------------------------------------

    The Plan would also describe proposed GSD Rule 50 (Market
Disruption and Force Majeure) and proposed MBSD Rule 40 (Market
Disruption and Force Majeure), which FICC is proposing to adopt in the
GSD Rule and MBSD Rules, respectively. This Proposed Rule would provide
transparency around how FICC would address extraordinary events that
may occur outside its control. Specifically, the Proposed Rule would
define a ``Market Disruption Event'' and the governance around a
determination that such an event has occurred. The Proposed Rule would
also describe FICC's authority to take actions during the pendency of a
Market Disruption Event that it deems appropriate to address such an
event and facilitate the continuation of its services, if practicable,
as described in greater detail below.
    The Plan would describe the interaction between the Proposed Rule
and FICC's existing processes and procedures addressing business
continuity management and disaster recovery (generally, the ``BCM/DR
procedures''), making clear that the Proposed Rule is designed to
support those BCM/DR procedures and to address circumstances that may
be exogenous to FICC and not necessarily addressed by the BCM/DR
procedures. Finally, the Plan would describe that, because the
operation of the Proposed Rule is specific to each applicable Market
Disruption Event, the Proposed Rule does not define a time limit on its
application. However, the Plan would note that actions authorized by
the Proposed Rule would be limited to the pendency of the applicable
Market Disruption Event, as made clear in the Proposed Rule. Overall,
the Proposed Rule is designed to mitigate risks caused by Market
Disruption Events and, thereby, minimize the risk of financial loss
that may result from such events.
    Recovery Tool Characteristics. The Recovery Plan would describe
FICC's evaluation of the tools identified within the Recovery Plan, and
its rationale for

concluding that such tools are comprehensive, effective, and
transparent, and that such tools provide appropriate incentives to
Members and minimize negative impact on Members and the financial
system, in compliance with guidance published by the Commission in
connection with the adoption of Rule 17Ad-22(e)(3)(ii) under the
Act.\45\ FICC's analysis and the conclusions set forth in this section
of the Recovery Plan are described in greater detail in Item 3(b) of
this filing, below.
---------------------------------------------------------------------------

    \45\ Standards for Covered Clearing Agencies, Securities
Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786
(October 13, 2016) (S7-03-14).
---------------------------------------------------------------------------

FICC Wind-Down Plan
    The Wind-down Plan would provide the framework and strategy for the
orderly wind-down of FICC if the use of the recovery tools described in
the Recovery Plan do not successfully return FICC to financial
viability. While FICC believes that, given the comprehensive nature of
the recovery tools, such event is extremely unlikely, as described in
greater detail below, FICC is proposing a wind-down strategy that
provides for (1) the transfer of FICC's business, assets and
memberships of both Divisions to another legal entity, (2) such
transfer being effected in connection with proceedings under Chapter 11
of the U.S. Federal Bankruptcy Code,\46\ and (3) after effectuating
this transfer, FICC liquidating any remaining assets in an orderly
manner in bankruptcy proceedings. FICC believes that the proposed
transfer approach to a wind-down would meet its objectives of (1)
assuring that FICC's critical services will be available to the market
as long as there are Members in good standing, and (2) minimizing
disruption to the operations of Members and financial markets generally
that might be caused by FICC's failure.
---------------------------------------------------------------------------

    \46\ 11 U.S.C. 1101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to FICC's Wind-down Plan, the
Plan would identify the factors that FICC considered in developing this
approach, including the fact that FICC does not own material assets
that are unrelated to its clearance and settlement activities. As such,
a business reorganization or ``bail-in'' of debt approach would be
unlikely to mitigate significant losses. Additionally, FICC's approach
was developed in consideration of its critical and unique position in
the U.S. markets, which precludes any approach that would cause FICC's
critical services to no longer be available.
    First, the Wind-down Plan would describe the potential scenarios
that could lead to the wind-down of FICC, and the likelihood of such
scenarios. The Wind-down Plan would identify the time period leading up
to a decision to wind-down FICC as the ``Runway Period.'' This period
would follow the implementation of any recovery tools, as it may take a
period of time, depending on the severity of the market stress at that
time, for these tools to be effective or for FICC to realize a loss
sufficient to cause it to be unable to effectuate settlements and repay
its obligations.\47\ The Wind-down Plan would identify some of the
indicators that it has entered this Runway Period, which would include,
for example, successive Member defaults, significant Member retirements
thereafter, and FICC's inability to replenish its financial resources
following the liquidation of the portfolio of the Defaulting Member(s).
---------------------------------------------------------------------------

    \47\ The Wind-down Plan would state that, given FICC's position
as a user-governed financial market utility, it is possible that
Members might voluntarily elect to provide additional support during
the recovery phase leading up to a potential trigger of the Wind-
down Plan, but would also make clear that FICC cannot predict the
willingness of Members to do so.
---------------------------------------------------------------------------

    The trigger for implementing the Wind-down Plan would be a
determination by the Board that recovery efforts have not been, or are
unlikely to be, successful in returning FICC to viability as a going
concern. As described in the Plan, FICC believes this is an appropriate
trigger because it is both broad and flexible enough to cover a variety
of scenarios, and would align incentives of FICC and the Members to
avoid actions that might undermine FICC's recovery efforts.
Additionally, this approach takes into account the characteristics of
FICC's recovery tools and enables the Board to consider (1) the
presence of indicators of a successful or unsuccessful recovery, and
(2) potential for knock-on effects of continued iterative application
of FICC's recovery tools.
    The Wind-down Plan would describe the general objectives of the
transfer strategy, and would address assumptions regarding the transfer
of FICC's critical services, business, assets and membership, and the
assignment of GSD's link with another FMI, to another legal entity that
is legally, financially, and operationally able to provide FICC's
critical services to entities that wish to continue their membership
following the transfer (``Transferee''). The Wind-down Plan would
provide that the Transferee would be either (1) a third party legal
entity, which may be an existing or newly established legal entity or a
bridge entity formed to operate the business on an interim basis to
enable the business to be transferred subsequently (``Third Party
Transferee''); or (2) an existing, debt-free failover legal entity
established ex-ante by DTCC (``Failover Transferee'') to be used as an
alternative Transferee in the event that no viable or preferable Third
Party Transferee timely commits to acquire FICC's business. FICC would
seek to identify the proposed Transferee, and negotiate and enter into
transfer arrangements during the Runway Period and prior to making any
filings under Chapter 11 of the U.S. Federal Bankruptcy Code.\48\ As
stated above, the Wind-down Plan would anticipate that the transfer to
the Transferee be effected in connection with proceedings under Chapter
11 of the U.S. Federal Bankruptcy Code, and pursuant to a bankruptcy
court order under Section 363 of the Bankruptcy Code, such that the
transfer would be free and clear of claims against, and interests in,
FICC, except to the extent expressly provided in the court's order.\49\
---------------------------------------------------------------------------

    \48\ See 11 U.S.C. et seq.
    \49\ See id. at 363.
---------------------------------------------------------------------------

    In order to effect a timely transfer of its services and minimize
the market and operational disruption of such transfer, FICC would
expect to transfer all of its critical services and any non-critical
services that are ancillary and beneficial to a critical service, or
that otherwise have substantial user demand from the continuing
membership. Following the transfer, the Wind-down Plan would anticipate
that the Transferee and its continuing membership would determine
whether to continue to provide any transferred non-critical service on
an ongoing basis, or terminate the non-critical service following some
transition period. FICC's Wind-down Plan would anticipate that the
Transferee would enter into a transition services agreement with DTCC
so that DTCC would continue to provide the shared services it currently
provides to FICC, including staffing, infrastructure and operational
support. The Wind-down Plan would also anticipate the assignment of
FICC's link arrangements, including its arrangements with clearing
banks and GSD's cross-margining arrangement with CME, described above,
to the Transferee.\50\ The Wind-down Plan

would provide that Members' open positions existing prior to the
effective time of the transfer would be addressed by the provisions of
the proposed Wind-down Rule, as defined and described below, and the
existing GSD Rule 22B (Corporation Default) and MBSD Rule 17
(Corporation Default) (collectively, ``Corporation Default Rule''), as
applicable, and that the Transferee would not acquire any pending or
open transactions with the transfer of the business.\51\ The Wind-down
Plan would anticipate that the Transferee would accept transactions for
processing with a trade date from and after the effective time of the
transfer.
---------------------------------------------------------------------------

    \50\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding
agreements, which are generally not assignable by FICC. However, to
the extent the Transferee adopts rules substantially identical to
those FICC has in effect prior to the transfer, it would have the
benefit of any rules-based liquidity funding. The Wind-down Plan
contemplates that neither of the Divisions' respective Clearing
Funds would be transferred to the Transferee, as they are not held
in a bankruptcy remote manner and they are the primary prefunded
liquidity resource to be accessed in the recovery phase.
    \51\ See supra note 8.
---------------------------------------------------------------------------

    The Wind-down Plan would provide that, following the effectiveness
of the transfer to the Transferee, the wind-down of FICC would involve
addressing any residual claims against FICC through the bankruptcy
process and liquidating the legal entity. As such, and as stated above,
the Wind-down Plan does not contemplate FICC continuing to provide
services in any capacity following the transfer time, and any services
not transferred would be terminated.
    The Wind-down Plan would also identify the key dependencies for the
effectiveness of the transfer, which include regulatory approvals that
would permit the Transferee to be legally qualified to provide the
transferred services from and after the transfer, and approval by the
applicable bankruptcy court of, among other things, the proposed sale,
assignments, and transfers to the Transferee.
    The Wind-down Plan would address governance matters related to the
execution of the transfer of FICC's business and its wind-down. The
Wind-down Plan would address the duties of the Board to execute the
wind-down of FICC in conformity with (1) the Rules, (2) the Board's
fiduciary duties, which mandate that it exercise reasonable business
judgment in performing these duties, and (3) FICC's regulatory
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in
making these decisions, which would include, for example, whether FICC
could safely stabilize the business and protect its value without
seeking bankruptcy protection, and FICC's ability to continue to meet
its regulatory requirements.
    The Wind-down Plan would describe (1) actions FICC or DTCC may take
to prepare for wind-down in the period before FICC experiences any
financial distress, (2) actions FICC would take both during the
recovery phase and the Runway Period to prepare for the execution of
the Wind-down Plan, and (3) actions FICC would take upon commencement
of bankruptcy proceedings to effectuate the Wind-down Plan.
    Finally, the Wind-down Plan would include an analysis of the
estimated time and costs to effectuate the plan, and would provide that
this estimate be reviewed and approved by the Board annually. In order
to estimate the length of time it might take to achieve a recovery or
orderly wind-down of FICC's critical operations, as contemplated by the
R&W Plan, the Wind-down Plan would include an analysis of the possible
sequencing and length of time it might take to complete an orderly
wind-down and transfer of critical operations, as described in earlier
sections of the R&W Plan. The Wind-down Plan would also include in this
analysis consideration of other factors, including the time it might
take to complete any further attempts at recovery under the Recovery
Plan. The Wind-down Plan would then multiply this estimated length of
time by FICC's average monthly operating expenses, including
adjustments to account for changes to FICC's profit and expense profile
during these circumstances, over the previous twelve months to
determine the amount of LNA that it should hold to achieve a recovery
or orderly wind-down of FICC's critical operations. The estimated wind-
down costs would constitute the ``Recovery/Wind-down Capital
Requirement'' under the Capital Policy.\52\ Under that policy, the
General Business Risk Capital Requirement is calculated as the greatest
of three estimated amounts, one of which is this Recovery/Wind-down
Capital Requirement.\53\
---------------------------------------------------------------------------

    \52\ See supra note 11.
    \53\ See supra note 11.
---------------------------------------------------------------------------

    The R&W Plan is designed as a roadmap, and the types of actions
that may be taken both leading up to and in connection with
implementation of the Wind-down Plan would be primarily addressed in
other supporting documentation referred to therein.
    The Wind-down Plan would address proposed GSD Rule 22D and MBSD
Rule 17B (Wind-down of the Corporation), which would be adopted to
facilitate the implementation of the Wind-down Plan, and are discussed
below.
Proposed Rules
    In connection with the adoption of the R&W Plan, FICC is proposing
to adopt the Proposed Rules, each described below. The Proposed Rules
would facilitate the execution of the R&W Plan and would provide
Members and Limited Members with transparency as to critical aspects of
the Plan, particularly as they relate to the rights and
responsibilities of both FICC and Members. The Proposed Rules also
provide a legal basis to these aspects of the Plan.
GSD Rule 22D and MBSD Rule 17B (Wind-Down of the Corporation)
    The proposed GSD Rule 22D and MBSD Rule 17B (collectively, ``Wind-
down Rule'') would be adopted by both Divisions to facilitate the
execution of the Wind-down Plan. The Wind-down Rule would include a
proposed set of defined terms that would be applicable only to the
provisions of this Proposed Rule. The Wind-down Rule would make clear
that a wind-down of FICC's business would occur (1) after a decision is
made by the Board, and (2) in connection with the transfer of FICC's
services to a Transferee, as described therein. Because GSD and MBSD
are both divisions of FICC, the individual Wind-down Rules are designed
to work together. A decision by the Board to initiate the Wind-down
Plan would be pursuant to, and trigger the provisions of, the Wind-down
Rule of each Division simultaneously. Generally, the proposed Wind-down
Rule is designed to create clear mechanisms for the transfer of
Eligible Members, Eligible Limited Members, and Settling Banks (as
these terms would be defined in the Wind-down Rule), and FICC's
business in order to provide for continued access to critical services
and to minimize disruption to the markets in the event the Wind-down
Plan is initiated.
    Wind-down Trigger. First, the Proposed Rule would make clear that
the Board is responsible for initiating the Wind-down Plan, and would
identify the criteria the Board would consider when making this
determination. As provided for in the Wind-down Plan and in the
proposed Wind-down Rule, the Board would initiate the Plan if, in the
exercise of its business judgment and subject to its fiduciary duties,
it has determined that the execution of the Recovery Plan has not or is
not likely to restore FICC to viability as a going concern, and the

implementation of the Wind-down Plan, including the transfer of FICC's
business, is in the best interests of FICC, Members and Limited Members
of both Divisions, its shareholders and creditors, and the U.S.
financial markets.
    Identification of Critical Services; Designation of Dates and Times
for Specific Actions. The Proposed Rule would provide that, upon making
a determination to initiate the Wind-down Plan, the Board would
identify the critical and non-critical services that would be
transferred to the Transferee at the Transfer Time (as defined below
and in the Proposed Rule), as well as any non-critical services that
would not be transferred to the Transferee. The proposed Wind-down Rule
would establish that any services transferred to the Transferee will
only be provided by the Transferee as of the Transfer Time, and that
any non-critical services that are not transferred to the Transferee
would be terminated at the Transfer Time. The Proposed Rule would also
provide that the Board would establish (1) an effective time for the
transfer of FICC's business to a Transferee (``Transfer Time''), (2)
the last day that transactions may be submitted to either Division for
processing (``Last Transaction Acceptance Date''), and (3) the last day
that transactions submitted to either Division will be settled (``Last
Settlement Date'').
    Treatment of Pending Transactions. The Wind-down Rule would also
authorize the Board to provide for the settlement of pending
transactions of either Division prior to the Transfer Time, so long as
the applicable Division's Corporation Default Rule has not been
triggered. For example, the Proposed Rule would provide the Board with
the ability to, if it deems practicable, based on FICC's resources at
that time, allow pending transactions of either Division to complete
prior to the transfer of FICC's business to a Transferee. The Board
would also have the ability to allow Members to only submit trades to
the applicable Division that would effectively offset pending positions
or provide that transactions will be processed in accordance with
special or exception processing procedures. The Proposed Rule is
designed to enable these actions in order to facilitate settlement of
pending transactions of the applicable Division and reduce claims
against FICC that would have to be satisfied after the transfer has
been effected. If none of these actions are deemed practicable (or if
the applicable Division's Corporation Default Rule has been triggered
with respect to a Division), then the provisions of the proposed
Corporation Default Rule would apply to the treatment of open, pending
transactions of such Division.
    The Proposed Rule would make clear, however, that neither Division
would accept any transactions for processing after the Last Transaction
Acceptance Date or which are designated to settle after the Last
Settlement Date for such Division. Any transactions to be processed
and/or settled after the Transfer Time would be required to be
submitted to the Transferee, and would not be FICC's responsibility.
    Notice Provisions. The proposed Wind-down Rule would provide that,
upon a decision to implement the Wind-down Plan, FICC would provide its
Members and Limited Members and its regulators with a notice that
includes material information relating to the Wind-down Plan and the
anticipated transfer of the membership of both Divisions and business,
including, for example, (1) a brief statement of the reasons for the
decision to implement the Wind-down Plan; (2) identification of the
Transferee and information regarding the transaction by which the
transfer of FICC's business would be effected; (3) the Transfer Time,
Last Transaction Acceptance Date, and Last Settlement Date; and (4)
identification of Eligible Members and Eligible Limited Members, and
the critical and non-critical services that would be transferred to the
Transferee at the Transfer Time, as well as those Non-Eligible Members
and Non-Eligible Limited Members (as defined in the Proposed Rule), and
any non-critical services that would not be included in the transfer.
FICC would also make available the rules and procedures and membership
agreements of the Transferee.
    Transfer of Membership. The proposed Wind-down Rule would address
the expected transfer of both Divisions' membership to the Transferee,
which FICC would seek to effectuate by entering into an arrangement
with a Failover Transferee, or by using commercially reasonable efforts
to enter into such an arrangement with a Third Party Transferee.
Therefore, the Wind-down Rule would provide Members, Limited Members
and Settling Banks with notice that, in connection with the
implementation of the Wind-down Plan and with no further action
required by any party, (1) their membership with the applicable
Division would transfer to the Transferee, (2) they would become party
to a membership agreement with such Transferee, and (3) they would have
all of the rights and be subject to all of the obligations applicable
to their membership status under the rules of the Transferee. These
provisions would not apply to any Member or Limited Member that is
either in default of an obligation to FICC or has provided notice of
its election to withdraw its membership from the applicable Division.
Further, the proposed Wind-down Rule would make clear that it would not
prohibit (1) Members and Limited Members that are not transferred by
operation of the Wind-down Rule from applying for membership with the
Transferee, or (2) Members, Limited Members, and Settling Banks that
would be transferred to the Transferee from withdrawing from membership
with the Transferee.\54\
---------------------------------------------------------------------------

    \54\ The Members and Limited Members whose membership is
transferred to the Transferee pursuant to the proposed Wind-down
Rule would submit transactions to be processed and settled subject
to the rules and procedures of the Transferee, including any
applicable margin charges or other financial obligations.
---------------------------------------------------------------------------

    Comparability Period. The proposed automatic mechanism for the
transfer of both Divisions' memberships is intended to provide the
membership with continuous access to critical services in the event of
FICC's wind-down, and to facilitate the continued prompt and accurate
clearance and settlement of securities transactions. Further to this
goal, the proposed Wind-down Rule would provide that FICC would enter
into arrangements with a Failover Transferee, or would use commercially
reasonable efforts to enter into arrangements with a Third Party
Transferee, providing that, in either case, with respect to the
critical services and any non-critical services that are transferred
from FICC to the Transferee, for at least a period of time to be agreed
upon (``Comparability Period''), the business transferred from FICC to
the Transferee would be operated in a manner that is comparable to the
manner in which the business was previously operated by FICC.
Specifically, the proposed Wind-down Rule would provide that: (1) The
rules of the Transferee and terms of membership agreements would be
comparable in substance and effect to the analogous Rules and
membership agreements of FICC; (2) the rights and obligations of any
Members, Limited Members and Settling Banks that are transferred to the
Transferee would be comparable in substance and effect to their rights
and obligations as to FICC; and (3) the Transferee would operate the
transferred business and provide any services that are transferred in a
comparable manner to which such services were provided by FICC. The

purpose of these provisions and the intended effect of the proposed
Wind-down Rule is to facilitate a smooth transition of FICC's business
to a Transferee and to provide that, for at least the Comparability
Period, the Transferee (1) would operate the transferred business in a
manner that is comparable in substance and effect to the manner in
which the business was operated by FICC, and (2) would not require
sudden and disruptive changes in the systems, operations and business
practices of the new members of the Transferee.
    Subordination of Claims Provisions and Miscellaneous Matters. The
proposed Wind-down Rule would also include a provision addressing the
subordination of unsecured claims against FICC of its Members and
Limited Members who fail to participate in FICC's recovery efforts
(i.e., such firms are delinquent in their obligations to FICC or elect
to retire from FICC in order to minimize their obligations with respect
to the allocation of losses, pursuant to the Rules). This provision is
designed to incentivize Members to participate in FICC's recovery
efforts.\55\
---------------------------------------------------------------------------

    \55\ Nothing in the proposed Wind-down Rule would seek to
prevent a Member, Limited Member or Settling Bank that retired its
membership at either of the Divisions from applying for membership
with the Transferee. Once its FICC membership is terminated,
however, such firm would not be able to benefit from the membership
assignment that would be effected by this proposed Wind-down Rule,
and it would have to apply for membership directly with the
Transferee, subject to its membership application and review
process.
---------------------------------------------------------------------------

    The proposed Wind-down Rule would address other ex-ante matters,
including provisions providing that its Members, Limited Members and
Settling Banks (1) will assist and cooperate with FICC to effectuate
the transfer of FICC's business to a Transferee, (2) consent to the
provisions of the rule, and (3) grant FICC power of attorney to execute
and deliver on their behalf documents and instruments that may be
requested by the Transferee. Finally, the Proposed Rule would include a
limitation of liability for any actions taken or omitted to be taken by
FICC pursuant to the Proposed Rule. The purpose of the limitation of
liability is to facilitate and protect FICC's ability to act
expeditiously in response to extraordinary events. As noted, such
limitation of liability would be available only following triggering of
the Wind-down Plan. In addition, and as a separate matter, the
limitation of liability provides Members with transparency for the
unlikely situation when those extraordinary events could occur, as well
supporting the legal framework within which FICC would take such
actions. These provisions, collectively, are designed to enable FICC to
take such acts as the Board determines necessary to effectuate an
orderly transfer and wind-down of its business should recovery efforts
prove unsuccessful.
GSD Rule 50 and MBSD Rule 40 (Market Disruption and Force Majeure)
    The proposed GSD Rule 50 and MBSD Rule 40 (Market Disruption and
Force Majeure) (collectively, ``Force Majeure Rule'') would address
FICC's authority to take certain actions upon the occurrence, and
during the pendency, of a ``Market Disruption Event,'' as defined
therein. Because GSD and MBSD are both divisions of FICC, the
individual Force Majeure Rules are designed to work together. A
decision by the Board or management of FICC that a Market Disruption
Event has occurred in accordance with the Force Majeure Rule would
trigger the provisions of the Force Majeure Rule of each Division
simultaneously. The Proposed Rule is designed to clarify FICC's ability
to take actions to address extraordinary events outside of the control
of FICC and of the memberships of the Divisions, and to mitigate the
effect of such events by facilitating the continuity of services (or,
if deemed necessary, the temporary suspension of services). To that
end, under the proposed Force Majeure Rule, FICC would be entitled,
during the pendency of a Market Disruption Event, to (1) suspend the
provision of any or all services, and (2) take, or refrain from taking,
or require its Members and Limited Members to take, or refrain from
taking, any actions it considers appropriate to address, alleviate, or
mitigate the event and facilitate the continuation of FICC's services
as may be practicable.
    The proposed Force Majeure Rule would identify the events or
circumstances that would be considered a ``Market Disruption Event,''
including, for example, events that lead to the suspension or
limitation of trading or banking in the markets in which FICC operates,
or the unavailability or failure of any material payment, bank
transfer, wire or securities settlement systems. The proposed Force
Majeure Rule would define the governance procedures for how FICC would
determine whether, and how, to implement the provisions of the rule. A
determination that a Market Disruption Event has occurred would
generally be made by the Board, but the Proposed Rule would provide for
limited, interim delegation of authority to a specified officer or
management committee if the Board would not be able to take timely
action. In the event such delegated authority is exercised, the
proposed Force Majeure Rule would require that the Board be convened as
promptly as practicable, no later than five Business Days after such
determination has been made, to ratify, modify, or rescind the action.
The proposed Force Majeure Rule would also provide for prompt
notification to the Commission, and advance consultation with
Commission staff, when practicable, including notification when an
event is no longer continuing and the relevant actions are terminated.
The Proposed Rule would require Members and Limited Members to notify
FICC immediately upon becoming aware of a Market Disruption Event, and,
likewise, would require FICC to notify Members and Limited Members if
it has triggered the Proposed Rule and of actions taken or intended to
be taken thereunder.
    Finally, the Proposed Rule would address other related matters,
including a limitation of liability for any failure or delay in
performance, in whole or in part, arising out of the Market Disruption
Event. The purpose of the limitation of liability would be similar to
the purpose of the analogous provision in the proposed Wind-down Rule,
which is to facilitate and protect FICC's ability to act expeditiously
in response to extraordinary events.
Proposed Changes to GSD Rules, MBSD Rules, and EPN Rules
    In order to incorporate the Proposed Rules into the Rules and the
EPN Rules, FICC is also proposing to amend (1) GSD Rule 3A (Sponsoring
Members and Sponsored Members), GSD Rule 3B (Centrally Cleared
Institutional Triparty Service) and GSD Rule 13 (Funds-Only
Settlement); (2) MBSD Rule 3A (Cash Settlement Bank Members); and (3)
Rule 1 of the EPN Rules. As shown on Exhibit 5b, these proposed changes
would clarify that certain types of Limited Members, as identified in
those rules, would be subject to the Proposed Rules.
(a) Statutory Basis
    FICC believes that the proposal is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to a
registered clearing agency. In particular, FICC believes that the R&W
Plan, each of the Proposed Rules and the other proposed changes to the
Rules and the EPN Rules are consistent with Section 17A(b)(3)(F) of the
Act,\56\ the R&W Plan and each of the Proposed Rules are consistent
with

Rule 17Ad-22(e)(3)(ii) under the Act,\57\ and the R&W Plan is
consistent with Rule 17Ad-22(e)(15)(ii) under the Act,\58\ for the
reasons described below.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78q-1(b)(3)(F).
    \57\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \58\ Id. at 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of FICC be designed to promote the prompt and accurate clearance and
settlement of securities transactions, and to assure the safeguarding
of securities and funds which are in the custody or control of FICC or
for which it is responsible.\59\ The Recovery Plan and the proposed
Force Majeure Rule would promote the prompt and accurate clearance and
settlement of securities transactions by providing FICC with a roadmap
for actions it may employ to mitigate losses, and monitor and, as
needed, stabilize, its financial condition, which would allow it to
continue its critical clearance and settlement services in stress
situations. Further, as described above, the Recovery Plan is designed
to identify the actions and tools FICC may use to address and minimize
losses to both FICC and Members. The Recovery Plan and the proposed
Force Majeure Rule would provide FICC's management and the Board with
guidance in this regard by identifying the indicators and governance
around the use and application of such tools to enable them to address
stress situations in a manner most appropriate for the circumstances.
Therefore, the Recovery Plan and the proposed Force Majeure Rule would
also contribute to the safeguarding of securities and funds which are
in the custody or control of FICC or for which it is responsible by
enabling actions that would address and minimize losses.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Wind-down Plan and the proposed Wind-down Rule, which would
facilitate the implementation of the Wind-down Plan, would also promote
the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in the custody or control of FICC or for which it is responsible.
The Wind-down Plan and the proposed Wind-down Rule would collectively
establish a framework for the transfer and orderly wind-down of FICC's
business. These proposals would establish clear mechanisms for the
transfer of FICC's critical services and membership. By doing so, the
Wind-down Plan and this Proposed Rule are designed to facilitate the
continuity of FICC's critical services and enable Members and Limited
Members to maintain access to FICC's services through the transfer of
its Divisions' memberships in the event the Wind-down Plan is triggered
by the Board. Therefore, by facilitating the continuity of FICC's
critical clearance and settlement services, FICC believes the proposals
would promote the prompt and accurate clearance and settlement of
securities transactions. Further, by creating a framework for the
transfer and orderly wind-down of FICC's business, FICC believes the
proposals would enhance the safeguarding of securities and funds which
are in the custody or control of FICC or for which it is responsible.
    Finally, the other proposed changes to the Rules and the EPN Rules
would clarify the application of the Proposed Rules to certain types of
Limited Members and would enable these Limited Members to readily
understand their rights and obligations. As such, FICC believes these
proposed changes would enable Limited Members that are governed by the
applicable rules to have a better understanding of those rules and,
thereby, would assist in promoting the prompt and accurate clearance
and settlement of securities transactions.
    Therefore, FICC believes the R&W Plan, each of the Proposed Rules,
and the other proposed changes are consistent with the requirements of
Section 17A(b)(3)(F) of the Act.\60\
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(3)(ii) under the Act requires FICC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by the covered clearing agency, which includes plans for the
recovery and orderly wind-down of the covered clearing agency
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses.\61\ The R&W Plan and each
of the Proposed Rules are designed to meet the requirements of Rule
17Ad-22(e)(3)(ii).\62\
---------------------------------------------------------------------------

    \61\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \62\ Id.
---------------------------------------------------------------------------

    The R&W Plan would be maintained by FICC in compliance with Rule
17Ad-22(e)(3)(ii) in that it provides plans for the recovery and
orderly wind-down of FICC necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses, as
described above.\63\ Specifically, the Recovery Plan would define the
risk management activities, stress conditions and indicators, and tools
that FICC may use to address stress scenarios that could eventually
prevent it from being able to provide its critical services as a going
concern. Through the framework of the Crisis Continuum, the Recovery
Plan would address measures that FICC may take to address risks of
credit losses and liquidity shortfalls, and other losses that could
arise from a Member default. The Recovery Plan would also address the
management of general business risks and other non-default risks that
could lead to losses.
---------------------------------------------------------------------------

    \63\ Id.
---------------------------------------------------------------------------

    The Wind-down Plan would be triggered by a determination by the
Board that recovery efforts have not been, or are unlikely to be,
successful in returning FICC to viability as a going concern. Once
triggered, the Wind-down Plan would set forth clear mechanisms for the
transfer of the memberships of both Divisions and FICC's business, and
would be designed to facilitate continued access to FICC's critical
services and to minimize market impact of the transfer. By establishing
the framework and strategy for the execution of the transfer and wind-
down of FICC in order to facilitate continuous access to FICC's
critical services, the Wind-down Plan establishes a plan for the
orderly wind-down of FICC. Therefore, FICC believes the R&W Plan would
provide plans for the recovery and orderly wind-down of the covered
clearing agency necessitated by credit losses, liquidity shortfalls,
losses from general business risk, or any other losses, and, as such,
meets the requirements of Rule 17Ad-22(e)(3)(ii).\64\
---------------------------------------------------------------------------

    \64\ Id.
---------------------------------------------------------------------------

    As described in greater detail above, the Proposed Rules are
designed to facilitate the execution of the R&W Plan, provide Members
and Limited Members with transparency regarding the material provisions
of the Plan, and provide FICC with a legal basis for implementation of
those provisions. As such, FICC also believes the Proposed Rules meet
the requirements of Rule 17Ad-22(e)(3)(ii).\65\
---------------------------------------------------------------------------

    \65\ Id.
---------------------------------------------------------------------------

    FICC has evaluated the recovery tools that would be identified in
the Recovery Plan and has determined that these tools are
comprehensive, effective, and transparent, and that such tools provide
appropriate incentives to Members to manage the risks they present. The
recovery tools, as outlined in the Recovery Plan and in the proposed
Force Majeure Rule, provide FICC with a comprehensive set of options to
address its material risks and support the resiliency of its critical
services under a range of stress scenarios. FICC

also believes the recovery tools are effective, as FICC has both legal
basis and operational capability to execute these tools in a timely and
reliable manner. Many of the recovery tools are provided for in the
Rules; Members are bound by the Rules through their membership
agreements with FICC, and the Rules are adopted pursuant to a framework
established by Rule 19b-4 under the Act,\66\ providing a legal basis
for the recovery tools found therein. Other recovery tools have legal
basis in contractual arrangements to which FICC is a party, as
described above. Further, as many of the tools are embedded in FICC's
ongoing risk management practices or are embedded into its predefined
default-management procedures, FICC is able to execute these tools, in
most cases, when needed and without material operational or
organizational delay.
---------------------------------------------------------------------------

    \66\ Id. at 240.19b-4.
---------------------------------------------------------------------------

    The majority of the recovery tools are also transparent, as they
are, or are proposed to be, included in the Rules, which are publicly
available. FICC believes the recovery tools also provide appropriate
incentives to Members, as they are designed to control the amount of
risk they present to FICC's clearance and settlement system. Members'
financial obligations to FICC, particularly their required deposits to
the applicable Division's Clearing Fund, are measured by the risk posed
by the Members' activity in FICC's systems, which incentivizes them to
manage that risk which would correspond to lower financial obligations.
Finally, FICC's Recovery Plan provides for a continuous evaluation of
the systemic consequences of executing its recovery tools, with the
goal of minimizing their negative impact. The Recovery Plan would
outline various indicators over a timeline of increasing stress, the
Crisis Continuum, with escalation triggers to FICC management or the
Board, as appropriate. This approach would allow for timely evaluation
of the situation and the possible impacts of the use of a recovery tool
in order to minimize the negative effects of the stress scenario.
Therefore, FICC believes that the recovery tools that would be
identified and described in its Recovery Plan, including the authority
provided to it in the proposed Force Majeure Rule, would meet the
criteria identified within guidance published by the Commission in
connection with the adoption of Rule 17Ad-22(e)(3)(ii).\67\
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    \67\ Supra note 45.
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    Therefore, FICC believes the R&W Plan and each of the Proposed
Rules are consistent with Rule 17Ad-22(e)(3)(ii).\68\
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    \68\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    Rule 17Ad-22(e)(15)(ii) under the Act requires FICC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify, monitor, and manage its general
business risk and hold sufficient LNA to cover potential general
business losses so that FICC can continue operations and services as a
going concern if those losses materialize, including by holding LNA
equal to the greater of either (x) six months of the covered clearing
agency's current operating expenses, or (y) the amount determined by
the board of directors to be sufficient to ensure a recovery or orderly
wind-down of critical operations and services of the covered clearing
agency.\69\ While the Capital Policy addresses how FICC holds LNA in
compliance with these requirements, the Wind-down Plan would include an
analysis that would estimate the amount of time and the costs to
achieve a recovery or orderly wind-down of FICC's critical operations
and services, and would provide that the Board review and approve this
analysis and estimation annually. The Wind-down Plan would also provide
that the estimate would be the ``Recovery/Wind-down Capital
Requirement'' under the Capital Policy. Under that policy, the General
Business Risk Capital Requirement, which is the sufficient amount of
LNA that FICC should hold to cover potential general business losses so
that it can continue operations and services as a going concern if
those losses materialize, is calculated as the greatest of three
estimated amounts, one of which is this Recovery/Wind-down Capital
Requirement. Therefore, FICC believes the R&W Plan, as it interrelates
with the Capital Policy, is consistent with Rule 17Ad-
22(e)(15)(ii).\70\
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    \69\ Id. at 240.17Ad-22(e)(15)(ii).
    \70\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe the proposal would have any impact, or impose
any burden, on competition not necessary or appropriate in furtherance
of the purpose of the Act.\71\ The proposal would apply uniformly to
all Members and Limited Members. FICC does not anticipate that the
proposal would affect its day-to-day operations under normal
circumstances, or in the management of a typical Member default
scenario or non-default event. FICC is not proposing to alter the
standards or requirements for becoming or remaining a Member, or
otherwise using its services. FICC also does not propose to change
either Division's methodology for calculation of margin or their
respective Clearing Fund contributions. The proposal is intended to (1)
address the risk of loss events and identify the tools and resources
available to it to withstand and recover from such events, so that it
can restore normal operations, and (2) provide a framework for its
orderly wind-down and the transfer of its business in the event those
recovery tools do not restore FICC to financial viability, as described
herein.
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    \71\ 15 U.S.C. 78q-1(b)(3)(I).
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    The R&W Plan and each of the Proposed Rules have been developed and
documented in order to satisfy applicable regulatory requirements, as
discussed above.
    With respect to the Recovery Plan, the proposal generally reflects
FICC's existing tools and existing internal procedures. Existing tools
that would have a direct impact on the rights, responsibilities or
obligations of Members are reflected in the existing Rules or are
proposed to be included in the Rules. Accordingly, the Recovery Plan
and the proposed Force Majeure Rule are intended to provide a roadmap,
define the strategy and identify the tools available to FICC in
connection with its recovery efforts. By proposing to enhance FICC's
existing internal management and its regulatory compliance related to
its recovery efforts, FICC does not believe the Recovery Plan or the
proposed Force Majeure Rule would have any impact, or impose any
burden, on competition.
    With respect to the Wind-down Plan and the proposed Wind-down Rule,
which facilitate the execution of the Wind-down Plan, the proposal
would operate to effect the transfer of all eligible Members and
Limited Members of both Divisions to the Transferee, and would not
prohibit any market participant from either bidding to become the
Transferee or from applying for membership with the Transferee. The
proposal also would not prohibit any Member or Limited Member from
withdrawing from FICC prior to the Transfer Time, as is permitted under
the Rules today, or from applying for membership with the Transferee.
Therefore, as the proposal would treat each similarly situated Member
identically under the Wind-down Plan and this Proposed Rule, FICC does
not believe the Wind-down Plan or the proposed Wind-down Rule would
have any impact, or impose any burden, on competition.
    FICC does not believe that the other proposed changes to the Rules
and the

EPN Rules would have any impact on competition because these proposed
changes to incorporate the Proposed Rules into the Rules and the EPN
Rules are technical clarifications, which would not, on their own,
change FICC's current practices or the rights or obligations of the
Members or EPN Users.

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

    While FICC has not solicited or received any written comments
relating to this proposal, FICC has conducted outreach to its Members
in order to provide them with notice of the proposal. FICC will notify
the Commission of any written comments received by FICC.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing. 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-2017-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2017-021. 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-2017-021 and should be submitted on
or before August 3, 2018.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\72\
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    \72\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15365 Filed 7-18-18; 8:45 am]
 BILLING CODE 8011-01-P