[Federal Register Volume 83, Number 169 (Thursday, August 30, 2018)]
[Notices]
[Pages 44361-44374]
[FR Doc No: 2018-18868]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83954; File No. SR-FICC-2017-805]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of No Objection to an Advance Notice, as Modified by Amendment
No. 1, To Adopt a Recovery & Wind-Down Plan and Related Rules

August 27, 2018.
    On December 18, 2017, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-FICC-2017-805 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'') \1\ and Rule 19b-4(n)(1)(i) under the
Securities Exchange Act of 1934 (``Act'') \2\ to adopt a recovery and
wind-down plan (``R&W Plan'') and related rules.\3\ The advance notice
was published for comment in the Federal Register on January 30,
2018.\4\ In that publication, the Commission also extended the review
period of the advance notice for an additional 60 days, pursuant to
Section 806(e)(1)(H) of the Clearing Supervision Act.\5\ On April 10,
2018, the Commission required additional information from FICC pursuant
to Section 806(e)(1)(D) of the Clearing Supervision Act,\6\ which
tolled the Commission's period of review of the advance notice until 60
days from the date the information required by the Commission was
received by the Commission.\7\ On June 28, 2018, FICC filed Amendment
No. 1 to the advance notice to amend and replace in its entirety the
advance notice as originally filed on December 18, 2017.\8\ On July 6,
2018, the Commission received a response to its request for additional
information in consideration of the advance notice, which, in turn,
added a further 60-days to the review period pursuant to Section
806(e)(1)(E) and (G) of the Clearing Supervision Act.\9\ The Commission
did not receive any comments. This publication serves as notice that
the Commission does not object to the proposed changes set forth in the
advance notice, as modified by Amendment No. 1 (hereinafter, ``Advance
Notice'').
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On December 18, 2017, FICC filed the advance notice as
proposed rule change SR-FICC-2017-021 with the Commission pursuant
to Section 19(b)(1) of the Act and Rule 19b-4 thereunder (``Proposed
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively. The Proposed Rule Change was published in the Federal
Register on January 8, 2018. Securities Exchange Act Release No.
82431 (January 2, 2018), 83 FR 871 (January 8, 2018) (SR-FICC-2017-
021). 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.
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). On March 20, 2018, the Commission instituted
proceedings to determine whether to approve or disapprove the
Proposed Rule Change. Securities Exchange Act Release No. 82913
(March 20, 2018), 83 FR 12997 (March 26, 2018) (SR-FICC-2017-021).
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. 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). On June 28, 2018,
FICC filed Amendment No. 1 to the Proposed Rule Change. Securities
Exchange Act Release No. 83630 (July 13, 2018), 83 FR 34213 (July
19, 2018) (SR-FICC-2017-021). FICC submitted a courtesy copy of
Amendment No. 1 to the Proposed Rule Change through the Commission's
electronic public comment letter mechanism. Accordingly, Amendment
No. 1 to the Proposed Rule Change has been publicly available on the
Commission's website at https://www.sec.gov/rules/sro/ficc.htm since
June 29, 2018. The Commission did not receive any comments. The
proposal, as set forth in both the advance notice and the Proposed
Rule Change, each as modified by Amendments No. 1, shall not take
effect until all required regulatory actions are completed.
    \4\ Securities Exchange Act Release No. 82580 (January 24,
2018), 83 FR 4341 (January 30, 2018) (SR-FICC-2017-805)
(``Notice'').
    \5\ Pursuant to Section 806(e)(1)(H) of the Clearing Supervision
Act, the Commission may extend the review period of an advance
notice for an additional 60 days, if the changes proposed in the
advance notice raise novel or complex issues, subject to the
Commission providing the clearing agency with prompt written notice
of the extension. 12 U.S.C. 5465(e)(1)(H). The Commission found that
the advance notice raised novel and complex issues and, accordingly,
extended the review period of the advance notice for an additional
60 days until April 17, 2018. See Notice, supra note 4.
    \6\ 12 U.S.C. 5465(e)(1)(D).
    \7\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); 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.
    \8\ Securities Exchange Act Release No. 83744 (July 31, 2018),
83 FR 38413 (August 6, 2018) (SR-FICC-2017-805). FICC submitted a
courtesy copy of Amendment No. 1 to the advance notice through the
Commission's electronic public comment letter mechanism.
Accordingly, Amendment No. 1 to the advance notice has been publicly
available on the Commission's website at https://www.sec.gov/rules/sro/ficc-an.htm since June 29, 2018.
    \9\ 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.
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I. Description of the Advance Notice

    In the Advance Notice, FICC proposes to (1) adopt an R&W Plan; (2)
amend FICC's Government Securities Division (``GSD'') Rulebook (``GSD
Rules'') 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; (3) 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
(4) amend Rule 1 of the Electronic Pool Netting (``EPN'') Rules of MBSD
(``EPN Rules'') 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.\10\ 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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    \10\ 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.
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    FICC states that the R&W Plan would be used by the Board of
Directors of FICC (``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.
    FICC states that 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; \11\ and (3) provide FICC with the
legal basis to implement those provisions of the R&W Plan when
necessary.
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    \11\ 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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A. FICC R&W Plan

    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 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''); \12\
(ii) an analysis of FICC's intercompany arrangements and an existing
link to another financial market infrastructure (``FMI''); (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 \13\ risks 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 designed to be
comprehensive, effective, and transparent, how the tools provide
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.
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    \12\ 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 R&W 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.
    \13\ FICC states that it uses the term ``credit/market'' risks
in the R&W Plan because 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.
See infra note 23.
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    Certain recovery tools that would be identified in the R&W Plan are
based in the Rules (including the Proposed Rules); therefore,
descriptions of those tools in the R&W Plan 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 operational support for matters described in the R&W Plan, and
that such documents would be supplemental and subordinate to the R&W
Plan.
    FICC states that 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''),\14\ (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,\15\ and (iii) the process for the
allocation of losses among Members, as provided in GSD Rule 4 (Clearing
Fund and Loss Allocation) and MBSD Rule 4 (Clearing Fund and Loss
Allocation).\16\ 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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    \14\ 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).
    \15\ See id.
    \16\ See supra note 10.
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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.\17\ 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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    \17\ 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. FICC
states that the Proposed Rules are designed to provide Members and
Limited Members with transparency and certainty with respect to these
matters. FICC also states that the Proposed Rules are designed to
facilitate the implementation of the R&W Plan, particularly FICC's
strategy for winding down and transferring its business, and are
designed to provide FICC with the legal basis to implement those
aspects of the R&W Plan.
1. 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 R&W 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 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. FICC states that the
overview section would provide a context for the R&W Plan by describing
FICC's business, organizational structure and critical links to other
entities. FICC also states that 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.
    The R&W 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.\18\ FICC states that this section of the R&W
Plan, which identifies and briefly describes FICC's established links,
is designed to 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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    \18\ 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 10.
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    The R&W 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 of
the R&W Plan would provide an analysis of the potential systemic impact
from a service disruption, which FICC states 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 (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, therefore, 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 R&W
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. The R&W Plan would also include a non-exhaustive
list of FICC services that are not deemed critical.
    FICC states that 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. 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 R&W Plan would describe the governance structure of both DTCC
and FICC. This section of the R&W Plan would identify the ownership and
governance model of these entities at both the Board and management
levels. The R&W 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 R&W
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 R&W 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 as well as oversight of
FICC's efforts to mitigate systemic risks that could impact those
markets and the broader financial system.\19\ The R&W 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 R&W 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 R&W 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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    \19\ The DTCC, DTC, NSCC, FICC Risk Committee Charter 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 R&W 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 R&W 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.\20\ More generally, the R&W 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. 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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    \20\ The R&W 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.
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    Finally, the R&W 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.
2. FICC Recovery Plan
    FICC states that 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. FICC also states
that as each event that could lead to a financial loss could be unique
in its circumstances, FICC proposes that 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. In
all cases, FICC states that it 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 to best protect FICC, the Members, and the markets in which
it operates.
(i) 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 \21\ (referred to in the R&W
Plan as the ``Member default phase''), and (4) a recovery phase. In the
R&W 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.\22\ Further, the R&W Plan would, for purposes of the R&W
Plan, use the following terms: (1) ``Member default'' to refer to the
event or events that precipitate FICC ceasing to act for a Member or an
Affiliated Family; (2) ``Defaulting Member'' to refer to a Member for
which FICC has ceased to act; and (3) ``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 R&W Plan.
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    \21\ The R&W Plan would define an ``Affiliated Family'' of
Members as a number of affiliated entities that are all Members of
either GSD or MBSD.
    \22\ 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 10.
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    FICC states that 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.
FICC also states that 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 states
that it manages these risk exposures collectively to limit their
overall impact on FICC and the memberships of the Divisions. FICC
states that 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.\23\ FICC states
that it 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.\24\
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    \23\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation), supra note 10. FICC
states that 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 GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule 4
(Clearing Fund and Loss Allocation). Therefore, FICC states that its
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 17 CFR 240.17Ad-22(e)(4).
    \24\ 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 No. 82377 (December 21, 2017), 82 FR
61617 (December 28, 2017) (SR-DTC-2017-004, SR-FICC-2017-008, SR-
NSCC-2017-005).
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    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. FICC states
that the Recovery Plan is designed to 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, FICC states that 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; \25\ 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.\26\
---------------------------------------------------------------------------

    \25\ FICC's stress testing practices are described in the
Clearing Agency Stress Testing Framework (Market Risk). See
Securities Exchange Act Release No. 82638 (December 19, 2017), 82 FR
61082 (December 26, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-
NSCC-2017-006).
    \26\ See supra note 24 (concerning FICC's liquidity risk
management strategy).
---------------------------------------------------------------------------

    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.\27\ 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. 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. 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.
---------------------------------------------------------------------------

    \27\ 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 10.
---------------------------------------------------------------------------

    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 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation)
provides 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 GSD Rule 4 (Clearing Fund and
Loss Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation),
as applicable.\28\
---------------------------------------------------------------------------

    \28\ See supra note 10. GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation)
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 of the General
Business Risk Capital Requirement, which is calculated pursuant to
the Capital Policy and, which FICC states 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 an effort to comply with Rule 17Ad-22(e)(15) under
the Act. See supra note 14 (concerning the Capital Policy); 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 R&W 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.\29\
The recovery phase would describe actions that FICC may take to avoid
entering into a wind-down of its business.
---------------------------------------------------------------------------

    \29\ As provided for in GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation), the
``Event Period'' is ten Business Days beginning on (i) with respect
to a Member default, the day on which FICC 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 FICC notifies Members of the
determination by the Board that there is a non-default loss event.
The proposed GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation) define a ``round'' as a
series of loss allocations relating to an Event Period, and provides
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 of those Members included in the round. See GSD Rule
4 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing Fund
and Loss Allocation), supra note 10.
---------------------------------------------------------------------------

    FICC states that it expects that significant deterioration of
liquidity resources would cause it to enter the Recovery Corridor.
Therefore, the R&W Plan would describe the actions FICC may take at
this stage aimed at replenishing those resources. 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.
    FICC states that 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. 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,\30\ as well as management
escalations required to authorize those steps. FICC states that because
FICC has never experienced the default of multiple Members, it has not,
historically, measured the deterioration or improvements metrics of the
corridor indicators. Therefore, FICC states that these metrics were
chosen based on the business judgment of FICC management.
---------------------------------------------------------------------------

    \30\ The Corridor Actions that would be identified in the R&W
Plan are designed to be 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 R&W 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. FICC states that 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. FICC states that 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 GSD
Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing
Fund and Loss Allocation), as applicable.\31\ 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. FICC states
that 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 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.
---------------------------------------------------------------------------

    \31\ See supra note 10.
---------------------------------------------------------------------------

    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.
    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
protocols 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.
(ii) 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 R&W
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 R&W Plan would first identify some of the
risks FICC faces that could lead to these losses, which include, for
example, (1) the business and profit/loss risks of unexpected declines
in revenue or growth of expenses; (2) 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 (3)
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.\32\ The Recovery Plan would also describe FICC's
approach to financial risk and capital management. The R&W 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.
---------------------------------------------------------------------------

    \32\ FICC states that the ``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. 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. 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 R&W 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,\33\ (b)
the Corporate Contribution,\34\ 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 (Clearing Fund and Loss Allocation) and MBSD Rule 4 (Clearing
Fund and Loss Allocation).\35\
---------------------------------------------------------------------------

    \33\ See supra note 28.
    \34\ See supra note 28.
    \35\ See supra note 10.
---------------------------------------------------------------------------

    The R&W 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.\36\ Finally the R&W 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 (Clearing Fund and Loss Allocation)
and MBSD Rule 4 (Clearing Fund and Loss Allocation).\37\
---------------------------------------------------------------------------

    \36\ See supra note 14 (concerning the Capital Policy).
    \37\ See supra note 10.
---------------------------------------------------------------------------

    The R&W 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. FICC states that this Proposed
Rule is designed to 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.
    The R&W 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''). FICC states that the intent is to make 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 R&W 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 R&W 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. FICC states that, 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.
(iii) 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 incentives to Members and minimize negative impact
on Members and the financial system.
3. 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. FICC states that while such event is extremely unlikely,
given the comprehensive nature of the recovery tools, 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. Bankruptcy Code,\38\ and (3) after
effectuating this transfer, FICC liquidating any remaining assets in an
orderly manner in bankruptcy proceedings. FICC states 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.
---------------------------------------------------------------------------

    \38\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to FICC's Wind-down Plan, the
R&W 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.
Therefore, FICC states that a business reorganization or ``bail-in'' of
debt approach would be unlikely to mitigate significant losses.
Additionally, FICC states that the proposed 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. FICC states that
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.\39\ The Wind-down Plan would
identify some of the indicators that it has entered this Runway Period.
---------------------------------------------------------------------------

    \39\ 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 be designed to 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 R&W Plan, FICC states that 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, FICC states that 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. Bankruptcy Code.\40\ 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. Bankruptcy
Code, and pursuant to a bankruptcy court order under Section 363 of the
Bankruptcy Code, with the intent that the transfer be free and clear of
claims against, and interests in, FICC, except to the extent expressly
provided in the court's order.\41\
---------------------------------------------------------------------------

    \40\ See 11 U.S.C. 101 et seq.
    \41\ See 11 U.S.C. 363.
---------------------------------------------------------------------------

    FICC states that 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.\42\ 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.\43\ 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.
---------------------------------------------------------------------------

    \42\ 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, FICC states that 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.
    \43\ See supra note 10.
---------------------------------------------------------------------------

    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. 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 R&W 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.\44\ 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.\45\
---------------------------------------------------------------------------

    \44\ See supra note 14.
    \45\ See supra note 14.
---------------------------------------------------------------------------

    FICC states that 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, as discussed
below.

B. Proposed Rules

    In connection with the adoption of the R&W Plan, FICC proposes to
adopt the Proposed Rules, each of which is described below. FICC states
that the Proposed Rules are designed to facilitate the execution of the
R&W Plan and are designed to provide Members and Limited Members with
transparency as to critical aspects of the R&W Plan, particularly as
they relate to the rights and responsibilities of both FICC and
Members. FICC also states that the Proposed Rules are designed to
provide a legal basis to these aspects of the R&W Plan.
1. GSD Rule 22D and MBSD Rule 17B (Wind-Down of the Corporation)
    FICC states that the proposed GSD Rule 22D and MBSD Rule 17B
(collectively, ``Wind-down Rule'') are designed 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. FICC states that the Wind-down Rule
is designed to 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. FICC states that, 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.
(i) Wind-Down Trigger
    First, FICC states that the Proposed Rule is designed to 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 Wind-down 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.
(ii) 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'').
(iii) Treatment of Pending Transactions
    The Wind-down Rule would 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. 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. FICC states that 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.
    FICC states that the Proposed Rule is designed to 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.
(iv) 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.
(v) 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, FICC states that the
proposed Wind-down Rule is designed to 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.\46\
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    \46\ 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.
---------------------------------------------------------------------------

(vi) Comparability Period
    FICC states that 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. 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. FICC states that 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.
(vii) Subordination of Claims Provisions and Miscellaneous Matters
    The proposed Wind-down Rule would 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., firms 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). FICC states that this
provision is designed to incentivize Members to participate in FICC's
recovery efforts.\47\
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    \47\ 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.
    FICC states that the purpose of the limitation of liability is to
facilitate and protect FICC's ability to act expeditiously in response
to extraordinary events. Such limitation of liability would be
available only following triggering of the Wind-down Plan. In addition,
and as a separate matter, FICC states that the limitation of liability
provides Members with transparency for the unlikely situation when
those extraordinary events could occur, as well as supporting the legal
framework within which FICC would take such actions. FICC states that
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.
2. 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.
FICC states that 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. 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. FICC states that 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.
3. 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 proposes 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) EPN Rule 1
(Definitions). FICC states that these proposed changes are designed to
clarify that certain types of Limited Members, as identified in those
rules, would be subject to the Proposed Rules.

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\48\
---------------------------------------------------------------------------

    \48\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \49\ authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities
engaged in designated activities for which the Commission is the
supervisory agency. Section 805(b) of the Clearing Supervision Act \50\
provides the following objectives and principles for the Commission's
risk management standards prescribed under Section 805(a):
---------------------------------------------------------------------------

    \49\ 12 U.S.C. 5464(a)(2).
    \50\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act \51\ and Section 17A of the
Act \52\ (``Rule 17Ad-22'').\53\ Rule 17Ad-22 requires registered
clearing agencies to establish, implement, maintain, and enforce
written policies and procedures that are reasonably designed to meet
certain minimum requirements for their operations and risk management
practices on an ongoing basis.\54\ Therefore, it is appropriate for the
Commission to review proposed changes in advance notices against the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act \55\ and
against Rule 17Ad-22.\56\
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    \51\ 12 U.S.C. 5464(a)(2).
    \52\ 15 U.S.C. 78q-1.
    \53\ See 17 CFR 240.17Ad-22.
    \54\ Id.
    \55\ 12 U.S.C. 5464(b).
    \56\ See 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposed changes in the Advance
Notice are designed to help FICC promote robust risk management,
promote safety and soundness, reduce systemic risks, and support the
stability of the broader financial system. As described above, the R&W
Plan, generally, would help FICC promote robust risk management and
reduce systemic risks by providing FICC with a roadmap for actions it
may employ to monitor and manage its risks, and, as needed, to
stabilize its financial condition in the event those risks materialize.
Specifically, the Recovery Plan would provide a roadmap that would
identify a number of triggers for the potential application of a number
of available recovery tools. Identifying triggers for the potential
application of recovery tools would help promote robust risk management
and reduce systemic risks by better enabling FICC to more promptly
determine when and how it may need to manage a significant stress
event, and, as needed, stabilize its financial condition.
    Similarly, the Force Majeure Rule is designed to provide a roadmap
to address extraordinary events that may occur outside of FICC's
control. Specifically, the Force Majeure Rule would define a Market
Disruption Event and provide governance around determining when such an
event has occurred. The Force Majeure Rule also would 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 FICC's services, if practicable. By defining a
Market Disruption Event and providing such governance and authority,
the Commission believes that the Force Majeure Rule also would help
promote robust risk management and reduce systemic risks by improving
FICC's ability to identify and manage a force majeure event, and, as
needed, to stabilize its financial condition so that FICC can continue
to operate and act as

a source of stability for the financial markets it serves.
    The Commission believes that the Recovery Plan and the Force
Majeure Rule reflect an approach designed to allow for a more
considered and comprehensive evaluation by FICC of a stressed market
situation and the ways in which FICC could apply available recovery
tools in a manner intended to minimize the potential negative effects
of the stress situation for FICC, its membership, and the broader
financial system. Therefore, the Commission believes that the Recovery
Plan and the Force Majeure Rule would help promote robust risk
management at FICC and, thus, reduce systemic risks by establishing a
means for FICC to best determine the most appropriate way to address
such stress situations in an effective manner.
    The Commission believes that the R&W Plan, generally, would help
FICC promote safety and soundness and support the stability of the
broader financial system by providing a roadmap to wind-down that is
designed to ensure the availability of FICC's critical services to the
marketplace, while reducing disruption to the operations of membership
and financial markets that might be caused by FICC's failure.
Specifically, as described above, the Wind-down Plan, as facilitated by
the Wind-down Rule, would provide for the wind-down of FICC's business
and transfer of membership and critical services if the recovery tools
do not successfully return FICC to financial viability. Accordingly,
critical services, such as services that lack alternative providers or
products; services that the failure of which could impact the volume of
transactions, transaction costs, or the flow of liquidity in the U.S.
financial markets; and services that are interconnected with other
participants and processes within the U.S. financial system would be
able to continue in an orderly manner while FICC is seeking to wind-
down its services. By designing the Wind-down Plan and the Wind-down
Rule to enable the continuity of FICC's critical services and
membership in an orderly manner while FICC is seeking to wind-down its
services, the Commission believes these proposed changes would help
FICC promote safety and soundness and support stability in the broader
financial system in the event the Wind-down Plan is implemented.
    As described above, to incorporate the Proposed Rules into the
Rules and the EPN Rules, FICC proposes 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)
EPN Rule 1 (Definitions). These proposed changes would clarify that
certain types of Limited Members, as identified in those rules, would
be subject to the Proposed Rules. These proposed changes would help
these Limited Members readily understand their rights and obligations
and would help enable Limited Members that are governed by the Proposed
Rules to have a better understanding of the Proposed Rules. Enhanced
access to and transparency of these rules would therefore assist such
parties in understanding, planning for, and reacting in an orderly
manner to, the implementation by FICC of the R&W Plan. Therefore, the
Commission believes that these proposed changes to the Rules and the
EPN Rules would help support the stability of the broader financial
system.
    By better enabling FICC to promote robust risk management, promote
safety and soundness, reduce systemic risks, and support the stability
of the broader financial system, as described above, the Commission
believes that the proposed changes in the Advance Notice are consistent
with Section 805(b) of the Clearing Supervision Act.\57\
---------------------------------------------------------------------------

    \57\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Under the
Act

    Rule 17Ad-22(e)(2)(i) under the Act requires a covered clearing
agency \58\ to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide for governance
arrangements that are clear and transparent.\59\ Rule 17Ad-
22(e)(2)(iii) under the Act requires a covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that support the public interest requirements in Section 17A of the Act
\60\ applicable to clearing agencies, and the objectives of owners and
participants.\61\ Rule 17Ad-22(e)(2)(v) under the Act requires a
covered clearing agency to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that specify clear and direct lines of
responsibility.\62\
---------------------------------------------------------------------------

    \58\ A ``covered clearing agency'' means, among other things, a
clearing agency registered with the Commission under Section 17A of
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated
systemically important by the Financial Stability Oversight Counsel
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). On July 18, 2012, FSOC
designated FICC as systemically important. U.S. Department of the
Treasury, ``FSOC Makes First Designations in Effort to Protect
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
Therefore, FICC is a covered clearing agency.
    \59\ 17 CFR 240.17Ad-22(e)(2)(i).
    \60\ 15 U.S.C. 78q-1.
    \61\ 17 CFR 240.17Ad-22(e)(2)(iii).
    \62\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------

    As described above, the R&W Plan is designed to identify clear
lines of responsibility concerning the R&W Plan including (1) the
ongoing development of the R&W Plan; (2) ongoing maintenance of the R&W
Plan; (3) reviews and approval of the R&W Plan; and (4) the functioning
and implementation of the R&W Plan. As described above, the R&R Team,
which reports to the Management Committee, is responsible for
maintaining the R&W Plan and for the development and ongoing
maintenance of the overall recovery and wind-down planning process.
Meanwhile, 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 also would review and approve
any changes that are proposed to the R&W Plan outside of the biennial
review. Moreover, the R&W Plan would state the stages of escalation
required to manage recovery under the Recovery Plan or to invoke FICC's
wind-down under the Wind-down Plan, which would range from relevant
business line managers up to the Board. The R&W Plan would identify the
parties responsible for certain activities under both the Recovery Plan
and the Wind-down Plan, and would describe their respective roles. The
R&W Plan also would specify the process FICC would take to receive
input from various parties at FICC, including management committees and
the Board.
    In considering the above, the Commission believes that the R&W Plan
would help contribute to establishing, implementing, maintaining, and
enforcing written policies and procedures reasonably designed to
provide for governance arrangements that are clear and transparent
because it would specify lines of control. The Commission also believes
that the R&W Plan would help contribute to establishing, implementing,
maintaining, and enforcing written policies and procedures reasonably
designed to provide for governance arrangements that support the public
interest requirements in Section 17A of the Act \63\ applicable to
clearing

agencies, and the objectives of owners and participants because the R&W
Plan specifies the process FICC would take to receive input from
various FICC stakeholders. In addition, the Commission believes that
the R&W Plan would help contribute to establishing, implementing,
maintaining, and enforcing written policies and procedures reasonably
designed to provide for governance arrangements that specify clear and
direct lines of responsibility because it specifies who is responsible
for the ongoing development, maintenance, reviews, approval,
functioning, and implementation of the R&W Plan.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    Therefore, the Commission believes that the R&W Plan is consistent
with Rules 17Ad-22(e)(2)(i), (iii), and (v) under the Act.\64\
---------------------------------------------------------------------------

    \64\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Act

    Rule 17Ad-22(e)(3)(ii) under the Act requires a covered clearing
agency 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.\65\
---------------------------------------------------------------------------

    \65\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    As described above, the R&W Plan's Recovery Plan provides a plan
for FICC's recovery necessitated by credit losses, liquidity
shortfalls, losses from general business risk, or any other losses by
defining the risk management activities, stress conditions and
indicators, and tools that FICC may use to address stress scenarios
that could eventually prevent FICC from being able to provide its
critical services as a going concern. More specifically, through the
framework of the Crisis Continuum, which identifies tools that can be
employed to mitigate losses and mitigate or minimize liquidity needs as
the market environment becomes increasingly stressed, the Recovery Plan
would identify measures that FICC may take to manage risks of credit
losses and liquidity shortfalls, and other losses that could arise from
a Member default. The Recovery Plan also would address FICC's
management of general business risks and other non-default risks that
could lead to losses by identifying potential non-default losses and
the resources available to FICC to address such losses, including
recovery triggers and tools to mitigate such losses. Therefore, the
Commission believes that the R&W Plan's Recovery Plan helps FICC
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 FICC, which includes a recovery plan
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses.
    As described above, the R&W Plan's Wind-down Plan provides a plan
for orderly wind-down of FICC, which 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 sets forth mechanisms for
the transfer of the membership of both Divisions and FICC's business,
and it is designed to maintain continued access to FICC's critical
services and to minimize market impact of the transfer while FICC is
seeking to ultimately wind-down its services. Specifically, the Wind-
down Plan would provide for the transfer of FICC's business, assets,
and membership to another legal entity with such transfer being
effected in connection with proceedings under Chapter 11 of the U.S.
Bankruptcy Code.\66\ After effectuating this transfer, FICC would
liquidate any remaining assets in an orderly manner in bankruptcy
proceedings.
---------------------------------------------------------------------------

    \66\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    Although the Commission is not opining on the Wind-down Plan's
consistency with the U.S. Bankruptcy Code, in reviewing the proposed
changes, the Commission believes that FICC's intent to use bankruptcy
proceedings to achieve an orderly liquidation of assets after any
transfer of FICC's business appears reasonable, in light of the
provisions of the Bankruptcy Code that address the liquidation and
distribution of a debtor's property among creditors and interest
holders.\67\ Under many circumstances, Section 363 of the Bankruptcy
Code provides for the sale of property ``free and clear of any interest
in such property of an entity other than the estate[.]'' \68\ The
Commission believes that FICC's analysis regarding the applicability of
these provisions, while not free from doubt, presents a reasonable
approach to liquidation in light of the circumstances and the available
alternatives.\69\ Therefore, the Commission believes that the R&W
Plan's Wind-down Plan helps FICC 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 FICC, which includes a
wind-down plan necessitated by credit losses, liquidity shortfalls,
losses from general business risk, or any other losses.
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    \67\ See, e.g., 11 U.S.C. 363, 726, and 1129(a)(7).
    \68\ See 11 U.S.C. 363(f).
    \69\ The Wind-down Plan would identify certain factors the Board
may consider in evaluating alternatives, 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.
---------------------------------------------------------------------------

    Therefore, the Commission believes that the R&W Plan is consistent
with Rule 17Ad-22(e)(3)(ii) under the Act.\70\
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    \70\ 17 CFR 240.17Ad-22(e)(3)(ii).
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D. Consistency With Rules 17Ad-22(e)(15)(i)-(ii) Under the Act

    Rule 17Ad-22(e)(15)(i) under the Act requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to identify, monitor, and manage its
general business risk and hold sufficient liquid net assets funded by
equity to cover potential general business losses so that the covered
clearing agency can continue operations and services as a going concern
if those losses materialize, including by determining the amount of
liquid net assets funded by equity based upon its general business risk
profile and the length of time required to achieve a recovery or
orderly wind-down, as appropriate, of its critical operations and
services if such action is taken.\71\ Rule 17Ad-22(e)(15)(ii) under the
Act requires a covered clearing agency to establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to identify, monitor, and manage its general business risk and
hold sufficient liquid net assets funded by equity to cover potential
general business losses so that the covered clearing agency can
continue operations and services as a going concern if those losses
materialize, including by holding liquid net assets funded by equity
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, as contemplated by the plans established
under Rule 17Ad-22(e)(3)(ii) under the Act,\72\ discussed above.\73\
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    \71\ 17 CFR 240.17Ad-22(e)(15)(i).
    \72\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \73\ 17 CFR 240.17Ad-22(e)(15)(ii).
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    As discussed above, FICC's Capital Policy is designed to address
how FICC holds LNA in compliance with these requirements,\74\ while the
Wind-down Plan would include an analysis to estimate the amount of time
and cost 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 also
would 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 amount of LNA that FICC
plans to 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,
the Commission believes that the R&W Plan is consistent with Rules
17Ad-22(e)(15)(i) and (ii) under the Act.\75\
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    \74\ Supra note 14.
    \75\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\76\ that the Commission DOES NOT OBJECT to
advance notice SR-FICC-2017-805, as modified by Amendment No. 1, and
that FICC is authorized to implement the proposal as of the date of
this notice or the date of an order by the Commission approving
proposed rule change SR-FICC-2017-021, as modified by Amendment No. 1,
whichever is later.
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    \76\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18868 Filed 8-29-18; 8:45 am]
 BILLING CODE 8011-01-P