[Federal Register Volume 76, Number 238 (Monday, December 12, 2011)]
[Notices]
[Pages 77287-77297]
[FR Doc No: 2011-31762]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65899; File No. SR-FICC-2008-01]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Allow the Mortgage-Backed
Securities Division To Provide Guaranteed Settlement and Central
Counterparty Services

 December 6, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on March 12, 2008, the Fixed Income Clearing Corporation
(``FICC'') filed with the Securities and Exchange Commission
(``Commission''), and on November 21, 2011, amended the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared primarily by FICC. The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The proposed rule changes consist of modifications to the rules of
FICC's MBSD to allow MBSD to provide guaranteed settlement and central
counterparty (``CCP'') services.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

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

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    (a) The purpose of this rule filing is to introduce CCP and
guaranteed settlement services for the MBSD. Establishment of these
processes for the MBSD has necessitated the drafting of a new MBSD
rulebook. Therefore, the existing MBSD clearing rulebook will be
replaced, in its entirety, by a new rulebook.\3\ Certain provisions in
the current MBSD rules which reflect processes that will continue upon
the introduction of the CCP services have been retained in the proposed
MBSD rulebook, where applicable. In order to promote uniformity between
FICC's two Divisions and to create transparency for common members, the
new MBSD rulebook follows the structure of the Government Securities
Division (the ``GSD'') rulebook. In addition, where possible and/or
applicable, the new MBSD provisions mirror the equivalent GSD
provisions. It should be noted that under the current MBSD Clearing
Rules, member firms are referred to as ``Participants.'' In the new
MBSD CCP rulebook, which is proposed by this filing, member firms shall
be referred to as ``Clearing Members.''
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    \3\ The MBSD's Electronic Pool Notification Service rulebook
will remain unchanged.
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I. Overview
    With the introduction of CCP services and guaranteed settlement for
transactions submitted to the MBSD, FICC will provide a trade guarantee
for all existing types of trades upon comparison of trade details
submitted by members.\4\ Additionally, a new pool netting system will
perform a daily net of pool allocations for those TBA trades that
according to the MBSD rules and procedures are eligible for pool
netting.\5\ It should be noted that not all guaranteed trades will be
included in the pool netting system. A determination of which trades
are included will be determined by netting percentages. FICC will
become CCP to those obligations, and settlement will occur versus FICC.
For all other obligations, settlement will occur outside of FICC, with
original settlement counterparties.
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    \4\ Currently, the MBSD recognizes two types of trades. Those
are ``to be announced'' (``TBA'') trades and specified pool trades
(``SPTs''). TBA trades may proceed through the Settlement Balance
Order engine for netting or may settle on a trade-for-trade basis. A
TBA is a contract for the purchase or sale of agency mortgage-backed
securities to be delivered at a future agreed-upon date; however,
the actual pool identities or the number of pools that will be
delivered to fulfill the trade obligation or terms of the contract
are unknown at the time of the trade. The difference between TBAs
and SPTs is that for an SPT all required pool data, including the
pool number to be delivered on settlement date, are agreed upon by
Clearing Members at the time of execution.
    \5\ SPTs are not eligible for pool netting under this proposal.
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A. Current Processing
    At no time during the current MBSD processing does FICC guarantee
settlement, or act as a CCP for submitted transactions. Under the
current MBSD processing model, the majority of the trading activity
submitted to the MBSD for processing, is submitted as Settlement
Balance Order Destined (``SBOD''). SBOD trades are eligible for
comparison, risk management services and the TBA Netting cycle. Firms
can submit TBA trades as Trade-For-Trade (``TFTD'') transactions, which
are TBA trades that are eligible for comparison and risk management
services but ineligible for the TBA Netting cycle. SPTs are not
considered TBAs because the actual pool number is part of the trade
terms; SPTs are eligible for comparison and risk management services
but ineligible for the TBA Netting cycle.

    Each of the transactions mentioned above is compared by FICC's
RTTMTM system. Settlement obligations for SPTs and TBA TFTD
transactions are generally established when a report indicating the
trade as compared is made available by the MBSD to the Participants on
both sides of the transaction.\6\ Settlement obligations for TBA SBOD
transactions are not established in this way. Instead, SBOD
transactions proceed to the MBSD's settlement balance order (``SBO'')
engine for TBA netting. The TBA Netting process establishes the
settlement obligations for the SBOD transactions.
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    \6\ Participants use FICC's Interactive Submission Method,
Multiple Batch Submission Method or Single Batch Submission Method
to submit trade data to the MBSD. Contemporaneous with successful
compassion of the trade data in FICC's RTTM system, FICC generates
output indicating that such trade data is compared, is uncompared
and/or has been deleted. FICC makes available to the Participants,
the RTTM Compare Report, which establishes the settlement obligation
for TBA TFTD transactions and for SPTs between the counterparties
since these trades do not enter the TBA netting process.
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    The SBO netting system produces settlement obligations between MBSD
Participants. Once Participants' settlement obligations are
established, Participants use FICC's electronic pool notification
service (the ``EPN Service'') to inform each other with respect to the
specific pools that will be delivered for settlement purposes.
Thereafter, members transmit notifications of settlement to FICC when
they have ultimately settled their obligations with applicable
counterparties.
B. Proposed Processing--Overview
    Under the proposed MBSD rules, each Clearing Member will be
required to submit to the MBSD for processing transactions with other
Clearing Members in all securities that are netting-eligible according
to MBSD rules and procedures. Certain MBSD processes will continue to
operate as they do today. Specifically, eligible transactions will
continue to be submitted to the RTTMTM system for matching
purposes.\7\ FICC will provide output of the trade as compared,
uncompared and/or deleted. The SBO netting process for TBA trades will
also continue to generate settlement obligations between Clearing
Members. However, the MBSD will now provide a trade guarantee at the
point of comparison of all submitted transactions (i.e., SBOD trades,
TFTD trades, SPT trades and Option Contracts (collectively, ``MBSD
Eligible Trades'') will be guaranteed by the MBSD), as is currently
done in the GSD. The timing of comparison of MBSD Eligible Trades is
the point at which the MBSD will make available to the Clearing Members
on both sides of the transaction an output indicating that such trade
data has been compared. In the event of a member default, FICC will
settle the guaranteed trade.
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    \7\ Trade data submitted to the MBSD must include such
identifying information as the MBSD may require and must be
submitted in the form and manner and in accordance with the time
schedules prescribed by the MBSD rules or otherwise set forth by
FICC from time to time. The symbol corresponding to the name of a
Clearing Member that is printed, stamped or written on any form,
document or other item issued by the Clearing Member pursuant to
Rule 5 Section 2 shall be deemed to have been adopted by the
Clearing Member as its signature and shall be valid and binding upon
the Clearing Member in all respects as though it had manually
affixed its signature to such form document or other item.
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    The MBSD proposes to introduce ``pool comparison'' and ``pool
netting,'' and interpose itself as settlement counterparty to certain
settlement obligations. Specifically, after the netting of TBA trades
occurs through the SBO engine, settlement obligations will be issued
between members and members will allocate pools for settlement via the
EPN Service (just as is done today). Additionally, however, members
will be required to submit pool details for those netted TBA Settlement
obligations via the RTTMTM system for pool comparison and
for consideration for pool netting. Pools allocated to obligations
associated with Settlement Balance Order Non-Original Counterparty
trades, Settlement Balance Order Original Counterparty trades and with
TFTD trades will be eligible for pool netting which establishes
settlement obligations.\8\
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    \8\ SPTs will not be considered an eligible transaction type for
pool netting at this time.
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    Compared pools will be evaluated for eligibility for pool netting.
The MBSD's system will determine which pools will receive maximum
benefit from pool netting by considering such factors as trading
velocity and projected netting factor. It is important to note that not
every compared pool will proceed to the pool netting system.
    Upon FICC's issuance of pool netting results to members, those
pools that are eligible for netting will be novated, i.e., settlement
obligations between the Clearing Members will be replaced with
obligations to settle with FICC. Certain outstanding obligations will
still require the Notification of Settlement (``NOS'') process. These
will include (1) SPTs, because they are not eligible for pool netting;
(2) transactions for which Clearing Members chose not to submit
allocation information into pool netting \9\; and (3) certain
transactions with an incomplete master file on a pool record or number.
When a pool is matched, in order for it to be considered for pool
netting, FICC must have the required pool information on its Security
Masterfile. This data for example would include the pool itself, factor
information and data to map it back to a TBA.\10\ With respect to any
obligations that fail to settle, these obligations will not be re-
netted, as they are in the GSD.\11\
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    \9\ For example, if a Clearing Member has a trade that was
matched with stipulations, the Clearing Member would not submit it
for pool netting. Pool netting creates delivery obligations based
off the net position of Members without regard to the original
counterparty relationship. With a trade matched with stipulations,
the buyer/seller will want to ensure receipt/delivery is maintained
between themselves to ensure the stipulated terms are adhered to.
    \10\ For example, if FICC has not received current month factor
on the pool number.
    \11\ The MBSD will retain the discretion to re-net fails or to
conduct pair-offs if it believes that such actions are necessary to
protect itself and its Clearing Members due to market conditions or
events.
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II. Proposed MBSD Rulebook

    As noted above, the current MBSD rulebook will be replaced in its
entirety by a new proposed rulebook. Set forth below is an overview of
the significant substantive and structural changes to the rules.

A. Definitions

    The MBSD rules will have a revised Rule 1, ``Definitions,'' which
will include terminology applicable to new MBSD processing and
procedures. For example, terms relevant to pool netting have been
included (such as ``pool deliver obligation'' and ``pool receive
obligation''). Where practical and/or applicable, the MBSD rulebook
uses terms from the current GSD rules, in order to harmonize language
between the Divisions.

B. Membership

    Rule 2, ``Members'', Rule 2A, ``Initial Membership Requirements,''
Rule 3, ``Ongoing Membership Requirements,'' and Rule 3A, ``Cash
Settling Bank Members,'' will govern membership types, member
application requirements and ongoing reporting requirements.
1. Initial Membership Requirements
    The new MBSD rules will provide for two membership types (as set
forth in Rule 2): Clearing Members and Cash Settling Bank Members.
Those entities qualifying for clearing membership will be guaranteed
service members of the MBSD--trades submitted by these Members will be
guaranteed at the point

of comparison, and eligible, as applicable, for pool comparison,
netting and settlement. Categories of clearing membership will include:
(i) Registered brokers or dealers; (ii) other registered clearing
agencies; (iii) registered investment companies; (iv) banks \12\; (v)
government securities issuers/government sponsored enterprises; (vi)
insurance companies; \13\ and (vii) unregistered investment pools.\14\
In addition, the MBSD will have the discretion to make its services
available to other entity types which it deems appropriate subject to
the approval of the Commission. Membership requirements for Cash
Settling Bank Members are set forth in Rule 3A, ``Cash Settling Bank
Members''. These requirements remain unchanged from the current MBSD
rulebook and they mirror the requirements of the GSD-equivalent
members, known as funds-only settling banks.
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    \12\ The term ``Banks'' shall include Federal Savings
Associations.
    \13\ The MBSD does not currently have any insurance company
Clearing Members. Financial and other membership requirements for
this category will be established in a future rule filing.
    \14\ Currently there are two members who do not fit the listed
membership types. As a result, these entities will be grandfathered
in and subject to ongoing membership requirements.
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    With respect to initial membership requirements as set forth in
Rule 2A, ``Initial Membership Requirements,'' the MBSD has mirrored the
current requirements for the GSD netting membership, where there is an
existing membership type in the GSD rules. The two membership
categories where there are no GSD equivalents are the unregistered
investment pools (the ``UIPs'') and the registered investment
companies. In addition to standard requirements regarding financial and
operational responsibility applicable to all Clearing Members,
registered investment companies must be registered under the Investment
Company Act of 1940, and have minimum net assets of $100 million. With
respect to the UIPs, membership standards that were adopted for these
entities via a 2006 rule filing \15\ will be revised in the new MBSD
rulebook, in consideration of their new status as guaranteed service
members. Revised requirements will be as follows:
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    \15\ See Securities Exchange Release Act Release No. 34-55037
(Jan. 3, 2007), 72 FR 1252 (Jan. 10, 2007) [SR-FICC-2006-10].
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     The UIP applicant must have an investment advisor
domiciled in the United States.
     The UIP's investment advisor must be registered with the
SEC under the Investment Advisors Act of 1940, the UIP must have (i)
$250 million in net assets, or (ii) have $100 million in net assets and
the UIP's investment advisor must advise an existing UIP Clearing
Member that has assets under management of $1.5 billion.
    Additional requirements for UIPs will appear in Rule 3, ``Ongoing
Membership Requirements,'' discussed further below. As is the case with
all MBSD Clearing Member applicants, UIPs must meet all applicable
financial requirements set forth in the proposed MBSD rules in order to
be admitted into membership. The required levels must be maintained as
a condition of membership on an ongoing basis.\16\ With respect to all
MBSD Clearing Member categories, as is currently the case under the
MBSD rules, applicants whose financial statements are not prepared in
accordance with U.S. generally accepted accounting principles
(``GAAP'') will be subject to increased minimum financial
requirements.\17\
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    \16\ Required membership levels must be maintained by all
members on an ongoing basis as a condition of membership.
    \17\ These higher GAAP-based requirements remain unchanged from
the current GSD and MBSD rules. Specifically, firms whose financial
statements are prepared in accordance with International Financial
Reporting Standards, Canadian GAAP or UK GAAP will have a minimum
financial requirement that is 1.5 times the U.S. GAAP requirement,
firms whose financial statements are prepared in accordance with the
GAAP principles of a European Union country other than the United
Kingdom will have a minimum financial requirement that is 5 times
the U.S. GAAP requirement, and firms whose financial statements are
prepared in accordance with any other type of GAAP will have a
minimum financial requirement that is 7 times the U.S. GAAP
requirement.
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    The MBSD will continue to require non-domestic membership
applicants to submit, with their membership application, legal opinions
on the laws of the applicants' home jurisdictions. Updates to such
legal opinions will be required from direct foreign members on an
annual basis. Any additional legal risk \18\ posed by such applicants
due to their home country law may result in additional risk mitigation
measures, including, for example, the posting of letters of credit as
collateral. Members that are U.S. branches or agencies of non-U.S.
banks (``U.S. Branches'') will be classified as U.S. members, based
particularly on the rationale that such U.S. Branches are regulated by
the U.S. and/or state regulators.\19\
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    \18\ ``Legal risk'' is currently defined in the rules as the
risk that, as a result of a law applicable to a Clearing Member's
insolvency or bankruptcy, FICC may be delayed or prohibited from:
(i) Accessing any portion of the Member's Clearing Fund, (ii)
netting, closing out or liquidating transactions, or setting off
obligations, or taking any other action contemplated by the rules
regarding clearing fund, cease to act, insolvency of a member or
(iii) otherwise exercising its rights pursuant to the rules.
    \19\ As in the current version of MBSD rule Article III Rule 15
``Special Provisions Applicable to Non-Domestic Participants'', U.S.
Branches will not be required to submit annual updates to their
foreign legal opinions unless FICC deems it necessary to address
legal risk; applicants in this category will, however, continue to
be required to submit an initial foreign legal opinion on their home
country law with their membership application. See Securities
Exchange Release Act Release No. 34-62828 (Sep. 2, 2010), 75 FR
54929 (Sep. 9, 2010) [SR-FICC-2010-02].
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2. Ongoing Membership Requirements
    Pursuant to Rule 3, ``Ongoing Membership Requirements,'' current
provisions applicable to the GSD netting membership under the GSD rules
have been carried over to the MBSD rules to apply to certain member
types. For example, the GSD currently assesses a premium against any
member whose Clearing Fund requirement exceeds its specified regulatory
capital figure.\20\ The MBSD will also apply this premium to members.
Also, bank, broker-dealer and UIP members of the MBSD will be rated.
Among other things, financial measures relevant to these types of
entities will be assessed. Any member that receives a poor rating may
be monitored more closely and/or placed on FICC's internal watch list.
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    \20\ By way of example, under the current GSD rules, if a member
has a Clearing Fund requirement of $11.4 million and excess net
capital of $10 million, its ``ratio'' is 1.14 (or 114 percent), and
the applicable collateral premium would be 114 percent of $1.4
million (which is equal to the amount by which the member's Clearing
Fund requirement exceeds its excess net capital), or $1,596,000. The
current GSD rules provide that FICC has the right to: (i) Apply a
lesser collateral premium (including no premium) based on specific
circumstances (such as a member being subject to an unexpected
haircut or capital charge that does not fundamentally change its
risk profile), and (ii) return all or a portion of the collateral
premium amount if it believes that the member's risk profile does
not require the maintenance of that amount. These rights will be
carried over to the proposed MBSD rules.
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    As set forth in Rule 3, the MBSD will take additional risk
management measures with respect to UIP members. Specifically, the
``value at risk'' (``VaR'') confidence level for UIP members will be
set at 99.5%, half a percentage higher than the standard assumption set
forth in the procedures of the Corporation (currently set to 99%).\21\
As set forth in Rule 2A, UIP members will also be required to achieve a
qualitative assessment rating of at least ``medium'' as part of the
initial membership requirement. Qualitative assessments will be based
on such factors as

management, capital, strategy/risk and profile, valuation procedures
and internal risk management controls. Any UIP member rated less than
``medium'' may be subject to an increased Required Fund Deposits that
may be achieved via higher confidence levels and may also become
subject to revocation of membership as set forth in Rule 3, Section 6.
Also, pursuant to Rule 4, the Clearing Fund requirement of UIPs shall
be no less than $1 million, whereas the current minimum is
$100,000.\22\
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    \21\ The MBSD rules will provide FICC with the discretion to
increase the confidence level if it determines that it is
appropriate to do so with respect to a particular Clearing Member or
Members generally. As an initial matter, UIPs will begin the service
with a confidence level of 99.5%.
    \22\ The MBSD rules will provide FICC with the discretion to
increase the minimum charge if it determines that it is appropriate
to do so with respect to a particular member or members generally.
As an initial matter, UIPs will begin the service with the higher
minimum of $1 million.
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C. Clearing Fund and Loss Allocation

    MBSD Rule 4, ``Clearing Fund and Loss Allocation'' will set forth
requirements with respect to Clearing Fund \23\ deposited by Clearing
Members.
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    \23\ The MBSD is adopting the term ``Clearing Fund'' to replace
``Participants Fund.''
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    The MBSD has already standardized the clearing and settlement
processes. The objective in offering CCP services is to leverage
potential means by which risks can be curbed, efficiency increased, and
operational risk within the marketplace can be reduced.
    The conversion of the MBSD to a CCP increases the amount of risk
for the clearing agency. The purpose of a CCP is to ensure settlement
can continue in the face of a member firm failure, and to reduce the
risk of loss due to that member failure. A CCP interposes itself as a
legal counterparty to both sides of a transaction. The CCP assumes the
counterparty credit risk of the other Clearing Members which primarily
includes (1) The market risk associated with liquidating the defaulted
Member's portfolio, and (2) the liquidity risk associated with
maintaining sufficient liquid resources to finance the defaulted
Member's scheduled settlement obligations.
    The MBSD has established a robust risk management framework to
manage the credit risks from its Clearing Members and the credit risks
involved with its payment, clearing and settlement process.
    The MBSD relies on five different controls to manage its
counterparty risk: Member standards, initial/variation margins, back/
stress testing, position/risk monitoring and non-margin collateral. The
first set of controls aims to prevent the CCP from dealing with or
reducing activity of counterparties that have unacceptably high
probabilities of default. As noted above in section B, concurrent with
the introduction of CCP services the MBSD will increase its minimum
financial standard for clearing membership eligibility to mirror GSD
eligibility standards and enhance its risk monitoring for UIPs.
    The second line of defense is the margins collected from
counterparties in the form of cash and highly liquid government
securities in the Clearing Fund. The dual purpose of the Clearing Fund
is to provide readily accessible liquidity to facilitate settlement and
reduce loss-related costs which may be incurred in the event of a
Clearing Member's insolvency or failure to fulfil its contractual
obligations to the MBSD. Margins are intended to cover possible losses
between the time of default of a counterparty, at which point the CCP
would inherit its positions, and the close-out of these positions
through selling or hedging. For this purpose, the MBSD marks member
portfolios to the market on a daily basis and charges variation margins
accordingly, and establishes initial margins to cover a minimum 99th
percentile of expected possible losses that could arise over a 3-day
settlement period utilizing a VaR-based approach.\24\ In order to
enhance the MBSD's risk framework and concurrent with the introduction
of CCP services, the MBSD will add two new components--the margin
requirement differential and the coverage charge--to the Clearing Fund,
as well as additional MBSD mark-to-market items related to the new pool
netting services. The MBSD also has the ability to collect charges
above the systemically generated Clearing Fund charges when deemed
appropriate in order to protect the corporation and its members. If any
loss were incurred in the liquidation of a Member that was not covered
by the Member's Clearing Fund deposit or amounts available under the
cross guaranty arrangement to which FICC is a party, the MBSD would
invoke its loss allocation process.
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    \24\ An index-based haircut methodology will be used for
securities with insufficient pricing data.
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    The MBSD uses regular back and stress testing to monitor the
sufficiency of collected margin levels vis-a-vis the risk represented
by the 99th percentile of expected possible losses from member
portfolios and to monitor its tail risk exposure that is beyond the
99th percentile. If a member portfolio does not pass the back test,
additional margin will be collected via the coverage charge. Stress
tests are also used to evaluate margin adequacy. The MBSD's framework
reflects stress events from the last 10 years as well as special stress
events that were not within the past 10 years and takes the form of
swap rate shifts and credit spread shocks that reflect market
conditions for the instruments that the MBSD clears or holds as
collateral. As described in the Clearing Fund section below, the MBSD
analyzes and reviews on an intraday basis certain components of the
Clearing Fund that are recalculated using updated positions and prices
if there is increased exposure in a member's portfolio intraday. In
addition, the MBSD may at its discretion call for additional collateral
on an intraday basis if exposures are in excess of predefined
thresholds.
    Finally, aside from the risk of loss that could be encountered from
a Clearing Member failure, a central counterparty could also face
liquidity risk, defined as the risk that the central counterparty has
insufficient financial resources to cover a default by a Clearing
Member to which it has the largest exposure. To that end, the MBSD
maintains sufficient resources to meet its observed liquidity risk. The
Clearing Fund would be the primary source to fulfil the liquidity need
incurred if MBSD had to complete settlement on behalf of the defaulting
Clearing Member. Other conventional funding tools such as loans secured
via the MBSD clearing banks and/or tri-party repo transactions would
also be used to fulfil the liquidity need, but if those were
unavailable or insufficient, the MBSD would invoke the ``Capped
Contingency Liquidity Facility,'' described in section G below to
provide additional financing in the event of a member default.
    Tail risk is one of the risks the MBSD has to manage. The MBSD
addresses this through a continuous process of (1) Reviewing margining
methodologies with stakeholders; (2) analysis and monitoring of margin/
collateral requirements; (3) actively reviewing and timely/appropriate
action on market conditions and credit events; (4) reviews of back/
stress tests, and (5) identifying, assessing and managing risks
associated with the products and services provided by the MBSD and
FICC.
1. Clearing Fund
    The underlying Clearing Fund methodology is designed primarily to
account for market risks associated with a Clearing Member's unsettled
portfolio. The Clearing Fund model is back tested on a monthly basis
and periodically validated by outside experts. Additional charges and
premiums may be considered to address additional risks (i.e., credit,
reputation, legal, etc.) or non-compliance with MBSD rules. The
Clearing Fund is calculated every business day for each MBSD Clearing
Member.

    Clearing Fund requirements will be calculated in accordance with
the VaR model. The Clearing Fund components will consist of the VaR
charge,\25\ the coverage charge, the margin requirement differential
charge and the deterministic components charge (which will include the
mark-to-market charges, cash obligation items and accrued principal and
interest). The VaR methodology will utilize the prior 252 days of
historical information for cash positions, including prices, spreads,
and market variables to simulate the market environments in the
forthcoming three days. Projected portfolio losses are then calculated
assuming these simulated environments actually will be realized. The
coverage charge is an additional charge to bring the Clearing Member's
coverage to a targeted confidence level. The margin requirement
differential considers intra-day portfolio variations and estimates the
potential increased risk intra-day and the risk that the next margin
call will not be satisfied. The deterministic risk component combines
the mark-to-market of the portfolio, gain or loss for the difference
between the original contract value and the internally generated
netting price derived from the TBA netting process, principal and
interest adjustments on failed positions, and other miscellaneous cash
items. The deterministic risk component can result in an increase or
decrease to a member's total clearing fund requirement.
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    \25\ The definition of ``VaR Charge'' (which is referred to as
``VaR Component'' in the current rules) is being amended to remove
the reference to the application of ``minimum amounts'' to such VaR
Charge. The MBSD is currently applying a minimum 5-basis point
charge which will not be applicable when the MBSD CCP becomes a CCP
because of the addition of the other components to the overall
Clearing Fund calculation. Minimum Clearing Fund deposit amounts per
Rule 4 remain applicable.
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    Requirements as to acceptable forms of collateral will remain
unchanged in the new MBSD rulebook.
    In order to further mitigate risk, and as part of FICC's efforts to
enhance its intraday monitoring capabilities, FICC has determined to
expand its intraday monitoring \26\ to recalculate the mark-to-market
elements of the deterministic risk component. This component of the
risk calculations will be updated at least hourly using intraday
pricing and position feeds for FICC members and compared against the
amounts that were previously collected in the Clearing Fund. If the
exposures increase above certain defined thresholds Risk Management
staff will be alerted to consider additional intraday margin calls,
outside of the formal Clearing Fund collection process. The proposed
rule change provides that such calls would need to be satisfied by the
affected members within one hour of FICC's notice. The initial
thresholds will be based on changes to a Clearing Member's position
size, composition and price changes on the constituent securities.
Qualitative factors including, but not limited to, Watch List status
and internal rating will also be considered in the application of
intraday mark-to-market.
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    \26\ This proposal is different from the intra-day margining
that was approved by the Commission to implement the single-pot
margining with New York Portfolio Clearing, LLC (``NYPC''). See
Securities Exchange Act Release No. 63986 (Feb. 28, 2011), 76 FR
12144 (Mar. 4, 2011). In the FICC-NYPC rule filing, established
second scheduled calls were approved. In the present proposal, FICC
is seeking the authority to require additional margin outside of the
formal calls.
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2. Other Changes--Clearing Fund
Use of Payments and Deposits
    FICC is proposing to revise Rule 4 ``Clearing Fund and Loss
Allocation'', Section 5 ``Use of Payments'' to include additional
disclosure relating to the Corporation's use of a Clearing Member's
deposits and payments for temporary financing needs. The proposed
revisions also clarify that whenever the Clearing Fund is charged for
any reason, other than to satisfy a clearing loss attributable to a
Clearing Member solely from that Clearing Member's Clearing Fund
deposit, the Corporation will provide the reasons therefore to each
Clearing Member. This would apply when the Clearing Fund is charged,
meaning the Corporation has applied the Clearing Fund for more than 30
days and is allocating the amount as a loss or for other loss
allocation purposes.
3. Loss Allocation
    In this CCP proposal, FICC is also introducing a new loss
allocation methodology for the MBSD. If a defaulting Clearing Member's
Clearing Fund and any amounts of the Defaulting Member available under
a cross-guaranty agreement are not sufficient to cover losses incurred
in the liquidation of the defaulting Clearing Member's positions (the
``Remaining Losses''), the MBSD's loss allocation methodology will be
invoked. Under this proposed loss allocation methodology, Remaining
Losses will first be allocated to the retained earnings of FICC
attributable to the MBSD, in the amount of up to 25 percent of the
retained earnings or such higher amount as may be approved by the Board
of Directors of FICC. If a loss still remains, MBSD Clearing Members
are placed into one of two tiers for loss allocation purposes: Tier One
members are subject to loss mutualization, whereas Tier Two members are
not subject to loss mutualization.\27\ FICC will divide the Remaining
Losses between the Tier One members and Tier Two members. The division
of Remaining Losses is based on the amount each solvent Clearing Member
would have lost or gained if it had closed out its original outstanding
trades with the defaulting Clearing Member on a bilateral basis.\28\
FICC then will determine the relevant share of each Tier One member's
bilateral losses (members with a bilateral liquidation profit are
ignored) in the total of all members' bilateral losses and sum these
shares to determine the Tier One Remaining Loss. Similarly, FICC will
determine the relative share of each Tier Two member's bilateral loss
in the total of all members' bilateral losses and sum these shares to
determine the Tier Two Remaining Loss.
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    \27\ Tier Two members are those that are legally prohibited from
participating in loss mutualization. Currently, only investment
companies registered under the Investment Company Act of 1940, as
amended, qualify as Tier Two members.
    \28\ With respect to brokered trades, in the MBSD such trades
are done on a ``give-up basis,'' and brokers are thus not considered
parties to fully-matched trades. However, for purposes of loss
allocation, broker members will be subject to loss allocation for
certain partially-matched trades. Brokers are considered Tier One
members, and as such will be subject to loss mutualization.
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    Tier One Remaining Losses will be allocated to Tier One members
first by assessing the Required Fund Deposit of each such Member in the
amount of up to $50,000, equally. If a loss remains, Tier One members
will be assessed ratably, in accordance with the respective amounts of
their Required Fund Deposits, based on the average daily amount of the
Clearing Member's Required Fund Deposit over the prior twelve months.
Tier Two Remaining Loss will be allocated to Tier Two Clearing Members
based on each Tier Two member's original trading activity with the
Defaulting Member that resulted in a loss. Tier Two members will only
be subject to loss to the extent they originally traded with the
Defaulting Member consistent with regulatory requirements applicable to
the Tier Two members. FICC shall assess such loss against the Tier Two
members ratably based upon their loss as a percentage of the entire
amount of the Tier Two Remaining Loss. This ensures that Tier Two
members are not subject to loss mutualization. Tier Two counterparties
will be liable for losses related to both direct and brokered trades
\29\ including partially-matched

trades for which the Tier Two member did not submit a statement to FICC
denying the existence of the trade.\30\
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    \29\ Brokered trades involve a broker intermediary between two
dealers. Each dealer and broker must submit the trade details to the
MBSD for trade comparison. This means that each dealer submits
against the broker and the broker submits against each dealer. A
fully matched trade will be achieved when both dealers match against
the broker (i.e. all submissions discussed above match). With a
fully matched trade, both dealers assume principle status which
results in the broker having no settlement obligations with respect
to the trade; the broker cannot be subject to any loss with respect
to such trade. A partially matched trade results when only one of
the two submissions achieves a bilateral match versus the broker.
The dealer who has matched with the broker will have a settlement
guarantee and is subject to Clearing Fund requirements with respect
to such trade. If the unmatched dealer submits a statement to FICC
denying the existence of the trade, the broker becomes the other
side of the trade which means that the broker is responsible for
such trade from a risk management perspective and loss allocation.
If the unmatched dealer does not submit a statement to FICC denying
the existence of the trade, the dealer becomes responsible for the
settlement and risk management and the broker is released from these
responsibilities.
    \30\ To illustrate the proposed MBSD Tier One (``T1'')/Tier 2
(``T2'') loss allocation rules, consider an example where the $20
million Clearing Fund requirement of an insolvent MBSD member X
turns out to be insufficient to cover the $30 million liquidation
loss that the MBSD incurred as a result of closing out all of X's
open positions. If X doesn't have any excess collateral, MBSD would
need to allocate a $10 million remaining loss.
    Assume that X has unsettled trades with three Tier One original
counterparties (T1A, T1B and T1C) and three Tier Two original
counterparties (T2A, T2B and T2C), all executed directly.
    Further assume that the bilateral liquidation results of X's
solvent original counterparties are as follows:
    T1A: $5 million; T1B: ($5 million); T1C: ($15 million); T2A:
($20 million); T2B: ($10 million); T2C: $15 million; Total: ($30
million).
    Also assume that there are no secondary defaults and no off-the-
market trades.
    Based on these assumptions, the bilateral Tier One liquidation
losses amount to $20 million ($5 million attributable to T1B and $15
million attributable to T1C), while the bilateral Tier Two
liquidation losses amount to $30 million ($20 million attributable
to T2A and $10 million attributable to T2B). This means that out of
a total of $50 million bilateral liquidation losses, 40% or $20
million can be attributed to Tier One counterparties and 60% or $30
million to Tier Two counterparties. As a result, the Tier One
remaining loss would be $4 million (i.e., 40% of the MBSD's $10
million overall remaining loss) and the Tier Two remaining loss
would be $6 million (i.e., 60% of the MBSD's $10 million overall
remaining loss).
    Given that T2A's and T2B's bilateral losses represent \2/3\ and
\1/3\ respectively of the Tier Two Remaining Loss, T2A's loss
allocation will be $4 million and T2B's loss allocation will be $2
million.
    The $4 million Tier One Remaining Loss would first be assessed
equally to each Tier One member's clearing fund, up to an amount of
$50,000 per Tier One member. If a loss still remains, the amount is
allocated among Tier One members, pro-rata based on each Tier One
member's average daily level of clearing fund over the prior twelve
months (or shorter period if a member did not maintain a clearing
fund deposit over the full twelve month period).
    Note that the loss allocation results are not impacted by
whether the defaulting Clearing Member is a Tier One or a Tier Two
member.
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D. TBA Trade Processing

    Rule 5, ``Trade Comparison'' and Rule 6, ``TBA Netting'' of the
proposed MBSD rulebook mirror current MBSD rules as these processes
will remain unchanged from an operational perspective. Members will
continue to submit TBA transactions and SPTs to the MBSD through the
RTTM\TM\ system to bilaterally match their trade data with trade data
submitted by their counterparties. The significant change to the
comparison rule is the introduction of FICC's guarantee. Transactions
will be guaranteed for settlement at the point of comparison.\31\ SBOD
TBA trades will proceed through the TBA/SBO netting process as they do
today. After netting, members will use the EPN Service to allocate
pools in satisfaction of open TBA obligations (both trade-for-trade and
SBO transactions). In addition, members will now be required to submit
pool allocation information to the MBSD's RTTM\TM\ system \32\--pool
allocation processing will proceed as described below.
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    \31\ While SPTs will be guaranteed at the point of comparison,
they will not be eligible for processing through the pool comparison
or pool netting systems. All SPTs will settle outside of FICC with
original counterparties.
    \32\ Because Clearing Members will be required to allocate pools
via EPN and RTTM\TM\ in order for pool allocations to proceed to
pool comparison and netting, all MBSD Clearing Members will be
required to be EPN members.
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E. Pool Allocation Processing

    Pool allocation processing refers to the Clearing Member's
submission via a RTTM\TM\ message of an allocated pool for matching and
pool netting services.
    On the allocation date,\33\ Clearing Members will also be required
to submit pool allocation information (called ``Pool Instructs'') via
the RTTM system for pool comparison (which is a pre-requisite for pool
netting). As with EPN allocation, Pool Instructs are to be submitted
against all TBA obligations, whether stemming from Trade-for-Trade
activity or TBA Netting. As noted previously, allocations are not
performed for SPTs and they are not eligible for pool netting services
and Clearing Members may choose not to submit Pool Instructs against
trades matched with stipulations.\34\
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    \33\ Pool allocation information (also known as ``Pool
instructs'') may be submitted up to the point that Pool Netting is
executed.
    \34\ Trades with stipulations are those where certain trade
terms are agreed to at point of match (e.g., one pool per million);
under the proposal, Clearing Members will be provided with the
option to hold out stipulation allocations from the pool netting
process so that they can preserve their ability to obtain the pools
that satisfy the stipulations of the trade.
---------------------------------------------------------------------------

    Pool data information on Pool Instructs must be bilaterally
compared (i.e., the mandatory comparison pool data submitted by the
seller must match the mandatory comparison pool data submitted by the
buyer) in order for the Pool Instructs to be eligible for consideration
for pool netting. Pool Instructs must further be ``assigned'' by the
MBSD to a valid, open TBA position, meaning that the trade terms
submitted on the Pool Instruct must match the trade terms of a TBA
CUSIP that has sufficient open position. Only compared and assigned
Pool Instructs are evaluated for inclusion in pool netting.
    Pool allocation processing will be governed by Rule 7, ``Pool
Comparison,'' Rule 8, ``Pool Netting,'' and Rule 9, ``Pool
Settlement''. Once netting eligible pools are defined by the MBSD, each
allocation will be netted into a single net position per pool CUSIP.
Pool netting results will be novated, meaning that open TBA obligations
will be terminated and replaced with resultant pool receive, deliver
and associated payment obligations which will settle versus FICC as
central counterparty.

F. Settlement

1. Settlement With FICC as Counterparty
    As stated above, obligations generated by the pool netting system
will settle versus FICC--this settlement process will be governed by
Rule 9, ``Pool Settlement with the Corporation.'' Clearing Members will
be required to designate a clearing bank for purposes of delivering
securities to, and receiving securities from, the MBSD in satisfaction
of settlement obligations. All deliveries and receipts of securities in
satisfaction of pool deliver obligations and pool receive obligations
will be required to be made against simultaneous payment. These
securities settlement procedures mirror the current GSD securities
settlement rule.\35\
---------------------------------------------------------------------------

    \35\ GSD Rule 12, ``Securities Settlement.''
---------------------------------------------------------------------------

2. Settlement Outside of FICC
    For those allocated pools (or pools matched as trade terms on SPT
trades) which are not processed through the pool netting system,
Clearing Members will be required to settle such transactions
bilaterally with applicable settlement counterparties, outside of FICC.
Please refer to ``Processing Overview'' referenced above, for a
description of the trades that would be required to settle outside of
FICC. It should be noted that such trades remain guaranteed for
settlement by FICC; such

trades were guaranteed at the time of comparison. Pursuant to Rule 10,
``Notification of Settlement'', Clearing Members must continue to
submit to FICC Notifications of Settlement (``NOS''). NOS will be
required to be received on the applicable clearance date for each
transaction. When the MBSD receives NOS from each counterparty to a
transaction, the MBSD will report clearance of the applicable
transaction back to each Clearing Member, as is done today. At this
point, the MBSD will stop collecting margin on the transaction, and
will no longer be responsible for principal and interest payments.
3. Cash Settlement
    Rule 11, ``Cash Settlement with the Corporation'' provides that
cash settlement processing will continue to be done via the Federal
Reserve's National Settlement Service and through the use of cash
settling banks appointed by Clearing Members. Several items have been
added to the calculation of each Clearing Member's cash settlement
obligation, including: (a) A ``net pool transaction adjustment
payment'' (to reflect the difference between the pool net price \36\
and a settlement price established at the TBA level); (b) principal and
interest payment amounts related to fails, and (c) a ``clearance
difference amount'' \37\ (to take into account the delivery to FICC of
mispriced securities by a member).
---------------------------------------------------------------------------

    \36\ ``Pool Net Price'' is defined in the proposed rules as the
uniform price for a pool (expressed in dollars per unit of par
value), not including accrued interest, established by the
Corporation on each business day, based on current market
information for each eligible security.
    \37\ ``Clearance Difference Amount'' is defined in the proposed
rules as the absolute value of the dollar difference between the
settlement value of a pool deliver obligation or a pool receive
obligation and the actual value at which such pool deliver
obligation or pool receive obligation was settled.
---------------------------------------------------------------------------

G. Additional Rule Changes

1. Capped Contingency Liquidity Facility
    FICC is proposing to add a provision to the proposed MBSD rules
that introduces a ``Capped Contingency Liquidity Facility,'' which is a
procedure designed to ensure that the MBSD has sufficient liquidity
resources to cover the largest failure of a family of accounts. This
facility will only be invoked if FICC declares a default or a cease to
act against a Clearing Member, i.e., a defaulting Clearing Member and
FICC does not have the ability to obtain sufficient liquidity through
its Clearing Fund cash deposits and its established repurchase
agreement arrangements (``CCLF Event''). FICC believes that the Capped
Contingency Liquidity Facility provides Clearing Members with finality
of settlement and allows firms to prepare for and manage their
potential financing requirements in the event of a Member's default.
Once a CCLF Event has been declared, FICC will contact Clearing Members
that are due to deliver obligations to FICC that are owed to a
defaulting Clearing Member. FICC will either cancel the Clearing
Member's obligations or instruct the Clearing Member to hold the
obligations (or a portion thereof) and await instructions as to when to
make these deliveries. With respect to the obligations subject to
financing (the ``Financing Amount'') up to the Clearing Member's
defined liquidity contribution cap (the ``Defined Capped Liquidity
Amount''),\38\ FICC as counterparty, will enter into repurchase
agreements with the Clearing Member equal to the Financing Amount
pursuant to the terms of the deemed 1996 SIFMA Master Repurchase
Agreement (without referenced annexes). If a liquidity need still
exists (the ``Remaining Financing Amount''), FICC will inform Clearing
Members that are below the Defined Capped Liquidity Amount and also
inform Clearing Members that do not have a delivery obligation to
defaulting Clearing Member.\39\ After these Clearing Members have been
notified, FICC will distribute the remaining financing need to such
Clearing Members on a pro rata basis and enter into repurchase
agreements pursuant to the terms of the deemed 1996 SIFMA Master
Repurchase Agreement (without referenced annexes). These transactions
would remain open until FICC completes the liquidation of the
underlying obligations and a haircut based on market conditions will be
applied to the transactions.
---------------------------------------------------------------------------

    \38\ The ``Defined Capped Liquidity Amount'' is the maximum
amount that a Clearing Member shall be required to fund during a
CCLF Event. The Defined Capped Liquidity Amount will be established
as follows:
    (a) For those Clearing Members that are eligible for and that
have established borrowing privileges at the Federal Reserve
Discount Window or for those Clearing Members who have an affiliate
that is eligible for and has established borrowing privileges at the
Federal Reserve Discount Window, FICC will conduct a study every six
months, or such other time period as FICC shall determine from time
to time as specified in Important Notices to Clearing Members, to
determine each Clearing Member's largest liquidity requirement for
the applicable time period based on a Clearing Member's sell
positions versus other Clearing Members at the family level on a
bilateral net basis within a TBA CUSIP. Based on the overall study,
FICC will define an adjustable percentage (the initial percentage
will be set at 60%), as determined by FICC from time to time, and
multiply that percentage amount against the maximum amount to
establish each Clearing Member's Defined Capped Liquidity Amount;
and
    (b) For those Clearing Members that are ineligible for or have
not established borrowing privileges at the Federal Reserve Discount
Window and for those Clearing Members that do not have an affiliate
that is eligible for or has established borrowing privileges at the
Federal Reserve Discount Window, FICC will conduct a study every
month or such other time period as FICC shall determine from time to
time as specified in Important Notices to Clearing Members, to
determine each Clearing Member's largest liquidity requirement for
the applicable time period based on a Clearing Member's sell
positions versus other Clearing Members at the family level on a
bilateral net basis within a TBA CUSIP. The Clearing Member's
largest liquidity requirement for the past month, adjusted in each
case of a CCLF Event to be no greater than the actual Pool Delivery
Obligation to the defaulting Clearing Member, will represent the
Clearing Member's Defined Capped Liquidity Amount. Firms in this
category will have a defined non-adjustable percentage amount set to
100%. Clearing Members in this category will not be required to
finance any Remaining Financing Amount.
    (c)
    \39\ Applicable to those Clearing Members that are eligible for
and that have established borrowing privileges at the Federal
Reserve Discount Window or to those Clearing Members who have an
affiliate that is eligible for and has established borrowing
privileges at the Federal Reserve Discount Window.
---------------------------------------------------------------------------

    Once FICC completes the liquidation of the underlying obligation,
FICC will instruct the Clearing Member to deliver the securities back
to FICC. FICC will then close the repurchase transaction and deliver
the securities to complete settlement on the contractual settlement
date of the liquidating trade. Because FICC would be receiving and
delivering securities on the same day, FICC would not have a liquidity
need resulting from the transaction of a defaulting Clearing Member.
    The applicable provisions of Rule 17 outline detailed procedures of
the mechanism that will be followed should FICC declare a Capped
Contingency Liquidity Facility event.
2. Corporation Default
    FICC has been approached by some of its dealer Clearing Members who
have requested that FICC add provisions to the rules of the MBSD CCP
\40\ to make explicit the close-out netting of obligations running
between FICC and its Clearing Members in the unlikely event that FICC
becomes insolvent or defaults in its obligations to its Clearing
Members which are included in the proposed rule change. The firms have
stated that the proposed rule changes will provide clarity in their
application of balance sheet netting to their positions with FICC under
U.S. GAAP in accordance with the criteria specified

in the Financial Accounting Standards Board's Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts (FIN 39). The firms
have stated further that the provisions would allow them to comply with
Basel Accord Standards relating to netting. Specifically, firms are
able to calculate their capital requirements on the basis of their net
credit exposure where they have legally enforceable netting
arrangements with their counterparties, which includes a close-out
netting provision in the event of the default of the counterparty (in
this case, the division of the clearing corporation acting as a central
counterparty).
---------------------------------------------------------------------------

    \40\ The firms have also requested the filing with respect to
the GSD and this change was submitted as a rule filing and approved
by the Commission. See Securities Exchange Act Release No. 63038
(Oct. 5, 2010), 75 FR 62899 (Oct. 13, 2010) [SR-FICC-2010-04].
---------------------------------------------------------------------------

H. Fails Charge

    The Treasury Markets Practices Group (the ``TMPG''), a group of
market participants active in the Treasury securities market sponsored
by the Federal Reserve Bank of New York (the ``FRBNY''), has been
addressing the persistent settlement fails in Agency debt and mortgage-
backed securities transactions that have arisen, in part, due to low
interest rates.
    To encourage market participants to resolve fails promptly, the
TMPG recommends expanding the applicability of the fails charge (which
currently applies to Treasury securities transactions) to the Agency
debt and MBS markets with the objective of reducing the incidence of
delivery failures and supporting liquidity in these markets.
    The fails charge will apply to certain trades settled in the MBSD,
i.e., settlement of pools versus FICC involving failing agency MBS
issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.
Pursuant to the TMPG recommendations, a fails charge will not apply to
TBA and pool level ``round robins.'' \41\
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    \41\ ``Round robins'' are a circular series of transactions
between multiple parties where there is no ultimate long and short
position to be settled. For example, if A sells to B and B sells to
C and C sells to A, this group of transactions would constitute a
``round robin''. In a round robin, there is no settlement of
securities, but there is satisfaction of money across all interested
parties. There can be a fail in a round robin transaction when a
deliver obligation arises because the trade submission of certain
members of the round robin do not match. The MBSD will not apply the
fails charge to a round robin if each affected Clearing Member in
the round robin provides the MBSD with the required information to
resolve the trade.
---------------------------------------------------------------------------

    The proposed charge will be equal to the greater of (a) 0 percent
and (b) 2 percent per annum minus the Federal funds target rate. The
charge accrues each calendar day a fail is outstanding. The MBSD will
not impose a fails charge if delivery occurs on either of the two
business days following the contractual settlement date. The MBSD will
not employ a minimum fail charge amount, but, instead, will apply the
fails charge to any pool for which delivery has not occurred within the
two business day grace period.\42\ Each business day, the MBSD will
provide reports reflecting fail charge amounts to Clearing Members and
will generate a consolidated monthly report at month end. Failing
parties with a net debit (i.e., the fails charge amounts such party
owes exceed the fails charge amounts it is owed) will be required to
pay such net amount in respect of those pools that have settled the
previous month and which are reflected in the previous month's
consolidated month end report by the Class ``B'' payable date (as
established by SIFMA guidelines) of the month following settlement in
conjunction with other cash movements. The fails charge funds received
by the MBSD then will be used to pay Clearing Members with fail net
credits.
---------------------------------------------------------------------------

    \42\ Fails charges are calculated between legal entities that
are counterparties to one another in an MBS transaction. Because the
MBSD is acting as a counterparty in multiple transactions, the MBSD
may owe a net credit to one counterparty which is financed by the
net debits owed to the MBSD by multiple counterparties (some of
which may be below the minimum $500 threshold identified in the TMPG
recommendations.) To ensure that the MBSD will be in a position to
deliver the net credits it owes, the MBSD is proposing to its
Clearing Members that it will not employ a minimum fails charge for
either debits or credits. Current Participants were informed of this
deviation from the TMPG recommendations via Important Notice (MBS
119.11) and have not objected.
---------------------------------------------------------------------------

    The MBSD will implement a rate change procedure so that if fails
accrue at one rate and the rate changes, the fail will keep the
original accrual and new fails calculations will be subject to the new
rate. When there is a substitution of the underlying pool, the fails
charge will be calculated pursuant to the above formula, using (in the
formula) the Fed funds target rate for each day of the substitution
period beginning on the contractual settlement date.
    In the event that the MBSD is the failing party because (i) The
MBSD received agency MBS issued or guaranteed by Fannie Mae, Freddie
Mac, or Ginnie Mae too near the close of Fedwire for redelivery or for
any other reason or (ii) MBSD received a substitution of a pool deliver
obligation of agency MBS issued or guaranteed by Fannie Mae, Freddie
Mac or Ginnie Mae too near the specified time in the SIFMA 48-hour rule
for same day redelivery of securities or for any other reason, the
fails charge will be distributed pro-rata to the Clearing Members based
upon usage of the MBSD's services.
    The MBSD will not guaranty fails charge proceeds in the event of a
default (i.e., if a defaulting Clearing Member does not pay its fail
charge, Clearing Members due to receive fails charge proceeds will have
those proceeds reduced pro-rata by the defaulting Clearing Member's
unpaid amount).

    Example 1: A delivery is contracted to occur on settlement date
(S), a Tuesday, but does not occur until the second business day
following contractual settlement, Thursday (S+2). The Clearing
Member would not be subject to a fails charge because delivery
occurs within the two business days following the contractual
settlement date.
    Example 2: A delivery is contracted to occur on settlement date
(S), a Tuesday, but does not occur until the third business day
following contractual settlement, Friday (S+3). The Clearing Member
would be subject to a three-day fails charge.
    Example 3: A delivery is contracted to occur on settlement date
(S), a Wednesday, but does not occur until the third business day
following contractual settlement, Monday (S+3). The Clearing Member
would be subject to a five-day fails charge, as the charge accrues
on each calendar day in the fail period.
    Example 4: A delivery is contracted to occur on settlement date
(S), May 10th, but does not occur until the month following the
contractual settlement date; it settles on June 8th. The Clearing
Member will not be subject to collection of the fails charge in June
(the month following the contractual settlement date) because
delivery did not occur in May. The participant will be subject to
the collection of the fails charge in July (on the Class ``B''
payable date) because delivery occurred in June. The charge will be
recalculated for 29 days.

    The implementation of a fails charge trading practice in the
mortgage-backed securities market requires that the current MBSD rules
be amended to add a new rule (i.e., Rule 12--Fails Charge). This new
rule specifies the charges levied on any Clearing Member who does not
satisfy a delivery obligation of securities issued or guaranteed by
Fannie Mae, Freddie Mac or Ginnie Mae and outlines the exceptions to
this rule, including a two-day grace period.
Revocation of Charges
    The proposed rule changes provide that FICC's Board of Directors
(or appropriate Committee thereof) will retain the right to revoke
application of the charges if industry events or practices warrant such
revocation.
Timing of Implementation
    Only as it applies to the proposed fails charge, FICC is proposing
that such fails charges will apply to transactions in agency debentures
and agency MBS entered into on or after the later of the approval of
this rule proposal or February 1, 2012, as well as to

transactions that were entered into, but remain unsettled as of the
later of the approval of this rule proposal or February 1, 2012. For
transactions entered into prior to, and unsettled as of, the later of
the approval of this rule proposal or February 1, 2012, the fails
charge will begin accruing on the latest of the approval of this rule
proposal, February 1, 2012, or the contractual settlement date.
I. Suspension of Rules in Emergency Circumstances
    Rule 33, ``Suspension of Rules in Emergency Circumstances'' in the
proposed MBSD rules has been revised from the equivalent rule in the
current MBSD rulebook to specify that (1) In the title of the Rule,
that the rule applies to emergency circumstances, (2) an emergency
shall exist in the judgement of the FICC Board or Officer, which causes
the Board or the Officer, as applicable, to believe that an extension,
waiver or suspension of the MBSD rules is necessary for the Corporation
to continue to facilitate the prompt and accurate clearance and
settlement of securities transactions, (3) the Corporation shall notify
the Commission of such extension, waiver or suspension of the MBSD
rules within 2 hours of such determination,\43\ (4) the written report
of such extension shall include the nature of the emergency, along with
the other requirements listed in the current rules and (5) such written
report shall be submitted to the Commission no later than three (3)
calendar days after the implementation of the extension, waiver or
suspension of the MBSD rules.
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    \43\ But no later than one (1) hour before the close of the
Federal Reserve Banks' Fedwire Funds Service if such determination
relates to the extension of time for settlement and is made on a
settlement day.
---------------------------------------------------------------------------

J. Ceasing To Act, Wind-Down Members and Insolvency

    Rule 14, ``Restrictions on Access to Services'', Rule 15, ``Wind
Down of a Member,'' Rule 16, ``Insolvency of a Member,'' and Rule 17,
``Procedures for When the Corporation Ceases to Act,'' mirror the
current GSD rules, but have been conformed to apply to the specifics of
MBSD processing as applicable. For example, upon the MBSD ceasing to
act for a Clearing Member, Members will be required to submit immediate
NOS so that the MBSD has all necessary settlement information with
respect to a defaulting Member to effect a close-out of such Member. In
addition, the MBSD will have the right, with respect to specified pool
trades, to substitute alternate pools as necessary.\44\
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    \44\ As is the case under Rule 4, ``Clearing Fund and Loss
Allocation'', in the event of a close out of a defaulting Member,
broker members will be responsible for partially-matched trades for
which FICC has received a statement denying the existence of the
trade.
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K. Other \45\
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    \45\ It should be noted that DTCC has an Audit Committee and
such Committee would not be dismantled without prior notification to
the Commission.
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    a. It should be noted that certain current MBSD rules will not be
included in the proposed MBSD rules. These are as follows:
     With respect to Article III (Participants), in the current
MBSD rules: Rule 1, ``Requirements Applicable to Participants and
Limited Purpose Participants''; Section 5, ``Supplemental Agreement of
Participants and Limited Purpose Participants''; and Section 14
``Special Provisions Applicable to Partnerships'' are not included in
the proposed MBSD rules because each of these rules is no longer
necessary. Proposed Rule 2A serves to harmonize the attached proposed
MBSD rules with the GSD rules on this subject. Rule 1, ``Requirements
Applicable to Participants and Limited Purpose Participants'' Section
15 ``Special Provisions Applicable to Non-Domestic Participants'' is
not included in the proposed MBSD rules because as with the GSD, the
MBSD will be using the Netting Agreement for foreign members and not
the master agreement format. Proposed Rule 2A, ``Initial Membership
Requirements'', Section 5, ``Member Agreement'' covers the provisions
of the membership agreement generally and thereby serves to harmonize
the proposed MBSD rules with the GSD rules with respect to this
subject.
     Rule 3, ``Corporation Declines to Act for a Participant or
Limited Purpose Participant'' Section 2 ``Other Grounds for Ceasing to
Act for a Participant or Limited Purpose'' is not included in the
proposed MBSD rules because it is being replaced by proposed MBSD Rule
14 ``Restrictions on Access to Services'' and Rule 16 ``Insolvency of a
Member'' which cover the same matters and harmonize these provisions
with those in the GSD rules.
     In an effort to harmonize with the GSD rules, Rule 3,
``Corporation Declines to Act for a Participant or Limited Purpose
Participant'' Section 3 is not reflected in the proposed MBSD Rules. We
do not believe it is necessary to state the current MBSD concept in the
proposed MBSD rules because it would apply regardless of whether it is
stated in the rules. Rule 3, ``Corporation Declines to Act for a
Participant or Limited Purpose Participant'' Sections 5(a)
``Disposition of Open Commitments'' is not included in the proposed
MBSD rules because FICC does not accept Letters of Credit as a
permissible form of Clearing Fund collateral as a routine matter;
however, FICC reserves the right to accept this type of collateral, if
needed. In addition, the current MBSD rule addresses the liquidation of
other types of collateral posted by the defaulting Member. Under the
proposed MBSD rule, close out processes, in general, are covered by
Rule 17, which has been drafted to be harmonized with the equivalent
GSD Rule to the extent possible. Section 5(c) of the current MBSD Rule
3 in Article III has not been carried into the proposed rulebook
because these current provisions speak to non-defaulting Members
engaging in the close-out of the defaulting Member's positions, which
will be undertaken by the MBSD as CCP under the proposed rules.
     Under the section titled ``Schedule of Charges Broker
Account Group'' in the appendix to the proposed MBSD rules, FICC no
longer provides hardcopy output from microfiche. As a result, the
reference to this charge is being removed.
    b. The following rules do not appear in the current MBSD rules and
have been added to the proposed MBSD rules in connection with this
filing:
     Rule 3, Section 6 ``General Continuance Standard'' of the
proposed MBSD rules includes additional language which states that FICC
may require that increased or modified Required Fund Deposits be
deposited by the Clearing Member on the same Business Day on which the
FICC requests additional assurances from such Member. FICC has always
interpreted that the current rules permit such action, however, this
additional language makes it explicit.
     Rule 5, ``Trade Comparison'' Section 1 ``General'' and
Section 3 ``Trade Submission Communication Methods'' includes
disclosure relating to the means by which data may be entered and
submitted to the Corporation. Section 10 ``Modification of Trade Data''
of this rule allows the Corporation to unilaterally modify trade data
submitted by Clearing Members if the Corporation becomes aware of any
changes to the transaction which invalidates the original terms upon
which it was submitted or compared and Rule 12 ``Obligations'' of this
Section discusses the point at which trade data becomes a settlement
obligation.

     With respect to the computation of cash balances under
Rule 11, ``Cash Settlement'', FICC has included a new process with
respect to fail tracking. Fail tracking is an automated process that
takes place when the actual settlement date of a transaction is beyond
the contract date. An adjustment is made when one or more beneficiary
dates fall between the contract date and the settlement date. The
adjustment results in the payment of funds from the message originator
to the message receiver through the Federal Reserve's National
Settlement Service (``NSS''). This eliminates a cumbersome manual
process for tracking and clearing adjustments from securities
transaction counter-parties and it impacts all Fed-eligible mortgage-
backed securities, including Freddie Mac, Fannie Mae and Ginnie Mae.
     With respect to Rule 26, ``Financial Reports and Internal
Accounting Control Reports'', Section 1 ``Financial Reports'' has been
revised to state that the Corporation will (1) Prepare its financial
statements in accordance with Generally Accepted Accounting Principles,
(2) make unaudited financial statements for the fourth quarter
available to its Clearing Members within 60 days following the close
the Corporation's calendar year, and (3) provide a certain level of
minimum disclosures in its quarterly financial statements. This rule
has also been revised to include Section 2 ``Internal Accounting
Control Reports'', which requires the Corporation to make internal
accounting control reports available to its Clearing Members.
     The proposed MBSD rules also introduce pool netting fees.
Below is a description of each fee:
    1. Matched Pool Instruct (``PID'') (per side): When a pool instruct
is matched resulting from either an instruct or an affirmation (with
our without pending status) a matched fee is charged to both sides.
    2. Customer Delivery Request (``CDR'') Pool Instruct Fee: When a
pool instruct in a matched status is included in the net (vs. FICC) a
CDR fee is charged at the instruct PID level to the Clearing Member
that submitted the CDR.
    3. Cancel of Matched Pool Instruct: This fee is assessed to the
Clearing Member submitting a unilateral cancel on a matched pool
instruct.
    4. Pool Obligation: This fee is charged to the net long and short
Clearing Member when a Pool Obligation (``POID'') is created vs. FICC.
    5. Post Net Subs: Charged to the Clearing Member that submits a
substitution (the net seller) on a POID vs. FICC.
    6. Clearance of Pool vs. FICC: Fee associated with clearing a POID
vs. FICC.
    7. Financing Charges (Financing costs are the costs of carrying
positions overnight): For each other Clearing Member, a pass-through
charge calculated on a percentage of the total of all such costs
incurred by the Corporation, allocated by agency product.
    c. The provisions listed below are in the current GSD rules and
have been further revised in the proposed MBSD rules in an effort to
harmonize the two rulebooks:

 Rule 3 Section 12 (Excess Capital Premium)
 Rule 5 Section 10 (Modification of Trade Data by the
Corporation)
 Rule 14 (Restrictions on Access to Services)
 Rule 15 (Wind-Down of a Member)
 Rule 16 (Insolvency of a Member)
 Rule 17 (Procedures For When the Corporation Ceases to Act)
 Rule 17A (Corporation Default)
 Rule 18 (Charges for Services Rendered)
 Rule 19 (Bills Rendered)
 Rule 20 (Admission to Premises of the Corporation, Powers of
Attorney, etc.)
 Rule 21 (Forms)
 Rule 22 (Release of Clearing Data)
 Rule 23 (Lists to be Maintained)
 Rule 24 (Signatures)
 Rule 25 (Insurance)
 Rule 26 (Financial Reports and Internal Accounting Control
Reports)
 Rule 27 (Rule Changes)
 Rule 28 (Hearing Procedures)
 Rule 29 (Governing Law and Captions)
 Rule 30 (Limitations of Liability)
 Rule 31 (General Provisions)
 Rule 32 (Cross-Guaranty Agreements)
 Rule 33 (Suspension of Rules in Emergency Circumstances)
 Rule 34 (Action by the Corporation)
 Rule 35 (Notices)
 Rule 36 (Interpretation of Terms)
 Rule 37 (Interpretation of Rules)
 Rule 38 (Disciplinary Proceedings)
 Rule 39 (DTCC Shareholders Agreement)

    (b) By establishing guaranteed settlement and CCP services for the
MBSD, FICC is promoting efficiencies in the mortgage-backed securities
marketplace, and for its membership. The MBSD guarantee of settlement
upon comparison of submitted trades will reduce risks associated with
defaults among counterparties. The introduction of pool comparison,
netting, and settlement services will reduce, for MBSD Clearing
Members, the number of pool settlements and the associated risks and
costs. In addition, providing CCP services will protect Clearing
Members from undue risks by allowing FICC to ``step in'' as settlement
counterparty on eligible trades. The proposed changes are therefore
consistent with the Securities and Exchange Act of 1934 and the rules
and regulations promulgated there under, in that they will further the
abilities of FICC to support the prompt and accurate clearance and
settlement of securities transactions.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change will have any
impact, or impose any burden, on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    Written comments relating to the proposed change have not yet been
solicited or received. FICC will notify the Commission of any written
comments received by FICC.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-FICC-2008-01 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2008-01. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of FICC and on FICC's
Web site at http://dtcc.com/downloads/legal/rule_filings/2008/ficc/2008-01_Amendment_No_1.pdf. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly.
    All submissions should refer to File Number File Number SR-FICC-
2008-01 and should be submitted on or before January 3, 2012.

For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-31762 Filed 12-9-11; 8:45 am]
BILLING CODE 8011-01-P