[Federal Register Volume 77, Number 50 (Wednesday, March 14, 2012)]
[Notices]
[Pages 15155-15163]
[FR Doc No: 2012-6187]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66550; File No. SR-FICC-2008-01]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Amended Proposed Rule Change to Allow the Mortgage-
Backed Securities Division To Provide Guaranteed Settlement and Central
Counterparty Services

March 9, 2012.

I. Introduction

    On March 12, 2008, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change (SR-FICC-2008-01) pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule
19b-4 \2\ thereunder. On November 21, 2011, FICC amended the proposed
rule change. The amended proposed rule change was published for comment
in the Federal Register on December 12, 2011.\3\ On January 10, 2012,
the Commission extended the time within which to take action on the
proposed rule change to March 9, 2012.\4\ The Commission received one
comment on the proposed rule change.\5\ This order approves the
proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 65899 (Dec. 6, 2011), 76
FR 77287 (Dec. 12, 2011). A non-substantive correction to the notice
of the proposed rule change was published on December 14, 2011. See
Securities Exchange Act Release No. 65899A (Dec. 12, 2011), 76 FR
77865 (Dec. 14, 2011).
    \4\ Securities Exchange Act Release No. 66124 (Jan. 10, 2012),
77 FR 2103 (Jan. 13, 2012).
    \5\ Letter from Christopher Killian, Managing Director,
Securities Industry and Financial Markets Association (Dec. 19,
2011).
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II. Description

    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. These modifications necessitated the
MBSD to draft a new rulebook, which is also part of this rule
filing.\6\
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    \6\ Certain provisions in the current MBSD rulebook that reflect
processes that will continue unchanged after introduction of the CCP
services are retained in the proposed MBSD rulebook. In order to
promote uniformity between FICC's two divisions and to increase
transparency for common members, the new MBSD rulebook follows the
structure of the Government Securities Division rulebook and, where
appropriate, the language of equivalent provisions mirror each
other.
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A. MBSD Rulebook Changes

    As noted above, the current MBSD rulebook will be replaced in its
entirety by a new proposed rulebook that incorporates parts of the
current MBSD rulebook where appropriate. Set forth below is an overview
of the significant substantive and structural changes to the rules.
1. 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.
2. Membership
    Rule 2, ``Members'', Rule 2A, ``Initial Membership Requirements,''
Rule 3, ``Ongoing Membership Requirements,'' and Rule 3A, ``Cash
Settling Bank Members,'' govern membership types, member application
requirements, and ongoing reporting requirements.
i. Membership Categories
    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. Clearing membership
categories include: (i) Registered brokers or dealers; (ii) other
registered clearing agencies; (iii) registered investment companies;
(iv) banks \7\; (v) government securities issuers/government sponsored
enterprises; (vi) insurance companies; \8\ and (vii) unregistered
investment pools (``UIPs'').\9\ 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.
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    \7\ The term ``Banks'' includes Federal Savings Associations.
    \8\ The MBSD does not currently have any insurance company
Clearing Members. Financial and other membership requirements for
this category may be established in a future rule filing.
    \9\ The MBSD currently has two members that do not fit into any
of the new listed membership types. These entities remain members of
the MBSD under Article III, Rule 1, Section (1)(f) of the MBSD rules
and remain subject to the MBSD rulebook and all ongoing membership
requirements.
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ii. Initial Membership Requirements
    The initial membership requirement for the MBSD members mirrors the
current requirements for the GSD netting membership where there is an
existing identical membership type in the GSD rules. The two membership
categories where there are no GSD equivalents are registered investment
companies and UIPs. 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. In addition to standard requirements regarding financial and
operational responsibility applicable to all Clearing Members, UIPs
must:
     Have an investment advisor domiciled in the United States
and registered with the Commission under the Investment Advisors Act of
1940; and
     the UIP must have (i) $250 million in net assets, or (ii)
$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.
iii. Ongoing Membership Requirements
    Required membership levels must be maintained by all members on an
ongoing basis as a condition of

membership. Current provisions applicable to the GSD netting membership
under the GSD rules have been incorporated 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.\10\ 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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    \10\ 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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    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 confidence level used for a VaR calculation
for non-UIP Clearing Members.\11\ UIP members also are 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 and risk
profile, valuation procedures, and internal risk management controls.
Current UIP members that become rated less than ``medium'' may be
subject to increased Required Fund Deposits and may also become subject
to revocation of membership. Finally, the Clearing Fund requirement of
UIPs shall be no less than $1 million.\12\
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    \11\ The MBSD rules will provide FICC with the discretion to
increase the confidence level for UIP and non-UIP Clearing Members
if it determines that it is appropriate to do so with respect to a
particular Clearing Member or Clearing Members generally. The MBSD
rules will require Clearing Fund requirements to each Clearing
Member within each membership type to be applied on a consistent and
non-discriminatory basis. See MBSD Proposed Rule 4 (Clearing Fund
and Loss Allocation), Section 2(c).
    \12\ 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 Clearing Member or Clearing
Members generally. The MBSD rules will require Clearing Fund
requirements to each Clearing Member within each membership type to
be applied on a consistent and non-discriminatory basis. See MBSD
Proposed Rule 4 (Clearing Fund and Loss Allocation), Section 2(c).
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3. Clearing Fund and Loss Allocation
    The conversion of the MBSD to a CCP increases the amount of risk
for the clearing agency. 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 Clearing Member's scheduled
settlement obligations. FICC believes that the MBSD has established a
robust risk management framework to manage the credit risks from its
Clearing Members and the credit and liquidity risks involved with its
payment, clearing, and settlement process.
    The MBSD relies on many different controls to manage its
counterparty risk. These controls include: (i) Membership standards,
(ii) initial and variation margins, (iii) back and stress testing, (iv)
position and risk monitoring, and (v) non-margin collateral. The first
set of controls aims to prevent the CCP from conducting business with
counterparties that have unacceptably high probabilities of default. As
noted above, 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 fulfill 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 Clearing
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.\13\
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    \13\ An index-based haircut methodology will be used for
securities with insufficient pricing data.
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    In order to further enhance the MBSD's risk framework, the MBSD
will add two 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 it deems it appropriate in order to protect
FICC and its Clearing Members. If any loss were incurred in the
liquidation of a Clearing Member that was not covered by the Clearing
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.
    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 Clearing Member
portfolios and to monitor its tail risk exposure that is beyond the
99th percentile. If a Clearing Member portfolio does not pass a 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 outside of 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 more fully 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 Clearing 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 fulfill 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 fulfill
the liquidity need, but if those were unavailable or insufficient, the
MBSD would invoke the ``Capped Contingency Liquidity Facility,'' as
described below, to provide additional financing in the event of a
Clearing Member default.
    Tail risk is one of the risks the MBSD has to manage. The MBSD
addresses this risk through a continuous process of: (1) Reviewing
margin methodologies with stakeholders; (2) analyzing and monitoring
margin and collateral requirements; (3) actively reviewing and timely
acting on market conditions and credit events; (4) reviewing back and
stress tests, and (5) identifying, assessing, and managing risks
associated with the products and services provided by the MBSD and
FICC.
i. 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, and legal) or non-compliance with the 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,\14\ 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 to-be-announced 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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    \14\ 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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    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 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. These intraday
margin 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.
ii. Use of Payments and Deposits
    FICC is providing additional disclosure relating to its use of a
Clearing Member's deposits and payments to the Clearing Fund for
temporary financing needs. The rulebook also clarifies 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, FICC will provide the reasons
therefore to each Clearing Member.\15\
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    \15\ The Clearing Fund is ``charged'' when FICC has applied the
Clearing Fund for more than 30 days and is allocating the amount as
a loss or for other loss allocation purposes.
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iii. Loss Allocation
    FICC is 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 (``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.\16\ 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.\17\ 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 Clearing 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 Clearing Members' bilateral losses and sum these shares to
determine the Tier Two Remaining Loss.
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    \16\ Tier Two members are those that are legally prohibited from
participating in loss mutualization. Currently, only Registered
Investment Companies qualify as Tier Two members.
    \17\ Brokered 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. Tier
Two counterparties will be liable for losses related to both direct and
brokered trades \18\ including partially-matched trades for which the
Tier Two member did not submit a statement to FICC denying the
existence of the trade.\19\
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    \18\ 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 principal 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 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.
    \19\ 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).
    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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4. Trade Processing
    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.\20\ Eligible transactions will be
submitted to FICC's Real-Time Trade Manager (``RTTM'') system for
matching purposes.\21\ FICC will provide a trade guarantee for all
existing types of trades upon comparison of trade details submitted by
members.\22\
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    \20\ Currently, the MBSD recognizes two types of trades: (i)
``To be announced'' (``TBA'') trades and (ii) specified pool trades
(``SPTs''). A TBA is a contract for the purchase or sale of agency
mortgage-backed securities to be delivered at an agreed-upon future
date; however, the actual pool identities and/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. TBA trades may
proceed through the Settlement Balance Order engine for netting or
may settle on a trade-for-trade basis (``TFTD''). In an SPT
contract, required pool data, including the pool number to be
delivered on settlement date, is specified at the time of execution.
    Clearing Members may use FICC's Interactive Submission Method,
Multiple Batch Submission Method, or Single Batch Submission Method
to submit trade data to the MBSD.
    \21\ 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.
    \22\ Comparison is deemed to occur at the point at which the
MBSD makes available to both of the counterparties an output
indicating that the trade data has been compared. FICC generates the
output indicating that a trade is compared contemporaneous with
successful comparison of the trade data in FICC's RTTM system.
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    Additionally, the MBSD will introduce ``pool comparison'' and
``pool netting'' and interpose itself as settlement counterparty to
certain settlement obligations. Specifically, after the netting of TBA
transactions, settlement obligations will be issued between Clearing
Members and Clearing Members will allocate pools for settlement through
the MBSD's Electronic Pool Notification (``EPN'') Service.\23\ Clearing
Members then will submit pool details for those netted TBA settlement
obligations through the RTTM system for pool comparison and for
consideration for pool netting.\24\ Upon FICC's issuance of pool
netting results to Clearing Members, those pools that are netted will
be novated; i.e., settlement obligations between the Clearing Members
will be replaced with settlement obligations between each Clearing
Member and FICC. For all other transactions, settlement will occur
outside of FICC between the original settlement counterparties and must
be reported to FICC through a Notification of Settlement (``NOS'').\25\
Obligations that fail to settle will not be re-netted, as they are in
the GSD.\26\
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    \23\ Because Clearing Members will be required to allocate pools
via EPN and RTTM in order for pool allocations to proceed to pool
comparison and netting, all MBSD Clearing Members will be required
to be EPN members.
    \24\ Not every compared pool will be included in the pool
netting system. FICC will determine which guaranteed trades would
receive maximum benefit from pool netting by considering such
factors as trading velocity and projected netting factor. SPTs are
not eligible for pool netting under this proposal.
    Pool allocation information (``Pool Instructs'') may be
submitted up to the point that pool netting is executed. Pool
Instructs must bilaterally compare (i.e., 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
also be assigned by the MBSD to a valid, open TBA position, meaning
that the trade terms submitted on the Pool Instructs must match the
trade terms of a TBA CUSIP that has a sufficient open position. Only
compared and assigned Pool Instructs will be evaluated for inclusion
in pool netting.
    \25\ These obligations include: (i) SPTs, which are ineligible
for pool netting; (ii) transactions for which Clearing Members do
not submit allocation information for pool netting; and (iii)
transactions with incomplete pool information on file.
    \26\ The MBSD retains the discretion to re-net fails or to
conduct pair-offs if it believes that such actions are necessary to
protect itself or its Clearing Members due to market conditions or
events.
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5. Settlement
i. Settlement With FICC as Counterparty
    As stated above, obligations generated by the pool netting system
will settle versus FICC. 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.
ii. Settlement Outside of FICC
    Clearing Members will be required to settle trades ineligible for
pool netting and allocated pools that are not processed through the
pool netting system bilaterally with applicable settlement
counterparties outside of FICC. As noted above, these trades remain
guaranteed for settlement by FICC but are not novated. The settlement
obligations between the Clearing Members are not replaced with
settlement obligations between each Clearing Member and FICC. Clearing
Members must submit to FICC NOSs on the applicable clearance date for
each transaction. When the MBSD receives an NOS from each counterparty
to a transaction, the MBSD will report clearance of the applicable
transaction back to each Clearing Member. At this point, the MBSD will
stop collecting margin on the transaction and will no longer be
responsible for principal and interest payments.
iii. Cash Settlement
    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 \27\ and a settlement price established at the TBA
level); (b) principal and interest payment amounts related to fails;
and (c) a ``clearance difference amount'' \28\ (to take into account
the delivery to FICC of mispriced securities by a Clearing Member).
---------------------------------------------------------------------------

    \27\ ``Pool Net Price'' is defined as the uniform price for a
pool (expressed in dollars per unit of par value), not including
accrued interest, established by FICC on each business day, based on
current market information for each eligible security.
    \28\ ``Clearance Difference Amount'' is defined 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.
---------------------------------------------------------------------------

6. Capped Contingency Liquidity Facility
    FICC is adding a provision to the MBSD rulebook 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 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 Clearing 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 (``Financing Amount'') up to the
Clearing Member's defined liquidity contribution cap (``Defined Capped
Liquidity Amount''),\29\ 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 (``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 the
defaulting Clearing Member.\30\ 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.
---------------------------------------------------------------------------

    \29\ 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. Clearing Members
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)
    \30\ 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.
7. Corporation Default
    FICC is adding provisions to the MBSD rulebook to make explicit the
close-out netting of obligations running between FICC and its Clearing
Members in the event that FICC becomes insolvent or defaults in its
obligations to its Clearing Members. FICC represents that its Clearing
Members 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).
8. Fails Charge
    To encourage market participants to resolve fails promptly, FICC is
applying a fails charge recommended by the Treasury Market Practices
Group (``TMPG'') that expands the applicability of the fails charge to
settlement of pools versus FICC involving failing agency MBS issued or
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.\31\ A fails
charge will not apply to TBA and pool level ``round robins.'' \32\ FICC
believes that the fails charge will reduce the incidence of delivery
failures and supporting liquidity in these markets.
---------------------------------------------------------------------------

    \31\ TMPG is a group of market participants active in the
Treasury securities market and sponsored by the Federal Reserve Bank
of New York. The Commission has approved similar rule proposals at
the GSD. See Securities Exchange Act Release No. 59802 (Apr. 20,
2009), 74 FR 19248 (Apr. 28, 2009) and Securities Exchange Act
Release No. 65910 (Dec. 8, 2011), 76 FR 77861 (Dec. 14, 2011)
(expanding applicability of the fails charge to Agency debt
securities transactions).
    \32\ ``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 constitutes 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.\33\ 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 that 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.
---------------------------------------------------------------------------

    \33\ FICC is not establishing a minimum charge because the MBSD,
as counterparty in multiple transactions, may owe a net credit to
one counterparty that is financed by multiple small net debits owed
to it by multiple counterparties. The lack of a threshold minimum
charge deviates from the TMPG recommendation of a $500 threshold.
FICC notified Clearing Members of this deviation in an Important
Notice (MBS 119.11) and received no objection.
---------------------------------------------------------------------------

    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 federal 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 late to make 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 late 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 guarantee 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). Failure by a Clearing Member to meet its obligations in
connection with a fails charge may be a violation of the MBSD rules
that is subject to disciplinary actions consistent with the MBSD rule
book. 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. The fails charges will
apply to applicable transactions entered into on or after the date of
this order, as well as to transactions that were entered into, but
remain unsettled as of the date of this order. For transactions entered
into prior to, and unsettled as of, the date of this order, the fails
charge will begin accruing on the later of the date of this order or
the contractual settlement date. The following are examples of fails
scenarios and the applicable fails charge in each scenario:
    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.
9. Suspension of Rules in Emergency Circumstances
    The MBSD rule regarding suspension of its rules in emergency
situations is being revised to specify that: (i) The rule applies to
emergency circumstances; (ii) an emergency shall exist in the judgement
of the FICC Board or a FICC Officer, which causes the Board or the FICC
Officer, as applicable, to believe that an extension, waiver, or
suspension of the MBSD rules is necessary for FICC to continue to
facilitate the prompt and accurate clearance and settlement of
securities transactions; (iii) FICC shall notify the Commission of such
extension, waiver, or suspension of the MBSD rules within 2 hours of
such determination;\34\ (iv) the written report of such extension shall
include the nature of the emergency, along with the other requirements
listed in the current rules; (v) such written report shall be submitted
to the Commission no later

than three calendar days after the implementation of the extension,
waiver, or suspension of the MBSD rules; and (vi) any suspension shall
not last for more than thirty calendar days from the date of the event
or events giving rise to the suspension unless the MBSD submits a
proposed rule change to the Commission seeking approval of a further
extension.
---------------------------------------------------------------------------

    \34\ But no later than one 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.
---------------------------------------------------------------------------

10. Ceasing to Act, Wind-Down Members, and Insolvency
    The MBSD's rules regarding restrictions on access to services,
ceasing to act, winding-down Clearing Members, and Clearing Member
mirror the current GSD rules, conformed to apply to the specifics of
MBSD processing as applicable. For example, upon the MBSD ceasing to
act for a Clearing Member, Clearing Members will be required to submit
immediate NOS so that the MBSD has all necessary settlement information
with respect to a defaulting Clearing Member to affect a close-out of
such Clearing Member. In addition, the MBSD will have the right, with
respect to specified pool trades, to substitute alternate pools as
necessary.\35\
---------------------------------------------------------------------------

    \35\ In the event of a close-out of a defaulting Clearing
Member, broker members will be responsible for partially-matched
trades for which FICC has received a statement denying the existence
of the trade.
---------------------------------------------------------------------------

11. DTCC Audit Committee
    While FICC MBSD does not have a rule and it is not adding a rule to
require an audit committee, FICC is governed by the DTCC Audit
Committee and such Committee could not be dismantled without a proposed
rule change filed with the Commission.
12. Summary of Other Rule Changes
i. Current MBSD Rules Not Reflected in Proposed Rulebook
    The following current MBSD rules are not included in the new
rulebook:
     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 because proposed Rule 2A harmonizes the 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'' of the current MBSD rules 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.
FICC does 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 Clearing 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 is not reflected in proposed rulebook
because it addresses non-defaulting Clearing Members engaging in the
close-out of the defaulting Clearing 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.
ii. New MBSD Rules
    The following rules are being added to the MBSD rulebook in
connection with this filing and have not been addressed separately
above:
     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 Clearing Member. FICC has
always interpreted the current rules to permit such action; this
additional language makes this point 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 FICC. Section 10 ``Modification of Trade Data'' of this
rule allows FICC to unilaterally modify trade data submitted by
Clearing Members if FICC becomes aware of any changes to the
transaction that invalidates the original terms upon which it was
submitted or compared and Rule 12 ``Obligations'' of Section 10
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 (i.e., certain securities have a record date that does not
represent the end of the accrual period and instead the beneficiary
date is the actual date the accrual period ends) 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. This
eliminates a cumbersome manual process for tracking and clearing
adjustments from securities transaction counterparties 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 FICC will: (i) Prepare its financial statements
in accordance with Generally Accepted Accounting Principles; (ii) make
unaudited financial statements

for the fourth quarter available to its Clearing Members within 60 days
following the close of FICC's calendar year; and (iii) 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 FICC 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 or
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 versus
FICC.
    5. Post Net Subs: This fee is charged to the Clearing Member that
submits a substitution (the net seller) on a POID vs. FICC.
    6. Clearance of Pool vs. FICC: This is a fee associated with
clearing a POID versus FICC.
    7. Financing Charges (Financing costs are the costs of carrying
positions overnight): For each Clearing Member, a pass-through charge
calculated on a percentage of the total of all such costs incurred by
FICC, allocated by Agency product.
iii. Revised MBSD Rules to Harmonize With GSD Rules
    The provisions listed below are revised to harmonize them with
similar provisions in the current GSD rules and in some cases updated
as appropriate to reflect the mortgage-backed securities market:
     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) (revised for the mortgage-backed securities market)
     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) (revised for the mortgage
backed-securities market)
     Rule 24 (Signatures)
     Rule 25 (Insurance)
     Rule 26 (Financial Reports and Internal Accounting Control
Reports) (revised as explained above)
     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)
(revised as explained above)
     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)

 III. Comments

    The Commission received one comment to the proposed rule change,
from SIFMA.\36\ The commenter supported the proposed rule change,
stating that the proposed rule change would both reduce risk and
increase efficiency in the mortgage-backed security market. The
commenter believes that the proposed rule change would reduce risk
because it would decrease the number of settlements through the pool
netting process and as a result likely would reduce the number of fails
in the market. Furthermore, the commenter believes the proposed rule
change would provide for a less risky process for the liquidation of
positions of a defaulting member.\37\ The commenter believes that the
proposed rule change would increase efficiency because as the total
number of settlements is reduced through pool netting, market
participants likely would have to deal with fewer settlement-related
issues, such as pool notifications, resolution disputes, and fails, for
which they currently dedicate significant time and resources.
---------------------------------------------------------------------------

    \36\ See supra note 5.
    \37\ The Commission notes that FICC, consulting with market
participants and regulators and using emergency powers under its
rulebook, has temporarily provided certain central counterparty
services in two instances to alleviate liquidity pressure on the
market: (i) To facilitate the orderly liquidation of Lehman
Brothers' positions and (ii) to facilitate the orderly liquidation
of MF Global positions. In both instances, FICC significantly
reduced the number of deliveries required by netting deliver and
receive obligations among members.
---------------------------------------------------------------------------

IV. Discussion

    The Commission has carefully considered the proposed rule change
and the comment thereto and the Commission finds that the proposed rule
change is consistent with the requirements of the Exchange Act and the
rules and regulations thereunder.
    The Commission agrees with the commenter that the proposed rule
change likely will reduce risk and promote efficiency in the mortgage-
backed security market by reducing the number of settlements that are
performed and as a result reducing the number of settlement-related
risks and costs that confront counterparties. The Commission also
believes that the FICC guarantee and the provision of CCP services will
reduce risks of bilateral counterparty default. The Commission believes
that these changes are consistent with the Exchange Act, including
Section 17A, because they should help facilitate the prompt and
accurate clearance and settlement of securities transactions and help
assure the safeguarding of securities and funds under FICC's control or
for which FICC is responsible. In particular, the Commission believes
that these changes to the MBSD's rules should result in a more
efficient system of settlement for the mortgage-backed security market.
    The Commission also notes that the MBSD marks Clearing Member
portfolios to the market on a daily basis and charges variation margins
accordingly, and establishes initial margins designed to cover a
minimum 99th percentile of expected possible losses that could arise
over a 3-day settlement period utilizing a VaR-based approach. In
addition, in order to further enhance the MBSD's risk framework, the
MBSD will add two 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.
Furthermore, 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
Clearing Member portfolios and to monitor its tail risk exposure that
is beyond the 99th percentile. The Commission believes these steps
should, consistent with Section

17A(b)(3)(A) of the Exchange Act,\38\ facilitate the prompt and
accurate clearance and settlement of securities transactions and the
safeguarding of securities and funds under FICC's custody or control or
for which FICC is responsible.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78q-1(b)(3)(A).
---------------------------------------------------------------------------

V. Conclusion

    On the basis of the foregoing, the Commission finds that the
amended proposed rule change is consistent with the requirements of the
Exchange Act and in particular Section 17A of the Exchange Act and the
rules and regulations thereunder.\39\
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that the proposed rule change (File No. SR-FICC-2008-01)
be, and hereby is, approved.\40\
---------------------------------------------------------------------------

    \40\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).

    By the Commission.
    Dated: March 9, 2012.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6187 Filed 3-13-12; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 83, Number 16 (Wednesday, January 24, 2018)]
[Proposed Rules]
[Pages 3283-3287]
[FR Doc No: 2018-00951]

========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.

========================================================================

Federal Register / Vol. 83, No. 16 / Wednesday, January 24, 2018 /
Proposed Rules

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2016-9392; Product Identifier 2016-NM-003-AD]
RIN 2120-AA64

Airworthiness Directives; Zodiac Aero Evacuation Systems

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Supplemental notice of proposed rulemaking (SNPRM); reopening
of comment period.

-----------------------------------------------------------------------

SUMMARY: We are revising an earlier proposal for Zodiac Aero Evacuation
Systems (formerly known as Air Cruisers) fusible plugs installed on
emergency evacuation equipment for various transport category
airplanes. This action revises the notice of proposed rulemaking (NPRM)
by extending the proposed compliance time, clarifying the
applicability, and clarifying certain proposed requirements. We are
proposing this airworthiness directive (AD) to address the unsafe
condition on these products. Since these actions would impose an
additional burden over those in the NPRM, we are reopening the comment
period to allow the public the chance to comment on these changes.

DATES: The comment period for the NPRM published in the Federal
Register on November 18, 2016 (81 FR 81709), is reopened.
    We must receive comments on this SNPRM by March 12, 2018.

ADDRESSES: You may send comments, using the procedures found in 14 CFR
11.43 and 11.45, by any of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.
     Fax:<PHONE_NUMBER>.
     Mail: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue SE, Washington, DC 20590.
     Hand Delivery: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue SE, Washington, DC, between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
    For service information identified in this SNPRM, contact Air
Cruisers, 1747 State Route 34, Wall Township, NJ 07727-3935; phone 732-
681-3527; email [email protected]. You may view
this referenced service information at the FAA, Transport Standards
Branch, 1601 Lind Avenue SW, Renton, WA. For information on the
availability of this material at the FAA, call<PHONE_NUMBER>. It is also
available on the internet at http://www.regulations.gov by searching
for and locating Docket No. FAA-2016-9392.

Examining the AD Docket

    You may examine the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-
9392; or in person at the Docket Management Facility between 9 a.m. and
5 p.m., Monday through Friday, except Federal holidays. The AD docket
contains this SNPRM, the regulatory evaluation, any comments received,
and other information. The street address for the Docket Office
(telephone:<PHONE_NUMBER>) is in the ADDRESSES section. Comments will be
available in the AD docket shortly after receipt.

FOR FURTHER INFORMATION CONTACT: Cesar Gomez, Aerospace Engineer,
Airframe and Mechanical Systems Section, FAA, New York ACO Branch, 1600
Stewart Avenue, Suite 410, Westbury, NY 11590; telephone<PHONE_NUMBER>;
fax<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Comments Invited

    We invite you to send any written relevant data, views, or
arguments about this proposal. Send your comments to an address listed
under the ADDRESSES section. Include ``Docket No. FAA-2016-9392;
Product Identifier 2016-NM-003-AD'' at the beginning of your comments.
We specifically invite comments on the overall regulatory, economic,
environmental, and energy aspects of this SNPRM. We will consider all
comments received by the closing date and may amend this SNPRM based on
those comments.
    We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We
will also post a report summarizing each substantive verbal contact we
receive about this SNPRM.

Discussion

    We issued an NPRM to amend 14 CFR part 39 by adding an AD that
would apply Zodiac Aero Evacuation Systems fusible plugs installed on
emergency evacuation equipment for various transport category
airplanes. The NPRM published in the Federal Register on November 18,
2016 (81 FR 81709) (``the NPRM''). The NPRM was prompted by reports
indicating that affected fusible plugs activated (vented gas) below the
rated temperature. The NPRM proposed to require an inspection of the
fusible plugs to determine the part number and lot number, and
replacement of all affected fusible plugs.

Comments

    We gave the public the opportunity to participate in developing the
NPRM. We considered the comments received.

Support for the NPRM

    One commenter, FedEx, stated no objection to the NPRM.

Requests To Withdraw the NPRM

    Airlines for America (A4A), formerly known as the Air Transport
Association of America (ATA), on behalf of its members, requested the
NPRM be withdrawn and reissued after the following errors and omissions
have been corrected:
     Errors in the applicability;
     A ``needlessly aggressive'' compliance time when taken
into account with operators' normal procedures; and
     An inadequate cost estimate based on the need to inspect
several slides per airplane, and the lack of taking into account the
feasibility and safety of inspecting ``on wing,'' as opposed to
inspecting during a shop visit.
    American Airlines (AA), Air Cruisers, A4A (on behalf of its
members), and Delta Air Lines (DAL) commented on the merits of issuing
the NPRM. Some noted that operators already have routine maintenance
inspections and

pre-flight checks in place to evaluate the bottle pressure of emergency
evacuation systems on airplanes; therefore, there is little to no risk
of the occurrence of the unsafe condition identified in the NPRM.
    A4A (on behalf of its members) added that, in light of pre-flight
cabin inspections and the low potential of carrying a suspect plug, the
risk to passenger safety is negligible. Air Cruisers stated it never
delivered a shipset of evacuation slides with the suspect fusible plugs
since widespread use of the fusible plugs was discontinued years before
the suspect batch was produced.
    We infer that these commenters request that we withdraw the NPRM.
We do not agree to withdraw the proposal since the risk assessment
determined the failure of the fusible plug to result in an unsafe
condition; however, after careful consideration of the commenters'
requests and rationale, data submitted by the manufacturer regarding
parts availability, the commenters' recommended compliance time, and
the degree of urgency to address the unsafe condition as determined by
the risk assessment, we do agree to clarify the applicability and to
extend the compliance time. We address applicability and the compliance
time extension in subsequent comment responses. Regarding costs, the
estimated costs are per slide and represent performing the actions
during scheduled maintenance of the emergency evacuation equipment.
Therefore, the cost estimates only account for the work required to
replace the fusible plug and do not account for costs associated with
getting access to the fusible plug and returning the emergency
evacuation equipment to service.

Requests To Clarify the Affected Airplanes and Parts Specified in the
Proposed AD

    Several commenters requested that the NPRM be revised to clarify
which airplanes and parts are affected. DAL specifically requested that
paragraph (c) of the proposed AD (in the NPRM) be revised to specify
all airplane models on which the affected fusible plugs are installed.
However, DAL did not provide justification for its request.
    AA requested that the applicability of the proposed AD (in the
NPRM) be revised to include all possible inflation systems that have
fusible plug part number (P/N) B13984-3 installed. AA noted that the
Air Cruisers service information states that in addition to the
inflation systems identified in the service information, other
inflation systems not mentioned in the service information might have
fusible plug P/N B13984-3 installed; therefore, any slide or bottle
that has fusible plug P/N B13984-3 installed should be inspected. In
addition, AA indicated that the proposed AD (in the NPRM) should
include detailed compliance instructions for evacuation systems not
identified in the Air Cruisers service information.
    AA added that based on its initial research, additional affected
components include the aft service door on Boeing Model MD-80
airplanes, and the over-wing escape slides on Airbus Model A319 and
A320 airplanes, and Boeing Model 757 airplanes.
    Cathay Pacific Airways (Cathay) noted that Boeing and Air Cruisers
confirmed that the suspect fusible plugs were only installed in the
reservoir and valve assemblies having a part number identified in Air
Cruisers Service Information Letter (SIL) 25-246, Rev. No. 1, dated
February 21, 2014 (``Air Cruisers SIL 25-246, Rev. No. 1''), and the
applicable service bulletins identified in that service information.
    Air Cruisers noted that the implied scope of the NPRM is too broad,
and that an unsafe condition does not exist in emergency equipment
other than that identified in the service information issued by Air
Cruisers in August and December 2010.
    Air Cruisers also stated that the inspection of the emergency
evacuation equipment (including all inflation valves, reservoir and
valve assemblies, and evacuation slides, slides/rafts, and life rafts)
specified in paragraph (g) of the proposed AD (in the NPRM) is based on
an assumption that fusible plugs are standard components used on all
Air Cruisers inflation systems--and that the assumption is incorrect.
Air Cruisers explained that many products do not have fusible plugs,
and that fusible plugs were only required when certain early generation
composite gas reservoirs were used in system design--and those were
phased out in the 2003 to 2004 timeframe.
    We agree to clarify which airplanes and parts are affected. Based
upon confirmation of the affected parts and airplanes by Air Cruisers,
we have revised paragraph (c) of the proposed AD (in the SNPRM) to
specify that the proposed AD would apply to Air Cruisers fusible plugs
installed on emergency evacuation equipment identified in the service
information specified in paragraphs (c)(1) through (c)(16) of this
proposed AD. Therefore, there is no need to include additional
compliance instructions for evacuation emergency equipment not
identified in the Air Cruisers service information. The service
information is described under ``Related Service Information under 1
CFR part 51'' of this SNPRM.

Requests To Extend the Compliance Time

    Air Cruisers, All Nippon Airways (ANA), Cathay, United Parcel
Service (UPS), AA, Airbus, DAL, and A4A (on behalf of its members)
requested that the compliance time proposed in paragraph (g) of the
proposed AD (in the NPRM) be extended. The commenters stated that the
proposed compliance time of 30 days is not adequate because there are
several slides on each airplane and additional spare slide assemblies
that also need to be inspected. The commenters also noted that the
slide assembly has to be unpacked to gain access to the fusible plug
for the inspection, and the slide unit would need to be discharged,
inspected, repacked, and recertified--whether or not an affected
fusible plug was identified.
    Several of the commenters also mentioned that the repacking and
recertification of the slide assemblies must be accomplished by a
certified third party vendor. UPS noted that there are few repair
facilities that have the capability of testing, repacking, and
recertifying emergency evacuation slides, and that an estimated 16,920
inflatable assemblies owned by U.S. operators may need to be inspected.
The commenters stated it would not be possible for the repair
facilities to accomplish this task within the proposed 30-day
compliance time.
    A4A (on behalf of its members) added that the NPRM did not address
the availability of the kits, and that it is unknown as to whether
Zodiac can provide the required parts given a 30-day compliance time,
and requested 48 months. UPS, Cathay, ANA, Airbus, AA, and DAL
requested the compliance time be extended so they can accomplish the
required actions during a standard overhaul period or next scheduled
overhaul of the evacuation system. The extended compliance time
requested by the commenters was between 36 to 48 months. The commenters
noted there are routine inspections of the pressure of the inflated
reservoir assemblies.
    We agree that the compliance time should be revised. We had
intended that the plug replacement occur during regularly scheduled
maintenance on the evacuation systems for the majority of affected
operators, when the airplanes would be located at a base where
necessary special equipment and trained personnel would be readily
available. After careful consideration of

the commenters' requests and rationale, data submitted by the
manufacturer regarding parts availability, the commenters' recommended
compliance time, and the degree of urgency to address the unsafe
condition, we have determined that extending the compliance time to 42
months will provide an acceptable level of safety. We have revised
paragraph (g) of this AD accordingly.

Request To Allow Other Methods of Compliance for the Inspection

    Air Cruisers and ANA requested that operators be allowed to show
compliance with the requirements of the proposed AD (in the NPRM) if
the actions in the Accomplishment Instructions of the applicable
service bulletins identified in Air Cruisers SIL 25-246, Rev. No. 1
have been completed. Air Cruisers stated that it issued the 16 service
bulletins identified in the SIL to identify the known systems and
inflation valves that might be fitted with the subject fusible plugs
from the affected lot numbers. Air Cruisers elaborated that
verification of the accomplishment of the actions included in the 16
service bulletins should be sufficient to show compliance with the
requirements of the proposed AD. ANA did not provide justification for
its request.
    AA requested that operators be allowed to show compliance with the
requirements of the proposed AD (in the NPRM) by a review of
maintenance records, without having to provide the lot number of the
fusible plug installed. AA noted that although paragraph (g) of the
proposed AD (in the NPRM) included a review of maintenance records,
that paragraph would require that the part number and lot number be
conclusively determined from that review. However, AA stated that a
records review is not possible because the lot number is not identified
on the maintenance records.
    We partially agree with the commenters' requests for the reasons
provided by the commenters. We have revised paragraph (g) of the
proposed AD (in this SNPRM) to allow a review of maintenance records if
that review can conclusively determine that the affected fusible plug
was replaced with a part not having P/N B13984-3, and not stamped with
Lot PA-21 or PA-22.

Request To Allow Other Methods of Compliance for the Replacement

    Cathay and Air Cruisers requested we allow using the component
maintenance manual (CMM) as a method of compliance for the replacement
specified in paragraph (g) of the proposed AD (in the NPRM). Cathay
stated that the vendor service information identified in Air Cruisers
SIL 25-246, Rev. No. 1, provides procedures for replacing the affected
fusible plugs. The commenter added that the vendor service information
has been incorporated into the applicable ``Reservoir and Valve
Inflation Assembly'' CMMs.
    Air Cruisers noted that the CMMs should be used instead of using
the vendor service information. The commenter stated it plans to add
information to the CMMs similar to that specified in the service
information.
    We agree with the commenter's request that the CMM or Air Cruisers
SIL 25-246, Rev. No. 1 may also be used to replace the fusible plug.
The proposed AD (in the NPRM) already provides allowance for the use of
the CMM or Air Cruisers SIL 25-246, Rev. No. 1 to provide guidance for
replacing the affected fusible plug as stated in ``Note 1 to paragraph
(g) of this AD'' in the proposed AD (in the NPRM). We have not changed
this proposed AD in this regard.

Request To Remove the Reporting Requirement

    ANA, UPS, Air Cruisers, AA, DAL, and A4A (on behalf of its members)
requested that the reporting requirement in paragraph (h) of the
proposed AD (in the NPRM) be removed. The commenters stated that the
Air Cruisers service bulletins identified in Air Cruisers SIL 25-246,
Rev. No. 1, do not mention reporting findings, and the operators that
have already started replacing the fusible plugs using the information
in those Air Cruisers service bulletins did not report their findings
to Air Cruisers. DAL noted that the information in the Air Cruisers
service bulletins identified in Air Cruisers SIL 25-246, Rev. No. 1,
was included in the applicable component maintenance manuals in 2011,
which has allowed sufficient time for the escape slide/rafts to have
gone through a regular overhaul at least once. Any fusible plugs from
the defective lots would have been removed and scrapped, but would not
have been reported because the Air Cruisers service bulletins did not
mention reporting.
    We agree with the commenters' request. We have removed the
reporting requirement from this proposed AD.

Related Service Information Under 1 CFR Part 51

    We reviewed the following Air Cruisers service information. The
service information identifies the affected fusible plugs. In addition,
it describes procedures for inspecting and replacing affected fusible
plugs. These documents are distinct since they apply to different
airplane models or configurations.
     Air Cruisers Service Bulletin 737 103-25-50, dated August
27, 2010.
     Air Cruisers Service Bulletin 757 105-25-80, dated August
27, 2010.
     Air Cruisers Service Bulletin 757 105-25-81, dated August
27, 2010.
     Air Cruisers Service Bulletin 767 106-25-10, Rev. No. 1,
dated October 15, 2010.
     Air Cruisers Service Bulletin 777 107-25-29, Rev. No. 1,
dated July 8, 2011.
     Air Cruisers Service Bulletin A300/A310 001-25-19, dated
August 27, 2010.
     Air Cruisers Service Bulletin A300/A310 003-25-33, dated
August 27, 2010.
     Air Cruisers Service Bulletin A310 002-25-08, dated August
27, 2010.
     Air Cruisers Service Bulletin A320 004-25-87, Rev. No. 2,
dated January 7, 2011.
     Air Cruisers Service Bulletin A321 005-25-21, dated August
27, 2010.
     Air Cruisers Service Bulletin BAe146 201-25-23, dated
December 10, 2010.
     Air Cruisers Service Bulletin F28 352-25-02, dated
December 10, 2010.
     Air Cruisers Service Bulletin F100 351-25-07, dated
December 10, 2010.
     Air Cruisers Service Bulletin Liferaft 35-25-79, dated
August 27, 2010.
     Air Cruisers Service Bulletin MD11 305-25-35, dated August
27, 2010.
     Air Cruisers Service Bulletin MD80/90/717 304-25-45, dated
August 27, 2010.
     Air Cruisers Service Information Letter 25-246, Rev. No.
1, dated February 21, 2014.
    This service information is reasonably available because the
interested parties have access to it through their normal course of
business or by the means identified in the ADDRESSES section.

FAA's Determination

    We are proposing this SNPRM because we evaluated all the relevant
information and determined the unsafe condition described previously is
likely to exist or develop in other products of the same type design.
Certain changes described above expand the scope of the NPRM. As a
result, we have determined that it is necessary to reopen the comment
period to provide additional opportunity for the public to comment on
this SNPRM.

Proposed Requirements of This SNPRM

    This SNPRM would require an inspection of the fusible plugs to
determine the part number and lot number, and replacement of all
affected fusible plugs.

Costs of Compliance

    We estimate that this proposed AD affects 3,384 airplanes of U.S.
registry. We estimate the following costs to comply with this proposed
AD:

                                                 Estimated Costs
----------------------------------------------------------------------------------------------------------------
                                                                                Cost per      Cost on U.S.
                Action                         Labor cost           Parts cost        product        operators
----------------------------------------------------------------------------------------------------------------
Determining part and lot number.......  1 work-hour x $85 per                 $0             $85        $287,640
                                         hour = $85.
----------------------------------------------------------------------------------------------------------------

    We estimate the following costs per slide to do any necessary
replacement of the fusible plug that would be required based on the
results of the proposed inspection. We have no way of determining the
number of aircraft that might need these replacements:

                                                On-Condition Cost
----------------------------------------------------------------------------------------------------------------
                                                                                Cost per
                 Action                           Labor cost                  Parts cost              product
----------------------------------------------------------------------------------------------------------------
Replacing...............................  1 work-hour x $85 per hour  Not available.............             $85
                                           = $85.
----------------------------------------------------------------------------------------------------------------

    According to the manufacturer, some of the costs of this proposed
AD may be covered under warranty, thereby reducing the cost impact on
affected individuals. We do not control warranty coverage for affected
individuals. As a result, we have included all available costs in our
cost estimate.

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, section 106, describes the
authority of the FAA Administrator. ``Subtitle VII: Aviation
Programs,'' describes in more detail the scope of the Agency's
authority.
    We are issuing this rulemaking under the authority described in
``Subtitle VII, Part A, Subpart III, Section 44701: General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.
    This proposed AD is issued in accordance with authority delegated
by the Executive Director, Aircraft Certification Service, as
authorized by FAA Order 8000.51C. In accordance with that order,
issuance of ADs is normally a function of the Compliance and
Airworthiness Division, but during this transition period, the
Executive Director has delegated the authority to issue ADs applicable
to transport category airplanes to the Director of the System Oversight
Division.

Regulatory Findings

    We determined that this proposed AD would not have federalism
implications under Executive Order 13132. This proposed AD would not
have a substantial direct effect on the States, on the relationship
between the national Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
    For the reasons discussed above, I certify this proposed
regulation:
    1. Is not a ``significant regulatory action'' under Executive Order
12866;
    2. Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979);
    3. Will not affect intrastate aviation in Alaska; and
    4. Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by
reference, Safety.

The Proposed Amendment

    Accordingly, under the authority delegated to me by the
Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

0
1. The authority citation for part 39 continues to read as follows:

    Authority:  49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13   [Amended]

0
2. The FAA amends Sec.  39.13 by adding the following new airworthiness
directive (AD):

Zodiac Aero Evacuation Systems: Docket No. FAA-2016-9392; Product
Identifier 2016-NM-003-AD.

(a) Comments Due Date

    We must receive comments by March 12, 2018.

(b) Affected ADs

    None.

(c) Applicability

    This AD applies to Zodiac Aero Evacuation Systems fusible plugs
installed on emergency evacuation equipment identified in the
service information specified in paragraphs (c)(1) through (c)(16)
of this AD. These affected fusible plugs might be installed on the
emergency evacuation equipment of the following manufacturers'
airplanes: Airbus, The Boeing Company, BAE Systems (Operations)
Limited, and Fokker Services B.V.
    (1) Air Cruisers Service Bulletin 737 103-25-50, dated August
27, 2010.
    (2) Air Cruisers Service Bulletin 757 105-25-80, dated August
27, 2010.
    (3) Air Cruisers Service Bulletin 757 105-25-81, dated August
27, 2010.
    (4) Air Cruisers Service Bulletin 767 106-25-10, Rev. No. 1,
dated October 15, 2010.
    (5) Air Cruisers Service Bulletin 777 107-25-29, Rev. No. 1,
dated July 8, 2011.
    (6) Air Cruisers Service Bulletin A300/A310 001-25-19, dated
August 27, 2010.

    (7) Air Cruisers Service Bulletin A300/A310 003-25-33, dated
August 27, 2010.
    (8) Air Cruisers Service Bulletin A310 002-25-08, dated August
27, 2010.
    (9) Air Cruisers Service Bulletin A320 004-25-87, Rev. No. 2,
dated January 7, 2011.
    (10) Air Cruisers Service Bulletin A321 005-25-21, dated August
27, 2010.
    (11) Air Cruisers Service Bulletin BAe146 201-25-23, dated
December 10, 2010.
    (12) Air Cruisers Service Bulletin F28 352-25-02, dated December
10, 2010.
    (13) Air Cruisers Service Bulletin F100 351-25-07, dated
December 10, 2010.
    (14) Air Cruisers Service Bulletin Liferaft 35-25-79, dated
August 27, 2010.
    (15) Air Cruisers Service Bulletin MD11 305-25-35, dated August
27, 2010.
    (16) Air Cruisers Service Bulletin MD80/90/717 304-25-45, dated
August 27, 2010.

(d) Subject

    Air Transport Association (ATA) of America Code 25, Equipment/
furnishings.

(e) Unsafe Condition

    This AD was prompted by reports indicating that affected fusible
plugs activated (vented gas) below the rated temperature. We are
issuing this AD to detect and replace fusible plugs that might
activate below the rated temperature, which renders the evacuation
system unusable.

(f) Compliance

    Comply with this AD within the compliance times specified,
unless already done.

(g) Fusible Plug Identification

    Within 42 months after the effective date of this AD, do an
inspection to determine if any fusible plug has part number (P/N)
B13984-3, stamped with Lot PA-21 or PA-22. A review of the airplane
maintenance records is acceptable to make this determination if it
can be conclusively determined from that review that a part not
having P/N B13984-3, stamped with Lot PA-21 or PA-22, has been
installed.

(h) Replacement of Affected Fusible Plug

    If, during the inspection or records review required by
paragraph (g) of this AD, it is determined that any fusible plug has
part number (P/N) B13984-3, stamped with Lot PA-21 or PA-22: Before
further flight, replace that fusible plug with a new part that does
not have P/N B13984-3, stamped with Lot PA-21 or PA-22.
    Note 1 to paragraph (h) of this AD: Guidance can be found in the
applicable component maintenance manual (CMM) for the replacement.
In addition, Air Cruisers Service Information Letter 25-246, Rev.
No. 1, dated February 21, 2014, provides information regarding
affected fusible plugs and guidance on the replacement.

(i) Parts Installation Prohibition

    As of the effective date of this AD, no person may install on
any airplane any fusible plug having P/N B13984-3, stamped with Lot
PA-21 or PA-22.

(j) Alternative Methods of Compliance (AMOCs)

    (1) The Manager, New York ACO Branch, FAA, has the authority to
approve AMOCs for this AD, if requested using the procedures found
in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request
to your principal inspector or local Flight Standards District
Office, as appropriate. If sending information directly to the
certification office, send it to ATTN: Program Manager, Continuing
Operational Safety, FAA, New York ACO Branch, 1600 Stewart Avenue,
Suite 410, Westbury, NY 11590; telephone:<PHONE_NUMBER>; fax: 516-
794-5531.
    (2) Before using any approved AMOC, notify your appropriate
principal inspector, or lacking a principal inspector, the manager
of the local flight standards district office/certificate holding
district office.

(k) Related Information

    (1) For more information about this AD, contact Cesar Gomez,
Aerospace Engineer, Airframe and Mechanical Systems Section, FAA,
New York ACO Branch, 1600 Stewart Avenue, Suite 410, Westbury, NY
11590; telephone<PHONE_NUMBER>; fax<PHONE_NUMBER>.
    (2) For service information identified in this AD, contact Air
Cruisers, 1747 State Route 34, Wall Township, NJ 07727-3935; phone
732-681-3527; email [email protected]. You
may view this service information at the FAA, Transport Standards
Branch, 1601 Lind Avenue SW, Renton, WA. For information on the
availability of this material at the FAA, call<PHONE_NUMBER>.

    Issued in Renton, Washington, on January 5, 2018.
Michael Kaszycki,
Acting Director, System Oversight Division, Aircraft Certification
Service.
[FR Doc. 2018-00951 Filed 1-23-18; 8:45 am]
 BILLING CODE 4910-13-P