[Federal Register Volume 83, Number 5 (Monday, January 8, 2018)]
[Notices]
[Pages 854-871]
[FR Doc No: 2018-00075]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82427; File No. SR-FICC-2017-022]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of a Proposed Rule Change To Amend the Loss Allocation
Rules and Make Other Changes

January 2, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 18, 2017, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 18, 2017, FICC filed this proposed rule change
as an advance notice (SR-FICC-2017-806) with the Commission pursuant
to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act entitled the Payment, Clearing,
and Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and
Rule 19b-4(n)(1)(i) of the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of
the advance notice is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    The proposed rule change consists of modifications to FICC's
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') and
Mortgage-Backed Securities Division (``MBSD'' and, together with GSD,
the ``Divisions'' and, each, a ``Division'') Clearing Rules (``MBSD
Rules,'' and collectively with the GSD Rules, the ``Rules'') in order
to amend provisions in the Rules regarding loss allocation as well as
make other changes, as described in greater detail below.\4\
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    \4\ Capitalized terms not defined herein are defined in the GSD
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf, and the MBSD Rules, available at
www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

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

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

1. Purpose
    The primary purpose of this proposed rule change is to amend GSD's
and MBSD's loss allocation rules in order to enhance the resiliency of
the Divisions' loss allocation processes so that each Division can take
timely action to address multiple loss events that occur in succession
during a short period of time (defined and explained in detail below).
In connection therewith, the proposed rule change would (i) align the
loss allocation rules of the three clearing agencies of The Depository
Trust & Clearing Corporation (``DTCC''), namely The Depository Trust
Company, National Securities Clearing Corporation (``NSCC''), and FICC
(collectively, the ``DTCC Clearing Agencies''), so as to provide
consistent treatment, to the extent practicable and appropriate,
especially for firms that are participants of two or more DTCC Clearing
Agencies, (ii) increase transparency and accessibility of the loss
allocation rules by enhancing their readability and clarity, (iii)
amend language regarding FICC's use of MBSD Clearing Fund, and (iv)
make conforming and technical changes.
(i) Background
    Central counterparties (``CCPs'') play a key role in financial
markets by mitigating counterparty credit risk on transactions between
market participants. CCPs achieve this by providing guaranties to
participants and, as a consequence, are typically exposed to credit
risks that could lead to default losses. In addition, in performing its
critical functions, a CCP could be exposed to non-default losses that
are otherwise incident to the CCP's clearance and settlement business.

    A CCP's rulebook should provide a complete description of how
losses would be allocated to participants if the size of the losses
exceeded the CCP's pre-funded resources. Doing so provides for an
orderly allocation of losses, and potentially allows the CCP to
continue providing critical services to the market and thereby results
in significant financial stability benefits. In addition, a clear
description of the loss allocation process offers transparency and
accessibility to the CCP's participants.
Current FICC Loss Allocation Process
    As CCPs, FICC's Divisions' loss allocation processes are key
components of their respective risk management processes. Risk
management is the foundation of FICC's ability to guarantee settlement
in each Division, as well as the means by which FICC protects itself
and its members from the risks inherent in the clearance and settlement
process. FICC's risk management processes must account for the fact
that, in certain extreme circumstances, the collateral and other
financial resources that secure FICC's risk exposures may not be
sufficient to fully cover losses resulting from the liquidation of the
portfolio of a member for whom a Division has ceased to act.\5\
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    \5\ GSD is permitted to cease to act for (i) a GSD Member
pursuant to GSD Rule 22A (Procedures for When the Corporation Ceases
to Act), (ii) a Sponsoring Member pursuant to Section 14 of GSD Rule
3A (Sponsoring Members and Sponsored Members), and (iii) a Sponsored
Member pursuant to Section 13 of GSD Rule 3A (Sponsoring Members and
Sponsored Members). MBSD is permitted to cease to act for an MBSD
Member pursuant to MBSD Rule 17 (Procedures for When the Corporation
Ceases to Act). GSD Rule 21 (Restrictions on Access to Services) and
GSD Rule 22 (Insolvency of a Member), and MBSD Rule 14 (Restrictions
on Access to Services) and MBSD Rule 16 (Insolvency of a Member) set
out the circumstances under which FICC may cease to act for a member
and the types of actions it may take. Supra note 4.
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    The GSD Rules and the MBSD Rules each currently provide for a loss
allocation process through which both FICC (by applying up to 25% of
its retained earnings in accordance with Section 7(b) of GSD Rule 4 and
Section 7(c) of MBSD Rule 4) and its members would share in the
allocation of a loss resulting from the default of a member for whom a
Division has ceased to act pursuant to the Rules. The GSD Rules and the
MBSD Rules also recognize that FICC may incur losses outside the
context of a defaulting member that are otherwise incident to each
Division's clearance and settlement business.
    The current GSD and MBSD loss allocation rules provide that, in the
event the Division ceases to act for a member, the amounts on deposit
to the Clearing Fund from the defaulting member, along with any other
resources of, or attributable to, the defaulting member that FICC may
access under the GSD Rules or the MBSD Rules (e.g., payments from
Cross-Guaranty Agreements), are the first source of funds the Division
would use to cover any losses that may result from the closeout of the
defaulting member's guaranteed positions. If these amounts are not
sufficient to cover all losses incurred, then each Division will apply
the following available resources, in the following loss allocation
waterfall order:
    First, as provided in the current Section 7(b) of GSD Rule 4 and
Section 7(c) of MBSD Rule 4, FICC's corporate contribution of up to 25
percent of FICC's retained earnings existing at the time of the failure
of a defaulting member to fulfill its obligations to FICC, or such
greater amount as the Board of Directors may determine; and
    Second, if a loss still remains, use of the Clearing Fund of the
Division and assessing the Division's Members in the manner provided in
GSD Rule 4 and MBSD Rule 4, as the case may be. Specifically, FICC will
divide the loss ratably between Tier One Netting Members and Tier Two
Members with respect to GSD, or between Tier One Members and Tier Two
Members with respect to MBSD, based on original counterparty activity
with the defaulting member. Then the loss allocation process applicable
to Tier One Netting Members or Tier One Members, as applicable, and
Tier Two Members will proceed in the manner provided in GSD Rule 4 and
MBSD Rule 4, as the case may be.
    Specifically, the applicable Division will first assess each Tier
One Netting Member or Tier One Member, as applicable, an amount up to
$50,000, in an equal basis per such member. If a loss remains, the
Division will allocate the remaining loss ratably among Tier One
Netting Members or Tier One Members, as applicable, in accordance with
the amount of each Tier One Netting Member's or Tier One Member's, as
applicable, respective average daily Required Fund Deposit over the
prior twelve (12) months. If a Tier One Netting Member or Tier One
Member, as applicable, did not maintain a Required Fund Deposit for
twelve (12) months, its loss allocation amount will be based on its
average daily Required Fund Deposit over the time period during which
such member did maintain a Required Fund Deposit.
    Pursuant to current Section 7(g) of GSD Rule 4 and MBSD Rule 4, if,
as a result of the Division's application of the Required Fund Deposit
of a member, a member's actual Clearing Fund deposit is less than its
Required Fund Deposit, it will be required to eliminate such deficiency
in order to satisfy its Required Fund Deposit amount. In addition to
losses that may result from the closeout of the defaulting member's
guaranteed positions, Tier One Netting Members or Tier One Members, as
applicable, can also be assessed for non-default losses incident to
each Division's clearance and settlement business, pursuant to current
Section 7(f) of GSD Rule 4 and MBSD Rule 4.
    The Rules of both Divisions currently provide that Tier Two Members
are only subject to loss allocation to the extent they traded with the
defaulting member and their trades resulted in a liquidation loss. FICC
will assess Tier Two Members ratably based on their loss as a
percentage of the entire remaining loss attributable to Tier Two
Members.\6\ Tier Two Members are required to pay their loss allocation
obligations in full and replenish their Required Fund Deposits as
needed and as applicable. The current Rule provisions which provide for
loss allocation of non-default losses incident to each Division's
clearance and settlement business (i.e., Section 7(f) of GSD Rule 4 and
MBSD Rule 4) do not apply to Tier Two Members.
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    \6\ GSD Rule 3B, Section 7 (Loss Allocation Obligations of CCIT
Members) provides that CCIT Members will be allocated losses as Tier
Two Members and will be responsible for the total amount of loss
allocated to them. With respect to CCIT Members with a Joint Account
Submitter, loss allocation will be calculated at the Joint Account
level and then applied pro rata to each CCIT Member within the Joint
Account based on the trade settlement allocation instructions. Supra
note 4.
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Overview of the Proposed Rule Changes
A. Changes To Enhance Resiliency of GSD's and MBSD's Loss Allocation
Processes
    In order to enhance the resiliency of GSD's and MBSD's loss
allocation processes, FICC proposes to change the manner in which each
of the aspects of the loss allocation waterfall described above would
be employed. GSD and MBSD would retain the current core loss allocation
process following the application of the defaulting member's resources,
i.e., first, by applying FICC's corporate contribution, and second, by
pro rata allocations to Tier One Netting Members or Tier One Members,
as applicable, and Tier Two Members. However, GSD and MBSD would
clarify or adjust certain elements and introduce certain new loss
allocation concepts, as further discussed below. The proposal would
also retain the types of losses that can be allocated to Tier One
Netting

Members or Tier One Members, as applicable, and Tier Two Members as
stated above. In addition, the proposed rule change would address the
loss allocation process as it relates to losses arising from or
relating to multiple default or non-default events in a short period of
time, also as described below.
    Accordingly, FICC is proposing five (5) key changes to enhance each
Division's loss allocation process:
    (1) Changing the calculation and application of FICC's corporate
contribution.
    As stated above, Section 7(b) of GSD Rule 4 and Section 7(c) of
MBSD Rule 4 currently provide that FICC will contribute up to 25% of
its retained earnings (or such higher amount as the Board of Directors
shall determine) to a loss or liability that is not satisfied by the
defaulting member's Clearing Fund deposit. Under the proposal, FICC
would amend the calculation of its corporate contribution from a
percentage of its retained earnings to a mandatory amount equal to 50%
of the FICC General Business Risk Capital Requirement.\7\ FICC's
General Business Risk Capital Requirement, as defined in FICC's
Clearing Agency Policy on Capital Requirements,\8\ is, at a minimum,
equal to the regulatory capital that FICC is required to maintain in
compliance with Rule 17Ad-22(e)(15) under the Act.\9\ The proposed
Corporate Contribution (as defined below and in the proposed rule
change) would be held in addition to FICC's General Business Risk
Capital Requirement.
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    \7\ FICC calculates its General Business Risk Capital
Requirement as the amount equal to the greatest of (i) an amount
determined based on its general business profile, (ii) an amount
determined based on the time estimated to execute a recovery or
orderly wind-down of FICC's critical operations, and (iii) an amount
determined based on an analysis of FICC's estimated operating
expenses for a six (6) month period.
    \8\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-FICC-2017-007).
    \9\ 17 CFR 240.17Ad-22(e)(15).
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    Currently, the Rules do not require FICC to contribute its retained
earnings to losses and liabilities other than those from member
defaults. Under the proposal, FICC would apply its corporate
contribution to non-default losses as well. The proposed Corporate
Contribution would apply to losses arising from Defaulting Member
Events and Declared Non-Default Loss Events (as such terms are defined
below and in the proposed rule change), and would be a mandatory
contribution by FICC prior to any allocation of the loss among the
applicable Division's members.\10\ As proposed, if the Corporate
Contribution is fully or partially used against a loss or liability
relating to an Event Period (as defined below and in the proposed rule
change) by one or both Divisions, the Corporate Contribution would be
reduced to the remaining unused amount, if any, during the following
two hundred fifty (250) Business Days in order to permit FICC to
replenish the Corporate Contribution.\11\ To ensure transparency, all
GSD Members and MBSD Members would receive notice of any such reduction
to the Corporate Contribution. There would be one FICC Corporate
Contribution, the amount of which would be available to both Divisions
and would be applied against a loss or liability in either Division in
the order in which such loss or liability occurs, i.e., FICC would not
have two separate Corporate Contributions, one for each Division. In
the event of a loss or liability relating to an Event Period, whether
arising out of or relating to a Defaulting Member Event or a Declared
Non-Default Loss Event, attributable to only one Division, the
Corporate Contribution would be applied to that Division up to the
amount then available. If a loss or liability relating to an Event
Period, whether arising out of or relating to a Defaulting Member Event
or a Declared Non-Default Loss Event, occurs simultaneously at both
Divisions, the Corporate Contribution would be applied to the
respective Divisions in the same proportion that the aggregate Average
RFDs (as defined below and in the proposed rule change) of all members
in that Division bears to the aggregate Average RFDs of all members in
both Divisions.\12\
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    \10\ The proposed rule change would not require a Corporate
Contribution with respect to the use of each Division's Clearing
Fund as a liquidity resource; however, if FICC uses a Division's
Clearing Fund as a liquidity resource for more than 30 calendar
days, as set forth in proposed Section 5 of GSD Rule 4 and MBSD Rule
4, then FICC would have to consider the amount used as a loss to the
respective Division's Clearing Fund incurred as a result of a
Defaulting Member Event and allocate the loss pursuant to proposed
Section 7 of Rule 4, which would then require the application of
FICC's Corporate Contribution.
    \11\ FICC believes that two hundred and fifth (250) Business
Days would be a reasonable estimate of the time frame that FICC
would require to replenish the Corporate Contribution by equity in
accordance with FICC's Clearing Agency Policy on Capital
Requirements, including a conservative additional period to account
for any potential delays and/or unknown exigencies in times of
distress.
    \12\ FICC believes that if a loss or liability relating to an
Event Period, whether arising out of or relating to a Defaulting
Member Event or a Declared Non-Default Loss Event, occurs
simultaneously at both Divisions, allocating the Corporate
Contribution ratably between the two Divisions based on the
aggregate Average RFDs of their respective members is appropriate
because the aggregate Average RFDs of all members in a Division
represents the amount of risks that those members bring to FICC over
the look-back period of seventy (70) Business Days.
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    As compared to the current approach of applying ``up to'' a
percentage of retained earnings to defaulting member losses, the
proposed Corporate Contribution would be a fixed percentage of FICC's
General Business Risk Capital Requirement, which would provide greater
transparency and accessibility to members. The proposed Corporate
Contribution would apply not only towards losses and liabilities
arising out of or relating to Defaulting Member Events but also those
arising out of or relating to Declared Non-Default Loss Events, which
is consistent with the current industry guidance that ``a CCP should
identify the amount of its own resources to be applied towards losses
arising from custody and investment risk, to bolster confidence that
participants' assets are prudently safeguarded.'' \13\
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    \13\ See Resilience of central counterparties (CCPs): Further
guidance on the PFMI, issued by the Committee on Payments and Market
Infrastructures and the International Organization of Securities
Commissions, at 42 (July 2017), available at www.bis.org/cpmi/publ/d163.pdf.
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    Under current Section 7(b) of GSD Rule 4 and Section 7(c) of MBSD
Rule 4, FICC has the discretion to contribute amounts higher than the
specified percentage of retained earnings, as determined by the Board
of Directors, to any loss or liability incurred by FICC as result of
the failure of a Defaulting Member to fulfill its obligations to FICC.
This option would be retained and expanded under the proposal so that
it would be clear that FICC can voluntarily apply amounts greater than
the Corporate Contribution against any loss or liability (including
non-default losses) of the Divisions, if the Board of Directors, in its
sole discretion, believes such to be appropriate under the factual
situation existing at the time.
    The proposed rule changes relating to the calculation and
application of Corporate Contribution are set forth in proposed
Sections 7 and 7a of GSD Rule 4 and Sections 7 and 7a of MBSD Rule 4,
as further described below.
    (2) Introducing an Event Period.
    In order to clearly define the obligations of each Division and its
respective Members regarding loss allocation and to balance the need to
manage the risk of sequential loss events against members' need for
certainty concerning their maximum loss allocation exposures, FICC is
proposing to introduce the concept of an ``Event Period'' to the GSD
Rules and the MBSD Rules to address the losses and

liabilities that may arise from or relate to multiple Defaulting Member
Events and/or Declared Non-Default Loss Events that arise in quick
succession in a Division. Specifically, the proposal would group
Defaulting Member Events and Declared Non-Default Loss Events occurring
in a period of ten (10) Business Days (``Event Period'') for purposes
of allocating losses to Members of the respective Divisions in one or
more rounds (as described below), subject to the limitations of loss
allocation set forth in the proposed rule change and as explained
below.\14\ In the case of a loss or liability arising from or relating
to a Defaulting Member Event, an Event Period would begin on the day
one or both Divisions notify their respective members that FICC has
ceased to act \15\ for a GSD Defaulting Member and/or an MBSD
Defaulting Member (or the next Business Day, if such day is not a
Business Day). In the case of a loss or liability arising from or
relating to a Declared Non-Default Loss Event, an Event Period would
begin on the day that FICC notifies members of the respective Divisions
of the determination by the Board of Directors that the applicable loss
or liability may be a significant and substantial loss or liability
that may materially impair the ability of FICC to provide clearance and
settlement services in an orderly manner and will potentially generate
losses to be mutualized among the Tier One Netting Members or Tier One
Members, as applicable, in order to ensure that FICC may continue to
offer clearance and settlement services in an orderly manner (or the
next Business Day, if such day is not a Business Day). If a subsequent
Defaulting Member Event or Declared Non-Default Loss Event occurs
during an Event Period, any losses or liabilities arising out of or
relating to any such subsequent event would be resolved as losses or
liabilities that are part of the same Event Period, without extending
the duration of such Event Period. An Event Period may include both
Defaulting Member Events and Declared Non-Default Loss Events, and
there would not be separate Event Periods for Defaulting Member Events
or Declared Non-Default Loss Events occurring during overlapping ten
(10) Business Day periods.
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    \14\ FICC believes that having a ten (10) Business Day Event
Period would provide a reasonable period of time to encompass
potential sequential Defaulting Member Events or Declared Non-
Default Loss Events that are likely to be closely linked to an
initial event and/or a severe market dislocation episode, while
still providing appropriate certainty for members concerning their
maximum exposure to mutualized losses with respect to such events.
    \15\ Supra note 5.
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    The amount of losses that may be allocated by each Division,
subject to the required Corporate Contribution, and to which a Loss
Allocation Cap (as defined below and in the proposed rule change) would
apply for any withdrawing member, would include any and all losses from
any Defaulting Member Events and any Declared Non-Default Loss Events
during the Event Period, regardless of the amount of time, during or
after the Event Period, required for such losses to be crystallized and
allocated.
    The proposed rule changes relating to the implementation of an
Event Period are set forth in proposed Section 7 of GSD Rule 4 and
Section 7 of MBSD Rule 4, as further described below.
    (3) Introducing the concept of ``rounds'' and Loss Allocation
Notice.
    Pursuant to the proposed rule change, a loss allocation ``round''
would mean a series of loss allocations relating to an Event Period,
the aggregate amount of which is limited by the sum of the Loss
Allocation Caps of affected Tier One Netting Members or Tier One
Members, as applicable (a ``round cap''). When the aggregate amount of
losses allocated in a round equals the round cap, any additional losses
relating to the applicable Event Period would be allocated in one or
more subsequent rounds, in each case subject to a round cap for that
round. FICC may continue the loss allocation process in successive
rounds until all losses from the Event Period are allocated among Tier
One Netting Members or Tier One Members, as applicable, that have not
submitted a Loss Allocation Withdrawal Notice (as defined below and in
the proposed rule change) in accordance with proposed Section 7b of GSD
Rule 4 or MBSD Rule 4.
    Each loss allocation would be communicated to Tier One Netting
Members or Tier One Members, as applicable, by the issuance of a Loss
Allocation Notice (as defined below and in the proposed rule change).
Each Loss Allocation Notice would specify the relevant Event Period and
the round to which it relates. The first Loss Allocation Notice in any
first, second, or subsequent round would expressly state that such Loss
Allocation Notice reflects the beginning of the first, second, or
subsequent round, as the case may be, and that each Tier One Netting
Member or Tier One Member, as applicable, in that round has five (5)
Business Days from the issuance of such first Loss Allocation Notice
for the round to notify FICC of its election to withdraw from
membership with GSD or MBSD, as applicable, pursuant to proposed
Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, and thereby
benefit from its Loss Allocation Cap.\16\
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    \16\ Pursuant to current Section 7(g) of GSD Rule 4 and MBSD
Rule 4, the time period for a member to give notice, pursuant to
Section 13 of GSD Rule 3 and MBSD Rule 3, of its election to
terminate its membership in GSD or MBSD, as applicable, in respect
of an allocation arising from any Remaining Loss allocated by FICC
pursuant to Section 7(d) of GSD Rule 4 or Section 7(e) of MBSD Rule
4, as applicable, and any Other Loss, is the Close of Business on
the Business Day on which the loss allocation payment is due to
FICC. Current Section 13 of GSD Rule 4 and MBSD Rule 4 requires a
10-day notice period. Supra note 4.
    FICC believes that it is appropriate to shorten such time period
from 10 days to five (5) Business Days because FICC needs timely
notice of which Tier One Netting Members or Tier One Members, as
applicable, would remain in its membership for purpose of
calculating the loss allocation for any subsequent round. FICC
believes that five (5) Business Days would provide Tier One Netting
Members or Tier One Members, as applicable, with sufficient time to
decide whether to cap their loss allocation obligations by
withdrawing from their membership in GSD or MBSD, as applicable.
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    The amount of any second or subsequent round cap may differ from
the first or preceding round cap because there may be fewer Tier One
Netting Members or Tier One Members, as applicable, in a second or
subsequent round if Tier One Netting Members or Tier One Members, as
applicable, elect to withdraw from membership with GSD or MBSD, as
applicable, as provided in proposed Section 7b of GSD Rule 4 or MBSD
Rule 4, as applicable, following the first Loss Allocation Notice in
any round.
    For example, for illustrative purposes only, after the required
Corporate Contribution, if FICC has a $5 billion loss determined with
respect to an Event Period and the sum of Loss Allocation Caps for all
Tier One Netting Members or Tier One Members, as applicable, subject to
the loss allocation is $4 billion, the first round would begin when
FICC issues the first Loss Allocation Notice for that Event Period.
FICC could issue one or more Loss Allocation Notices for the first
round until the sum of losses allocated equals $4 billion. Once the $4
billion is allocated, the first round would end and FICC would need a
second round in order to allocate the remaining $1 billion of loss.
FICC would then issue a Loss Allocation Notice for the $1 billion and
this notice would be the first Loss Allocation Notice for the second
round. The issuance of the Loss Allocation Notice for the $1 billion
would begin the second round.
    The proposed rule change would link the Loss Allocation Cap to a
round in order to provide Tier One Netting Members or Tier One Members,
as applicable, the option to limit their loss allocation exposure at
the beginning of

each round. As proposed and as described further below, a Tier One
Netting Member or Tier One Member, as applicable, could limit its loss
allocation exposure to its Loss Allocation Cap by providing notice of
its election to withdraw from membership within five (5) Business Days
after the issuance of the first Loss Allocation Notice in any round.
    The proposed rule changes relating to the implementation of
``rounds'' and Loss Allocation Notices are set forth in proposed
Section 7 of GSD Rule 4 and Section 7 of MBSD Rule 4, as further
described below.
    (4) Implementing a revised ``look-back'' period to calculate a
member's loss allocation pro rata share and its Loss Allocation Cap.
    Currently, the GSD Rules and the MBSD Rules calculate a Tier One
Netting Member's or a Tier One Member's pro rata share for purposes of
loss allocation based on the member's average daily Required Fund
Deposit over the prior twelve (12) months (or such shorter period as
may be available in the case of a member which has not maintained a
deposit over such time period). The Rules currently do not anticipate
the possibility of more than one Defaulting Member Event or Declared
Non-Default Loss Event in quick succession.
    GSD and MBSD are proposing to calculate each Tier One Netting
Member's or Tier One Member's, as applicable, pro rata share of losses
and liabilities to be allocated in any round (as described below and in
the proposed rule change) to be equal to (i) the average of a member's
Required Fund Deposit for the seventy (70) Business Days prior to the
first day of the applicable Event Period (or such shorter period of
time that the member has been a member) (``Average RFD'') divided by
(ii) the sum of Average RFD amounts for all members that are subject to
loss allocation in such round.
    Additionally, GSD and MBSD are proposing that each member's maximum
payment obligation with respect to any loss allocation round (the
member's Loss Allocation Cap) be equal to the greater of (i) its
Required Fund Deposit on the first day of the applicable Event Period
or (ii) its Average RFD.
    FICC believes that employing a revised look-back period of seventy
(70) Business Days instead of twelve (12) months to calculate a Tier
One Netting Member's or a Tier One Member's, as applicable, loss
allocation pro rata share and Loss Allocation Cap is appropriate,
because FICC recognizes that the current look-back period of twelve
(12) months is a very long period during which a member's business
strategy and outlook could have shifted significantly, resulting in
material changes to the size of its portfolios. A look-back period of
seventy (70) Business Days would minimize that issue yet still would be
long enough to enable FICC to capture a full calendar quarter of such
members' activities and smooth out the impact from any abnormalities
and/or arbitrariness that may have occurred.
    The proposed rule changes relating to the implementation of the
revised look-back period are set forth in proposed Section 7 of GSD
Rule 4 and Section 7 of MBSD Rule 4, as further described below.
    (5) Capping withdrawing members' loss allocation exposure and
related changes.
    Currently, pursuant to Section 7(g) of GSD Rule 4 and MBSD Rule 4,
a member can withdraw from membership in order to avail itself of a cap
on loss allocation if the member notifies FICC via a written notice, in
accordance with Section 13 of GSD Rule 3 or MBSD Rule 3, as applicable,
of its election to terminate its membership. Such notice must be
provided by the Close of Business on the Business Day on which the loss
allocation payment is due to FICC and, if properly provided to FICC,
would limit the member's liability for a loss allocation to its
Required Fund Deposit for the Business Day on which the notification of
allocation is provided to the member.\17\ As discussed above, the
proposed rule change would continue providing members the opportunity
to limit their loss allocation exposure by offering withdrawal options;
however, the cap on loss allocation would be calculated differently and
the associated withdrawal process would also be modified as it relates
to withdrawals associated with the loss allocation process. In
particular, the proposed rule change would shorten the withdrawal
notification period from 10 days to five (5) Business Days, as further
described below.
---------------------------------------------------------------------------

    \17\ Current Section 13 of GSD Rule 3 and MBSD Rule 3 requires a
member to provide FICC with 10 days written notice of the member's
termination; however, FICC, in its discretion, may accept such
termination within a shorter notice period. Supra note 4.
---------------------------------------------------------------------------

    As proposed, if a member provides notice of its withdrawal from
membership, the maximum amount of losses it would be responsible for
would be its Loss Allocation Cap,\18\ provided that the member complies
with the requirements of the withdrawal process in proposed Section 7b
of GSD Rule 4 and Section 7b of MBSD Rule 4.
---------------------------------------------------------------------------

    \18\ If a member's Loss Allocation Cap exceeds the member's
then-current Required Fund Deposit, it must still cover the excess
amount.
---------------------------------------------------------------------------

    Currently, pursuant to Section 7(g) of GSD Rule 4 and MBSD Rule 4,
if notification is provided to a member that an allocation has been
made against the member pursuant to GSD Rule 4 or MBSD Rule 4, as
applicable, and that application of the member's Required Fund Deposit
is not sufficient to satisfy such obligation to make payment to FICC,
the member is required to deliver to FICC by the Close of Business on
the next Business Day, or by the Close of Business on the Business Day
of issuance of the notification if so determined by FICC, that amount
which is necessary to eliminate any such deficiency, unless the member
elects to terminate its membership in FICC. To increase transparency of
the timeframe under which FICC would require funds from members to
satisfy their loss allocation obligations, FICC is proposing that
members would receive two (2) Business Days' notice of a loss
allocation, and members would be required to pay the requisite amount
no later than the second Business Day following issuance of such
notice.\19\ Members would have five (5) Business Days \20\ from the
issuance of the first Loss Allocation Notice in any round of an Event
Period to decide whether to withdraw from membership.
---------------------------------------------------------------------------

    \19\ FICC believes that allowing members two (2) Business Days
to satisfy their loss allocation obligations would provide Members
sufficient notice to arrange funding, if necessary, while allowing
FICC to address losses in a timely manner.
    \20\ Supra note 16.
---------------------------------------------------------------------------

    Each round would allow a Tier One Netting Member or Tier One
Member, as applicable, the opportunity to notify FICC of its election
to withdraw from membership after satisfaction of the losses allocated
in such round. Multiple Loss Allocation Notices may be issued with
respect to each round to allocate losses up to the round cap.
    Specifically, the first round and each subsequent round of loss
allocation would allocate losses up to a round cap of the aggregate of
all Loss Allocation Caps of those Tier One Netting Members or Tier One
Members, as applicable, included in the round. If a Tier One Netting
Member or Tier One Member, as applicable, provides notice of its
election to withdraw from membership, it would be subject to loss
allocation in that round, up to its Loss Allocation Cap. If the first
round of loss allocation does not fully cover FICC's losses, a second
round will be noticed to those members that did not elect to withdraw
from membership in the previous round; however, as noted above, the
amount of any second or subsequent

round cap may differ from the first or preceding round cap because
there may be fewer Tier One Netting Members or Tier One Members, as
applicable, in a second or subsequent round if Tier One Netting Members
or Tier One Members, as applicable, elect to withdraw from membership
with GSD or MBSD, as applicable, as provided in proposed Section 7b of
GSD Rule 4 or MBSD Rule 4, as applicable, following the first Loss
Allocation Notice in any round.
    Pursuant to the proposed rule change, in order to avail itself of
its Loss Allocation Cap, a Tier One Netting Member or Tier One Member,
as applicable, would need to follow the requirements in proposed
Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, which would
provide that the Tier One Netting Member or Tier One Member, as
applicable, must: (i) Specify in its Loss Allocation Withdrawal Notice
an effective date of withdrawal, which date shall not be prior to the
scheduled final settlement date of any remaining obligations owed by
the member to FICC, unless otherwise approved by FICC, and (ii) as of
the time of such member's submission of the Loss Allocation Withdrawal
Notice, cease submitting transactions to FICC for processing, clearance
or settlement, unless otherwise approved by FICC.
    The proposed rule changes are designed to enable FICC to continue
the loss allocation process in successive rounds until all of FICC's
losses are allocated. To the extent that the Loss Allocation Cap of a
Tier One Netting Member or Tier One Member, as applicable, exceeds such
member's Required Fund Deposit on the first day of an Event Period,
FICC may in its discretion retain any excess amounts on deposit from
the member, up to the Loss Allocation Cap of a Tier One Netting Member
or Tier One Member, as applicable.
    The proposed rule changes relating to capping withdrawing members'
loss allocation exposure and related changes to the withdrawal process
are set forth in proposed Sections 7 and 7b of GSD Rule 4 and Sections
7 and 7b of MBSD Rule 4, as further described below.
B. Changes To Align Loss Allocation Rules
    The proposed rule changes would align the loss allocation rules, to
the extent practicable and appropriate, of the three DTCC Clearing
Agencies so as to provide consistent treatment, especially for firms
that are participants of two or more DTCC Clearing Agencies. As
proposed, the loss allocation waterfall and certain related provisions,
e.g., returning a former member's Clearing Fund, would be consistent
across the DTCC Clearing Agencies to the extent practicable and
appropriate. The proposed rule changes of FICC that would align loss
allocation rules of the DTCC Clearing Agencies are set forth in
proposed Sections 1, 5, 6, 10, and 11 of GSD Rule 4 and MBSD Rule 4, as
further described below.
C. Clarifying Changes Relating to Loss Allocation
    The proposed rule changes are intended to make the provisions in
the Rules governing loss allocation more transparent and accessible to
members. In particular, FICC is proposing the following changes
relating to loss allocation to clarify members' obligations for
Declared Non-Default Loss Events.
    Aside from losses that FICC might face as a result of a Defaulting
Member Event, FICC could incur non-default losses incident to each
Division's clearance and settlement business.\21\ The GSD Rules and the
MBSD Rules currently permit FICC to apply Clearing Fund to non-default
losses.\22\ Section 5 of GSD Rule 4 and MBSD Rule 4 provides that the
use of Clearing Fund deposits is limited to satisfaction of losses or
liabilities of FICC, which includes losses or liabilities that are
otherwise incident to the operation of the clearance and settlement
business of FICC, although the application of Clearing Fund to such
losses or liabilities is more limited under MBSD Rule 4 when compared
to GSD Rule 4.\23\ Section 7(f) of GSD Rule 4 and MBSD Rule 4 provides
that any loss or liability incurred by the Corporation incident to its
clearance and settlement business arising other than from a Remaining
Loss shall be allocated among Tier One Netting Members or Tier One
Members, as applicable, ratably, in accordance with their Average
Required Clearing Fund Deposits.\24\
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    \21\ Non-default losses may arise from events such as damage to
physical assets, a cyber-attack, or custody and investment losses.
    \22\ Arguably there is an ambiguity created by the first
paragraph of Section 7 in both GSD Rule 4 and MBSD Rule 4, which
suggests that losses or liabilities may only be allocated in a
member default scenario, while Section 5 in both GSD Rule 4 and MBSD
Rule 4 makes it clear that the applicable Division's Clearing Fund
may be used to satisfy non-default losses.
    \23\ Section 5 of GSD Rule 4 provides that ``The use of the
Clearing Fund deposits shall be limited to satisfaction of losses or
liabilities of the Corporation . . . otherwise incident to the
clearance and settlement business of the Corporation . . .'' Supra
note 4.
    Section 5 of MBSD Rule 4 provides that ``The use of the Clearing
Fund deposits and assets and property on which the Corporation has a
lien on shall be limited to satisfaction of losses or liabilities of
the Corporation . . . otherwise incident to the clearance and
settlement business of the Corporation with respect to losses and
liabilities to meet unexpected or unusual requirements for funds
that represent a small percentage of the Clearing Fund . . .'' Supra
note 4.
    \24\ Section 7(f) of GSD Rule 4 provides that ``Any loss or
liability incurred by the Corporation incident to its clearance and
settlement business . . . arising other than from a Remaining Loss
(hereinafter, an ``Other Loss'') shall be allocated among Tier One
Netting Members, ratably, in accordance with the respective amounts
of their Average Required FICC Clearing Fund Deposits. Supra note 4.
     Section 7(f) of MBSD Rule 4 provides that ``Any loss or
liability incurred by the Corporation incident to its clearance and
settlement business . . . arising other than from a Remaining Loss
(hereinafter, an ``Other Loss''), shall be allocated among Tier One
Members, ratably, in accordance with the respective amounts of their
Average Required Clearing Fund Deposits. Supra note 4.
---------------------------------------------------------------------------

    If there is a failure of FICC following a non-default loss, such
occurrence would affect members in much the same way as a failure of
FICC following a Defaulting Member Event. Accordingly, FICC is
proposing rule changes to enhance the provisions relating to non-
default losses by clarifying members' obligations for such losses and
aligning the non-default loss provisions in the GSD Rules and the MBSD
Rules.
    Specifically, for both the GSD Rules and the MBSD Rules, FICC is
proposing enhancement of the governance around non-default losses that
would trigger loss allocation to Tier One Netting Members or Tier One
Members, as applicable, by specifying that the Board of Directors would
have to determine that there is a non-default loss that may be a
significant and substantial loss or liability that may materially
impair the ability of FICC to provide clearance and settlement services
in an orderly manner and will potentially generate losses to be
mutualized among the Tier One Netting Members or Tier One Members, as
applicable, in order to ensure that FICC may continue to offer
clearance and settlement services in an orderly manner. The proposed
rule change would provide that FICC would then be required to promptly
notify members of this determination (a ``Declared Non-Default Loss
Event''). In addition, FICC is proposing to better align the interest
of FICC with those of its members by stipulating a mandatory Corporate
Contribution apply to a Declared Non-Default Loss Event prior to any
allocation of the loss among members, as described above. Additionally,
FICC is proposing language to clarify members' obligations for Declared
Non-Default Loss Events.
    Under the proposal, FICC would clarify the Rules of both Divisions
to make clear that Tier One Netting Members or Tier One Members, as

applicable, are subject to loss allocation for non-default losses
(i.e., Declared Non-Default Loss Events under the proposal) and Tier
Two Members are not subject to loss allocation for non-default losses.
    The proposed rule changes relating to Declared Non-Default Loss
Events and members' obligations for such events are set forth in
proposed Section 7 of GSD Rule 4 and Section 7 of MBSD Rule 4, as
further described below.
D. Amending Language Regarding FICC's Use of MBSD Clearing Fund
    The proposed rule change would delete language currently in Section
5 of MBSD Rule 4 that limits certain uses by FICC of the MBSD Clearing
Fund to ``unexpected or unusual'' requirements for funds that represent
a ``small percentage'' of the MBSD Clearing Fund. FICC believes that
these limiting phrases (which appear in connection with FICC's use of
MBSD Clearing Fund to cover losses and liabilities incident to its
clearance and settlement business outside the context of an MBSD
Defaulting Member Event as well as to cover certain liquidity needs)
are vague and imprecise, and should be replaced in their entirety.
Specifically, FICC is proposing to delete the limiting language with
respect to FICC's use of MBSD Clearing Fund to cover losses and
liabilities incident to its clearance and settlement business outside
the context of an MBSD Defaulting Member Event so as to not have such
language be interpreted as impairing FICC's ability to access the MBSD
Clearing Fund in order to manage non-default losses. FICC is also
proposing to delete the limiting language with respect to FICC's use of
MBSD Clearing Fund to cover certain liquidity needs because the effect
of the limitation in this context is confusing and unclear.
    The proposed rule changes relating to FICC's use of MBSD Clearing
Fund are set forth in proposed Section 5 of MBSD Rule 4, as further
described below.
    The foregoing changes as well as other changes (including a number
of conforming and technical changes) that FICC is proposing in order to
improve the transparency and accessibility of the Rules are described
in detail below.
(ii) Detailed Description of the Proposed Rule Changes Related to Loss
Allocation

A. Proposed Changes to GSD Rule 4 (Clearing Fund and Loss Allocation)
and MBSD Rule 4 (Clearing Fund and Loss Allocation)

Overview of GSD Rule 4 and MBSD Rule 4
    GSD Rule 4 and MBSD Rule 4 currently address Clearing Fund
requirements and loss allocation obligations, as well as permissible
uses of the Clearing Fund. These Rules address the various Clearing
Fund calculations for each Division's Clearing Fund and set forth
rights, obligations and other aspects associated with each Division's
Clearing Fund, as well as each Division's loss allocation process. GSD
Rule 4 and MBSD Rule 4 are each currently organized into 12 sections.
Sections of these Rules that FICC is proposing to change are described
below.
Section 1 of GSD Rule 4 and MBSD Rule 4
    Currently, Section 1 of GSD Rule 4 and MBSD Rule 4 set forth the
requirement that each GSD Netting Member and each MBSD Clearing Member
make and maintain a deposit to the Clearing Fund at the minimum level
set forth in the respective Rule 4 and note that the timing of such
payment is set forth in another section of the respective Rule 4.
Current Section 1 of the respective rule also provides that the
deposits to the Clearing Fund will be held by FICC or its designated
agents. Current Section 1 of MBSD Rule 4 also defines the term
``Transaction'' for purposes of MBSD Rule 4 and references a Member's
obligation to replenish the deficit in its Required Fund Deposit if it
is charged by FICC under certain circumstances.
    FICC is proposing to rename the subheading of Section 1 of Rule 4
in both the GSD Rules and MBSD Rules from ``General'' to ``Required
Fund Deposits'' and to restructure the wording of the provisions for
clarity and readability.
    Under the proposed rule change, Section 1 of GSD Rule 4 and Section
1 of MBSD Rule 4 would continue to have the same provisions as they
relate to Netting Members or Clearing Members, as applicable, except
for the following: (i) The language throughout the sections would be
reorganized, streamlined and clarified, and (ii) language would be
added regarding additional deposits maintained by the Netting Members
or Clearing Members, as applicable, at FICC, and highlight for members
that such additional deposits would be deemed to be part of the
Clearing Fund and the member's Actual Deposit (as discussed below and
as defined in the proposed rule change) but would not be deemed to be
part of the member's Required Fund Deposit.
    The proposed language regarding maintenance of a member's Actual
Deposit would also make it clear that FICC will not be required to
segregate such deposit, but shall maintain books and records concerning
the assets that constitute each member's Actual Deposit.
    In addition, FICC proposes a technical change to update a cross
reference in Section 1 of GSD Rule 4 and MBSD Rule 4.
    Furthermore, in Section 1 of MBSD Rule 4, FICC is proposing to move
the definition of ``Transactions'' to proposed Section 2(a) of MBSD
Rule 4, where the first usage of ``Transactions'' in MBSD Rule 4
appears. FICC is also proposing to delete the last sentence in Section
1 of MBSD Rule 4, which references a Member's obligation to replenish
the deficit in its Required Fund Deposit if it is charged by FICC under
certain circumstances, because it would no longer be relevant under the
proposed rule change to Section 7 of MBSD Rule 4, as FICC would require
members to pay their loss allocation amounts instead of charging their
Required Fund Deposits for Clearing Fund losses.
Section 2 of GSD Rule 4 and MBSD Rule 4
    Current Section 2 of GSD Rule 4 and MBSD Rule 4 set forth more
detailed requirements pertaining to members' Required Fund Deposits.
FICC is proposing to rename the subheadings in these sections from
``Required Fund Deposit'' to ``Required Fund Deposit Requirements'' in
order to better reflect the purpose of this section.
    In addition, FICC is proposing to expand the definition of ``Legal
Risk'' in both the GSD and MBSD provisions (current Section 2(e) of GSD
Rule 4 and Section 2(f) of MBSD Rule 4) by deleting references to Legal
Risk being defined only in reference to a member's insolvency or
bankruptcy, as FICC believes that Legal Risk may arise outside the
context of an insolvency or bankruptcy event regarding a member, and
FICC should be permitted to adequately protect itself in those non-
insolvency/bankruptcy circumstances as well.
    For better organization of Rule 4, FICC is also proposing to
relocate the provision on minimum Clearing Fund cash requirements
(current Section 2(b)

of GSD Rule 4 and Section 2(d) of MBSD Rule 4) to the section in each
of GSD Rule 4 and MBSD Rule 4 dealing specifically with the form of
Clearing Fund deposits (proposed Section 3 of GSD Rule 4 and MBSD Rule
4). This would necessitate the re-lettering of the provisions in
Section 2. In addition, as stated above, the provision regarding the
definition of ``Transactions'' for purposes of MBSD Rule 4 would be
moved to proposed Section 2(a) from current Section 1.
    FICC is proposing technical changes to correct typographical errors
in current Section 2 of GSD Rule 4.
Sections 3, 3a and 3b of GSD Rule 4 and MBSD Rule 4
    Currently, Sections 3, 3a and 3b of GSD Rule 4 and MBSD Rule 4
address the permissible form of Clearing Fund deposits and contain
detailed requirements regarding each form. FICC is proposing changes to
improve the readability of these sections.
    In addition, for better organization of the subject matter, FICC is
proposing to move certain paragraphs from one section to another,
including (i) moving clauses (b) and (d) in current Section 2 of GSD
Rule 4 and MBSD Rule 4, respectively, to proposed Section 3 of GSD Rule
4 and MBSD Rule 4 and (ii) moving the last paragraph of current Section
3 in GSD Rule 4 and MBSD Rule 4 to proposed Section 3b of GSD Rule 4
and MBSD Rule 4.
    Under the proposed rule change, FICC is also proposing to update
the cash investment provision in Section 3a of GSD Rule 4 and MBSD Rule
4 to reflect the Clearing Agency Investment Policy adopted by FICC \25\
and to define Clearing Fund Cash as (i) cash deposited by a Netting
Member or Clearing Member, as applicable, as part of its Actual
Deposit, (ii) the proceeds of (x) any loans made to FICC secured by the
pledge by FICC of Eligible Clearing Fund Securities pledged to FICC or
(y) any sales of Eligible Clearing Fund Securities pledged to FICC,
(iii) cash receipts from any investment of, repurchase or reverse
repurchase agreements relating to, or liquidation of, Clearing Fund
assets, and (iv) cash payments on Eligible Letters of Credit. Lastly,
FICC is proposing technical changes to correct typographical errors in
current Section 3 of MBSD Rule 4 and current Section 3b of GSD Rule 4.
---------------------------------------------------------------------------

    \25\ See Securities Exchange Act Release No. 79528 (December 12,
2016), 81 FR 91232 (December 16, 2016) (SR-FICC-2016-005).
---------------------------------------------------------------------------

Section 4 of GSD Rule 4 and MBSD Rule 4
    Currently, Section 4 of GSD Rule 4 and MBSD Rule 4 address the
granting of a first priority perfected security interest by each
Netting Member or Clearing Member, as applicable, in all assets and
property placed by the member in the possession of FICC (or its agents
acting on its behalf). FICC is not proposing any substantive changes to
these sections except for streamlining the provisions for readability
and clarity, and adding ``Actual Deposit'' as a defined term to refer
to Eligible Clearing Fund Securities, funds and assets pledged to FICC
to secure any and all obligations and liabilities of a Netting Member
or a Clearing Member, as applicable, to FICC.
Section 5 of GSD Rule 4 and MBSD Rule 4
    Currently, Section 5 of GSD Rule 4 and MBSD Rule 4 describe the use
of each Division's Clearing Fund. FICC is proposing to rename the
subheading of this section from ``Use of Deposits and Payments'' to
``Use of Clearing Fund'' to better reflect the purpose of the section.
    Under the proposed rule change, FICC is also proposing changes to
streamline this section for clarity and readability and to align the
GSD Rules and MBSD Rules. Specifically, FICC is proposing to delete the
first paragraph of current Section 5 of GSD Rule 4 and MBSD Rule 4 and
replace it with clearer language that sets forth the permitted uses of
each Division's Clearing Fund. Specifically, the proposed Section 5 of
GSD Rule 4 and MBSD Rule 4 provides that each Division's Clearing Fund
would only be used by FICC (i) to secure each member's performance of
obligations to FICC, including, without limitation, each member's
obligations with respect to any loss allocations as set forth in
proposed Section 7 of GSD Rule 4 and MBSD Rule 4 and any obligations
arising from a Cross-Guaranty Agreement pursuant to GSD Rule 41 or MBSD
Rule 32, as applicable, or a Cross-Margining Agreement pursuant to GSD
Rule 43, (ii) to provide liquidity to FICC to meet its settlement
obligations, including, without limitation, through the direct use of
cash in the GSD Clearing Fund or MBSD Clearing Fund, as applicable, or
through the pledge or rehypothecation of pledged Eligible Clearing Fund
Securities in order to secure liquidity, and (iii) for investment as
set forth in proposed Section 3a of GSD Rule 4 and MBSD Rule 4.
    The current first paragraph of Section 5 of GSD Rule 4 and MBSD
Rule 4 provides that if FICC pledges, hypothecates, encumbers, borrows,
or applies any part of the respective Division's Clearing Fund deposits
to satisfy any liability, obligation, or liquidity requirements for
more than thirty (30) days, FICC, at the Close of Business on the 30th
day (or on the first Business Day thereafter) will consider the amount
used as an actual loss to the respective Division's Clearing Fund and
immediately allocate such loss in accordance with Section 7 of GSD Rule
4 or MBSD Rule 4, as applicable. As proposed, FICC would retain this
provision conceptually but replace it with clearer and streamlined
language that provides that each time FICC uses any part of the
respective Division's Clearing Fund for more than 30 calendar days to
provide liquidity to FICC to meet its settlement obligations,
including, without limitation, through the direct use of cash in the
Clearing Fund or through the pledge or rehypothecation of pledged
Eligible Clearing Fund Securities in order to secure liquidity, FICC,
at the Close of Business on the 30th calendar day (or on the first
Business Day thereafter) from the day of such use, would consider the
amount used but not yet repaid as a loss to the Clearing Fund incurred
as a result of a Defaulting Member Event and immediately allocate such
loss in accordance with proposed Section 7 of GSD Rule 4 or MBSD Rule
4, as applicable.
    The proposed rule change also includes deleting language currently
in Section 5 of MBSD Rule 4 that limits certain uses by FICC of the
MBSD Clearing Fund to ``unexpected or unusual'' requirements for funds
that represent a ``small percentage'' of the MBSD Clearing Fund. FICC
believes that these limiting phrases (which appear in connection with
FICC's use of MBSD Clearing Fund to cover losses and liabilities
incident to its clearance and settlement business outside the context
of an MBSD Defaulting Member Event as well as to cover certain
liquidity needs) are vague and imprecise, and should be replaced in
their entirety. Specifically, FICC is proposing to delete the limiting
language with respect to FICC's use of MBSD Clearing Fund to cover
losses and liabilities incident to its clearance and settlement
business outside of an MBSD Defaulting Member Event so as to not have
such language be interpreted as impairing FICC's ability to access the
MBSD Clearing Fund in order to manage non-default losses. FICC is also
proposing to delete the limiting language with respect to FICC's use of
MBSD Clearing Fund to cover certain liquidity needs because

the effect of the limitation in this context is confusing and unclear.
    In addition, FICC is proposing to delete the last paragraph in
current Section 5 of GSD Rule 4 and MBSD Rule 4 because these
paragraphs address the application of a member's deposits to the
applicable Clearing Fund to cover the allocation of a loss or liability
incurred by FICC. These paragraphs would no longer be relevant,
because, under the proposed Section 7 of GSD Rule 4 and MBSD Rule 4
(discussed below), FICC would not apply the member's deposit to the
Clearing Fund unless the member does not satisfy payment of its
allocated loss amount within the required timeframe. These paragraphs
also currently include provisions regarding other agreements, such as a
Cross-Guaranty Agreement, that pertain to a Defaulting Member, and such
provisions would now be covered by proposed Section 6 of GSD Rule 4 and
MBSD Rule 4.
Section 6 of GSD Rule 4 and MBSD Rule 4
    Currently, Section 6 of GSD Rule 4 and MBSD Rule 4 are reserved for
future use. FICC is proposing to use this section for provisions
relating to the application of deposits to the respective Division's
Clearing Fund and other amounts held by FICC to a Defaulting Member's
obligations.
    FICC is proposing to add a subheading of ``Application of Clearing
Fund Deposits and Other Amounts to Defaulting Members' Obligations'' to
Section 6 of GSD Rule 4 and MBSD Rule 4. Under the proposed rule
change, for better organization by subject matter, FICC is also
proposing to relocate certain provisions to these sections from the
respective current Section 7 of GSD Rule 4 and MBSD Rule 4, which
addresses FICC's application of Clearing Fund deposits and other assets
held by FICC securing a Defaulting Member's obligations to FICC.
    For additional clarity and for consistency with the loss allocation
rules of the other DTCC Clearing Agencies, FICC proposes to add a
provision which makes it clear that, if FICC applies a Defaulting
Member's Clearing Fund deposits, FICC may take any and all actions with
respect to the Defaulting Member's Actual Deposits, including
assignment, transfer, and sale of any Eligible Clearing Fund
Securities, that FICC determines is appropriate.
Sections 7, 7a and 7b of GSD Rule 4 and MBSD Rule 4
    Current Section 7 of GSD Rule 4 and MBSD Rule 4 contains FICC's
current loss allocation waterfall for losses or liabilities incurred by
FICC. With respect to any loss or liability incurred by FICC as the
result of the failure of a Defaulting Member to fulfill its obligations
to FICC, the loss allocation waterfall for each Division currently
provides:
    (i) Application of any Clearing Fund deposits and other collateral
held by FICC securing a Defaulting Member's obligations to FICC and
additional resources as are applicable to the Defaulting Member.
    (ii) If a loss or liability remains after the application of the
Defaulting Member's collateral and resources, FICC would apply up to
25% of FICC's existing retained earnings, or such higher amount as the
Board of Directors determines.
    (iii) If a loss or liability still remains after the application of
the retained earnings, FICC would apply the loss or liability to
members as follows:
    (a) If the remaining loss or liability is attributable to Tier One
Netting Members or Tier One Members, as applicable, then FICC will
allocate such loss or liability to Tier One Netting Members or Tier One
Members, as applicable, by assessing the Required Fund Deposit
maintained by each such member an amount up to $50,000, in an equal
basis per Tier One Netting Member or Tier One Member, as applicable.
    (b) If the remaining loss or liability is attributable to Tier Two
Members, then FICC will allocate such loss or liability to Tier Two
Members based upon their trading activity with the Defaulting Member
that resulted in a loss.
    (iv) If there is any loss or liability that still remains after the
application of (ii) and (iii) above that is attributable to Tier One
Netting Members or Tier One Members, as applicable, then FICC will
allocate such loss or liability among Tier One Netting Members or Tier
One Members, as applicable, ratably based on the amount of each Tier
One Netting Member's or Tier One Member's Required Fund Deposit and
based on the average daily level of such deposit over the prior twelve
(12) months (or such shorter period as may be available if the member
has not maintained a deposit over such time period).
    Current Section 7(f) of GSD Rule 4 and MBSD Rule 4 also provides
that Other Losses shall be allocated among Tier One Netting Members or
Tier One Members, as applicable, ratably in accordance with the
respective amounts of each Tier One Netting Member's or Tier One
Member's Required Fund Deposit and based on the average daily level of
such deposit over the prior twelve (12) months (or such shorter period
as may be available if the member has not maintained a deposit over
such time period).
    Currently, pursuant to Section 7(e) of GSD Rule 4, an Inter-Dealer
Broker Netting Member, or a Non-IDB Broker with respect to activity in
its Segregated Broker Account, will not be subject to an aggregate
allocation loss for any single loss-allocation event that exceeds $5
million. FICC believes that it is appropriate for GSD to retain this
cap under the proposed rule change because the Inter-Dealer Broker
Netting Members are required to limit their business as provided in
Section 8(e) of GSD Rule 3, which would in turn minimize the potential
losses or liabilities that could be incurred by FICC from Inter-Dealer
Broker Netting Members.\26\ FICC believes that it is also appropriate
for GSD to retain this cap under the proposed rule change for Non-IDB
Brokers because their activity in their respective Segregated Broker
Accounts would be subject to similar limitations as the Inter-Dealer
Broker Netting Members. However, FICC is proposing a technical change
to replace the term ``Segregated Broker Account'' with ``Segregated
Repo Account,'' which is the correct term defined in GSD Rule 1.
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    \26\ Pursuant to Section 8(e) of GSD Rule 3, an Inter-Dealer
Broker Netting Member is required to (A) limit its business to
acting exclusively as a broker, (B) conduct all of its business in
Repo Transactions with Netting Members, and (C) conduct at least 90
percent of its business in transactions that are not Repo
Transactions with Netting Members. If an Inter-Dealer Broker Netting
Member fails to comply with these requirements, then the Inter-
Dealer Broker Netting Member shall be considered by FICC as a Dealer
Netting Member. Supra note 4.
---------------------------------------------------------------------------

    Current Section 7(g) of GSD Rule 4 and MBSD Rule 4 further provides
that if the Required Fund Deposit of the member being allocated the
loss is not sufficient to satisfy its loss allocation obligation, the
member is required to deliver to FICC an amount that is necessary to
eliminate the deficiency by the Close of Business on the next Business
Day, or by the Close of Business on the Business Day of issuance of the
notification if so determined by FICC. Under the current Rules, a
member may elect to terminate its membership, which would limit its
loss allocation to the amount of its Required Fund Deposit for the
Business Day on which the notification of such loss allocation is
provided to the member. If the member does not elect to terminate its
membership and fails to satisfy its Required Fund Deposit within the
timeframe specified in the Rules, FICC will cease to act generally with
regard to such member pursuant to GSD Rules 21 and 22A or MBSD Rules 14

and 17, as applicable, and may take disciplinary action against such
member pursuant to GSD Rule 48 or MBSD Rule 38, as applicable.
    Current Section 7(h) of GSD Rule 4 and MBSD Rule 4 requires FICC to
promptly notify members and the Commission of the amount involved and
the causes if a Remaining Loss or Other Loss occurs. In addition,
current Section 7(i) of GSD Rule 4 and MBSD Rule 4 also provides that
any increase in Clearing Fund deposit as required by subsection (f) of
current Section 2 of GSD Rule 4 or provisions of MBSD Rule 4 regarding
special charges or other premiums will not be taken into account when
calculating loss allocation based on a GSD Member's Average Required
FICC Clearing Fund Deposit amount or an MBSD Member's Average Required
Fund Deposit amount, as applicable, under current Section 7 of GSD Rule
4 and MBSD Rule 4.
    Under the proposed rule change, FICC is proposing to rename the
subheading of Section 7 of GSD Rule 4 and MBSD Rule 4 to ``Loss
Allocation Waterfall, Off-the-Market Transactions.'' In addition, FICC
is proposing to restructure its loss allocation waterfall as described
below.
    For better organization of the subject matter, FICC is proposing to
move certain paragraphs from one section to another, including (i)
relocating the last sentence of current Section 7(h) of GSD Rule 4 and
MBSD Rule 4 regarding recovery of allocated losses or liabilities by
FICC to the fifth paragraph of proposed Section 7 of GSD Rule 4 and
MBSD Rule 4, (ii) relocating from current Section 7(a) of GSD Rule 4
and MBSD Rule 4 provisions which address FICC's application of Clearing
Fund deposits and other assets held by FICC securing a Defaulting
Member's obligations to FICC to proposed Section 6 of GSD Rule 4 and
MBSD Rule 4, (iii) relocating from current Section 7 of GSD Rule 4 to
proposed Section 6 of GSD Rule 4 the provision regarding FICC's right
to treat certain payments to an FCO under a Cross-Margining Guaranty as
a loss to be allocated, (iv) relocating the provisions in current
Section 7(i) of GSD Rule 4 and MBSD Rule 4 regarding certain increases
in Clearing Fund deposits not being taken into account when calculating
loss allocation so that such provisions would come right after the loss
allocation calculation provision, with an updated reference to proposed
renumbered Sections 2(d) and 2(e) in GSD Rule 4 and MBSD Rule 4,
respectively, and (v) relocating the provision regarding withdrawing
members reapplying to become members in the second paragraph of current
Section 7(g) of GSD Rule 4 and MBSD Rule 4 to come right after the
paragraph regarding the election of a Tier One Netting Member or Tier
One Member, as applicable, to withdraw from membership in proposed
Section 7 of GSD Rule 4 and MBSD Rule 4. Furthermore, in order to
enhance readability and clarity, FICC is proposing a number of changes
to streamline the language in these provisions.
    Under the proposal, Section 7 of GSD Rule 4 and MBSD Rule 4 would
make clear that the loss allocation waterfall applies to losses and
liabilities (i) relating to or arising out of a default of a member or
(ii) otherwise incident to the clearance and settlement business of
FICC (i.e., non-default losses). The loss allocation waterfall would be
triggered if FICC incurs a loss or liability relating to or arising out
of the default of a Defaulting Member that is not satisfied pursuant to
proposed Section 6 of GSD Rule 4 and MBSD Rule 4, as applicable, (a
``Defaulting Member Event'') or as a result of a Declared Non-Default
Loss Event.
    Under proposed Section 7 of GSD Rule 4 and MBSD Rule 4, the loss
allocation waterfall would begin with a corporate contribution from
FICC (``Corporate Contribution''), as is the case under the current
Rules, but in a different form than under the current Section 7 of GSD
Rule 4 and MBSD Rule 4 described above. Today, Section 7(b) of GSD Rule
4 and Section 7(c) of MBSD Rule 4 provide that, if FICC incurs any loss
or liability as the result of the failure of a Defaulting Member to
fulfill its obligations to FICC, FICC will contribute up to 25% of its
existing retained earnings (or such higher amount as the Board of
Directors shall determine), to such loss or liability; however, no
corporate contribution from FICC is currently required for losses
resulting other than those from Member impairments. Under the proposal,
FICC would add a proposed new Section 7a to GSD Rule 4 and MBSD Rule 4
with a subheading of ``Corporate Contribution'' and define FICC's
Corporate Contribution with respect to any loss allocation pursuant to
proposed Section 7 of GSD Rule 4 or MBSD Rule 4, whether arising out of
or relating to a Defaulting Member Event or a Declared Non-Default Loss
Event, as an amount that is equal to fifty (50) percent of the amount
calculated by FICC in respect of its General Business Risk Capital
Requirement as of the end of the calendar quarter immediately preceding
the Event Period.\27\ The proposed rule change would specify that
FICC's General Business Risk Capital Requirement, as defined in FICC's
Clearing Agency Policy on Capital Requirements,\28\ is, at a minimum,
equal to the regulatory capital that FICC is required to maintain in
compliance with Rule 17Ad-22(e)(15) under the Act.\29\
---------------------------------------------------------------------------

    \27\ Supra note 7.
    \28\ Supra note 8.
    \29\ Supra note 9.
---------------------------------------------------------------------------

    As proposed, if FICC applies the Corporate Contribution to a loss
or liability arising out of or relating to one or more Defaulting
Member Events or Declared Non-Default Loss Events relating to an Event
Period, then for any subsequent Event Periods that occur during the two
hundred fifty (250) Business Days thereafter,\30\ the Corporate
Contribution would be reduced to the remaining unused portion of the
Corporate Contribution amount that was applied for the first Event
Period. Proposed Section 7a of both GSD Rule 4 and MBSD Rule 4 would
require FICC to notify members of any such reduction to the Corporate
Contribution.
---------------------------------------------------------------------------

    \30\ Supra note 11.
---------------------------------------------------------------------------

    Proposed Section 7a to GSD Rule 4 and MBSD Rule 4 would also make
clear that there would be one FICC Corporate Contribution, the amount
of which would be available to both Divisions and would be applied
against a loss or liability in either Division in the order in which
such loss or liability occurs, i.e., FICC would not have two separate
Corporate Contributions, one for each Division. As proposed, in the
event of a loss or liability relating to an Event Period, whether
arising out of or relating to a Defaulting Member Event or a Declared
Non-Default Loss Event, attributable to only one Division, the
Corporate Contribution would be applied to that Division up to the
amount then available. Under the proposal, if a loss or liability
relating to an Event Period, whether arising out of or relating to a
Defaulting Member Event or a Declared Non-Default Loss Event, occurs
simultaneously at both Divisions, the Corporate Contribution would be
applied to the respective Divisions in the same proportion that the
aggregate Average RFDs of all members in that Division bears to the
aggregate Average RFDs of all members in both Divisions.\31\
---------------------------------------------------------------------------

    \31\ Supra note 12.
---------------------------------------------------------------------------

    Currently, the Rules do not require FICC to contribute its retained
earnings to losses and liabilities other than those from member
defaults. Under the proposal, FICC would expand the application of its
corporate contribution

beyond losses and liabilities as the result of the failure of a
Defaulting Member to fulfill its obligations to FICC. The proposed
Corporate Contribution would apply to losses or liabilities relating to
or arising out of Defaulting Member Events and Declared Non-Default
Loss Events, and would be a mandatory loss contribution by FICC prior
to any allocation of the loss among the applicable Division's members.
    Current Section 7(b) of GSD Rule 4 and Section 7(c) of MBSD Rule 4
provide FICC the option to contribute amounts higher than the specified
percentage of retained earnings as determined by the Board of
Directors, to any loss or liability incurred by FICC as the result of
the failure of a Defaulting Member to fulfill its obligations to FICC.
This option would be retained and expanded under the proposal to also
cover non-default losses. Proposed Section 7a of GSD Rule 4 and MBSD
Rule 4 would provide that nothing in the Rules would prevent FICC from
voluntarily applying amounts greater than the Corporate Contribution
against any FICC loss or liability, whether a Defaulting Member Event
or a Declared Non-Default Loss Event, if the Board of Directors, in its
sole discretion, believes such to be appropriate under the factual
situation existing at the time.
    Proposed Section 7 of GSD Rule 4 and MBSD Rule 4 would provide that
FICC shall apply the Corporate Contribution to losses and liabilities
that arise out of or relate to one or more Defaulting Member Events
and/or (ii) Declared Non-Default Loss Events that occur within an Event
Period. The proposed rule change also provides that if losses and
liabilities with respect to such Event Period remain unsatisfied
following application of the Corporate Contribution, FICC would
allocate such losses and liabilities to members, as described below.
    As proposed, Section 7 of GSD Rule 4 and MBSD Rule 4 would retain
the differentiation in allocating losses to Tier One Netting Members or
Tier One Members, as applicable, and Tier Two Members. Specifically, as
is the case today, losses or liabilities that arise out of or relate to
one or more Defaulting Member Events would be attributable to Tier One
Netting Members or Tier One Members, as applicable, and Tier Two
Members, while losses or liabilities that arise out of or relate to one
or more Declared Non-Default Loss Events would only be attributable to
Tier One Netting Members or Tier One Members, as applicable. Tier Two
Members would not be subject to loss allocation with respect to
Declared Non-Default Loss Events.
    Under the proposal, FICC would delete the provision in current
Section 7(h) of GSD Rule 4 and MBSD Rule 4 that requires FICC to
promptly notify members and the Commission of the amounts involved and
the causes if a Remaining Loss or Other Loss occurs because such
notification would no longer be necessary under the proposed rule
change. Under the proposed rule change, FICC would notify members
subject to loss allocation of the amounts being allocated to them in
one or more Loss Allocation Notices for both Defaulting Member Events
and Declared Non-Default Loss Events. As such, in order to conform to
the proposed rule change, FICC is proposing to eliminate the
notification to members regarding the amounts involved and the causes
if a Remaining Loss or Other Loss occurs that is required under current
Section 7(h) of GSD Rule 4 and MBSD Rule 4. FICC is also proposing to
delete the notification to the Commission regarding the amounts
involved and the causes if a Remaining Loss or Other Loss occurs as
required in the same section. While as a practical matter, FICC would
notify the Commission of a decision to loss allocate, FICC does not
believe such notification needs to be specified in the Rules.
    In addition, FICC is proposing to clarify the provision related to
Off-the-Market Transactions so that it is clear that loss or liability
of FICC in connection with the close-out or liquidation of an Off-the-
Market Transaction in the portfolio of a Defaulting Member would be
allocated to the Member that was the counterparty to such transaction.
    Tier One Netting Members/Tier One Members:
    For Tier One Netting Members or Tier One Members, as applicable,
proposed Section 7 of GSD Rule 4 and MBSD Rule 4 would establish the
concept of an ``Event Period'' to provide for a clear and transparent
way of handling multiple loss events occurring in a period of ten (10)
Business Days, which would be grouped into an Event Period.\32\ As
stated above, both Defaulting Member Events or Declared Non-Default
Loss Events could occur within the same Event Period.
---------------------------------------------------------------------------

    \32\ Supra note 14.
---------------------------------------------------------------------------

    Under the proposal, an Event Period with respect to a Defaulting
Member Event would begin on the day FICC notifies members that it has
ceased to act for a Defaulting Member (or the next Business Day, if
such day is not a Business Day). In the case of a Declared Non-Default
Loss Event, an Event Period would begin on the day that FICC notifies
members of the determination by the Board of Directors that the
applicable loss or liability incident to the clearance and settlement
business of FICC may be a significant and substantial loss or liability
that may materially impair the ability of FICC to provide clearance and
settlement services in an orderly manner and will potentially generate
losses to be mutualized among Tier One Netting Members or Tier One
Members, as applicable, in order to ensure that FICC may continue to
offer clearance and settlement services in an orderly manner (or the
next Business Day, if such day is not a Business Day). If a subsequent
Defaulting Member Event or Declared Non-Default Loss Event occurs
during an Event Period, any losses or liabilities arising out of or
relating to any such subsequent event would be resolved as losses or
liabilities that are part of the same Event Period, without extending
the duration of such Event Period.
    The proposed rule change to Section 7 of GSD Rule 4 and MBSD Rule 4
would clarify that all Tier One Netting Members or Tier One Members, as
applicable, would be subject to loss allocation for losses and
liabilities relating to or arising out of a Declared Non-Default Loss
Event; however, in the case of losses and liabilities relating to or
arising out of a Defaulting Member Event, only non-defaulting Tier One
Netting Members or Tier One Members, as applicable, would be subject to
loss allocation. In addition, FICC is proposing to clarify that after a
first round of loss allocations with respect to an Event Period, only
Tier One Netting Members or Tier One Members, as applicable, that have
not submitted a Loss Allocation Withdrawal Notice in accordance with
proposed Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, would
be subject to further loss allocations with respect to that Event
Period. FICC is also proposing that FICC would notify Tier One Netting
Members or Tier One Members, as applicable, subject to loss allocation
of the amounts being allocated to them (``Loss Allocation Notice'') in
successive rounds of loss allocations.
    Under the proposed rule change, a loss allocation ``round'' would
mean a series of loss allocations relating to an Event Period, the
aggregate amount of which is limited by the round cap. When the
aggregate amount of losses allocated in a round equals the round cap,
any additional losses relating to the applicable Event Period would be
allocated in one or more subsequent rounds, in each case subject to a
round cap for that round. FICC may continue

the loss allocation process in successive rounds until all losses from
the Event Period are allocated among Tier One Netting Members or Tier
One Members, as applicable, that have not submitted a Loss Allocation
Withdrawal Notice in accordance with proposed Section 7b of GSD Rule 4
or MBSD Rule 4.
    As proposed, each loss allocation would be communicated to the Tier
One Netting Members or Tier One Members, as applicable, by the issuance
of a Loss Allocation Notice. Each Loss Allocation Notice would specify
the relevant Event Period and the round to which it relates. The first
Loss Allocation Notice in any first, second, or subsequent round would
expressly state that such Loss Allocation Notice reflects the beginning
of the first, second, or subsequent round, as the case may be, and that
each Tier One Netting Member or Tier One Member, as applicable, in that
round has five (5) Business Days from the issuance of such first Loss
Allocation Notice for the round to notify FICC of its election to
withdraw from membership with GSD or MBSD, as applicable, pursuant to
proposed Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, and
thereby benefit from its Loss Allocation Cap.\33\
---------------------------------------------------------------------------

    \33\ Supra note 16.
---------------------------------------------------------------------------

    Proposed Section 7 of GSD Rule 4 and MBSD Rule 4 would also retain
the requirement of loss allocation among Tier One Netting Members or
Tier One Members, as applicable, if a loss or liability remains after
the application of the Corporate Contribution, as described above. In
contrast to the current Section 7 where FICC would assess the Required
Fund Deposits of Tier One Netting Members or Tier One Members, as
applicable, to allocate losses, under the proposal, FICC would require
Tier One Netting Members or Tier One Members, as applicable, to pay
their loss allocation amounts (leaving their Required Fund Deposits
intact).\34\ Loss allocation obligations would continue to be
calculated based upon a Tier One Netting Member's or Tier One Member's,
as applicable, pro rata share of losses and liabilities (although the
pro rata share would be calculated differently than it is today), and
Tier One Netting Members or Tier One Members, as applicable, would
still retain the ability to voluntarily withdraw from membership and
cap their loss allocation obligation (although the loss allocation
obligation would also be calculated differently than it is today).
---------------------------------------------------------------------------

    \34\ FICC believes that shifting from the two-step methodology
of applying the respective Division's Clearing Fund and then
requiring members to immediately replenish it to requiring direct
payment would increase efficiency, while preserving the right to
charge the member's Clearing Fund deposits in the event the member
does not timely pay. Such a failure to pay would trigger recourse to
the Clearing Fund deposits of the member under proposed Section 6 of
GSD Rule 4 or MBSD Rule 4, as applicable. In addition, this change
would provide greater stability for FICC in times of stress by
allowing FICC to retain the respective Division's Clearing Fund, its
critical pre-funded resource, while charging loss allocations.
---------------------------------------------------------------------------

    As proposed, each such member's pro rata share of losses and
liabilities to be allocated in any round would be equal to (i) the
member's Average RFD, divided by (ii) the sum of the Average RFD
amounts of all members subject to loss allocation in such round. Each
such member would have a maximum payment obligation with respect to any
loss allocation round that would be equal to the greater of (x) its
Required Fund Deposit on the first day of the applicable Event Period
or (y) its Average RFD (such amount would be each member's ``Loss
Allocation Cap''). Therefore, the sum of the Loss Allocation Caps of
the members subject to loss allocation would constitute the maximum
amount that FICC would be permitted to allocate in each round. FICC
would retain the loss allocation limit of $5 million for Inter-Dealer
Broker Netting Members, or Non-IDB Brokers with respect to activities
in their Segregated Broker Accounts, as discussed above.
    As proposed, Section 7 of GSD Rule 4 and MBSD Rule 4, would also
provide that, to the extent that a Tier One Netting Member's or Tier
One Member's, as applicable, Loss Allocation Cap exceeds such member's
Required Fund Deposit on the first day of the applicable Event Period,
FICC may, in its discretion, retain any excess amounts on deposit from
the member, up to the Loss Allocation Cap of the Tier One Netting
Member or Tier One Member, as applicable.
    As proposed, Tier One Netting Members or Tier One Members, as
applicable, would have two (2) Business Days after FICC issues a first
round Loss Allocation Notice to pay the amount specified in any such
notice.\35\ On a subsequent round (i.e., if the first round did not
cover the entire loss of the Event Period because FICC was only able to
allocate up to the round cap), these members would also have two (2)
Business Days after notice by FICC to pay their loss allocation amounts
(again subject to their Loss Allocation Caps), unless the members have
notified (or will timely notify) FICC of their election to withdraw
from membership with respect to a prior loss allocation round.
---------------------------------------------------------------------------

    \35\ Supra note 19.
---------------------------------------------------------------------------

    Under the proposal, if a Tier One Netting Member or Tier One
Member, as applicable, fails to make its required payment in respect of
a Loss Allocation Notice by the time such payment is due, FICC would
have the right to proceed against such member as a Defaulting Member
that has failed to satisfy an obligation in accordance with proposed
Section 6 of GSD Rule 4 or MBSD Rule 4 described above. Members who
wish to withdraw from membership would be required to comply with the
requirements in proposed Section 7b of GSD Rule 4 and MBSD Rule 4,
described further below. Specifically, proposed Section 7 of GSD Rule 4
and MBSD Rule 4 would provide that if, after notifying FICC of its
election to withdraw from membership pursuant to proposed Section 7b of
GSD Rule 4 or MBSD Rule 4, as applicable, the Tier One Netting Member
or Tier One Member, as applicable, fails to comply with the provisions
of proposed Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, its
notice of withdrawal would be deemed void and any further losses
resulting from the applicable Event Period may be allocated against it
as if it had not given such notice.
    FICC is proposing to delete the provisions in the current GSD Rule
4 and MBSD Rule 4 that require FICC to assess the Required Fund Deposit
maintained by each Tier One Netting Member or Tier One Member, as
applicable, an amount up to $50,000, in an equal basis per such member,
before allocating losses to Tier One Netting Members or Tier One
Members, as applicable, ratably, in accordance with each such member's
Required Fund Deposit and Average Required FICC Clearing Fund Deposit
or Average Required Clearing Fund Deposit, as applicable. FICC believes
that in the event of a loss or liability, this assessment is unlikely
to alleviate the need for loss mutualization and creates an unnecessary
administrative burden for each Division. FICC believes that moving
straight to the loss mutualization described herein would be more
practical. This proposed change would also streamline each Division's
loss allocation waterfall processes and align such processes with those
of the other DTCC Clearing Agencies.
    Tier Two Members:
    FICC is not proposing any substantive change to the provisions
regarding Tier Two Members in current Section 7 of GSD Rule 4 and MBSD
Rule 4, except to (i) add a subheading of ``Tier Two Members'' in the
beginning of these provisions for ease of identification and (ii) add a
paragraph that makes it clear that if a Tier Two Member fails to make

its required payment in respect of a Loss Allocation Notice by the time
such payment is due, FICC would have the right to proceed against such
member as a Defaulting Member that has failed to satisfy an obligation
in accordance with proposed Section 6 of GSD Rule 4 or MBSD Rule 4
described above, consistent with the proposed change regarding Tier One
Netting Members or Tier One Members, as applicable.
    Withdrawal from Membership:
    Proposed Section 7b of GSD Rule 4 and MBSD Rule 4 would include the
provisions regarding withdrawal from membership currently covered by
Section 7(g) of GSD Rule 4 and MBSD Rule 4. FICC believes that
relocating the provisions on withdrawal from membership as it pertains
to loss allocation, so that it comes right after the section on the
loss allocation waterfall, would provide for the better organization of
GSD Rule 4 and MBSD Rule 4. As proposed, the subheading for Section 7b
of GSD Rule 4 and MBSD Rule 4 would read ``Withdrawal Following Loss
Allocation.''
    Currently, Section 7(g) of GSD Rule 4 and MBSD Rule 4 provides that
a member may, pursuant to current Section 13 of GSD Rule 3 or MBSD Rule
3, notify FICC by the Close of Business on the Business Day on which a
payment in an amount necessary to cover losses allocated to such member
after the application of its Required Fund Deposit is due, of its
election to terminate its membership and thereby avail itself of a cap
on loss allocation, which is currently its Required Fund Deposit as
fixed on the Business Day the pro rata charge loss allocation
notification is provided to such member.
    As stated above, under the proposed rule change, Section 7 of GSD
Rule 4 and MBSD Rule 4 would provide that a Tier One Netting Member or
a Tier One Member, as applicable, who wishes to withdraw from
membership in respect of a loss allocation must provide notice of its
election to withdraw (``Loss Allocation Withdrawal Notice'') within
five (5) Business Days from the issuance of the first Loss Allocation
Notice in any round.\36\ In order to avail itself of its Loss
Allocation Cap, such member would need to follow the requirements in
proposed Section 7b of GSD Rule 4 and MBSD Rule 4, as applicable, which
would provide that such member must: (i) Specify in its Loss Allocation
Withdrawal Notice an effective date for withdrawal from membership,
which date shall not be prior to the scheduled final settlement date of
any remaining obligations owed by the member to FICC, unless otherwise
approved by FICC, and (ii) as of the time of such member's submission
of the Loss Allocation Withdrawal Notice, cease submitting transactions
to FICC for processing, clearance or settlement, unless otherwise
approved by FICC.
---------------------------------------------------------------------------

    \36\ Supra note 16.
---------------------------------------------------------------------------

    FICC is proposing to include a sentence in proposed Section 7b of
GSD Rule 4 and MBSD Rule 4 to make it clear that if the Tier One
Netting Member or Tier One Member, as applicable, fails to comply with
the requirements set forth in that section, its Loss Allocation
Withdrawal Notice will be deemed void, and such member will remain
subject to further loss allocations pursuant to proposed Section 7 of
GSD Rule 4 and MBSD Rule 4 as if it had not given such notice.
    For better organization of the subject matter, FICC is also
proposing to move the provision that covers members' obligations to
eliminate any deficiency in their Required Fund Deposits from the last
sentence in the first paragraph of current Section 7(g) of GSD Rule 4
and MBSD Rule 4 to proposed Section 9 of GSD Rule 4 and MBSD Rule 4.
Section 8
    As proposed, Section 8 of GSD Rule 4 and MBSD Rule 4 would cover
the provisions on the return of a member's Clearing Fund deposit that
are currently covered by Section 10 of GSD Rule 4 and MBSD Rule 4.
Proposed Section 8's subheading would be ``Return of Members' Clearing
Fund Deposits.''
    FICC is proposing changes to streamline and enhance the clarity and
readability of this section, including adding language to clarify that
a member's obligations to FICC would include both matured as well as
contingent obligations, but is otherwise retaining the substantive
provisions of this section.
Section 9
    FICC is proposing to renumber Section 8 of GSD Rule 4 and MBSD Rule
4, which addresses the timing of members' payment of the respective
Division's Clearing Fund. Under the proposal, this section would be
renumbered as Section 9 of GSD Rule 4 and MBSD Rule 4 and retitled to
``Initial Required Fund Deposit and Changes in Members' Required Fund
Deposits'' to better reflect the subject matter of this section.
    Currently, Section 8 of GSD Rule 4 and MBSD Rule 4 requires members
to satisfy any increase in their Required Fund Deposit requirement
within such time as FICC requires. FICC is proposing to clarify that at
the time the increase becomes effective, the member's obligations to
FICC will be determined in accordance with the increased Required Fund
Deposit whether or not the member has satisfied such increased amount.
FICC is also proposing to add language to clarify that (i) if FICC
applies a GSD Netting Member's or an MBSD Clearing Member's Clearing
Fund deposits as permitted pursuant to GSD Rule 4 or MBSD Rule 4, as
applicable, FICC may take any and all actions with respect to the GSD
Netting Member's or MBSD Clearing Member's Actual Deposit, including
assignment, transfer, and sale of any Eligible Clearing Fund
Securities, that FICC determines is appropriate, and (ii) if such
application results in any deficiency in the GSD Netting Member's or
MBSD Clearing Member's, as applicable, Required Fund Deposit, such
member shall immediately replenish it. These clarifications are
consistent with the Divisions' rights as set forth in current Sections
4 and 11 of GSD Rule 4 and current Sections 4 and 11 of MBSD Rule 4. In
addition, the provisions in clause (ii) of the previous sentence is
consistent with the requirements in current Section 1 of GSD Rule 4 and
MBSD Rule 4 that a member must maintain its Required Fund Deposit.
    As discussed above, for better organization of the subject matter,
FICC is proposing to move the provision that covers members'
obligations to eliminate any deficiency in their Required Fund Deposits
from the last sentence in the first paragraph of current Section 7(g)
of GSD Rule 4 and MBSD Rule 4 to proposed Section 9 of GSD Rule 4 and
MBSD Rule 4.
Section 10
    Currently, Section 9 of GSD Rule 4 and MBSD Rule 4 addresses
situations where a member has excess on deposit in the Clearing Fund
(i.e., amounts above its Required Fund Deposit). The current provision
provides that FICC will notify a member of any Excess Clearing Fund
Deposit as FICC determines from time to time. Upon the request of a
member, FICC will return an excess amount requested by a member that
follows the formats and timeframe established by FICC for such request.
The current provision makes clear that FICC may, in its discretion,
withhold any or all of a member's Excess Clearing Fund Deposit (i) if
the member has an outstanding payment obligation to FICC, (ii) if FICC
determines that the member's anticipated activity over the next 90
calendar days may reasonably be expected to be materially different
than the prior 90 calendar days, or (iii) if the

member has been placed on the Watch List. Section 9 also makes clear
that the return of an Excess Clearing Fund Deposit to any member is
subject to (i) such return of Excess Clearing Fund Deposit not being
done in a manner that would cause the member to violate any other
section of the Rules, (ii) such return not reducing the amount of the
member's Cross-Guaranty Repayment Deposit to the Clearing Fund below
the amount required to be maintained by the member pursuant to GSD Rule
41 or MBSD Rule 32, as applicable, and (iii) with respect to GSD
Members only, such return not reducing the amount of a GSD Member's
Cross-Margining Repayment Deposit to the Clearing Fund below the amount
required to be maintained by the GSD Member pursuant to GSD Rule 43.
    FICC is proposing to renumber Section 9 as Section 10 for both GSD
Rule 4 and MBSD Rule 4 and to retitle its subheading to ``Excess
Clearing Fund Deposits'' to better reflect the subject matter of the
provisions. FICC is not proposing any changes to this section except to
streamline and clarify the provisions as well as to align GSD Rule 4
and MBSD Rule 4, including adding a sentence to clarify that nothing in
this section limits FICC's rights under Section 7 of GSD Rule 3 or
Section 6 of MBSD Rule 3, as applicable.
Section 11
    Current Section 11 of GSD Rule 4 and MBSD Rule 4 provides that FICC
has certain rights with respect to the Clearing Fund. FICC is proposing
to add a sentence which would make it clear that GSD Rule 4 or MBSD
Rule 4, as applicable, would govern in the event of any conflict or
inconsistency between such rule and any agreement between FICC and any
member. FICC believes that this proposed change would facilitate
members' understanding of the Rules and their obligations thereunder.
It would also align the Rules with the Rules and Procedures of NSCC so
as to provide consistent treatment for firms that are members of both
FICC and NSCC.\37\ Furthermore, in order to enhance the readability and
clarity, FICC is proposing a number of changes to streamline the
language in this section.
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    \37\ See Section 12 of Rule 4 in NSCC's Rules and Procedures,
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
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(ii) Other Proposed Rule Changes
    FICC is proposing changes to GSD Rule 1 (Definitions), GSD Rule 3
(Ongoing Membership Requirements), GSD Rule 3A (Sponsoring Members and
Sponsored Members), GSD Rule 3B (Centrally Cleared Institutional
Triparty Service), GSD Rule 13 (Funds-Only Settlement), GSD Rule 18
(Special Provisions for Repo Transactions), GSD Rule 21A (Wind-Down of
a Netting Member), GSD Rule 22B (Corporation Default), GSD Rule 41
(Cross Guaranty Agreements), GSD Rule 43 (Cross-Margining
Arrangements), GSD Board Interpretations and Statements of Policy, and
GSD Interpretive Guidance with Respect to Watch List Consequences. FICC
is also proposing changes to MBSD Rule 1 (Definitions), MBSD Rule 3
(Ongoing Membership Requirements), MBSD Rule 5 (Trade Comparison), MBSD
Rule 11 (Cash Settlement), MBSD Rule 17A (Corporation Default), MBSD
Rule 32 (Cross Guaranty Agreements), and MBSD Interpretive Guidance
with Respect to Watch List Consequences. FICC is proposing changes to
these Rules in order to conform them with the proposed changes to GSD
Rule 4 and MBSD Rule 4, as applicable, as well as to make certain
technical changes to these Rules, as further described below.
Adding Defined Terms
    Specifically, FICC is proposing to add the following defined terms
to GSD Rule 1, in alphabetical order: Actual Deposit, Average RFD, CCIT
Member Termination Date, CCIT Member Voluntary Termination Notice,
Clearing Fund Cash, Corporate Contribution, Declared Non-Default Loss
Event, Defaulting Member Event, Event Period, Excess Clearing Fund
Deposit, Former Sponsored Members, Lender, Loss Allocation Cap, Loss
Allocation Notice, Loss Allocation Withdrawal Notice, Sponsored Member
Termination Date, Sponsored Member Voluntary Termination Notice,
Sponsoring Member Termination Date, Sponsoring Member Voluntary
Termination Notice, Termination Date, and Voluntary Termination Notice.
    FICC is also proposing to add the following defined terms to MBSD
Rule 1, in alphabetical order: Actual Deposit, Average RFD, Clearing
Fund Cash, Corporate Contribution, Declared Non-Default Loss Event,
Defaulting Member Event, Event Period, Excess Clearing Fund Deposit,
Lender, Loss Allocation Cap, Loss Allocation Notice, Loss Allocation
Withdrawal Notice, Termination Date, and Voluntary Termination Notice.
Technical Changes
    In addition, FICC is proposing technical changes (i) to delete the
defined term ``The Corporation'' in GSD Rule 1 and replace it with
``Corporation'' in GSD Rule 1, (ii) to correct cross-references in
Section 8 of MBSD Rule 5 and the definition of ``Legal Risk'' in GSD
Rule 1, (iii) to update references to sections that would be changed
under this proposal in Section 12 of GSD Rule 3, Sections 10 and 12(a)
of GSD Rule 3A, Section 3(f) of GSD Rule 18, GSD Rule 21A, Sections
3(a), 3(b) and 4 of GSD Rule 41, Section 6 of GSD Rule 43, GSD
Interpretive Guidance with Respect to Watch List Consequences, Sections
11, 14, and 15 of MBSD Rule 3, Section 3(b) of MBSD Rule 32, and MBSD
Interpretive Guidance with Respect to Watch List Consequences, (iv) to
update the reference to a subheading that would be changed under this
proposal in Section 7 of GSD Rule 3B, and (v) to delete a reference to
the Cross-Margining Agreement between FICC and NYPC that is no longer
in effect. FICC believes that these proposed technical changes would
ensure the Rules remain clear and accurate, which would in turn allow
Members to readily understand their obligations under the Rules.
Voluntary Termination
    FICC is also proposing changes to the voluntary termination
provisions in GSD Rule 3, GSD Rule 3A, GSD Rule 3B, and MBSD Rule 3 in
order to ensure that termination provisions in the GSD Rules and MBSD
Rules, whether voluntary or in response to a loss allocation, are
consistent with one another to the extent appropriate.
    Currently, the voluntary termination provisions in GSD Rule 3, GSD
Rule 3A, GSD Rule 3B, and MBSD Rule 3 generally provide that a member
may elect to terminate its membership by providing FICC with 10 days
written notice of such termination. Such termination will not be
effective until accepted by FICC, which shall be evidenced by a notice
to FICC's members announcing the member's termination and the effective
date of the termination, and that the terminating member will no longer
be eligible to submit transactions to FICC as of the date of
termination. This provision also provides that a member's voluntary
termination of membership shall not affect its obligations to FICC.
    Where appropriate, FICC is proposing changes to align the voluntary
termination provisions in Section 13 of GSD Rule 3, Sections 2(i) and
3(e) of GSD Rule 3A, Section 6 of GSD Rule 3B, and Section 14 of MBSD
Rule 3 with the proposed new Section 7b of GSD Rule 4 and MBSD Rule 4,
given that they all address termination of membership. Specifically, in
Section 13 of GSD Rule 3, FICC is proposing that when a GSD

Member elects to voluntarily terminate its membership by providing FICC
a written notice of such termination (``Voluntary Termination
Notice''), the GSD Member must specify in its Voluntary Termination
Notice an effective date of its withdrawal from membership
(``Termination Date''); provided, however, if the GSD Member is
terminating its membership in GSD (i.e., not terminating its membership
just in the Netting System), the Termination Date shall not be prior to
the scheduled final settlement date of any remaining obligation owed by
the GSD Member to FICC as of the time such Voluntary Termination Notice
is submitted to FICC, unless otherwise approved by FICC.
    The proposed change to Section 13 of GSD Rule 3 would also provide
that if any trade is submitted to FICC either by the withdrawing GSD
Member or its authorized submitter that is scheduled to settle on or
after the Termination Date, the GSD Member's Voluntary Termination
Notice would be deemed void and the GSD Member would remain subject to
the GSD Rules as if it had not given such notice. Furthermore, FICC is
proposing to add a sentence to Section 13 of GSD Rule 3 to refer GSD
Members to Section 8 of GSD Rule 4 regarding provisions on the return
of a GSD Member's Clearing Fund deposit and to specify that if an Event
Period were to occur after a Tier One Netting Member has submitted its
Voluntary Termination Notice but prior to the Termination Date, in
order for such Tier One Netting Member to benefit from its Loss
Allocation Cap pursuant to Section 7 of GSD Rule 4, the Tier One
Netting Member would need to comply with the provisions of Section 7b
of GSD Rule 4 and submit a Loss Allocation Withdrawal Notice, which
notice, upon submission, would supersede and void any pending Voluntary
Termination Notice previously submitted by the Tier One Netting Member.
    Parallel changes are also being proposed to Section 2(i) of GSD
Rule 3A and Section 14 of MBSD Rule 3 with additional language in
Section 2(i) of GSD Rule 3A and Section 14 of MBSD Rule 3 making it
clear that the acceptance by FICC of a member's Voluntary Termination
Notice shall be no later than ten (10) Business Days after the receipt
of such notice from the member, in order to provide certainty to
members as well as to align these sections with the current Section 13
of GSD Rule 3.
    With respect to Section 3(e) of GSD Rule 3A and Section 6 of GSD
Rule 3B, changes similar to the ones described above in the previous
paragraph are also being proposed for Sponsored Members and CCIT
Members, except there would be no references to the return of a
member's Clearing Fund deposits and to Loss Allocation Caps because
they would not apply to these member types. In addition, FICC is
proposing a technical change in Section 6 of GSD Rule 3B to reflect a
defined term that would be changed under this proposal.
Other MBSD Proposed Rule Changes
    FICC is proposing to delete Section 15 of MBSD Rule 3 because FICC
believes that this section is akin to a loss allocation provision and
therefore would no longer be necessary under the proposed rule change,
as the scenarios envisioned by Section 15 of MBSD Rule 3 would be
governed by the proposed loss allocation provisions in MBSD Rule 4.
Other GSD Proposed Rule Changes
    Under the proposal, Section 12(c) of GSD Rule 3A would also be
revised to incorporate the concept of the Loss Allocation Cap and to
reference the applicable proposed sections in GSD Rule 4 that would
apply when a Sponsoring Member elects to terminate its status as a
Sponsoring Member.
    FICC is also proposing to delete an Interpretation of the Board of
Directors of the Government Securities Clearing Corporation (the
predecessor to GSD), which currently clarifies certain provisions of
GSD Rule 4 and the extent to which the GSD Clearing Fund and other
required deposits of GSD Netting Members may be applied to a loss or
liability incurred by FICC. FICC is proposing this deletion because
this interpretation would no longer be necessary following the proposed
rule change. This is because the proposed rule change to GSD Rule 4
would cover the extent to which the GSD Clearing Fund and other
collateral or assets of GSD Netting Members would be applied to a loss
or liability incurred by FICC.
Other GSD Proposed Rule Changes and MBSD Proposed Rule Changes
    FICC is proposing changes to Section 11 of GSD Rule 4 and MBSD Rule
4. Specifically, FICC is proposing to replace ``letters of credit''
with ``Eligible Letters of Credit,'' which is already a defined term in
the Rules. In addition, FICC is proposing to specify that a reference
to 30 days means 30 calendar days.
    FICC is proposing to delete ``Remaining Loss'' and ``Other Loss''
in Sections 12(a) and 12(b) of GSD Rule 3A, Section 5 of GSD Rule 13,
Section 4 of GSD Rule 41, Section 6 of GSD Rule 43, Section 9(o) of
MBSD Rule 11, and Section 4 of MBSD Rule 32 because these terms would
no longer be used under the proposed GSD Rule 4 and MBSD Rule 4, and to
add clarifying language that conforms to the proposed changes to GSD
Rule 4 and MBSD Rule 4.
    In addition, FICC is proposing changes to GSD Rule 22B (Corporation
Default) and MBSD Rule 17A (Corporation Default). FICC is proposing to
relocate the interpretational parenthetical in each rule to come right
after the reference to GSD Rule 22A and MBSD Rule 17. FICC is proposing
this change because, in the event of a Corporation Default, the
portfolio of each GSD Member or MBSD Member, as applicable, would be
closed out in the same way as the portfolio of a GSD Defaulting Member
or MBSD Defaulting Member, i.e., by applying the close out procedures
of GSD Rule 22A (Procedures for When the Corporation Ceases to Act) or
MBSD Rule 17 (Procedures for When the Corporation Ceases to Act), as
applicable. In addition, in the proposed GSD Rule 22B and MBSD Rule
17A, FICC is proposing to add a reference to the loss allocation
provisions of GSD Rule 4 and MBSD Rule 4 and delete references to
specific sections of GSD Rule 4 and MBSD Rule 4, because those sections
are being modified under the proposed rule change.
Member Outreach
    Beginning in August 2017, FICC conducted outreach to Members in
order to provide them with advance notice of the proposed changes. As
of the date of this filing, no written comments relating to the
proposed changes have been received in response to this outreach. The
Commission will be notified of any written comments received.
Implementation Timeframe
    Pending Commission approval, FICC expects to implement this
proposal promptly. Members would be advised of the implementation date
of this proposal through issuance of a FICC Important Notice.
2. Statutory Basis
    FICC believes that the proposed rule change is consistent with the
requirements of the Act, and the rules and regulations thereunder
applicable to a registered clearing agency. Specifically, FICC believes
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \38\ and Rules 17Ad-22(e)(13) and 17Ad-

22(e)(23)(i),\39\ each as promulgated under the Act, for the reasons
described below.
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
    \39\ 17 CFR 240.17Ad-22(e)(13) and (e)(23)(i).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the Rules be designed
to promote the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of securities
and funds which are in the custody or control of each Division or for
which it is responsible.\40\ The proposed rule changes to (1) modify
the calculation and application of FICC's corporate contribution, (2)
introduce an Event Period, (3) introduce the concept of ``rounds'' (and
accompanying Loss Allocation Notices) and apply this concept to the
timing of loss allocation payments and the member withdrawal process in
connection with the loss allocation process, and (4) implement a
revised ``look-back'' period to calculate a member's loss allocation
obligation and its Loss Allocation Cap, taken together, are intended to
enhance the overall resiliency of each Division's loss allocation
process.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    By modifying the calculation of FICC's corporate contribution, FICC
would apply a mandatory fixed percentage of its General Business Risk
Capital Requirements (as compared to the current Rules which provide
for ``up to'' a percentage of retained earnings), which would provide
greater transparency and accessibility to members as to how much FICC
would contribute in the event of a loss or liability. By modifying the
application of FICC's corporate contribution to apply to Declared Non-
Default Loss Events, in addition to Defaulting Member Events, on a
mandatory basis, FICC would expand the application of its corporate
contribution beyond losses and liabilities from member defaults, which
would better align the interests of FICC with those of its respective
Division's members by stipulating a mandatory application of the
Corporate Contribution to a Declared Non-Default Loss Event prior to
any allocation of the loss among Tier One Netting Members or Tier One
Members, as applicable. Taken together, these proposed rule changes
would enhance the overall resiliency of each Division's loss allocation
process by enhancing the calculation and application of FICC's
Corporate Contribution, which is one of the key elements of each
Division's loss allocation process. Moreover, by providing greater
transparency and accessibility to members, as stated above, the
proposed rule changes regarding the Corporate Contribution, including
the proposed replenishment period and proposed allocation of FICC
Corporate Contribution between Divisions, would allow members to better
assess the adequacy of each Division's loss allocation process.
    By introducing the concept of an Event Period, FICC would be able
to group Defaulting Member Events and Declared Non-Default Loss Events
occurring in a period of ten (10) Business Days for purposes of
allocating losses to members. FICC believes that the Event Period would
provide a defined structure for the loss allocation process to
encompass potential sequential Defaulting Member Events or Declared
Non-Default Loss Events that are likely to be closely linked to an
initial event and/or market dislocation episode. Having this structure
would enhance the overall resiliency of FICC's loss allocation process
because FICC would be better equipped to address losses that may arise
from multiple Defaulting Member Events and/or Declared Non-Default Loss
Events that arise in quick succession. Moreover, the proposed Event
Period structure would provide certainty for members concerning their
maximum exposure to mutualized losses with respect to such events.
    By introducing the concept of ``rounds'' (and accompanying Loss
Allocation Notices) and applying this concept to the timing of loss
allocation payments and the member withdrawal process in connection
with the loss allocation process, FICC would (i) set forth a defined
amount that it would allocate to members during each round (i.e., the
round cap), (ii) advise members of loss allocation obligation
information as well as round information through the issuance of Loss
Allocation Notices, and (iii) provide members with the option to limit
their loss allocation exposure after the issuance of the first Loss
Allocation Notice in each round. These proposed rule changes would
enhance the overall resiliency of FICC's loss allocation process
because they would enable FICC to continue the loss allocation process
in successive rounds until all of FICC's losses are allocated and
enable FICC to identify continuing members for purposes of calculating
subsequent loss allocation obligations in successive rounds. Moreover,
the proposed rule changes would define for members a clear manner and
process in which they could cap their loss allocation exposure to FICC.
    By implementing a revised ``look-back'' period to calculate a
member's loss allocation obligations and its Loss Allocation Cap, FICC
would be able to capture a full calendar quarter of the member's
activities and smooth out the impact from any abnormalities and/or
arbitrariness that may have occurred. By determining a member's loss
allocation obligations and its Loss Allocation Cap based on the greater
of its Required Fund Deposit or the average thereof over a look-back
period, FICC would be able to calculate a member's pro rata share of
losses and liabilities based on the amount of risk that the member
brings to FICC. These proposed rule changes would enhance the overall
resiliency of each Division's loss allocation process because they
would align a member's loss allocation obligation and its Loss
Allocation Cap with the amount of risk that the member brings to FICC.
    Taken together, the foregoing proposed rule changes would establish
a stronger (for all the reasons discussed above) and clearer loss
allocation process for each Division, which FICC believes would allow
each Division to take timely action to address losses. The ability to
timely address losses would allow each Division to continue to meet its
clearance and settlement obligations, especially in circumstances that
may involve a series of substantially contemporaneous loss events.
Therefore, FICC believes that these proposed rule changes would promote
the prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.
    By deleting certain vague and imprecise limiting language that
could be interpreted as impairing FICC's ability to access the MBSD
Clearing Fund to cover losses and liabilities incident to its clearance
and settlement business outside the context of an MBSD Defaulting
Member Event, as well as to cover certain liquidity needs, the proposed
rule change to amend FICC's permitted use of MBSD Clearing Fund would
enhance FICC's ability to ensure that it can continue its operations
and clearance settlement services in an orderly manner in the event
that it would be necessary or appropriate for FICC to access MBSD
Clearing Fund deposits to address losses, liabilities or liquidity
needs to meet its settlement obligations. Therefore, FICC believes that
this proposed rule change would promote the prompt and accurate
clearance and settlement of securities transactions, consistent with
Section 17A(b)(3)(F) of the Act.
    Rule 17Ad-22(e)(13) under the Act requires, in part, that FICC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure each

Division has the authority and operational capacity to take timely
action to contain losses and continue to meet its obligations.\41\ As
described above, the proposed rule changes to (1) modify the
calculation and application of FICC's corporate contribution, (2)
introduce an Event Period, (3) introduce the concept of ``rounds'' (and
accompanying Loss Allocation Notices) and apply this concept to the
timing of loss allocation payments and the member withdrawal process in
connection with the loss allocation process, and (4) implement a
revised ``look-back'' period to calculate a member's loss allocation
obligation and its Loss Allocation Cap, taken together, are designed to
enhance the resiliency of each Division's loss allocation process.
Having a resilient loss allocation process would help ensure that each
Division can effectively and timely address losses relating to or
arising out of either the default of one or more members or one or more
non-default loss events, which in turn would help each Division contain
losses and continue to meet its clearance and settlement obligations.
Therefore, FICC believes that the proposed rule changes to enhance the
resiliency of each Division's loss allocation process are consistent
with Rule 17Ad-22(e)(13) under the Act.
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23)(i) under the Act requires FICC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to publicly disclose all relevant rules and
material procedures, including key aspects of each Division's default
rules and procedures.\42\ The proposed rule changes to (i) align the
loss allocation rules of the DTCC Clearing Agencies, (ii) improve the
overall transparency and accessibility of the provisions in the Rules
governing loss allocation and (iii) make conforming and technical
changes, would not only ensure that each Division's loss allocation
rules are, to the extent practicable and appropriate, consistent with
the loss allocation rules of other DTCC Clearing Agencies, but also
would help to ensure that each Division's loss allocation rules are
transparent and clear to members. Aligning the loss allocation rules of
the DTCC Clearing Agencies would provide consistent treatment, to the
extent practicable and appropriate, especially for firms that are
participants of two or more DTCC Clearing Agencies. Having transparent
and clear loss allocation rules would enable members to better
understand the key aspects of each Division's default rules and
procedures and provide members with increased predictability and
certainty regarding their exposures and obligations. As such, FICC
believes that the proposed rule changes to align the loss allocation
rules of the DTCC Clearing Agencies as well as to improve the overall
transparency and accessibility of each Division's loss allocation rules
are consistent with Rule 17Ad-22(e)(23)(i) under the Act.
---------------------------------------------------------------------------

    \42\ 17 CFR 240.17Ad-22(e)(23)(i).
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(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe that the proposed rule changes to enhance the
resiliency of each Division's loss allocation process would impact
competition.\43\ As described above, the proposed rule changes to (1)
modify the calculation and application of FICC's corporate
contribution, (2) introduce an Event Period, (3) introduce the concept
of ``rounds'' (and accompanying Loss Allocation Notices) and apply this
concept to the timing of loss allocation payments and the member
withdrawal process in connection with the loss allocation process, and
(4) implement a revised ``look-back'' period to calculate a member's
loss allocation obligation and its Loss Allocation Cap, taken together,
are intended to enhance the overall resiliency of each Division's loss