[Federal Register Volume 85, Number 7 (Friday, January 10, 2020)]
[Notices]
[Pages 1354-1362]
[FR Doc No: 2020-00203]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87896; File No. SR-FICC-2019-007]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change Regarding the Close-Out and
Funds-Only Settlement Processes Associated With the Sponsoring Member/
Sponsored Member Service

January 6, 2020.
    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 27, 2019, 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. 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.
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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 amendments to the FICC
Government Securities Division (``GSD'') Rulebook (``Rules'') \3\ in
order to facilitate the submission of repurchase transactions
(``repos'') with a scheduled final settlement date beyond the next
Business Day after the initial settlement date (``term repo activity'')
through the Sponsoring Member/Sponsored Member Service (``Service'')
\4\ by: (i) Providing a mechanism by which a Sponsoring Member may
cause the termination and liquidation of a Sponsored Member's positions
arising from Sponsored Member Trades between the Sponsoring Member and
its Sponsored Member that have been novated to FICC and (ii) revising
how FICC calculates the funds-only settlement obligations of Sponsored
Members and Sponsoring Members with respect to Sponsored Member Trades
that have haircuts \5\ in order to ensure that the calculation does not
result in a return of the haircuts until final settlement. In addition,
the proposed rule change would make a correction and certain
clarifications and conforming changes, as described in greater detail
below.
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    \3\ Capitalized terms not defined herein are defined in the
Rules, available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf.
    \4\ This Service is primarily governed by Rule 3A. Supra note 3.
    \5\ The term haircut shall refer to the amount of collateral in
excess of the value of the cash due to the Sponsored Member client
at the Close Leg.
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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 purpose of the proposed rule change is to amend the Rules in
order to facilitate the submission of term repo activity through the
Service by: (i) Providing a mechanism by which a Sponsoring Member may
cause the termination and liquidation of a Sponsored Member's positions
arising from Sponsored Member Trades between the Sponsoring Member and
its Sponsored Member that have been novated to FICC and (ii) revising
how FICC calculates the funds-only settlement obligations of Sponsored
Members and Sponsoring Members with respect to Sponsored Member Trades
that have haircuts in order to ensure that the calculation does not
result in a return of the haircuts until final settlement. In addition,
the proposed rule change would make a correction and certain
clarifications and conforming changes, as described in greater detail
below.
(i) Background
    Under Rule 3A (Sponsoring Members and Sponsored Members), certain
Netting Members are permitted to sponsor, as ``Sponsoring Members,''
qualified institutional buyers as defined by Rule 144A \6\ under the
Securities Act of 1933, as amended (``Securities Act''),\7\ and certain
legal entities that, although not organized as entities specifically
listed in paragraph (a)(1)(i) of Rule 144A under the Securities Act,
satisfy the financial requirements necessary to be qualified
institutional buyers as specified in that paragraph (i.e., Sponsored
Members) into GSD membership.
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    \6\ 17 CFR 230.144A.
    \7\ 15 U.S.C. 77a et seq.
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    Under Rule 3A, a Sponsoring Member is permitted to submit to FICC,
for comparison, novation, and netting, certain types of eligible
securities transactions between itself and its Sponsored Members
(``Sponsored Member Trades'').\8\ The Sponsoring Member is required to
establish an omnibus account at FICC for its Sponsored Members'
positions arising from such Sponsored Member Trades (``Sponsoring
Member Omnibus Account''),\9\ which is separate from the Sponsoring
Member's regular netting accounts. For operational and administrative
purposes, FICC interacts solely with the Sponsoring Member as agent for
purposes of the day-to-day satisfaction of its Sponsored Members'
obligations to or from FICC, including their securities and funds-only
settlement obligations.\10\ Additionally, for operational convenience,
pursuant to Section 8(b) of Rule 3A,\11\ FICC calculates a single Net
Settlement

Obligation and Fail Net Settlement Obligation in each CUSIP for the
Sponsoring Member Omnibus Account and associated Deliver Obligations
and Receive Obligations.\12\ Such calculations do not affect the
Sponsored Member's obligations, which are calculated in accordance with
Section 7 of Rule 3A \13\ in a manner that is generally consistent with
how FICC calculates the obligations of other Members.
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    \8\ Rule 1, definition of ``Sponsored Member Trade''; Rule 3A,
Sections 6(b) and 7(a), supra note 3. In March 2019, the Commission
approved FICC rule filing SR-FICC-2018-013, Securities Exchange Act
Release No. 85470 (March 29, 2019), 84 FR 13328 (April 4, 2019),
which expanded the definition of ``Sponsored Member Trade'' to
include certain types of eligible securities transactions between a
Sponsored Member and a Netting Member other than the Sponsoring
Member. This proposed rule change would apply only to Sponsored
Member Trades between the Sponsoring Member and its Sponsored
Member.
    \9\ Rule 1, definition of ``Sponsoring Member Omnibus Account,''
supra note 3.
    \10\ Rule 3A, Sections 5, 6, 7, 8, and 9, supra note 3.
    \11\ Rule 3A, Section 8(b), supra note 3.
    \12\ See Rule 3A, Section 7(a), supra note 3.
    \13\ Rule 3A, Section 7, supra note 3.
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    Sponsoring Members are also responsible for providing FICC with a
Sponsoring Member Guaranty \14\ whereby the Sponsoring Member
guarantees to FICC the payment and performance by its Sponsored Members
of their obligations under the Rules.\15\ Although Sponsored Members
are principally liable to FICC for their own settlement obligations
under the Rules, the Sponsoring Member Guaranty requires the Sponsoring
Member to satisfy those settlement obligations on behalf of a Sponsored
Member if the Sponsored Member defaults and fails to perform its
settlement obligations.
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    \14\ Section 2(c) of Rule 3A provides: ``Each Netting Member to
become a Sponsoring Member shall also sign and deliver to [FICC] a
Sponsoring Member Guaranty . . . .'' A ``Sponsoring Member
Guaranty'' is defined in Rule 1 as ``a guaranty . . . that a
Sponsoring Member delivers to [FICC] whereby the Sponsoring Member
guarantees to [FICC] the payment and performance by its Sponsored
Members of their obligations under [the] Rules, including, without
limitation, all of the securities and funds-only settlement
obligations of its Sponsored Members under [the] Rules.'' Supra note
3.
    \15\ Rule 3A, Section 2(c), supra note 3.
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    Although Rule 3A currently permits Sponsoring Members to submit
term repo activity within the Service,\16\ most of the Sponsored Member
Trades submitted to FICC by Sponsoring Members have a scheduled
settlement date of the next Business Day after the initial settlement
date, i.e., overnight repo. FICC believes that certain provisions of
the Rules discourage the submission of term repo activity within the
Service, as discussed more fully below.
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    \16\ Rule 3A, Section 5, supra note 3.
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(ii) Proposed Change To Facilitate the Submission of Term Repo Activity
Through the Service by Providing a Mechanism by Which a Sponsoring
Member May Cause the Termination and Liquidation of a Sponsored
Member's Positions Arising From Sponsored Member Trades Between the
Sponsoring Member and its Sponsored Member That Have Been Novated to
FICC
(A) Existing Close-Out Framework
    The current Rules allow only FICC to cause the termination and
liquidation of a Sponsored Member's positions, even though the relevant
Sponsoring Member is responsible for the Sponsored Member's payment and
performance in respect of such positions. Rule 22A governs any such
termination and liquidation by FICC.\17\ That rule provides that, if
FICC ceases to act for a Member, including a Sponsored Member, FICC
will close-out the Sponsored Member's positions the same way it would
close-out the positions of any other Member for which FICC has ceased
to act: By (i) establishing a Final Net Settlement Position for each
Eligible Netting Security with a distinct CUSIP equal to the net of all
outstanding deliver and receive obligations of the Member in respect of
the security and (ii) taking market action to liquidate such Final Net
Settlement Position.\18\
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    \17\ Rule 3A, Sections 13(c) and 15(b), supra note 3.
    \18\ Rule 22A, Section 2(b), supra note 3.
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    A Sponsoring Member is required to advise FICC if circumstances
have arisen that require FICC to cease to act for a Sponsored
Member.\19\ However, a Sponsoring Member is not unilaterally able to
cause the termination or liquidation of any Sponsored Member Trades.
This limitation is inconsistent with other intermediated relationships.
In the context of those relationships, the clearing member or similar
intermediary is typically permitted to terminate and liquidate the
positions of its client that the intermediary guarantees if an event of
default or other similar circumstance occurs under the customer or
similar bilateral agreement between the intermediary and the
client.\20\ The intermediary's ability to cause such termination and
liquidation is not dependent on a third party's determination that a
certain circumstance or event has occurred. Rather, the intermediary
and the client are able to agree bilaterally to the circumstances and
events that give rise to an event of default allowing the intermediary
to terminate or liquidate the guaranteed positions.
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    \19\ Rule 3A, Section 15(a), supra note 3.
    \20\ For example, in the context of futures and cleared swaps, a
futures commission merchant (``FCM'') is generally permitted to
terminate and liquidate positions that the FCM carries for a
customer at a derivatives clearing organization (``DCO'') following
the customer's default by either entering into offsetting positions
in the FCM's customer account at the DCO or terminating the position
in the customer account and establishing an identical position in
the FCM's house account at the DCO. See, e.g., ICE Clear Credit Rule
304(c), available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf.
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    The inability of a Sponsoring Member to trigger the termination and
liquidation of a Sponsored Member's positions, particularly term repo
activity, may result in additional capital requirements for Sponsoring
Members and their parent organizations under regulatory standards that
implement the recommendations of the Basel Committee on Banking
Supervision (the ``BCBS''). This is because, if a Sponsoring Member
cannot trigger the termination and liquidation of a Sponsored Member's
positions, it is less able to stop the effective extension of credit to
the client under the Sponsoring Member Guaranty.\21\ In addition, the
inability to terminate a Sponsored Member's positions limits the extent
to which a Sponsoring Member can use certain risk management tools,
such as cross-defaults or other early warning triggers, that allow a
Sponsoring Member to close-out the Sponsored Member's positions and
stem losses before the Sponsored Member becomes subject to insolvency
proceedings or is unable to pay its debts as they become due.\22\
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    \21\ More specifically, FICC's understanding is that in order
for a Sponsoring Member subject to capital requirements that
implement the BCBS standards to apply the favorable capital
treatment to its obligations under the Sponsoring Member Guaranty
that it currently applies to bilateral repos, the Sponsoring Member
must conclude with a well-founded basis that, among other things, it
will be able to terminate the Sponsored Member Trades subject to the
Sponsoring Member Guaranty. See, e.g., 12 CFR 3.2, 3.3(e), 217.2,
217.3(e), 324.2, and 324.3(e). While a lesser standard applies if
the guaranteed Sponsored Member Trades are limited to overnight
repos, FICC believes that applying the same termination and
liquidation mechanism to overnight and term repo activity would help
to clarify the capital treatment for both types of activity and
promote consistency across Sponsored Member Trades. Sponsoring
Members interested in such relief should discuss this matter with
their regulatory capital experts.
    \22\ A ``cross-default'' is a provision that allows one party to
exercise default rights if its customer or counterparty defaults
under another agreement. Other early warning triggers include credit
rating downgrades, breaches of representations, and covenants
limiting a party's ability to incur debt or suffer liens on its
property. If a Sponsoring Member is unable to initiate the
termination of a Sponsored Member's Sponsored Member Trades, it
cannot use these ``early warning triggers,'' but must instead wait
for the occurrence of a circumstance that gives FICC the ability to
cease to act for the Sponsored Member. By that point, however, the
Sponsoring Member may have significant uncovered exposure to the
Sponsored Member.

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    In addition to giving FICC the exclusive ability to cause the
termination and liquidation of a Sponsored Member's positions, Rule 22A
provides for FICC to control such termination and liquidation of a
Sponsored Member's Final Net Settlement Positions.\23\ When FICC ceases
to act for a Member, it generally looks to buy, borrow, reverse in,
sell, lend, or repo out securities, so as to facilitate its ability to
settle the Final Net Settlement Positions.\24\
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    \23\ Rule 22A, Section 2(b), supra note 3.
    \24\ Id.
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    FICC's control of such termination and liquidation of Sponsored
Member Trades could expose the Sponsoring Member to certain risks that
other intermediaries do not typically face. This is because, in the
event FICC ceases to act for a Sponsored Member under Rule 22A,\25\ the
Sponsoring Member will generally enter into one or more transactions
with third parties in order to hedge its performance obligations under
the Sponsoring Member Guaranty. In most other intermediated
relationships, the price at which the intermediary hedges or closes out
the exposure under the customer's defaulted positions typically informs
the pricing of those positions and thus the amount of the
intermediary's claim against the customer. However, if FICC, rather
than the Sponsoring Member, calculates the price of the Sponsored
Member's positions, there may be differences arising from the timing of
execution or the type of liquidation or hedging transactions used by
FICC and/or the use of different pricing sources by FICC, all of which
could limit the ability of the Sponsoring Member to recover the losses
it incurs in entering into its hedging transactions.
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    \25\ Rule 22A, supra note 3.
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(B) Proposed Rule Change
    FICC is proposing to amend Rule 3A to add a new Section 18. This
new section would allow a Sponsoring Member to cause the termination
and liquidation of a Sponsored Member's positions arising from
Sponsored Member Trades between the Sponsoring Member and the Sponsored
Member for which the Sponsoring Member is responsible. The section
would not, however, limit the ability of FICC to cease to act for a
Sponsored Member.
    In the event (i) the Sponsoring Member triggers the termination of
a Sponsored Member's positions or (ii) FICC ceases to act for the
Sponsored Member and the Sponsoring Member does not continue to perform
the obligations of the Sponsored Member, both the Sponsored Member's
positions and the Sponsoring Member's corresponding positions arising
from the Sponsored Member Trades between the Sponsoring Member and the
Sponsored Member would be terminated. Thereupon, the Sponsoring Member
would calculate a net liquidation value of such terminated positions,
which liquidation value would be paid either to or by the Sponsored
Member by or to the Sponsoring Member. FICC would not, as a practical
matter, be involved in such settlement and would not need to take any
market action because the termination of the Sponsored Member's
positions and the corresponding Sponsoring Member's positions would
leave FICC flat. Additionally, the Sponsoring Member would indemnify
FICC for any claim by a Sponsored Member arising out of the Sponsoring
Member's calculation of the net liquidation value.
(C) Benefits of the Proposal
    By allowing Sponsoring Members to terminate and liquidate a
Sponsored Member's positions that arise from Sponsored Member Trades
between the Sponsored Member and the Sponsoring Member that have been
novated to FICC, FICC believes that the new Section 18 would align the
Service to other intermediated relationships and allow Sponsoring
Members to more effectively manage the risks of Sponsored Member
Trades, particularly term repo activity. Sponsoring Members and their
Sponsored Members would be able to agree with one another in their
bilateral documentation on the circumstances in which the Sponsoring
Member would be permitted to cause the termination of the Sponsored
Member's positions. Such agreement would not affect FICC's ability to
cease to act for a Sponsored Member in accordance with existing Rules
3A, 21 and 22.\26\
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    \26\ Rules 3A, 21 and 22, supra note 3.
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    FICC believes that providing Sponsoring Members with greater
ability to manage their risks associated with Sponsored Member Trades
would allow Sponsoring Members to submit to FICC more Sponsored Member
Trades, including, in particular, term repo activity. FICC believes
that having more centrally cleared term repo transactions would promote
the prompt and accurate clearance and settlement of securities
transactions because more securities transactions would benefit from
FICC's risk management and guaranty of settlement.
    Further, FICC believes that allowing the Sponsoring Member to take
market action would decrease the price risks currently faced by
Sponsoring Members (as described in the last paragraph of Item
II(A)1(ii)(A) above) without increasing the litigation risk to FICC
arising from a Sponsored Member default because the Sponsoring Member
would indemnify FICC for any losses or expense arising from a Sponsored
Member's claim related to the Sponsoring Member's calculation of any
liquidation amount.
(D) Proposed Changes to the Rules
Addition of New Section 18 to Rule 3A (Sponsoring Members and Sponsored
Members)
    FICC is proposing to add a new Section 18 to Rule 3A, which would
(i) permit a Sponsoring Member to cause the termination and liquidation
of a Sponsored Member's positions arising from Sponsored Member Trades
between the Sponsoring Member and the Sponsored Member and (ii) govern
how the termination and liquidation would be effectuated. Section 18
would contain the following subsections.
Subsection (a)
    Subsection (a) would clarify the scope of positions to which
proposed Section 18 applies. It would state that Section 18 applies
only to positions arising from Sponsored Member Trades within the
meaning of subsection (a) of the Sponsored Member Trade definition.\27\
Subsection (a) of the Sponsored Member Trade definition \28\
encompasses eligible transactions between a Sponsored Member and its
Sponsoring Member. Sponsored Member Trades that are between a Sponsored
Member and a third-party Member would not be within the scope of
Section 18 because, in that instance, there would not be a
corresponding Sponsoring Member position to terminate.
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    \27\ Rule 1, supra note 3.
    \28\ Id.
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    Subsection (a) would further state that Section 18 would not apply
if either (i) FICC has ceased to act for the relevant Sponsoring Member
or (ii) a Corporation Default has occurred. FICC has discretion in the
event that it ceases to act for a Sponsoring Member to close-out the
positions of Sponsored Members for which the defaulting Sponsoring
Member was responsible or to allow them to settle.\29\ If FICC does
close-out such positions, it will do so in accordance with Rule
22A.\30\ If a Corporation Default has occurred in

respect of FICC, each Sponsored Member's positions, and all other
Members' positions, will be closed out in accordance with the
provisions of Rule 22B.\31\
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    \29\ Rule 3A, Section 16, supra note 3.
    \30\ Rule 22A, supra note 3.
    \31\ Rule 22B, supra note 3. In September 2018, the Commission
approved FICC rule filing SR-FICC-2018-008, Securities Exchange Act
Release No. 84255 (September 21, 2018), 83 FR 48890 (September 27,
2018), which amended the Rules to clarify that Rule 22B (Corporation
Default) applies to Sponsored Members.
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Subsection (b)
    Subsection (b) of proposed Section 18 would set out the process by
which a Sponsoring Member or FICC may cause the termination of a
Sponsored Member's positions. It would provide that the Sponsoring
Member or FICC may cause such termination by delivering a notice to
FICC or the Sponsoring Member, respectively. FICC anticipates that each
Sponsored Member and Sponsoring Member would agree in the bilateral
documentation between them as to what circumstances or events give rise
to the ability of the Sponsoring Member to deliver a notice to FICC
terminating the Sponsored Member's positions.\32\
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    \32\ It bears noting in this regard that termination of the
Sponsored Member's positions would not be the exclusive mechanism by
which a Sponsoring Member may limit its credit risk. Under Section
2(i) of current Rule 3A, a Sponsoring Member may voluntarily elect
to terminate its status as a Sponsoring Member in respect of one or
more Sponsored Members. Such a termination does not affect the
settlement of the Sponsored Member's existing positions but does
restrict the ability of the Sponsored Member to have its future
trades accepted for novation to FICC through such Sponsoring Member.
The proposed rule change would not affect the functioning of Section
2(i) or the general ability of a Sponsoring Member and the Sponsored
Member to agree on the circumstances of when the Sponsoring Member
may terminate its status as Sponsoring Member for the Sponsored
Member. Rule 3A, Section 2(i), supra note 3.
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    The notice submitted by a Sponsoring Member to FICC (or vice versa)
would cause the termination of all of the positions of the Sponsored
Member that arose from Sponsored Member Trades between the Sponsoring
Member and the Sponsored Member and that have been novated to FICC. The
notice would also cause the termination of the corresponding positions
of the Sponsoring Member (i.e., the positions of the Sponsoring Member
that arose from Sponsored Member Trades between the Sponsoring Member
and the Sponsored Member). The effect of such terminations would be to
leave FICC flat.
    Subsection (b) would also provide that the termination of the
Sponsored Member's positions (and the Sponsoring Member's corresponding
positions) would be effected by the Sponsoring Member's establishment
of a final Net Settlement Position for each Eligible Netting Security
with a distinct CUSIP number (``Final Net Settlement Position''). This
provision would align with existing Rule 22A,\33\ which provides for
FICC to calculate such Final Net Settlement Position when it ceases to
act for a Member. As under existing Rule 22A,\34\ the Final Net
Settlement Position would equal the net of all outstanding deliver
obligations and receive obligations of the Sponsored Member or
Sponsoring Member with respect to the relevant security.
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    \33\ Rule 22A, supra note 3.
    \34\ Id.
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Subsection (c)
    Subsection (c) of proposed Section 18 would specify how the Final
Net Settlement Positions established pursuant to subsection (b) would
be liquidated (i.e., how such positions would be converted into an
amount payable). It would also provide how the amount payable arising
from the liquidation of the Final Net Settlement Positions would be
discharged.
    Subsection (c) would first provide that the Sponsoring Member would
liquidate the Final Net Settlement Positions established pursuant to
subsection (b) by establishing (i) a single liquidation amount in
respect of the Sponsored Member's Final Net Settlement Positions (a
``Sponsored Member Liquidation Amount'') and (ii) a single liquidation
amount in respect of the Sponsoring Member's Final Net Settlement
Positions (a ``Sponsoring Member Liquidation Amount''). The Sponsored
Member Liquidation Amount would be owed either by FICC to the Sponsored
Member or by the Sponsored Member to FICC because it would relate to
the Sponsored Member's Final Net Settlement Positions with FICC, while
the Sponsoring Member Liquidation Amount would be owed either by FICC
to the Sponsoring Member or by the Sponsoring Member to FICC because it
would relate to the Sponsoring Member's Final Net Settlement Positions
with FICC.
    Because the Final Net Settlement Positions of the Sponsoring Member
would be identical to, but in the opposite direction of, the Final Net
Settlement Positions of the Sponsored Member, the Sponsored Member
Liquidation Amount would equal the Sponsoring Member Liquidation
Amount. Therefore, if FICC were to owe the Sponsored Member Liquidation
Amount to the Sponsored Member, the Sponsoring Member would owe the
Sponsoring Member Liquidation Amount to FICC. By the same token, if the
Sponsored Member were to owe the Sponsored Member Liquidation Amount to
FICC, FICC would owe the Sponsoring Member the Sponsoring Member
Liquidation Amount. In all instances, FICC would owe and be owed the
same amount of money.
    Subsection (c) would also provide how the Sponsoring Member may
calculate the Sponsoring Member Liquidation Amount. It would state that
the Sponsoring Member may calculate the Sponsoring Member Liquidation
Amount based on prevailing market prices of the relevant securities
and/or the gains realized and losses incurred by the Sponsoring Member
in hedging its risk associated with the liquidation of the Sponsoring
Member's Final Net Settlement Positions. Subsection (c) would further
clarify that such Sponsoring Member Liquidation Amount may also take
into account any losses and expenses incurred by the Sponsoring Member
in connection with the liquidation of the positions. This approach
would be broadly consistent with how FICC would calculate an amount
owing by a Member in respect of its Final Net Settlement Positions
under existing Rule 22A.\35\
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    \35\ Id.
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    Subsection (c) would provide that, if a Sponsored Member
Liquidation Amount is due to FICC, the Sponsoring Member would be
obligated to pay such Sponsored Member Liquidation Amount to FICC under
the Sponsoring Member Guaranty and that this obligation would,
automatically and without further action, be set off against the
obligation of FICC to pay the corresponding Sponsoring Member
Liquidation Amount to the Sponsoring Member. By virtue of such setoff,
the Sponsored Member's obligation to FICC would be discharged, as would
FICC's obligation to the Sponsoring Member. The Sponsoring Member
would, however, have a reimbursement claim against the Sponsored Member
in an amount equal to the Sponsored Member Liquidation Amount. This
reimbursement claim would arise as a matter of law by virtue of the
Sponsoring Member's performance under Sponsoring Member Guaranty,
though Sponsoring Members and Sponsored Members may specify terms
related to the reimbursement claim in their bilateral documentation.
FICC would have no rights or obligations in respect of any such
reimbursement claim.
    If a Sponsored Member Liquidation Amount were owed by FICC to the
Sponsored Member, subsection (c) would provide for the Sponsoring
Member to satisfy that obligation by

transferring the Sponsored Member Liquidation Amount to the account at
the Funds-Only Settling Member Bank at which the Sponsoring Member
maintains Funds-Only Settlement Amounts related to its Sponsored Member
Omnibus Account. Subsection (c) would state that, to the extent the
Sponsoring Member makes such a transfer, it will discharge FICC's
obligation to transfer the Sponsored Member Liquidation Amount to the
Sponsored Member and the Sponsoring Member's corresponding obligation
to transfer the Sponsoring Member Liquidation Amount to FICC.
Subsection (d)
    Under existing Rule 22A,\36\ FICC is responsible for the
liquidation of a Member's Final Net Settlement Positions and
calculation of an amount owing by or to the Member. Because proposed
Section 18 would provide for the Sponsoring Member, rather than FICC,
to liquidate the Sponsored Member's (and the Sponsoring Member's) Final
Net Settlement Positions and calculate the corresponding amounts owing,
the Sponsoring Member would be required to indemnify FICC in the event
the Sponsored Member makes or asserts any claim relating to such
calculation. Subsection (d) would set forth such indemnity. It would
provide for the Sponsoring Member to indemnify FICC and its officers,
directors, employees, shareholders, agents, and Members for any loss,
liability, or expenses resulting from any claim by a Sponsored Member
relating to the Sponsoring Member's calculation of the Sponsored Member
Liquidation Amount or Sponsoring Member Liquidation Amount.
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    \36\ Id.
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Subsection (e)
    Under Section 8(g) of existing Rule 3A,\37\ each Sponsored Member
grants to FICC a security interest in all assets and property placed by
the Sponsored Member in the possession of FICC in order to secure the
obligations of the Sponsored Member to FICC. This security interest
provides FICC with credit support in the event that it must terminate
and liquidate the Sponsored Member's positions and assert a claim
against the Sponsored Member. However, if proposed Section 18 were to
apply, the obligation of the Sponsored Member to FICC under the
terminated positions would be discharged via the setoff provided for
under subsection (c).
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    \37\ Rule 3A, Section 8(g), supra note 3.
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    Subsection (e) of proposed Section 18 would clarify FICC
acknowledges that a Sponsoring Member may take a security interest in
FICC's obligations to the Sponsored Member. Such security interest
would not impose new obligations on FICC, but could allow the
Sponsoring Member to direct FICC to submit payments due to the
Sponsored Member to the Sponsoring Member, so that the Sponsoring
Member can apply such amounts to the Sponsored Member's unsatisfied
obligations to the Sponsoring Member. Subsection (e) additionally would
provide that, if Section 18 were to apply, FICC's security interest in
the Sponsored Member's assets would be subordinated to the Sponsoring
Member's security interest. As noted above, if Section 18 applied, FICC
would not need to look to the Sponsored Member or its assets for
performance in respect of the positions that are terminated under
Section 18.
(iii) Proposed Change To Facilitate the Submission of Term Repo
Activity Through the Service by Revising How FICC Calculates the Funds-
Only Settlement Obligations of Sponsored Members and Sponsoring Members
With Respect to Sponsored Member Trades That Have Haircuts in Order To
Ensure That Such Calculation Does Not Result in a Return of the
Haircuts Until Final Settlement
    In light of the intermediary relationship between a Sponsoring
Member and its Sponsored Member, a Sponsoring Member may choose to post
to its Sponsored Member client a haircut in order to address regulatory
and/or investment guideline concerns. Specifically, the regulations
and/or investment guidelines to which a Sponsored Member is subject may
require that it receive Eligible Securities worth more than the cash
that it is due to receive at final settlement of a FICC-cleared reverse
repo, i.e., a haircut.\38\ Similarly, in some circumstances, a
Sponsoring Member may choose to collect such haircut from its Sponsored
Member client at the Start Leg to mitigate its exposure under the
Sponsoring Member Guaranty. In both situations, FICC's understanding is
that accounting considerations may favor those postings being
facilitated through FICC's systems. Specifically, in light of the fact
that the counterparty on a FICC-cleared trade changes after novation--
and the Sponsoring Member and Sponsored Member thereafter both face
FICC as principal--having an obligation to receive and/or deliver a
haircut at final settlement directly to FICC as the post-novation
counterparty may be favorable for the Sponsoring Member and the
Sponsored Member from an accounting perspective.\39\
---------------------------------------------------------------------------

    \38\ For example, FICC's understanding is that Investment
Company Act Rule 5b-3 requires that a repurchase agreement be
``collateralized fully'' in order for a registered investment
company to apply favorable regulatory treatment to it. The
``collateralized fully'' definition requires that the value of the
securities posted to the investment company at all times equal or
exceed the repurchase price, plus any loss of interest or
transaction costs that could be incurred in a default. In light of
these requirements, FICC understands that many registered investment
companies require counterparties to post securities with a value
that is equal to the repurchase price, plus a cushion to cover any
changes in value of the securities or lost interest or transaction
costs associated with a counterparty default.
    \39\ Sponsoring Members interested in such relief should discuss
this matter with their accounting experts.
---------------------------------------------------------------------------

    However, under Rule 13, FICC's standard funds-only settlement
process involves marking to market twice a day each Business Day all
positions associated with term repo activity, including any Sponsored
Member Trade with a Close Leg that is scheduled to occur two or more
Business Days after the settlement of the Start Leg.\40\ Specifically,
FICC will calculate a ``Collateral Mark'' equal to the absolute value
of the difference between (i) a Sponsored Member Trade's Contract Value
(i.e., the dollar value at which it is due to finally settle) and (ii)
its Market Value (i.e., FICC's system price of the securities
underlying the transaction). This Collateral Mark is incorporated into
the calculation of certain of the Funds-Only Settlement Amounts payable
under Rule 13.\41\
---------------------------------------------------------------------------

    \40\ Rule 13, supra note 3.
    \41\ Id.
---------------------------------------------------------------------------

    When the Market Value exceeds the Contract Value, the Collateral
Mark is negative for, and thus payable by, the Member party that has a
Net Short Position (i.e., the party required to deliver securities at
final settlement). As a result, under FICC's existing funds-only
settlement process, a Sponsored Member or Sponsoring Member that has
received a haircut at the Start Leg of a Sponsored Member Trade would
be required to transfer an amount of cash equal to that haircut (plus
or minus any interim mark-to-market movements) on the next Business Day
after the Start Leg has settled. This would frustrate the purpose of
the haircut as between the Sponsoring Member and Sponsored Member.
Specifically, if the haircut is returned before final settlement of a
Sponsored Member Trade, the party that was supposed to retain the
haircut for the duration of the trade would cease to be
overcollateralized, thus defeating the contractual intent of the
parties.\42\
---------------------------------------------------------------------------

    \42\ Because the Schedule of Timeframes in the Rules provides
for intraday funds-only settlement amounts to be calculated using
each Member's positions as of noon on the relevant Business Day,
FICC's existing funds-only settlement process will not materially
affect haircuts on overnight Sponsored Member Trades that are
submitted for clearing in the afternoon. Nonetheless, FICC believes
that applying the same Funds-Only Settlement calculations to
overnight and term repo activity would help promote consistency
across Sponsored Member Trades.

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

    In order to ensure that haircuts are not returned until final
settlement, FICC proposes to amend Rule 3A and Rule 1. Specifically,
FICC proposes to amend Section 9(a) of Rule 3A to provide that, if the
parties to a Sponsored Member Trade agree for such Sponsored Member
Trade to have a haircut, then any Funds-Only Settlement Amount
applicable to such Sponsored Member Trade that includes a Collateral
Mark would be calculated without regard for the Collateral Mark. Such
Collateral Mark would be replaced by either a Haircut Deficit or
Haircut Surplus. A ``Haircut Deficit'' would exist if the amount by
which the Market Value as of the settlement date of the Start Leg
exceeded the Contract Value of the Close Leg (the ``Initial Haircut'')
is greater than the amount by which the Market Value as of the time of
measurement exceeds the Contract Value of the Close Leg (the ``Current
Haircut''). Any Haircut Deficit would be payable by the Member party
with a Net Long Position. A ``Haircut Surplus'' would exist if the
Current Haircut exceeds the Initial Haircut, and any Haircut Surplus
would be payable by the Member party with a Net Short Position. FICC
also proposes to amend Section 9(a) of Rule 3A to make clear that any
Initial Haircut would be as agreed between the parties to the Sponsored
Member Trade, and that FICC would not be under any obligation to verify
the parties' agreement with respect to any Initial Haircut, and its
calculation of the Initial Haircut would be conclusive and binding on
the parties.
    For example, if on initial settlement of a Sponsored Member Trade a
Sponsored Member transferred $98 in cash and received Eligible
Securities worth $100,\43\ the Initial Haircut for such Sponsored
Member Trade would be $2 (i.e., Market Value as of the settlement date
of the Start Leg of $100 minus Contract Value of the Close Leg of $98).
If on the next Business Day after initial settlement the value of the
Eligible Securities increases in value to $101, then the Current
Haircut on the Sponsored Member Trade on such Business Day would be $3
(i.e., Market Value as of the time of measurement of $101 minus
Contract Value of the Close Leg of $98), and there would be a Haircut
Surplus of $1 (i.e., Current Haircut of $3 minus the Initial Haircut of
$2) that would be owing to FICC by the Sponsored Member, as the Member
party with the Net Short Position. Similarly, if in the same example,
the value of the Eligible Securities decreased from $100 to $99 on the
next Business Day after initial settlement, then the Current Haircut on
the Sponsored Member Trade on such Business Day would be $1 (i.e.,
Market Value of $99 as of the time of measurement minus Contract Value
of the Close Leg of $98) and there would be a Haircut Deficit of $1
(i.e., Initial Haircut of $2 minus the Current Haircut of $1) that
would be owing to FICC by the Sponsoring Member, as the Member party
with the Net Long Position.
---------------------------------------------------------------------------

    \43\ For the sake of simplicity, this example excludes accrued
interest and thus assumes that the amount of cash transferred at
settlement of the Start Leg equals the amount of cash due to be
transferred at the Close Leg.
---------------------------------------------------------------------------

    FICC would also revise Rule 1 to add new defined terms; these new
defined terms are related to the proposed clarifications to Rule 3A
described in the paragraph above. FICC would add the following new
defined terms: (i) Current Haircut, (ii) Haircut Deficit, (iii) Haircut
Surplus and (iv) Initial Haircut.
    FICC believes that the proposed changes to Rule 3A and Rule 1
described above would allow a Sponsoring Member and its Sponsored
Member who intend for one of those two parties to remain
overcollateralized for the duration of a Sponsored Member Trade to
transfer a haircut between each other and allow such haircut to remain
with the intended party until final settlement of the Sponsored Member
Trade.
(iv) Proposed Correction, Clarifications and Conforming Changes
    FICC proposes to make a correction as well as certain
clarifications and conforming changes to Rule 3A, as further described
below.
(A) Proposed Clarifications to Sections 8(c) and 9(b) of Rule 3A
    FICC proposes to make certain clarifications to Section 8(c) of
Rule 3A related to proposed Section 18 described in Item II(A)1(ii)
above.
    First, FICC is proposing to add a parenthetical to Section 8(c)
clarifying that the operational netting provisions of Section 8(b) do
not substantively modify a Sponsored Member's obligations to FICC. As
noted above, Section 8(b) provides that, for operational convenience,
FICC calculates a single Net Settlement Position and Fail Net
Settlement Position in each CUSIP for the Sponsoring Member's
Sponsoring Member Omnibus Account. Section 8(c), in turn, provides that
each Sponsored Member shall satisfy its ``allocable portion'' of the
Deliver Obligations and Receive Obligations established for the
Sponsoring Member Omnibus Account.
    Neither Section 8(b) nor Section 8(c) modifies the obligations of
any Sponsored Member; those provisions are simply designed for
operational convenience. Each Sponsored Member still remains
responsible for its Deliver Obligations to and Receive Obligations from
FICC, which are calculated in accordance with Section 7 of Rule 3A. The
Sponsored Member's ``allocable portion'' of the Deliver Obligations and
Receive Obligations of the Sponsoring Member Omnibus Account will
always equal its Deliver Obligations to and Receive Obligations from
FICC, as calculated under Section 7 of Rule 3A.
    Therefore, in order to eliminate doubt regarding the extent of the
Sponsored Member's obligations upon a termination and liquidation of a
Sponsored Member's positions pursuant to proposed Section 18, FICC is
proposing to add a parenthetical to Section 8(c) to make clear that a
Sponsored Member's ``allocable portion'' of the obligations established
for the Sponsoring Member Omnibus Account are the obligations of the
Sponsored Member, as calculated in Section 7 of Rule 3A.
    FICC is also proposing to add language at the end of Sections 8(c)
and 9(b) to clarify that, if a Sponsoring Member satisfies the net
Deliver Obligations and Receive Obligations or the net Funds-Only
Settlement Amount obligations of its Sponsoring Member Omnibus Account,
including through the setoff described in proposed Section 18, before
the Sponsoring Member receives corresponding performance from the
Sponsored Member, such satisfaction would constitute performance by the
Sponsoring Member under the Sponsoring Member Guaranty with respect to
the relevant Sponsored Member's allocable portion of the Sponsoring
Member Omnibus Account Deliver Obligations and Receive Obligations or
Funds-Only Settlement Amount obligations.
    If a termination and liquidation under proposed Section 18 were to
occur, the Sponsoring Member would be required to perform on behalf of
the Sponsored Member under the Sponsoring Member Guaranty. The
clarification described above is designed to ensure that, when the
Sponsoring Member effects such performance, it would be entitled to

reimbursement from the Sponsored Member.

(B) Proposed Correction, Clarifications and Conforming Changes to
Section 9 of Rule 3A

    FICC also proposes to make a correction as well as certain
clarifications and conforming changes to Rule 3A. The proposed
correction, clarifications and conforming changes are related to the
clarifications described in Item II(A)1(iii) above with respect to the
haircut.
    To enhance clarity, FICC proposes to make certain structural
changes to Rule 3A, Section 9. Specifically, FICC proposes to move
language from current subsection (b) of Section 9 and make it
subsection (c). This, in turn, would require conforming changes to re-
letter original Sections 9(c) and 9(d) to 9(d) and 9(e), respectively.
FICC also proposes to make a conforming grammatical change by deleting
``such'' and replacing it with ``the'' in the first sentence of
proposed subsection (c). FICC also proposes to revise proposed Section
9(c) of Rule 3A to clarify that the Sponsored Member is responsible for
satisfying the allocable portion of the Funds-Only Settlement Amount
calculated for the Sponsoring Member Omnibus Account.
2. Statutory Basis
    FICC believes these proposed changes are consistent with the
requirements of the Act, and the rules and regulations applicable to a
registered clearing agency. Specifically, FICC believes that the
proposed changes are consistent with Section 17A(b)(3)(F) of the Act
\44\ and Rule 17Ad-22(e)(23)(i),\45\ as promulgated under the Act, for
the reasons stated below.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78q-1(b)(3)(F).
    \45\ 17 CFR 240.17Ad-22(e)(23)(i).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to (i) remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions and (ii) promote the prompt and accurate
clearance and settlement of securities transactions.\46\
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC believes that the proposed changes described in Item
II(A)1(ii) above, i.e., to facilitate the submission of term repo
activity through the Service by providing a mechanism by which a
Sponsoring Member may cause the termination and liquidation of a
Sponsored Member's positions arising from Sponsored Member Trades
between the Sponsoring Member and its Sponsored Member that have been
novated to FICC, are designed to remove certain impediments to and
perfect the mechanism of a national settlement system for the prompt
and accurate clearance and settlement of securities transactions. In
particular, FICC believes that providing a mechanism by which a
Sponsoring Member may cause the termination and liquidation of a
Sponsored Member's positions arising from Sponsored Member Trades
between the Sponsoring Member and its Sponsored Member that have been
novated to FICC would give Sponsoring Members greater ability to manage
the risks associated with Sponsored Member Trades, particularly
Sponsored Member Trades with a scheduled final settlement date beyond
the next Business Day after the initial settlement date. Such effective
risk management would reduce the risk of a Sponsoring Member failure,
which could otherwise disrupt the prompt and accurate clearance and
settlement of Sponsored Member Trades and other transactions submitted
to FICC. As described above, the absence of the ability on the part of
Sponsoring Members to terminate and liquidate such Sponsored Member
positions is currently an impediment that discourages term repo
activity within the Service. The proposal to provide Sponsoring Members
with that ability would remove the impediment, consistent with Section
17A(b)(3)(F) of the Act.\47\
---------------------------------------------------------------------------

    \47\ Id.
---------------------------------------------------------------------------

    FICC also believes the proposed changes are designed to promote the
prompt and accurate clearance and settlement of securities
transactions. By allowing Sponsoring Members to manage risks associated
with Sponsored Member Trades more effectively, FICC believes the
proposed changes would enable Sponsoring Members to submit a greater
number of securities transactions to be cleared and settled by a
central counterparty. In particular, FICC believes Sponsoring Members
would be able to submit to FICC more term repo activity. FICC's
clearance and settlement of such term repo activity would promote the
prompt and accurate clearance and settlement of securities transactions
by increasing the number of transactions subject to FICC's risk
management and guaranty of settlement.
    FICC believes the proposed changes described in Item II(A)1(iii)
above, i.e., to facilitate the submission of term repo activity through
the Service by revising how FICC calculates the funds-only settlement
obligations of Sponsored Members and Sponsoring Members with respect to
Sponsored Member Trades that have haircuts in order to ensure that such
calculation does not result in a return of the haircuts until final
settlement, are designed to promote the prompt and accurate clearance
and settlement of securities transactions. As described above, FICC
believes these clarifications would honor the contractual intent of the
Sponsoring Members and their Sponsored Members to transfer haircuts
between each other for Sponsored Member Trades. FICC believes that the
proposed change to the calculation (resulting in the return of haircuts
at final settlement only) may encourage Sponsoring Members to submit a
greater number of securities transactions to be cleared and settled by
FICC, and in particular, term repo activity. As described above, FICC's
clearance and settlement of such term repo activity would promote the
prompt and accurate clearance and settlement of securities transactions
by increasing the number of transactions subject to FICC's risk
management and guaranty of settlement. Moreover, the current
calculation of the funds-only settlement obligations of Sponsored
Members and Sponsoring Members is currently an impediment that
discourages term repo activity within the Service. The proposal
described in Item II(A)1(iii) above would remove the impediment,
consistent with Section 17A(b)(3)(F) of the Act.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    FICC believes the proposed correction, clarifications, and
conforming changes described in Item II(A)1(iv) above are also designed
to promote the prompt and accurate clearance and settlement of
securities transactions by enhancing clarity and transparency regarding
the Service. Having transparent and clear provisions regarding the
Service would enable Members to better understand the operation of the
Service and would provide Members with increased predictability and
certainty regarding their rights and obligations. FICC believes that
this increased predictability and certainty regarding their rights and
obligations may encourage Sponsoring Members to submit a greater number
of securities transactions to be cleared and settled by FICC, and in
particular, term repo activity. FICC's clearance and settlement of such
term repo activity would promote the prompt and accurate clearance and
settlement of securities transactions by increasing the number of
transactions subject to FICC's risk management and guaranty of
settlement. Therefore, FICC believes the proposed correction,
clarifications, and

conforming changes described in Item II(A)1(iv) above are designed to
promote the prompt and accurate clearance and settlement of securities
transactions.
    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.\49\ FICC believes that the proposed changes
described in Item II(A)1(ii) above would establish a clear and
transparent mechanism by which a Sponsoring Member may terminate and
liquidate the positions of a Sponsored Member. Having a clear mechanism
for such termination and liquidation would allow Sponsoring Members and
Sponsored Members to understand the circumstances in which a Sponsored
Member's positions may be terminated and liquidated and how such
termination and liquidation would occur. FICC also believes that the
proposed rule changes described in Item II(A)1(iii) above would enhance
clarity and transparency regarding the funds-only settlement
obligations of Sponsored Members with respect to any term repo
activity. Specifically, the proposed changes would revise how FICC
calculates the funds-only settlement obligations of Sponsored Members
and Sponsoring Members with respect to Sponsored Member Trades that
have haircuts in order to ensure that such calculation does not result
in a return of the haircuts until final settlement. FICC believes that
these proposed changes would provide enhanced clarity to Sponsoring
Members and Sponsored Members regarding their rights and obligations as
well as the rights and obligations of FICC. Additionally, the proposed
correction, clarifications, and conforming changes described in Item
II(A)1(iv) above would add further clarity to the Rules. FICC believes
the proposal would ensure that the Rules remain clear and accurate, and
facilitate Members' understanding of the Rules, and provide Members
with increased predictability and certainty regarding their
obligations. As such, FICC believes that these proposed changes are
consistent with Rule 17Ad-22(e)(23)(i) under the Act.\50\
---------------------------------------------------------------------------

    \49\ 17 CFR 240.17Ad-22(e)(23)(i).
    \50\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed changes in Item II(A)1(ii) above
could have an impact on competition by promoting and burdening
competition. The proposal to allow a Sponsoring Member to control the
termination and liquidation of its Sponsored Member's FICC-cleared
positions could promote competition by increasing the ability of
Sponsoring Members to more effectively manage the risks of Sponsored
Member Trades, particularly Sponsored Member Trades with a scheduled
final settlement date beyond the next Business Day after the initial
settlement date. Such increased risk management ability, in turn, could
cause more institutions to become Sponsoring Members, and existing and
future Sponsoring Members to accept a greater number and variety of
Sponsored Members and Sponsored Member Trades, including, in
particular, term repo activity. FICC also believes the proposed changes
in Item II(A)1(ii) above could promote competition by allowing
Sponsoring Members and Sponsored Members to negotiate the circumstances
in which the Sponsoring Member could cause the termination and
liquidation of the Sponsored Member's positions. The prospect of
negotiation could allow Sponsored Members to consider various
Sponsoring Members and the terms they offer.
    Conversely, the proposed changes described in Item II(A)1(ii) above
to allow a Sponsoring Member to control the termination and liquidation
of its Sponsored Member's FICC-cleared positions could burden
competition by applying a different standard for the termination and
liquidation of Sponsored Members' FICC-cleared positions than the
standard that applies to other Members under Rule 22A.\51\ However,
FICC does not believe that the proposed changes described in Item
II(A)1(ii) above would result in a significant burden on competition
because the Sponsored Member would have the ability to negotiate with
possible Sponsoring Members the circumstances in which the Sponsoring
Member may effectuate a termination and the methodology it would use in
calculating the liquidation amount.
---------------------------------------------------------------------------

    \51\ Rule 22A, supra note 3.
---------------------------------------------------------------------------

    Regardless of whether the potential burden on competition discussed
in the previous paragraph is significant, FICC believes that any burden
on competition that may be created by these proposed changes would be
necessary and appropriate in furtherance of the purposes of the Act, as
permitted by Section 17A(b)(3)(I) of the Act.\52\
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    FICC believes that any burden on competition created by the
proposed changes described in Item II(A)1(ii) above is necessary in
furtherance of the purposes of the Act to (i) remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions and (ii) promote
the prompt and accurate clearance and settlement of securities
transactions.\53\ Specifically, FICC believes that any burden on
competition resulting from allowing a Sponsoring Member to control the
termination and liquidation of its Sponsored Member's FICC-cleared
positions would be necessary in order to provide Sponsoring Members
with greater ability to manage the risks associated with Sponsored
Member Trades, particularly term repo activity. As described in detail
in Item II(A)2 above, FICC believes that providing Sponsoring Members
with greater ability to manage the risks associated with Sponsored
Member Trades, particularly term repo activity, would (i) remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities transactions
and (ii) promote the prompt and accurate clearance and settlement of
securities transactions. Therefore, FICC believes any burden that is
created by these proposed changes would be necessary in furtherance of
the purposes of the Act, as permitted by Section 17A(b)(3)(I) of the
Act.\54\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78q-1(b)(3)(F).
    \54\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Furthermore, FICC believes that any burden on competition resulting
from allowing a Sponsoring Member to control the termination and
liquidation of its Sponsored Member's FICC-cleared positions would be
appropriate in furtherance of the purposes of the Act, as permitted by
Section 17A(b)(3)(I) of the Act,\55\ because the proposed changes would
remove the current impediment whereby the Sponsoring Member is not
unilaterally able to cause the termination or liquidation of any
Sponsored Member Trades. As stated above, there is an intermediary
relationship between a Sponsoring Member and its Sponsored Member,
including the Sponsoring Member's liability to FICC for the Sponsored
Member's performance under the Sponsoring Member Guaranty, which does
not apply to other Members. FICC believes this unique relationship
warrants the Sponsoring Member having control over the termination and
liquidation of its Sponsored Member's FICC-cleared positions. Moreover,
the proposed changes would be more consistent with other intermediated

relationships where the intermediary is typically permitted to
terminate and liquidate the positions of its client that the
intermediary guarantees if an event of default or other similar
circumstance occurs under the bilateral agreement between the
intermediary and the client. The current inability to effectuate such
termination and liquidation is inconsistent with other intermediated
relationships and discourages term repo activity within the Service.
The proposed changes would enable the Sponsoring Member to cause the
termination and liquidation of the Sponsored Member's positions for
which the Sponsoring Member is responsible, thereby providing it with
greater ability to manage the risks associated with Sponsored Member
Trades, particularly term repo activity. Therefore, FICC believes any
burden that is created by these proposed changes would be appropriate
in furtherance of the purposes of the Act, as permitted by Section
17A(b)(3)(I) of the Act.\56\
---------------------------------------------------------------------------

    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    FICC believes that the proposed changes described in Item
II(A)1(iii) above to facilitate the submission of term repo activity
through the Service by revising how FICC calculates the funds-only
settlement obligations of Sponsored Members and Sponsoring Members with
respect to Sponsored Member Trades with haircuts could promote
competition. This is because the proposed changes would honor the
parties' contractual intent (as described in Item II(A)1(iii) above)
and, thus, encourage more term repo activity within the Service. As
such, FICC believes that these proposed changes could promote
competition.
    In addition, FICC does not believe that the proposed correction,
clarifications, and conforming changes in Item II(A)1(iv) above would
have an impact on competition. These changes would simply provide
additional clarity, transparency and consistency to the Rules and not
affect Members' rights and obligations. As such, FICC believes that
these proposed changes would not have any impact on competition.

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

    FICC reviewed the proposed rule change with its Sponsoring Members
in order to benefit from their expertise. Written comments relating to
this proposed rule change have not been received from the Sponsoring
Members or any other person. FICC will notify the Commission of any
written comments received by FICC.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-FICC-2019-007 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2019-007. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FICC-2019-007 and should be submitted on
or before January 31, 2020.
---------------------------------------------------------------------------

    \57\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00203 Filed 1-9-20; 8:45 am]
 BILLING CODE 8011-01-P