[Federal Register Volume 83, Number 169 (Thursday, August 30, 2018)]
[Notices]
[Pages 44331-44340]
[FR Doc No: 2018-18865]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83951; File No. SR-FICC-2017-806]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of No Objection to an Advance Notice, as Modified by Amendment
No. 1, To Amend the Loss Allocation Rules and Make Other Changes

August 27, 2018.
    On December 18, 2017, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-FICC-2017-806 pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act
entitled the Payment, Clearing, and Settlement Supervision Act of 2010
(``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the
Securities Exchange Act of 1934 (``Act'') \2\ to amend the loss
allocation rules and make other conforming and technical changes.\3\
The

advance notice was published for comment in the Federal Register on
January 30, 2018.\4\ In that publication, the Commission also extended
the review period of the advance notice for an additional 60 days,
pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act.\5\ On
April 10, 2018, the Commission required additional information from
FICC pursuant to Section 806(e)(1)(D) of the Clearing Supervision
Act,\6\ which tolled the Commission's period of review of the advance
notice until 60 days from the date the information required by the
Commission was received by the Commission.\7\ On June 28, 2018, FICC
filed Amendment No. 1 to the advance notice to amend and replace in its
entirety the advance notice as originally filed on December 18,
2017.\8\ On July 6, 2018, the Commission received a response to its
request for additional information in consideration of the advance
notice, which, in turn, added a further 60 days to the review period
pursuant to Section 806(e)(1)(E) and (G) of the Clearing Supervision
Act.\9\ The Commission did not receive any comments. This publication
serves as notice that the Commission does not object to the proposed
changes set forth in the advance notice, as modified by Amendment No. 1
(hereinafter, ``Advance Notice'').
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On December 18, 2017, FICC filed the advance notice as
proposed rule change SR-FICC-2017-022 with the Commission pursuant
to Section 19(b)(1) of the Act and Rule 19b-4 thereunder (``Proposed
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively. The Proposed Rule Change was published in the Federal
Register on January 8, 2018. Securities Exchange Act Release No.
82427 (January 2, 2018), 83 FR 854 (January 8, 2018) (SR-FICC-2017-
022). On February 8, 2018, the Commission designated a longer period
within which to approve, disapprove, or institute proceedings to
determine whether to approve or disapprove the Proposed Rule Change.
Securities Exchange Act Release No. 82670 (February 8, 2018), 83 FR
6626 (February 14, 2018) (SR-DTC-2017-022, SR-FICC-2017-022, SR-
NSCC-2017-018). On March 20, 2018, the Commission instituted
proceedings to determine whether to approve or disapprove the
Proposed Rule Change. Securities Exchange Act Release No. 82909
(March 20, 2018), 83 FR 12990 (March 26, 2018) (SR-FICC-2017-022).
On June 25, 2018, the Commission designated a longer period for
Commission action on the proceedings to determine whether to approve
or disapprove the Proposed Rule Change. Securities Exchange Act
Release No. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018) (SR-
DTC-2017-022, SR-FICC-2017-022, SR-NSCC-2017-018). On June 28, 2018,
FICC filed Amendment No. 1 to the Proposed Rule Change, which was
published in the Federal Register on July 19, 2018. Securities
Exchange Act Release No. 83631 (July 13, 2018), 83 FR 34193 (July
19, 2018) (SR-FICC-2017-022). FICC submitted a courtesy copy of
Amendment No. 1 to the Proposed Rule Change through the Commission's
electronic public comment letter mechanism. Accordingly, Amendment
No. 1 to the Proposed Rule Change has been publicly available on the
Commission's website at https://www.sec.gov/rules/sro/ficc.htm since
June 29, 2018. The Commission did not receive any comments. The
proposal, as set forth in both the advance notice and the Proposed
Rule Change, each as modified by Amendments No. 1, shall not take
effect until all required regulatory actions are completed.
    \4\ Securities Exchange Act Release No. 82583 (January 24,
2018), 83 FR 4358 (January 30, 2018) (SR-FICC-2017-806)
(``Notice'').
    \5\ Pursuant to Section 806(e)(1)(H) of the Clearing Supervision
Act, the Commission may extend the review period of an advance
notice for an additional 60 days, if the changes proposed in the
advance notice raise novel or complex issues, subject to the
Commission providing the clearing agency with prompt written notice
of the extension. 12 U.S.C. 5465(e)(1)(H). The Commission found that
the advance notice raised complex issues and, accordingly, extended
the review period of the advance notice for an additional 60 days
until April 17, 2018. See Notice, supra note 4.
    \6\ 12 U.S.C. 5465(e)(1)(D).
    \7\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); see Memorandum
from the Office of Clearance and Settlement Supervision, Division of
Trading and Markets, titled ``Commission's Request for Additional
Information,'' available at http://www.sec.gov/rules/sro/ficc-an.shtml.
    \8\ Securities Exchange Act Release No. 83748 (July 31, 2018),
83 FR 38375 (August 6, 2018) (SR-FICC-2017-806) (``Notice of
Amendment No. 1''). FICC submitted a courtesy copy of Amendment No.
1 to the advance notice through the Commission's electronic public
comment letter mechanism. Accordingly, Amendment No. 1 to the
advance notice has been publicly available on the Commission's
website at http://www.sec.gov/rules/sro/ficc-an.shtml since June 29,
2018.
    \9\ 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the
Office of Clearance and Settlement Supervision, Division of Trading
and Markets, titled ``Response to the Commission's Request for
Additional Information,'' available at http://www.sec.gov/rules/sro/ficc-an.shtml.
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I. Description of the Advance Notice

    The Advance Notice consists of proposed changes 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'') \10\ in
order to (1) modify each Division's loss allocation process; (2) align
the Divisions' loss allocation rules with the three clearing agencies
of The Depository Trust & Clearing Corporation (``DTCC'')--The
Depository Trust Company (``DTC''), National Securities Clearing
Corporation (``NSCC''), and FICC (collectively, the ``DTCC Clearing
Agencies''); \11\ (3) amend the MBSD Rules regarding the use of the
MBSD's Clearing Fund; and (4) make conforming and technical changes.
Each of these proposed changes is described below. A detailed
description of the specific rule text changes proposed in this Advance
Notice can be found in the Notice of Amendment No. 1.\12\
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    \10\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth 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.
    \11\ DTCC is a user-owned and user-governed holding company and
is the parent company of DTC, FICC, and NSCC. DTCC operates on a
shared services model with respect to the DTCC Clearing Agencies.
Most corporate functions are established and managed on an
enterprise-wide basis pursuant to intercompany agreements under
which it is generally DTCC that provides a relevant service to a
DTCC Clearing Agency.
    \12\ See Notice of Amendment No. 1, supra note 8.
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A. Changes to the Loss Allocation Process

    The GSD Rules and the MBSD Rules each currently provide for a loss
allocation process through which both FICC (by applying up to 25
percent 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 \13\ 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.\14\
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.
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    \13\ The term ``Member'' is defined in both the GSD Rules and
the MBSD Rules, and has a different meaning under each. See supra
note 10. In the Notice of Amendment No. 1, FICC used ``member'' to
refer to both the Members of GSD and MBSD. See Notice of Amendment
No. 1, supra note 8.
    \14\ GSD is permitted to cease to act for (1) a GSD Member
pursuant to GSD Rule 21 (Restrictions on Access to Services) and GSD
Rule 22 (Insolvency of a Member), (2) a Sponsoring Member pursuant
to Section 14 and Section 16 of GSD Rule 3A (Sponsoring Members and
Sponsored Members), and (3) a Sponsored Member pursuant to Section
13 and Section 15 of GSD Rule 3A (Sponsoring Members and Sponsored
Members). MBSD is permitted to cease to act for an MBSD Member
pursuant to MBSD Rule 14 (Restrictions on Access to Services) and
MBSD Rule 16 (Insolvency of a Member). GSD Rule 22A (Procedures for
When the Corporation Ceases to Act) and MBSD Rule 17 (Procedures for
When the Corporation Ceases to Act) set out the types of actions
FICC may take when it ceases to act for a member. Supra note 10.
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    The current GSD and MBSD loss allocation rules provide that, in the
event the Division ceases to act for a member, the amount 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 order: (1) 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 (2) 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.
    Pursuant to current Rules, 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 respective average daily Required Fund Deposit over the
prior 12 months. If a Tier One Netting Member or Tier One Member, as
applicable, did not maintain a Required Fund Deposit for 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, the member 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.\15\ 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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    \15\ 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 10.
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    FICC proposes to change the manner in which each of the aspects of
the loss allocation process described above would be employed. GSD and
MBSD would clarify or adjust certain elements and introduce certain new
loss allocation concepts, as further discussed below. In addition, the
proposal 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.
    FICC proposes six key changes to enhance each Division's loss
allocation process. Specifically, FICC proposes to make changes to each
Division regarding (1) its Corporate Contribution, (2) the Event
Period, (3) the loss allocation round and notice, (4) the look-back
period, (5) the loss allocation withdrawal notice and cap, and (6) the
governance around non-default losses, each of which is discussed below.
(1) 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
percent 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
percent of the FICC General Business Risk Capital Requirement.\16\
FICC's General Business Risk Capital Requirement, as defined in FICC's
Clearing Agency Policy on Capital Requirements,\17\ 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.\18\ The proposed
Corporate Contribution would be held in addition to FICC's General
Business Risk Capital Requirement.
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    \16\ FICC calculates its General Business Risk Capital
Requirement as the amount equal to the greatest of (1) an amount
determined based on its general business profile, (2) an amount
determined based on the time estimated to execute a recovery or
orderly wind-down of FICC's critical operations, and (3) an amount
determined based on an analysis of FICC's estimated operating
expenses for a six month period.
    \17\ See Securities Exchange Act Release No. 81105 (July 7,
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-NSCC-2017-
004, SR-FICC-2017-007).
    \18\ 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 would be a mandatory contribution by FICC prior to any
allocation of the loss among the applicable Division's members.\19\ As
proposed, if the Corporate Contribution is fully or partially used
against a loss or liability relating to an Event Period by one or both
Divisions, the Corporate Contribution would be reduced to the remaining
unused amount, if any, during the following 250 Business Days in order
to permit FICC to replenish the Corporate Contribution.\20\ To ensure
transparency, all GSD Members and MBSD Members would receive notice of
any such reduction to the Corporate Contribution.
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    \19\ The proposed 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.
    \20\ FICC states that 250 Business Days would be a reasonable
estimate of the time frame that FICC would be required 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.
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    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. In other words, FICC would not have two separate
Corporate Contributions 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 of all members in that
Division bear to the aggregate Average RFDs of all members in both
Divisions.\21\
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    \21\ FICC states 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
represent the amount of risks that those members bring to FICC over
the look-back period of 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.
    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.
(2) Event Period
    FICC states that 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 proposes 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 within a period
of 10 Business Days (``Event Period'') for purposes of allocating
losses to members of the respective Divisions in one or more rounds,
subject to the limitations of loss allocation as explained below.\22\
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    \22\ FICC states that having a 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.
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    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 for the GSD Defaulting Member and/or the 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 Declared Non-
Default Loss Event (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 10 Business Day periods.
    The amount of losses that may be allocated by each Division,
subject to the required Corporate Contribution, and to which a Loss
Allocation Cap would apply for any Member that elects to withdraw from
membership in respect of a loss allocation round, 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.\23\
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    \23\ Under the proposal, each Tier One Netting Member or Tier
One Member, as applicable, that is a Tier One Netting Member or Tier
One Member on the first day of an Event Period would be obligated to
pay its pro rata share of losses and liabilities arising out of or
relating to each Defaulting Member Event (other than a Defaulting
Member Event with respect to which it is the Defaulting Member) and
each Declared Non-Default Loss Event occurring during the Event
Period.
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(3) Loss Allocation Round and Loss Allocation Notice
    Under the proposal, 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 in accordance with proposed Section 7b of GSD Rule 4
or MBSD Rule 4.
    Each loss allocation would be communicated to each Tier One Netting
Member or Tier One Member, as applicable, by the issuance of a notice
that advises the Tier One Netting Member or Tier One Member, as
applicable, of the amount being allocated to it (``Loss Allocation
Notice''). 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 would be equal to (1) the average of its Required Fund
Deposit for the 70 Business Days preceding the first day of the
applicable Event Period or such shorter period of time that the Tier
One Netting Member or Tier One Member, as applicable, has been a member
(each member's ``Average RFD''), divided by (2) the sum of Average RFD
amounts of all Tier One Netting Members or Tier One Members, as
applicable, subject to loss allocation in such round.
    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
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.\24\ In other words, the proposed

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. 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 allocation with respect to
that Event Period.
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    \24\ 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 10.
    FICC states that it is appropriate to shorten such time period
from 10 days to five 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
states that five 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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    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. Under the proposal, FICC is
proposing that members would receive two 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.\25\
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    \25\ FICC states that allowing members two 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.
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(4) Look-Back Period
    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 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.
    GSD and MBSD propose 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 to be equal to (1) the Tier
One Netting Member's or Tier One Member's, as applicable, Average RFD
divided by (2) the sum of Average RFD amounts for all Tier One Netting
Members or a Tier One Members, as applicable, that are subject to loss
allocation in such round. Additionally, if a Tier One Netting Member or
Tier One Member, as applicable, withdraws from membership pursuant to
proposed Section 7b of GSD Rule 4 or MBSD Rule 4, as applicable, GSD
and MBSD are proposing that such member's Loss Allocation Cap be equal
to the greater of (1) its Required Fund Deposit on the first day of the
applicable Event Period or (2) its Average RFD.
    FICC states that employing a revised look-back period of 70
Business Days instead of 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 states
that the current look-back period of 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. FICC states that a look-back period of 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.
(5) Loss Allocation Withdrawal Notice and Loss Allocation Cap
    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
member's 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.
Current Section 13 of GSD Rule 3 and MBSD Rule 3 require 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. 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.
    Under the proposal, a Tier One Netting Member or Tier One Member,
as applicable, would be able to limit its loss allocation exposure to
its Loss Allocation Cap by providing notice of its election to withdraw
from membership within five Business Days from the issuance of the
first Loss Allocation Notice in any round of an Event Period. 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. As proposed, if a
member timely provides notice of its withdrawal from membership in
respect of a loss allocation round, the maximum amount of losses it
would be responsible for would be its Loss Allocation Cap,\26\ 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. The proposed Section 7b of GSD Rule 4 or MBSD Rule 4, as
applicable, would provide that the Tier One Netting Member or Tier One
Member, as applicable, must (1) 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 (2) 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.
---------------------------------------------------------------------------

    \26\ If a member's Loss Allocation Cap exceeds the member's
then-current Required Fund Deposit, it must still cover the excess
amount.
---------------------------------------------------------------------------

    As stated above, under the current Rules, the cap of a Tier One
Netting Member or Tier One Member, as applicable, that provided a
withdrawal notice would be its Required Fund Deposit for the Business
Day on which the notification of allocation is provided to the member.
Under the proposal, the Loss Allocation Cap of a Tier One Netting
Member or Tier One Member, as applicable, would be equal to the greater
of (1) its Required Fund Deposit on the first day of the applicable
Event Period and (2) its Average RFD. 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, 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.
    As proposed, a Tier One Netting Member or a Tier One Member, as
applicable, that withdraws in compliance with proposed Section 7b of
GSD Rule 4 or MBSD Rule 4, as applicable, would remain obligated for
its pro rata share of losses and liabilities with respect to any Event
Period for which it is otherwise obligated under GSD Rule 4 or MBSD
Rule 4, as applicable; however, its aggregate obligation would be
limited to the amount of its Loss Allocation Cap as fixed in the round
for which it withdrew.
    FICC states that the proposed 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.
(6) Declared Non-Default Loss Event
    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.\27\ The GSD Rules and the
MBSD Rules currently permit FICC to apply Clearing Fund to non-default
losses.\28\ Section 5 of GSD Rule 4 and MBSD Rule 4 provides that the
use of the 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 the Clearing Fund to such
losses or liabilities is more limited under MBSD Rule 4 when compared
to GSD Rule 4.\29\ 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.\30\
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    \27\ Non-default losses may arise from events such as damage to
physical assets, a cyber-attack, or custody and investment losses.
    \28\ The first paragraph of Section 7 in both GSD Rule 4 and
MBSD Rule 4 is not clear and may suggest 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.
    \29\ 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 10.
     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 10.
    \30\ 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 (hereinafter, an ``Other Loss'') shall be allocated
among [Tier One Netting Members/Tier One Members], ratably, in
accordance with the respective amounts of their Average Required
[FICC Clearing Fund Deposits/Clearing Fund Deposits]''. Supra note
10.
---------------------------------------------------------------------------

    For both the GSD Rules and the MBSD Rules, FICC proposes
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
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 proposes to specify that a mandatory
Corporate Contribution would apply to a Declared Non-Default Loss Event
prior to any allocation of the loss among members. Additionally, FICC
proposes 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.

B. Changes To Align the Loss Allocation Rules

    The proposed 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 for firms that are participants
of multiple DTCC Clearing Agencies. As proposed, the loss allocation
process and certain related provisions would be consistent across the
DTCC Clearing Agencies to the extent practicable and appropriate.

C. Use of MBSD Clearing Fund

    The proposed 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 states 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,
imprecise, and should be replaced in their entirety. Specifically, FICC
proposes 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 proposes 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.

D. Conforming and Technical Changes

    FICC proposes to make various conforming and technical changes
necessary to harmonize the remaining current Rules with the proposed
changes. Such changes include, but are not limited to: (1) Amending
Rule 1 (Definitions; Governing Law) to add cross-references to proposed
terms that would be defined in Rule 4; (2) inserting, deleting, or
changing various terms for clarity and consistency; (3) modifying the
voluntary termination provisions to ensure that termination provisions
in the GSD Rules and the MBSD Rules are consistent, whether voluntary
or in response to a loss allocation, are consistent with one another to
the extent appropriate; and (4) deleting obsolete sections due to the
proposal.

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\31\
---------------------------------------------------------------------------

    \31\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \32\ authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities
engaged in designated activities for which the Commission is the
supervisory agency. Section 805(b) of the Clearing Supervision Act \33\
provides the following objectives and principles for the Commission's
risk management standards prescribed under Section 805(a):
---------------------------------------------------------------------------

    \32\ 12 U.S.C. 5464(a)(2).
    \33\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act \34\ and Section 17A of the
Act \35\ (``Rule 17Ad-22'').\36\ Rule 17Ad-22 requires registered
clearing agencies to establish, implement, maintain, and enforce
written policies and procedures that are reasonably designed to meet
certain minimum requirements for their operations and risk management
practices on an ongoing basis.\37\ Therefore, it is appropriate for the
Commission to review proposed changes in advance notices against the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act \38\ and
against Rule 17Ad-22.\39\
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 5464(a)(2).
    \35\ 15 U.S.C. 78q-1.
    \36\ 17 CFR 240.17Ad-22.
    \37\ Id.
    \38\ 12 U.S.C. 5464(b).
    \39\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

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

    The Commission believes that the proposed changes in the Advance
Notice are designed to help FICC promote robust risk management,
promote safety and soundness, reduce systemic risks, and support the
stability of the broader financial system as discussed below.
    FICC proposes to make the following changes to its loss allocation
process as described above. First, for both the GSD Rules and the MBSD
Rules, the proposed changes would modify the calculation of FICC's
Corporate Contribution so that FICC would apply a mandatory fixed
percentage of its General Business Risk Capital Requirement as compared
to the current Rules which provide for a ``up to'' percentage of
retained earnings. The proposed changes also would clarify that the
proposed Corporate Contribution would apply to Declared Non-Default
Loss Events, as well as Defaulting Member Events, on a mandatory basis
prior to any allocation of the loss among Tier One Netting Members or
Tier One Members, as applicable. The proposal would specify how the
Corporate Contribution would be applied between Divisions. Moreover,
the proposal specifies that if the Corporate Contribution is applied to
a loss or liability relating to an Event Period, then for any
subsequent Event Periods that occur during the 250 business days
thereafter, the Corporate Contribution would be reduced to the
remaining, unused portion of the Corporate Contribution. The Commission
believes that these changes set clear expectations about how and when
FICC's Corporate Contribution would be applied to help address a loss,
and allow FICC to better anticipate and prepare for potential exposures
that may arise during an Event Period.
    Second, as described above, FICC proposes to determine a member's
loss allocation obligation based on the average of its Required Fund
Deposit over a look-back period of 70 Business Days and to determine
its Loss Allocation Cap based on the greater of its Required Fund
Deposit or the average thereof over a look-back period of 70 Business
Days. 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 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. These proposed changes are designed to allow
FICC to calculate a member's pro rata share of losses and liabilities
based on the amount of risk that the member brings to FICC, and cover a
sufficient amount of time to measure such risk. The look-back period of
70 Business Days is designed to be long enough to enable FICC to
capture a full calendar quarter of members' activities and to smooth
out the impact from any abnormalities that may have occurred, but not
excessively long such that members' business strategy and outlook could
have shifted significantly during the time period, resulting in
material changes to the size of its portfolios. As a result of these
changes, the Commission believes that FICC should be in a better
position to manage its risk by using a look-back period that more
accurately reflects the amount of risk that the member brings to FICC.
    Third, as described above, FICC proposes to introduce the concept
of an Event Period, which would group Defaulting Member Events and
Declared Non-Default Loss Events occurring within a period of 10
Business Days for purposes of allocating losses to members in one or
more rounds. Under the current Rules, every time each Division incurs a
loss or liability, FICC will initiate its current loss allocation
process by applying its retained earnings and allocating losses. The
current Rules do not contemplate a situation where loss events occur in
quick succession. Accordingly, even if multiple losses occur within a
short period, the current Rules dictate that FICC start the loss
allocation process separately for each loss event. Having multiple loss
allocation calculations and notices from FICC and withdrawal

notices from members after multiple sequential loss events could cause
operational risk to FICC, since multiple notices may cause confusion at
a time of significant stress.
    The Commission believes that the proposed change to introduce an
Event Period would improve upon the current loss allocation process
described immediately above. Specifically, the introduction of an Event
Period would provide a more defined and transparent structure than the
current loss allocation process. Such an improved structure should
enable both FICC and each member to more effectively manage the risks
and potential financial obligations presented by sequential Defaulting
Member Events and/or Declared Non-Default Loss Events that are likely
to arise in quick succession and could be closely linked to an initial
event and/or market dislocation episode. In other words, the proposed
Event Period structure should help clarify and define for both FICC and
its members how FICC would initiate a single defined loss allocation
process to cover all loss events within 10 Business Days. As a result,
all loss allocation calculation and notices from FICC and potential
withdrawal notices from members would be tied back to one Event Period
instead of each individual loss event.
    Fourth, as described above, the proposal would improve upon the
approach laid out in FICC's current Rules by providing for a loss
allocation round, a Loss Allocation Notice process, a Loss Allocation
Withdrawal Notice process, and a Loss Allocation Cap, for both the GSD
Rules and the MBSD Rules. A loss allocation round would be a series of
loss allocations relating to an Event Period, the aggregate amount of
which would be limited by the round cap. When the losses allocated in a
round equals the round cap, any additional losses relating to the Event
Period would be allocated in subsequent rounds until all losses from
the Event Period are allocated among members. Each loss allocation
would be communicated to members by the issuance of a Loss Allocation
Notice. Each member in a loss allocation round would have five 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
FICC, and thereby benefit from its Loss Allocation Cap. The Loss
Allocation Cap of a member would be equal to the greater of its
Required Fund Deposit on the first day of the applicable Event Period
and its Average RFD. Members would have two Business Days after FICC
issues a first round Loss Allocation Notice to pay the amount specified
in such notice.
    The Commission believes that those four proposed changes, to (1)
establish a specific Event Period, (2) continue the loss allocation
process in successive rounds, (3) clearly communicate with its members
regarding their loss allocation obligations, and (4) effectively
identify continuing members for the purpose of calculating loss
allocation obligations in successive rounds, are designed to make
FICC's loss allocation process more certain. In addition, the changes
are designed to provide members with a clear set of procedures that
operate within the proposed loss allocation structure, and provide
increased predictability and certainty regarding members' exposures and
obligations. Furthermore, by grouping all loss events within 10
business days, the loss allocation process relating to multiple loss
events can be streamlined. With enhanced certainty, predictability, and
efficiency, FICC would then be able to better manage its risks from
loss events occurring in quick succession, and members would be able to
better manage their risks by deciding whether and when to withdraw from
membership and limit their exposures to FICC. Furthermore, the proposed
changes are designed to reduce liquidity risk to members by providing a
two-day window to arrange funding to pay for loss allocation, while
still allowing FICC to address losses in a timely manner.
    Fifth, as described above, for both the GSD Rules and the MBSD
Rules, FICC proposes to clarify the governance around Declared Non-
Default Loss Events by providing 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 its services in an orderly manner. FICC also
proposes to provide that FICC would then be required to promptly notify
members of this determination. In addition, FICC proposes to apply a
mandatory Corporate Contribution to a Declared Non-Default Loss Event
prior to any allocation of the loss among members.
    The Commission believes that the immediately above described
changes should provide an orderly and transparent procedure to allocate
a non-default loss by requiring the Board of Directors to make a
definitive decision to announce an occurrence of a Declared Non-Default
Loss Event, and requiring FICC to provide a notice to members of such
decision. The Commission further believes that an orderly and
transparent procedure should result in a risk management process at
FICC that is more robust as a result of enhanced governance around
FICC's response to non-default losses, thereby promoting safety and
soundness.
    Collectively, the Commission believes that the proposed changes to
FICC's loss allocation process would provide greater transparency,
certainty, and efficiency to both FICC and members regarding the amount
of resources and the instances in which FICC would apply such resources
to address risks arising from Defaulting Member Events and Declared
Non-Default Loss Events, which could occur in quick succession. The
Commission believes that such transparency, certainty, and efficiency
would allow better predictability to FICC and its members regarding
their exposures, and in turn, would allow a risk management process at
FICC and its members that is more robust in response to such events and
would improve their ability to continue to operate and recover in a
safe and sound manner during such events. Therefore, the Commission
believes that the proposal promotes robust risk management as well as
safety and soundness.
    In addition to the key changes discussed above, FICC proposes 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. Further, FICC proposes 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 Commission believes that the
proposed change to delete certain vague and imprecise limiting language
that could impair 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, is designed to promote robust
risk management by allowing FICC to use MBSD Clearing Fund to manage
its risk. In addition, the Commission believes that the change is
designed to promote safety and soundness by enhancing FICC's ability to
ensure that it can continue its operations and clearance and 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.
    Finally, FICC proposes to align the loss allocation rules of the
DTCC Clearing Agencies to the extent practicable and appropriate. The
alignment is designed to help provide consistent treatment for firms
that are participants of multiple DTCC Clearing Agencies. The
Commission believes that providing consistent treatment through
consistent procedures among the DTCC Clearing Agencies would help firms
that participate in multiple DTCC Clearing Agencies from encountering
unnecessary complexities and confusion stemming from differences in
procedures regarding loss allocation processes, particularly at times
of significant stress. Accordingly, the Commission believes that the
change is designed to reduce systemic risk and support the stability of
the broader financial system.
    Therefore, for all of the reasons stated above, the Commission
believes that the changes proposed in the Advance Notice are consistent
with the objectives and principles of Section 805(b) of the Clearing
Supervision Act.\40\
---------------------------------------------------------------------------

    \40\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(4)(viii)

    Rule 17Ad-22(e)(4)(viii) under the Act requires, in part, that a
covered clearing agency \41\ establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes, including by addressing allocation of credit
losses the covered clearing agency may face if its collateral and other
resources are insufficient to fully cover its credit exposures.\42\
---------------------------------------------------------------------------

    \41\ A ``covered clearing agency'' means, among other things, a
clearing agency registered with the Commission under Section 17A of
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated
systemically important by the Financial Stability Oversight Counsel
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461
et seq.). See 17 CFR 240.17Ad-22(a)(5) and (6). On July 18, 2012,
FSOC designated FICC as systemically important. U.S. Department of
the Treasury, ``FSOC Makes First Designations in Effort to Protect
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
Therefore, FICC is a covered clearing agency.
    \42\ 17 CFR 240.17Ad-22(e)(4)(viii).
---------------------------------------------------------------------------

    As described above, the proposal would revise the loss allocation
process to address how FICC would manage loss events, including
Defaulting Member Events. Under the proposal, if losses arise out of or
relate to a Defaulting Member Event, FICC would first apply its
Corporate Contribution. If such funds prove insufficient, the proposal
provides for allocating the remaining losses to the remaining members
through the proposed process. Accordingly, the Commission believes that
the proposal is reasonably designed to manage FICC's credit exposures
to its members, by addressing allocation of credit losses.
    Therefore, the Commission believes that FICC's proposal is
consistent with Rule 17Ad-22(e)(4)(viii) under the Act.\43\
---------------------------------------------------------------------------

    \43\ Id.
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(13)

    Rule 17Ad-22(e)(13) under the Act requires, in part, that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to ensure the covered
clearing agency has the authority to take timely action to contain
losses and liquidity demands and continue to meet its obligations.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    As described above, the proposal would establish a more detailed
and structured loss allocation process by (1) modifying the calculation
and application of the Corporate Contribution; (2) introducing an Event
Period; (3) introducing a loss allocation round and notice process; (4)
implementing a look-back period to calculate a member's loss allocation
obligation; (5) modifying the withdrawal process and the cap of
withdrawing member's loss allocation exposure; and (6) providing the
governance around a non-default loss. The Commission believes that each
of these proposed changes helps establish a more transparent and clear
loss allocation process and authority of FICC to take certain actions,
such as announcing a Declared Non-Default Loss Event, within the loss
allocation process. Further, having a more transparent and clear loss
allocation process as proposed would provide clear authority to FICC to
allocate losses from Defaulting Member Events and Declared Non-Default
Loss Events and take timely actions to contain losses, and continue to
meet its clearance and settlement obligations.
    Therefore, the Commission believes that FICC's proposal is
consistent with Rule 17Ad-22(e)(13) under the Act.\45\
---------------------------------------------------------------------------

    \45\ Id.
---------------------------------------------------------------------------

D. Consistency With Rule 17Ad-22(e)(23)(i) and (ii)

    Rule 17Ad-22(e)(23)(i) under the Act requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to publicly disclose all
relevant rules and material procedures, including key aspects of its
default rules and procedures.\46\ Rule 17Ad-22(e)(23)(ii) under the Act
requires that a covered clearing agency establish, implement, maintain
and enforce written policies and procedures reasonably designed to
provide sufficient information to enable participants to identify and
evaluate the risks, fees, and other material costs they incur by
participating in the covered clearing agency.\47\
---------------------------------------------------------------------------

    \46\ 17 CFR 240.17Ad-22(e)(23)(i).
    \47\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

    As described above, the proposal would publicly disclose how FICC's
Corporate Contribution would be calculated and applied. In addition,
the proposal would establish and publicly disclose a detailed procedure
in the Rules for loss allocation. More specifically, the proposed
changes would establish an Event Period, loss allocation rounds, a
look-back period to calculate each member's loss allocation obligation,
a withdrawal process followed by a loss allocation process, and a Loss
Allocation Cap that would apply to members after withdrawal.
Additionally, the proposal would align the loss allocation rules across
the DTCC Clearing Agencies to help provide consistent treatment, and
clarify that non-default losses would trigger loss allocation to
members. The proposal would also provide for and make known to members
the procedures to trigger a loss allocation procedure, contribute
FICC's Corporate Contribution, allocate losses, and withdraw and limit
member's loss exposure. Accordingly, the Commission believes that the
proposal is reasonably designed to (1) publicly disclose all relevant
rules and material procedures concerning key aspects of FICC's default
rules and procedures, and (2) provide sufficient information to enable
members to identify and evaluate the risks by participating in FICC.
    Therefore, the Commission believes that FICC's proposal is
consistent with Rules 17Ad-22(e)(23)(i) and (ii) under the Act.\48\
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
---------------------------------------------------------------------------

III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\49\ that the Commission does not object to
advance notice SR-FICC-2017-806, as modified by Amendment No. 1, and
that FICC is authorized to implement the proposal as

of the date of this notice or the date of an order by the Commission
approving proposed rule change SR-FICC-2017-022, as modified by
Amendment No. 1, whichever is later.
---------------------------------------------------------------------------

    \49\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18865 Filed 8-29-18; 8:45 am]
 BILLING CODE 8011-01-P


                                  MEMORANDUM

Tetra Tech, Inc.
10306 Eaton Place, Suite 340
Fairfax, VA 22030
phone<PHONE_NUMBER>
fax<PHONE_NUMBER>

DATE: 		February 28, 2011

TO:			Paul Shriner, EPA

FROM:		Kelly Meadows, Tetra Tech

SUBJECT:	Space Constraints for Cooling Tower Retrofits

The size of the property plays an important role in determining whether a retrofit to cooling towers is feasible.  EPA previously addressed the issue of land availability for cooling tower retrofits in its final effluent limitation guideline (ELG) for steam electric facilities (39 FR 36186, October 8, 1974).  In this ELG, the Agency stated that it had determined that "28 acres per 1000 megawatts (MW) generating capacity is ample land on which any existing plant can construct a mechanical draft cooling tower." (See 39 FR 36190.)  The ELG also required a facility to consider relocating existing uses (such as parking areas), alternative cooling tower designs (e.g., natural draft towers, which require approximately 40% less land area), or the acquisition of adjacent land in its consideration of whether sufficient space is available.  Since land uses have likely changed since the early 1970's, EPA collected new data on the acreage and production capacity of power plant properties from site visits, regional offices, draft permits, and other sources.  This memo then explores the uncertainty over land availability and other space constraints to retrofitting wet cooling towers on an existing facility.

This memo primarily documents those sites EPA has visited in support of the 2011 proposed section 316(b) rulemaking, and is not intended to provide a statistical analysis. However, the data collected suggests that power plants where the ratio of facility size (expressed in MW) to facility acreage is equal to or exceeds 160 should have ample space to construct retrofit cooling towers.  EPA bases this ratio on the observation that approximately 95 percent of the 47 sites with a ratio of 160 and above would have sufficient acreage to retrofit mechanical draft cooling towers.  For the 25 observed sites with a ratio less than 160 MW per 1000 acres, as many as 20 percent of the facilities would likely be space constrained.  This memo documents only the observations of each site visit team, and does not reflect a detailed engineering feasibility assessment for each site.  For example, the configuration of the existing facility, topography, existing structures or uses, neighboring properties and uses, and other site-specific details may constrain the potential locations for siting cooling towers.

The table below summarizes the data collected (see Attachment A). EPA obtained most of the acreage data from facility's stated property boundaries during site visits.  Other site data was provided from facility permit applications, by EPA regions and state permitting authorities, or other site reports. This acreage includes the power block itself, transmission yards, parking areas, coal piles, and all other existing equipment or land uses.  Next, the land area was normalized by dividing the acres by the facility's generating capacity.  In doing so, a ratio of acres per 1000 MW was generated for all sites, thereby allowing for a comparison of facilities of all sizes and types.

                                 Facility Type
                                    Range
                                (acres/1000 MW)
                         Average Ratio (acres/1000 MW)
                         Median Ratio (acres/1000 MW)
All Site Visit Facilities
7  -  6216
858
350
Sites With Retrofit Cooling Towers
160 - 6216
2235
1920
Sites With Non-Retrofit Cooling Towers
83  -  5657
2318
1266

EPA also collected data on the facility size of plants with existing closed-cycle cooling systems (i.e. the cooling towers were not a retrofit).  EPA was able (through basic internet searches) to find information on facility acreage for an additional 25 facilities with either partial or full closed-cycle systems.

                                 Facility Type
                                    Range
                                (acres/1000 MW)
                         Average Ratio (acres/1000 MW)
                         Median Ratio (acres/1000 MW)
Partial CCRS
202  -  16,667
3077
1304
Closed-Cycle Cooling
117  -  5654
1285
850

Case Studies

Two facilities are worth discussing in greater detail as case studies for space constraints to cooling tower retrofits.

Brayton Point: Brayton Point Station in Massachusetts is currently constructing two natural draft cooling towers as part of a closed-cycle cooling system retrofit.  EPA Region I and Dominion Energy conducted thorough analyses on all aspects of the retrofit before Dominion Energy determined the final design.  Space constraints at the site was not identified as a feasibility issue in retrofitting to cooling towers.  In this analysis, Brayton Point's ratio was 160 acres/1000 MW.

McDonough: McDonough Power Plant in Georgia converted an older coal-fired plant to closed-cycle cooling (with a wet cooling tower) in 2008 as part of a broader plan to repower the site to use multiple natural gas combined cycle generating units.  To install the towers, Georgia Power demolished the adjacent Atkinson Plant to create space to construct the cooling towers.  Georgia Power also faced a number of challenges in retrofitting the towers, including relocating maintenance buildings, burying cooling water pipes, and adding pump stations.  According to data collected during the site visit, the ratio for McDonough (using the current coal-fired generating capacity and the original dimensions of the site) is 612 acres/1000 MW.  However, given the construction of the two new combined cycle units on other parts of the property, the effective acreage of the McDonough site could be as little as 80 acres, making the facility's ratio 163.


Lydia Wegman/RTP/USEPA/US

12/03/2007 10:28 AM

To

<EMAIL_ADDRESS><EMAIL_ADDRESS><EMAIL_ADDRESS> cc

<EMAIL_ADDRESS><EMAIL_ADDRESS>Zachary Pekar/RTP/USEPA/US@EPA, <EMAIL_ADDRESS>Tricia Crabtree/RTP/USEPA/US@EPA, <EMAIL_ADDRESS>Eileen Pritchard/DC/USEPA/US@EPA, Charlotte Bertrand/DC/USEPA/US@EPA

Subject

New redline version of lead NAAQS ANPR

Heidi and others,

Here's the new redline version of the ANPR responding to your comments and the discussions last Friday.  Please call me to let me know you received it.

----- Forwarded by Lydia Wegman/RTP/USEPA/US on 12/03/2007 10:25 AM -----

Zachary Pekar/RTP/USEPA/US

12/03/2007 10:23 AM

To

Lydia Wegman/RTP/USEPA/US@EPA, Karen Martin/RTP/USEPA/US@EPA, Deirdre Murphy/RTP/USEPA/US@EPA, David Orlin/DC/USEPA/US@EPA, John Hannon/DC/USEPA/US@EPA

cc

Subject

Emailing: Pb ANPR Nov 14 OMB draft-nov28-nov30-revsclean-Dec3-redline.pdf

Here is the pdf of the ANPR - ready for OMB review,

zach

The message is ready to be sent with the following file or link attachments:

Pb ANPR Nov 14 OMB draft-nov28-nov30-revsclean-Dec3-redline.pdf

Note: To protect against computer viruses, e-mail programs may prevent sending or receiving certain types of file attachments.  Check your e-mail security settings to determine how attachments are handled.

Zachary Pekar, Ph.D.

Ambient Standards Group

Office of Air and Radiation, USEPA

(919)541-3704

<EMAIL_ADDRESS>  - Pb ANPR Nov 14 OMB draft-nov28-nov30-revsclean-Dec3-redline.pdf


1 6/ 12/ 06 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY HUMAN STUDIES REVIEW BOARD ( HSRB) JUNE 27 30, 2006 PUBLIC MEETING One Potomac Yard ( South Building) 2777 Crystal Drive Arlington, VA 22202 703 305 7090 HSRB WEB SITE http:// www. epa. gov/ osa/ hsrb/ Docket Telephone: ( 202) 566 1752 Docket Number: EPA HQ ORD 2006 0384 Chair Celia B. Fisher, Ph. D. Marie Ward Doty Professor of Psychology Director, Center for Ethics Education Fordham University Department of Psychology, Dealy Hall 117F 441 East Fordham Road Bronx, NY 10458 Vice Chair William S. Brimijoin, Ph. D. Chair and Professor Molecular Pharmacology and Experimental Therapeutics Mayo Foundation 200 First Street SW Rochester, MN 55905 Members David C. Bellinger, Ph. D. Professor of Neurology Harvard Medical School Professor in the Department of Environmental Health Harvard School of Public Health Children's Hospital Farley Basement Box 127 300 Longwood Avenue Boston, MA 02115 2 Alicia Carriquiry, Ph. D. Professor Department of Statistics Iowa State University Snedecor Hall, Ames, IA 50011 1210 Ames, IA 50011 1210 Gary L. Chadwick, PharmD, MPH, CIP Associate Provost Director, Office for Human Subjects Protection University of Rochester 601 Elmwood Avenue Rochester, NY 14642 8628 Janice Chambers, Ph. D., D. A. B. T. William L. Giles Distinguished Professor Director, Center for Enviornmental Health Sciences College of Veterinary Medicine Mississippi State University PO Box 6100 Wise Center Spring Street Mississippi State, MS 39762 6100 Richard Fenske, Ph. D., MPH Professor Dept of Environmental and Occupational Health Sciences 1959 Northeast Pacific Street F 463 University of Washington Seattle WA 98105 Susan S. Fish, PharmD, MPH Associate Professor, Biostatistics & Epidemiology Boston University School of Public Health Co Director, MA in Clinical Investigation Boston University School of Medicine 715 Albany St ( T 4E) Boston, MA 02118 Suzanne C. Fitzpatrick, Ph. D., DABT Senior Science Policy Analyst Office of the Commissioner Office of Science and Health Coordination U. S. Food and Drug Administration 3 5600 Fishers Lane Rockville, MD 20852 Kannan Krishnan, Ph. D. Professor Département de santé environnementale et santé au travail Faculté de médicine Université de Montréal 2375 chemin de la Côte Ste Catherine, Room 4105 Montréal, QC, H3T 1A8, Canada KyungMann Kim, Ph. D., CCRP Professor & Associate Chair Department of Biostatistics & Medical Informatics School of Medicine and Public Health University of Wisconsin Madison 600 Highland Ave, Bx 4675 Madison, WI 53792 Michael D. Lebowitz, Ph. D., FCCP Professor of Public Health & Medicine University of Arizona, POBox 245211 MEZCOPH, Drachman Hall, Rm. A240 1295 N. Martin, Tucson, AZ 85704 Lois D. Lehman Mckeeman, Ph. D. Distinguished Research Fellow, Discovery Toxicology Bristol Myers Squibb Company PO Box 4000, Mail Stop H24 03 Rt. 206 and Province Line Roads Princeton, NJ 08543 Jerry A. Menikoff, M. D. Associate Professor of Law, Ethics & Medicine Director of the Institute for Bioethics, Law and Public Policy University of Kansas Medical Center 3901 Rainbow Boulevard Kansas City, KS 66160 7311 Robert Nelson, M. D., Ph. D. Associate Professor of Anesthesiology and Critical Care Department of Anesthesiology and Critical Care University of Pennsylvania School of Medicine The Children's Hospital of Philadelphia Room 1513 3535 Market Street 4 Philadelphia, PA 19104 Sean M. Philpott, Ph. D. Research Scientist David Axelrod Institute Wadsworth Center for Laboratories and Research New York State Department of Health 120 New Scotland Ave. Albany, NY 12208 Consultant to the Board Col Raj K Gupta, Ph. D. BCE Director, Science, Technology and Strategy Headquarters, Walter Reed Army Institute of Research 503 Robert Grant Avenue Silver Spring, MD 20910 7500 Daniel Strickman, Ph. D. National Program Leader Veterinary, Medical, and Urban Entomology United States Department of Agriculture Agricultural Research Service 5601 Sunnyside Ave. Room 4 2178 Beltsville, MD 20705 HSRB Staff Paul I. Lewis, Ph. D. Designated Federal Officer EPA Human Studies Review Board Office of the Science Advisor 1300 Pennsylvania Avenue, NW Washington, DC 20460


P-21-0189 Sanitized Support Documents Index:
 P-21-0189 Sanitized Premanufacture Notice (linked)
 P-21-0189 Sanitized Determination Document (linked)
 P-21-0189 Sanitized CHEM Report (attached)
 P-21-0189 Sanitized ECO Report (attached)
 P-21-0189 Sanitized ENG Report (attached)
 P-21-0189 Sanitized EXP Report (attached)
 P-21-0189 Sanitized Fate Report (attached)
 P-21-0189 Sanitized HLTH Report_POST-FOCUS FINAL (attached)


                    EPA/HQ Summary  -  Meeting with Walmart

Attendees

Walmart Participants: Richard Leahy, Wendy Brant, Melissa Wilson EPA/HQ Participants:

Betsy Devlin, Jessica Young, Drew Lausch, Jim O'Leary, Kristin Fitzgerald, Josh Smeraldi, Narendra Chaudhari

Date:  October 21, 2015

Location:  EPA/HQ  -  Potomac Yard North

Summary

EPA HQ met with representatives of Walmart primarily to discuss the proposed Hazardous Waste Pharmaceuticals Rule.  Walmart's presentation and associated discussions focused on:  (1) RCRA and the retail sector; (2) its Consent Agreement and Final Order with EPA; (3) over-the-counter pharmaceuticals; (4) prescription pharmaceuticals; (5) retail generator status and (6) waste determination documentation.  Walmart also provided data relating to the proposed Hazardous Waste Generator Improvements Rule.

Walmart subsequently provided confidential business information (CBI) and non-CBI (redacted) versions of its presentation to EPA HQ (see attached).