81 FR 31996 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing To Suspend the Interbank Service of the GCF Repo® Service

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 98 (May 20, 2016)

[Federal Register Volume 81, Number 98 (Friday, May 20, 2016)]
[Notices]
[Pages 31996-31999]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-11880]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77840; File No. SR-FICC-2016-002]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing To Suspend the Interbank Service of the GCF 
Repo[supreg] Service

May 16, 2016.
    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 May 5, 2016, the Fixed Income Clearing Corporation (``FICC'' or the 
``Corporation'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FICC. 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 purpose of this filing is to suspend the interbank service of 
the GCF Repo[supreg] service, as described more fully below. The 
proposed suspension does not require changes to the text of the 
Government Securities Division (``GSD'') Rulebook (the ``GSD 
Rules''),\3\ however, changes will occur within FICC's Real-Time Trade 
Matching (``RTTM[supreg]'') system to effectuate this change.
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    \3\ The GSD Rulebook is available at DTCC's Web site, 
www.dtcc.com/legal/rules-and-procedures.aspx.
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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

[[Page 31997]]

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
i. Reasons for Adopting the Proposed Rule Change
    The GCF Repo service allows GSD dealer members (hereinafter ``GCF 
Repo Participants'') who choose to participate in the service to trade 
general collateral repos throughout the day without requiring intra-
day, trade-for-trade settlement on a delivery-versus-payment basis.\4\ 
The service allows the GCF Repo Participants to trade such general 
collateral repos, based on rate and term, throughout the day with 
inter-dealer brokers on a blind basis. Standardized, generic CUSIP 
numbers have been established exclusively for GCF Repo processing and 
are used to specify the acceptable type of underlying Fedwire book-
entry eligible collateral, which includes Treasuries, Agencies and 
certain mortgage-backed securities.
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    \4\ Securities Exchange Act Release No. 34-57652 (April 11, 
2008), 73 FR 20999 (April 17, 2008) (SR-FICC-2007-08).
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    The GCF Repo service currently operates on an interbank basis and 
on an intrabank basis. ``Interbank'' means that the two GCF Repo 
Participants which have been matched in a GCF Repo transaction each 
clear at a different clearing bank. ``Intrabank'' means that the two 
GCF Repo Participants which have been matched in a GCF Repo transaction 
clear at the same clearing bank.
    Since 2011, FICC has been committed to working with its clearing 
banks, JP Morgan Chase and The Bank of New York Mellon (together 
hereinafter referred to as the ``Clearing Banks''), to make changes to 
its GCF Repo service in order to comply with the recommendations that 
had been made by the Tri-Party Repo Infrastructure Reform Task Force 
(``TPR''),\5\ an industry group formed and sponsored by the Federal 
Reserve Bank of New York.\6\ Because the GCF Repo service operates as a 
triparty mechanism, FICC was requested to incorporate changes to the 
GCF Repo service to align the service with other TPR recommended 
changes for the overall triparty market.
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    \5\ Information about the Federal Reserve's Tri-Party Repo 
Infrastructure Reform is available via http://www.newyorkfed.org/banking/tpr_infr_reform.html.
    \6\ The TPR's effort shall hereinafter be referred to as 
``Triparty Reform.''
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    The main purpose of the TPR was to develop recommendations to 
address the risk presented by triparty repo transactions due to the 
morning reversal (commonly referred to as the ``unwind'') process and 
to move to a process by which transactions are collateralized all day. 
By way of background, the GCF Repo service was originally designed to 
have transactions ``unwind'' every morning in order to mirror the 
transactions in the triparty repo market. Prior to Triparty Reform, 
transactions submitted on ``Day 1'' unwound on the morning of ``Day 
2.'' To ``unwind'' means that the securities are returned to the lender 
of securities in the transaction and the cash is returned to the 
borrower of securities.
    Because of certain changes to the way in which the Triparty Reform 
effort was to proceed and the impact of such changes on the interbank 
service of the GCF Repo service as further described below, FICC is 
proposing to suspend the interbank service of the GCF Repo service. The 
intrabank service will continue to operate as it does today.
ii. The Situation That the Proposed Rule Change Is Intended To Address 
and the Manner in Which the Proposed Rule Change Will Operate To 
Resolve It
    By way of background, all collateral that is settled via the 
interbank service is unwound the next morning to FICC's account at the 
pledging Clearing Bank in order to make the collateral available for 
collateral substitutions. In order to facilitate this intraday 
collateral substitution process, the Clearing Banks currently extend 
credit each business day to FICC at no charge. This uncapped and 
uncommitted credit extension to FICC facilitates the GCF Repo 
settlement process for both the intra-day and end of day settlement. 
The final changes related to the Triparty Reform effort would have 
eliminated the need for uncapped and uncommitted credit (a TPR goal) by 
including the development of interactive messages for the collateral 
substitution process (this was referred to as the ``Sub Hub''), which 
would have eliminated the need for the current morning unwind of 
interbank GCF Repo and would have allowed for substitution of 
collateral across the Clearing Banks with minimal intra-day credit 
required. The last change was also going to include a streamlined end 
of day GCF Repo settlement process to reduce the amount of cash and 
collateral needed in order to complete settlement. This change would 
have incorporated the concept of a ``cap'' on FICC credit from the 
Clearing Banks and an automated solution would have been developed to 
process the interbank GCF Repo settlement without breaching the defined 
and agreed to caps. This means that the amount of credit that FICC 
would have required from the Clearing Banks would have been managed to 
a minimal amount.
    FICC was advised by one of the Clearing Banks that the Sub Hub has 
been determined not to be feasible and that FICC would instead require 
a capped line of credit which would be applicable to the current 
interbank service (without the benefits of any re-design to manage the 
amounts of needed credit). In other words, this new proposed capped 
line of credit would be applied to the interbank service as the service 
currently operates and not in the re-designed fashion that was 
contemplated by the Triparty Reform effort, which would have allowed 
for smaller settlement amounts.
    FICC and several GCF Repo Participants considered the feasibility 
of a cap on the current structure of the interbank service of the GCF 
Repo service without the Sub Hub functionality and without the re-
design of the interbank service to allow for manageable caps. FICC and 
such GCF Repo Participants determined that there would be significant 
operational constraints in attempting to trade and settle GCF Repo 
while attempting to implement a cap on interbank GCF Repo trading and 
settlement. Specifically, the inter-dealer brokers would need to be 
integrated as a group from a technological perspective in order to be 
able to track the GCF Repo Participants' real-time netted positions, 
from an intrabank and interbank perspective, to ensure that the cap is 
not breached; this would require an integrated pre-trade check across 
each inter-dealer broker's platform and FICC to ensure conformity to 
the cap.
    Because FICC cannot operate the current interbank service within a 
capped credit amount as proposed by the one of the Clearing Banks with 
the current settlement process at the Clearing Banks and because it is 
not feasible to institute a pre-trade validation system as discussed 
above, FICC will no longer operate the interbank service of the GCF 
Repo service after July 15, 2016 (the ``Suspension Date''), which is 
approximately six (6) weeks prior to the date that the Clearing Bank 
has stated it will begin to impose the capped line of credit (September 
1, 2016 or the ``Capped Charges Date''). Subsequent to

[[Page 31998]]

the Suspension Date, inter-dealer brokers will only be permitted to 
execute transactions among GCF Repo Participants within the same 
Clearing Bank. Inter-dealer brokers will establish two markets for GCF 
Repo trading--one for each Clearing Bank. This is the same approach 
that was utilized when the interbank service was previously suspended 
between 2003 and 2008.\7\ In addition, GSD will only accept and process 
transactions among GCF Repo Participants that settle within the same 
Clearing Bank. As a result, the RTTM[supreg] system will not accept and 
process transactions among GCF Repo Participants who settle at 
different Clearing Banks. FICC will continue to explore whether there 
are other ways in which the interbank service might be re-introduced in 
the future.
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    \7\ Securities Exchange Act Release No. 48006 (June 10, 2003), 
68 FR 35745 (June 16, 2003) (SR-FICC-2003-04).
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iii. The Manner in Which the Proposed Rule Change Will Affect GSD 
Netting Members
    GCF Repo Participants will be affected by the suspension of the 
interbank service in that, after the Suspension Date, these Members 
will only be matched with GCF Repo Participants who clear at their 
Clearing Bank. This may limit the potential number of counterparties 
available to GCF Repo Participants and for some GCF Repo Participants 
this limitation may significantly reduce the benefits of the GCF Repo 
service.
    Currently, one Clearing Bank has more GCF Repo Participants than 
the other Clearing Bank. Thus, GCF Repo Participants who clear at the 
Clearing Bank with the least number of GCF Repo Participants will have 
a limited number of GCF Repo counterparties with which they are able to 
transact. This limitation may result in a less liquid market for GCF 
Repo Participants within that particular Clearing Bank. The GCF Repo 
Participants at the other Clearing Bank may not experience this 
limitation since they will have more GCF Repo counterparties available 
to them.
    The fact that interbank settlement currently occurs on a daily 
basis suggests that GCF Repo Participants benefit from their ability to 
borrow money from GCF Repo counterparties on an interbank basis. Once 
this option no longer exists, financing needs may be absorbed within 
the intrabank GCF Repo market or, it may shift to the delivery-versus-
payment (``DVP'') or triparty repo markets. It is also possible that 
the number of GCF Repo Participants may decrease depending upon each 
Participant's ability to access alternative funding sources and the 
assets that such Participants are looking to finance. For example, U.S. 
Treasuries and Agencies may be more easily financed in the DVP repo 
market, however, Agency mortgage-backed securities (``MBS'') are not as 
easily financed via the DVP repo market. Thus, GCF Repo Participants 
with portfolios comprised of Agency mortgage-backed securities may have 
fewer financing options due to the suspension of the interbank service.
iv. Any Significant Problems Known to FICC That Netting Members Are 
Likely To Have in Complying With the Proposed Rule Change
    FICC does not believe that GCF Repo Participants will have problems 
in complying with the suspension of the interbank service because of 
the nature of the GCF Repo Service. Specifically, because the service 
is conducted through the inter-dealer brokers on a blind basis, the 
brokers will not match dealers from different Clearing Banks after the 
Suspension Date.
v. Detailed Description of the Proposed Rule Changes in Exhibit 5
    No changes to the text of the GSD Rules are required to implement 
the suspension of the interbank service.
2. Statutory Basis
    Pursuant to Section 17A(b)(3)(F) of the Act, GSD's Rules must be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions.\8\ FICC is proposing to suspend the interbank 
service of the GCF Repo service because FICC cannot operate the current 
interbank service within a capped credit amount as described above. 
Because the Clearing Bank has stated that it will not provide credit to 
FICC to complete interbank settlement above the capped amount after the 
Capped Charges Date, FICC will not be able to complete settlement of 
the interbank service. Therefore, in order to continue to promote the 
prompt and accurate clearance and settlement of securities 
transactions, FICC is proposing to suspend the interbank service.
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    \8\ 5 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    The suspension of the interbank service could have an impact on 
competition based on the fact that GCF Repo Participants will only be 
matched in GCF Repo transactions with other Members that clear at the 
same Clearing Bank. This may limit the number of potential 
counterparties for the Members. Currently, one Clearing Bank has more 
GCF Repo Participants than the other Clearing Bank. Thus, GCF Repo 
Participants who clear at the Clearing Bank with the least number of 
GCF Repo Participants will have a limited number of GCF Repo 
counterparties. This limitation may result in a less liquid market for 
GCF Repo Participants within that particular Clearing Bank. However, 
FICC believes that any burden on competition would be necessary and 
appropriate in furtherance of the purposes of the Act. By suspending 
the interbank service of the GCF Repo service, FICC is avoiding a 
situation where it would not be able to complete settlement as 
described above.

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

    Written comments on the suspension of the interbank service have 
not yet been solicited or received. FICC will notify the Commission of 
any written comments received by FICC.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period 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 the 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 protected]. Please include 
File Number SR-FICC-2016-002 on the subject line.

[[Page 31999]]

Paper Comments

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

All submissions should refer to File Number SR-FICC-2016-002. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of FICC and on 
DTCC's Web site at http://www.dtcc.com/legal/sec-rule-filings.aspx. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FICC-2016-002 and should be 
submitted on or before June 10, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11880 Filed 5-19-16; 8:45 am]
 BILLING CODE 8011-01-P