82 FR 21439 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Granting Approval of Proposed Rule Change To Establish the Centrally Cleared Institutional Triparty Service and Make Other Changes

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 87 (May 8, 2017)

Page Range		21439-21443
FR Document		2017-09193

Federal Register, Volume 82 Issue 87 (Monday, May 8, 2017)

[Federal Register Volume 82, Number 87 (Monday, May 8, 2017)]
[Notices]
[Pages 21439-21443]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2017-09193]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80574; File No. SR-FICC-2017-005]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Granting Approval of Proposed Rule Change To Establish the
Centrally Cleared Institutional Triparty Service and Make Other Changes

May 2, 2017.

I. Introduction

On March 9, 2017, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-FICC-2017-005, pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on March 30, 2017.\3\ The Commission received one
comment letter on the proposed rule change.\4\ This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4. FICC also filed this proposal as an
advance notice pursuant to Section 802(e)(1) of the Payment,
Clearing, and Settlement Supervision Act of 2010 and Rule 19b-
4(n)(1) under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1). The advance notice was published for comment in the Federal
Register on April 7, 2017. See Securities Exchange Act Release No.
80361 (April 3, 2017), 82 FR 17053 (April 7, 2017) (SR-FICC-2017-
803). The Commission did not receive any comments on the advance
notice.
\3\ Securities Exchange Act Release No. 80303 (March 24, 2017),
82 FR 15749 (March 30, 2017) (SR-FICC-2017-005) (``Notice'').
\4\ See letter from Thomas Wipf, Chief Financial Officer, Morgan
Stanley & Co. LLC, dated April 19, 2017, to Eduardo A. Aleman,
Assistant Secretary, Commission, available at https://www.sec.gov/comments/sr-ficc-2017-005/ficc2017005.htm (``Morgan Stanley
Letter'').
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II. Description of the Proposal

Repurchase agreement (``repo'') transactions involve the sale of
securities along with an agreement to repurchase the securities on a
later date. Bilateral repo transactions involve a cash lender (e.g., a
money market mutual fund, pension fund, or other entity with funds
available for lending) and a cash borrower (typically a broker-dealer,
hedge fund, or other entity seeking to finance securities that can be
used to collateralize the loan). In the opening leg of the repo
transaction, the cash borrower receives cash in exchange for securities
equal in value to the amount of cash received, plus a haircut. In the
closing leg of the repo transaction, the cash borrower pays back the
cash plus interest in exchange for

[[Page 21440]]

the securities posted as collateral. In tri-party repo transactions, a
clearing bank tri-party agent provides to both the cash lender and the
cash borrower certain operational, custodial, collateral valuation, and
other services to facilitate the repo transactions. For example, the
tri-party agent may facilitate and record the exchange of cash and
securities on a book-entry basis for each of the counterparties to the
repo transaction, as well as effectuating the collection and transfer
of collateral that may be required under the terms of the repo
transaction. Cash lenders use tri-party repos as investments that offer
liquidity maximization, principal protection, and a small positive
return, while cash borrowers rely on them as a major source of short-
term funding.\5\
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\5\ See Federal Reserve Bank of New York, Tri-Party Repo
Infrastructure Reform, https://www.newyorkfed.org/medialibrary/media/banking/nyfrb_triparty_whitepaper.pdf (last visited Apr. 27,
2017).
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FICC currently provides central clearing to a segment of the tri-
party repo market through its general collateral finance repo service
(``GCF Repo[supreg] Service'').\6\ The GCF Repo Service is available to
sell-side entities, such as dealers, that enter into tri-party repo
transactions, in GCF Repo Securities, with each other.\7\
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\6\ The term ``GCF Repo'' is a registered trademark of FICC. The
GCF Repo Service is a service offered by FICC to compare, net, and
settle general collateral repos. Notice, 82 FR at 15750.
\7\ GCF Repo Securities are securities issued or guaranteed by
the United States, a U.S. government agency or instrumentality, a
U.S. government-sponsored corporation (or otherwise approved by
FICC's Board of Directors), and such securities are only eligible
for submission to FICC in connection with the comparison, netting
and/or settlement of repo transactions involving generic CUSIP
numbers (i.e., identifying numbers established for a category of
securities, as opposed to a specific security). See Notice, 82 FR at
15750.
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FICC's proposal would broaden the pool of entities that would be
eligible to submit tri-party repo transactions for central clearing at
FICC. Specifically, FICC proposes to amend its Government Securities
Division (``GSD'') Rulebook (``GSD Rules'') \8\ to establish the
``Centrally Cleared Institutional Tri-Party Service'' or the
``CCIT^TM Service.'' \9\ The proposed CCIT Service would
allow the submission of tri-party repo transactions in GCF Repo
Securities between GSD Netting Members \10\ that participate in the GCF
Repo Service and institutional counterparties (other than registered
investment companies (``RICs'') under the Investment Company Act of
1940, as amended),\11\ where the institutional counterparties are the
cash lenders in the transactions.
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\8\ Available at http://www.dtcc.com/legal/rules-and-procedures.
\9\ CCIT is a trademark of The Depository Trust & Clearing
Corporation, of which FICC is a subsidiary. FICC defines ``Centrally
Cleared Institutional Tri-Party Service'' and ``CCIT Service'' as
``the service offered by the Corporation to clear institutional tri-
party repurchase agreement transactions, as more fully described in
Rule 3B.'' Proposed GSD Rule 1, Definitions.
\10\ The term ``Netting Member'' is defined as a member of
FICC's Comparison System (i.e., the system of reporting, validating,
and matching the long and short sides of securities trades to ensure
that the details of such trades are in agreement between the
parties) and FICC's Netting System (i.e., the system for aggregating
and matching offsetting obligations resulting from trades). GSD
Rules, supra note 8.
\11\ 15 U.S.C. 80a-1 et seq. According to FICC, the legal
ability of such registered investment companies to participate in
the proposed CCIT Service is uncertain in light of applicable
regulatory requirements under the Investment Company Act of 1940
(including, for example, liquid asset requirements and counterparty
diversification requirements). Notice 82 FR at 15762.
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To effectuate the proposed CCIT Service, FICC proposes to create a
new limited service membership category in GSD for institutional cash
lenders. These new members would be referred to as CCIT members, and
the GSD membership provisions that apply to the CCIT members would be
addressed in proposed GSD Rule 3B. These new membership provisions
include: \12\
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\12\ For additional discussion of the membership provisions set
forth in proposed GSD Rule 3B, see also Notice, 82 FR at 15751-58.
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Membership eligibility criteria, including minimum
financial requirements, operational capabilities, and opinions of
counsel;
joint account ownership, in which one authorized entity
would act as agent for two or more CCIT members;
membership application processes, including document
provision and disclosure requirements, operational testing
requirements, reporting requirements, FATCA compliance certification
requirements,\13\ and the procedures for denying membership;
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\13\ FATCA is the Foreign Account Tax Compliance Act, 26 U.S.C.
1471 et seq. FATCA compliance means that an ``. . . FFI [foreign
financial institution] Member has qualified under such procedures
promulgated by the Internal Revenue Service . . . to establish
exemption from withholding under FATCA such that [FICC] would not be
required to withhold [anything] under FATCA . . . .'' GSD Rules 1,
supra note 8.
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membership agreement terms describing rights and
obligations;
procedures for the voluntary termination of CCIT
membership; and
ongoing membership requirements, including (i) annual
financial and other disclosure requirements; (ii) operational testing
requirements and related reporting requirements; (iii) notification of
GSD rule non-compliance; (iv) penalties for GSD rule non-compliance;
(v) mandatory assurances in the event that FICC has reason to believe a
member may fall into GSD rule non-compliance; (vi) requirements to
comply with applicable tax, money laundering, and sanctions laws; (vii)
audit provisions allowing FICC to access relevant books and records;
and (viii) financial/operational monitoring.
In addition to membership provisions, proposed Rule 3B also would
set forth the applicable risk management provisions relating to the new
limited service membership category, including: \14\
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\14\ For additional discussion of the risk management provisions
set forth in proposed GSD Rule 3B, see also Notice, 82 FR at 15757-
58.
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Non-mutualized loss allocation obligations of CCIT
members, including FICC's perfected security interest in each CCIT
member's underlying repo securities;
a rules-based committed liquidity facility for CCIT
members, in which CCIT members that have outstanding CCIT transactions
with a defaulting member would be required to enter into CCIT master
repurchase agreement (``MRA'') transactions with FICC for specified
periods of time;
uncommitted liquidity repos between CCIT members and FICC;
and
application of certain other GSD Rules (e.g., comparison,
netting, settlement, default, and other applicable provisions) to CCIT
members and transactions.
In addition to the proposed changes to the GSD Rules related to the
proposed CCIT Service, the proposal also contains other changes to the
GSD Rules, unrelated to the CCIT proposal. These non-CCIT related
changes generally are intended to update the GSD Rules and provide
additional specificity, clarity, and transparency for members that rely
on them.\15\ These non-CCIT related proposed rule changes include the
following:
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\15\ For additional description and explanation of the non-CCIT-
related changes included in the proposal, see Notice, 82 FR at
15759-60.
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Clarifying that Comparison-Only Members must conform to
FICC's operational conditions and requirements; \16\
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\16\ GSD members may be either Comparison-Only Members or
Netting Members. Comparison-Only Members are members of the GSD
Comparison System, which is the GSD system for reporting,
validating, and in some cases, matching of securities trades.
Netting Members are members of both the GSD Comparison System and
the GSD Netting System, which is the GSD system for aggregating and
matching offsetting obligations resulting from securities trades.
Pursuant to GSD Rule 2A, FICC may require an entity to be a
Comparison-Only Member for a period of time (during which FICC
assess the entity's operational soundness) before the entity becomes
eligible to apply for netting membership.

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[[Page 21441]]

clarifying the point of time in which a member is required
to notify FICC that the member is no longer in compliance with a
relevant membership qualification and standard;
providing that a member's written notice of its membership
termination is not effective until accepted by FICC;
requiring all GCF Repo transactions to be fully
collateralized by 9:00 a.m. New York Time;
prohibiting a member that receives collateral in the GCF
Repo process from withdrawing the securities or cash collateral
received;
specifying the steps that members must take in the event
of FICC's default so that FICC may determine the net amount owed by or
to each member;
reflecting FICC's current practice of annual study and
evaluation of FICC's internal accounting control system; and
correcting several grammatical and out-of-date cross-
references.
In addition to the proposed changes listed above, the proposed rule
change also includes a proposal for a non-CCIT related rule change that
would provide FICC with access to the books and records of a RIC
Netting Member's controlling management. The change is intended to
enable FICC to determine whether the RIC has sufficient financial
resources and monitor compliance with FICC's financial requirements on
an ongoing basis.

III. Summary of Comments Received

The Commission received one comment letter from Morgan Stanley in
support of the proposal. In the comment letter, Morgan Stanley notes
the general benefits of central clearing, including enhanced risk
management, efficiency in securities financing transactions, enhancing
market access, and increased creditworthiness.\17\ Morgan Stanley also
notes the specific benefits of the CCIT proposal, including (i)
generating access for clients to high quality liquid assets (e.g., U.S.
Government securities); (ii) providing capacity to cash lenders; (iii)
retaining bilateral agreements; (iv) building operational efficiencies;
(v) reducing settlement risk; (vi) providing opportunities for margin
and capital efficiency and balance sheet netting; and (vii) increasing
market stability, liquidity, and price transparency by enhancing the
tri-party repo market.\18\
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\17\ See Morgan Stanley Letter at 1-2.
\18\ See Morgan Stanley Letter at 2-3.
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IV. Discussion of Commission Findings

Section 19(b)(2)(C) of the Act \19\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the proposed rule
change and the comment received, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to FICC. In particular, the
Commission believes the proposal is consistent with Sections
17A(b)(3)(F), (G), and (H) of the Act,\20\ as well as Rules 17Ad-
22(e)(1), (4), and (18) thereunder.\21\
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\19\ 15 U.S.C. 78s(b)(2)(C).
\20\ 15 U.S.C. 78q-1(b)(3)(F), (G), and (H).
\21\ 17 CFR 240.17Ad-22(e)(1), (4), and (18)
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A. Consistency With Section 17A(b)(3)(F) of the Act

Section 17A(b)(3)(F) of the Act requires, in part, that the GSD
Rules be designed to (i) promote the prompt and accurate clearance and
settlement of securities transactions; (ii) remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions; and (iii) in
general, to protect investors and the public interest.\22\
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\22\ 15 U.S.C. 78q-1(b)(3)(F).
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First, the Commission believes that the proposed changes that are
unrelated to the proposed CCIT Service are consistent with promoting
prompt and accurate clearance and settlement. As described above, FICC
proposes a number of rule changes that are unrelated to the proposed
CCIT service. Specifically, FICC proposes changes to Section 3(a) of
GSD Rule 2A (Initial Membership Requirements), Sections 7, 10 and 13 of
GSD Rule 3 (Ongoing Membership Requirements), Section 5 of GSD Rule 4
(Clearing Fund and Loss Allocation), Section 3 of GSD Rule 20 (Special
Provisions for GCF Repo Transactions) and the Schedule of GCF
Timeframes, Subsection (a) of GSD Rule 22B (Corporation Default), and
GSD Rule 35 (Financial Reports). These changes are intended to provide
specificity, clarity, and additional transparency to the GSD Rules,
which would help provide members with a better understanding of the
Rules, decrease the likelihood of errors in the performance of members'
responsibilities to FICC, and, thereby, help ensure that FICC's
clearing and settlement system works more efficiently. Therefore, the
Commission believes that these proposed rule changes would promote the
prompt and accurate clearance and settlement of securities transactions
by FICC, consistent with Section 17A(b)(3)(F) of the Act.\23\
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\23\ Id.
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Second, the Commission believes that the proposed rule changes
related to the proposed CCIT service are consistent with removing
impediments to and perfecting the mechanism of a national system for
the prompt and accurate clearance and settlement of securities
transactions. As described above, the proposed CCIT Service would
establish a new membership category at FICC (i.e., the CCIT
membership). By removing current obstacles to FICC's membership through
the creation of a new, limited-service GSD membership category for
institutional cash lenders, the proposal would expand the availability
of GSD's infrastructure to institutional cash lenders and, in turn,
enable a greater number of tri-party repo transactions to be eligible
for the benefits of FICC's centralized clearing. Accordingly, the
Commission believes that the proposed rule change would help remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\24\
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\24\ Id.
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Third, the Commission believes that the proposed rule changes
related to the proposed CCIT service are consistent with the protection
of investors and in the public interest. As described above, FICC
proposes to establish the CCIT service, which would establish the
centralized clearing of proposed CCIT securities transactions that are
otherwise transacted bilaterally. By expanding access to centralized
clearing (and thus, FICC's netting, novation, and settlement
guarantee), the proposal would lower the risk of diminished liquidity
in the tri-party repo market caused by a large scale exit of
participants from the market in a stress scenario. The proposal would
also protect against fire sale risk through FICC's ability to
centralize and control the liquidation of a greater portion of a failed
counterparty's portfolio. Accordingly, by applying the efficiencies and
risk mitigating aspects of centralized clearing to the proposed CCIT
transactions, the proposal would help decrease the settlement and
operational risks that are otherwise present in the current bilateral
transactions of such securities.
In addition, as described above, the CCIT proposal includes
provisions that would establish the CCIT MRA and a perfected security
interest in each CCIT member's underlying repo securities.

[[Page 21442]]

Each of these tools would help provide FICC with sufficient liquidity
resources to settle the obligations of a CCIT member's defaulted
Netting Member pre-novation counterparty. In doing so, the proposed
CCIT Service provides for prudent risk management of CCIT transactions
and CCIT members.
For these reasons, the Commission believes that the proposed rule
changes related to the proposed CCIT Service help protect investors,
particularly those in the CCIT market, and are in the public interest,
consistent with Section 17A(b)(3)(F) of the Act.\25\
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\25\ Id.
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B. Consistency With Section 17A(b)(3)(G) and (H) of the Act

Section 17A(b)(3)(G) of the Act requires that the GSD Rules
``provide that . . . [FICC's] participants shall be appropriately
disciplined for violation of any provision of the rules of the clearing
agency by expulsion, suspension, limitation of activities, functions,
and operations, fine, censure, or any other fitting sanction.'' \26\
Section 17A(b)(3)(H) of the Act requires, in part, that the GSD Rules
``provide a fair procedure with respect to the disciplining of
participants, the denial of participation to any person seeking
participation therein, and the prohibition or limitation by the
clearing agency of any person with respect to access to services
offered by the clearing agency.'' \27\
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\26\ 15 U.S.C. 78q-1(b)(3)(G).
\27\ 15 U.S.C. 78q-1(b)(3)(H).
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As described above, the proposed CCIT membership would subject CCIT
members, and applicants that wish to become CCIT members, to comparable
admission requirements \28\ and the same disciplinary requirements (and
related due process procedures) as those applicable to Netting Members,
and applicants that wish to become Netting Members. In establishing the
proposed CCIT membership under similar admission and disciplinary
requirements as FICC's existing requirements, the Commission believes
that the proposed CCIT membership would establish an appropriate
framework for the admission and disciplining of CCIT members,
consistent with the requirements of Sections 17A(b)(3)(G) and
17A(b)(3)(H) of the Act.\29\
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\28\ There would be certain differences between the admission
requirements applicable to CCIT members under proposed GSD Rule 3B
and those applicable to Netting Members under GSD Rule 2A. See
Notice, 82 FR at 15761.
\29\ 15 U.S.C. 78q-1(b)(3)(G) and (H).
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C. Consistency With Rules 17Ad-22(e)(1), (4), and (18) Under the Act

The Commission believes that the proposed rule change is consistent
with Rule 17Ad-22(e)(1) under the Act.\30\ Rule 17Ad-22(e)(1) requires,
in part, that FICC ``establish, implement, maintain and enforce written
policies and procedures reasonably designed to . . . [p]rovide for a
well-founded, clear, transparent and enforceable legal basis for each
aspect of its activities.'' \31\ As described above, FICC proposes a
number of changes that are unrelated to the proposed CCIT Service and
designed to make the GSD Rules more clear, consistent, and current for
members that rely on them. The Commission believes that these non-CCIT
related changes could make FICC's policies and procedures in the GSD
Rules more clear, consistent, and transparent for members that rely on
them, and therefore believes that the proposed changes would help
support FICC's rules being clear and transparent, consistent with Rule
17Ad-22(e)(1), cited above.
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\30\ 17 CFR 240.17Ad-22(e)(1).
\31\ Id.
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The Commission believes that the proposed rule change is consistent
with Rule 17Ad-22(e)(4)(iii) under the Act.\32\ Rule 17Ad-22(e)(4)(iii)
requires, in part, that FICC ``establish, implement, maintain and
enforce written policies and procedures reasonably designed to . . .
[e]ffectively identify, measure, monitor, and manage its credit
exposures to participants and those arising from [FICC's] payment,
clearing, and settlement processes, including by . . . maintaining . .
. financial resources at the minimum to enable [FICC] to cover a wide
range of stress scenarios. . . .'' \33\ As discussed above, the CCIT
Service includes risk management tools, such as the perfected security
interest and the CCIT MRA liquidity resource. The Commission believes
that these risk management tools would help facilitate FICC's
management of credit, market, and liquidity risk that would arise from
becoming a central counterparty to the new repo positions coming in via
the proposed CCIT Service. Accordingly, the Commission believes that
the proposed changes to its policies and procedures in the GSD Rules
are designed to help effectively manage FICC's exposure, including its
credit exposure to participants, arising from its payment, clearing,
and settlement processes for the proposed CCIT transactions by
providing for financial resources to help cover a wide range of
foreseeable stress scenarios, consistent with Rule 17Ad-22(e)(4)(iii),
cited above.
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\32\ 17 CFR 240.17Ad-22(e)(4)(iii).
\33\ Id.
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The Commission also believes that the proposal is consistent with
Rule 17Ad-22(e)(18) under the Act.\34\ Rule 17Ad-22(e)(18) requires, in
part, that FICC ``establish, implement, maintain and enforce written
policies and procedures reasonably designed to . . . [e]stablish
objective, risk-based, and publicly disclosed criteria for
participation, which . . . require participants to have sufficient
financial resources and robust operational capacity to meet obligations
arising from participation in the clearing agency, and monitor
compliance with such participation requirements on an ongoing basis.''
\35\
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\34\ 17 CFR 240.17Ad-22(e)(18).
\35\ Id.
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In connection with the establishment of the proposed CCIT Service,
FICC would include provisions in the GSD rules to incorporate
membership standards, requiring, for example, ongoing financial
responsibility and operational capacity requirements, as well as the
requirements that would be applicable to Netting Members with respect
to their participation in the proposed CCIT Service. The Commission
believes that, by incorporating such requirements, FICC would establish
in its policies and procedures objective, risk-based, and publicly
disclosed criteria for participation in the CCIT Service, consistent
with Rule 17Ad-22(e)(18).
Similarly, in connection with the proposed non-CCIT related change
to provide FICC with access to the books and records of a RIC Netting
Member's controlling management, FICC would be authorized to review the
financial information of the RIC. Because this would enable FICC to
determine whether the RIC has sufficient financial resources and
monitor compliance with FICC's financial requirements on an ongoing
basis, the Commission believes this requirement is consistent with Rule
17Ad-22(e)(18).

V. Conclusion

On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act, in particular
the requirements of Section 17A of the Act \36\ and the rules and
regulations promulgated thereunder.
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\36\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that proposed rule change SR-FICC-2017-005 be and hereby is APPROVED as
of the date of this order or the date of a

[[Page 21443]]

notice by the Commission authorizing FICC to implement FICC's advance
notice proposal (SR-FICC-2017-803) that is consistent with this
proposed rule change, whichever is later.\37\
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\37\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09193 Filed 5-5-17; 8:45 am]
BILLING CODE 8011-01-P

Federal Register / Vol. 82, No. 87 / Monday, May 8, 2017 / Notices 21439

A proposed rule change filed Electronic Comments SECURITIES AND EXCHANGE
pursuant to Rule 19b–4(f)(6) under the COMMISSION
Act 13 normally does not become • Use the Commission’s Internet
comment form (http://www.sec.gov/ [Release No. 34–80574; File No. SR–FICC–
operative for 30 days after the date of its 2017–005]
filing. However, Rule 19b–4(f)(6)(iii) 14 rules/sro.shtml); or
permits the Commission to designate a • Send an email to rule-comments@ Self-Regulatory Organizations; Fixed
shorter time if such action is consistent sec.gov. Please include File Number SR– Income Clearing Corporation; Order
with the protection of investors and the GEMX–2017–04 on the subject line. Granting Approval of Proposed Rule
public interest. The Exchange has asked Change To Establish the Centrally
the Commission to waive the 30-day Paper Comments Cleared Institutional Triparty Service
operative delay so that the proposal may and Make Other Changes
become operative immediately upon • Send paper comments in triplicate
filing. The Commission believes that to Secretary, Securities and Exchange May 2, 2017.
waiving the 30-day operative delay is Commission, 100 F Street NE.,
Washington, DC 20549–1090. I. Introduction
consistent with the protection of
investors and the public interest. The On March 9, 2017, Fixed Income
All submissions should refer to File Clearing Corporation (‘‘FICC’’) filed
Commission notes that GEMX (formerly Number SR–GEMX–2017–04. This file
known as Topaz Exchange, LLC) was with the Securities and Exchange
number should be included on the Commission (‘‘Commission’’) proposed
approved as an Exchange on July 26, subject line if email is used. To help the
2013, and its rules at that time provided rule change SR–FICC–2017–005,
Commission process and review your pursuant to Section 19(b)(1) of the
for a quote mitigation plan.15 According
to the Exchange, GEMX transitioned to comments more efficiently, please use Securities Exchange Act of 1934
a new operating platform (INET) on only one method. The Commission will (‘‘Act’’),1 and Rule 19b–4 thereunder.2
April 3, 2017; however, this platform post all comments on the Commission’s The proposed rule change was
does not support the quote mitigation Internet Web site (http://www.sec.gov/ published for comment in the Federal
strategy in current GEMX Rule 804(h). rules/sro.shtml). Copies of the Register on March 30, 2017.3 The
The Exchange represents that since submission, all subsequent Commission received one comment
GEMX transitioned to INET, it has been amendments, all written statements letter on the proposed rule change.4
mitigating quotes pursuant to the quote with respect to the proposed rule This order approves the proposed rule
mitigation strategy used by Phlx today. change that are filed with the change.
The Exchange represents that the Commission, and all written II. Description of the Proposal
proposal would allow the Exchange to communications relating to the Repurchase agreement (‘‘repo’’)
operate a quote mitigation plan on the proposed rule change between the transactions involve the sale of
INET platform and effectively mitigate Commission and any person, other than securities along with an agreement to
the amount of options quote traffic on those that may be withheld from the repurchase the securities on a later date.
the Exchange. Accordingly, the public in accordance with the Bilateral repo transactions involve a
Commission hereby waives the provisions of 5 U.S.C. 552, will be cash lender (e.g., a money market
operative delay and designates the available for Web site viewing and mutual fund, pension fund, or other
proposal operative upon filing.16 printing in the Commission’s Public
At any time within 60 days of the entity with funds available for lending)
Reference Room, 100 F Street NE., and a cash borrower (typically a broker-
filing of the proposed rule change, the
Washington, DC 20549, on official dealer, hedge fund, or other entity
Commission summarily may
business days between the hours of seeking to finance securities that can be
temporarily suspend such rule change if
10:00 a.m. and 3:00 p.m. Copies of the used to collateralize the loan). In the
it appears to the Commission that such
filing also will be available for opening leg of the repo transaction, the
action is: (i) Necessary or appropriate in
inspection and copying at the principal cash borrower receives cash in exchange
the public interest; (ii) for the protection
office of the Exchange. All comments for securities equal in value to the
of investors; or (iii) otherwise in
received will be posted without change; amount of cash received, plus a haircut.
furtherance of the purposes of the Act.
the Commission does not edit personal In the closing leg of the repo
If the Commission takes such action, the
identifying information from transaction, the cash borrower pays back
Commission shall institute proceedings
the cash plus interest in exchange for
to determine whether the proposed rule submissions. You should submit only
should be approved or disapproved. information that you wish to make 1 15 U.S.C. 78s(b)(1).
available publicly. All submissions 2 17 CFR 240.19b–4. FICC also filed this proposal
IV. Solicitation of Comments
should refer to File Number SR–GEMX– as an advance notice pursuant to Section 802(e)(1)
Interested persons are invited to 2017–04 and should be submitted on or of the Payment, Clearing, and Settlement
submit written data, views, and before May 30, 2017.
Supervision Act of 2010 and Rule 19b–4(n)(1)
under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR
arguments concerning the foregoing, 240.19b–4(n)(1). The advance notice was published
including whether the proposed rule For the Commission, by the Division of
for comment in the Federal Register on April 7,
change is consistent with the Act. Trading and Markets, pursuant to delegated 2017. See Securities Exchange Act Release No.
Comments may be submitted by any of authority.17 80361 (April 3, 2017), 82 FR 17053 (April 7, 2017)
Eduardo A. Aleman, (SR–FICC–2017–803). The Commission did not
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the following methods: receive any comments on the advance notice.
Assistant Secretary. 3 Securities Exchange Act Release No. 80303
13 17 CFR 240.19b–4(f)(6). [FR Doc. 2017–09192 Filed 5–5–17; 8:45 am] (March 24, 2017), 82 FR 15749 (March 30, 2017)
14 17 CFR 240.19b–4(f)(6)(iii).
BILLING CODE 8011–01–P
(SR–FICC–2017–005) (‘‘Notice’’).
15 See note 3, supra. 4 See letter from Thomas Wipf, Chief Financial
16 For purposes only of waiving the 30-day Officer, Morgan Stanley & Co. LLC, dated April 19,
operative delay, the Commission has also 2017, to Eduardo A. Aleman, Assistant Secretary,
considered the proposed rule’s impact on Commission, available at https://www.sec.gov/
efficiency, competition, and capital formation. See comments/sr-ficc-2017-005/ficc2017005.htm
15 U.S.C. 78c(f). 17 17 CFR 200.30–3(a)(12). (‘‘Morgan Stanley Letter’’).

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21440 Federal Register / Vol. 82, No. 87 / Monday, May 8, 2017 / Notices

the securities posted as collateral. In tri- Members 10 that participate in the GCF that FICC has reason to believe a
party repo transactions, a clearing bank Repo Service and institutional member may fall into GSD rule non-
tri-party agent provides to both the cash counterparties (other than registered compliance; (vi) requirements to comply
lender and the cash borrower certain investment companies (‘‘RICs’’) under with applicable tax, money laundering,
operational, custodial, collateral the Investment Company Act of 1940, as and sanctions laws; (vii) audit
valuation, and other services to facilitate amended),11 where the institutional provisions allowing FICC to access
the repo transactions. For example, the counterparties are the cash lenders in relevant books and records; and (viii)
tri-party agent may facilitate and record the transactions. financial/operational monitoring.
the exchange of cash and securities on To effectuate the proposed CCIT In addition to membership provisions,
a book-entry basis for each of the Service, FICC proposes to create a new proposed Rule 3B also would set forth
counterparties to the repo transaction, limited service membership category in the applicable risk management
as well as effectuating the collection and GSD for institutional cash lenders. provisions relating to the new limited
transfer of collateral that may be These new members would be referred service membership category,
required under the terms of the repo to as CCIT members, and the GSD including: 14
transaction. Cash lenders use tri-party membership provisions that apply to the • Non-mutualized loss allocation
repos as investments that offer liquidity CCIT members would be addressed in obligations of CCIT members, including
maximization, principal protection, and proposed GSD Rule 3B. These new FICC’s perfected security interest in
a small positive return, while cash membership provisions include: 12 each CCIT member’s underlying repo
borrowers rely on them as a major • Membership eligibility criteria, securities;
source of short-term funding.5 including minimum financial • a rules-based committed liquidity
FICC currently provides central requirements, operational capabilities, facility for CCIT members, in which
clearing to a segment of the tri-party and opinions of counsel; CCIT members that have outstanding
• joint account ownership, in which CCIT transactions with a defaulting
repo market through its general
one authorized entity would act as agent member would be required to enter into
collateral finance repo service (‘‘GCF
for two or more CCIT members; CCIT master repurchase agreement
Repo® Service’’).6 The GCF Repo
• membership application processes, (‘‘MRA’’) transactions with FICC for
Service is available to sell-side entities,
including document provision and specified periods of time;
such as dealers, that enter into tri-party
disclosure requirements, operational • uncommitted liquidity repos
repo transactions, in GCF Repo
testing requirements, reporting between CCIT members and FICC; and
Securities, with each other.7
requirements, FATCA compliance • application of certain other GSD
FICC’s proposal would broaden the certification requirements,13 and the Rules (e.g., comparison, netting,
pool of entities that would be eligible to procedures for denying membership; settlement, default, and other applicable
submit tri-party repo transactions for • membership agreement terms provisions) to CCIT members and
central clearing at FICC. Specifically, describing rights and obligations; transactions.
FICC proposes to amend its Government • procedures for the voluntary In addition to the proposed changes to
Securities Division (‘‘GSD’’) Rulebook termination of CCIT membership; and the GSD Rules related to the proposed
(‘‘GSD Rules’’) 8 to establish the • ongoing membership requirements, CCIT Service, the proposal also contains
‘‘Centrally Cleared Institutional Tri- including (i) annual financial and other other changes to the GSD Rules,
Party Service’’ or the ‘‘CCITTM disclosure requirements; (ii) operational unrelated to the CCIT proposal. These
Service.’’ 9 The proposed CCIT Service testing requirements and related non-CCIT related changes generally are
would allow the submission of tri-party reporting requirements; (iii) notification intended to update the GSD Rules and
repo transactions in GCF Repo of GSD rule non-compliance; (iv) provide additional specificity, clarity,
Securities between GSD Netting penalties for GSD rule non-compliance; and transparency for members that rely
(v) mandatory assurances in the event on them.15 These non-CCIT related
5 See Federal Reserve Bank of New York, Tri-

Party Repo Infrastructure Reform, https:// 10 The term ‘‘Netting Member’’ is defined as a
proposed rule changes include the
www.newyorkfed.org/medialibrary/media/banking/ member of FICC’s Comparison System (i.e., the following:
nyfrb_triparty_whitepaper.pdf (last visited Apr. 27, system of reporting, validating, and matching the • Clarifying that Comparison-Only
2017). long and short sides of securities trades to ensure Members must conform to FICC’s
6 The term ‘‘GCF Repo’’ is a registered trademark that the details of such trades are in agreement operational conditions and
of FICC. The GCF Repo Service is a service offered between the parties) and FICC’s Netting System
by FICC to compare, net, and settle general (i.e., the system for aggregating and matching requirements; 16
collateral repos. Notice, 82 FR at 15750. offsetting obligations resulting from trades). GSD
7 GCF Repo Securities are securities issued or Rules, supra note 8. 14 For additional discussion of the risk

guaranteed by the United States, a U.S. government 11 15 U.S.C. 80a–1 et seq. According to FICC, the management provisions set forth in proposed GSD
agency or instrumentality, a U.S. government- legal ability of such registered investment Rule 3B, see also Notice, 82 FR at 15757–58.
sponsored corporation (or otherwise approved by companies to participate in the proposed CCIT 15 For additional description and explanation of
FICC’s Board of Directors), and such securities are Service is uncertain in light of applicable regulatory the non-CCIT-related changes included in the
only eligible for submission to FICC in connection requirements under the Investment Company Act of proposal, see Notice, 82 FR at 15759–60.
with the comparison, netting and/or settlement of 1940 (including, for example, liquid asset 16 GSD members may be either Comparison-Only
repo transactions involving generic CUSIP numbers requirements and counterparty diversification Members or Netting Members. Comparison-Only
(i.e., identifying numbers established for a category requirements). Notice 82 FR at 15762. Members are members of the GSD Comparison
of securities, as opposed to a specific security). See 12 For additional discussion of the membership
System, which is the GSD system for reporting,
Notice, 82 FR at 15750. provisions set forth in proposed GSD Rule 3B, see
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validating, and in some cases, matching of
8 Available at http://www.dtcc.com/legal/rules- also Notice, 82 FR at 15751–58. securities trades. Netting Members are members of
and-procedures. 13 FATCA is the Foreign Account Tax both the GSD Comparison System and the GSD
9 CCIT is a trademark of The Depository Trust & Compliance Act, 26 U.S.C. 1471 et seq. FATCA Netting System, which is the GSD system for
Clearing Corporation, of which FICC is a subsidiary. compliance means that an ‘‘. . . FFI [foreign aggregating and matching offsetting obligations
FICC defines ‘‘Centrally Cleared Institutional Tri- financial institution] Member has qualified under resulting from securities trades. Pursuant to GSD
Party Service’’ and ‘‘CCIT Service’’ as ‘‘the service such procedures promulgated by the Internal Rule 2A, FICC may require an entity to be a
offered by the Corporation to clear institutional tri- Revenue Service . . . to establish exemption from Comparison-Only Member for a period of time
party repurchase agreement transactions, as more withholding under FATCA such that [FICC] would (during which FICC assess the entity’s operational
fully described in Rule 3B.’’ Proposed GSD Rule 1, not be required to withhold [anything] under soundness) before the entity becomes eligible to
Definitions. FATCA . . . .’’ GSD Rules 1, supra note 8. apply for netting membership.

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21442 Federal Register / Vol. 82, No. 87 / Monday, May 8, 2017 / Notices

Each of these tools would help provide C. Consistency With Rules 17Ad– foreseeable stress scenarios, consistent
FICC with sufficient liquidity resources 22(e)(1), (4), and (18) Under the Act with Rule 17Ad–22(e)(4)(iii), cited
to settle the obligations of a CCIT The Commission believes that the above.
member’s defaulted Netting Member proposed rule change is consistent with The Commission also believes that the
pre-novation counterparty. In doing so, Rule 17Ad–22(e)(1) under the Act.30 proposal is consistent with Rule 17Ad-
the proposed CCIT Service provides for Rule 17Ad–22(e)(1) requires, in part, 22(e)(18) under the Act.34 Rule 17Ad–
prudent risk management of CCIT that FICC ‘‘establish, implement, 22(e)(18) requires, in part, that FICC
transactions and CCIT members. maintain and enforce written policies ‘‘establish, implement, maintain and
and procedures reasonably designed to enforce written policies and procedures
For these reasons, the Commission
. . . [p]rovide for a well-founded, clear, reasonably designed to . . . [e]stablish
believes that the proposed rule changes
transparent and enforceable legal basis objective, risk-based, and publicly
related to the proposed CCIT Service
for each aspect of its activities.’’ 31 As disclosed criteria for participation,
help protect investors, particularly those
described above, FICC proposes a which . . . require participants to have
in the CCIT market, and are in the
number of changes that are unrelated to sufficient financial resources and robust
public interest, consistent with Section
the proposed CCIT Service and designed operational capacity to meet obligations
17A(b)(3)(F) of the Act.25 arising from participation in the clearing
to make the GSD Rules more clear,
B. Consistency With Section consistent, and current for members that agency, and monitor compliance with
17A(b)(3)(G) and (H) of the Act rely on them. The Commission believes such participation requirements on an
that these non-CCIT related changes ongoing basis.’’ 35
Section 17A(b)(3)(G) of the Act could make FICC’s policies and In connection with the establishment
requires that the GSD Rules ‘‘provide procedures in the GSD Rules more clear, of the proposed CCIT Service, FICC
that . . . [FICC’s] participants shall be consistent, and transparent for members would include provisions in the GSD
appropriately disciplined for violation that rely on them, and therefore believes rules to incorporate membership
of any provision of the rules of the that the proposed changes would help standards, requiring, for example,
clearing agency by expulsion, support FICC’s rules being clear and ongoing financial responsibility and
suspension, limitation of activities, transparent, consistent with Rule 17Ad– operational capacity requirements, as
functions, and operations, fine, censure, 22(e)(1), cited above. well as the requirements that would be
or any other fitting sanction.’’ 26 Section The Commission believes that the applicable to Netting Members with
17A(b)(3)(H) of the Act requires, in part, proposed rule change is consistent with respect to their participation in the
that the GSD Rules ‘‘provide a fair Rule 17Ad–22(e)(4)(iii) under the Act.32 proposed CCIT Service. The
procedure with respect to the Rule 17Ad–22(e)(4)(iii) requires, in part, Commission believes that, by
disciplining of participants, the denial that FICC ‘‘establish, implement, incorporating such requirements, FICC
of participation to any person seeking maintain and enforce written policies would establish in its policies and
participation therein, and the and procedures reasonably designed to procedures objective, risk-based, and
prohibition or limitation by the clearing . . . [e]ffectively identify, measure, publicly disclosed criteria for
agency of any person with respect to monitor, and manage its credit participation in the CCIT Service,
access to services offered by the clearing exposures to participants and those consistent with Rule 17Ad–22(e)(18).
agency.’’ 27 arising from [FICC’s] payment, clearing, Similarly, in connection with the
and settlement processes, including by proposed non-CCIT related change to
As described above, the proposed
. . . maintaining . . . financial provide FICC with access to the books
CCIT membership would subject CCIT
resources at the minimum to enable and records of a RIC Netting Member’s
members, and applicants that wish to controlling management, FICC would be
become CCIT members, to comparable [FICC] to cover a wide range of stress
scenarios. . . .’’ 33 As discussed above, authorized to review the financial
admission requirements 28 and the same information of the RIC. Because this
the CCIT Service includes risk
disciplinary requirements (and related would enable FICC to determine
management tools, such as the perfected
due process procedures) as those whether the RIC has sufficient financial
security interest and the CCIT MRA
applicable to Netting Members, and resources and monitor compliance with
liquidity resource. The Commission
applicants that wish to become Netting FICC’s financial requirements on an
believes that these risk management
Members. In establishing the proposed ongoing basis, the Commission believes
tools would help facilitate FICC’s
CCIT membership under similar this requirement is consistent with Rule
management of credit, market, and
admission and disciplinary 17Ad–22(e)(18).
liquidity risk that would arise from
requirements as FICC’s existing
becoming a central counterparty to the
requirements, the Commission believes V. Conclusion
new repo positions coming in via the
that the proposed CCIT membership proposed CCIT Service. Accordingly, On the basis of the foregoing, the
would establish an appropriate the Commission believes that the Commission finds that the proposal is
framework for the admission and proposed changes to its policies and consistent with the requirements of the
disciplining of CCIT members, procedures in the GSD Rules are Act, in particular the requirements of
consistent with the requirements of designed to help effectively manage Section 17A of the Act 36 and the rules
Sections 17A(b)(3)(G) and 17A(b)(3)(H) FICC’s exposure, including its credit and regulations promulgated
of the Act.29 exposure to participants, arising from its thereunder.
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payment, clearing, and settlement It is therefore ordered, pursuant to
25 Id.
processes for the proposed CCIT Section 19(b)(2) of the Act, that
26 15 U.S.C. 78q–1(b)(3)(G). transactions by providing for financial proposed rule change SR–FICC–2017–
27 15 U.S.C. 78q–1(b)(3)(H).
resources to help cover a wide range of 005 be and hereby is APPROVED as of
28 There would be certain differences between the

admission requirements applicable to CCIT
the date of this order or the date of a
30 17 CFR 240.17Ad–22(e)(1).
members under proposed GSD Rule 3B and those
31 Id. 34 17 CFR 240.17Ad–22(e)(18).
applicable to Netting Members under GSD Rule 2A.
See Notice, 82 FR at 15761. 32 17 CFR 240.17Ad–22(e)(4)(iii). 35 Id.
29 15 U.S.C. 78q–1(b)(3)(G) and (H). 33 Id. 36 15 U.S.C. 78q–1.

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Document Created: 2017-05-06 02:21:33
Document Modified: 2017-05-06 02:21:33

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		82 FR 21439