Self-Regulatory Organization; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the Government Securities Division…

Self-Regulatory Organization; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the Government Securities Division Rulebook in Order To Establish an Early Unwind Intraday Charge in Connection With the Inclusion of GCF Repo(R) Positions in GSD's Intraday Participant Clearing Fund Requirement, and GSD's Hourly Internal Surveillance Cycles

August 25, 2014.

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 August 11, 2014, the Fixed Income Clearing Corporation ("FICC") filed with the Securities and Exchange Commission ("Commission") the proposed rule change as described in Items I, II and III below, which Items have been prepared by FICC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. /3/

FOOTNOTE 1 15 U.S.C. 78s(b)(1). END FOOTNOTE

FOOTNOTE 2 17 CFR 240.19b-4. END FOOTNOTE

FOOTNOTE 3 On January 10, 2014, FICC filed advance notice SR-FICC-2014-801 pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act titled the Payment, Clearing, and Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i) of the Securities Exchange Act of 1934, 17 CFR 240.19b-4(n)(1)(i). The Commission published notice for comment in the Federal Register on February 10, 2014. Securities Exchange Act Release No. 34-71469 (February 4, 2014), 79 FR 7722 (February 10, 2014) (SR-FICC-2014-801). FICC filed Amendment No. 1 to this advance notice on August 11, 2014. A copy of the advance notice and Amendment No. 1 are available at http://www.dtcc.com/legal/sec-rule-filings.aspx. END FOOTNOTE

I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change

The Government Securities Division ("GSD") of FICC is proposing to amend the GSD Rulebook (the "Rules") in order to establish an early unwind intraday charge to protect against the exposure that may result from intraday cash substitutions and early unwind of interbank allocations /4/ in connection with GSD's proposal to include the underlying collateral pertaining to the GCF Repo(R) /5/ positions in GSD's noon intraday /6/ participant Clearing Fund requirement ("CFR") calculation, and GSD's hourly internal surveillance cycles.

FOOTNOTE 4 The "early unwind of interbank allocations" refers to the automatic return of the collateral from the reverse repo side (cash lender) to FICC's account at the repo side's (cash borrower's) settlement bank and the return of cash to the reverse repo side, which typically occurs before the opening of Fedwire. END FOOTNOTE

FOOTNOTE 5 The GCF Repo(R) service enables dealers to trade general collateral repos, based on rate, term, and underlying product, throughout the day without requiring intra-day, trade-for-trade settlement on a Deliver-versus-Payment ("DVP") basis. The service fosters a highly liquid market for securities financing. GCF Repo(R) is a registered trademark of The Depository Trust & Clearing Corporation. END FOOTNOTE

FOOTNOTE 6 Noon intraday refers to the routine intraday margining cycle which is based on a 12:00 p.m. (ET) position snap shot. Pursuant to Rule 4, FICC may request additional margin outside of the formal intraday margin calls. END FOOTNOTE

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose

GSD is proposing to amend its Rules in order to establish an early unwind intraday charge ("EUIC") /7/ (discussed below) to protect against the exposure that may result from intraday cash substitutions and early unwind of interbank allocations in connection with including the underlying collateral pertaining to the GCF Repo(R) positions in its noon intraday participant CFR calculation, and its hourly internal surveillance cycles.

FOOTNOTE 7 In connection with GSD's proposal to include the underlying collateral pertaining to the GCF Repo(R) positions in its noon intraday CFR, GSD discovered circumstances under which a member would be charged an EUIC. If, however, a member is assessed an EUIC under circumstances that were not initially contemplated and the EUIC charge is deemed unnecessary, management will have the discretion to waive such charge. END FOOTNOTE

(a) Background

On January 10, 2014, FICC filed advance notice SR-FICC-2014-801 /8/ ("Advance Notice") with the Commission. This filing describes FICC's proposal to include the underlying collateral pertaining to the GCF Repo(R) positions in its noon intraday participant CFR calculation, and its hourly internal surveillance cycles. This enhancement is intended to align GSD's risk management calculations and monitoring with the changes that have been implemented to the tri-party infrastructure by the Tri-Party Reform Task Force, /9/ specifically, with respect to locking up of GCF Repo(R) collateral until 3:30 p.m. (ET) rather than 7:30 a.m. (ET). Subsequent to the initial Advance Notice filing, FICC discovered that under the proposed change, a potential exposure may result from a GCF Repo(R) participant's cash substitutions and early unwinds of interbank allocations. As a result, on August 11, 2014, FICC filed Amendment No. 1 to the Advance Notice with the Commission. FICC is filing this proposed rule change in order to amend its Rules to establish an EUIC to protect against the exposure that may result from intraday cash substitutions and early unwind of interbank allocations.

FOOTNOTE 8 Securities Exchange Act Release No. 34-71469 (February 4, 2014), 79 FR 7722 (February 10, 2014) (SR-FICC-2014-801). A copy of this Advance Notice filing and the amendment thereto are available at http://www.dtcc.com/legal/sec-rule-filings.aspx. END FOOTNOTE

FOOTNOTE 9 The Task Force was formed in September 2009 under the auspices of the Payments Risk Committee, a private-sector body sponsored by the Federal Reserve Bank of New York. The Task Force's goal is to enhance the repo market's ability to navigate stressed market conditions by implementing changes that help better safeguard the market. DTCC has worked in close collaboration with the Task Force on their reform initiatives. END FOOTNOTE

(b) Proposed Change

As noted above, GSD is proposing to establish an EUIC /10/ to protect against the exposure that may result from intraday cash substitutions and early unwind of interbank allocations in connection with including the underlying collateral pertaining to the GCF Repo(R) positions in its noon intraday participant CFR calculation, and its hourly internal surveillance cycles.

FOOTNOTE 10 GSD's discovered circumstances under which a member would be charged an EUIC. If, however, a member is assessed an EUIC under circumstances that were not initially contemplated and the EUIC charge is deemed unnecessary, management will have the discretion to waive such charge. END FOOTNOTE

In connection with its review of its proposal to incorporate the underlying collateral pertaining to the GCF Repo(R) positions in the GSD's noon intraday participant CFR calculation, GSD discovered that there were instances where exposure to FICC arose as a result of certain cash substitutions or early unwind of interbank allocations. This is because the noon intraday underlying collateral pertaining to the GCF Repo(R) positions of impacted participants may exhibit a different risk profile than their same end-of-day ("EOD") /11/ positions. The impact could be to increase or decrease the Value-at-Risk ("VaR") component of the CFR.

FOOTNOTE 11 As used herein "prior EOD" refers to the end of day cycle immediately preceding the current noon intraday cycle and "same EOD" refers to the end of day cycle immediately subsequent to the current noon intraday cycle. END FOOTNOTE

In certain instances, cash substitutions, for repo and reverse repo positions and the early unwind of interbank allocations for reverse repo positions, could result in higher cash balances in the underlying collateral pertaining to GCF Repo(R) positions at noon intraday than the same EOD, and could present a potential under-margin condition because cash collateral is not margined. In addition, it is likely that the cash will be replaced by securities in the next GCF Repo(R) allocation of collateral. The under-margin condition will exist overnight because the VaR on the GCF Repo(R) collateral in the same EOD cycle will not be calculated until after Fedwire is closed thus precluding members from satisfying margin deficits until the morning of the next business day. Accordingly, GSD will adjust the noon intraday CFR in the form of an EUIC, to address this risk. In order to determine whether an EUIC should be applied, GSD will take the following steps:

1. At noon, GSD will compare the prior EOD VaR component of the CFR calculation with the current day's noon intraday VaR component of the CFR calculation.

2. If the current day's noon intraday VaR calculation is equal to or higher than the prior EOD's VaR calculation then GSD will not apply an EUIC. If however, the current day's noon calculation is lower, then GSD will proceed to the step 3. below.

3. GSD will review the GCF Repo(R) participant's DVP and GCF Repo(R) portfolio to determine whether the reduction in the noon calculation may be attributable to the GCF Repo(R) participant's intraday cash substitutions or early unwind of interbank allocations. If so, then GSD will apply the EUIC.

--This is a summary of a Federal Register article originally published on the page number listed below--

Citation: "79 FR 51630"

Document Number: "Release No. 34-72908; File No. SR-FICC-2014-01"

Federal Register Page Number: "51630"

"Notices"