[Federal Register Volume 75, Number 229 (Tuesday, November 30, 2010)]
[Notices]
[Pages 74110-74117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30034]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63361; File No. SR-FICC-2010-09]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of a Proposed Rule Change To Introduce Cross-Margining
of Certain Positions Cleared at the Fixed Income Clearing Corporation
and Certain Positions Cleared at New York Portfolio Clearing, LLC
November 23, 2010.
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 November 12, 2010, the Fixed Income Clearing Corporation (``FICC'')
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 primarily 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. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would allow FICC to offer cross-margining
of certain positions cleared at its Government Securities Division
(``GSD'') and certain positions cleared at New York Portfolio Clearing,
LLC (``NYPC''). The proposed rule change also would make certain other
related changes to GSD's rules.
[[Page 74111]]
II. Self-Regulatory Organization'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.\3\
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\3\ The Commission has modified the text of the summaries
prepared by FICC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to: (i) Introduce cross-
margining of certain positions cleared at the GSD and of certain
positions cleared at NYPC and (ii) make certain other changes to the
GSD Rules as set forth below.\4\
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\4\ The specific language of the proposed provision can be found
at http://www.dtcc.com/downloads/legal/rule_filings/2010/ficc/2010-09.pdf.
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NYPC has applied for registration with the Commodity Futures
Trading Commission (``CFTC'') as a derivatives clearing organization
(``DCO'') pursuant to Section 5b of the Commodity Exchange Act and Part
39 of the Regulations of the CFTC.\5\ FICC would not implement the
proposed rule change until NYPC obtains such registration. Upon
registration as a DCO, NYPC proposes initially to clear U.S. dollar-
denominated interest rate futures contracts.
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\5\ NYPC's DCO application may be viewed on the CFTC's Web site:
http://www.cftc.gov/IndustryOversight/IndustryFilings/index.htm.
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The proposed rule change would allow certain GSD Members to combine
their positions at the GSD with their positions or those of certain
permitted affiliates cleared at NYPC, within a single margin portfolio
(``Margin Portfolio'').
1. Cross-Margining With NYPC
Background
Currently, the GSD maintains a clearing fund (``Clearing Fund'')
comprised of deposits of cash and eligible securities from its members
(each a ``GSD Member'') to provide liquidity and satisfy any losses
that might otherwise be incurred as a result of a GSD Member's default
and the subsequent close out of its positions. The amount of a GSD
Member's required deposit to the Clearing Fund (``Required Fund
Deposit'') is calculated with reference to several factors relating to
an analysis of the possible losses associated with the GSD Member's
positions. Currently, this analysis is performed with respect to the
GSD Member's positions in a particular account.
Proposed Cross-Margining With NYPC
The cross-margining arrangement with NYPC contemplated herein
(``NYPC Arrangement'') is to be distinguished from the cross-margining
arrangement currently conducted between the Chicago Mercantile Exchange
(``CME'') and FICC (``CME Arrangement''). In the CME Arrangement, each
of FICC and CME holds and manages its own positions and collateral, and
independently determines the amount of margin that it will make
available for cross-margining, referred to as the ``residual margin
amount,'' that remains after each of FICC and CME conducts its own
internal offsets. FICC then computes the amount by which the cross-
margining participant's margin requirement can be reduced at each
clearing organization (``cross-margining reduction'') by comparing the
participant's positions and the related margin requirements at FICC as
against those at CME. FICC offsets each cross-margining participant's
residual margin amount based on related positions at FICC against the
offsetting residual margin amounts of the participant or its affiliate
at CME. FICC and CME may then reduce the amount of collateral that they
collect to reflect the offsets between the cross-margining
participant's positions at FICC and its or its affiliate's positions at
CME.
Under the proposed NYPC Arrangement, a member of FICC that is also
an NYPC clearing member (``Joint Clearing Member'') could, at the
discretion of NYPC and FICC, and in accordance with the provisions of
the GSD and NYPC Rules, elect to have its margin requirement with
respect to eligible positions in its proprietary account at NYPC and
its margin requirement with respect to eligible positions at FICC
calculated by taking into consideration the net risk of such eligible
positions at both clearing organizations. In addition, an affiliate of
a member of FICC that is a clearing member of NYPC (``Permitted Margin
Affiliate'') could agree to have its positions and margin at NYPC
margined together with eligible positions of the FICC member.
The NYPC Arrangement would allow (i) Joint Clearing Members and
(ii) members of FICC and their Permitted Margin Affiliates to have
their margin requirements for FICC and NYPC positions determined on a
combined basis, with FICC and NYPC each having a security interest in
such members' margin deposits and other collateral to secure such
members' obligations to FICC and NYPC.
The following types of FICC members would not be eligible to
participate in the NYPC Arrangement in order to allow FICC to maintain
segregation of certain business or member types that are treated
differently for purposes of loss allocation: (i) GSD Sponsored Members,
(ii) Inter-Dealer Broker Netting Members and (iii) Dealer Netting
Members with respect to their segregated brokered accounts. In
addition, in order for a Banking Netting Member to combine its accounts
into a Margin Portfolio with any other accounts, it would have to
demonstrate to the satisfaction of FICC and NYPC that doing so would
comply with the regulatory requirements applicable to the Bank Netting
Member.
In order to distinguish between the CME Arrangement and the NYPC
Arrangement, FICC is proposing to amend the definition of ``Cross-
Margining Agreement'' in the GSD Rules, which would be defined as an
agreement entered into between FICC and one or more FCOs (as defined in
GSD Rule 1) pursuant to which a Cross-Margining Participant, at the
discretion of FICC and in accordance with the provisions of the GSD
Rules, could elect to have its Required Fund Deposit with respect to
Eligible Positions at FICC, and its or its Permitted Margin
Affiliate's, if applicable, margin requirements with respect to
Eligible Positions at such FCO(s), calculated either (i) by taking into
consideration the net risk of such Eligible Positions at each of the
clearing organizations or (ii) as if such positions were in a single
portfolio. Therefore, the CME Arrangement would fall into clause (i) of
the definition whereas the NYPC Arrangement would fall into clause
(ii). Conforming changes would be made to GSD Rule 1, Definitions,
relating to cross-margining. GSD Rule 43, Cross-Margining Arrangements,
also would be amended to add provisions regarding single-portfolio
margining (i.e., the proposed NYPC Arrangement). To implement this
proposal, FICC and NYPC would enter into a cross-margining agreement
(``NYPC Agreement''), which would be appended to the GSD Rules and made
a part thereof.
Pursuant to the NYPC Agreement, and consistent with previous
approvals of cross-margining arrangements involving
[[Page 74112]]
DCOs, cross-margining with certain NYPC positions would be limited to
positions carried in proprietary accounts of clearing members of NYPC.
Customers of NYPC clearing members would not be permitted to
participate in the cross-margining arrangement. Participation in the
NYPC Arrangement would be voluntary. Participants and their Permitted
Margin Affiliates would be required to execute the requisite cross-
margining participant agreements (the Joint Member or Affiliated Member
version, as applicable), which are exhibits to the NYPC Agreement.
FICC would be responsible for performing the margin calculations in
its capacity as the Administrator under the terms of the NYPC
Agreement. Specifically, FICC would determine the combined FICC
Clearing Fund and NYPC Original Margin \6\ requirement for each
participant. FICC would calculate those requirements using a Value-at-
Risk (``VaR'') methodology, with a 99 percent confidence level and a 3-
day liquidation period for cash positions and a 1-day liquidation
period for futures positions. In addition, each cross-margining
participant's one-pot margin requirement would be subject to a daily
back test, and a ``coverage component'' would be applied and charged to
the participant in the event that the back test reflects insufficient
coverage. The one-pot margin requirement for each participant would
then be allocated between FICC and NYPC in proportion to the clearing
organizations' respective ``stand-alone'' margin requirements--in other
words, an amount reflecting the ratio of what each clearing
organization would have required from that participant if it was not
participating in the cross-margining program (``Constituent Margin
Ratio''). The NYPC Agreement provides that either FICC or NYPC could,
at any time, require additional margin to be deposited by a participant
above what is calculated under the NYPC Agreement based upon the
financial condition of the participant, unusual market conditions or
other special circumstances. The standards that FICC proposes to use
for these purposes are the standards currently contained in the GSD
Rules, so that notwithstanding the calculation of a member's Clearing
Fund requirement pursuant to the NYPC Agreement, FICC would still
retain the rights contained within the GSD Rules to charge additional
Clearing Fund under the circumstances specified in the GSD Rules. For
example, the GSD Rules currently contain a provision providing that if
a Dealer Netting Member falls below its minimum financial requirement
it shall be required to post additional Clearing Fund equal to the
greater of (i) $1 million or (ii) 25 percent of its Required Fund
Deposit.
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\6\ Original Margin is the NYPC equivalent of the Clearing Fund.
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FICC would utilize the same VaR engine for futures and cash
positions. Under this method, the prior 250 days of historical
information for futures positions and the prior 252 days of historical
information for cash positions, including prices, spreads and market
variables such as Treasury zero-coupon yields and London Interbank
Offered Rate curves, are used to simulate the market environments in
the forthcoming 1 day for futures positions and the forthcoming 3 days
for cash positions. Projected portfolio profits and losses are
calculated assuming these simulated environments will actually be
realized. These simulations would be used to calculate VaR. Historical
simulation is a continuation of the FICC margin methodology.
With respect to the confidence level, FICC currently utilizes
extreme value theory to determine the 99th percentile of loss
distribution. Upon implementation of the FICC-NYPC one-pot margining,
FICC would utilize a front-weighting mechanism to determine the 99th
percentile of loss distribution. This front-weighting mechanism would
place more emphasis on more recent observations. Additionally, FICC's
VaR engine would be enhanced to accommodate more securities; this means
that certain CUSIPs which are now considered to be ``non-priceable''
(because, for example, of a lack of historical information regarding
the security) and subject to a ``haircut'' requirement (i.e., fixed
percentage charge) where offsets are not permitted, would be treated as
``priceable'' and therefore included in the core VaR calculation.
Based on preliminary analyses, FICC expects that the FICC VaR
component of the Clearing Fund requirement may be reduced by as much as
approximately 20 percent for common FICC-NYPC members as a result of
the NYPC Arrangement. FICC has performed backtesting analysis to verify
that there will be sufficient coverage after the FICC-NYPC cross-
margining reductions are applied. Moreover, an independent firm has
performed backtesting analysis of the FICC-NYPC one-pot methodology, as
well as FICC's and NYPC's stand-alone methodologies. Both such analyses
demonstrated that the VaR methodologies provide coverage at the 99th
confidence level.
In the event of the insolvency or default of a member that
participates in the NYPC Arrangement, the positions in such
participant's one-pot portfolio including, where applicable, the
positions of its Permitted Margin Affiliate at NYPC, would be
liquidated by FICC and NYPC as a single portfolio and the liquidation
proceeds would be applied to the defaulting participant's obligations
to FICC and NYPC in accordance with the provisions of the NYPC
Agreement.
The NYPC Agreement provides for the sharing of losses by FICC and
NYPC in the event that the one-pot portfolio margin deposits of a
defaulting participant would not be sufficient to cover the losses
resulting from the liquidation of that participant's trades and
positions:
If either clearing organization had a net loss (``worse-
off party''), and the other had a net gain (``better-off party'') that
is equal to or exceeds the worse-off party's net loss, then the better-
off party pays the worse-off party the amount of the latter's net loss.
In this scenario, one clearing organization's gain would extinguish the
entire loss of the other clearing organization.
If either clearing organization had a net loss (``worse-
off party'') and the other clearing organization had a net gain
(``better-off party'') that is less than or equal to the worse-off
party's net loss, then the better-off party would pay the worse-off
party an amount equal to the net gain. Thereafter, if such payment did
not extinguish the net loss of the worse-off party, the better-off
party would pay the worse-off party an amount equal to the lesser of:
(i) The amount necessary to ensure that the net loss of each clearing
organization is in proportion to the Constituent Margin Ratio or (ii)
the better-off party's ``Maximum Transfer Payment'' less the better-off
party's net gain. The ``Maximum Transfer Payment'' would be defined
with respect to each clearing organization to mean an amount equal to
the product of (i) the sum of the margin reductions of the clearing
organizations and (ii) the other clearing organization's Constituent
Margin Ratio--in other words, the amount by which the other clearing
organization reduced its margin requirements in reliance on the cross-
margining arrangement. In this scenario, one clearing organization's
gain does not completely extinguish the entire loss of the other
clearing organization, and the better-off clearing organization would
be required to make an additional payment to the worse-off clearing
organization. This potential additional payment would be capped as
described in this paragraph.
[[Page 74113]]
If either clearing organization had a net loss, and the
other had the same net loss, a smaller net loss, or no net loss, then:
[cir] In the event that the net losses of the clearing
organizations were in proportion to the Constituent Margin Ratio, no
payment would be made.
[cir] In the event that the net losses of the clearing
organizations were not in proportion to the Constituent Margin Ratio,
then the clearing organization that had a net loss which was less than
its proportionate share of the total net losses incurred by the
clearing organizations (``better-off party'') would pay the other
clearing organization (``worse-off party'') an amount equal to the
lesser of: (i) The better-off party's Maximum Transfer Payment or (ii)
the amount necessary to ensure that the clearing organizations'
respective net losses were allocated between them in proportion to the
Constituent Margin Ratio.
If FICC had a net gain after making a payment as described
above, FICC would pay to NYPC the amount of any deficiency in the
defaulting member's customer segregated funds accounts or, if
applicable, such defaulting member's Permitted Margin Affiliate held at
NYPC up to the amount of FICC's net gain.
If FICC received a payment under the Netting Contract and
Limited Cross-Guaranty (``Cross-Guaranty Agreement'') to which it is a
party (i.e., because FICC had a net loss), and NYPC had a net loss,
FICC would share the cross-guaranty payment with NYPC pro rata, where
such pro rata share is determined by comparing the ratio of NYPC's net
loss to the sum of FICC's and NYPC's net losses.\7\ This allocation is
appropriate because the ``single pot'' combines FICC and NYPC
proprietary positions into a unified portfolio that would be margined
and liquidated as a single unit. This requirement would not apply after
NYPC becomes a party to the Cross-Guaranty Agreement. The GSD Rules
would further provide that in the event of a close out of a cross-
margining participant under the NYPC Agreement, FICC would offset its
liquidation results first with NYPC because the liquidation will
essentially be of a single portfolio and then present its results for
purposes of the Cross-Guaranty Agreement.
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\7\ The other parties to the Cross-Guaranty Agreement are The
Depository Trust Company, National Securities Clearing Corporation
and The Options Clearing Corporation.
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The GSD Rules would further provide that FICC would offset its
liquidation results in the event of a close out of a cross-margining
participant in the NYPC Agreement first with NYPC because the
liquidation would essentially be of a single Margin Portfolio and then
would present its results for purposes of the multilateral Cross-
Guaranty Agreement.
2. Other GSD Proposed Rule Changes
The proposed rule filing would allow FICC to permit margining of
positions held in accounts of an affiliate of a member within GSD, akin
to the inter-affiliate margining in the CME Arrangement and the
proposed NYPC Arrangement. Thus, as in those arrangements, if a GSD
member defaults, its GSD Clearing Fund deposits, cash settlement
amounts and other available collateral would be available to FICC to
cover the member's default, as would the GSD Clearing Fund deposits and
available collateral of any Permitted Margin Affiliate with which it
cross-margins.
Loss Allocation
Under the current loss allocation methodology in GSD Rule 4,
Clearing Fund and Loss Allocation, GSD allocates losses first to the
most recent counterparties of a defaulting member. The proposed changes
to GSD Rule 4 would delete this step in the loss allocation methodology
in order to achieve a more equitable result. Instead, any loss
allocation would first be made against the retained earnings of FICC
attributable to GSD in an amount up to 25 percent of FICC's retained
earnings or such higher amount as may be approved by the Board of
Directors of FICC.
If a loss still remained, GSD would divide the loss between the
FICC Tier 1 Netting Members and the FICC Tier 2 Netting Members. ``Tier
One Netting Member'' and ``Tier Two Netting Member'' have been
introduced in the GSD Rules to reflect two different categories which
have been designated as such by FICC for loss allocation purposes.
Currently, only investment companies registered under the Investment
Company Act of 1940, as amended, would qualify as Tier 2 Netting
Members. Tier 2 Netting Members would only be subject to loss to the
extent they traded with the defaulting members, due to regulatory
requirements applicable to them.
Tier 1 Netting Members would be allocated the loss applicable to
them first by assessing the Clearing Fund deposit of each such member
in the amount of up to $50,000, equally. If a loss remains, Tier 1
Netting Members would be assessed ratably in accordance with the
respective amounts of their Required Fund Deposits based on the average
daily amount of the member's Required Fund Deposit over the prior
twelve months. Consistent with the current Rules, GSD members that are
acting as Inter-Dealer Brokers would be limited to a loss allocation of
$5 million in respect of their inter-dealer broker activity.
Margin Calculation--Intraday Margin Calls
In order to facilitate the NYPC Arrangement, GSD is proposing to
adopt the futures clearing house convention of calculating Clearing
Fund requirements twice per day. GSD would retain its regular
calculation and call as set out in the GSD Rules. An additional daily
intra-day calculation and call (``Intraday Supplemental Clearing Fund
Deposit'') would be made subject to a threshold that would be
identified in FICC's risk management procedures. In addition, the GSD
would process a mark-to-market pass-through twice per day, instead of
the current practice of once daily. The second collection and pass-
through of mark-to-market amounts would include a limited set of
components to be defined in FICC's risk management procedures. All
mark-to-market debits would be collected in full. FICC would pay out
mark-to-market credits only after any intra-day Clearing Fund deficit
is met.
Since GSD would be recalculating and margining a GSD Member's
exposure intra-day, the margin calculation methodology set forth in GSD
Rule 4, Clearing Fund and Loss Allocation, would be revised to
eliminate the Margin Requirement Differential component of the FICC
Clearing Fund calculation. In addition, GSD Rule 4 would be revised to
provide that in the case of a Margin Portfolio that contains accounts
of a Permitted Margin Affiliate, FICC would apply the highest VaR
confidence level applicable to the GSD Member or the Permitted Margin
Affiliate. Application of a higher VaR confidence levels would result
in a higher margin rate. Consistent with current GSD Rules, a minimum
Required Fund Deposit of $5 million would apply to a member that
maintains broker accounts.
Consolidated Funds-Only Settlement
The funds-only settlement process at GSD currently requires a
member to appoint a settling bank that will settle the member's net
debit or net credit amount due to or from the division by way of the
National Settlement Service of the Board of Governors of the Federal
Reserve System (``NSS''). Any funds-only settling bank that would
settle for a member that is also an NYPC member or that would settle
for a member and a Permitted Margin Affiliate that is an
[[Page 74114]]
NYPC member would have its net-net credit or debit balances at each
clearing corporation, other than balances with respect to futures
positions of a ``customer'' as such term is defined in CFTC Regulation
1.3(k), aggregated and netted for operational convenience and would pay
or be paid such netted amount. The proposed rule change makes clear
that, notwithstanding the consolidated settlement, the member would
remain obligated to GSD for the full amount of its funds-only
settlement amount.
Submission of Locked-in Trades From NYPC
The current GSD Rules allow for submission of ``locked-in trades''
(i.e., trades that are deemed compared when the data on the trade is
received from a single source) submitted by a locked-in trade source on
behalf of a GSD Member. Currently, designated locked-in trade sources
are Federal Reserve Banks on behalf of the Treasury Department, Freddie
Mac and GCF-Authorized Inter-Dealer Brokers for GCF Repo transactions.
Under the proposed rule change, GSD Rule 6C, Locked-In Comparison,
would be amended to include NYPC as an additional locked-in trade
source. This would be necessary because there would be futures
transactions cleared by NYPC that would proceed to physical delivery.
NYPC would submit the trade data as a locked-in trade source for
processing through FICC, identifying the GSD Member that had authorized
FICC to accept the locked-in trade from NYPC. Once these transactions
are submitted to FICC, they would no longer be futures but rather would
be in the form of buy-sells eligible for processing by GSD. As would be
the case with other locked-in trade submissions accepted by FICC, the
GSD Member designated in the trade information would have executed FICC
documentation evidencing to FICC its authorization of NYPC.
Deletion of Category 1/Category 2 Distinction
The proposed rule change would delete the legacy characterization
of certain types of members as either ``Category 1'' or ``Category 2'',
a distinction that currently applies to Dealer Netting Members, Futures
Commission Merchant Netting Members and Inter-Dealer Broker Netting
Members at GSD. Historically, the two categories were used to margin
lower capitalized members (i.e., Category 2) at a higher rate. With the
adoption of the VaR margin methodology, this distinction is no longer
necessary. Rather than margin Netting Members at higher rates solely
due to a single static capitalization threshold, FICC is able, by use
of the VaR margin methodology, to margin Netting Members at a higher
rate by applying a higher confidence level against any Netting Member
which, regardless of size, FICC believes may pose a higher risk.
With the deletion of the Category 1/Category 2 distinction, Section
1 of GSD Rule 13, Funds-Only Settlement, is proposed to be changed to
provide that all Netting Members could receive forward mark adjustment
payments, subject to FICC's general discretion to withhold credits that
would be otherwise due to a distressed Netting Member.
Amendment of CME Agreement
The proposed NYPC Arrangement would necessitate an amendment to the
CME Agreement to clarify that the NYPC Arrangement would take priority
over the CME Arrangement when determining residual FICC positions that
would be available for cross-margining with the CME. In addition, when
calculating and presenting liquidation results under the CME Agreement,
the amendment would provide that FICC's liquidation results would
include FICC's liquidation results in combination with NYPC's
liquidation results because the NYPC Agreement would provide for a
right of first offset between FICC and NYPC. The CME Agreement showing
the proposed changes was filed as an attachment to the proposed rule
change as part of Exhibit 5.
3. Summary of Other Proposed Changes to Rule Text
In GSD Rule 1, Definitions, the following definitions are proposed
to be added, revised or deleted:
The terms ``Broker Account'' and ``Dealer Account'' would be added
to the text of the GSD Rules. A ``Broker Account'' is an account that
is maintained by an inter-dealer broker netting member, or a segregated
broker account of a netting member that is a not an inter-dealer broker
netting member. An account that is not a Broker Account is referred to
as a Dealer Account.
``Coverage Charge'' would be revised to refer to the additional
charge with respect to the member's Required Fund Deposit (rather that
its VaR Charge) which brings the member's coverage to a targeted
confidence level.
``Current Net Settlement Positions'' would be corrected to clarify
its current intent, that it is calculated with respect to a certain
Business Day and not necessarily on that day, since it may be
calculated after market close on the day prior to its application
(i.e., before or after midnight between the close of business one day
and the open of business on the next day).
``Excess Capital Differential'' would be corrected to refer to the
amount by which a member's VaR Charge exceeds its Excess Capital,
instead of by reference to the amount by which its required Clearing
Fund deposit exceeds its Excess Capital.
``Excess Capital Premium Calculation Amount'' would be deleted
because, with the introduction of VaR methodology, the calculation is
no longer applicable. The terms ``Excess Capital Differential'' and
``Excess Capital Ratio'' would be amended to delete archaic references
to ``Excess Capital Premium Calculation Amount'' and to refer instead
to the comparison of a member's capital calculation to its VaR Charge.
In addition, the text of Section 14 of GSD Rule 3 would be amended to
provide that the Excess Capital Premium charge applies to any type of
entity that is a GSD Netting Member rather than limiting its
applicability to only the specified types formerly identified in the
text.
``Excess Capital Ratio'' would be amended to mean the quotient
resulting from dividing the amount of a member's VaR Charge by its
Excess Net Capital.
``GSD Margin Group'' would be added to refer to the GSD Accounts
within a Margin Portfolio.
``Margin Portfolio'' would be added to refer to the positions
designated by the member as grouped for cross-margining, subject to the
rules set forth in GSD Rule 4. Dealer Accounts and Broker Accounts
could not be combined in a common Margin Portfolio. A Sponsoring Member
Omnibus Account could not be combined with any other Accounts.
``Unadjusted GSD Margin Portfolio Amount'' would be added to define
the amount calculated by GSD with regard to a Margin Portfolio, before
application of premiums, maximums or minimums. It includes the VaR
Charge and the Coverage Charge for GSD. In the case of a cross-
margining participant of GSD, the Unadjusted GSD Margin Portfolio
Amount also would include the cross-margining reduction, if any.
The terms ``Category 2 Gross Margin Amount'', ``Margin Adjustment
Amount'', ``Repo Volatility Factor'' and ``Revised Gross Margin
Amount'' would be deleted from GSD Rule 1 since they are no longer used
elsewhere in the GSD Rules. The Schedule of Repo Volatility Factors
would be deleted because it is no longer applicable.
In Section 2 of GSD Rule 3, Ongoing Membership Requirements, the
[[Page 74115]]
requirement that GCF counterparties submit information relating to the
composition of their NFE-related accounts, would be amended to require
the submission of such information periodically, rather than on a
quarterly basis. GSD currently requires this information every other
month and by this change, FICC could institute periodic reporting on a
schedule that is appropriate at such time, in response to current
conditions.
In Section 9 of GSD Rule 4, Clearing Fund and Loss Allocation,
concerning the return of excess deposits and payments, FICC's
discretion to withhold the return of excess Clearing Fund to a member
that has an outstanding payment obligation to FICC would be changed to
refer to FICC's determination that the member's anticipated
transactions or obligations in the near future (rather than specifying
over the next 90 calendar days, as in the current text) may reasonably
be expected to be materially different than those of the recent past
rather than the 90 prior calendar days, as in the current text.
In addition, technical and clarifying changes are proposed to be
made to the rules and cross-references to rule sections contained
throughout. The rules have been reviewed by FICC and proposed to be
corrected as needed to reflect the correct rule section references as
originally intended.
The proposed rule change to permit cross-margining of positions
held at FICC and NYPC may increase the available offsets among
positions held at FICC and NYPC, thereby allowing a more efficient use
of participant collateral and promoting efficiencies in the fixed
income securities marketplace. The proposed rule change is therefore
consistent with the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder because it supports
the prompt and accurate clearance and settlement of securities
transactions.
B. Self-Regulatory Organization's Statement on Burden on Competition
FICC does not believe that the proposed rule change would have any
negative impact, or impose any burden, on competition. To the contrary,
FICC believes NYPC would be a powerful catalyst for competition by
offering all FICC members as well as other futures exchanges and DCOs
an equal opportunity to benefit from the innovative efficiencies of
``one-pot'' portfolio margining. FICC states that, because of these
unique and groundbreaking open access policies, NYPC would set a new
industry standard as the most fair, open and accessible DCO in the
market.
The NYPC Arrangement has been structured in a way that access to,
and the benefits of, the ``single pot'' are provided to other futures
exchanges and DCOs on fair and reasonable terms as described below. The
proposed single pot is required to be accessed by other futures
exchanges and DCOs via NYPC.\8\ As described below, this is done to
ensure the uniformity and consistency of risk methodologies and risk
management, to simplify and standardize operational requirements for
new participants and to maximize the effectiveness of the one-pot
arrangement.
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\8\ Section 16 of the NYPC Agreement provides that FICC
covenants and agrees that, during the term of the NYPC Agreement:
(i) NYPC-cleared contracts shall have priority for margin offset
purposes over any other cross-margining agreement; (ii) FICC will
not enter into any other cross-margining agreement if such agreement
would adversely affect the priority of NYPC and FICC under the NYPC
Agreement with respect to available assets; and (iii) FICC will not,
without the prior written consent of NYPC, amend the CME Agreement,
if such further amendment would adversely affect NYPC's right to
cross-margin positions in eligible products prior to any cross-
margining of CME positions with FICC-cleared contracts or adversely
affect the priority of NYPC and FICC under the NYPC Agreement with
respect to available assets.
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The proposed one-pot cross-margining method would allow members to
post margin based on the net risk of their aggregate positions across
asset classes, thereby releasing excess capital into the economy for
more efficient use. By linking positions in fixed income securities
held at FICC with interest rate products traded on NYSE Liffe U.S. and
other designated contract markets (``DCMs''), the proposal between FICC
and NYPC has the potential to create a substantial pool of highly
correlated assets that are capable of being cross-margined. This pool
will deepen as more DCOs and DCMs join NYPC, creating the potential for
even greater margin and risk offsets.
NYPC will initially clear certain contracts transacted on NYSE
Liffe U.S. NYPC will clear for additional DCMs that are interested in
clearing through NYPC as soon as it is feasible for NYPC do so. Such
additional DCMs will be treated in the same way as NYSE Liffe US, i.e.,
they must: (i) Be eligible under the rules of NYPC, (ii) contribute to
NYPC's guaranty fund, (iii) demonstrate that they have the operational
and technical ability to clear through NYPC and (iv) enter into a
clearing services agreement with NYPC.
Moreover, NYPC has also committed to admit other DCOs as limited
purpose participants as soon as it is feasible, thereby allowing such
DCOs to participate in the one-pot margining arrangement with FICC
through their limited purpose membership in NYPC.\9\ Such DCOs will be
required to satisfy pre-defined, objective criteria set forth in NYPC's
rules.\10\ In particular, such DCOs must: (i) Submit trades subject to
the limited purpose participant agreement between NYPC and each DCO
that would otherwise be cleared by the DCO to NYPC, with NYPC acting as
central counterparty and DCO with respect to such trades,\11\ (ii) be
eligible under the rules of NYPC and agree to be bound by the NYPC
rules,\12\ (iii) contribute to NYPC's guaranty fund,\13\ (iv) provide
clearing services to unaffiliated markets on a ``horizontal'' basis
(i.e., not limit their provision of clearing services on a vertical
basis to a single market or limited number of markets) \14\ and (v)
agree to participate using the uniform risk methodology and risk
management policies, systems and procedures that have been adopted by
FICC and NYPC for implementation and administration of the NYPC
Arrangement.\15\ Reasonable clearing fees will be allocated between
NYPC and the limited purpose participant DCO as may be agreed by NYPC
and the DCO, taking into account factors such as the cost of services
(including capital expenditures incurred by NYPC), technology that may
be contributed by the limited purpose participant, the volume of
transactions, and such other factors as may be relevant.
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\9\ See NYPC Agreement, Section 14.
\10\ NYPC's rules can be viewed as part of NYPC's DCO
registration application on the CFTC's Web site (http://www.cftc.gov), as well as on NYPC's Web site (http://www.nypclear.com).
\11\ See NYPC Rule 801(b)(1).
\12\ See NYPC Rule 801(b)(2).
\13\ Pursuant to NYPC Rule 801(b)(3), limited purpose
participants will be required to make a contribution to the NYPC
guaranty fund in form and substance similar to and in an amount not
less than the NYSE guaranty, which will initially consist of a
$50,000,000 guaranty secured by $25,000,000 in cash during the first
year of NYPC's operations.
\14\ See NYPC Rule 801(c)(1)(i).
\15\ See NYPC Rule 801(c)(1)(ii).
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As a basic structure, FICC and NYPC anticipate that the limited
purpose participant agreement will encompass the foregoing requirements
for limited purpose membership contained in NYPC's rules. Because each
DCO could present different operational issues, terms beyond the basic
rules provisions will be discussed on a case-by-case basis and
reflected in the respective limited purpose participant agreement
accordingly. FICC and NYPC envision that a possible structure for DCO
limited purpose participation could be an omnibus account, with the DCO
limited
[[Page 74116]]
purpose participant essentially acting as a processing agent for its
clearing members vis-a-vis NYPC with respect to the submission of
eligible positions of the DCO's clearing members to NYPC for purposes
of inclusion in the one-pot arrangement with FICC. In order for their
eligible positions to be included in the single pot, clearing members
of the DCO limited purpose participant would need to authorize the DCO
to submit their positions to NYPC. Under such a structure, the DCO
would be responsible for fulfilling all margin and guaranty fund
requirements associated with the activity in the omnibus account.
With respect to both the clearance of trades for unaffiliated DCMs
and the admission of DCOs as limited purpose participants, NYPC has
committed that it will complete the substantial operational effort of
admitting and integrating another DCM or DCO as soon as feasible, but
no later than 24 months from the start of operations. FICC states that
this provision is necessary to the effective implementation of the one-
pot cross-margining methodology and that this narrow window of time is
required to allow for refinement and enhancement of certain systems
post go-live, to allow time for the possible simultaneous integration
with multiple major clearing members so that fair market access is
assured, and to allow time for the completion of the material
operational challenge of connecting and integrating with the separate
technologies of other DCMs and/or DCOs. However, this period does not
preclude NYPC from engaging in discussions with other DCMs and DCOs
immediately, and NYPC is currently, in fact, having such discussions
with interested parties. NYPC anticipates that it will be able to
complete the integration of additional DCMs and/or DCOs in advance of
that two-year period.
DCMs and DCOs will be required to contribute to the NYPC guaranty
fund in the same manner as NYSE Euronext has done. This provision is
designed to ensure that the financial resources supporting NYPC remain
robust as the risks of new DCMs and/or DCOs are introduced. As NYPC's
business grows over time and more participants join NYPC and contribute
to the guaranty fund, FICC would expect that the contribution from DCMs
(including NYSE Euronext) and DCOs could be reduced across these
entities on a pro rata basis as concentration risk is reduced. It
should be noted that exchange contribution to clearing organization
default resources is standard practice both in the U.S. and in Europe.
FICC further believes that the NYPC Arrangement meets the
competition standard of Section 17A of the Exchange Act, which provides
that the rules of a clearing agency may not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act. The proposed one-pot method of cross-margining
will allow NYPC to compete in the market for clearing U.S. dollar
denominated interest rate futures products. NYPC, in turn, will commit
to provide fair access to all DCMs and DCOs that are interested in
participating as described above. FICC members and other market
participants will benefit greatly from the entry of NYPC as a
competitor in the U.S. futures market via greater competition,
increased capital and operational efficiencies, and enhanced
transparency.
FICC's cross-margining arrangement with NYPC will enable NYPC to
provide an innovative and highly efficient clearing solution to the
U.S. futures market, while, at the same time, providing enhanced cross-
margining benefits to FICC members. By their terms, the rules and
provisions governing the FICC-NYPC proposal would not affect the
ability of another clearing organization to access NYPC, only the means
of such access. As stated above, any qualified DCO may access the
single pot and NYPC will offer the service on non-discriminatory terms
to all qualified participants. FICC states that these unprecedented
open access provisions are far superior to the cross-margining
arrangements offered by any of NYPC's competitors and that there is no
other clearinghouse in the global futures market that is similarly
obligated by charter to inter-operate with other DCMs and/or DCOs,
including, potentially, direct competitors.
With the recent passage of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the ``Dodd-Frank Act''),\16\ which states that
``under no circumstances shall a derivatives clearing organization be
compelled to accept the counterparty credit risk of another clearing
organization'',\17\ this type of open access clearing for futures
becomes even more difficult to achieve unless accomplished through
industry-led initiative. NYPC's unprecedented admission policy sets
such a new industry standard by both providing market participants with
a real alternative from the dominant vertical clearing model and
creating a level playing field that will enable multiple new entrants
to compete in the U.S. futures market.
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\16\ Public Law 111-203 (July 21, 2010). See Dodd-Frank Wall
Street Reform and Consumer Protection Act Sec. 725(h).
\17\ See Section 725(h) of the Dodd-Frank Act.
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FICC strongly believes that the ability to deliver one-pot margin
efficiencies depends on FICC's ability to appropriately manage its
risk, which FICC believes can best be achieved by requiring other DCOs
to link into NYPC to join the one-pot arrangement. Utilizing NYPC as a
standardized portal for the one-pot arrangement provides FICC with
needed assurance, in light of NYPC's contractual obligations to FICC,
that operational issues and risk methodologies and management are
understood, uniform and consistent for all participants in the one-pot
arrangement. Without such a mechanism, this transformative innovation
could not be delivered to the marketplace in a manner that minimizes
systemic risk, thereby depriving the U.S. futures market of the most
promising opportunity it has seen to-date for true competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Prior to submitting this rule filing to the Commission, FICC
received a letter in 2009 from the ELX Futures Exchange which
encouraged FICC to reconsider its plan to enter into a relationship
with NYSE. FICC has also received two letters from NASDAQ OMX in 2010
questioning the manner in which DTCC determined to enter into the joint
venture with NYSE to form NYPC, arguing that the venture is contrary to
DTCC's mission and suggesting that DTCC consider instead an enhanced
form of ``two-pot'' cross-margining. FICC will notify the Commission of
any additional written comments.
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
[[Page 74117]]
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act and with respect to the following:
The Commission requests comment on all aspects of the
proposed single pot margining arrangement, including the risk
management of the combined positions cleared by GSD and NYPC. What
unique risk management issues does a single pot cross margining
arrangement raise in comparison with the two pot arrangements
previously approved by the Commission? Would the VaR margining
methodology proposed to be used by FICC as the administrator of the
single-pot margining arrangement adequately measure the risk exposures
of the positions? Are there other risk management standards or
requirements that should be established regarding a single-pot
margining methodology?
The Commission requests comment on the proposed loss
allocation between FICC and NYPC. Does the loss allocation arrangement,
in all scenarios, fairly reflect the risks presented by each clearing
entity? Does it pose any undue risks to either FICC or NYPC or to any
of their participants? If so, how would those risks be remediated?
The Commission requests comment on the burden on
competition, if any, that the proposed single pot cross margining
arrangement may have. Does the proposal to admit other DCOs as limited
purpose participants of NYPC mitigate any perceived burden on
competition? If not, why not? Is there a more effective means of
address concerns related to competition?
The Commission requests comment on the implementation
timeframe for the single pot margining arrangement and on the potential
24 month time period before unaffiliated DCOs or DCMs are admitted to
the cross-margining arrangement. What are commenters' views on the
proposed time period? Is a shorter or longer time period justified
based on the operational issues associated with starting the new cross-
margining arrangement?
The Commission requests comment on the proposed guarantee
fund contribution required of all DCOs (including NYPC) and DCMs. Is a
sizable guarantee fund contribution needed to assure the safeguarding
of securities and funds within the cross-margining arrangement? Is a
higher or lower contribution justified? What is the impact on
competition of such a requirement?
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 e-mail to [email protected]. Please include
File Number SR-FICC-2010-09 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FICC-2010-09. This file
number should be included on the subject line if e-mail 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 Section, 100 F Street,
NE., Washington, DC 20549-1090, on official business days between the
hours of 10 a.m. and 3 p.m. Copies of such filings will also be
available for inspection and copying at the principal office of FICC
and on FICC's Web site at http://dtcc.com/downloads/legal/rule_filings/2010/ficc/2010-09.pdf. 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-2010-09 and should be submitted on or before
December 21, 2010.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-30034 Filed 11-29-10; 8:45 am]
BILLING CODE 8011-01-P