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Federal Register / Vol. 86, No. 168 / Thursday, September 2, 2021 / Notices
lotter on DSK11XQN23PROD with NOTICES1

Market Risk Management FICC would manage its market risk with respect to Sponsored GC Trades similar to the manner in which FICC
manages existing trades within the Sponsored Service. To mitigate market risk, FICC would calculate the Value at Risk VaR margin component VaR
Charge 28 for each Sponsored Member based on its activity in the Sponsored Service, including its activity in the proposed Sponsored GC Service. The VaR Charge for the Sponsoring Members omnibus account for Sponsored Member trading activity would continue to be gross-margined as the sum of the individual VaR Charges for each Sponsored Member client.29
Additionally, FICC would assign a symbol to each Sponsored Member to facilitate FICCs ability to surveil the Sponsored Members activity across its Sponsored GC Trades as well as its other Sponsored Member Trades within the existing Sponsored Service both with the same Sponsoring Member and across Sponsoring Members, if applicable. In addition, FICC would apply certain heightened requirements that apply to certain Sponsoring Members within the Sponsored GC
Service as well.30 For example, FICC
may impose heightened financial requirements on these Sponsoring Members based on their anticipated activity and other factors,31 and FICC
may limit such a Sponsoring Members activity if the sum of the VaR Charges of its omnibus and netting accounts exceeds its net capital.32
In addition, FICC would manage the mark-to-market risk associated with unaccrued repo interest on a Sponsored GC Trade through a proposed new interest rate mark component of fundsonly settlement.33 FICC would also 28 Each members margin consists of a number of applicable components. The VaR Charge is typically the largest component of a members margin requirement. The VaR Charge is designed to capture the potential market price risk associated with the securities in a members portfolio. The VaR Charge is designed to provide an estimate of FICCs projected liquidation losses with respect to a defaulted members portfolio at a 99 percent confidence level. See Rule 1 definition of VaR
Charge, supra note 4; Securities Exchange Act Release No. 83362 June 1, 2018, 83 FR 26514 June 7, 2018 SRFICC2018001.
29 See Rule 3A, Section 10, supra note 4.
30 Specifically, these restrictions apply to Category 2 Sponsoring Members, which are other members that meet certain financial requirements as compared to Category 1 Sponsoring Members, which are bank netting members that are wellcapitalized with $5 billion in equity capital. See Rule 3A, Section 2a, supra note 4.
31 See Rule 3A, Section 2b, supra note 4.
32 See Rule 3A, Section 2h, supra note 4.
33 This GC Interest Rate Mark would be calculated in the same manner as the GCF Interest Rate Mark is for GCF Repo transactions. For a detailed
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apply an Interest Adjustment Payment to Sponsored GC Trades to account for overnight use of funds by the Sponsoring Member or Sponsored Member, as applicable, based on such partys receipt from FICC of a Forward Mark Adjustment Payment reflecting a GC Interest Rate Mark on the previous business day.34
Liquidity Risk Management Currently, trades between a Sponsoring Member and its Sponsored Member do not independently create liquidity risk for FICC. Under its Rules, if a Sponsoring Member defaults, FICC
may close out that is, cash settle the Sponsored Member trades of the defaulting Sponsoring Member.35
Similarly, if a Sponsored Member defaults, FICC may offset its settlement obligations to the Sponsoring Member against the Sponsoring Members obligations under the Sponsoring Member Guaranty to perform on behalf of its defaulting Sponsored Member.36
Thus, in both default scenarios, FICC
bears no liquidity risk.
As a result, to the extent a Sponsoring Member either 1 runs a matched book of Sponsored Member trades i.e., enters into offsetting trades with its own Sponsored Members, or 2 simply enters into trades with its Sponsored Member i.e., without entering into offsetting transactions, such activities do not increase FICCs liquidity risk.
FICC bears liquidity risk only when a Sponsoring Member enters into an offsetting trade in which a third-party member is the pre-novation counterparty. In that scenario, FICC is required to settle the obligations of a defaulting Sponsoring Member.
Since Sponsored GC Trades would not involve third-party members, such trades would impact FICCs liquidity risk in a similar manner to trades between a Sponsoring Member and its Sponsored Member in the current Sponsored Service. As a result, FICC
proposes to manage the liquidity risk description of the calculation, see Notice of Filing, supra note 5 at 29837.
34 No other components of funds-only settlement would be necessary to apply to Sponsored GC
Trades because, as described above, i all Sponsored GC Trades would novate after the settlement of the Start Legs of such trades i.e., not during the Forward-Starting Period, ii mark-tomarket changes in the value of the securities transferred under Sponsored GC Trades would be managed by the Sponsored GC Clearing Agent Bank on FICCs behalf consistent with the manner in which GCF Repo transactions are currently processed, and iii the accrued repo interest on Sponsored GC Trades would be passed on a daily basis, as described above.
35 See Rule 3A, Section 14c, supra note 4. See also Rule 22A, Section 2, supra note 4.
36 See Rule 3A, Section 11, supra note 4.

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associated with Sponsored GC Trades in the same manner that it currently manages such risk for other trades between a Sponsoring Member and its Sponsored Member.
C. Proposed Changes to Allocations Within the Capped Contingency Liquidity Facility CCLF
1. CCLF Background On April 25, 2017, the Commission approved FICCs adoption of the Clearing Agency Liquidity Risk Management Framework Framework, which broadly describes FICCs liquidity risk management strategy and objective to maintain sufficient liquid resources in order to meet the potential amount of funding required to settle outstanding transactions of a defaulting member including affiliates in a timely manner.37 The Framework identifies, among other things, each of the qualifying liquid resources available to FICC, including the CCLF.38 The CCLF
is a rules-based, committed liquidity resource, designed to enable FICC to meet its cash settlement obligations in the event of a default of the member including the members family of affiliated members to which FICC has the largest exposure in extreme but plausible market conditions.39 FICC
would activate the CCLF if, upon a member default, FICC determines that its non-CCLF liquidity resources would not generate sufficient cash to satisfy FICCs payment obligations to its nondefaulting members. In simple terms, a CCLF repo is equivalent to a nondefaulting member financing FICCs payment obligation under the original trade, thereby providing FICC with time to liquidate the securities underlying the original trade. More specifically, upon activating the CCLF, members would be called upon to enter into repo transactions as cash lenders with FICC
as cash borrower up to a predetermined capped dollar amount, thereby providing FICC with sufficient liquidity to meet its payment 37 See Securities Exchange Act Release No. 80489
April 19, 2017, 82 FR 19120 April 25, 2017 SR
FICC2017008.
38 See id.
39 FICC designed the CCLF to meet the regulatory requirement for a covered clearing agency to measure, monitor, and manage its liquidity risk by maintaining sufficient liquid resources to effect same-day settlement of payment obligations in the event of a default of the participant family that would generate the largest aggregate payment obligation for the clearing agency in extreme but plausible market conditions. 17 CFR 240.17Ad 22e7i; see Securities Exchange Act Release No.
82090 November 15, 2017, 82 FR 55427, 55430
November 21, 2017 SRFICC2017002; Rule 22A, Section 2a, supra note 4.

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