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Federal Register / Vol. 86, No. 168 / Thursday, September 2, 2021 / Notices
2. Sponsored Membership In 2005, FICC established the Sponsored Service, allowing eligible members to sponsor their clients into a limited form of membership.16 A
Sponsoring Member is permitted to submit to FICC, for comparison, novation, and netting, certain eligible securities transactions of its Sponsored Members. FICC requires each Sponsoring Member to establish an omnibus account at FICC separate from its regular netting account for Sponsored Member trading activity.
Sponsored Members generally have to meet the definition of a qualified institutional buyer QIB, as defined in Rule 144A 17 under the Securities Act of 1933.18
For operational and administrative purposes, FICC interacts solely with the Sponsoring Member as agent for purposes of the day-to-day satisfaction of its Sponsored Members obligations to and from FICC, including their securities and funds-only settlement obligations.19 Sponsoring Members are also responsible for providing FICC with a Sponsoring Member Guaranty, whereby the Sponsoring Member guarantees to FICC the payment and performance by its Sponsored Members of their obligations under the Rules.20
Although Sponsored Members are principally liable to FICC for their own settlement obligations under the Rules, the Sponsoring Member Guaranty requires the Sponsoring Member to satisfy those settlement obligations on behalf of a Sponsored Member if the Sponsored Member defaults and fails to perform its settlement obligations.21

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B. Proposed Sponsored GC Service Currently, the Sponsored Service only facilitates trading in bilateral DVP repos, not tri-party repos. In the Advance Notice, FICC proposes to expand the Sponsored Service to accommodate triparty repo trading, which it believes would increase term repo activity within the Sponsored Service. FICC
states that several market participants have indicated that they currently transact tri-party term repos outside of central clearing because they are not operationally equipped to perform the collateral management and other functions associated with term DVP
16 Securities Exchange Act Release No. 51896
June 21, 2005, 70 FR 36981 June 27, 2005 SR
FICC200422. See Rule 3A, supra note 4.
17 17 CFR 230.144A.
18 15 U.S.C. 77a et seq.
19 See Rule 3A, Section 8, supra note 4.
20 See Rule 1 definition of Sponsoring Member Guaranty and Rule 3A, Section 2c, supra note 4.
21 Id.

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repos.22 In particular, money market funds and other mutual funds generally prefer to use the tri-party repo market because a clearing bank administers collateral management and other functions, as described above.23
Therefore, FICC proposes to add the Sponsored GC Service, which would allow but not require Sponsoring Members and their Sponsored Members to trade general collateral repos with each other on the tri-party platform of a Sponsored GC Clearing Agent Bank 24
each, a Sponsored GC Trade. Such general collateral repos would involve the same asset classes that are currently available for members using the GCF
Repo Service.25 Consistent with the GCF
Repo Service, the Sponsored GC Service would also permit cash borrowers to make collateral substitutions. Sponsored GC Trades would settle in a manner similar to the way Sponsoring Members and Sponsored Members currently settle tri-party repos with each other outside of central clearing.
Sponsored GC Service Structure Sponsored GC Trades would only be between a Sponsored Member and its Sponsoring Member. FICC would novate 22 See Notice of Filing, supra note 5 at 29836. A
key difference between the bilateral and tri-party repo markets deals with the operational aspects of managing term repos. In the tri-party repo market, a clearing bank typically automatically selects securities from the cash borrowers account to serve as collateral that satisfies the credit and liquidity criteria agreed between the parties. The clearing bank delivers securities against the simultaneous delivery of cash between the parties accounts at the clearing bank. The clearing bank manages the regular revaluation of collateral, variation margining, income payments on the collateral, and collateral substitutions. In the bilateral repo market, the parties themselves perform such collateral management and other administrative functions.
23 See Notice of Filing, supra note 5 at 29836.
24 The Bank of New York Mellon operates the triparty platform that would facilitate trades conducted through the Sponsored GC Service.
25 FICC would register a new series of Generic CUSIP Numbers for the Sponsored GC Service as follows: i U.S. Treasury Securities maturing in ten 10 years or less, ii U.S. Treasury Securities maturing in thirty 30 years or less, iii NonMortgage-Backed U.S. Agency Securities, iv Federal National Mortgage Association Fannie Mae and Federal Home Loan Mortgage Corporation Freddie Mac Fixed Rate MortgageBacked Securities, v Fannie Mae and Freddie Mac Adjustable Rate Mortgage-Backed Securities, vi Government National Mortgage Association Ginnie Mae Fixed Rate Mortgage-Backed Securities, vii Ginnie Mae Adjustable Rate Mortgage-Backed Securities, viii U.S. Treasury Inflation-Protected Securities TIPS and ix U.S.
Treasury Separate Trading of Registered Interest and Principal of Securities STRIPS. The purpose of registering a new series of Generic CUSIP Numbers specific to the Sponsored GC
Service is to avoid any operational processing errors that could otherwise result if a trade intended for the Sponsored GC Service was inadvertently processed as a GCF Repo transaction or vice versa.
Notice of Filing, supra note 5 at 29836.

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only the End Legs of Sponsored GC
Trades. Consistent with the current settlement process of such tri-party repos outside of central clearing, the Start Legs of Sponsored GC Trades would continue to settle on a trade-fortrade basis on the tri-party platform of a Sponsored GC Clearing Agent Bank.26
Accrued repo interest on Sponsored GC Trades would be paid and collected by FICC on a daily basis. Additionally, if the market value of the securities collateral decreases from its market value at the Start Leg, the cash borrower would be required deliver to FICC
additional securities and/or cash such that the market value of the total securities collateral remains at least equal to its market value at the Start Leg. Conversely, if the market value of the securities collateral increases from its value at the Start Leg, the cash lender would be required to deliver to FICC
securities and/or cash such that the market value of the remaining securities collateral remains at least equal to its market value at the Start Leg. Such additional securities and/or cash must be delivered within the timeframe set forth in a proposed new schedule of Sponsored GC Trade timeframes set forth in the Rules.
In order to facilitate settlement of securities and cash obligations, FICC
would direct each party to a Sponsored GC Trade to make any payment or delivery due to FICC in respect of a Sponsored GC Trade except for certain funds-only settlement obligations, as discussed below directly to the relevant pre-novation counterparty. As a result, each transfer of securities and daily repo interest would be made directly between the Sponsored Member and its Sponsoring Member via the tri-party repo platform of a Sponsored GC
Clearing Agent Bank.27
26 FICC does not believe it would be efficient or appropriate to novate the Start Legs of Sponsored GC Trades, as that novation would unnecessarily complicate an already efficient process by requiring the parties to make significant operational and business changes to include FICC in the transaction chain. Since Sponsored GC Trades would only be between a Sponsored Member and its Sponsoring Member on a known i.e., not blind basis, all Start Leg obligations would settle between a single set of counterparties, negating any efficiency or reduced settlement risk that FICCs novation would provide.
See Notice of Filing, supra note 5 at 2983637.
27 FICC similarly does not believe it would be appropriate for FICC to be in the transaction chain for each payment and delivery under a Sponsored GC Trade because inserting FICC in the middle of the payments and deliveries would require substantial changes in operational processes for both Sponsored Members and Sponsoring Members.
FICC does not believe such operational changes are necessary since there can only be two pre-novation counterparties involved in the settlement of a Sponsored GC Trade i.e., the Sponsoring Member and its Sponsored Member client. See id.

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