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Federal Register / Vol. 86, No. 168 / Thursday, September 2, 2021 / Notices
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FICC to provide CCP services covering a greater number of tri-party repo transactions, the Sponsored GC Service would enable FICC to control the liquidation of a greater number of positions in a member default scenario, which in turn, should help protect against the risk of a large-scale exit by institutional firms from the U.S.
financial market in a stress scenario.56
Accordingly, the Commission believes that an increase in centrally cleared triparty repo activity via the Sponsored GC
Service would help reduce systemic risks and support the stability of the broader financial system, consistent with Section 805b of the Act.57
The Commission also believes that FICCs proposal to change the CCLF
allocation methodology is consistent with the principles of reducing systemic risks and supporting the stability of the broader financial system. As discussed above in Section I.C., trades between a Sponsoring Member and its Sponsored Member do not independently create liquidity risk for FICC. However, under the current Rules, if a Sponsoring Member enters into a Sponsored Member trade without entering into an offsetting transaction, the Sponsoring Member is subject to CCLF obligations for the Sponsored Members position in the Sponsoring Members omnibus account as well as its own position arising from the Sponsored Member trade recorded in its netting account.
Although the positions in the Sponsoring Members omnibus account and netting account offset each other, FICC does not currently net such positions for CCLF purposes because CCLF allocations are determined at the participant account level. FICC proposes to change the Rules to allow netting, for CCLF allocation purposes, of offsetting positions in a Sponsoring Members omnibus account and netting account.
FICC designed this proposal to ensure unprecedented market volatility in MarchApril 2020. See Notice of Filing, supra note 5 at 29835.
56 See Letter from Robert Toomey, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association June 18, 2021 at 2 commenting that the proposed Sponsored GC Service should incentivize more central clearing of tri-party repos, thereby contributing to enhancing the capacity and resiliency of the repo market and mitigating the risk of a large-scale exit by institutional firms from the market in a stress scenario. The U.S. financial market experienced such a liquidity drain from the repo market in the 20072008 financial crisis when the bankruptcy of Lehman Brothers gave rise to concerns among cash provider institutional firms about the creditworthiness of their borrower counterparties. See Ben S. Bernanke, The Courage to Act: A Memoir of a Crisis and its Aftermath 397
2017 discussing the paralyzing uncertainty on the part of repo lenders about banks financial health in 2007 and 2008.
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that a Sponsoring Members CCLF
obligation aligns more closely with the actual liquidity risk its trading activity presents to FICC. This, in turn, may decrease the frequency with which a Sponsoring Members daily peak liquidity needs reach into higher CCLF
supplemental liquidity tiers, resulting in a larger pro-rata allocation of CCLF
obligations among other members whose daily peak liquidity needs reach into those supplemental liquidity tiers.
Based on the foregoing, FICCs current CCLF allocation methodology subjects Sponsoring Members to CCLF
obligations beyond the level of risk presented by their trading activity, essentially requiring those Sponsoring Members to partially subsidize the CCLF obligations of other members who would otherwise bear larger CCLF
obligations under the proposal.58 As a result, Sponsoring Members must currently direct capital towards CCLF
obligations that could otherwise be used to support the trading activity of their clients.
FICCs proposal to change the CCLF
allocation methodology would result in a distribution of CCLF obligations that better aligns with the liquidity risk each members trading activity presents to FICC. Market stability is enhanced when market participants are incentivized to manage the actual risks presented by their trading activity. Accordingly, the Commission believes that FICCs proposal to change the CCLF allocation methodology would help reduce systemic risk and support the stability of the broader financial system, consistent with Section 805b of the Act.59
2. Promoting Robust Risk Management and Safety and Soundness The Commission believes that FICCs proposals in the Advance Notice are consistent with the objectives of promoting robust risk management and promoting safety and soundness at FICC. With respect to the proposed Sponsored GC Service, FICC would leverage its existing risk management tools to manage the risks associated with repos transacted. For example, 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 58 In reaching this conclusion, the Commission reviewed and analyzed an impact analysis filed by FICC, comparing the changes in CCLF allocations under the current Rules and under the proposal. As part of the Advance Notice, FICC filed Exhibit 3
FICC/GSD CCLF Allocations Impact Study.
Pursuant to 17 CFR 240.24b2, FICC requested confidential treatment of Exhibit 3.
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Service. Specifically, FICC would calculate the VaR Charge 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 would continue to be the sum of the individual VaR Charges for each Sponsored Member client i.e., grossmargined. Additionally, FICC would risk manage the mark-to-market risk associated with unaccrued repo interest on a Sponsored GC Trade through a proposed new interest rate mark, calculated in the same manner that FICC
currently calculates the interest rate mark for GCF Repo transactions.
Moreover, the Advance Notice includes a proposal for a new risk management feature for the Sponsored Service. Specifically, 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. In addition, the new Sponsored GC Service would continue to apply certain heightened requirements on particular types of Sponsoring Members. The foregoing risk management measures would help FICC prevent and otherwise manage the risks presented by the potential default of a member within Sponsored GC Service. Accordingly, the Commission believes that the proposed Sponsored GC Service would promote robust risk management and safety and soundness at FICC, consistent with Section 805b of the Act.60
The Commission also believes that FICCs proposals in the Advance Notice are consistent with the objective of promoting safety and soundness in the tri-party repo market. As discussed above, the Sponsored GC Service would make the risk-reducing benefits of central clearing available to a greater portion of trades in the tri-party repo market. Also, as described above in Section III.A.1., FICCs proposed CCLF
allocation methodology would reduce CCLF obligations for Sponsoring Members with respect to Sponsored Member trades entered into without offsetting i.e., matched book trades. As a result, the proposed CCLF allocation methodology would reduce costs for Sponsoring Members and thereby provide an additional incentive for eligible market participants to join the Sponsored Service and offer the Sponsored GC Service to a potentially broader segment of the tri-party market.
By bringing a greater portion of tri-party 60 Id.

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