DD Support Board and Research Team

[Mariner*]

SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-83457; File No. SR-FICC-2018-004)
June 18, 2018
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change to Introduce a Floor to the Calculation of the Fails Charges and Make Other Changes
On May 8, 2018, Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-FICC-2018-004, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)1 and Rule 19b-4 thereunder.2 The proposed rule change was published for comment in the Federal Register on May 17, 2018.3 The Commission did not receive any comment letters on the proposed rule change. For the reasons discussed below, the Commission approves the proposed rule change.

I. Description of the Proposed Rule Change
The proposed rule change would update FICC’s Government Securities Division (“GSD”) Rulebook (“GSD Rules”) and FICC’s Mortgage-Backed Securities Division (“MBSD”) Clearing Rules (“MBSD Rules”)4 to (i) introduce a floor of one percent to the calculation of the existing fails charge rules, (ii) clarify the target rate that may be used in the fails charge calculations under certain circumstances, and (iii) make certain technical
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
3 See Securities Exchange Act Release No. 83222 (May 11, 2018), 83 FR 23032 (May 17, 2018) (SR-FICC-2018-004) (“Notice”).
4 The GSD Rules and the MBSD Rules are available at http://www.dtcc.com/legal/rules-and-procedures

changes to the fails charge provisions to ensure consistent use of defined terms.
5
The proposed rule change would also update the MBSD Rules to clarify that a cap applies to the MBSD fails charge.
6
Each of these proposed changes are described below.
A. Proposed One Percent Floor
In a securities transaction, a settlement fail occurs when the seller does not deliver the securities to the buyer on the agreed upon settlement date. FICC states that although settlement fails are generally not treated as contractual default events, provided that the failing seller delivers the securities soon after the settlement date, persistent elevated levels of settlement fails create market inefficiencies and increase credit risk for market participants.
7
To help mitigate settlement fails, FICC maintains a fails charge in both the GSD Rules and the MBSD Rules.
8
However, FICC states that under the current GSD Rules and MBSD Rules, the respective fails charge calculations could result in a zero charge.
9
Specifically, under the GSD version of the current fails charge, if the federal funds target rate would rise to three percent, then the calculation of the charge would result in a zero charge.
10
Similarly, under the MBSD version of the current fails charge, if the federal funds target rate would rise to two percent, then the calculation of the charge would result in a zero charge.
11
To address this issue, FICC proposes to amend the GSD Rules and the MBSD Rules to add a one percent floor to the respective GSD and MBSD fails charge calculations.
12
FICC’s proposal comes in response to a recent announcement by the Treasury Market Practices Group (“TMPG”),
13
in which the TMPG proposed the same change to its recommended best practices to help ensure that there is always a minimum fails charge amount.
14
The TMPG states that its recommendation of a one percent floor is driven by the concern that market participants would discontinue their fails charge operational processes in a prolonged zero charge scenario.
15
Adding the one percent floor would help maintain a fails charge during elevated federal funds target rate levels, and thereby help ensure that market participants do not discontinue their fails charge operational processes.
16
FICC states that as one of the largest participants in U.S. Government securities market, it is imperative that FICC implement the TMPG’s recommendation to help maintain consistency and symmetry within the market.
17
Notice, 83 FR at 23032-34.
6 Id.
7 See Notice, 83 FR at 23033. See also Frequently Asked Questions: TMPG Fails Charges (April 23, 2018) at 1, available at https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG-Fails-Charge-FAQ-04-23-2018.pdf (“FAQ”).
8 GSD Rule 11; MBSD Rule 12, supra note 4.
9 Id.; Notice, 83 FR at 23034.

E. Implementation Timeframe
FICC proposes to implement the proposed changes on July 2, 2018
.33 FICC states that it would announce such implementation date by Important Notice.34

FICC’s proposal to implement a one percent floor to the fails charge calculations would advance FICC’s efforts to "Discourage settlement fails by ensuring that the fails charge calculation would not produce a zero charge, particularly during periods of elevated target levels for the federal funds rate. In turn, ensuring that the respective GSD and MBSD fails charge calculations do not produce a zero charge would encourage market participants to maintain their fails charge operational processes. Accordingly, the Commission finds that the proposed rule change is designed to help ensure that settlement in the applicable markets covered by FICC’s processes occurs on a timely basis, and thereby promotes the prompt and accurate clearance and settlement of securities transactions", consistent with Section 17A(b)(3)(F) of the Act
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FICC-2018-004
FICC - GOV, FICC - MBS

Update the Government Securities Division Rulebook and the Mortgage-Backed Securities Division Clearing Rules to introduce a floor to the calculation of the fails charges and make other changes
Federal Release:
Release No. 34-83457; File No. SR-FICC-2018-004
(June 18, 2018)

http://www.dtcc.com/legal/sec-rule-filings