FICC Proposes Second Set of Rules for Mandated Clearing of US Government Securities
Commentary by Steven Lofchie
The Fixed Income Clearing Corporation ("FICC") proposed new rules in response to SEC amendments mandating that a central clearing agency for US Government securities require its members to clear certain of their cash market and repurchase transactions.
The FICC proposed requirements (i) that each Netting Member "submit all eligible secondary market transactions, both for repurchase agreements and certain categories of cash transactions, to which it is a counterparty to FICC for clearance and settlement;" and to "define the scope of such trade submission requirement;" (ii) to "facilitate FICC's ability to identify and monitor Netting Members compliance, (iii) to enhance rules qualifications and standards, and (iv) otherwise, to "clarify, conform and enhance disclosures."
Aspects of the FICC rule proposals go beyond the express requirements of the SEC's Rule. These include:
- additional requirements that will be imposed on firms that seek to become clearing members, including additional requirements to confirm the availability of sufficient financial resources;
- periodic reporting requirements that a clearing member will be required to make to FICC to certify that it is in compliance with the clearing mandate include the requirements to provide a certification of the firm's CCO and on a triennial basis to obtain an audit of compliance;
- express requirements to adopt procedures to maintain connectivity and to adopt cybersecurity measures; and
- expanded authority of FICC to impose fines for noncompliance by clearing members and an increase in the amount of fines that FICC may impose.
Commentary
Much of the substance of the FICC proposals is simply a reiteration of SEA Rule 17Ad-22; (i.e., stating the transactions to which the clearing mandate applied and the counterparties that would be exempt from the clearing mandate.)
One point of clarification made in the proposing release is that a bank that is a FICC member is required to abide by the clearing mandate as to transactions entered into by every branch of the bank; the bank can not take the position that only certain branches are FICC members. The rule proposal would not amend (or expand) the repurchase transactions that are currently eligible to be cleared by FICC.