FIA Asks FICC to Revise Proposals to Implement Clearing Mandate on US Govs

FIA urged the SEC and the Fixed Income Clearing Corporation ("FICC") to reconsider aspects of the trade submission requirements and the complementary compliance regime related to FICC's recent proposal to modify its rulebook. (See previous coverage.) 

In its comment responding to the proposed rule changes, FIA highlighted the challenges these requirements will pose for FICC Netting Members. FIA asked FICC and the SEC to collaborate with Netting Members to revise the proposal and adjust the FICC Rules in accordance with FIA's recommendations.

FIA requested the following:

• Revision of Rule 5. The current draft of Rule 5 prohibits Netting Members from clearing US Treasury securities through any clearing agency other than FICC. FIA argued that this restriction directly contradicts the mandates of Section 17(a) ("Records and Reports") of the Exchange Act and could create significant challenges for Netting Members that join other clearing agencies. FIA recommended that FICC revise Rule 5 to permit Netting Members to clear US Treasury securities through alternative clearing agencies that may exist in the future. FIA noted that CME and ICE have publicly announced their intentions to offer clearing services for US Treasury securities. 
• Streamlining the Compliance Framework. FIA argued that the proposed compliance framework should be streamlined for greater effectiveness and flexibility. FIA did not object to an attestation framework, but said it must be "fit for purpose and appropriately tailored." FIA said that FICC should (i) revise the ad hoc notification of a trade submission failure to broaden the range of acceptable contact persons and incorporate a materiality threshold, i.e., separate trade submission failures that are "not systemic or important to market stability" from those that "may in fact implicate the broader market;" (ii) modify the annual compliance attestation to allow more flexibility on appropriate attesting personnel and align the annual attestation with the other trade submission compliance notification procedures in the rules; and (iii) eliminate the Triennial Requirement entirely as redundant and, if retained, require greater flexibility for compliance.
• Limit Compliance Obligations. FIA said FICC should clarify that compliance certifications, reviews and notifications of failure are confined to a Netting Member's own activities. These obligations should not extend to the activities of Sponsored Members, customers, or other counterparties, as Netting Members submitting "done-away" trades lack the means to monitor these entities' compliance.
• Flexibility and Non-Exclusivity. FIA stated that FICC's compliance program should be designed with flexibility and should not be exclusive to a single clearing agency. FIA said that the SEC's compliance monitoring requirements apply to all clearing agencies offering US Treasury clearing and Netting Members should be able to leverage their compliance with FICC's program across different agencies. FIA said the SEC and FICC should reassess the costs and benefits of the proposed compliance framework with these considerations in mind.
• Clarification of Membership Standards. FIA requested that FICC specify which of the new initial membership standards apply to existing Netting Members to avoid confusion and inadvertent non-compliance. FIA noted new requirements for submission of financial information and other due diligence requirements. FIA requested that FICC explicitly clarify which requirements apply to new applicants versus existing Netting Members. 
• Penalty Tolling. FIA recommended that FICC should suspend penalties while a Netting Member is in the process of remediating a compliance issue.
• Cross-Border Compliance Relief. FIA recommended that the SEC and FICC may need to extend the compliance timeline and issue no-action relief to address cross-border concerns adequately. FIA noted the unfamiliarity with FICC and the Clearing Mandate amongst non-US counterparties as well as practical issues, such as time zones, that are still being investigated. FIA recommended that the SEC and FICC consider a limited exception, of a sufficiently long time period, to permit uncleared trades in US Treasury securities between a Netting Member and its foreign affiliates or foreign branches and counterparties in jurisdictions not on FICC’s approved jurisdiction list. 
• No Changes for Non-US Banks. FIA stated that FICC should refrain from altering the access methods for non-US banks regarding the proposed requirement that a bank and its branches must apply under a single membership as one Bank Netting Member.