## 1. Detailed Assessment of Observance of the Fixed Income Clearing Corporation – Government Securities Division (FICC-GSD) of the CPSS-IOSCO Recommendations for Central Counterparties

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### Legal framework and enforceability (Recommendation 1)
- Findings:
  - Laws, regulations, rules, procedures and contractual provisions governing FICC-GSD operations are public and readily accessible.
  - All changes to FICC-GSD’s Rules are filed with and reviewed by the SEC; proposed rule changes are published for public comment.
  - All FICC-GSD participants are required to execute membership agreements binding them to FICC-GSD’s Rules.
- Legal basis (listed statutes/regulations):
  - Securities Exchange Act of 1934
  - Securities and Exchange Commission rules and regulations
  - Federal Reserve Act
  - Federal Reserve Banks Operating Circulars (in particular OC12, OC6)
  - Self Regulatory Organizations Rules and Procedures
  - New York State Law
  - FICC-GSD’s rules and procedures
  - Article 8 of the Uniform Commercial Code
  - Subpart B of regulation J incorporating the provisions of article 4A of the Uniform Commercial Code
  - U.S. Federal Deposit Insurance Corporation Improvement act of 1991
  - New York State Banking Laws
  - Liquidation provisions of applicable federal and state banking laws
- Key legal assurances:
  - Enforceability of CCP role supported by New York UCC §8-111 and membership counsel opinions.
  - Netting arrangements supported by FDICIA and Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amendments validating master netting agreements.
  - Protections for CCP interest in collateral principally in UCC Articles 8 and 9 and New York contract law; FDICIA, the Code, FDIA, and SIPA contain specific protections for clearing agency close-outs.
  - Finality between FICC-GSD and clearing banks governed by account agreements; settlement instructions acted upon by clearing banks may not be reversed except for error correction.
- Cross-border:
  - Around 10 percent of FICC-GSD members are established or incorporated outside the US.
  - FICC-GSD has currently no cross-border arrangement with other CCPs.
- Assessment: Observed.

### Participation, access and monitoring (Recommendation 2)
- Findings:
  - Participation types distinguished: (i) comparison-only members, (ii) netting members, (iii) sponsoring members and sponsored members, and (iv) funds-only settling bank members.
  - Rule 2A sets initial membership conditions; Rule 3 sets ongoing membership requirements; Rule 4 (Clearing Fund) requires guaranteed service Members to deposit to the Clearing Fund.
  - Operational testing (e.g., connectivity testing) required prior to activating membership.
  - Members must submit annual audited financial statements; interim financial statements required for certain members.
  - Internal credit risk rating matrix used for bank and broker/dealer Members; matrix is quantitatively driven and subject to periodic regulatory review.
- Suspension/termination:
  - Termination can be voluntary (Rule 3/Rule 3A) or by FICC-GSD (wind-down procedures under rule 21A; restrictions under rule 21; insolvency under rule 22).
  - Notification to SEC and members via “important notices”.
- Open and fair access:
  - Access criteria objective and set out in FICC-GSD rules; Section 17A(b)(3) framework supports fair access and non-discrimination.
  - Applicants denied must be given a concise written statement and right to request a hearing.
- Recent developments:
  - FICC submitted a rule filing to SEC to expand membership to include some buy-side unregistered investment pools (UIP), such as hedge funds, with additional surveillance and higher Clearing Fund confidence levels.
- Assessment: Observed.

### Measurement of exposures and margin methodology (Recommendations 3 and 4)
- Measurement and timing:
  - Exposures measured daily; Clearing Fund contributions required by 09:30 am on the settlement day.
  - Daily calculation uses the prior day’s closing market price; ability to call for intraday Clearing Fund deposits exists.
- Margin methodology:
  - Clearing Fund requirement components: (a) an end-of-day value at risk (VaR); (b) a margin requirement differential; and (c) a coverage component.
  - VaR calculations based on most recent 250 days for bonds and a three-day period with confidence level of 99 percent.
  - VaR back-testing over past two years reflected actual overall coverage exceeding 99 percent (assumes no positions liquidated until the third day).
  - Haircuts: initial haircut rates determined on a ten-year historical return volatility analysis using a 5 sigma confidence level; haircut rates reviewed quarterly.
  - Minimum cash requirement: the lesser of 10 percent or $5 million of a Member’s Clearing Fund requirement must be made and maintained in cash.
- Model validation and intraday calls:
  - Monthly internal back-testing; models periodically examined by regulators, internal and external auditors; externally validated by experts.
  - Legal authority and operational capability to demand intraday margins and collect them as necessary.
- Terminology:
  - Comment: Public assessment should clarify the distinction between "margins" and "Clearing Fund" to align with RCCP glossary and international usage.
- Assessment: Observed.

### Financial resources, stress testing and liquidity (Recommendation 5)
- Stress testing:
  - Stress testing performed on a monthly basis covering 50 stress scenarios selected from the past 10 years and special events (e.g., 1987 crash).
  - Additionally, 82 scenarios include at least some hypothetical components not based solely on historical performance.
  - Stress testing assumptions are not disclosed to participants.
  - External expert review of models/parameters/scenarios/frequency completed end-2009.
- Liquidity resources (as described):
  - (i) the cash in the Clearing Fund (amounting to US$3.2 billion, end-2008);
  - (ii) the cash obtainable by repoing the securities in the Clearing Fund (amounting to US$15.4 billion in U.S. Treasury and Agency securities and US$223 million in eligible mortgage backed securities);
  - (iii) the cash that would be obtained by repoing the securities that would have been delivered to the defaulting member, had it not defaulted.
- Back-testing:
  - Back test study of family liquidity requirements covering the period from 2008 through April 2009 showed sufficient liquidity to cover failure of any affiliated family 100 percent of the time assuming repo arrangement funding.
  - Most recent back test showed sum of all back test losses of Members is less than sum of required Clearing Fund deposits.
- Availability and access:
  - Clearing Fund resources held in accounts at the two clearing banks in the name of FICC-GSD.
  - Clearing Fund cash held in a tri-party repo overnight and returned to a FICC-GSD bank account during the day for immediate access.
  - Securities in the Clearing Fund held at clearing banks and available for repoing; FICC-GSD has not obtained committed credit lines.
- Recommendations to reach full compliance:
  - consider additional liquid financial resources in case repo agreements cannot be used;
  - minimize exposure and concentration risk vis-à-vis the two clearing banks;
  - consider conducting more frequent stress testing than once a month, particularly in times of unusual market volatility;
  - disclose stress testing assumptions to participants.
- Assessment: Broadly observed.

### Default procedures and close-out management (Recommendation 6)
- Definition and authority:
  - Rules clearly define default and empower the Board or delegated Committee to terminate/suspend Members for insolvency, failure to perform, fraudulent/dishonest conduct, or significant financial difficulty.
  - Rule 22A ("Procedures for When the Corporation Ceases to Act") requires prompt completion of close-out procedures and allows application of liquidation proceeds and other funds to meet obligations.
- Customer protection and external mechanisms:
  - SIPC/SIPA provides protection for customers of failed broker-dealers, including insurance coverage up to US$500,000 of the customer’s net equity balance in certain circumstances.
- Internal plans and coordination:
  - Comprehensive closeout management framework; periodic internal tests at least once per year.
  - Coordination mechanisms include multilateral cross-guaranty agreement among FICC-GSD, OCC, NSCC and DTC; cross-margining agreement with CME; procedures to coordinate with regulators.
- Transparency:
  - Key aspects of close-out procedures in FICC-GSD Rules available at www.dtcc.com; Important Notices posted on website.
- Legal enforceability:
  - 2005 Amendments validate close-out and netting protections in bankruptcy contexts (subject to SIPA exceptions).
  - UCC Articles 8 and 9 and New York contract law provide comfort for lien and collateral protections.
- Assessment: Observed.

### Custody, investments and concentration risk (Recommendation 7)
- Custody:
  - Securities and cash held in FICC-GSD accounts at the Bank of New York Mellon and JP Morgan Chase.
  - Rely on regulatory oversight of these entities and DTC for safety and accessibility.
- Investment policy:
  - Cash invested primarily in reverse repurchase agreements (repos) in U.S. Government and Agency debt; tri-party repo arrangements; possible direct purchase of U.S. Government debt.
  - Repo counterparties must have long term debt rating of A- or better.
  - Reverse repo collateral market value must be ≥102 percent of cash invested; investment limits and daily credit limit monitoring across DTCC subsidiaries.
- Concentration:
  - Credit limits by counterparty established and monitored daily; overall exposure to a counterparty considered when placing investments.
- Recommendations / comments:
  - Continue to monitor and mitigate potential risks of holding assets at only two commercial banks.
  - To the greatest extent possible avoid unsecured investments.
- Assessment: Observed.

### Operational risk, systems reliability and business continuity (Recommendation 8)
- Organization and oversight:
  - DTCC holding company coordinates BCP activities; DTC, NSCC, FICC and other DTCC applications run on same mainframe with separated applications.
  - Dedicated groups: Operational Risk Group, Internal Risk Management Committee, Security Committee, Internal Audit.
- Business continuity and testing:
  - Central Corporate Business Continuity function; out-of-region data centre is a warm site with 2 hour recovery capability; out-of-region business operations sites are hot sites.
  - Data centre failover tests conducted 3-4 times per year; business operations tests conducted throughout the year.
  - Contingency plans and back-up facilities for failure of key systems are not tested with participants; connectivity tests done annually only with participants deemed critical.
  - DTCC uses BITS Shared Assessments Program and publishes an annual white paper describing BCP program and an “Out-of-Region” guide.
- Capacity and availability:
  - No FICC-GSD key system failures or data loss reported in the last year.
  - FICC-GSD can process in excess of 2 times their respective historical peaks in a processing day.
  - Capacity/utilization reports generated and reviewed by Infrastructure Department; annual Capacity Planning Report presented to Board and regulators.
- Recommendations / comments:
  - DTCC should test its back-up sites to critical participants’ backup sites.
- Assessment: Observed.

### Money settlement, settlement bank arrangements and finality (Recommendation 9)
- Funds-only settlement:
  - FICC-GSD uses central bank model with a tiered settlement arrangement for funds-only settlement; settlement occurs on the Federal Reserve’s National Settlement Service (“NSS”).
  - FICC-GSD relies on DTC to submit settlement files to the Federal Reserve Bank of New York.
  - Members required to engage a settling bank that meets FICC-GSD criteria and has access to Reserve Bank account and NSS.
- Finality:
  - All debits and credits on the Federal Reserve’s NSS are final when made by the Federal Reserve.
- Settlement bank concentration:
  - No major settlement bank concentration for funds-only settlement on the Federal Reserve.
- Assessment: Observed.

### Physical delivery obligations and DVP (Recommendation 10)
- Obligations and settlement mechanics:
  - Three underpinnings of settlement: (1) every securities delivery is made against full payment; (2) FICC-GSD does not hold securities during the day; deliveries are instantaneously redelivered; (3) all DVP settlements are made either over the Federal Reserve’s Fedwire Securities Service or on the clearing bank’s books with finality at securities movement.
  - FICC-GSD uses two clearing banks (Bank of New York Mellon and JPMorgan Chase) to access Fedwire Securities services; Members must designate clearing bank(s) prior to activating membership.
  - Participation in GCF Repo service requires dealer Members to have an account with either or both BNY or JPMC.
- Risk mitigation:
  - FICC-GSD is obligated to deliver securities to net long Members only when matching securities received from net short Members with same CUSIP and not allocated elsewhere.
  - No warehousing/transportation risks because securities are in book-entry form.
- Comment / recommendation:
  - As a systemically important CCP, FICC should have direct access to Fedwire Securities and Fedwire Funds services to settle DVP in central bank money and reduce settlement concentration to the two clearing banks; achieving this would require FICC to be chartered as a bank or statutory changes granting Federal Reserve authority to provide accounts/services to FICC.
- Assessment: Observed.

### Links, cross-margining and cross-border cooperation (Recommendation 11)
- Links:
  - No CCP-link in place; FICC-GSD has a cross-margining arrangement with the Chicago Mercantile Exchange (CME).
  - Cross-margining allows eligible clearing members to offset margin obligations between CME and FICC-GSD for certain products.
- Legal and operational controls:
  - Cross-margining agreement governed by New York law; approved by the SEC; referenced in FICC-GSD Rule 43.
  - Both clearing organizations independently calculate residual margin amounts; agreement requires notice before rule changes affecting clearing fund/capital/assessment rights.
  - Daily exchange of cross-margining data supports ongoing monitoring.
  - Section 14 of the agreement provides for information sharing regarding participant surveillance, reporting, capital and margin changes, and aggregate clearing fund contributions.
- Oversight cooperation:
  - Framework for cooperation between CFTC and SEC; participation in the Unified Clearing Group with CFTC, SEC and Fed as observers.
- Assessment: Observed.

### Cost-effectiveness and service levels (Recommendation 12)
- Pricing and cost recovery:
  - Fees are cost based; excess net revenues returned to users via rebates or refunds.
  - DTCC performs periodic benchmarking studies; pricing reviewed against cost during annual budget process.
  - Internal Audit and external auditors test cost allocation methodology to ensure no cross-subsidization among services.
- Service level monitoring:
  - Participant surveys conducted annually; operational reliability monitored monthly and reported to IT, product and senior management; annual Capacity Planning Report presented to Board and regulators.
- Assessment: Observed.

### Governance arrangements (Recommendation 13)
- Structure and transparency:
  - DTCC is holding company of DTC, FICC and NSCC; these are independent legal entities.
  - DTCC common shareholders include approximately 362 banks, broker-dealers, mutual funds and other financial services companies participating in one or more DTCC clearing agency subsidiaries.
  - Some governance information publicly disclosed; additional information under review for potential publication pending approval.
- Risk reporting lines:
  - Clear separation between risk management and operations; Chief Risk Officer reports directly to the Chairman and CEO.
  - Board committees include credit and market risk management committee, compliance and operational risk management committee, and core services operations and planning committee.
- Management accountability:
  - Management and Board establish formal corporate goals yearly; compensation linked to performance via Board’s Compensation Committee (non-management directors).
  - Auditors ensure services do not cross-subsidize and that risk management financial resources are separately maintained and not co-mingled.
- Board composition:
  - Board of DTCC composed of 18 members including two DTCC Executives (CEO and COO), two members designated by preferred shareholders (NYSE and FINRA) and other members designated by shareholders.
  - There are currently no non-participant Board members.
- Assessment: Observed.
- Comment: For observance of this recommendation, the governance arrangements for FICC should be more clearly specified and transparent, including criteria for the composition and selection of Board members.

### Governance Committee: director nomination criteria
- Responsibility: nominate persons for election as directors.
- Nomination criteria:
  - ability to represent users of the services of each of DTCC’s clearing and depository subsidiaries;
  - ownership of DTCC common stock;
  - expertise;
  - with respect to current directors, their length of service, attendance at Board and Committee meetings, and effectiveness;
  - adequate diversity on the Board.
- Assessment: Broadly observed.
- Comment: Governance arrangements for FICC should be more clearly specified and transparent, including criteria for the composition and selection of Board members.

### Public interest objectives and public comment process (Section 17A basis)
- Legal basis:
  - FICC’s public interest objectives are based upon section 17 A of the Securities Exchange Act.
  - The SEC is directed by Congress, “having due regard for the public interest,” to facilitate establishment of a national system for prompt and accurate clearance and settlement of securities transactions, including registration of clearing agencies that meet Exchange Act statutory standards.
- Public comment and transparency:
  - SEC must receive and consider public comments on each proposed rule change filed by FICC-GSD.
  - Public comment period for proposed rule changes is at least 21 days from publication in the Federal Register (unless accelerated approval or immediate effectiveness criteria are met).
  - Registered clearing agencies must publish notices of proposed rule changes on their websites when filed with the SEC, with contact information for participants to provide comments.
  - FICC engages participants or participant groups and consults with regulators before formal filings when proposals may have significant impact.
  - FICC-GSD staff participates in industry groups; DTCC publishes periodicals and newsletters targeted to membership, trade organizations, regulators and Participants.
- Assessment: Broadly observed.

### Recommendation 14 — Disclosure of risk management information
- Requirement: A CCP should provide market participants sufficient information to identify and evaluate risks and costs of using its services.
- FICC-GSD disclosures:
  - Rules and procedures publicly available on DTCC’s website.
  - Rules explicit as to when FICC-GSD assumes counterparty exposure and provide information on default procedures.
  - Explanatory service bulletins and guidelines on risk management measures communicated via Important Notices posted on DTCC’s website, along with any rule filings.
  - Public disclosure of key financial and operational risk.
  - Website contains general product and service information and contact information.
- Financial reporting:
  - SEC standards and FICC-GSD Rule 35 require that after the end of each calendar year FICC-GSD provides participants with annual audited financial statement prepared by an independent public accountant.
  - FICC-GSD must provide participants with unaudited financial statements for each of the first three calendar quarters of each calendar year.
  - The annual audited financial statements of FICC as well as the consolidated financial statements of DTCC are available on the DTCC website, www.dtcc.com.
- Accessibility:
  - Information is provided in English and made available on FICC’s website.
  - System management responds to inquiries from participants and meets with them as requested to assist understanding of rules and risk implications.
- RCCP key questions:
  - FICC-GSD completed and disclosed answers to the key questions from the assessment methodology.
  - The self-assessment is published on DTCC’s website after senior management review and Board approval.
  - Review frequency: at least every two years, unless necessary earlier due to material change.
- Assessment: Observed.

### Recommendation 15 — Transparent and effective regulation and oversight
- Scope and legal status:
  - FICC is a clearing agency as defined by the Exchange Act and required to register with the SEC under section 17A unless exempted.
  - FICC is subject to full regulation under the Exchange Act and is a self-regulatory organization (SRO) that must meet SRO requirements under the Exchange Act.
  - The Federal Reserve is interested in FICC-GSD given its role in government securities market and systemic importance.
- Legal capacity and resources:
  - United States currently does not have a statute providing formal oversight authority to the central bank for non-bank payment, clearing, and settlement systems such as FICC.
  - At the SEC, an estimated 51 staff are involved in whole or in part in clearing oversight (approximately 23 full-time equivalent staff positions).
  - The SEC’s oversight program encompasses staff from 7 different offices.
  - Between FRBNY and the Board, about 20 budgeted officers and staff work full time on policy and oversight with respect to payment, clearing and settlement.
  - Additionally, about 15 supervisory staff are dedicated full time to specific private sector systems; 9 examiners broadly dedicated to payment and settlement infrastructure and 12 more focused on systemically important clearing activities by banks and affiliates.
- Definition and disclosure of objectives:
  - The SEC’s regulatory objectives, responsibilities, and main policies are defined and publicly disclosed; scope of SEC regulation of clearing agencies is defined by the Exchange Act, including Sections 17A and 19.
  - The SEC’s Division of Trading and Markets has published standards regarding objectives and requirements of clearing agency registration under Section 17A.
  - The SEC publishes rule releases, concept releases and policy statements; materials are publicly available on the SEC’s website.
  - The Federal Reserve publishes policy statements such as the Policy on Payments System Risk and operating circulars.
  - FICC-GSD is required to file with the SEC and make public all proposed rule changes; filings must be clear and comprehensible to enable meaningful public comment and SEC determinations.
- Timely provision of oversight information:
  - FICC-GSD must submit proposed changes to rules and a description of the purpose of the proposed rule change to the SEC.
  - FICC-GSD is subject to recordkeeping requirements in the Exchange Act (Section 17) and SEC rules (Rule 17a-1 et seq.); records must be held for not less than five years, with the first two years in an “easily accessible place”.
  - SEC Rule 17a-6 sets forth the manner for destruction/disposal of documentation.
  - Records are subject to periodic, special, or other examinations by SEC representatives.
  - FICC-GSD may be asked to furnish copies of materials upon request from participants, other SROs, or regulators.
  - FICC is required to notify the SEC of disciplinary actions taken with respect to participants.
  - SEC staff conducts onsite examinations of registered clearing agencies, including FICC; examinations may include internal audit, membership, member financial surveillance, clearing fund and collateral risk, risk assessment and risk management systems, clearance and settlement processes, and liquidity.
  - FICC-GSD must submit all proposed rule changes to the SEC for review, notice, comment, and, with some limited exceptions, approval under Section 19 of the Exchange Act and rules thereunder.
  - Example: SEC reviewed and approved the cross-margining arrangement and amendments thereto FICC-GSD put in place with the CME. A MOU with the CFTC is in place for issues of common interest.
- Automation Review Policy:
  - SEC has established an Automation Review Policy (ARP) applicable to SROs, including FICC-GSD.
  - ARP encourages comprehensive planning and assessment programs for systems capacity and vulnerability and requests real-time notifications of significant system outages; ARP staff conducts IT-specific onsite examinations of FICC-GSD.
- Domestic and cross-border cooperation:
  - Legal framework supports cooperation and coordination among authorities.
  - Domestic: SEC and the Federal Reserve have signed exam-specific information-sharing arrangements regarding oversight of FICC-GSD to provide for consolidated supervision and stem systemic risk.
  - Cross-border: SEC has entered into memoranda of understanding (MOUs) with regulators from non-domestic institutions for exchange of information; MOUs are available on the SEC website.
- Assessment: Observed.
- Comments and recommendations:
  - The SEC has not formally required FICC-GSD to perform a self-assessment with respect to the CPSS-IOSCO recommendations; however, the SEC reviews self-assessments currently prepared by clearing agencies.
  - Compliance with SEC rules ensures compliance with most of the recommendations.
  - SEC staff indicated it would consider recommending that clearing agencies be required to perform self-assessments against the CPSS-IOSCO recommendations by rule or policy statement to encourage consistency in assessment of globally relevant systems and facilitate co-operation with other authorities.
  - Recommendation: The Federal Reserve should be provided a legal mandate to oversee FICC, which is a systemically important system, as a complementary function to existing SEC regulation and supervision.

### Summary table highlights (selected entries from Table 2)
- Overall methodology: Detailed assessment of FICC-GSD with the CPSS-IOSCO Recommendations for Central Counterparties.
- Selected responsibilities, gradings, and comments:
  - 1. Legal risk — Grading: O
  - 2. Participation requirement — Grading: O
    - Comment: FICC submitted a rule filing to SEC for expanding membership to include some buy-side unregistered investment pools (UIP), such as hedge funds, as a new membership category; monitoring via contractual surveillance and additional access requirements; certain buy-side entities (e.g., SEC-registered investment companies) are not permitted to mutualize losses.
    - FICC will impose additional risk management measures for UIP members, including calculating their Clearing Fund requirements at a higher value at risk confidence level and instituting an additional qualitative assessment requirement.
  - 3. Measurement and management of credit exposures — Grading: O
    - Comment: Definition of margins and clearing funds in the public assessment should be made more consistent with international usage/practice and glossary of the RCCP; FICC-GSD management stated they would clarify terminology in next self-assessment revision.
  - 4. Margin requirements — Grading: O
  - 5. Financial resources — Grading: BO
    - To be fully compliant, FICC-GSD should:
      - consider additional liquid financial resources to use in case of extreme situations where repo agreements cannot be used; and, in particular;
      - minimize its exposure and concentration risk vis-à-vis the two clearing banks;
      - consider conducting more frequent stress testing than once a month, in particular, in times of unusual market volatility; and
      - disclose stress testing assumptions to participants.
    - Current liquidity sources: FICC-GSD’s liquidity can be increased by repoing the securities in the Clearing Fund or the unpaid allocations of defaulting members; this arrangement cannot be considered a committed line because repo markets may not be effective in extreme market situations.

### Default procedures — high-level requirement (excerpts)
- Default procedures should be clearly stated, and they should ensure that the CCP can take timely action to contain losses and liquidity pressures and to continue meeting its obligations.
- Key aspects of the default procedures should be publicly available.

### Custody and investment risk (excerpts)
- A CCP should hold assets in a manner whereby risk of loss or of delay in its access to them is minimized.
- Assets invested by a CCP should be held in instruments with minimal credit, market and liquidity risks.
- Assessment finding: FICC-GSD should continue to monitor and mitigate the potential risks that result from holding assets at only two commercial banks.
- Recommendation: FICC-GSD should to the greatest extent possible avoid unsecured investments.

### Operational risk (excerpts)
- A CCP should identify sources of operational risk and minimize them through the development of appropriate systems, controls and procedures.
- Systems should be reliable and secure, and have adequate, scalable capacity. Business continuity plans should allow for timely recovery of operations and fulfillment of a CCP’s obligations.
- Assessment finding: Contingency plans and backup facilities for the failure of key systems are not tested and reviewed with participants (only connectivity is tested with the critical participants).
- Recommendation: DTCC should test its back-up sites to critical participants’ backup sites.

### Money settlements (excerpts)
- A CCP should employ money settlement arrangements that eliminate or strictly limit its settlement bank risks, that is, its credit and liquidity risks from the use of banks to effect money settlements with its participants.
- Funds transfers to a CCP should be final when effected.

### Physical deliveries (excerpts)
- A CCP should clearly state its obligations with respect to physical deliveries. The risks from these obligations should be identified and managed.
- Assessment/recommendation: As a systemically important CCP, FICC should have direct access to Fedwire Securities and Fedwire Funds services. Such an access will allow FICC to settle DVP in central bank money and reduce the settlement concentration to the two clearing banks.
- Constraint: Due to current legal constraint, this recommendation can only be met by either FICC being chartered as a bank or statutory changes that grant the Federal Reserve legal authority to provide accounts and services to FICC.

### Risks in links between CCPs (excerpts)
- CCPs that establish links either cross-border or domestically to clear trades should evaluate the potential sources of risks that can arise, and ensure that the risks are managed prudently on an ongoing basis.
- There should be a framework for cooperation and coordination between the relevant regulators and overseers.

### Efficiency (excerpts)
- While maintaining safe and secure operations, CCPs should be cost-effective in meeting the requirements of participants.

### Transparency (excerpts)
- A CCP should provide market participants with sufficient information for them to identify and evaluate accurately the risks and costs associated with using its services.

### Regulation and oversight (excerpts)
- A CCP should be subject to transparent and effective regulation and oversight.
- In both a domestic and an international context, central banks and securities regulators should cooperate with each other and with other relevant authorities.
- Assessment findings and recommendations:
  - The SEC has not formally required FICC-GSD to perform a self-assessment with respect to the CPSS-IOSCO recommendations. However, the SEC reviews the self-assessments currently prepared by the clearing agencies.
  - Compliance with SEC rules ensures compliance with most of the recommendations.
  - SEC staff stated that it would consider recommending to the Commission that clearing agencies be required to perform self-assessments against the CPSS-IOSCO recommendations by rule or by policy statement. SEC is encouraged to do so, also with a view to encouraging consistency in the assessment of globally relevant systems and to facilitate co-operation with other authorities.
  - Recommendation: The Federal Reserve should be provided a legal mandate to oversee FICC, which is systemically important system, as a complementary function to the existing SEC regulation and supervision.

### Table 3 — Actions to Improve Compliance (selected recommendations and recommended actions)
- Recommendation 3: credit exposures management
  - Align the definitions of margins and clearing funds with international ones.
- Recommendation 5: Financial resources
  - Consider additional liquid financial resources to use in case of extreme situations where repo agreements cannot be used.
  - Minimize FICC’s exposure and concentration risk vis-à-vis the two clearing banks.
  - Consider conducting more frequent stress testing than once a month, in particular, in times of unusual market volatility.
  - Disclose stress testing assumptions to participants.
- Recommendation 7: Custody and investment risk
  - Continue to monitor and mitigate the potential risks, which result from holding assets at only two commercial banks.
  - Avoid to the largest extent possible unsecured investments.
- Recommendation 8: Operational risk
  - Test and review FICC backup sites to critical participants’ backup sites.
- Recommendation 10: Physical deliveries
  - Provide FICC direct access to Fedwire Securities and Fedwire Funds services to settle DVP transactions in central bank money.
- Recommendation 13: Governance
  - FICC’s governance arrangements should be more clearly specified and transparent, including criteria for the composition and selection of Board members.
- Recommendation 15: Regulation and oversight
  - SEC should formally require FICC to perform a self-assessment with respect to the CPSS-IOSCO recommendations.
  - Ensure the compliance of the SEC rules with the CPSS/IOSCO Recommendations.
  - Provide legal mandate to the Federal Reserve to oversee FICC, which is systemically important system, as a complementary function to the existing SEC regulation and supervision.

### Authorities’ response to the assessment
- The U.S. authorities welcome the IMF’s assessment of the Fixed Income Clearing Corporation (FICC) against the CPSS-IOSCO Recommendations for Central Counterparties (RCCP).
- The authorities appreciate the significant undertaking associated with an FSAP review of the biggest financial sector in the world, as well as the challenges that accompany the first assessment of a large advanced country in the wake of the crisis.
- The authorities are pleased to note that the IMF’s assessment reflects the high degree of compliance of FICC with the RCCPs, and will work with FICC in considering the assessment’s specific comments and recommendations.
- The authorities appreciate the significant undertaking associated with the assessment of FICC and the contribution that the assessment process makes to the stability and effective regulation and oversight of systemically important payment, clearing and settlement systems.

*Source: _cr10130 - 1. Detailed Assessment of Observance of the Fixed Income Clearing Corporation – (FICC-GSD) – PDF (excerpted content units).*

### 1. Detailed Assessment of Observance of the Fixed Income Clearing Corporation –

### _cr10130 - 1. Detailed Assessment of Observance of the Fixed Income Clearing Corporation – Government Securities Division (FICC-GSD) of the CPSS-IOSCO Recommendations for Central Counterparties

### Section 1: Detailed Assessment
- Title as presented: "1. Detailed Assessment of Observance of the Fixed Income Clearing Corporation – Government Securities Division (FICC-GSD) of the CPSS-IOSCO Recommendations for Central Counterparties"
- Appears beginning on page "4" in the source listing.

### Section 2: Summary of the Detailed Assessment
- Title as presented: "2. Summary of the Detailed Assessment of the Observance of Fixed Income Clearing Corporation – Government Securities Division (FICC-GSD) with the CPSS-IOSCO Recommendations for Central Counterparties"
- Appears beginning on page "25" in the source listing.

*Source: _cr10130 - 1. Detailed Assessment of Observance of the Fixed Income Clearing Corporation – (FICC-GSD) – PDF (pages indicated in source list)*

### 3.  Actions to Improve Compliance ......................................................................................

### 3.  Actions to Improve Compliance

### Legal framework and enforceability (Recommendation 1)
- Findings:
  - Laws, regulations, rules, procedures and contractual provisions governing FICC-GSD operations are public and readily accessible.
  - All changes to FICC-GSD’s Rules are filed with and reviewed by the SEC; proposed rule changes are published for public comment.
  - All FICC-GSD participants are required to execute membership agreements binding them to FICC-GSD’s Rules.
- Legal basis (listed statutes/regulations):
  - Securities Exchange Act of 1934
  - Securities and Exchange Commission rules and regulations
  - Federal Reserve Act
  - Federal Reserve Banks Operating Circulars (in particular OC12, OC6)
  - Self Regulatory Organizations Rules and Procedures
  - New York State Law
  - FICC-GSD’s rules and procedures
  - Article 8 of the Uniform Commercial Code
  - Subpart B of regulation J incorporating the provisions of article 4A of the Uniform Commercial Code
  - U.S. Federal Deposit Insurance Corporation Improvement act of 1991
  - New York State Banking Laws
  - Liquidation provisions of applicable federal and state banking laws
- Key legal assurances:
  - Enforceability of CCP role supported by New York UCC §8-111 and membership counsel opinions.
  - Netting arrangements supported by FDICIA and Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amendments validating master netting agreements.
  - Protections for CCP interest in collateral principally in UCC Articles 8 and 9 and New York contract law; FDICIA, the Code, FDIA, and SIPA contain specific protections for clearing agency close-outs.
  - Finality between FICC-GSD and clearing banks governed by account agreements; settlement instructions acted upon by clearing banks may not be reversed except for error correction.
- Cross-border:
  - Around 10 percent of FICC-GSD members are established or incorporated outside the US.
  - FICC-GSD has currently no cross-border arrangement with other CCPs.
- Assessment: Observed.

### Participation, access and monitoring (Recommendation 2)
- Findings:
  - Participation types distinguished: (i) comparison-only members, (ii) netting members, (iii) sponsoring members and sponsored members, and (iv) funds-only settling bank members.
  - Rule 2A sets initial membership conditions; Rule 3 sets ongoing membership requirements; Rule 4 (Clearing Fund) requires guaranteed service Members to deposit to the Clearing Fund.
  - Operational testing (e.g., connectivity testing) required prior to activating membership.
  - Members must submit annual audited financial statements; interim financial statements required for certain members.
  - Internal credit risk rating matrix used for bank and broker/dealer Members; matrix is quantitatively driven and subject to periodic regulatory review.
- Suspension/termination:
  - Termination can be voluntary (Rule 3/Rule 3A) or by FICC-GSD (wind-down procedures under rule 21A; restrictions under rule 21; insolvency under rule 22).
  - Notification to SEC and members via “important notices”.
- Open and fair access:
  - Access criteria objective and set out in FICC-GSD rules; Section 17A(b)(3) framework supports fair access and non-discrimination.
  - Applicants denied must be given a concise written statement and right to request a hearing.
- Recent developments:
  - FICC submitted a rule filing to SEC to expand membership to include some buy-side unregistered investment pools (UIP), such as hedge funds, with additional surveillance and higher Clearing Fund confidence levels.
- Assessment: Observed.

### Measurement of exposures and margin methodology (Recommendations 3 and 4)
- Measurement and timing:
  - Exposures measured daily; Clearing Fund contributions required by 09:30 am on the settlement day.
  - Daily calculation uses the prior day’s closing market price; ability to call for intraday Clearing Fund deposits exists.
- Margin methodology:
  - Clearing Fund requirement components: (a) an end-of-day value at risk (VaR); (b) a margin requirement differential; and (c) a coverage component.
  - VaR calculations based on most recent 250 days for bonds and a three-day period with confidence level of 99 percent.
  - VaR back-testing over past two years reflected actual overall coverage exceeding 99 percent (assumes no positions liquidated until the third day).
  - Haircuts: initial haircut rates determined on a ten-year historical return volatility analysis using a 5 sigma confidence level; haircut rates reviewed quarterly.
  - Minimum cash requirement: the lesser of 10 percent or $5 million of a Member’s Clearing Fund requirement must be made and maintained in cash.
- Model validation and intraday calls:
  - Monthly internal back-testing; models periodically examined by regulators, internal and external auditors; externally validated by experts.
  - Legal authority and operational capability to demand intraday margins and collect them as necessary.
- Terminology:
  - Comment: Public assessment should clarify the distinction between "margins" and "Clearing Fund" to align with RCCP glossary and international usage.
- Assessment: Observed.

### Financial resources, stress testing and liquidity (Recommendation 5)
- Stress testing:
  - Stress testing performed on a monthly basis covering 50 stress scenarios selected from the past 10 years and special events (e.g., 1987 crash).
  - Additionally, 82 scenarios include at least some hypothetical components not based solely on historical performance.
  - Stress testing assumptions are not disclosed to participants.
  - External expert review of models/parameters/scenarios/frequency completed end-2009.
- Liquidity resources (as described):
  - (i) the cash in the Clearing Fund (amounting to US$3.2 billion, end-2008);
  - (ii) the cash obtainable by repoing the securities in the Clearing Fund (amounting to US$15.4 billion in U.S. Treasury and Agency securities and US$223 million in eligible mortgage backed securities);
  - (iii) the cash that would be obtained by repoing the securities that would have been delivered to the defaulting member, had it not defaulted.
- Back-testing:
  - Back test study of family liquidity requirements covering the period from 2008 through April 2009 showed sufficient liquidity to cover failure of any affiliated family 100 percent of the time assuming repo arrangement funding.
  - Most recent back test showed sum of all back test losses of Members is less than sum of required Clearing Fund deposits.
- Availability and access:
  - Clearing Fund resources held in accounts at the two clearing banks in the name of FICC-GSD.
  - Clearing Fund cash held in a tri-party repo overnight and returned to a FICC-GSD bank account during the day for immediate access.
  - Securities in the Clearing Fund held at clearing banks and available for repoing; FICC-GSD has not obtained committed credit lines.
- Recommendations to reach full compliance:
  - consider additional liquid financial resources in case repo agreements cannot be used;
  - minimize exposure and concentration risk vis-à-vis the two clearing banks;
  - consider conducting more frequent stress testing than once a month, particularly in times of unusual market volatility;
  - disclose stress testing assumptions to participants.
- Assessment: Broadly observed.

### Default procedures and close-out management (Recommendation 6)
- Definition and authority:
  - Rules clearly define default and empower the Board or delegated Committee to terminate/suspend Members for insolvency, failure to perform, fraudulent/dishonest conduct, or significant financial difficulty.
  - Rule 22A ("Procedures for When the Corporation Ceases to Act") requires prompt completion of close-out procedures and allows application of liquidation proceeds and other funds to meet obligations.
- Customer protection and external mechanisms:
  - SIPC/SIPA provides protection for customers of failed broker-dealers, including insurance coverage up to US$500,000 of the customer’s net equity balance in certain circumstances.
- Internal plans and coordination:
  - Comprehensive closeout management framework; periodic internal tests at least once per year.
  - Coordination mechanisms include multilateral cross-guaranty agreement among FICC-GSD, OCC, NSCC and DTC; cross-margining agreement with CME; procedures to coordinate with regulators.
- Transparency:
  - Key aspects of close-out procedures in FICC-GSD Rules available at www.dtcc.com; Important Notices posted on website.
- Legal enforceability:
  - 2005 Amendments validate close-out and netting protections in bankruptcy contexts (subject to SIPA exceptions).
  - UCC Articles 8 and 9 and New York contract law provide comfort for lien and collateral protections.
- Assessment: Observed.

### Custody, investments and concentration risk (Recommendation 7)
- Custody:
  - Securities and cash held in FICC-GSD accounts at the Bank of New York Mellon and JP Morgan Chase.
  - Rely on regulatory oversight of these entities and DTC for safety and accessibility.
- Investment policy:
  - Cash invested primarily in reverse repurchase agreements (repos) in U.S. Government and Agency debt; tri-party repo arrangements; possible direct purchase of U.S. Government debt.
  - Repo counterparties must have long term debt rating of A- or better.
  - Reverse repo collateral market value must be ≥102 percent of cash invested; investment limits and daily credit limit monitoring across DTCC subsidiaries.
- Concentration:
  - Credit limits by counterparty established and monitored daily; overall exposure to a counterparty considered when placing investments.
- Recommendations / comments:
  - Continue to monitor and mitigate potential risks of holding assets at only two commercial banks.
  - To the greatest extent possible avoid unsecured investments.
- Assessment: Observed.

### Operational risk, systems reliability and business continuity (Recommendation 8)
- Organization and oversight:
  - DTCC holding company coordinates BCP activities; DTC, NSCC, FICC and other DTCC applications run on same mainframe with separated applications.
  - Dedicated groups: Operational Risk Group, Internal Risk Management Committee, Security Committee, Internal Audit.
- Business continuity and testing:
  - Central Corporate Business Continuity function; out-of-region data centre is a warm site with 2 hour recovery capability; out-of-region business operations sites are hot sites.
  - Data centre failover tests conducted 3-4 times per year; business operations tests conducted throughout the year.
  - Contingency plans and back-up facilities for failure of key systems are not tested with participants; connectivity tests done annually only with participants deemed critical.
  - DTCC uses BITS Shared Assessments Program and publishes an annual white paper describing BCP program and an “Out-of-Region” guide.
- Capacity and availability:
  - No FICC-GSD key system failures or data loss reported in the last year.
  - FICC-GSD can process in excess of 2 times their respective historical peaks in a processing day.
  - Capacity/utilization reports generated and reviewed by Infrastructure Department; annual Capacity Planning Report presented to Board and regulators.
- Recommendations / comments:
  - DTCC should test its back-up sites to critical participants’ backup sites.
- Assessment: Observed.

### Money settlement, settlement bank arrangements and finality (Recommendation 9)
- Funds-only settlement:
  - FICC-GSD uses central bank model with a tiered settlement arrangement for funds-only settlement; settlement occurs on the Federal Reserve’s National Settlement Service (“NSS”).
  - FICC-GSD relies on DTC to submit settlement files to the Federal Reserve Bank of New York.
  - Members required to engage a settling bank that meets FICC-GSD criteria and has access to Reserve Bank account and NSS.
- Finality:
  - All debits and credits on the Federal Reserve’s NSS are final when made by the Federal Reserve.
- Settlement bank concentration:
  - No major settlement bank concentration for funds-only settlement on the Federal Reserve.
- Assessment: Observed.

### Physical delivery obligations and DVP (Recommendation 10)
- Obligations and settlement mechanics:
  - Three underpinnings of settlement: (1) every securities delivery is made against full payment; (2) FICC-GSD does not hold securities during the day; deliveries are instantaneously redelivered; (3) all DVP settlements are made either over the Federal Reserve’s Fedwire Securities Service or on the clearing bank’s books with finality at securities movement.
  - FICC-GSD uses two clearing banks (Bank of New York Mellon and JPMorgan Chase) to access Fedwire Securities services; Members must designate clearing bank(s) prior to activating membership.
  - Participation in GCF Repo service requires dealer Members to have an account with either or both BNY or JPMC.
- Risk mitigation:
  - FICC-GSD is obligated to deliver securities to net long Members only when matching securities received from net short Members with same CUSIP and not allocated elsewhere.
  - No warehousing/transportation risks because securities are in book-entry form.
- Comment / recommendation:
  - As a systemically important CCP, FICC should have direct access to Fedwire Securities and Fedwire Funds services to settle DVP in central bank money and reduce settlement concentration to the two clearing banks; achieving this would require FICC to be chartered as a bank or statutory changes granting Federal Reserve authority to provide accounts/services to FICC.
- Assessment: Observed.

### Links, cross-margining and cross-border cooperation (Recommendation 11)
- Links:
  - No CCP-link in place; FICC-GSD has a cross-margining arrangement with the Chicago Mercantile Exchange (CME).
  - Cross-margining allows eligible clearing members to offset margin obligations between CME and FICC-GSD for certain products.
- Legal and operational controls:
  - Cross-margining agreement governed by New York law; approved by the SEC; referenced in FICC-GSD Rule 43.
  - Both clearing organizations independently calculate residual margin amounts; agreement requires notice before rule changes affecting clearing fund/capital/assessment rights.
  - Daily exchange of cross-margining data supports ongoing monitoring.
  - Section 14 of the agreement provides for information sharing regarding participant surveillance, reporting, capital and margin changes, and aggregate clearing fund contributions.
- Oversight cooperation:
  - Framework for cooperation between CFTC and SEC; participation in the Unified Clearing Group with CFTC, SEC and Fed as observers.
- Assessment: Observed.

### Cost-effectiveness and service levels (Recommendation 12)
- Pricing and cost recovery:
  - Fees are cost based; excess net revenues returned to users via rebates or refunds.
  - DTCC performs periodic benchmarking studies; pricing reviewed against cost during annual budget process.
  - Internal Audit and external auditors test cost allocation methodology to ensure no cross-subsidization among services.
- Service level monitoring:
  - Participant surveys conducted annually; operational reliability monitored monthly and reported to IT, product and senior management; annual Capacity Planning Report presented to Board and regulators.
- Assessment: Observed.

### Governance arrangements (Recommendation 13)
- Structure and transparency:
  - DTCC is holding company of DTC, FICC and NSCC; these are independent legal entities.
  - DTCC common shareholders include approximately 362 banks, broker-dealers, mutual funds and other financial services companies participating in one or more DTCC clearing agency subsidiaries.
  - Some governance information publicly disclosed; additional information under review for potential publication pending approval.
- Risk reporting lines:
  - Clear separation between risk management and operations; Chief Risk Officer reports directly to the Chairman and CEO.
  - Board committees include credit and market risk management committee, compliance and operational risk management committee, and core services operations and planning committee.
- Management accountability:
  - Management and Board establish formal corporate goals yearly; compensation linked to performance via Board’s Compensation Committee (non-management directors).
  - Auditors ensure services do not cross-subsidize and that risk management financial resources are separately maintained and not co-mingled.
- Board composition:
  - Board of DTCC composed of 18 members including two DTCC Executives (CEO and COO), two members designated by preferred shareholders (NYSE and FINRA) and other members designated by shareholders.
  - There are currently no non-participant Board members.
- Assessment: Observed.

*IMF staff assessment: detailed assessment of FICC-GSD observance of CPSS-IOSCO Recommendations for Central Counterparties as presented in the source chapter.*

### Section 17A of the Exchange Act, and reflect other governance best practices. The

### _cr10130 - Section 17A of the Exchange Act, and reflect other governance best practices. The

### Governance Committee: director nomination criteria
- Responsibility: nominate persons for election as directors.
- Nomination criteria:
  - ability to represent users of the services of each of DTCC’s clearing and depository subsidiaries;
  - ownership of DTCC common stock;
  - expertise;
  - with respect to current directors, their length of service, attendance at Board and Committee meetings, and effectiveness;
  - adequate diversity on the Board.
- Assessment: Broadly observed.
- Comment: For the observance of this recommendation, the governance arrangements for FICC should be more clearly specified and transparent, including criteria for the composition and selection of Board members.

### Public interest objectives (Section 17A basis and public comment process)
- Legal basis:
  - FICC’s public interest objectives are based upon section 17 A of the Securities Exchange Act.
  - The SEC is directed by Congress, “having due regard for the public interest,” to facilitate establishment of a national system for prompt and accurate clearance and settlement of securities transactions, including registration of clearing agencies that meet Exchange Act statutory standards.
- Public comment and transparency:
  - SEC must receive and consider public comments on each proposed rule change filed by FICC-GSD.
  - SEC rules provide that the public comment period for proposed rule changes is at least 21 days from the date a proposal is published in the Federal Register (unless criteria for accelerated approval or immediate effectiveness are met).
  - All registered clearing agencies (including DTC, NSCC and FICC) must publish notices of proposed rule changes on their websites when filed with the SEC, with contact information for participants to provide comments directly to the clearing agencies (which the affected clearing agency would forward to the SEC).
  - FICC engages participants or participant groups (e.g., relevant divisions of SIFMA) and consults with regulators before formal filings when proposals may have significant impact.
  - FICC-GSD staff participates in industry groups to share information in advance of or after filings; DTCC publishes periodicals and newsletters targeted to clearing agency membership, trade organizations, regulators and Participants.
- Assessment: Broadly observed.

### Recommendation 14 — Disclosure of risk management information
- Requirement: A CCP should provide market participants sufficient information to identify and evaluate risks and costs of using its services.
- FICC-GSD disclosures:
  - Rules and procedures publicly available on DTCC’s website.
  - Rules explicit as to when FICC-GSD assumes counterparty exposure and provide information on default procedures.
  - Explanatory service bulletins and guidelines on risk management measures communicated via Important Notices posted on DTCC’s website, along with any rule filings.
  - Public disclosure of key financial and operational risk.
  - Website contains general product and service information and contact information.
- Financial reporting:
  - SEC standards and FICC-GSD Rule 35 require that after the end of each calendar year FICC-GSD provides participants with annual audited financial statement prepared by an independent public accountant.
  - FICC-GSD must provide participants with unaudited financial statements for each of the first three calendar quarters of each calendar year.
  - The annual audited financial statements of FICC as well as the consolidated financial statements of DTCC are available on the DTCC website, www.dtcc.com.
- Accessibility:
  - Information is provided in English and made available on FICC’s website.
  - System management responds to inquiries from participants and meets with them as requested to assist understanding of rules and risk implications.
- RCCP key questions:
  - FICC-GSD completed and disclosed answers to the key questions from the assessment methodology.
  - The self-assessment is published on DTCC’s website after senior management review and Board approval.
  - Review frequency: at least every two years, unless necessary earlier due to material change.
- Assessment: Observed.

### Recommendation 15 — Transparent and effective regulation and oversight
- Scope and legal status:
  - FICC is a clearing agency as defined by the Exchange Act and required to register with the SEC under section 17A unless exempted.
  - FICC is subject to full regulation under the Exchange Act and is a self-regulatory organization (SRO) that must meet SRO requirements under the Exchange Act.
  - The Federal Reserve is interested in FICC-GSD given its role in government securities market and systemic importance.
- Legal capacity and resources:
  - United States currently does not have a statute providing formal oversight authority to the central bank for non-bank payment, clearing, and settlement systems such as FICC.
  - At the SEC, an estimated 51 staff are involved in whole or in part in clearing oversight (approximately 23 full-time equivalent staff positions).
  - The SEC’s oversight program encompasses staff from 7 different offices, including offices involved in legal and policy, examination and compliance, and automation review.
  - Between FRBNY and the Board, about 20 budgeted officers and staff work full time on policy and oversight with respect to payment, clearing and settlement.
  - Additionally, about 15 supervisory staff are dedicated full time to specific private sector systems; 9 examiners broadly dedicated to payment and settlement infrastructure and 12 more focused on systemically important clearing activities by banks and affiliates.
- Definition and disclosure of objectives:
  - The SEC’s regulatory objectives, responsibilities, and main policies are defined and publicly disclosed; scope of SEC regulation of clearing agencies is defined by the Exchange Act, including Sections 17A and 19.
  - The SEC’s Division of Trading and Markets has published standards regarding objectives and requirements of clearing agency registration under Section 17A.
  - The SEC publishes rule releases, concept releases and policy statements; materials are publicly available, including via the SEC’s website (www.sec.gov).
  - The Federal Reserve publishes policy statements such as the Policy on Payments System Risk at www.federalreserve.gov and operating circulars at http://www.frbservices.org/.
  - FICC-GSD is required to file with the SEC and make public all proposed rule changes; filings must be clear and comprehensible to enable meaningful public comment and SEC determinations.
- Timely provision of oversight information:
  - FICC-GSD must submit proposed changes to rules and a description of the purpose of the proposed rule change to the SEC.
  - FICC-GSD is subject to recordkeeping requirements in the Exchange Act (Section 17) and SEC rules (Rule 17a-1 et seq.):
    - Must make and keep prescribed records and reports as the SEC prescribes.
    - Records must be held for not less than five years, with the first two years in an “easily accessible place”.
    - SEC Rule 17a-6 sets forth the manner for destruction/disposal of documentation.
    - Records are subject to periodic, special, or other examinations by SEC representatives.
    - FICC-GSD may be asked to furnish copies of materials upon request from participants, other SROs, or regulators.
  - FICC is required to notify the SEC of disciplinary actions taken with respect to participants, including ceasing to act for a participant or denying access.
  - SEC staff conducts onsite examinations of registered clearing agencies, including FICC; examinations may include internal audit, membership, member financial surveillance, clearing fund and collateral risk, risk assessment and risk management systems, clearance and settlement processes, and liquidity.
  - FICC-GSD is required to notify the SEC if it imposes a final disciplinary sanction on a participant, denies participation, limits access to services, or ceases to act for a participant and indicate actions taken to resolve outstanding obligations.
  - FICC-GSD must submit all proposed rule changes to the SEC for review, notice, comment, and, with some limited exceptions, approval under Section 19 of the Exchange Act and rules thereunder.
  - Example: SEC reviewed and approved the cross-margining arrangement and amendments thereto FICC-GSD put in place with the CME. A MOU with the CFTC is in place for issues of common interest.
- Automation Review Policy:
  - SEC has established an Automation Review Policy (ARP) applicable to SROs, including FICC-GSD.
  - ARP encourages comprehensive planning and assessment programs for systems capacity and vulnerability and requests real-time notifications of significant system outages; ARP staff conducts IT-specific onsite examinations of FICC-GSD.
- Domestic and cross-border cooperation:
  - Legal framework supports cooperation and coordination among authorities.
  - Domestic: SEC and the Federal Reserve have signed exam-specific information-sharing arrangements regarding oversight of FICC-GSD to provide for consolidated supervision and stem systemic risk.
  - Cross-border: SEC has entered into memoranda of understanding (MOUs) with regulators from non-domestic institutions for exchange of information; MOUs are available on the SEC website.
- Assessment: Observed.
- Comments and recommendations:
  - The SEC has not formally required FICC-GSD to perform a self-assessment with respect to the CPSS-IOSCO recommendations; however, the SEC reviews self-assessments currently prepared by clearing agencies.
  - Compliance with SEC rules ensures compliance with most of the recommendations.
  - SEC staff indicated it would consider recommending that clearing agencies be required to perform self-assessments against the CPSS-IOSCO recommendations by rule or policy statement to encourage consistency in assessment of globally relevant systems and facilitate co-operation with other authorities.
  - Recommendation: The Federal Reserve should be provided a legal mandate to oversee FICC, which is a systemically important system, as a complementary function to existing SEC regulation and supervision.

### Summary table highlights (selected entries from Table 2)
- Overall methodology: Detailed assessment of FICC-GSD with the CPSS-IOSCO Recommendations for Central Counterparties.
- Selected responsibilities, gradings, and comments:
  - 1. Legal risk — Grading: O
  - 2. Participation requirement — Grading: O
    - Comment: FICC submitted a rule filing to SEC for expanding membership to include some buy-side unregistered investment pools (UIP), such as hedge funds, as a new membership category; monitoring via contractual surveillance and additional access requirements; certain buy-side entities (e.g., SEC-registered investment companies) are not permitted to mutualize losses.
    - FICC will impose additional risk management measures for UIP members, including calculating their Clearing Fund requirements at a higher value at risk confidence level and instituting an additional qualitative assessment requirement.
  - 3. Measurement and management of credit exposures — Grading: O
    - Comment: Definition of margins and clearing funds in the public assessment should be made more consistent with international usage/practice and glossary of the RCCP; FICC-GSD management stated they would clarify terminology in next self-assessment revision.
  - 4. Margin requirements — Grading: O
  - 5. Financial resources — Grading: BO
    - To be fully compliant, FICC-GSD should:
      - consider additional liquid financial resources to use in case of extreme situations where repo agreements cannot be used; and, in particular;
      - minimize its exposure and concentration risk vis-à-vis the two clearing banks;
      - consider conducting more frequent stress testing than once a month, in particular, in times of unusual market volatility; and
      - disclose stress testing assumptions to participants.
    - Current liquidity sources: FICC-GSD’s liquidity can be increased by repoing the securities in the Clearing Fund or the unpaid allocations of defaulting members; this arrangement cannot be considered a committed line because repo markets may not be effective in extreme market situations.

*Italic: Source — _cr10130 - Section 17A of the Exchange Act, and reflect other governance best practices. The*

### 6. A CCP’s default procedures should be

### 6. A CCP’s default procedures should be

### Default procedures — high-level requirement
- Default procedures should be clearly stated, and they should ensure that the CCP can take timely action to contain losses and liquidity pressures and to continue meeting its obligations.
- Key aspects of the default procedures should be publicly available.

### Custody and investment risk
- A CCP should hold assets in a manner whereby risk of loss or of delay in its access to them is minimized.
- Assets invested by a CCP should be held in instruments with minimal credit, market and liquidity risks.
- Assessment finding: FICC-GSD should continue to monitor and mitigate the potential risks that result from holding assets at only two commercial banks.
- Recommendation: FICC-GSD should to the greatest extent possible avoid unsecured investments.

### Operational risk
- A CCP should identify sources of operational risk and minimize them through the development of appropriate systems, controls and procedures.
- Systems should be reliable and secure, and have adequate, scalable capacity. Business continuity plans should allow for timely recovery of operations and fulfillment of a CCP’s obligations.
- Assessment finding: Contingency plans and backup facilities for the failure of key systems are not tested and reviewed with participants (only connectivity is tested with the critical participants).
- Assessment details: FICC explained that the data centers in the New York region act as a single data centre and provide secondary back-up to both systems and the entire facility. In the event the New York region data centers are not available, the out of region recovery site is available to cover all critical systems. Failover and recovery of any data centre does not require changes by participants. The network automatically reroutes the client traffic from their primary or backup sites to the recovered data centre. Therefore, it is not relevant to test the failure of one key system with the participants.
- Recommendation: DTCC should test its back-up sites to critical participants’ backup sites.

### Money settlements
- A CCP should employ money settlement arrangements that eliminate or strictly limit its settlement bank risks, that is, its credit and liquidity risks from the use of banks to effect money settlements with its participants.
- Funds transfers to a CCP should be final when effected.

### Physical deliveries
- A CCP should clearly state its obligations with respect to physical deliveries. The risks from these obligations should be identified and managed.
- Assessment/recommendation: As a systemically important CCP, FICC should have direct access to Fedwire Securities and Fedwire Funds services. Such an access will allow FICC to settle DVP in central bank money and reduce the settlement concentration to the two clearing banks.
- Constraint: Due to current legal constraint, this recommendation can only be met by either FICC being chartered as a bank or statutory changes that grant the Federal Reserve legal authority to provide accounts and services to FICC.

### Risks in links between CCPs
- CCPs that establish links either cross-border or domestically to clear trades should evaluate the potential sources of risks that can arise, and ensure that the risks are managed prudently on an ongoing basis.
- There should be a framework for cooperation and coordination between the relevant regulators and overseers.

### Efficiency
- While maintaining safe and secure operations, CCPs should be cost-effective in meeting the requirements of participants.

### Governance
- Governance arrangements for a CCP should be clear and transparent to fulfill public interest requirements and to support the objectives of owners and participants.
- They should promote the effectiveness of a CCP’s risk management procedures.
- Assessment finding: For the observance of this recommendation, the governance arrangements for FICC should be more clearly specified and transparent, including criteria for the composition and selection of Board members.

### Transparency
- A CCP should provide market participants with sufficient information for them to identify and evaluate accurately the risks and costs associated with using its services.

### Regulation and oversight
- A CCP should be subject to transparent and effective regulation and oversight.
- In both a domestic and an international context, central banks and securities regulators should cooperate with each other and with other relevant authorities.
- Assessment findings and recommendations:
  - The SEC has not formally required FICC-GSD to perform a self-assessment with respect to the CPSS-IOSCO recommendations. However, the SEC reviews the self-assessments currently prepared by the clearing agencies.
  - Compliance with SEC rules ensures compliance with most of the recommendations.
  - SEC staff stated that it would consider recommending to the Commission that clearing agencies be required to perform self-assessments against the CPSS-IOSCO recommendations by rule or by policy statement. SEC is encouraged to do so, also with a view to encouraging consistency in the assessment of globally relevant systems and to facilitate co-operation with other authorities.
  - Recommendation: The Federal Reserve should be provided a legal mandate to oversee FICC, which is a systemically important system, as a complementary function to the existing SEC regulation and supervision.

### Table 3 — Actions to Improve Compliance (selected recommendations and recommended actions)
- Recommendation 3: credit exposures management
  - Align the definitions of margins and clearing funds with international ones.
- Recommendation 5: Financial resources
  - Consider additional liquid financial resources to use in case of extreme situations where repo agreements cannot be used.
  - Minimize FICC’s exposure and concentration risk vis-à-vis the two clearing banks.
  - Consider conducting more frequent stress testing than once a month, in particular, in times of unusual market volatility.
  - Disclose stress testing assumptions to participants.
- Recommendation 7: Custody and investment risk
  - Continue to monitor and mitigate the potential risks, which result from holding assets at only two commercial banks.
  - Avoid to the largest extent possible unsecured investments.
- Recommendation 8: Operational risk
  - Test and review FICC backup sites to critical participants’ backup sites.
- Recommendation 10: Physical deliveries
  - Provide FICC direct access to Fedwire Securities and Fedwire Funds services to settle DVP transactions in central bank money.
- Recommendation 13: Governance
  - FICC’s governance arrangements should be more clearly specified and transparent, including criteria for the composition and selection of Board members.
- Recommendation 15: Regulation and oversight
  - SEC should formally require FICC to perform a self-assessment with respect to the CPSS-IOSCO recommendations.
  - Ensure the compliance of the SEC rules with the CPSS/IOSCO Recommendations.
  - Provide legal mandate to the Federal Reserve to oversee FICC, which is systemically important system, as a complementary function to the existing SEC regulation and supervision.

### Authorities’ response to the assessment
- The U.S. authorities welcome the IMF’s assessment of the Fixed Income Clearing Corporation (FICC) against the CPSS-IOSCO Recommendations for Central Counterparties (RCCP).
- The authorities appreciate the significant undertaking associated with an FSAP review of the biggest financial sector in the world, as well as the challenges that accompany the first assessment of a large advanced country in the wake of the crisis.
- The authorities are pleased to note that the IMF’s assessment reflects the high degree of compliance of FICC with the RCCPs, and will work with FICC in considering the assessment’s specific comments and recommendations.
- The authorities appreciate the significant undertaking associated with the assessment of FICC and the contribution that the assessment process makes to the stability and effective regulation and oversight of systemically important payment, clearing and settlement systems.

*Excerpt from the IMF assessment (content unit: 6. A CCP’s default procedures should be).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10130.pdf_