FR 2021-01587

The recent order approved by the Securities and Exchange Commission (SEC) involves a rule change proposed by the Fixed Income Clearing Corporation (FICC). This amendment pertains to how certain financial transactions, known as repurchase agreements or "repos," are handled in terms of their risk management, novation, guarantee, and settlement.

Summary of the Document

The rule change focuses on expanding FICC's role in being the central party that oversees the settlement of same-day starting repo transactions. Previously, FICC only managed one part of these transactions, leaving the other part to be settled directly between the two trading parties, which could increase the risk of errors and settlement failures. The rule change introduces two new services:

1. Same-Day Settling Service: This service allows both parts of a same-day settling repo to be managed under FICC's centralized system, reducing the risk of settlement issues.

2. Pair-Off Service: This service enables offsetting failed obligations to be settled on the same day they occur, reducing the risk carried overnight to the next trading day.

Significant Issues or Concerns

The document, as it stands, is filled with technical jargon, primarily crafted for those with an insider understanding of securities and financial regulations. This complexity may alienate the general public, who could find it difficult to grasp the full impact or benefits of these changes. Moreover, the document does not provide a clear picture of the financial implications or specific quantifiable benefits of these changes, which makes it challenging for stakeholders to assess their value.

Broader Public Impact

For the general public, particularly those engaging in transactions involving U.S. Treasury securities through repos, these changes are designed to streamline and safeguard the clearing and settlement process. While these repos are generally more relevant to financial institutions than individual investors, ensuring a more efficient and secure settlement system is part of broader efforts to maintain stable financial markets, indirectly benefiting the public by supporting a more resilient economy.

Impact on Specific Stakeholders

Positive Impact:

• Financial Institutions and Intermediaries: By centralizing the oversight and reducing potential operational risks, the new system offers enhanced efficiency and reduced risks of settlement failures. This could lead to smoother operations and possibly lower transaction costs in the long run.

• Member Institutions of FICC: These entities stand to benefit directly from the decrease in market risks and increased liquidity due to faster settlements offered by the Pair-Off Service.

Negative Impact or Concerns:

• Repo Brokers: While the change is mandatory for some participants, it remains voluntary for repo brokers. This optional participation might limit the full effectiveness of the change if brokers choose not to engage with the new system. There is also a lack of discussion on how the changes might influence market competition, as various entities could benefit differently depending on their market positions and operational capacities.

• General Market Competition: Due to the absence of a clearly articulated assessment of costs or risks associated with the proposed changes, it remains uncertain whether smaller or less resource-rich entities could face any disadvantages in adapting to the new system.

In conclusion, while the proposed changes appear to be beneficial in enhancing the efficiency and security of repo transactions within the financial market, the complexity of the language and the lack of detailed analysis of impacts make it challenging for broader audiences to fully comprehend or assess the implications of these changes. A more detailed and accessible explanation could help in better evaluating its full spectrum of benefits and potential drawbacks.

In this document, the use of money is primarily referenced in the context of settling transactions within the Delivery-Versus-Payment (DVP) Service offered by the Fixed Income Clearing Corporation (FICC). The financial implications of these settlements are essential to understand, as they underpin the proposed changes to the risk management, novation, guarantee, and settlement services that FICC provides.

Contract Value vs. System Value

FICC employs two financial reference points for settling transactions: Contract Value and System Value. The Contract Value refers to the specific dollar amount at which a transaction is settled on its scheduled date. Essentially, this is the agreed price at the time the transaction is executed. On the other hand, transactions settled at a future date are settled at what is called the System Value, which includes the dollar amount plus accrued interest. This distinction is crucial because it demonstrates the financial flow impact when a transaction does not net and settles immediately compared to when it is postponed and involves interest calculations.

The document outlines that transactions not involved in the netting process will follow the Contract Value principle, settling each transaction based on the original agreed amount. This financial arrangement underscores the importance of maintaining a straightforward settlement process that avoids the complexities and potential risks associated with interest accruals when delays occur.

Issues and Implications

One of the major issues identified is the document's complex language and technical jargon, which may not be easily understood by the broader public. This complexity can obscure the practical financial implications of the proposed changes. The absence of a comprehensive summary outlining the financial benefits of the Same-Day Settling Service further complicates understanding. Although the document highlights potential efficiencies and risk reductions, it doesn't provide quantifiable data or examples to help assess the value or effectiveness of these services financially.

The lack of a clear discussion regarding potential costs or risks associated with implementing these changes is another concern. While outlining the potential to streamline settlements and reduce operational risks, there is no mention of any additional financial burdens or adjustments required by FICC or its members to accommodate these changes. This omission could have significant implications for members who may be affecte

Additionally, the document lacks clarity on how the proposed changes might influence market competition or if particular organizations would benefit disproportionately more than others. For example, since participation in the Same-Day Settling Service is voluntary for Repo Brokers, there exists a risk that these brokers might opt-out, potentially undermining the service's effectiveness. If brokers can choose not to participate, the anticipated financial efficiencies and any related cost-savings or risk reductions might not materialize fully.

Overall, while the document touches on significant financial processes and references, it does not clearly articulate the financial implications or benefits in a way that is accessible to a general audience or that thoroughly addresses potential issues identified.