A diverse group of financial market participants (the "signatories") urged the SEC not to approve a rule change proposed by the Government Securities Division ("GSD") of the Fixed Income Clearing Corporation ("FICC") that would a establish a "Capped Contingent Liquidity Facility" ("CCLF"). Under the proposal, the FICC would require "solvent members of the GSD to [have demonstrated sufficient liquidity reserves to] fund the portfolio of a failed participant family during the liquidation process of that participant family."

The signatories argued that even though Exchange Act Rule 17Ad-22(b)(3) requires a registered clearing agency to be able to "maintain sufficient financial resources to withstand . . . a default by the participant family to which it has the largest exposure in extreme but plausible market conditions," U.S. government securities are "riskless assets." For that reason, the signatories claimed, the scenario that the CCLF is designed to remedy is unlikely ever to come to fruition. Instead, the funding burden imposed on market participants by the CCLF would force participants away from central clearing transactions, increase costs to customers, reduce the availability of liquidity for other markets in greater need, and reduce the availability of funding in stable economic conditions.

The signatories asked the SEC not to approve the adoption of the CCLF in its current form. They also urged the Commission to undertake a more comprehensive review of the potential effects of CCLF implementation.

Note: Cadwalader consulted on the content of the comment letter.

Commentary / Steven Lofchie

Regulators are beginning to pay attention to the deleterious effects of Dodd-Frank rulemaking, including to decreased liquidity in the fixed income markets. In a recent speech, CFTC Commissioner J. Christopher Giancarlo noted that there have been an increasing number of market breaks in the government securities markets. He attributed those disruptions to burdensome regulations. Instituting safety measures where they are not required actually reduces the soundness of the market by discouraging market participation.

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