The Capped Contingency Liquidity Facility (CCLF) is a procedure designed to ensure that MBSD has sufficient liquidity to cover the largest failure of a family of accounts. CCLF would only be invoked if FICC declares a “cease to act” against a Clearing Member and FICC does not have the ability to obtain sufficient liquidity through its Clearing Fund cash deposits and its established repurchase agreement arrangements.
CCLF was designed to provide member firms with finality of settlement and to allow firms to prepare for and manage their potential financing requirements in the event of a member’s default. Once a CCLF event has been declared, FICC will contact Clearing Members that are due to deliver obligations to FICC that are owed to a defaulting member, i.e. the defaulting member is a net buyer. FICC will either cancel the Clearing Member’s obligations or instruct the Clearing Member to hold the obligations (or a portion thereof) and await instructions as to when to make these deliveries; these obligations are referred to as the “Financing Amount.”
FICC will calculate for each MBSD Clearing Member a “Defined Capped Liquidity Amount,” which is the maximum amount that a Clearing Member will be required to fund during a CCLF event. Members will be required to finance the obligations (i.e. the Financing Amount) up to their defined cap. FICC, as counterparty, will enter into repurchase agreements with the Clearing Member equal to the Financing Amount. If a liquidity need still exists, FICC will inform clearing members that are below the Defined Capped Liquidity Amount and also inform clearing members that do not have a delivery obligation to a defaulting member. After these members have been notified, FICC will distribute the remaining financing need to such members on a pro rata basis and enter into repurchase agreements. These transactions would remain open until FICC completes the liquidation of the underlying obligations, and a haircut based on market conditions will be applied to the transactions.
Once FICC completes the liquidation of the underlying obligation, FICC will instruct the clearing member to deliver the securities back to FICC. FICC will then close the repurchase transaction and deliver the securities to complete settlement on the contractual settlement date of the liquidating trade. Because FICC would be receiving and delivering securities on the same day, FICC would not have a liquidity need resulting from the transaction of a defaulting member.
The applicable provisions of the rules outline detailed procedures of the mechanism that will be followed should FICC declare a CCLF event.