Notice2024-27762
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change, as Modified by Partial Amendment No. 1, To Modify the GSD Rules To Facilitate Access to Clearance and Settlement of All Eligible Secondary Market Transactions in U.S. Treasury Securities
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 27, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 229 (Wednesday, November 27, 2024)</title>
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[Federal Register Volume 89, Number 229 (Wednesday, November 27, 2024)]
[Notices]
[Pages 93784-93802]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27762]
[[Page 93784]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101694; File No. SR-FICC-2024-005]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change, as Modified by Partial
Amendment No. 1, To Modify the GSD Rules To Facilitate Access to
Clearance and Settlement of All Eligible Secondary Market Transactions
in U.S. Treasury Securities
November 21, 2024.
On March 11, 2024, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-FICC-2024-005 pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder to modify FICC's Government Securities Division
(``GSD'') Rulebook (``GSD Rules'') with respect to facilitating access
to GSD's clearance and settlement services for all eligible secondary
market transactions in U.S. Treasury securities.\3\ On March 19, 2024,
FICC filed Partial Amendment No. 1 to make clarifications and
corrections \4\ to the proposed rule change. The proposed rule change,
as modified by Partial Amendment No. 1, is referred to herein as the
``Proposed Rule Change.'' The Proposed Rule Change was published for
public comment in the Federal Register on March 27, 2024.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing, infra note 5, at 89 FR 21363.
\4\ Partial Amendment No. 1 makes clarifications and corrections
to the description of the proposed rule change and Exhibit 5.
Specifically, as originally filed, the description of the proposed
rule change made a reference to an incorrect section of the GSD
Rulebook. Partial Amendment No. 1 corrects that reference.
Additionally, as originally filed, the description of the proposed
rule change and Exhibit 5 contained inconsistent references
regarding whether FICC or its Board would be responsible for
approving membership applications and related membership matters.
Partial Amendment No. 1 clarifies and corrects those references.
\5\ Securities Exchange Act Release No. 99817 (March 21, 2024),
89 FR 21362 (March 27, 2024) (File No. SR-FICC-2024-005) (``Notice
of Filing'').
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On May 1, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\6\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the Proposed Rule Change.\7\ On June 27, 2024,
the Commission instituted proceedings to determine whether to approve
or disapprove the Proposed Rule Change.\8\ On September 24, 2024,
pursuant to Section 19(b)(2) of the Exchange Act,\9\ the Commission
extended the period for the conclusion of proceedings to determine
whether to approve or disapprove the Proposed Rule Change.\10\
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\6\ 15 U.S.C. 78s(b)(2).
\7\ Securities Exchange Act Release No. 100031 (Apr. 25, 2024),
89 FR 35269 (May 1, 2024) (File No. SR-FICC-2023-005).
\8\ Securities Exchange Act Release No. 100399 (June 21, 2024),
89 FR 53681 (June 27, 2024) (SR-FICC-2024-005).
\9\ 15 U.S.C. 78s(b)(2)(B)(ii)(II).
\10\ Securities Exchange Act Release No. 101081 (Sept. 18,
2024), 89 FR 77949 (Sept. 24, 2024) (SR-FICC-2024-005).
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The Commission received several comment letters on the Proposed
Rule Change.\11\ In addition, the Commission received a letter from
FICC responding to the public comments.\12\ For the reasons discussed
below, the Commission is approving the Proposed Rule Change.
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\11\ Comments on the Proposed Rule Change are available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-005/srficc2024005.htm">https://www.sec.gov/comments/sr-ficc-2024-005/srficc2024005.htm</a>.
\12\ See Letter from Laura Klimpel, Head of Fixed Income
Financing Solutions, Depository Trust & Clearing Corporation, (Aug.
1, 2024) (``FICC Letter'').
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I. Description of the Proposed Rule Change
A. Background and Current Access Models
FICC, through GSD, serves as a central counterparty (``CCP'') and
provides real-time trade matching, clearing, risk management and
netting for cash purchases and sales of U.S. Treasury securities as
well as repurchase and reverse repurchase transactions (``repos'')
involving U.S. Treasury securities. Currently, FICC is the sole
provider of clearance and settlement services for U.S. Treasury
securities.
On December 13, 2023, the Commission adopted amendments to the
standards applicable to covered clearing agencies, such as FICC,\13\
requiring each such clearing agency for U.S. Treasury securities to
have written policies and procedures reasonably designed to, among
other things, ensure that it has appropriate means to facilitate access
to clearance and settlement services of all eligible secondary market
transactions in U.S. Treasury securities, including those of the
clearing agency's indirect participants.\14\
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\13\ A ``covered clearing agency'' is, among other things, a
registered clearing agency that provides the services of a CCP, and
a CCP is a clearing agency that interposes itself between the
counterparties to securities transactions, acting functionally as
the buyer to every seller and the seller to every buyer. 17 CFR
240.17ad-22(a); see also 15 U.S.C. 78c(a)(23) (defining a clearing
agency). FICC is a clearing agency registered with the Commission
under Section 17A of the Exchange Act (15 U.S.C. 78q-1), and it acts
as a CCP.
\14\ 17 CFR 240.17ad-22(e)(18)(iv)(C). See Securities Exchange
Act Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16, 2024)
(``Adopting Release,'' and the rules adopted therein referred to
herein as ``Treasury Clearing Rules'').
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1. Direct Participation at FICC
GSD's CCP services are currently available directly to entities
that are approved under the GSD Rules \15\ to be Netting Members.\16\
Currently, there are different categories of Netting Member based upon
the type of legal entity (i.e., Bank Netting Member, Dealer Netting
Member, Inter-Dealer Broker Netting Member, etc.) and whether an entity
is incorporated in the United States or not (i.e., a Foreign Netting
Member). Netting Member applicants must meet both financial and
operational minimum eligibility requirements \17\ and, once admitted,
Netting Members must adhere to ongoing minimum membership
standards.\18\ Furthermore, both the minimum eligibility requirements
and ongoing standards vary depending on the relevant Netting Membership
category. However, in general, all Netting Member categories may access
the services available through GSD's Comparison System \19\ and Netting
System.\20\
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\15\ The GSD Rules are available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/ficc_gov_rules.pdf. Terms not
otherwise defined herein are defined in the GSD Rules.
\16\ See GSD Rule 2, supra note 15.
\17\ See GSD Rule 2A, supra note 15.
\18\ See GSD Rule 3, supra note 15.
\19\ See GSD Rule 5, supra note 15. The Comparison System
includes the system of GSD services and operations in connection
with the reporting, validating, and in some cases, matching of the
long and short sides of a securities trade. GSD also has a limited
membership that permits Comparison-Only Members to participate only
in its Comparison System. FICC does not act as a CCP for activity
processed through its Comparison System and the services offered
through its Comparison System are not guaranteed by FICC.
\20\ See GSD Rule 11, supra note 15. The Netting System includes
the system of GSD services and operations in connection with
aggregating and matching offsetting obligations resulting from
securities trades submitted by or on behalf of Netting Members.
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2. Indirect Participation at FICC
Market participants may also access GSD's clearing services
indirectly through a Netting Member. There are currently two indirect
participation models to facilitate indirect participant access to GSD--
the Sponsored Service \21\ and the correspondent clearing/prime broker
services.\22\ Each of these indirect participation models gives market
participants different options to consider in accessing GSD's
[[Page 93785]]
clearance and settlement services. The primary difference between the
two models is that an indirect participant who becomes a Sponsored
Member must establish an indirect, limited purpose GSD membership,
whereas the correspondent clearing/prime broker services do not require
an indirect member to establish any relationship with GSD.
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\21\ See GSD Rule 3A, supra note 15.
\22\ See GSD Rule 8, supra note 15.
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The Sponsored Service permits Netting Members, approved under the
GSD Rules as ``Sponsoring Members,'' to sponsor certain institutional
firms, referred to as ``Sponsored Members,'' into GSD membership. The
Sponsoring Member is permitted to submit to FICC for comparison,
novation, and netting certain types of eligible transactions either
between itself and its Sponsored Members (i.e., ``done-with''), or
between the Sponsored Members and other third-party Netting Members
(i.e., ``done-away''). For operational and administrative purposes, a
Sponsored Member appoints its Sponsoring Member to act as processing
agent with respect to the Sponsored Member's satisfaction of its
securities and funds-only settlement obligations.\23\
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\23\ See GSD Rule 3A, supra note 15. An entity that chooses to
become a Sponsoring Member retains its status as a Netting Member
and can continue to submit any non-Sponsored Member activity to FICC
as such.
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A Sponsored Member is a GSD Member and the legal counterparty to
FICC for any submitted transactions.\24\ However, the Sponsoring Member
unconditionally guarantees to FICC the Sponsored Member's performance
under a Sponsoring Member Guaranty, which guarantees to FICC the
payment and performance of a Sponsored Member's obligations to
FICC.\25\ Therefore, FICC relies on the financial resources of the
Sponsoring Member in relying upon the Sponsoring Member Guaranty. If a
Sponsoring Member fails to perform under the Sponsoring Member
Guaranty, FICC may cease to act for the Sponsoring Member both as a
Sponsoring Member as well as a Netting Member.\26\
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\24\ See GSD Rule 3A, section 7 (describing novation of
Sponsored Member Trades) and 2 (identifying membership types), supra
note 15.
\25\ See GSD Rule 3A (describing the operation of the Sponsoring
Member Guaranty) and 1 (defining the Sponsoring Member Guaranty),
supra note 15.
\26\ See Notice of Filing, supra note 5, at 89 FR 21365; see
also GSD Rule 3A, Section 14; and GSD Rule 21, Sections 1(a), 1(b),
4(a) supra note 15.
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Netting Members may also submit to FICC eligible activity on behalf
of their customers through the correspondent clearing/prime broker
services.\27\ Under the current GSD Rules, the Netting Member is
referred to as the ``Submitting Member'' and the customer is referred
to as the ``Executing Firm.'' \28\ Unlike the Sponsored Service, FICC
has no relationship with the Executing Firm,\29\ and all obligations
(i.e., margin and settlement) under the GSD Rules remain with the
Submitting Member.\30\ Additionally, Submitting Members have the option
of either netting Executing Firm activity with other activity they
submit to FICC (i.e., Submitting Member proprietary activity) or
segregating Executing Firm activity in separate accounts.\31\ In all
cases, however, the Submitting Member must identify the relevant
Executing Firm(s) on the FICC transaction submission file.\32\ The
current GSD Rule does not address the qualifications of a Submitting
Member (or how a Netting Member becomes a Submitting Member); does not
specify the information that each Submitting Member must provide to
FICC regarding the Executing Firms on whose behalf it submits
transactions; does not require acknowledgments from Executing Firms;
and does not set forth any rules regarding the processing of
transactions through the correspondent clearing/prime broker service or
how such transactions are treated in the event of a default.
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\27\ See GSD Rule 8, supra note 15.
\28\ See id. There are no operational differences between the
current correspondent clearing service and the prime broker service.
The primary difference between the two services is that FICC
provides a report to prime brokers that identifies margin
calculation for their customers' transactions and does not provide
such report to Members using the correspondent clearing service.
\29\ See GSD Rule 1 (defining the term Executing Firm), supra
note 15.
\30\ See GSD Rule 8, Section 4, and GSD Rule 15, Section 1,
supra note 15.
\31\ See id.
\32\ See GSD Rule 8, Section 2, supra note 15.
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B. Proposed Changes <SUP>33</SUP>
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\33\ For a detailed description of each proposed change, please
refer generally to the Notice of Filing, supra note 5.
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1. Re-Naming the Correspondent Clearing/Prime Broker Services as the
Agent Clearing Service and Providing Additional Specificity on the
Agent Clearing Service
FICC proposes to re-name, consolidate, and adopt additional
provisions governing GSD's existing correspondent clearing/prime broker
services. Moving forward, the correspondent clearing/prime broker
services would be referred to as the ``Agent Clearing Service,''
Submitting Members would be referred to as ``Agent Clearing Members,''
and Executing Firms would be referred to as ``Executing Firm
Customers.'' The Agent Clearing Service would continue to allow Netting
Members to submit, on behalf of their customers, transactions to FICC
for novation. These proposed changes would primarily amend GSD Rule
8,\34\ which currently describes the correspondent clearing/prime
broker services, to describe the Agent Clearing Service with greater
specificity.
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\34\ See GSD Rule 8, supra note 15.
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FICC designed the proposed changes to the Agent Clearing Service to
highlight the similarities between the Agent Clearing Service and other
agent clearing models, such as those through which market participants
in the cleared derivatives markets can execute commodity derivatives
with third parties and then give them up to a futures commission
merchant (``FCM'') for clearing.\35\ FICC states that these proposed
changes would enhance the ability of indirect participants to identify
the Agent Clearing Service as a workable ``done-away'' model that
allows indirect participants to access clearing through multiple direct
participants.\36\
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\35\ See Notice of Filing, supra note 5, at 89 FR 21365-66.
\36\ See id. FICC also states that these proposed changes would
improve the transparency of the GSD Rules regarding the availability
and operations of this service to both Netting Members and,
indirectly, their customers. See id.
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While the proposed changes would re-name certain terms in the GSD
Rules and otherwise expand upon the description of how the
correspondent clearing/prime broker access models operate, most of the
proposed changes would not alter how Netting Members and their
customers use this model to access GSD's services.\37\ Like the
correspondent clearing/prime broker models, the Agent Clearing Service
would continue to facilitate agent-style trading by allowing an Agent
Clearing Member to act as processing agent and credit intermediary for
its Executing Firm Customers.
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\37\ See Notice of Filing, supra note 5, at 89 FR 21366.
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Specifically, the Proposed Rule Change would address various
specific topics. First, the Proposed Rule Change would address Agent
Clearing Member qualifications and the application process to become an
Agent Clearing Member. A Netting Member, other than an Inter-Dealer
Broker Netting Member, shall be eligible to become an Agent Clearing
Member. An applicant to be an Agent Clearing Member would have to
submit an application and provide additional information that FICC may
request, and this application would include information about the
applicant's customers, past and/or projected volumes of applicant
customer activity, and the applicant's
[[Page 93786]]
controls for monitoring and mitigating risks, including any risks posed
by its customers.
Second, the Proposed Rule Change would require certain information
regarding an Agent Clearing Member's Executing Firm Customer
Relationships to be provided to FICC. The required information would
include a Legal Entity Identifier (``LEI'') for each Executing Firm
Customer,\38\ and each Agent Clearing Member would be required to
indemnify FICC for any losses, liabilities, expenses and legal actions
that could arise related to the LEI requirement. Thus, an Agent
Clearing Member would establish a relationship with one or more
Executing Firm Customers and provide FICC with notice confirming the
Executing Firm relationship with each such customer. FICC states that
this information sharing would better enable FICC to identify and
manage the risks posed by such indirect participants and would support
FICC's compliance with the requirements of Rule 17ad-22(e)(18)(iii)
under the Exchange Act to monitor compliance with its participation
requirements on an ongoing basis.\39\
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\38\ In addition to the LEI, this information would include: the
name and executing firm symbol of the Executing Firm Customer;
written authorization from the Executing Firm Customer to act on its
behalf; confirmation that the Executing Firm Customer and the Agent
Clearing Member have entered into an agreement that binds the
Executing Firm Customer to the applicable provisions of the GSD
Rules, as would be required by Section 3, described below; and
confirmation that the Executing Firm Customer understands,
acknowledges and agrees to each of the Executing Firm Customer
Acknowledgments set forth in, and as would be required by the GSD
Rules.
\39\ See Notice of Filing, supra note 5, at 89 FR 21365; 17 CFR
240.17ad-22(e)(18)(iii).
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In addition, the Proposed Rule Change would require that an
agreement between the Agent Clearing Member and the Executing Firm
Customer bind the customer to the applicable provisions of the GSD
Rules. However, beyond this specific requirement the Proposed Rule
Change would also acknowledge such an agreement may otherwise be on any
terms and conditions mutually agreed to by the parties and confirm that
the GSD Rules do not prohibit any reimbursement or other payments
sharing arrangements that may be established between those parties,
away from FICC.
Third, the Proposed Rule Change would define what transactions are
eligible to be submitted through the Agent Clearing Service, which
would remain the same as the transactions eligible for the
correspondent/prime broker services and would continue to exclude
Netting Eligible Auction Purchases, Brokered Transactions, GCF Repo
Transactions, and CCIT Transactions.\40\
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\40\ FICC states that GCF Repo Transactions and CCIT
Transactions are currently excluded due to system limitations, and
Brokered Transactions are necessarily excluded because Inter-Dealer
Broker Netting Members are not permitted to act as Agent Clearing
Members, as discussed above. The exclusion of Netting Eligible
Auction Purchases is driven by the specific processing rules
applicable to auctions that are external to FICC and established by
the U.S. Department of the Treasury. See Notice of Filing, supra
note 5, at 89 FR 21368.
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Fourth, the Proposed Rule Change would identify the rights and
obligations of Agent Clearing Members. For example, it would define the
role of the Agent Clearing Members as processing agents of Executing
Firm Customers and establish that Agent Clearing Members are liable to
FICC for all obligations arising in connection with their Agent
Clearing Transactions in the same manner as if the Agent Clearing
Member had executed those trades. It would also state that FICC has no
liability or obligation to any Executing Firm Customer. It would also
provide that FICC may request information or reports regarding Agent
Clearing Transactions, which would allow FICC to continue to identify,
monitor and manage the risks its Agent Clearing Members may present to
it and the broader GSD membership.\41\
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\41\ See Notice of Filing, supra note 5, at 89 FR 21368.
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Fifth, the Proposed Rule Change would include specific Executing
Firm Customer acknowledgements with respect to their participation in
the Agent Clearing Service.\42\ Because Executing Firm Customers would
continue to have no relationship to FICC, the Proposed Rule Change
would provide that Agent Clearing Members are responsible for affirming
that their Executing Firm Customers understand, acknowledge and agree
to the provisions in the relevant section of the GSD Rules.
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\42\ These acknowledgments would include that the Agent Clearing
Service is governed by the GSD Rules, including Novation of Agent
Clearing Transactions; that FICC is not obligated to deal directly
with the Executing Firm Customer and may deal exclusively with the
Agent Clearing Member; that FICC shall have no obligations to the
Executing Firm Customer with respect to any Agent Clearing
Transactions submitted by an Agent Clearing Member on behalf of the
Executing Firm Customer, including with respect to any payment or
delivery obligations; and that the Executing Firm Customer shall
have no right to receive from FICC, or any right to assert a claim
against FICC with respect to, nor shall FICC be liable to the
Executing Firm Customer for, any payment or delivery obligation in
connection with any Agent Clearing Transactions submitted by an
Agent Clearing Member on behalf of the Executing Firm Customer, and
FICC shall make any such payments or redeliveries solely to the
Agent Clearing Member.
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Finally, the Proposed Rule Change would set forth rules regarding
the processing of Agent Clearing Transactions. FICC would require Agent
Clearing Members to process and record their customers' activity in
separate ``Agent Clearing Member Omnibus Accounts,'' as opposed to the
optional segregated submission approach provided for in the current GSD
Rules, to facilitate FICC's ability to monitor and, ultimately, risk
manage that activity appropriately.\43\ It would also require that all
Agent Clearing Transactions include an executing firm symbol that
identifies the Executing Firm Customer. It would describe that Agent
Clearing Transactions would continue to be processed in the same way
that FICC processes other transactions through the GSD netting,
clearing and settlement systems and would describe how Agent Clearing
Transactions are processed when the optional field identifying the
contra-party is either omitted or does not match on the transaction
file. It would also address how a loss would be allocated within the
Agent Clearing Service, that is, that the Agent Clearing Member, as
principal, would be responsible for satisfying the loss allocation
obligations that are calculated for its Executing Firm Customers.\44\
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\43\ See Notice of Filing, supra note 5, 89 FR at 21368.
\44\ The Proposed Rule Change would also provide that the
Clearing Fund obligations applicable to an Agent Clearing Members'
Agent Clearing Transactions would be calculated separately from the
obligations calculated with respect to other activity of the Agent
Clearing Member. However, FICC would have the right to apply any
Clearing Fund deposits of an Agent Clearing Member to any
obligations of that Member (including in their capacity as a Netting
Member). As a substantive matter, the above two changes do not vary
from how FICC calculates and applies loss allocation or Clearing
Fund requirements under the correspondent clearing and prime broker
services today. See Notice of Filing, supra note 5, 89 FR at 21369.
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2. Changes to the Sponsored Service
Eliminate Separate Categories of Sponsoring Members
Under the current GSD Rules, there are two categories of Sponsoring
Members--Category 1 Sponsoring Members are Bank Netting Members that
meet the eligibility criteria described in Section 2(a) of Rule 3A, and
Category 2 Sponsoring Members are all other eligible Netting
Members.\45\ While Bank Netting Members are currently subject to
certain capitalization requirements as
[[Page 93787]]
Sponsoring Member applicants,\46\ Category 2 Sponsoring Member
applicants are subject to financial requirements that are greater than
the financial requirements applicable in their capacity as Netting
Members.\47\ Thus, the current tiered category structure creates
differing applicant criteria based on the type of entity seeking
Sponsoring Member status.
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\45\ See Securities Exchange Act Release No. 85470 (Mar. 29,
2019) 84 FR 13328 (Apr. 4, 2019) (SR-FICC-2018-013) (creating two
categories of Netting Members to be eligible to be Sponsoring
Members, expanding the eligibility of the service to other types of
Netting Members in addition to Bank Netting Members). See also GSD
Rule 3A, Section 2, supra note 15.
\46\ Under Section 2(a) of GSD Rule 3A, Bank Netting Members
applying to be a Sponsoring Member must (i) have equity capital of
at least $5 billion, (ii) be ``Well-Capitalized,'' as such term is
defined in the GSD Rules, and (iii) have a bank holding company that
is registered under the Bank Holding Company Act of 1954, as amended
and that such bank holding company also be ``Well Capitalized.''
``Well Capitalized'' is defined in GSD Rule 1 to have the meaning
given that term in the capital adequacy rules and regulations of the
Federal Deposit Insurance Corporation. Supra note 15.
\47\ These increased financial requirements do not solely relate
to an applicant's capitalization, but instead are based on the
applicant's anticipated use of the Sponsoring Service in relation to
their financial condition. See Section 2(b)(ii) of GSD Rule 3A,
supra note 15.
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Additionally, the ongoing Sponsoring Member requirements in the GSD
Rules also apply a differentiated approach for Category 1 and Category
2 Sponsoring Members. For example, a Category 1 Sponsoring Member may
be subject to an increase in its Required Fund Deposit if it fails to
meet the applicable capitalization requirements.\48\ Alternatively, a
Category 2 Sponsoring Member may be subject to a limit on the activity
it can submit through the Sponsoring Service if the Sponsoring Member's
VaR Charges exceed its Netting Member Capital.\49\
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\48\ See Section 2(h) of GSD Rule 3A, supra note 15.
\49\ The ``VaR Charge'' is a component of the Required Fund
Deposit and defined in GSD Rule 1; ``Netting Member Capital'' is
defined in GSD Rule 1 to mean ``Net Capital, net assets or equity
capital as applicable, to a Netting Member based on its type of
regulation.'' Supra note 15.
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FICC proposes to eliminate the two categories of Sponsoring Members
and make all Sponsoring Members subject to the same eligibility and
ongoing requirements that are currently applicable to Category 2
Sponsoring Members. FICC states that these proposed changes would
encourage additional Netting Members to become Sponsoring Members thus
facilitating broader access to clearance and settlement services for
eligible secondary market transactions in U.S. Treasury securities,
including those of indirect participants who may seek to use the
Sponsored Service as Sponsored Members.\50\ The proposed changes would
affect Bank Netting Members that are--or will apply to be--Sponsoring
Members by removing the above-mentioned capitalization requirements and
instead applying the activity limits and financial condition factors
used under the current GSD Rules for Category 2 Sponsoring Members. The
proposed changes would create parity among all Sponsoring Members (and
applicants), which FICC states would encourage additional market
participants to become Sponsoring Members, which in turn should give
indirect participants a wider range of Sponsoring Members to consider
should they choose to access GSD's central clearing services via the
Sponsored Service.\51\ FICC states that the activity limits and
financial condition monitoring will allow FICC to continue to manage
the risks that could be presented by any activity cleared through the
Sponsored Service.\52\ FICC does not believe the proposed changes would
increase the risks presented to it by Bank Netting Members'
participation in the Sponsored Service as Sponsoring Members because
other existing risk management tools (e.g., FICC's ability to impose
greater and additional financial requirements,\53\ the Excess Capital
Premium,\54\ and activity limits \55\) would be available for FICC to
continue to manage those risks.\56\
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\50\ See Notice of Filing, supra note 5, at 89 FR 21370.
\51\ See id.
\52\ See id.
\53\ See GSD Rule 3A, Section 2(b)(ii) (describing the factors
that FICC may consider when determining whether to impose additional
financial requirements on a Sponsoring Member), supra note 5. For
the purposes of illustration only, such financial requirements could
include, without limitation, additional reporting requirements,
including reporting of parent company financials, or a higher
minimum deposit to the Clearing Fund.
\54\ See GSD Rule 3, Section 14 (the Excess Capital Premium is
an additional Clearing Fund deposit that may be required if a
Netting Member's capital levels drop below a threshold relative to
its other margin requirements), supra note 5.
\55\ The activity limit, which currently only applies to
Category 2 Sponsoring Members, restricts a Sponsoring Member from
submitting additional activity into its Sponsoring Member Omnibus
Account(s) if its capital levels exceed the sum of its VaR Charge
component of the Clearing Fund. See GSD Rule 3A, Section 2(h), supra
note 5.
\56\ See Notice of Filing, supra note 5, at 89 FR 21370.
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Remove the ``Qualified Institutional Buyer'' Requirements for Sponsored
Members
FICC proposes to remove the requirement that Sponsored Members
either be ``qualified institutional buyers,'' as such term is defined
by Rule 144A under the Securities Act of 1933,\57\ or satisfy the
financial requirements of such definition (``QIB Requirement''). This
proposed change would make the Sponsored Service available to
additional market participants, thereby providing such firms with
access to GSD's clearing services. FICC states that expanding
eligibility to become a Sponsored Member supports the goals of the
Treasury Clearing Rules to facilitate increased central clearing of
transactions involving U.S. Treasury securities.\58\
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\57\ 17 CFR 230.144A.
\58\ See Notice of Filing, supra note 5, at 89 FR 21371;
Adopting Release supra note 14, at 2716-17 (referring to the
revisions to Rule 17ad-22(e)(18) as being designed to ``bring the
benefits of central clearing to more transactions involving U.S.
Treasury securities, thereby reducing the overall systemic risk in
the market'').
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FICC states that this change would not increase the relevant risks
because FICC risk manages the Sponsored Service primarily at the
Sponsoring Member level, not the Sponsored Member level.\59\ For
example, a Sponsoring Member is responsible for posting to FICC the
Required Fund Deposit for its sponsored activity and, while Sponsored
Members are principally liable to FICC for their settlement
obligations, the Sponsoring Member is also required to provide a
guaranty to FICC for such obligations.\60\ In the event a Sponsored
Member does not satisfy its settlement obligations, FICC is able to
invoke the Sponsoring Member Guaranty.\61\ Additionally, Sponsoring
Members may be required to provide FICC with reports or other
information that FICC may require, including, for example, responses to
annual or ad hoc due diligence requests.\62\ FICC utilizes such due
diligence requests to identify, monitor and manage the risks Sponsoring
Members and their Sponsored Members may present to it. As discussed
above, where FICC identifies risks (whether via the due diligence
process or otherwise), FICC can impose supplemental financial
requirements on a Sponsoring Member, an Excess Capital Premium charge
(where applicable), and activity limits.\63\ Therefore, FICC states
that that its existing risk management practices with respect to the
Sponsored Service, which do not rely on the QIB Requirement, are
sufficiently effective.\64\
---------------------------------------------------------------------------
\59\ See Notice of Filing, supra note 5, at 89 FR 21371.
\60\ See GSD Rule 3A, supra note 15.
\61\ See id.
\62\ See id.
\63\ See supra notes 53, 54, and 55.
\64\ See Notice of Filing, supra note 5, 89 FR 21371.
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3. Clarify Eligibility Criteria for Non-U.S. and Other Applicants
Changes Regarding Non-U.S. Applicants
Currently, a Foreign Person applying to be a Netting Member must
meet the eligibility criteria for the distinct
[[Page 93788]]
Netting Member category of ``Foreign Netting Members.'' \65\ In
contrast with the eligibility criteria for other Netting Member
categories, the eligibility criteria for Foreign Netting Members in
Section 3(a)(v) of GSD Rule 2A do not specify or reference eligible
types of legal entities.\66\ Instead, Section 4(b)(ii)(E) of GSD Rule
2A provides FICC the authority to set minimum financial requirements
for Foreign Netting Member applicants.\67\ Additionally, Section 3(b)
of GSD Rule 2A currently states that an entity can only be one category
of Netting Member at a time.\68\ Thus, a Foreign Person that is the
foreign equivalent of, for example a Registered Investment Company,
which is a legal entity recognized in the GSD Rules for U.S. entities,
would apply to be a Foreign Netting Member, and would be subject to the
eligibility criteria, other membership qualifications, and ongoing
minimum membership standards applicable to Foreign Netting Members.\69\
However, the GSD Rules also contain specific eligibility criteria,
other membership qualifications, and ongoing minimum membership
standards applicable to, in this example, Registered Investment Company
Netting Members.\70\ Therefore, in this example, the current GSD Rules
are unclear as to whether the applicant entity would only be subject to
the Foreign Netting Member standards or would also be subject to the
Registered Investment Company Netting Member standards.\71\
---------------------------------------------------------------------------
\65\ See GSD Rule 2A, supra note 15.
\66\ See id.
\67\ See id.
\68\ See id.
\69\ See Notice of Filing, supra note 5, 89 FR at 21372.
\70\ See Notice of Filing, supra note 5, 89 FR at 21372.
\71\ See id. FICC states that such ambiguity can have meaningful
implications; for example, a Registered Investment Company Netting
Member is excluded from certain requirements under the GSD Rules,
and, therefore, if a Registered Investment Company that is a Foreign
Person applied, and was approved, to be a Foreign Netting Member, it
would not be clear if the applicable exclusions should apply to this
Foreign Netting Member Applicant. See id.
---------------------------------------------------------------------------
To avoid this ambiguity, FICC proposes to eliminate the category of
``Foreign Netting Member'' and expand the qualifications for each
category of Netting Member to include the foreign equivalent of the
same legal entity types.\72\ Foreign Persons that are eligible to apply
to be a Netting Member would be subject to both the minimum membership
standards of the applicable Netting Member category as well as the
eligibility criteria currently applicable to Foreign Netting Members,
currently set forth in Section 3(a)(v) of GSD Rule 2A.\73\ In making
the determination of whether a Foreign Person is an equivalent legal
entity to the domestic legal entities that qualify for a category of
Netting Member, FICC would consider, for example, the applicant's
business model and its regulatory framework and designated examining
authority. Therefore, the Proposed Rule Change would provide that a
Foreign Person shall be eligible to become a Netting Member if either
(1) it qualifies for one of the existing categories of Netting Member,
or (2) FICC determines that the applicant may apply in the same way as
an applicant that does not qualify under an existing category of
Netting Member, as discussed with respect to ``Changes Regarding Other
Applicants'' below.
---------------------------------------------------------------------------
\72\ In making the determination of whether a Foreign Person is
an equivalent legal entity to one of the domestic legal entities
that qualify for a category of Netting Member, FICC would consider,
for example, the applicant's business model and its regulatory
framework and designated examining authority. See Notice of Filing,
supra note 5, at 89 FR 21372.
\73\ See GSD Rule 2A, Section 3(a)(v) (providing that a person
may be eligible to apply to be a Foreign Netting Member if it ``(i)
has a home country regulator that has entered into a memorandum of
understanding with the SEC regarding the sharing or exchange of
information, and (ii) maintains a presence in the United States,
either directly or through a suitable agent, that both has available
individuals fluent in English who are knowledgeable in the Foreign
Person's business and can assist the Corporation's representatives
as necessary, and ensures that the Foreign Person will be able to
meet its data submission, settlement, and other obligations to the
Corporation as a Member in a timely manner.'') and Section
4(b)(ii)(E) (specifying the minimum financial requirements for an
applicant to be a Foreign Netting Member), supra note 15.
---------------------------------------------------------------------------
Foreign Persons that are eligible to apply to be a Netting Member
would be subject to both the minimum membership standards of the
applicable Netting Member category and the eligibility criteria
currently applicable to Foreign Netting Members, currently set forth in
Section 3(a)(v) of Rule 2A. Where an applicable Netting Member category
is subject to membership qualifications that are inconsistent with the
qualifications applicable to a Foreign Person, then the standards
applicable to a Foreign Person would apply. Although this could lead to
an approach where a Foreign Person applicant remains subject to home
jurisdiction requirements that are different than the requirements
applicable to other Netting Members, FICC states that that this is
acceptable because, as discussed further below, the GSD Rules would
still provide that FICC will continue to apply the membership standards
that were designed specifically to address the risks that may not be
present when an applicant is not domiciled in the U.S. and whose
primary regulator is not U.S.-based.\74\
---------------------------------------------------------------------------
\74\ See Notice of Filing, supra note 5, 89 FR at 21372.
---------------------------------------------------------------------------
Changes Regarding Other Applicants
Additionally, FICC proposes to clarify the eligibility criteria for
applicants that do not fit into one of the existing Netting Member
categories. In light of the adoption of the Treasury Clearing Rules,
additional market participants will need to access FICC's clearance and
settlement services, either as direct Netting Members or as indirect
participants. However, under the current GSD Rules, FICC does not have
the authority to consider a Netting Member applicant that does not meet
the eligibility criteria of one of the Netting Member categories
enumerated in the GSD Rules. Therefore, FICC proposes amendments to the
GSD Rules that would provide a framework for FICC to consider an
applicant, including a Foreign Person, to be a Netting Member if that
applicant does not meet the eligibility criteria of one of the existing
Netting Member categories.
Specifically, the Proposed Rule Change would first require that an
applicant submit an application questionnaire and other initial
application materials that demonstrate to FICC that the applicant's
business and capabilities are such that it could reasonably expect
material benefit from direct access to FICC's services. FICC proposes
to establish minimum membership standards, including financial and
other qualifications for membership, as it may determine are reasonable
and appropriate based on information provided by or concerning such an
applicant. FICC's determination of the minimum membership standards to
apply to that applicant would be based on the risk profile of the
applicant, as determined by FICC, and information related to (i) the
applicant's business model, (ii) its regulatory framework and
designated examining authority, (iii) its organizational structure and
risk management framework, and (iv) its anticipated use of the
Corporation's services.
FICC states that it cannot reliably predict which types of legal
entities will apply for direct membership or predict the risk profiles
of those entities.\75\ The proposed changes would provide FICC with the
necessary flexibility to consider any potential applicants, including
legal entities that do not fit into its current Netting Member
[[Page 93789]]
categories.\76\ FICC states that these proposed changes would
facilitate access to GSD's clearing services to a broader range of
market participants.\77\
---------------------------------------------------------------------------
\75\ See Notice of Filing, supra note 5, at 89 FR 21373.
\76\ See id.
\77\ See id.
---------------------------------------------------------------------------
4. Other Proposed Changes
FICC proposes changes to the GSD Rules generally designed to
describe the criteria and related requirements regarding direct and
indirect access to GSD's clearance and settlement services. FICC states
that these proposed changes should enhance the ability of market
participants, and in particular indirect participants, to understand
and evaluate the comparative tradeoffs of using GSD's central clearing
services depending on the relevant access model.\78\
---------------------------------------------------------------------------
\78\ See id.
---------------------------------------------------------------------------
Specifically, FICC proposes to include a ``road map'' in the GSD
Rules describing the various GSD access models that allow for both
direct and indirect access to GSD's clearance and settlement services.
In addition, to simplify the description of eligibility requirements in
GSD Rule 2A, FICC proposes to move the definitions of the Netting
Member Categories from GSD Rule 2A to the defined terms in GSD Rule 1.
FICC further proposes to remove definitions which are only used once in
the GSD Rules and replace those uses with the defined terms, meaning
that it would remove stand-alone definitions that are used only once
and instead fold the one-time definition into broader context within
the GSD Rules.\79\ FICC proposes to clarify eligibility criteria for
FCM Netting Members to require membership in the National Futures
Association. Additionally, FICC proposes to make several grammatical
and other non-substantive changes to the GSD Rules to streamline,
clarify, and simplify the GSD access models, related definitions, and
other relevant provisions.\80\
---------------------------------------------------------------------------
\79\ For example, the GSD Rules currently contain a definition
for Inter-Dealer Broker which is used only, in turn, to define an
Inter-Dealer Broker Netting Member. The revisions would collapse the
definition of an Inter-Dealer Broker into the description of an
Inter-Dealer Broker Netting Member.
\80\ See Notice of Filing, supra note 5, 89 FR at 21374-75.
---------------------------------------------------------------------------
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act \81\ directs the Commission
to approve a proposed rule change of a self-regulatory organization if
it finds that such proposed rule change is consistent with the
requirements of the Exchange Act and rules and regulations thereunder
applicable to such organization. After carefully considering the
Proposed Rule Change,\82\ the Commission finds that the Proposed Rule
Change is consistent with the requirements of the Exchange Act and the
rules and regulations thereunder applicable to FICC. In particular, the
Commission finds that the Proposed Rule Change is consistent with
Sections 17A(b)(3)(F) \83\ and (b)(3)(I) \84\ of the Exchange Act and
Rules 17ad-22(e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii)
thereunder.\85\
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\81\ 15 U.S.C. 78s(b)(2)(C).
\82\ 17 CFR 240.17ad-22(e)(18)(iii), (e)(18)(iv)(C), (e)(19),
and (e)(23)(ii).
\83\ 15 U.S.C. 78q-1(b)(3)(F).
\84\ 15 U.S.C. 78q-1(b)(3)(I).
\85\ As part of the Commission's process of analyzing the
Proposed Rule Change for consistency with the Exchange Act and rules
and regulations thereunder, the Commission carefully considered the
public comment letters. Many of the comment letters were submitted
in response to both the Proposed Rule Change and a related set of
proposed rule changes (see Securities Exchange Act Release No. 99845
(Mar. 22, 2024), 89 FR 21603 (Mar. 28, 2024) (File No. SR-FICC-2024-
802) and Securities Exchange Act Release No. 99844 (March 22, 2024),
89 FR 21586 (Mar. 28, 2024) (File No. SR-FICC-2024-007)). On October
25, 2024, FICC filed Partial Amendment No. 1 to the related set of
proposed rule changes (see Securities Exchange Act Release No.
101455 (Oct. 28, 2024), 89 FR 87449 (Nov. 1, 2024) (File No. SR-
FICC-2024-802) and Securities Exchange Act Release No. 101454 (Oct.
28, 2024), 89 FR 87441 (Nov. 1, 2024) (File No. SR-FICC-2024-007)
(together, the ``Account Segregation Proposals'')). The comment
letters generally did not specify which individual comments relate
to the Proposed Rule Change as opposed to the Account Segregation
Proposals. In the instant Order, the Commission addresses the
comments related to the Proposed Rule Change. In a separate Order,
the Commission addresses the comments related to the Account
Segregation Proposals.
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act \86\ requires that the
rules of a clearing agency, such as FICC, be designed to, among other
things, promote the prompt and accurate clearance and settlement of
securities transactions, and protect investors and the public interest.
---------------------------------------------------------------------------
\86\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above in Section I.B., FICC proposes changes to the
GSD Rules that are designed to encourage and facilitate a greater
number of market participants to utilize GSD's clearance and settlement
services for transactions in U.S. Treasury securities, including for
done-with and done-away transactions. Specifically, as described in
Section I.B.1, FICC's consolidation of the correspondent clearing/prime
broker services into the Agent Clearing Service and the substantially
increased level of detail about how this service operates should allow
for a better understanding of the availability of this model at
FICC.\87\ By updating and expanding the Agent Clearing Service to more
closely resemble the nomenclature and functioning of an FCM-style
model, the Proposed Rule Change should better present the Agent
Clearing Service as a viable method for market participants to consider
for clearing transactions in U.S. Treasury securities. The new
terminology should help to show that the Agent Clearing Service
operates similarly to agent clearing models in cleared derivatives
markets, where market participants execute transactions with third
parties and then give them up to their futures commission merchant for
clearing.
---------------------------------------------------------------------------
\87\ See DTCC White Paper, Looking to the Horizon: Assessing a
Potential Expansion of U.S. Treasury Central Clearing (Sept. 2023)
(``2023 DTCC White Paper'') at 9, available at <a href="https://www.dtcc.com/-/media/Files/Downloads/WhitePapers/Accessing-Potential-Expansion-US-Treasury-Clearing-White-Paper.pdf">https://www.dtcc.com/-/media/Files/Downloads/WhitePapers/Accessing-Potential-Expansion-US-Treasury-Clearing-White-Paper.pdf</a>.
---------------------------------------------------------------------------
Further, the increased specificity regarding the functioning of the
Agent Clearing Service should help market participants better evaluate
its fitness for their individual needs. The current GSD Rules do not
describe a Submitting Member as an agent for an Executing Firm or as
submitting given up transactions to FICC for clearing, and the current
GSD Rules present only limited information about how the service
functions. By contrast, the expanded rules regarding the Agent Clearing
Service makes clear how the Agent Clearing Service would function. It
addresses various topics, including the qualifications of Agent
Clearing Members and the application process, what an Executing Firm
Customer is and what information an Agent Clearing Member must provide
to FICC regarding its Executing Firm Customers (including confirmation
that there is an agreement binding the Executing Firm Customer to the
applicable GSD Rules and that the Executing Firm Customer agrees to the
specified Executing Firm Customer Acknowledgments, what transactions
may be submitted through the service, the rights and obligations of the
Agent Clearing Member, and how transactions are addressed in the event
of a default or non-default loss event. These changes substantially
expand the description of how this service functions beyond the limited
and high-level information currently in the GSD Rules. The Commission
understands that, based on a survey conducted by FICC, a significant
number (28 percent) of Netting Member survey respondents have already
indicated that they expect to facilitate clearing transactions in U.S.
Treasury securities using their existing prime brokerage, agency
clearing, or
[[Page 93790]]
FCM business units currently used for clearing listed and over-the-
counter derivatives.\88\
---------------------------------------------------------------------------
\88\ See FICC Letter at 5-6, 11 (citing DTCC White Paper, The
U.S. Treasury Clearing Mandate: An Industry Pulse Check (July 2024)
(``2024 DTCC White Paper'') at 6, available at <a href="https://www.dtcc.com/-/media/WhitePapers/Treasury-Clearing-Mandate.pdf">https://www.dtcc.com/-/media/WhitePapers/Treasury-Clearing-Mandate.pdf</a>).
---------------------------------------------------------------------------
The changes regarding the Agent Clearing Service should help
facilitate market participants' ability to access central clearing by
providing more detail about how the service functions and, potentially,
allowing market participants to leverage existing policies and
practices used for other agent clearing models to clear other types of
products. In addition, the changes would provide FICC with increased
ability to risk manage and monitor the Agent Clearing Transactions
because it would require additional information on Executing Firm
Customers and the use of an Agent Clearing Omnibus Account. These
changes should therefore help promote prompt and accurate clearance and
settlement and protect investors and the public interest.
Additionally, FICC's proposals to streamline and clarify certain
aspects of its membership standards would remove entry barriers and
make it easier for market participants to utilize the Sponsored
Service. First, as described above in Section I.B.2., the Proposed Rule
Change would enable additional market participants to become Sponsoring
Members by removing capital requirements and eliminating other
distinctions between the two existing categories of Sponsoring Members.
Second, the Proposed Rule Change would enable additional market
participants to become Sponsored Members by removing the QIB
Requirement. These changes should allow FICC to streamline the
Sponsored Service and improve its accessibility to potential Sponsoring
and Sponsored Members, while still allowing FICC to appropriately risk
manage transactions cleared through the Sponsored Service. Therefore,
this aspect of the Proposed Rule Change should facilitate greater
participation in the Sponsored Service and, therefore, in central
clearing more generally, subject to appropriate risk management at
FICC, which is consistent with both promoting prompt and accurate
clearance and settlement and the protection of investors and the public
interest.
The Proposed Rule Change, as described in Section I.B.3, would also
facilitate broader market participation in GSD by streamlining and
clarifying the Netting Member eligibility criteria applicable to
Foreign Persons and applicants that do not otherwise fit into one of
the existing categories of Netting Member and would establish an
application process for such entities that allows FICC to consider any
applicant and the potential risk that it could bring to FICC. FICC's
membership requirements are part of its overall risk management because
membership requirements help to guard against defaults of any FICC
member, as well as to protect FICC and the financial system as a whole
from the risk that one member's default could cause others to default,
potentially including FICC itself.
Additionally, FICC's proposals to add new provisions to the GSD
Rules that more clearly describe the various direct and indirect GSD
access models, and otherwise clarify the GSD Rule provisions regarding
the GSD access models, would provide greater transparency on those
subjects to market participants, and thereby enable market participants
to more accurately and efficiently evaluate which model best fits their
business needs.
Finally, as described above in Section I.B.4., FICC proposes to
make several grammatical and other non-substantive changes to the GSD
Rules to streamline, clarify, and simplify the GSD access models,
related definitions, and other relevant provisions.
The Proposed Rule Change would encourage and facilitate greater
participation in central clearing, while still providing sound risk
management which would promote the prompt and accurate clearance and
settlement of securities transactions, and would protect investors and
the public interest. As the Commission explained when adopting the
Treasury Clearing Rules, U.S. Treasury securities play a critical and
unique role in the U.S. and global economy, serving as a significant
investment instrument and hedging vehicle for investors, a risk-free
benchmark for other financial instruments, and an important mechanism
for the Federal Reserve's implementation of monetary policy.\89\
Consequently, confidence in the U.S. Treasury market, and in its
ability to function efficiently is critical to the stability of the
global financial system. In central clearing, through novating
transactions (i.e., becoming the counterparty to both sides of a
transaction), a CCP addresses concerns about counterparty risk by
substituting its own creditworthiness and liquidity for the
creditworthiness and liquidity of the counterparties.\90\ A CCP thereby
enables market participants to effectively reduce costs, increase
operational efficiency, and manage risks.\91\ Moreover, a CCP provides
a centralized system of default management that can mitigate the
potential for a single market participant's failure to destabilize
other market participants or the financial system more broadly.\92\ The
Commission adopted the Treasury Clearing Rules, in part, to help reduce
contagion risk to the CCP and bring the benefits of central clearing to
more transactions involving U.S. Treasury securities, thereby lowering
overall systemic risk in the market.\93\
---------------------------------------------------------------------------
\89\ See Adopting Release, supra note 14, 89 FR at 2715-17.
\90\ See Adopting Release, supra note 14, 89 FR at 2716.
\91\ See id. (citing Covered Clearing Agency Standards Proposing
Release, Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR
29507, 29587 (May 27, 2014) (``CCA Standards Proposing Release'')).
\92\ See Adopting Release, supra note 14, 89 FR at 2716 (citing
Order Granting Temporary Exemptions Under the Securities Exchange
Act of 1934 in Connection with Request of Liffe Administration and
Management and Lch.Clearnet Ltd. Related to Central Clearing of
Credit Default Swaps, and Request for Comments, Exchange Act Release
No. 59164 (Dec. 24, 2008), 74 FR 139, 140 (Jan. 2, 2009) (``Liffe
Order'')).
\93\ See Adopting Release, supra note 14, 89 FR at 2716 (citing
Proposing Release, Standards for Covered Clearing Agencies for U.S.
Treasury Securities and Application of the Broker-Dealer Customer
Protection Rule With Respect to U.S. Treasury Securities, Exchange
Act Release No. 95763 (Sept. 14, 2022), 87 FR 64610, 64614 (Oct. 25,
2022) (``Proposing Release'')).
---------------------------------------------------------------------------
CCP rules that are clear and comprehensible, increase operational
efficiency, and more effectively manage risks, like the Proposed Rule
Change, should encourage a broader scope of market participants to
utilize the CCP's services, thereby promoting the prompt and accurate
clearance and settlement of securities transactions, and protecting
investors and the public interest, consistent with Section 17A(b)(3)(F)
of the Exchange Act. The Proposed Rule Change is consistent with those
objectives because it encourages and supports greater participation in
GSD's central clearing services for different types of market
participants and transactions. Accordingly, the Proposed Rule Change
would promote the prompt and accurate clearance and settlement of
securities transactions, and protect investors and the public interest,
because by encouraging greater participation in central clearing, the
proposals would extend the benefits of operational efficiency and risk
management to a greater segment of the U.S. Treasury securities market.
For these reasons, the Proposed Rule Change is consistent with the
[[Page 93791]]
requirements of Section 17A(b)(3)(F) of the Exchange Act.\94\
---------------------------------------------------------------------------
\94\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Section 17A(b)(3)(I) of the Exchange Act
Section 17A(b)(3)(I) of the Exchange Act requires that the rules of
a clearing agency, such as FICC, do not impose any burden on
competition not necessary or appropriate in furtherance of the Exchange
Act.\95\ Section 17A(b)(3)(I) does not require the Commission to make a
finding that FICC chose the option that imposes the least possible
burden on competition. Rather, the Exchange Act requires that the
Commission find that the Proposed Rule Change does not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act, which involves balancing the
competitive effects of the Proposed Rule Change against all other
relevant considerations under the Exchange Act.\96\
---------------------------------------------------------------------------
\95\ 15 U.S.C. 78q-1(b)(3)(I).
\96\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105
(D.C. Cir. 1978).
---------------------------------------------------------------------------
Several commenters suggest that the Proposed Rule Change's failure
to include a requirement that FICC's direct participants offer done-
away clearing services would not sufficiently provide for a workable
done-away model.\97\ For example, one commenter states that it does not
expect Netting Members to offer done-away trading via the Agent
Clearing Model (which would effectively result in clearing members
surrendering potentially lucrative commissions from trade execution to
other brokers).\98\ This commenter further states that the Proposed
Rule Change does not address this or otherwise provide any other
mechanism to properly align Netting Members' incentives with the goal
of facilitating done-away trading.\99\ Another commenter states that
the Proposed Rule Change ``ignores the current reality'' in which the
commenter is not aware of any clearing member currently offering done-
away clearing to its customers for either cash or repo transactions and
the Proposed Rule Change fails to explain why done-with and done-away
transactions continue to be treated differently given that a clearing
member should be agnostic about with whom a trade is executed, as the
counterparty of a cleared trade is FICC (i.e., not the executing
counterparty).\100\ This commenter states that FICC has not explained
the justification for treating done-with and done-away transactions
differently and why it has elected to continue to permit its clearing
members to require all customers to bundle execution and clearing in
these models.\101\ Another commenter states that there remain serious
questions whether Netting Members view offering done-away services as
practicable from a regulatory net capital perspective and whether a
sufficient number of Netting Members will provide clearing services on
a standalone basis, as opposed to bundling execution and clearing.\102\
---------------------------------------------------------------------------
\97\ See Letter from William C. Thum, Managing Director and
Assistant General Counsel, Securities Industry and Financial Markets
Association, Asset Management Group (May 24, 2024) (``SIFMA-AMG
Letter'') at 5; Letter from Joanna Mallers, Secretary, Futures
Industry of America, Principal Traders Group (April 17, 2024)
(``FIA-PTG Letter I'') at 2-3, 6-7; Letter from Sarah A. Bessin,
Deputy General Counsel and Nhan Nguyen, Associate General Counsel,
Investment Company Institute (June 20, 2024) (``ICI Letter'') at 2,
4-5; Letter from Jennifer W. Han, Executive Vice President, Chief
Counsel and Head of Global Regulatory Affairs, Managed Funds
Association (April 17, 2024) (``MFA Letter I'') at 4-5, 7-8; Letter
from Jennifer W. Han, Executive Vice President, Chief Counsel and
Head of Global Regulatory Affairs, Managed Funds Association (Nov.
12, 2024) (``MFA Letter II'') at 3-4; see also Letter from Jiri
Krol, Deputy Chief Executive Officer, Global Head of Government
Affairs, Alternative Investment Management Association (April 23,
2024) (``AIMA Letter'') at 4-5 (stating that not addressing the
done-away problem leaves a critical gap in access to clearing and
settlement service and places significant competitive burdens on
indirect participants).
\98\ See SIFMA-AMG Letter at 5.
\99\ See id.
\100\ See FIA-PTG Letter I at 3.
\101\ See id.; see also MFA Letter II at 3-4.
\102\ See ICI Letter at 4-5.
---------------------------------------------------------------------------
As a solution to the foregoing concerns, the commenters state that
FICC should require Netting Member intermediaries (i.e., Sponsoring
Members and Agent Clearing Members) to offer done-away clearing to
their customers.\103\
---------------------------------------------------------------------------
\103\ See FIA-PTG Letter I at 3-4; MFA Letter I at 4-5, 7-8;
AIMA Letter at 4-5; SIFMA-AMG Letter at 2; ICI Letter at 2, 4-5.
Commenters also state that by not including a requirement on Netting
Member intermediaries to offer done-away clearing to their
customers, the Proposed Rule Change does not adequately facilitate
access for such customers to FICC's clearance and settlement
services, consistent with Rule 17ad-22(e)(18)(iv)(C). See 17 CFR
240.17ad-22(e)(18)(iv)(C). The Commission addresses those comments
below in Section II.D.
---------------------------------------------------------------------------
In contrast to these commenters, one commenter states that a
mandate from FICC is not a necessary condition for a viable done-away
access model.\104\ Instead, the commenter states that a Netting
Member's decision to provide done-away services--or any services--to
market participants is, and should remain, a commercial and risk
decision of each member, and that such commercial arrangements should
not be mandated by rule or otherwise.\105\ The commenter further states
that mandating the provision of done-away services could compromise the
goals of the Treasury Clearing Rules by making the access models less
attractive from a business perspective to Netting Members and cause
Netting Members to limit the offerings they do make to customers if
doing so would mandate other commercial arrangements or transactions
that they may not wish to engage in.\106\
---------------------------------------------------------------------------
\104\ See Letter from Robert Toomey, Head of Capital Markets,
Managing Director/Associate General Counsel, SIFMA, at 3-4 (July 31,
2024) (``SIFMA Letter II'').
\105\ See SIFMA Letter II at 2.
\106\ See id.
---------------------------------------------------------------------------
In response, FICC states that requiring Netting Member
intermediaries to offer done-away clearing services to customers could
expose FICC and its participants to additional risks and other
challenges that could limit the commercial and risk management choices
an intermediary could consider in offering clearing services, which in
turn could reduce the number of market participants willing to provide
such services.\107\ FICC further states that such a contraction in the
availability of direct participants providing clearing services would
result in concentration of risk, increased costs, and reduced liquidity
in the Treasury market.\108\ Additionally, FICC states that unlike
done-with clearing, done-away clearing presents unique liquidity risks
to both FICC and Netting Member intermediaries.\109\ For FICC, if a
customer's Netting Member intermediary defaults, FICC would be
obligated to perform the one-sided obligations of the done-away
transactions of the customer and would need liquidity to do so.\110\
For Netting Member intermediaries, done-away transactions would
increase the maximum liquidity a Netting Member may be required to
provide to FICC under the Capped Contingency
[[Page 93792]]
Liquidity Facility (``CCLF''), increasing the cost of clearing done-
away transactions.\111\
---------------------------------------------------------------------------
\107\ See FICC Letter at 11.
\108\ See id.
\109\ See FICC Letter at 11-14.
\110\ See FICC Letter at 11-12. FICC also states that, by
contrast, in a done-with transaction, the customer enters into the
transaction with its clearing member, and that, if the clearing
member then defaults, the clearing agency has the option to close
out both the obligations to the clearing member and those to the
customer (i.e., ``both sides of the trade''), with the sole
resulting payment obligation being the mark-to-market value of the
positions. See id. at 12. One commenter states that it is
``inaccurate'' that done-away transactions have greater liquidity
risks, but the commenter does not disagree with FICC's description
of these liquidity concerns, and instead states that this
distinction highlights a deficiency of FICC's current default
management framework. See Letter from Stephen Berger, Managing
Director, Global Head of Government & Regulatory Policy, Citadel and
Citadel Securities, (Oct. 21, 2024) (``Citadel Letter'') at 5; see
also MFA Letter II at 3-4. The concerns regarding the default
management framework are discussed in Section II.D.6 infra.
\111\ See FICC Letter at 12, 14. The CCLF is a member-funded,
rules-based, committed liquidity resource, designed to enable FICC
to meet its cash settlement obligations in the event of a default of
the member (including affiliates) to which FICC has the largest
exposure in extreme but plausible market conditions. FICC allocates
$15 billion of the total size of the CCLF among all members. FICC
allocates the remainder of the total size of the CCLF among members
depending on the amount and frequency with which they generate
liquidity needs above $15 billion. See GSD Rule 22A, Section 2a,
supra note 15.
---------------------------------------------------------------------------
FICC also states that since done-away transactions are negotiated
between a customer and its counterparty, the Netting Member
intermediary must rely on external parties and/or processes to confirm
that a transaction is consistent with the Netting Member's risk limits
and regulatory requirements.\112\ Therefore, FICC states that imposing
a done-away mandate on Netting Members that lack the infrastructure to
perform such confirmations could discourage market participants from
providing clearing services to customers.\113\ FICC also states that
done-away clearing might subject Netting Member intermediaries to
certain regulatory challenges (e.g., regarding trade reporting and
confirmations) and/or increased capital requirements (since it may be
difficult to conclude that they have a well-founded basis on which they
can exercise close-out netting rights upon a customer default).\114\
FICC states that in light of the foregoing risks and challenges, a
done-away mandate could have the unintended consequence of discouraging
Netting Member intermediaries from providing clearing services to
customers, which would concentrate risk, increase costs, and reduce
liquidity in the Treasury market.\115\ Instead of a done-away mandate,
FICC states that Netting Member intermediaries should be allowed to
decide whether and how to provide clearing services to customers after
evaluating the relevant risks.\116\
---------------------------------------------------------------------------
\112\ See FICC Letter at 12-13.
\113\ See id.
\114\ See FICC Letter at 14.
\115\ See FICC Letter at 11.
\116\ See FICC Letter at 5-6, 11. FICC states that for Netting
Members (both current and prospective) with business units already
engaged in FCM-style derivatives clearing, the ability to leverage
their existing systems should enable them to offer done-away
clearing for transactions in U.S. Treasury securities. See also FICC
Letter at 7, 9 (citing 2024 DTCC White Paper supra note 88 at 6
(noting a significant number (28 percent) of Netting Members
indicated that they expect to facilitate clearing transactions in
U.S. Treasury securities through business units already engaged in
done-away clearing of other product types and citing statements from
Netting Members and other market participants indicating an intent
to utilize their existing FCM-style systems to offer done-away
clearing for U.S. Treasury securities and citing statements from
Netting Members and other market participants indicating an intent
to utilize their existing FCM-style systems to offer done-away
clearing for U.S. Treasury securities)).
---------------------------------------------------------------------------
As proposed, the GSD access models, including the ability to bundle
execution and clearing, do not constitute a burden on competition that
is not necessary or appropriate in furtherance of the Exchange Act,
because the models continue to offer optionality for different types of
market participants to access central clearing in different ways. After
proposing the Treasury Clearing Rules,\117\ the Commission received
similar comments regarding the impact that the absence of a done-away
mandate would have on competition for GSD's indirect participants.\118\
At that time, the Commission disagreed with those comments and declined
to impose a done-away mandate and did not agree that FICC's current
access models constituted a burden on competition that is not necessary
or appropriate in furtherance of the Exchange Act.\119\ Notably, the
client clearing models that FICC has proposed allow for Netting Members
to offer done-away services. Although the models have not been widely
used for done-away services to date, market participants have indicated
that they will provide such services going forward.\120\ In addition,
as the Commission stated in the Treasury Clearing Adopting Release, in
order to encourage Netting Member intermediaries to provide services
that enable customers to access central clearing, it is best not to
remove the ability of such intermediaries to determine which risks to
take with respect to guaranteeing transactions to a CCP.\121\ As FICC
and one commenter highlighted, providing done-away clearing services
brings certain risks to the Netting Member, which the Netting Member
must evaluate and manage. Finally, approving the Proposed Rule Change
does not preclude further action by FICC to incentivize or facilitate
done-away clearing services going forward.
---------------------------------------------------------------------------
\117\ See Covered Clearing Agency Standards Proposing Release,
Securities Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR
29507 (May 27, 2014) (``Proposing Release''); Adopting Release at
2756-57, supra note 14 (regarding comments arguing that the
Commission should require FICC obligate its members to accept done-
away transactions to avoid an undue burden on competition).
\118\ See Adopting Release at 2756-57, supra note 14.
\119\ See id.
\120\ See FICC Letter at 8 (reporting survey results that 43
percent of Netting Members would likely clear indirect participant
transactions through the Agent Clearing Service). See also, e.g.,
Bernard Goyder, ``BNY to Launch `Done Away' UST and Repo Clearing
Service,'' available at <a href="https://www.risk.net/markets/7960175/bny-to-launch-done-away-ust-and-repo-clearing-service">https://www.risk.net/markets/7960175/bny-to-launch-done-away-ust-and-repo-clearing-service</a> (Oct. 21, 2024);
Bernard Goyder, ``RJ O'Brien Plots Expansion Into US Treasury
Clearing,'' available at <a href="https://www.risk.net/markets/7959638/rj-obrien-plots-expansion-into-us-treasury-clearing">https://www.risk.net/markets/7959638/rj-obrien-plots-expansion-into-us-treasury-clearing</a> (July 1, 2024).
\121\ See Adopting Release at 2756-57, supra note 14.
---------------------------------------------------------------------------
In addition, commenters state that the Proposed Rule Change should
prohibit bundling of clearing and execution services. One commenter
states that this prohibition need not include a done-away mandate, as
it would simply prohibit Netting Members from requiring forced
bundling, and the commenter also disagrees with FICC's legal arguments
regarding whether FICC may impose such a prohibition.\122\ An
additional commenter states that there are economic incentives for
direct participants to bundle their execution and clearing services by
favoring done-with transactions.\123\ This commenter cites certain
prohibitions adopted by the Commodity Futures Trading Commission
(``CFTC'') and states that FICC should adopt the same protections for
the U.S. Treasury market, as necessary to ensure a robust done-away
clearing market.\124\
---------------------------------------------------------------------------
\122\ See Citadel Letter at 8.
\123\ See MFA Letter I at 5.
\124\ See id.
---------------------------------------------------------------------------
In response to such comments, FICC states that such a prohibition
would effectively mean that a Netting Member could not charge lower
fees for done-with clearing because that would amount to tying
executing to clearing, and, as a result, could be viewed as the
clearing agency dictating pricing terms.\125\ FICC further states that
such setting of prices is not clearly consistent with Section
17A(b)(3)(E) of the Exchange Act, which provides that the rules of a
clearing agency may not impose any schedule of prices, or fix rates or
other fees, for services rendered by its participants.\126\
---------------------------------------------------------------------------
\125\ See FICC Letter at 15.
\126\ See FICC Letter at 15-16. One commenter states that FICC
also relied upon Section 17A(b)(6) regarding a prohibition on
bundling and execution. See Citadel Letter at 8. However, FICC's
reference to that statutory provision relates to a comment that
would require done-away clearing services to any customer that posts
margin and not to the bundling of execution and clearing services.
---------------------------------------------------------------------------
The Commission considered similar comments regarding a prohibition
of bundling and clearing when it adopted the Treasury Clearing
Rules.\127\ Specifically, several commenters stated that the Commission
should require
[[Page 93793]]
U.S. Treasury securities central clearing agencies to obligate their
members to accept done-away transactions and prohibit their members
from requiring clients to bundle execution and clearing.\128\ In
response, the Commission stated that it disagrees that the failure to
require the submission of done-away transactions necessarily
constitutes ``unfair discrimination,'' as discussed in Section
17A(b)(3)(F).\129\ In order to encourage market participants to provide
services to enable indirect access to central clearing, the Commission
stated that it believes it is best not to remove the ability of FICC's
direct participants to determine what risks to take with respect to
guaranteeing customer transactions. In addition, the Commission also
did not agree that, at that time, the current access models offered by
FICC constitute a burden on competition that is not necessary or
appropriate, as discussed in Section 17A(b)(3)(I).\130\ The
Commission's analysis remains applicable to the commenters seeking such
a prohibition from FICC.
---------------------------------------------------------------------------
\127\ See Treasury Clearing Adopting Release, supra note 14, 89
FR at 2756-77 (including n. 415 identifying such comments). More
generally, the statutory authority for the CFTC provisions cited by
one commenter differs significantly from the statutory authority
applicable to the Commission for the U.S. Treasury market.
\128\ See Treasury Clearing Adopting Release, supra note 14, 89
FR at 2756.
\129\ See Treasury Clearing Adopting Release, supra note 14, 89
FR at 2757.
\130\ See Treasury Clearing Adopting Release, supra note 14, 89
FR at 2756-77.
---------------------------------------------------------------------------
For these reasons, after considering the public comments and FICC's
response, the access models in the Proposed Rule Change, which would
not prevent a Netting Member from bundling execution and clearing and
do not require a Netting Member to provide done-away clearing services
would not impose a burden on competition not necessary or appropriate
in furtherance of the Exchange Act.\131\
---------------------------------------------------------------------------
\131\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
C. Consistency With Rule 17ad-22(e)(18)(iii)
Rule 17ad-22(e)(18)(iii) under the Exchange Act requires that a
covered clearing agency, such as FICC, establish objective, risk-based,
and publicly disclosed criteria for participation, which monitor
compliance with such participation requirements on an ongoing
basis.\132\
---------------------------------------------------------------------------
\132\ 17 CFR 240.17ad-22(e)(4)(18)(iii).
---------------------------------------------------------------------------
As described above in Section I.B.1., FICC proposes changes that
would enable it to monitor activity submitted through the Agent
Clearing Service. Specifically, FICC would require a Netting Member to
submit an application to become an Agent Clearing Member and provide
additional information regarding each Executing Firm Customer beyond
that which is required for Executing Firms under the current GSD Rules,
such as a Legal Entity Identifier (``LEI''). FICC would also require an
Agent Clearing Member to submit activity on behalf of its Executing
Firm Customer(s) through one or more separate Agent Clearing Member
Omnibus Accounts, as opposed to the optional segregated submission
approach provided for in the current GSD Rules. Finally, for both
initial and ongoing membership purposes, FICC would require an Agent
Clearing Member to provide FICC with information related to its use of
the Agent Clearing Service. Adding these provisions to the GSD Rules
should help FICC monitor the trading activity generated withing the
Agent Clearing Service because they should allow FICC to better
understand which transactions are attributable to which Executing Firm
Customers submitting through an Agent Clearing Member, which should, in
turn, provide better overall understanding of market participants'
activity at FICC even across multiple Agent Clearing Members.
One commenter states that FICC should change its proposal regarding
the requirement on Agent Clearing Members to indemnify FICC for any
harm arising out of the Agent Clearing Member's failure to have the
current LEIs of its Executing Firm Customers on file with FICC.\133\
Specifically, the commenter states that FICC's proposal is overly broad
insofar as it would ostensibly require an Agent Clearing Member to halt
a customer's trading activity for minor lapses in LEI renewals and
require the Agent Clearing Member to verify current LEIs on any number
of LEI service provider websites.\134\ The commenter states that FICC
should not need to maintain such strict rules governing LEIs when other
identifying information accompanies each trade.\135\ Therefore, the
commenter states that FICC should more narrowly tailor the
indemnification provision to cover only relevant harms arising out of
an Agent Clearing Member's gross negligence, willful misconduct, or
fraudulent conduct.\136\
---------------------------------------------------------------------------
\133\ See Letter from Katherine Darras, General Counsel,
International Swaps and Derivatives Association (April 17, 2024)
(``ISDA Letter I'') at 5-6; Letter from Katherine Darras, General
Counsel, International Swaps and Derivatives Association (July 18,
2024) (``ISDA Letter II'') at 5.
\134\ See ISDA Letter II at 5.
\135\ See id.
\136\ See id.
---------------------------------------------------------------------------
In response, FICC states that, although the Agent Clearing Member
has a contractual relationship with its customers, FICC does not.\137\
Therefore, the Agent Clearing Member is able to include contract
provisions that obligate its customers to maintain current LEI
information and notify the Agent Clearing Member of any LEI renewals or
changes.\138\ FICC further states that although it does not generally
expect the LEI indemnification provision to give rise to significant
liability, neither FICC nor its other members should bear the costs of
any such liability.\139\
---------------------------------------------------------------------------
\137\ See FICC Letter at 41.
\138\ See id.
\139\ See id.
---------------------------------------------------------------------------
The Commission agrees with FICC on this point. The LEI portion of
the Proposed Rule Change is consistent with FICC's existing rule
regarding a Sponsoring Member's obligation to provide an LEI for its
Sponsored Members.\140\ Therefore, Sponsoring Members are already
subject to such a requirement. An Agent Clearing Member, like a
Sponsoring Member, should be able to contract with its Executing Firm
Customers to ensure that it receives updated LEI information to provide
to FICC. Neither FICC nor its other members should bear any liability
arising out of an Agent Clearing Member's failure to have the current
LEIs of its Executing Firm Customers on file with FICC.
---------------------------------------------------------------------------
\140\ See GSD Rules, Rule 3A, Section 2(d) (``Each Sponsoring
Member shall submit the Legal Entity Identifier for each of its
Sponsored Member applicants as part of the application of such
Sponsored Member applicant. Each Sponsoring Member shall provide the
Corporation with a Legal Entity Identifier for each of its Sponsored
Members such that the Corporation shall have a current Legal Entity
Identifier for each Sponsored Member at all times.'').
---------------------------------------------------------------------------
Accordingly, the Proposed Rule Change would assist FICC in
monitoring its participants' ongoing compliance with the Agent Clearing
Service participation requirements, consistent with Rule 17ad-
22(e)(18)(iii).\141\
---------------------------------------------------------------------------
\141\ 17 CFR 240.17ad-22(e)(18)(iii).
---------------------------------------------------------------------------
D. Consistency With Rule 17ad-22(e)(18)(iv)(C)
Rule 17ad-22(e)(18)(iv)(C) under the Exchange Act requires that a
covered clearing agency, such as FICC, when providing CCP services for
transactions in U.S Treasury securities, establish objective, risk-
based, and publicly disclosed criteria for participation, which ensure
that it has appropriate means to facilitate access to clearance and
settlement services of all eligible secondary market transactions in
U.S. Treasury securities, including those of indirect
participants.\142\
---------------------------------------------------------------------------
\142\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
FICC states that the Proposed Rule Change is primarily designed to
ensure that the access models in the GSD Rules comply with Rule 17ad-
22(e)(18)(iv)(C) by constituting criteria for participation
[[Page 93794]]
that facilitate access to GSD's clearance and settlement services,
including for indirect participants.\143\ Specifically, FICC developed
the Proposed Rule Change following FICC's review of GSD's existing
direct and indirect access models.\144\ That review examined whether
those models provide market participants with access to GSD's clearance
and settlement services in as flexible a means as possible, consistent
with FICC's responsibility to provide sound risk management and comply
with its regulatory risk management obligations under Rule 17ad-22(e)
and other parts of the Exchange Act.\145\
---------------------------------------------------------------------------
\143\ See Notice of Filing, supra note 5, at 89 FR 21363.
\144\ See id.
\145\ See 17 CFR 240.17ad-22(e); Notice of Filing, supra note 5,
at 89 FR 21363.
---------------------------------------------------------------------------
1. Changes to the Agent Clearing Service
As described above in Section I.B.1., FICC proposes to re-name
GSD's existing correspondent clearing/prime broker services as the
Agent Clearing Service. FICC also proposes to consolidate and adopt
additional provisions governing the re-named Agent Clearing Service.
The proposed changes to re-name, consolidate, and provide additional
specificity regarding the operation of the Agent Clearing Service
should improve transparency of the GSD Rules regarding the Agent
Clearing Service and allow market participants to better evaluate and
consider how the Agent Clearing Service operates, including how it
compares to existing cleared derivatives systems and infrastructure.
The refinement of the proposed Agent Clearing Service should help
ensure that market participants are able to evaluate and, if they
choose, use this service to access FICC, including for done-away
transactions, as discussed above in Section I.A. Therefore, these
proposed changes are consistent with Rule 17ad-22(e)(18)(iv)(C).
Several commenters request that FICC clarify that an Agent Clearing
Member would be permitted to treat its customer transactions as off-
balance sheet for accounting purposes, otherwise the Agent Clearing
Service may be so capital intensive as to disincentivize use of the
access model.\146\ In response, FICC states that it is actively working
with industry groups to determine the balance sheet impact of done-away
transactions.\147\
---------------------------------------------------------------------------
\146\ See FIA Letter at 5, 10-11; Letter from Robert Toomey,
Head of Capital Markets, Managing Director/Associate General
Counsel, SIFMA, at 3-4 (May 22, 2024) (``SIFMA Letter I'') at 2, 5;
SIFMA Letter II at 3. One commenter further states that if FICC can
provide clarity on this matter, it would negate the need for a done-
away clearing mandate in the GSD Rules. See SIFMA Letter I at 5.
\147\ See FICC Letter at 14.
---------------------------------------------------------------------------
It is ultimately the responsibility of each Netting Member to
determine the accounting treatment of its own transactions. FICC need
not opine on the balance sheet treatment for transactions within the
Agent Clearing Service in order for the Commission to evaluate the
Proposed Rule Change's consistency with Rule 17ad-
22(e)(18)(iv)(C).\148\
---------------------------------------------------------------------------
\148\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
Another commenter is concerned that the rights of Executing Firm
Customers are too limited vis-[agrave]-vis FICC within the Agent
Clearing Service.\149\ For example, the commenter states that under the
Proposed Rule Change, FICC would have no obligations to Executing Firm
Customers; rather, FICC's obligations would be solely to the Agent
Clearing Member.\150\
---------------------------------------------------------------------------
\149\ See ICI Letter at 4.
\150\ See id.
---------------------------------------------------------------------------
In the Notice of Filing, FICC states that within the current
correspondent clearing/prime broker services, an indirect participant
does not establish any relationship with FICC.\151\ FICC's proposed
changes regarding the Agent Clearing Service would not change that
aspect of the access model. In contrast, within the Sponsored Service,
a Sponsored Member must establish an indirect, limited purpose
membership with FICC. FICC states that one of the factors that an
indirect participant may wish to consider in choosing between GSD
access models is whether the participant prefers to be in a direct
contractual relationship with FICC.\152\
---------------------------------------------------------------------------
\151\ See Notice of Filing, supra note 5, 89 FR at 21364.
\152\ See FICC Letter at 50-51.
---------------------------------------------------------------------------
In the Treasury Clearing Rules Adopting Release, the Commission
also recognized that certain access models offered by FICC may not
result in a contractual relationship or direct obligation between FICC
and an indirect participant.\153\ This generally would be the case in
any agent clearing relationship in which an indirect participant relies
upon a direct participant to submit transactions for clearing on its
behalf.\154\ The commenter's concern that within the Agent Clearing
Service, indirect participants would not have a contractual
relationship with FICC, does not render the Proposed Rule Change
inconsistent with Rule 17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
\153\ See Adopting Release, supra note 14, 89 FR at 2758.
\154\ See id.
---------------------------------------------------------------------------
2. Comments Regarding Done-Away Clearing
As discussed in more detail in Section II.B above, several
commenters suggest that by not including a requirement on Netting
Member intermediaries to provide done-away clearing services to
customers, the Proposed Rule Change would fail to implement criteria
for participation that facilitate access to GSD's clearance and
settlement services for indirect participants.\155\ Specifically,
commenters state that if a customer is limited to done-with
transactions, it would need to establish separate clearing
relationships with each done-with counterparty with whom it wishes to
transact, which would increase cost, complexity, operational risk, and
limit the number of counterparties with whom to transact.\156\ In
addition, several commenters state that alternatively, these market
participants may limit their cash and/or repo U.S. Treasury
transactions, thereby negatively impacting market liquidity.\157\
Commenters also state that FICC should prohibit the bundling of
clearing and execution services to comply with Rule 17ad-
22(e)(18)(iv)(C). As discussed further in Section II.B infra, these
commenters state that such a prohibition is necessary to ensure that
market participants will provide done-away clearing services.\158\
---------------------------------------------------------------------------
\155\ See FIA-PTG Letter I at 3 (stating that the Proposed Rule
Change ``raises serious questions regarding whether [it]
appropriately facilitate[s] access to clearing for indirect
participants as required by'' Rule 17ad-22(e)(18)(iv)(C)); MFA
Letter I at 3 (stating that the Proposed Rule change ``[does] not go
far enough to satisfy'' Rule 17ad-22(e)(18)(iv)(C)); AIMA Letter at
4-5 (stating that the changes in the Proposed Rule Change ``are not
sufficient to facilitate access to clearing for indirect
participants''); SIFMA-AMG Letter at 4 (stating that FICC must
ensure that the Proposed Rule Change facilitates done-away trading
in a manner that fulfills the requirements of the Treasury Clearing
Rules); ICI Letter at 4 (stating that ``it is not clear that the
[Proposed Rule Change] fully implements the requirements of'' Rule
17ad-22(e)(18)(iv)(C)).
\156\ See FIA-PTG Letter I at 3; MFA Letter I at 4-5; AIMA
Letter at 4 (stating that without a done-away model, indirect
participants will face new and unnecessary costs in having to bundle
execution and clearing services or establish additional clearing
relationships so that they can engage with multiple execution
counterparties).
\157\ See AIMA Letter at 4; see also SIFMA-AMG-Letter at 4-5
(arguing that without changes to the GSD access models, many market
participants may be shut out of the U.S. Treasury market, with
significant negative effects on liquidity).
\158\ See Citadel Letter at 7-8; MFA Letter II at 4.
---------------------------------------------------------------------------
Generally, these commenters state that FICC should impose a mandate
on Netting Member intermediaries to provide done-away clearing services
to customers and should prohibit the
[[Page 93795]]
bundling of clearing and execution services to address these
concerns.\159\
---------------------------------------------------------------------------
\159\ See FIA-PTG Letter I at 2-3, 6-7; MFA Letter I at 4-5, 7-
8; AIMA Letter at 4-5.
---------------------------------------------------------------------------
As discussed in more detail in Section II.B above, in response,
FICC states that the Proposed Rule Change would meaningfully facilitate
done-away clearing, without imposing a done-away mandate or prohibiting
the bundling of clearing and execution services.\160\ FICC also states
that a done-away mandate could expose both FICC and its participants to
unique risks.\161\ First, as discussed in Section II.B above, done-away
transactions present liquidity risks that done-with transactions do
not.\162\ Because done-away transactions are entered into between a
customer and a counterparty other than the customer's Netting Member
intermediary, if the intermediary defaults, FICC would need to perform
the one-sided obligations of the customer.\163\ Second, because done-
away transactions are negotiated between the customer and its
counterparty, the Netting Member intermediary must depend on outside
processes or parties to confirm that the transactions do not give rise
to risk or regulatory issues (e.g., trade reporting and confirmation
requirements, anti-money laundering and sanctions regulations,
etc.).\164\ FICC states that its direct participants should
independently determine whether they can assume the risks associated
with providing done-away clearing services.\165\ Otherwise, according
to FICC, the increased risks and costs associated with a done-away
mandate could stifle the ongoing and positive market developments
toward done-away clearing by discouraging Netting Member intermediaries
from providing clearing services altogether.\166\
---------------------------------------------------------------------------
\160\ See FICC Letter at 8.
\161\ See FICC Letter at 11-13.
\162\ See id.
\163\ See id.
\164\ See id.
\165\ See id.
\166\ See FICC Letter at 13-15.
---------------------------------------------------------------------------
FICC further states that a done-away mandate could be inconsistent
with Section 17A(b)(3)(E) and/or Section 17A(b)(6) of the Exchange
Act.\167\ FICC states that for a done-away mandate to be effective, it
would likely need to prohibit the bundling of execution and clearing
(and thereby prevent a Netting Member intermediary from forcing its
customers into done-with transactions through more favorable
terms).\168\ FICC states that, as a result, a done-away mandate could
be viewed as FICC dictating pricing terms, which could violate Section
17A(b)(3)(E).\169\ Additionally, Section 17A(b)(6) provides that a
clearing agency may not ``prohibit or limit access by any person to
services offered by any participant therein.'' \170\ FICC states that a
requirement on Netting Member intermediaries to provide done-away
clearing to customers that post margin could violate Section 17A(b)(6)
because the service offered to customers who do not post margin could
potentially be limited to done-with clearing.\171\
---------------------------------------------------------------------------
\167\ See FICC Letter at 15-16; 15 U.S.C. 78q-1(b)(3)(E); 15
U.S.C. 78q-1(b)(6).
\168\ See FICC Letter at 15-16.
\169\ See 15 U.S.C. 78q-1(b)(3)(E).
\170\ 15 U.S.C. 78q-1(b)(6).
\171\ See FICC Letter at 16; 15 U.S.C. 78q-1(b)(6).
---------------------------------------------------------------------------
In addition, as stated above in Section II.B., one commenter also
states that FICC should not impose a done-away clearing mandate.\172\
Rather, the commenter states that any decision to offer done-away
services should be a commercial/business decision left to clearing
members, driven by evaluations of risk.\173\ The commenter states that
FICC can implement an access model, without a done-away clearing
mandate, that would be reasonably designed to ensure that FICC has
appropriate means to facilitate access to its clearance and settlement
services consistent with Rule 17ad-22(e)(18)(iv)(C).\174\
---------------------------------------------------------------------------
\172\ See SIFMA Letter II at 3-4.
\173\ See id.
\174\ See SIFMA Letter II at 4.
---------------------------------------------------------------------------
The Proposed Rule Change does not include a requirement that FICC's
participants offer done-away clearing or prohibit the bundling of
clearing and execution services. The Commission shall approve a
proposed rule change of a self-regulatory organization if it finds that
it is consistent with the Exchange Act,\175\ and the Proposed Rule
Change is consistent with the Exchange Act and the rules thereunder,
even in the absence of a done-away mandate or a prohibition on the
bundling of clearing and execution services.
---------------------------------------------------------------------------
\175\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
The Commission disagrees with the commenters arguing that FICC must
impose a done-away clearing mandate on Netting Member intermediaries or
prohibit the bundling of clearing and execution services to comply with
Rule 17ad-22(e)(18)(iv)(C). As discussed in the Adopting Release, Rule
17ad-22(e)(18)(iv)(C) does not prescribe a particular access model, but
it instead helps ensure that FICC, and any other covered clearing
agency serving the U.S. Treasury market, review their indirect access
models and ensure that they facilitate access to clearance and
settlement services in a manner suited to the needs and regulatory
requirements of market participants, including indirect
participants.\176\ Further, in the Adopting Release, the Commission
stated that a requirement to accept done-away transactions would
require a covered clearing agency to, in turn, require their direct
participants to transact with their customers in specific ways and
limit their ability to offer certain types of pricing services.\177\
---------------------------------------------------------------------------
\176\ See Treasury Clearing Adopting Release, supra note 14, 89
FR at 2755-56.
\177\ See Treasury Clearing Adopting Release, supra note 14, 89
FR at 2757.
---------------------------------------------------------------------------
More generally, and as stated above in Section II.A., both the
Sponsored Service and the Agent Clearing Service (including the prime
broker/correspondent clearing service in place currently) allow (and
are currently used) for done-away clearing.\178\ As stated in the
Adopting Release, in order to encourage Netting Member intermediaries
to provide services that enable customers to access central clearing,
it is best not to remove the ability of such intermediaries to
determine which risks to take with respect to guaranteeing transactions
to a CCP such as FICC.\179\ This is also true with respect to providing
done-away clearing services. The Commission agrees with the rationale
articulated by both FICC and one commenter arguing that a done-away
clearing mandate could be counterproductive and ultimately discourage
Netting Member intermediaries from providing clearing services to
customers.\180\ Additionally, it is appropriate to allow the U.S.
Treasury market to adjust to the implementation of the Treasury
Clearing Rules (e.g., the Account Segregation Proposals) before
determining that additional access models are needed.\181\ For the
foregoing reasons, FICC need not impose a done-away clearing mandate on
Netting Member intermediaries in order to comply with Rule 17ad-
22(e)(18)(iv)(C).\182\
---------------------------------------------------------------------------
\178\ See FICC Letter at 7, note 14 and accompanying text
(highlighting that although the bulk of current done-away
transactions are cash transactions cleared through the correspondent
clearing/prime broker clearing models, nearly 10 percent of FICC's
Sponsoring Members currently clear done-away repo transactions
through the Sponsored Service).
\179\ See Adopting Release at 2756-57, supra note 14.
\180\ See FICC Letter at 11-15; SIFMA Letter II at 3-4.
\181\ See Adopting Release at 2756-57, supra note 14.
\182\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
Several commenters state that FICC should explain how its proposal
to re-brand the Agent Clearing Service would actually facilitate done-
away
[[Page 93796]]
clearing.\183\ Two commenters state the re-branding and making
conforming, technical amendments to the Agent Clearing Service are non-
substantive and ``superficial'' and would not increase the availability
of done-away trading.\184\ One commenter states that there is not a
significant amount of repo activity conducted through the current
correspondent clearing/prime broker clearing services.\185\ The
commenter further questions why that would change after the services
are re-branded as the Agent Clearing Service.\186\ In response, FICC
states that its survey results demonstrate that prior to publication of
the Notice of Filing, 77 percent of market participants were not very
familiar with the correspondent clearing/prime brokerage services, and
that lack of familiarity is likely the reason for the relatively low
level of use of those GSD access models.\187\ FICC states that after
publication of the Notice of Filing, its survey results indicate that
43 percent of Netting Members would likely clear indirect participant
transactions through the Agent Clearing Service.\188\ FICC attributes
the shift among participants towards considering using the Agent
Clearing Service is a result of the Proposed Rule Change's
clarifications and consolidations regarding the Agent Clearing
Service.\189\
---------------------------------------------------------------------------
\183\ See SIFMA-AMG Letter at 2, 4-5; ICI Letter at 2, 4-5; MFA
Letter I at 3-4.
\184\ See SIFMA-AMG Letter at 2, 4-5; ICI Letter at 2, 4-5.
\185\ See MFA Letter I at 3-4.
\186\ See id.
\187\ See FICC Letter at 8.
\188\ See id.
\189\ See id.
---------------------------------------------------------------------------
The Proposed Rule Change sufficiently explains how the Agent
Clearing Service would work and how it could facilitate done-away
clearing. Further explanation is unnecessary for purposes of
considering the Proposed Rule Change, and each market participant has
to determine which access model to use for its own business purposes.
However, the Commission observes that FICC has engaged in market
outreach to assist market participants in evaluating and understanding
the operations and business case for each access model.\190\
---------------------------------------------------------------------------
\190\ See FICC Letter at 4; see generally FICC's U.S. Treasury
Clearing information website, available at <a href="https://www.dtcc.com/ustclearing">https://www.dtcc.com/ustclearing</a> (e.g., the ``Access Central Clearing'' tab, which
provides resources for direct and indirect participants to
understand and evaluate each GSD access model, including
explanations of recommended access models for specific types of
market participants).
---------------------------------------------------------------------------
Several commenters raise the concern that even if a Netting Member
intermediary offers done-away clearing services, customers would be
required to disclose the identity of their execution counterparties to
the intermediary.\191\ One commenter states that requiring the
disclosure of execution counterparties to the Netting Member
intermediary divulges confidential information regarding the customer's
trading activities and could lead to limitations placed on those
execution counterparties, directly undermining a key benefit of central
clearing.\192\ Another commenter states that in a cleared market, the
identity of a customer's original execution counterparty should be
irrelevant to a clearing member because the clearing member is not
exposed to the creditworthiness of the execution counterparty, meaning
that a clearing member should not be in a position to limit a
customer's execution counterparties.\193\ This commenter also states
that this concern is why the Commodity Futures Trading Commission
specifically prohibited ``the type of trilateral execution agreement
described by FICC.'' \194\ Therefore, commenters state, FICC should
enable customers to avoid disclosing the identity of their execution
counterparties to their Netting Member intermediaries and prohibit the
restriction of execution counterparties.\195\
---------------------------------------------------------------------------
\191\ See FIA-PTG Letter I at 7-8; MFA Letter I at 4-5; FIA-PTG
II at 3; Citadel Letter at 4-5.
\192\ See FIA-PTG Letter I at 7-8.
\193\ See Citadel Letter at 4-5; see also Letter from Joanna
Mallers, Secretary, Futures Industry of America, Principal Traders
Group (Oct. 11, 2024) (``FIA-PTG Letter II'') at 3.
\194\ See Citadel Letter at 5.
\195\ See FIA-PTG Letter I at 7-8; MFA Letter I at 4-5.
---------------------------------------------------------------------------
FICC states that it is currently not practically feasible to
prohibit a direct participant from knowing the execution counterparty's
identity because there is no mechanism in the U.S. Treasury market
available for someone other than a direct participant to submit
transactions and counterparty information to FICC.\196\ Regarding the
concerns that disclosure of the identity of a customer's execution
counterparty could result in the Netting Member intermediary placing
limitations on the execution counterparty, FICC states that Netting
Member intermediaries may, in certain cases, have legitimate reasons to
know or limit a customer's execution counterparties.\197\ For example,
FICC states that a Netting Member may need to confirm that a customer's
proposed execution counterparty has an execution or similar agreement
in place with the Netting Member and that the execution counterparty
has performed any obligations set forth in that agreement.\198\ FICC
also states that Netting Members may also need to know the identity of
a customer's execution counterparty to assess certain risks, such as
potential CCLF requirements.\199\ FICC states that whether and how a
Netting Member intermediary may restrict execution counterparties are
matters that should be commercially negotiated between the intermediary
and its customers, rather than dictated by FICC in the GSD Rules.\200\
---------------------------------------------------------------------------
\196\ See FICC Letter at 16. FICC states that in other markets
(e.g., the U.S. markets for equity securities and cleared
derivatives), there are execution facilities or affirmation
platforms that provide post-trade settlement market infrastructure
with counterparty information. However, in the U.S. Treasury market,
such facilities or platforms are not predominant or do not currently
offer similar services. See id.
\197\ See FICC Letter at 17.
\198\ See id.
\199\ See id.
\200\ See id.
---------------------------------------------------------------------------
The Commission acknowledges that a customer may not wish to
disclose the identity of its execution counterparty to its Netting
Member intermediary. Although the commenters state that FICC should
enable anonymous execution, such anonymous execution is not yet
possible considering the current market infrastructure. Therefore, FICC
need not require Netting Member intermediaries to provide for anonymous
execution in order for the Proposed Rule Change to be consistent with
Rule 17ad-22(e)(18)(iv)(C).\201\
---------------------------------------------------------------------------
\201\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
In addition, regarding the concern that a Netting Member
intermediary could restrict the execution counterparty, FICC's response
that a Netting Member intermediary might have legitimate reasons to
know the identity and restrict execution counterparties supports the
suggestion that such matters should be negotiated bilaterally between
customers and their Netting Members intermediaries.\202\ However,
regarding potential liquidity risk arising from done-away transactions,
the Commission understands that the existence of exposure arising from
a done-away transaction, and not necessarily the execution counterparty
to that exposure, could have an effect on the Netting Member's
liquidity obligations to FICC in the event of a member default. The
Commission would not view the
[[Page 93797]]
identity of the execution counterparty as relevant to the potential
liquidity risk arising from that transaction. Moreover, the Commission
disagrees that FICC's statements regarding confirming that a proposed
execution counterparty has an execution or similar agreement in place
with the Netting Member equates to the types of trilateral agreements
prohibited by the CFTC.\203\
---------------------------------------------------------------------------
\202\ In addition, the Commission understands that, to the
extent that a market participant is transacting on an inter-dealer
broker or similar platform, the execution counterparty to the
transaction would be the inter-dealer broker or platform, not the
other market participant that was brought together on the platform
and also had a transaction with the inter-dealer broker or platform.
\203\ Such agreements incorporated optional annexes that make
the clearing member to one or both of the executing parties a party
to the agreement. These trilateral agreements contain provisions
that would permit a customer's FCM, in consultation with the swap
dealer (``SD'') that is the customer's counterparty, to establish
specific credit limits for the customer's swap transactions with the
SD, and that the FCM will only accept for clearing those
transactions that fall within these specific limits. The limits set
for trades with the SD or MSP might be less than the overall limits
set for the customer for all trades cleared through the FCM. CFTC,
Customer Clearing Documentation, Timing of Acceptance for Clearing,
and Clearing Member Risk Management, 77 FR 21278, 21279 (Apr. 9,
2012).
---------------------------------------------------------------------------
One commenter asked why the Agent Clearing Service cannot be used
for ``brokered transactions'' or GCF repo transactions.\204\ The
commenter also states that for Treasury cash transactions executed by
inter-dealer brokers, there would appear to be no way to comply with
the Treasury Clearing Rules via customer clearing, as the execution
counterparty does not offer customer clearing services and therefore
another clearing member must accept these trades via a done-away
offering.\205\ In response, FICC states that, with respect to general
collateral repo transactions, FICC would not be able to clear such
transactions through the proposed Agent Clearing Service, but it states
that it is considering developing such capabilities based on feedback
from market participants.\206\ With respect to brokered transactions,
FICC states that it would not be appropriate for transactions cleared
through the proposed Agent Clearing Service to be treated as ``Brokered
Transactions'' under the GSD Rules because Brokered Transactions are
designed to capture certain transactions that present lower risk than
other cleared transactions.\207\ Moreover, the Account Segregation
Proposals \208\ would modify the GSD Rules regarding Brokered
Transactions, further clarifying the unique treatment of Brokered
Transactions due to the limited risk they present to FICC.\209\ The
current GSD Rules cap the amount of loss allocation that may be applied
to Inter-Dealer Broker Netting Members and Non-IDB Repo Brokers
submitting Brokered Transactions.\210\ The Account Segregation
Proposals would revise the definition of Brokered Transactions to only
include the side of the transactions submitted to FICC for novation by
an Inter-Dealer Broker Netting Member and entered into on the Inter-
Dealer Broker Netting Member's own trading platform.\211\ As a result,
the favorable loss allocation treatment for Brokered Transactions would
only apply to the transactions that present limited risk since an
Inter-Dealer Broker is standing in between two counterparties in those
transactions and is therefore completely flat.\212\ Since the favorable
loss allocation treatment is only appropriate for Inter-Dealer Broker
Netting Members submitting Brokered Transactions, the Account
Segregation Proposals would delete the term ``Non IDB Repo Broker''
from the GSD Rules.\213\ Additionally, the concurrently approved
Account Segregation Proposals would provide that transactions entered
into on an Inter-Dealer Broker Netting Member's trading platform or
similar platform may be cleared using the Sponsored Service or the
Agent Clearing Service, which addresses the commenter's concern.\214\
---------------------------------------------------------------------------
\204\ See FIA-PTG Letter I at 7.
\205\ See FIA-PTG Letter I at 3; FIA-PTG Letter II at 3.
\206\ See FICC Letter at 22.
\207\ See FICC Letter at 22-23.
\208\ See Account Segregation Proposals, supra note 85.
\209\ See Account Segregation Proposals, supra note 85, 89 FR at
87451.
\210\ See GSD Rule 4, Section 6, supra note 15.
\211\ See Account Segregation Proposals, supra note 85, 89 FR at
87451.
\212\ See Account Segregation Proposals, supra note 85, 89 FR at
21598.
\213\ See id.
\214\ See Account Segregation Proposals, supra note 85, 89 FR at
87451; see also FICC Letter at 22-23.
---------------------------------------------------------------------------
In response to the comments regarding transactions executed on an
inter-dealer broker or similar platform, the Commission agrees that, as
FICC represented,\215\ such transactions could be submitted through the
Agent Clearing Service.
---------------------------------------------------------------------------
\215\ See Account Segregation Proposals, supra note 85; FICC
Letter at 23.
---------------------------------------------------------------------------
3. Changes to the Sponsored Service
As described above in Section I.B.2., FICC also proposes to update
certain membership standards in the GSD Rules regarding the Sponsored
Service. First, FICC proposes to eliminate the two categories of
Sponsoring Members, and instead, make all Sponsoring Members subject to
the same eligibility and ongoing requirements that are currently
applicable to Category 2 Sponsoring Members. These proposed changes
would remove the capitalization requirements on Bank Netting Members
from the current GSD Rules, and instead apply the activity limits and
financial condition factors used under the current GSD Rules for
Category 2 Sponsoring Members. These proposed changes would create
parity among all Sponsoring Members (and applicants), thereby
encouraging additional market participants to become Sponsoring
Members, which in turn should give indirect participants a wider range
of Sponsoring Members to consider should they choose to access GSD's
central clearing services via the Sponsored Service.\216\ Second, FICC
proposes to remove the QIB Requirement for Sponsored Members, which
would make the Sponsored Service available to additional market
participants (i.e., those unable to meet the QIB Requirement).\217\
---------------------------------------------------------------------------
\216\ See Notice of Filing, supra note 5, 89 FR at 21370.
\217\ One commenter expressed support for FICC's proposal to
eliminate the QIB Requirement. See ICI Letter at 5. No other
commenter addressed this particular change or any other changes to
the Sponsored Service.
---------------------------------------------------------------------------
Therefore, the proposed changes to the GSD Rules to (1) consolidate
the Sponsoring Member categories, and (2) eliminate the QIB Requirement
for Sponsored Members, constitute criteria for participation that
facilitate access to GSD's clearance and settlement services, including
for indirect participants, are consistent with Rule 17ad-
22(e)(18)(iv)(C), because the proposed changes would expand the
availability of the Sponsored Service to a broader range of market
participants.\218\
---------------------------------------------------------------------------
\218\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
4. Changes to Eligibility Criteria for Non-U.S. and Other Applicants
As described above in Section I.B.2., FICC proposes to clarify the
eligibility criteria for non-U.S. Netting Member applicants. Whereas
the current GSD Rules are unclear as to whether a non-U.S. applicant
entity would only be subject to the Foreign Netting Member standards or
would also be subject to the legal entity standards, FICC proposes to
streamline the relevant membership categories by eliminating the
category of ``Foreign Netting Member'' and expanding the qualifications
for each category of Netting Member to include the foreign equivalent
of the same legal entity types. Additionally, FICC proposes to clarify
the eligibility criteria for applicants (including non-U.S. entities)
that do not fit into one of the existing Netting Member categories.
Following the adoption of the Treasury Clearing Rules, additional
market participants will need to access FICC's clearance and settlement
services, either as direct Netting Members or as indirect participants.
[[Page 93798]]
Whereas the current GSD Rules do not provide FICC with the authority to
consider a Netting Member applicant that does not meet the eligibility
criteria of one of the Netting Member categories enumerated in the GSD
Rules, the proposed changes, as described in Section I.B.2, would
provide a framework for FICC to consider such other applicants. FICC
designed the proposed changes regarding non-U.S. and other applicants
to facilitate access to GSD's clearing services to a broader range of
market participants.\219\
---------------------------------------------------------------------------
\219\ See Notice of Filing, supra note 5, at 89 FR 21373.
---------------------------------------------------------------------------
The proposed changes to the GSD Rules to clarify the eligibility
criteria for non-U.S. Netting Member applicants and applicants that do
not fit into one of the existing Netting Member categories, are
consistent with Rule 17ad-22(e)(18)(iv)(C), because the proposed
changes would expand the availability of GSD's clearing services to a
broader range of market participants.\220\
---------------------------------------------------------------------------
\220\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
5. Changes To Clarify the GSD Access Models
As described above in Section I.B.3., FICC proposes to include a
``road map'' in the GSD Rules describing the various GSD access models
that allow for both direct and indirect access to GSD's clearance and
settlement services. FICC also proposes to simplify the GSD Rule
definitions regarding the different types of membership and other
related definitions.\221\ FICC states that these proposed changes would
enhance the ability of market participants to better understand and
evaluate the comparative tradeoffs between GSD's different access
models.\222\
---------------------------------------------------------------------------
\221\ See Notice of Filing, supra note 5, 89 FR at 21374.
\222\ See Notice of Filing, supra note 5, 89 FR at 21373-74.
---------------------------------------------------------------------------
Several commenters request that FICC provide further clarity
regarding the GSD access models.\223\ Specifically, commenters request
that FICC explain the expected use cases for each of the GSD access
models to enable market participants to better evaluate the relative
benefits of each access model by understanding the substantive
differences between them.\224\ One commenter states that FICC should
eliminate any access model that it cannot justify with a use case.\225\
One commenter states that although the availability of multiple access
models may provide flexibility to market participants, it could also
introduce unnecessary complexity and confusion.\226\
---------------------------------------------------------------------------
\223\ See FIA-PTG Letter I at 6-8; ISDA Letter I at 8; MFA
Letter I at 6; AIMA Letter at 5-6; SIFMA-AMG Letter at 3, 11-12;
ISDA Letter II at 2-3.
\224\ See id.
\225\ See MFA Letter I at 7.
\226\ See MFA Letter I at 6; FIA-PTG Letter I at 4. For example,
with a greater number of access models, a direct participant's
service offerings and pricing might not be readily apparent to
indirect participants. See id.
---------------------------------------------------------------------------
FICC states that it developed four indirect access models (i.e.,
the Sponsored Service and Agent Clearing Service, each with either
segregated or non-segregated margin) after engagement with market
participants to ensure a diverse array of models through which market
participants can access central clearing.\227\ In response to the
comments requesting further clarity and challenging the need for each
of the proposed access models, FICC describes some of the possible use
cases and advantages of each of the four access models.\228\
Specifically, FICC states that market participants might prefer the
Agent Clearing Service due to its conceptual and operational similarity
to an FCM-style cleared derivatives model, enabling market participants
to leverage their existing legal analyses, structures, policies, and
procedures to clear transactions in U.S. Treasury securities.\229\
Additionally, due to the greater intermediation of the Agent Clearing
Service, a Netting Member intermediary would be able to utilize a
``financial asset'' election to perfect its security interest in
cleared transactions without having to file a Uniform Commercial Code
financing statement, potentially reducing cost, risk, and
publicity.\230\ Moreover, in comparison to the Sponsored Service, the
Agent Clearing Service would involve a simpler onboarding process,
would not require privity of contract between indirect participants and
FICC, and would not impose the same jurisdictional requirements on
indirect participants.\231\ On the other hand, FICC highlights
potential advantages to the Sponsored Service, including being in a
direct contractual relationship with FICC.\232\ FICC also states that
Netting Members have existing clearing agreements with many customers
for the Sponsored Service without segregation and could continue to
utilize their existing agreements.\233\ Additionally, since the
Sponsored Service has existed for nearly two decades, FICC states that
market participants have achieved a certain level of confidence
regarding the Sponsored Service's treatment for legal, regulatory,
accounting, and other purposes.\234\
---------------------------------------------------------------------------
\227\ See FICC Letter at 18, 20.
\228\ See FICC Letter at 50-51.
\229\ See FICC Letter at 20, 50-51.
\230\ See FICC Letter at 19, 50-51.
\231\ See FICC Letter at 19-20, 50-51.
\232\ See FICC Letter at 50-51.
\233\ See id.
\234\ See FICC Letter at 20, 50-51.
---------------------------------------------------------------------------
Publication of ``use cases'' or justifications are not required for
a proposed rule change to be consistent with Rule 17ad-
22(e)(18)(iv)(C), which requires only that a covered clearing agency
have written policies and procedures reasonably designed to ensure
appropriate access to its clearing and settlement services, including
for indirect participants. Further, the decision of which access model
to use is for each individual market participant to determine, as each
market participant has different regulatory obligations, business
strategies, ownership models, etc. Nevertheless, FICC's description of
the reasons for each of its four access models is sound and clearly
identifies potential advantages and disadvantages of each model for
market participants to consider.\235\
---------------------------------------------------------------------------
\235\ The Commission also understands that FICC has engaged in
outreach and education efforts to further explain the different
features of each model. See generally FICC's U.S. Treasury Clearing
information website, available at <a href="https://www.dtcc.com/ustclearing">https://www.dtcc.com/ustclearing</a>
(e.g., the ``Access Central Clearing'' tab, which provides resources
for direct and indirect participants to understand and evaluate each
GSD access model, including explanations of recommended access
models for specific types of market participants).
---------------------------------------------------------------------------
In addition, several commenters questioned the decision to offer
both segregated and non-segregated accounts in both the Sponsored
Service and Agent Clearing Service. Specifically, one commenter
requests that FICC explain the benefits of the access models insofar as
they allow for omnibus (i.e., non-segregated) margin submission.\236\
Another commenter questioned whether both the Sponsored Service and
Agent Clearing Service should offer segregated models.\237\
---------------------------------------------------------------------------
\236\ See SIFMA-AMG Letter at 11-12.
\237\ See FIA-PTG Letter at 4.
---------------------------------------------------------------------------
In response, FICC explains potential advantages regarding margin
segregation options (i.e., to explain why the GSD access models allow
for both segregated and non-segregated, or omnibus, margin
submission).\238\ Specifically, within the Agent Clearing Service, if
margin is not segregated, Clearing Fund requirements for customer
transactions would be calculated on a net basis across all Executing
Firm Customers whose transactions are recorded within the same account,
resulting in aggregate margin obligations that are substantially lower
than under the Sponsored
[[Page 93799]]
Service.\239\ If margin is segregated, Agent Clearing Members would not
bear the costs of financing margin obligations for customer positions--
a cost saving that could be passed on to customers without exposing
customers to FICC, fellow customer, or Netting Member risk.\240\
Regarding the Sponsored Service, FICC states that many customers have
clearing agreements in place that already provide for non-segregated
margin.\241\ By continuing to allow non-segregated margin within the
Sponsored Service, FICC would enable such customers to maintain their
existing clearing agreements and associated processes.\242\
---------------------------------------------------------------------------
\238\ See FICC Letter at 50-51.
\239\ See id.
\240\ See id.
\241\ See id.
\242\ See id.
---------------------------------------------------------------------------
FICC's explanation of the potential reasons why a customer may want
to be able to pursue the various options of segregation within both
models is sound. Each market participant will have to evaluate the
advantages and drawbacks of each option and determine what works best
for its own business. The existence of both segregated and omnibus
options for both the Agent Clearing and Sponsored Services is
consistent with Rule 17ad-22(e)(18)(iv)(C), which requires only that a
covered clearing agency have written policies and procedures reasonably
designed to ensure appropriate access to its clearing and settlement
services, including for indirect participants.
For these reasons, FICC's proposals to include a ``road map''
describing the various GSD access models and to simplify the
definitions regarding GSD membership would, among other things, provide
clarity in the GSD Rules regarding the models that direct and indirect
participants may use to access GSD's clearance and settlement services.
The proposed changes would enable market participants to better
understand and evaluate the various GSD access models for clearing
transactions in U.S. Treasury securities. Therefore, the proposed
changes would constitute criteria for participation that facilitate
access to GSD's clearance and settlement services, including for
indirect participants, consistent with Rule 17ad-22(e)(18)(iv)(C).\243\
---------------------------------------------------------------------------
\243\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
Additionally, one commenter states that FICC should require Netting
Member intermediaries to allow their customers to choose whether to
access clearing through the Sponsored Service or the Agent Clearing
Service.\244\ The same commenter further states that that margin
segregation should be automatic for any Sponsored Member that posts its
own margin.\245\
---------------------------------------------------------------------------
\244\ See MFA Letter I at 7.
\245\ See id.
---------------------------------------------------------------------------
In response, FICC states that the best way to facilitate access to
clearing is to enable direct and indirect participants to select the
access method and associated terms that are most consistent with their
commercial, regulatory, risk, operational, and legal considerations.
Moreover, FICC states that mandating that Netting Members offer a
particular service or clearing model could be inconsistent with Section
17A(b)(3)(E) of the Exchange Act, which prohibits a clearing agency
from imposing any schedule of prices, or fix rates or other fees for
its participants' services.\246\ In response to the comment regarding
automatic margin segregation within the Sponsored Service, FICC states
that margin segregation should not be automatic for Sponsored Members
that post their own margin, because there are scenarios in which market
participants may prefer the flexibility of choosing non-segregated
margin even when a Sponsored Member posts its own margin.\247\
---------------------------------------------------------------------------
\246\ See FICC Letter at 32-33; 15 U.S.C. 78q-1(b)(3)(E).
\247\ See FICC Letter at 21-22.
---------------------------------------------------------------------------
The Proposed Rule Change does not include a requirement that FICC's
Netting Members offer their customers a choice of what access model to
use. The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that it is consistent with the
Act,\248\ and the lack of a requirement that each Netting Member give
its customers the choice of which access model to use is not
inconsistent with the Act.
---------------------------------------------------------------------------
\248\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
One commenter raises concerns as to whether FICC has the
operational capability to onboard and account for the large number of
new accounts that would need to be established to support the increased
volume of clearing activity that would arise from FICC's implementation
of its requirements pursuant to the Treasury Clearing Rules.\249\
Specifically, the commenter states that that FICC would need to
establish and maintain a large number of new accounts because each
Agent Clearing Member would need to set up an individual account at
FICC for each indirect participant for which the Agent Clearing Member
would segregate margin.\250\
---------------------------------------------------------------------------
\249\ See SIFMA-AMG Letter at 12.
\250\ See id.
---------------------------------------------------------------------------
In response, FICC states it proposed each access model after
confirming that FICC has the ability, from a legal, operational, risk,
regulatory, and commercial perspective, to provide such a model.\251\
Regarding individual accounts, FICC states that neither the Sponsored
Service nor the Agent Clearing Service would necessitate individual
accounts for each customer.\252\
---------------------------------------------------------------------------
\251\ See FICC Letter at 22.
\252\ See id.
---------------------------------------------------------------------------
The Commission agrees that neither the Proposed Rule Change nor
FICC's implementation of its other requirements pursuant to the
Treasury Clearing Rules would require FICC to establish and maintain
accounts for each indirect participant.\253\ Moreover, in its
supervisory capacity regarding FICC, the Commission routinely and
regularly receives data, reports, and other information regarding
FICC's clearance and settlement activities, including FICC's
operational capabilities. Based on the Commission's supervisory
knowledge, FICC has the requisite operational capacity to offer the
access models that it has proposed.\254\
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\253\ See <a href="https://www.dtcc.com/-/media/Files/Downloads/Microsites/Treasury-Clearing/FICC-Treasury-Clearing-Client-Impact-Roadmap.pdf">https://www.dtcc.com/-/media/Files/Downloads/Microsites/Treasury-Clearing/FICC-Treasury-Clearing-Client-Impact-Roadmap.pdf</a>.
\254\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
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One commenter raised concerns regarding the inability of FCMs to
utilize the GSD access models.\255\ Specifically, the commenter states
that certain regulatory requirements to which FCMs are subject would
conflict with FCMs participating in both the Sponsored Service and
Agent Clearing Service.\256\ The commenter urges FICC
[[Page 93800]]
to allow Netting Members to maintain sub-accounts for futures customer
funds, cleared swaps customer funds, and foreign futures customer funds
that comply with CFTC requirements.\257\ Additionally, the commenter
states that FCMs are currently seeking relief from the CFTC to
recognize FICC as an acceptable counterparty and otherwise align the
GSD access models with CFTC requirements.\258\ In the interim, the
commenter requests that FICC apply to FCMs certain GSD Rules that would
exempt a Netting Member's Covered Affiliate from submitting trades to
FICC if the obligation to submit the trade would cause a violation of
any applicable law, rule, or regulation.\259\ The commenter further
requests that FICC work with FCMs and the CFTC to develop alternative
CFTC-compliant access models.\260\
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\255\ See Letter from Walt L. Lukken, President and Chief
Executive Officer, Futures Industry of America (April 18, 2024)
(``FIA Letter'') at 2-12. On July 1, 2024, FICC filed a separate
proposed rule change that would, among other things, require each
Netting Member to submit for central clearing all eligible secondary
market transactions in U.S. Treasury securities to which it is a
counterparty. See Securities Exchange Act Release No. 100417 (June
25, 2024), 89 FR 54602 (July 1, 2024) (SR-FICC-2024-009) (``Trade
Submission Proposal''). The Commission notes that the FIA Letter
includes a request for relief from the clearing requirement in the
Trade Submission Proposal. See FIA Letter at 2-3. The commenter
appropriately submitted a separate comment letter in response to the
Trade Submission Proposal requesting similar relief, and the
Commission will address the comment when adjudicating the Trade
Submission Proposal. However, the commenter's request is outside the
scope of the instant Proposed Rule Change.
\256\ See FIA Letter at 4, 7-8 (citing CFTC Regulations
regarding acceptable FCM counterparties, delivery-versus-payment and
payment-versus-delivery requirements, posting collateral as margin
for repos entered into with customer funds, FCM bankruptcy
management, FCM repos with affiliates, and FCMs holding customer
assets in customer segregated accounts).
\257\ See FIA Letter at 8.
\258\ See FIA Letter at 2-3, 11.
\259\ See FIA Letter at 4-5; GSD Rule 11, Section 3 and GSD Rule
18, Section 2, supra note 15.
\260\ See FIA Letter at 5, 8-10.
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FICC states that it is open to considering additional access models
if necessary to address market participants' regulatory or other
needs.\261\ In response to the commenter's request regarding sub-
accounts, FICC states that the GSD Rules would allow Netting Members to
instruct FICC to establish separate accounts for certain kinds of
transactions and to have such accounts constitute separate margin
portfolios.\262\ Thus, a Netting Member that enters into transactions
using futures, cleared swaps, or foreign futures customer funds could
have those transactions recorded in an account that does not net with
the Netting Member's other accounts for purposes of calculating margin
or funds-only settlement amounts.\263\
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\261\ See FICC Letter at 23.
\262\ See id.
\263\ See id.
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The commenter specifically seeks relief from the CFTC from certain
CFTC regulations, which are not within the Commission's
jurisdiction.\264\ The commenter also requests that FICC continue to
apply certain GSD Rule provisions that would exempt FCMs from the
requirement to submit trades to FICC if such trade submission would
cause the FCM to be in violation of any applicable rule, or
regulation.\265\ The Commission notes that the GSD Rule provisions
cited by the commenter are currently the subject of the Trade
Submission Proposal, a separate pending proposed rule change filed by
FICC.\266\ Because the commenter's request to be excluded from the
trade submission requirement deals with GSD Rule provisions that are
subject to change as part of a separate proposed rule change, the
Commission is not addressing the comment in the instant Order. For the
same reason, the Commission is not addressing the commenter's request
to require FICC to apply those GSD Rule provisions that are subject to
change as part of a separate proposed rule change.\267\
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\264\ See FIA Letter at 4-5.
\265\ See id.; GSD Rule 11, Section 3 and GSD Rule 18, Section
2, supra note 15.
\266\ See Trade Submission Proposal, supra note 257.
\267\ See FIA Letter at 11.
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Finally, the commenter requests that FICC work with FCMs and the
CFTC to develop access models that are more suitable for FCMs than the
Agent Clearing Service.\268\ As mentioned above, FICC states that it is
open to considering additional access models if necessary to address
market participants' regulatory or other needs.\269\ Additionally, FICC
states that it continues to actively engage with the FCM community to
resolve outstanding issues regarding the GSD access models.\270\
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\268\ See FIA Letter at 4-5.
\269\ See FICC Letter at 23.
\270\ See FICC Letter at 23-24.
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One commenter requests that FICC confirm that a bank's branches and
Netting Member's affiliates can establish a separate margin portfolio
within the Netting Member's account that would be separately netted and
margined, such that they would not have to establish indirect access to
FICC.\271\ Because the commenter's request relates directly to GSD Rule
provisions that are subject to change as part of the Trade Submission
Proposal, a separate pending proposed rule change filed by FICC,\272\
the Commission is not addressing the comment in the instant Order.
---------------------------------------------------------------------------
\271\ See ISDA Letter I at 6-7; ISDA Letter II at 5.
\272\ See Trade Submission Proposal, supra note 257, at 89 FR
54605.
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6. Comments Regarding Default Within the Client Clearing Models
Commenters raised several issues related to how FICC should address
certain aspects of default within the Agent Clearing and Sponsored
Services.
One commenter states that FICC should allow indirect participants
to close out their positions with a defaulting Sponsoring Member or
Agent Clearing Member.\273\ For example, the commenter states that
under the current GSD Rules, the process for closing out indirect
participants' trade positions under the Sponsored Service is driven
entirely by FICC, with indirect participants having no ``say'' in
whether their positions are closed out, meaning that the customer may
need to continue to rely on an insolvent (or near insolvent) Netting
Member to make or receive payments on its behalf.\274\ This commenter
also states that FICC should clearly address Executing Firm Customers
close-out rights in the event of the default of their Agent Clearing
Member.\275\ Alternatively, the commenter states that in the event of
such a default, customers should be able to elect to receive payment
directly from FICC, with FICC using any customer funds held at FICC to
satisfy such amounts owed.\276\ Similarly, an additional commenter
states that the GSD Rules should address the situation of a FICC
default simultaneous with a Sponsoring Member default, suggesting that
Sponsored Members should have the ability to promptly close out and
manage its positions.\277\
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\273\ See SIFMA-AMG Letter at 2, 6, 11.
\274\ See SIFMA-AMG Letter at 7.
\275\ See id.
\276\ See SIFMA-AMG Letter at 2, 6, 11.
\277\ See ICI Letter at 14.
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In response, FICC states that it was not aware of any such U.S. CCP
that provides either for customers to have the ability to direct the
CCP to terminate trades or to make payments directly to the customer,
but that, instead, CCPs interface directly with clearing members, as
agents for their customers consistent with the framework of an
intermediated clearing arrangement.\278\ FICC further states that, from
a risk perspective, it important to FICC to interface with Netting
Members as agents for their customers because Netting Members are
subject to comprehensive operational requirements and testing that are
designed to ensure that they have the capability to perform and to
receive performance from FICC and that such performance will not expose
FICC to operational risks (e.g., systems failures and viruses).\279\
FICC states that because customers are not subject to such
requirements, FICC cannot establish interoperability without exposing
itself, its participants, and the broader market to significant
operational risk.\280\ FICC also states that imposition of operational
standards to customers would be quite burdensome, if not infeasible,
for many customers, and that such burdens would likely outweigh any
benefits of establishing interoperability with customers, because in a
Netting Member default scenario, FICC would generally
[[Page 93801]]
close out trades or settle through the trustee or receiver of the
defaulting member and applicable insolvency law would likely prohibit
FICC from engaging directly with customers.\281\
---------------------------------------------------------------------------
\278\ FICC Letter at 27.
\279\ See id.
\280\ See id.
\281\ See id.
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The Proposed Rule Change does not include these types of close-out
provisions for indirect participants that the commenter seeks. The
Commission shall approve a proposed rule change of a self-regulatory
organization if it finds that it is consistent with the Act,\282\ and
the lack of such close-out provisions is not inconsistent with the Act.
---------------------------------------------------------------------------
\282\ See 15 U.S.C. 78s(b)(2)(C)(i).
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One commenter requests that FICC clarify the differences in the GSD
Rules between the Sponsored Service and Agent Clearing Service
governing a default of the Sponsoring Member or Agent Clearing
Member.\283\ The commenter states that the Proposed Rule Change
suggests that customer positions will always be closed-out under the
Agent Clearing Service, whereas FICC may elect to continue to settle
customer positions under the Sponsored Service in the event of a
Netting Member default.\284\ FICC agrees with the commenter's
suggestion that FICC should have the opportunity to settle the
outstanding cleared transactions that a defaulting Agent Clearing
Member has cleared through the Agent Clearing Service.\285\ FICC states
that, as a general matter, settlement may in many instances be the most
effective and customer-protective way to address a member default
scenario, so long as the receiver or trustee of the defaulting member
consents.\286\
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\283\ See FIA-PTG Letter at 8.
\284\ See FIA-PTG Letter at 8; FIA-PTG Letter II at 3.
\285\ See FICC Letter at 25-26.
\286\ See FICC Letter at 26. FICC further states that it is
considering amendments to the Proposed Rule Change that would give
FICC the option to effectuate such settlement, but that it would be
more efficient to propose such changes after the Commission has
considered the Proposed Rule Change, but at the very least before
Dec. 31, 2025. See id.
---------------------------------------------------------------------------
The Proposed Rule Change does not include the ability for FICC to
settle the transactions of a defaulting Agent Clearing Member's
customers that the commenter seeks. The Commission shall approve a
proposed rule change of a self-regulatory organization if it finds that
it is consistent with the Act,\287\ and the lack of such close-out
provisions is not inconsistent with the Act.
---------------------------------------------------------------------------
\287\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
Some commenters question why the proposed Agent Clearing Service
does not include a close-out mechanism regarding a defaulted customer's
open positions, which could pose unique risks to an Agent Clearing
Member by forcing it to keep a defaulted customer's positions open
until the default is resolved.\288\ One commenter further states that
FICC may have declined to provide a mechanism for liquidating customer
trades because, in contrast to the Sponsored Service, Executing Firm
Customers are not members of FICC and therefore a ``close out amount''
cannot be calculated as between the customer and FICC.\289\ However,
this commenter also states that FICC could amend its rulebook to
explicitly allow Netting Members to liquidate positions with defaulting
customers, with such close-out procedure then addressed in account
documentation between the Agent Clearing Member and its Executing Firm
Customer.\290\ Several commenters also state that FICC should allow an
Agent Clearing Member to liquidate the transactions of a defaulted
customer by transferring the positions to its proprietary account or by
transferring offsetting positions to its omnibus account.\291\ In
addition, one commenter states that FICC should include similar trade
liquidation procedures for done-away transactions cleared through the
Sponsored Service.\292\
---------------------------------------------------------------------------
\288\ See SIFMA Letter I at 2-3 (stating that FICC should revise
the Agent Clearing Service to allow Netting Members to liquidate
positions of defaulting indirect participants, consistent with what
is available in the Sponsored Service); see also ISDA Letter I at 2-
3 and ISDA Letter II at 4 (similarly discussing the need to close-
out positions by transferring them to the proprietary/house account
or by transferring offsetting positions to the omnibus account).
\289\ See SIFMA Letter I at 3.
\290\ See id.
\291\ See ISDA Letter I at 2-3 (stating that FICC should provide
in the GSD Rules that an Agent Clearing Member may liquidate an
Executing Firm Customer's positions by transferring the positions to
its proprietary/house account or by transferring positions into the
Agent Clearing Member Omnibus Account to flatten open positions of
the Executing Firm Customer); ISDA Letter II at 4 (same); FIA Letter
at 5, 10 (stating that FICC should incorporate a rule that
authorizes an Agent Clearing Member, in connection with liquidating
an Executing Firm Customer's open positions upon its default, to
cause the Executing Firm Customer's open positions to be transferred
from the applicable Agent Clearing Member Omnibus Account and/or
transfer to the Agent Clearing Member Omnibus Account transactions
that offset or flatten the Executing Firm Customer's open
positions); SIFMA Letter I at 2-3 (stating that FICC's proposed
rules should permit Netting Members to transfer a defaulting
customer's positions to the Netting Member's Proprietary Account or
Agent Clearing Member Omnibus Account to flatten open positions of
the defaulting Executing Firm Customer).
\292\ See ISDA Letter II at 4.
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In response, FICC states that the Agent Clearing Service was
designed to closely resemble the clearing model used in the futures and
cleared swap market, and that such clearing models do not, to FICC's
knowledge, prescribe a close-out mechanism for a clearing member to use
to close out its customers' trades.\293\ FICC further states that,
instead, the clearing models generally leave it to the bilateral
agreement between clearing members and their customers to address how
such close-out should be effected. FICC also states that it is open to
considering steps FICC can take to facilitate the ability of Netting
Members to address a customer default situation and to promote legal
certainty for both done-away and done-with transactions under the Agent
Clearing and Sponsored Services.
---------------------------------------------------------------------------
\293\ See FICC Letter at 26.
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The Proposed Rule Change does not include these types of close-out
provisions that the commenter seeks. However, the Commission shall
approve a proposed rule change of a self-regulatory organization if it
finds that it is consistent with the Act,\294\ and the lack of such
close-out provisions is not inconsistent with the Act.
---------------------------------------------------------------------------
\294\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
Several commenters state that the GSD Rules should provide for a
porting mechanism to enable a customer to transfer positions to another
Netting Member intermediary for risk management or business-related
reasons.\295\ Some commenters highlight that porting mechanisms exist
in the cleared futures market as an important risk management
tool.\296\ In addition, one commenter states that in the event of a
clearing member default, all non-defaulting customers will want the
option to avoid immediately having their positions closed-out by FICC
(regardless of whether their original execution counterparty was the
clearing member or a third party), through either continuing to settle
open positions or porting them to another clearing member.\297\
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\295\ See FIA-PTG Letter I at 8; ISDA Letter I at 5; MFA Letter
I at 6, 8; FIA Letter at 11; SIFMA Letter I at 2, 4; SIFMA-AMG
Letter at 2-3; ISDA Letter II at 3-4; FIA-PTG Letter II at 2; MFA
Letter II at 7.
\296\ See ISDA Letter I at 5 (stating that many cleared futures
clients are accustomed to their porting rights and use them as an
important risk management tool); ISDA Letter II at 3-4 (stating that
the commenting association's members have already come to rely on
this type of guardrail in the futures clearing model as an essential
risk management tool); MFA Letter I at 6 (stating that porting is an
important risk management tool that provides additional certainty to
indirect participants, particularly during periods of market
stress); SIFMA-AMG Letter at 8 (stating that the ability to port
positions is an important feature of the cleared swaps and futures
market.).
\297\ See Citadel Letter at 5.
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In response, FICC states that it intends to propose amendments to
the GSD Rules that would add porting provisions similar to those
adopted by other U.S.
[[Page 93802]]
CCPs, to make clear that porting is possible for FICC-cleared
trades.\298\ FICC also states its belief that it will be more efficient
to wait until the Commission decides whether to approve or disapprove
the Proposed Rule Change before proposing a specific porting framework,
and states that it will seek to facilitate porting before December 31,
2025.\299\ FICC also states that any porting framework would need to
take into consideration the fact that many FICC-cleared customer
transactions are overnight, and that porting may not be practical for
such transactions because they will generally settle before the porting
can be completed.\300\ FICC further states that the ability to settle
(which is currently included in the GSD Rules governing the Sponsored
Service) is therefore substantially more important than the ability to
port.\301\
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\298\ See FICC Letter at 25.
\299\ See id.
\300\ See id.
\301\ See id.
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The Proposed Rule Change does not contain any provisions related to
porting customer transactions at FICC. However, the Commission shall
approve a proposed rule change of a self-regulatory organization if it
finds that it is consistent with the Act,\302\ and the lack of porting
provisions is not inconsistent with the Act.
---------------------------------------------------------------------------
\302\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
Accordingly, for the reasons above, the Proposed Rule Change is
consistent with Rule 17ad-22(e)(18)(iv)(C).\303\
---------------------------------------------------------------------------
\303\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
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E. Consistency With Rule 17ad-22(e)(23)(ii)
Rule 17ad-22(e)(23)(ii) under the Exchange Act requires a covered
clearing agency, such as FICC, to establish, implement, maintain, and
enforce written policies and procedures reasonably designed to provide
sufficient information to enable participants to identify and evaluate
the risks, fees, and other material costs they incur by participating
in the covered clearing agency.\304\
---------------------------------------------------------------------------
\304\ 17 CFR 240.17ad-22(e)(23)(ii).
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Several commenters state that FICC should regularly publish
statistics regarding the GSD access models, such as the volumes and
proportion of transactions cleared through each access model and
transactions executed on done-with and done-away bases.\305\ The
commenters suggest that FICC's publication of such data would enable
market participants to better evaluate which access model best fits
their business needs.\306\ FICC responds that it intends to collect and
publish information regarding the GSD access models, including the (1)
number of Netting Members enabled to use each model, (2) number of
Sponsoring Members enabled to offer done-away clearing, and (3) volumes
of trading through each access model, including the number of
transactions and total notional.\307\ The Commission agrees that FICC's
regular publication of the foregoing data should provide information
that would better enable market participants to evaluate the GSD access
models.
---------------------------------------------------------------------------
\305\ See FIA-PTG Letter I at 4; MFA Letter I at 8; AIMA Letter
at 6.
\306\ See id.
\307\ See FICC Letter at 20-21.
---------------------------------------------------------------------------
One commenter states that in addition to regularly publishing the
data referenced in the immediately preceding paragraph, FICC should
also regularly publish the number of clearing members who are in fact
clearing more than de minimis volumes pursuant to each such model, and
clearly separate out done-with and done-away activity.\308\ The
Proposed Rule Change does not contain any provisions related to FICC's
publication of the specific data requested by the commenter. The
Commission shall approve a proposed rule change of a self-regulatory
organization if it finds that it is consistent with the Act,\309\ and
the lack of provisions regarding FICC's regular publication of the data
requested by the commenter is not inconsistent with the Act.
---------------------------------------------------------------------------
\308\ See FIA-PTG Letter II at 4.
\309\ See 15 U.S.C. 78s(b)(2)(C)(i).
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For the reasons discussed above, the Proposed Rule Change would
enable FICC to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide sufficient
information to enable members to identify and evaluate the risks, fees,
and other material costs they incur as FICC's members, consistent with
Rule 17ad-22(e)(23)(ii).\310\
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\310\ 17 CFR 240.17ad-22(e)(23)(ii).
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act and in particular with the requirements of Section 17A of
the Exchange Act \311\ and the rules and regulations promulgated
thereunder.
---------------------------------------------------------------------------
\311\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act \312\ that proposed rule change SR-FICC-2024-005, be, and
hereby is, Approved.\313\
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\312\ 15 U.S.C. 78s(b)(2).
\313\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\314\
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\314\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27762 Filed 11-26-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on November 27, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.