Notice2025-09485
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend and Restate the Cross-Margining Agreement Between FICC and CME
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
May 28, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 101 (Wednesday, May 28, 2025)</title>
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[Federal Register Volume 90, Number 101 (Wednesday, May 28, 2025)]
[Notices]
[Pages 22538-22545]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-09485]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103096; File No. SR-FICC-2025-014]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Amend and Restate the
Cross-Margining Agreement Between FICC and CME
May 21, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 9, 2025, Fixed Income Clearing Corporation (``FICC'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The FICC is proposing a rule change related to its cross-margining
arrangement (the ``Cross-Margining Arrangement'') with the Chicago
Mercantile Exchange Inc. (``CME''). The proposed rule change consists
of a proposed Second Amended and Restated Cross-Margining Agreement
(the ``Second A&R Agreement'') between FICC and CME (CME, collectively
FICC and CME are referred to herein as the ``Clearing Organizations''
or ``Parties''). The proposed Second A&R Agreement would replace the
current Amended and Restated Cross-Margining Agreement between the
Parties (the ``Existing Agreement'') \3\ in its entirety and would be
incorporated into the FICC Government Securities Division (``GSD'')
Rulebook (``GSD Rules''). The
[[Page 22539]]
proposed rule change does not require any changes to the text of the
GSD Rules.<SUP>4 5</SUP>
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\3\ See Securities Exchange Act Release No. 98327 (Sept. 8,
2023), 88 FR 63185 (Sept. 14, 2023) (SR-FICC-2023-010).
\4\ The Existing Agreement is incorporated in the GSD Rules
available at <a href="http://www.dtcc.com/legal/rules-and-procedures">www.dtcc.com/legal/rules-and-procedures</a>. Unless
otherwise specified, capitalized terms not defined herein shall have
the meanings ascribed to them in the GSD Rules (as amended by recent
rule changes approved by the SEC) on November 21, 2024), which
includes the Existing Agreement. See Securities Exchange Act Release
No. 101694 (Nov. 21, 2024), 89 FR 93784 (Nov. 27, 2024) (SR-FICC-
2024-005); and No. 101695 (Nov. 21, 2024), 89 FR 93763 (Nov. 27,
2024) (SR-FICC-2024-007).
\5\ Proposed Second Amended and Restated Cross-Margining
Agreement by Fixed Income Clearing Corporation and Chicago
Mercantile Exchange Inc.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
Executive Summary
Generally, the purpose of the Cross-Margining Arrangement is to
enable FICC and CME to recognize for margin purposes the offsetting
risk of positions maintained by a member (or a member and its
Affiliate) at the two Clearing Organizations in circumstances when the
Clearing Organizations can look to all of those positions (and all
associated margin) for performance of the member's obligations. In
particular, the Cross-Margining Arrangement allows the Clearing
Organizations to consider the net risk of a participant's eligible
positions at FICC and CME when setting margin requirements for such
positions.\6\ Any resulting margin reductions create capital
efficiencies for participating members and incentivize such members to
maintain portfolios that present lower overall risk. It also
facilitates the ability of clearing members and their indirect
participant affiliates to access central clearing by ensuring that
their margin obligations are commensurate to the risks of their
portfolios.
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\6\ See Section 4, ``Calculation of the Cross-Margin
Requirements'' of the Existing Agreement, supra note 4.
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Pursuant to the terms of the Existing Agreement, a joint clearing
member of the Clearing Organizations (a ``Joint Clearing Member'') that
participates in the Cross-Margining Arrangement may designate any of
its accounts at FICC (except its Sponsoring Member Omnibus Account) to
be cross-margined with a cross-margining account on the books of CME
(each such account, a ``Cross-Margining Account''). In addition, a
Joint Clearing Member may include in a Cross-Margining Account both its
proprietary positions and those of an affiliate, as long as the
affiliate is not a customer under certain rules of the SEC and its
account on the records of the Joint Clearing Member is a ``proprietary
account'' within the meaning of 17 CFR 1.3 (an ``Eligible Affiliate'').
On December 13, 2023, the SEC amended Rule 17ad-22 to require FICC
to mandate that Netting Members submit for the clearance and settlement
of eligible secondary market transactions (the ``U.S. Treasury Clearing
Rule'') and to require FICC to calculate, collect, and hold margin for
transactions in U.S. Treasury securities that a Netting Member submits
to FICC on behalf of an indirect participant, including an affiliate of
the Netting Member, separately and independently from margin for the
Netting Member's proprietary positions in U.S. Treasury securities
(``Separate Margining Requirement'').\7\
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\7\ See Securities Exchange Act Release No. 99149 (Dec. 13,
2023), 89 FR 2714 (Jan. 16, 2024) (S7-23-22).
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FICC has adopted amendments to the GSD Rules to implement the
Separate Margining Requirement (the ``Separate Margining
Amendments'').\8\ These amendments went into effect on March 24,
2025.\9\ Under the Separate Margining Amendments, a Netting Member will
need to ensure that transactions it submits to FICC for the benefit of
an indirect participant are recorded in an Indirect Participants
Account, such as an Agent Clearing Member Omnibus Account, rather than
in one of the Netting Member's Proprietary Accounts.\10\ At the same
time, the regulations promulgated by the Commodity Futures Trading
Commission (``CFTC'') applicable to the positions that a Joint Clearing
Member maintains at CME for an Eligible Affiliate require that such
positions be maintained in the Joint Clearing Member's house account in
which the Joint Clearing Member may also maintain its own proprietary
positions.\11\
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\8\ See Securities Exchange Act Release No. 101695 (Nov. 21,
2024), 89 FR 93763 (Nov. 27, 2024) (SR-FICC-2024-007).
\9\ On February 25, 2025, the SEC granted temporary exemptive
relief to covered clearing agencies providing central counterparty
services for U.S. Treasury securities from enforcing their written
policies and procedures related to the Separate Margining
Requirement until September 30, 2025. FICC has issued an Important
Notice concerning such relief, which is available at <a href="http://www.dtcc.com/-/media/Files/pdf/2025/2/26/GOV1909-25.pdf">www.dtcc.com/-/media/Files/pdf/2025/2/26/GOV1909-25.pdf</a>.
\10\ See supra note 8.
\11\ See 7 U.S.C. 6d (permitting the commingling of futures
customer property solely with the property of other futures
customers); 17 CFR 1.3, ``Customer'' (deeming the holder of a
``proprietary account'' not to be a customer for purposes of 7
U.S.C. 6d); 17 CFR 1.3 ``proprietary account'' (``This term means
commodity futures . . . account carried on the books and records of
an individual, a partnership, corporation or other type of
association: . . . (2) Of which ten percent or more is owned by one
of the following persons, or an aggregate of ten percent or more of
which is owned by more than one of the following persons: . . .
(vii) A business affiliate that directly or indirectly controls such
individual, partnership, corporation or association; or (viii) A
business affiliate that, directly or indirectly is controlled by or
is under common control with, such individual, partnership,
corporation or association. . . .'').
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The purpose of the proposed Second A&R Agreement is to make certain
technical changes that are designed to account for this difference in
account structure so that an Eligible Affiliate of a Joint Clearing
Member that accesses FICC's clearing services and the Cross-Margining
Arrangement through a Joint Clearing Member will continue to be able to
participate in the Cross-Margining Arrangement in accordance with the
Separate Margining Requirement and Separate Margining Amendments.
The key changes reflected in the proposed Second A&R Agreement set
forth below are principally those necessary to enable Eligible
Affiliates to continue participating in the Cross-Margining Arrangement
in accordance with the Separate Margining Requirement and Separate
Margining Amendments. They consist of:
<bullet> A requirement for any Joint Clearing Member that wishes to
subject the eligible positions of an Eligible Affiliate (a
``Participating Affiliate'') to the Cross-Margining Arrangement to
cause such positions, to the extent cleared at FICC, to be recorded in
an Agent Clearing Member Omnibus Account, which account must contain
exclusively the positions of the Joint Clearing Member's Eligible
Affiliates.
<bullet> Changes to reflect the role of a Participating Affiliate
as a principal on the FICC-cleared eligible positions that are subject
to the Cross-Margining Arrangement and recorded in an Agent Clearing
Member Omnibus Account. These changes include adjustments to
[[Page 22540]]
descriptions of payment and transfer obligations to make clear that
they may be owed by or to an Eligible Affiliate in the case of FICC-
cleared eligible positions. They also include provisions to preserve
the ability of the Clearing Organizations to look to the positions a
Joint Clearing Member carries for a Participating Affiliate and all
associated margin to satisfy the Joint Clearing Member's obligations to
the Clearing Organizations in relation to Cross-Margining Accounts.
Clarifications to ensure that the use of the Cross-Margining
Arrangement by Participating Affiliates does not affect the claims of
any non-participating customers of a Joint Clearing Member under
applicable Customer Protection Regimes (as defined below). In addition
to the foregoing changes, the proposed Second A&R Agreement would
contain revisions to extend from 30 days to 180 days the notice period
in which FICC or CME may provide written notice to the other party of
its election to terminate the proposed Second A&R Agreement.\12\
Although this proposed change is not necessary to enable Eligible
Affiliates to participate in the Cross-Margining Arrangement in
accordance with the Separate Margining Requirement, the Parties believe
this adjustment would provide FICC and CME with the necessary time
needed to unwind the Cross-Margining Arrangement if that ever becomes
necessary.
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\12\ See Sections 15(a) and (b), ``Termination'' of the Existing
Agreement, supra note 4.
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These changes would not otherwise affect the functioning of the
Cross-Margining Arrangement, including the calculation of margin
reductions and default management, under the Existing Agreement.
In addition, the Existing Agreement is supplemented by a Service
Level Agreement (``SLA'') between FICC and CME. FICC and CME will make
edits to the SLA as necessary to ensure conformance with the proposed
Second A&R Agreement.\13\
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\13\ The SLA is provided as confidential Exhibit 3 to this
proposed rule change.
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A. The Proposed Second A&R Agreement
Overview
As noted above, FICC proposes to enter into the proposed Second A&R
Agreement with CME. The proposed amendments to the Existing Agreement
are designed to permit an Eligible Affiliate to have its positions
cross-margined pursuant to the Cross-Margining Arrangement consistent
with Separate Margining Requirement and the Separate Margining
Amendments. FICC believes that such amendments would promote the
maintenance of lower risk and more balanced portfolios and facilitate
the access of indirect participants to central clearing in accordance
with Rule 17ad-22.
1. Proposal To Ensure Compliance With Separate Margining Requirement
In order to facilitate an Eligible Affiliate's participation in the
Cross-Margining Arrangement consistent with the Separate Margining
Requirement and the Separate Margining Amendments, the proposed Second
A&R Agreement would continue to permit a Joint Clearing Member to
subject eligible positions cleared for an Eligible Affiliate to the
Cross-Margining Arrangement but would require any such positions
cleared at FICC to be recorded in an Agent Clearing Member Omnibus
Account. More specifically, the proposed Second A&R Agreement would
contain a new clause providing that in the event transactions or
positions maintained in an Account are not the proprietary transactions
or positions of the Cross-Margining Participant,\14\ then such
transactions or positions and margin therefore may only be maintained
in a Cross-Margining Account at FICC if (i) the transactions, positions
and margin are maintained by the Cross-Margining Participant for an
Eligible Affiliate, and (ii) the Account in which the transactions and
positions in FICC Eligible Products are recorded is an Agent Clearing
Member Omnibus Account \15\ that contains exclusively the transactions
and positions of the Eligible Affiliate(s).\16\ In order to ensure
these conditions (the ``Separate Margining Conditions'') are satisfied,
the proposed Second A&R Agreement would add certain provisions to the
Cross-Margining Agreement (Common Member) attached as Appendix A to the
proposed Second A&R Agreement (the ``Common Member Agreement''), which
all Joint Clearing Members would be required to execute with the
Clearing Organizations. Those provisions would consist of
representations by the Joint Clearing Member to the Clearing
Organizations that the Separate Margining Conditions are met.\17\
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\14\ See Section 1 of the Existing Agreement (defining ``Cross
Margining Participant'' as ``a Joint Clearing Member that has
become, or a Clearing Member that is part of a pair of Cross-
Margining Affiliates each of which has become, a participant in the
cross-margining arrangement between FICC and CME established
pursuant to this Agreement. . . .''), supra note 4.
\15\ See GSD Rule 8, Section 5, supra note 4. As a result of the
recent amendment to GSD Rules to facilitate access to clearance and
settlement of all eligible secondary market transactions in U.S.
Treasury securities (the ``Access Amendments''), FICC will offer two
different types of Indirect Participant Accounts for use without
margin segregation: the Agent Clearing Member Omnibus Account and
the Sponsoring Member Omnibus Account. Securities Exchange Act
Release No. 101694 (Nov. 21, 2024), 89 FR 93784 (Nov. 27, 2024) (SR-
FICC-2024-005). The GSD Rules do not currently permit a Joint
Clearing Member to designate a Sponsoring Member Omnibus Account as
a Cross-Margining Account. See GSD Rule 3A, Section 10(h). FICC is
not proposing to change this limitation. FICC calculates margin
obligations for Sponsoring Member Omnibus Accounts that are not
designated for segregation in a different manner from how it
calculates margin requirements for Proprietary Accounts and Agent
Clearing Member Omnibus Accounts that are not designated for
segregation. In particular, FICC generally calculates margin
requirements for Sponsoring Member Omnibus Accounts on a gross
(i.e., Sponsored Member-by-Sponsored Member) basis, while it
calculates margin for Agent Clearing Member Omnibus Accounts that
are not designated for segregation and Proprietary Accounts on a net
basis across all positions in the account. As a result, significant
systems and other changes would be necessary to allow Joint Clearing
Members to record Eligible Positions of Participating Affiliates in
a Sponsoring Member Omnibus Account. FICC is not aware of any market
interest in using unsegregated Sponsoring Member Omnibus Accounts
for purposes of cross-margining involving Eligible Affiliates.
\16\ A Joint Clearing Member and any Eligible Affiliate(s) would
need to satisfy FICC's requirements to be an Agent Clearing Member
and an Executing Firm, respectively, in accordance with GSD Rule 8,
supra note 4.
\17\ See Appendix A, ``Fixed Income Clearing Corporation/Chicago
Mercantile Exchange Inc. Cross-Margining Participant Agreement
(Common Member)'' of the proposed Second A&R Agreement, supra note
5.
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By virtue of these changes, in no circumstance would any
proprietary securities positions of the Joint Clearing Member at FICC
(or any proprietary margin securing those positions) be incorporated
into or netted against FICC's calculation of the margin requirement
applicable to the positions the Joint Clearing Member carries for its
Eligible Affiliates.
2. Proposals To Address the Role of Participating Affiliates as
Principal
Under the GSD Rules, when an Agent Clearing Member clears an Agent
Clearing Member Transaction for an Executing Firm Customer, it ``acts
solely as agent.'' \18\ Accordingly, an Executing Firm Customer, such
as a Participating Affiliate, is a principal on such transaction. The
proposed Second A&R Agreement would include changes to reflect the role
of a Participating Affiliate as principal on the Eligible Positions
recorded in an Agent Clearing Member Omnibus Account. In particular,
the proposed Second A&R Agreement would adjust a number of defined
terms, including ``Cross-Margin VM Gain,'' ``Cross-Margin VM Loss,''
[[Page 22541]]
``Liquidation Cost,'' ``Margin,'' ``Other VM Gain,'' ``Other VM Loss,''
``Variation Margin,'' \19\ as well as the provisions of Section 7
relating to the termination of a Cross-Margining Participant to
recognize that payment or delivery obligations may be owed by or to an
Eligible Participant, rather than by or to the Joint Clearing
Member.\20\
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\18\ See GSD Rules, Rule 8, Section 5(b), supra note 2;
Securities Exchange Act Release No. 101695 (Nov. 21, 2024), 89 FR
93763 (Nov. 27, 2024) (SR-FICC-2024-007).
\19\ See Section 1, ``Definitions'' of the proposed Second A&R
Agreement, supra note 5.
\20\ See Section 7(a), ``Suspension and Liquidation of Cross-
Margining Participant'' of the proposed Second A&R Agreement, supra
note 5.
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In addition, the proposed Second A&R Agreement would include a
number of additions to the Common Member Agreement to ensure that, as
is the case with the Existing Agreement, FICC and CME would be able to
look to the entirety of a Participating Affiliate's Eligible Positions
and all associated margin to satisfy the obligations arising from the
Joint Clearing Member's Cross-Margining Accounts at FICC and CME. In
particular, the proposed Second A&R Agreement would require each Joint
Clearing Member to agree in the Common Member Agreement, as agent for
each of its Participating Affiliates, that each such Participating
Affiliate (i) unconditionally promises to pay any amounts owing in
respect of the Cross-Margining Accounts established for such
Participating Affiliate (each, an ``Affiliate Account''), (ii) agrees
that it is jointly and severally liable for any payment obligation in
respect of any Cross-Margining Account of the Joint Clearing Member, in
an amount up to the liquidation value of the positions maintained for
the Participating Affiliate in any Affiliate Account and, without
duplication, the value realized on any margin or other collateral held
for any such account, and (iii) agrees it is bound by the GSD Rules and
the CME rules as applicable to a Participating Affiliate and by the
provisions of the proposed Second A&R Agreement and Common Member
Agreement.\21\
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\21\ See supra note 17.
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In order to ensure the effectiveness of these agreements by a Joint
Clearing Member on behalf of its Participating Affiliates, each Joint
Clearing Member would represent and warrant in the Common Member
Agreement that it has full power and authority to bind each of its
Participating Affiliates to the foregoing terms and that before
permitting an Eligible Affiliate to be a Participating Affiliate it
will have obtained such Participating Affiliate's written consent to
such terms.\22\ The proposed Common Member Agreement would require each
Joint Clearing Member to provide such written consent to the Clearing
Organizations upon their request.\23\
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\22\ See id.
\23\ See id.
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Furthermore, the proposed Second A&R Agreement would include
revisions to the security interest language in the Common Member
Agreement so that the obligations secured include those of the
Participating Affiliate, and that the Joint Clearing Member grants the
security interest on behalf of itself and each Participating
Affiliate.\24\
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\24\ See id.
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These proposed changes to the Common Member Agreement would ensure
that, if a Joint Clearing Member defaults and FICC makes payment to CME
pursuant to the cross-guarantee set forth in the proposed Second A&R
Agreement,\25\ FICC would be able to set off and apply to its claim for
reimbursement the positive liquidation value of each Participating
Affiliate's positions and the margin securing such positions.\26\
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\25\ The cross-guarantee would remain unchanged, see Section 8,
``Guaranty of FICC to CME'' and Section 9 ``Guaranty of CME to
FICC'' of the Existing Agreement, supra note 4.
\26\ The proposed Second A&R Agreement also includes a number of
acknowledgments and agreements from each Joint Clearing Member, as
agent for each Participating Affiliate, about the treatment of CME-
cleared positions and CME-held margin and the Participating
Affiliate's rights and obligations related thereto. See Appendix A,
``Fixed Income Clearing Corporation/Chicago Mercantile Exchange Inc.
Cross-Margining Participant Agreement (Common Member)'' of the
proposed Second A&R Agreement, supra note 5.
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3. Proposals Relating to Customer Protection
The proposed Second A&R Agreement would include provisions to
ensure that, consistent with the Existing Agreement, the use of the
Cross-Margining Arrangement by Participating Affiliates would not
affect the customer protections available to any non-participating
customers of the Joint Clearing Member under the Securities Investor
Protection Act (``SIPA''), the stockbroker liquidation provisions of
Subchapter III of Chapter 7 of the Bankruptcy Code, the commodity
broker liquidation provisions of Subchapter IV of Chapter 7 of the
Bankruptcy Code, or the Commodity Futures Trading Commission's Part 190
regulations thereunder (collectively, the ``Customer Protection
Regimes''). In order to accomplish this, the proposed Second A&R
Agreement would limit the scope of Eligible Affiliates to entities that
are Non-Customers,\27\ which the proposed Second A&R Agreement would
define as ``any Affiliate of the Clearing Member (i) that is not a
`customer' of the Clearing Member within the meaning of Securities
Investor Protection Act, Subchapter III of Chapter 7 of the U.S.
Bankruptcy Code, or Rule 15c3-3 as promulgated under the Act \28\ and
(ii) whose Eligible Positions in CME Eligible Products are carried in a
Proprietary Account of the Clearing Member.'' \29\
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\27\ See ``Recitals'' of the proposed Second A&R Agreement,
supra note 5.
\28\ In order for an Affiliate to constitute a non-customer for
purposes of SIPA, the Affiliate would generally need to enter into a
subordination agreement with the Joint Clearing Member pursuant to
which the Affiliate agrees and acknowledges that its FICC-cleared
positions and margin maintained in a Cross- Margining Account will
not receive customer treatment under the Exchange Act or SIPA or be
treated as ``customer property'' as defined in 11 U.S.C. 741 in a
liquidation of the Joint Clearing Member.
\29\ See Section 1, ``Definitions'' of the proposed Second A&R
Agreement, supra note 5.
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In addition, the proposed Second A&R Agreement would require that
each Affiliate Account be limited to the positions of Non-Customers (or
in the case of an Affiliate Account at CME, the Joint Clearing Member's
proprietary positions) and any margin posted to FICC in relation to
such an account would not be subject to segregation. It would achieve
this by requiring a Joint Clearing Member to represent in the Common
Member Agreement that any Participating Affiliate is a Non-Customer,
that any Cross-Margining Account (whether at CME or FICC) includes
exclusively the positions of Non-Customers or the Joint Clearing
Member, and that any margin posted to FICC in relation to an Eligible
Affiliate account is not subject to segregation under the Rules.\30\
These proposed changes are designed to ensure that no Participating
Affiliate would have a claim under any Customer Protection Regime in
relation to its Affiliate Account or Eligible Positions that could
disrupt the priority rights of any customers of a Joint Clearing Member
under those regimes to segregated pools of property.
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\30\ See Section 15, ``Termination'' of the proposed Second A&R
Agreement, supra note 5.
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4. Proposal To Extend the Termination Notification Period
The proposed Second A&R Agreement would revise Sections 15(a) and
(b) of the Existing Agreement (Termination) to extend the prior written
notification period for either party to terminate the Cross-Margining
Arrangement from 30 days to 180 days.\31\ While this proposed
[[Page 22542]]
change is not required to facilitate the principal purpose of the
proposed Second A&R Agreement, which is to allow Eligible Affiliates to
participate in the Cross-Margining Arrangement consistently with the
Separate Margining Requirement and Separate Margining Amendments, it
would provide for a more effective timeframe for the Parties to unwind
the Cross-Margining Arrangement, which would benefit FICC as well as
all Cross-Margining Participants, including any Eligible Affiliates,
where applicable.
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\31\ Pursuant to the Existing Agreement, either Party may
terminate the Agreement without cause by delivering written notice
of termination to the other Party specifying a termination date not
less than 30 days following the date on which such notice is sent.
See Sections 15(a) and (b), ``Termination'' of the Existing
Agreement, supra note 4.
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B. Implementation of the Proposal
As noted above, the principal purpose of the proposed Second A&R
Agreement is to allow Eligible Affiliates to participate in cross-
margining in a manner consistent with the Separate Margining
Requirement and the Separate Margining Amendments. The proposed Second
A&R Agreement would therefore not become effective and replace the
Existing Agreement until the latest of (i) the date both the SEC
approves this proposed rule change and the CFTC approves CME's proposed
rule change and (ii) a date agreed to by FICC and CME.\32\ No later
than two (2) business days following the date of the Commission's
approval of this proposed rule change, FICC would add a legend to the
proposed Second A&R Agreement to state that the specified changes are
approved but not yet operative. The legend would also include the file
number of the approved proposed rule change, and would state that once
operative, the legend would automatically be removed from the proposed
Second A&R Agreement. FICC would issue an important notice to members
providing notice of the specific operative date at least two weeks
prior to such date.
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\32\ See Section 18(j), ``Effective Date'' of the proposed
Second A&R Agreement, supra note 5.
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2. Statutory Basis
FICC believes that the proposed rule change is consistent with
Section 17A of the Act \33\ and the rules thereunder applicable to
FICC.
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\33\ 15 U.S.C. 78q-1.
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Section 17A(b)(3)(F) of the Act, requires, in part, that the rules
of a clearing agency be designed to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\34\ FICC believes that
the proposed rule change would assure the safeguarding of securities
and funds which are in its custody or control for which it is
responsible for a number of reasons.
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\34\ 15 U.S.C. 78q-1(b)(3)(F).
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First, the proposed rule change would create a framework through
which Eligible Affiliates may engage in cross-margining consistent with
the Separate Margining Requirement and Separate Margining
Amendments.\35\ As the Commission recently found, those rule changes
should allow FICC to better identify and measure the unique risk
profiles of each Netting Member and indirect participant, enhancing
FICC's ability to calculate and collect sufficient margin from each
Netting Member and indirect participant to cover potential losses from
a Netting Member or indirect participant default, thereby reducing the
likelihood that FICC, Netting Members, or indirect participants would
incur losses resulting from a default. As a result, the changes should
limit FICC's risk to a Netting Member or indirect participant default
and thereby enhance its ability to safeguard securities and funds in
its control and for which it is responsible.\36\
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\35\ See ``Recitals'' of the proposed Second A&R Agreement,
supra note 5.
\36\ Supra note 8.
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Cross-margining likewise reduces the likelihood of FICC, its
Netting Members, or its indirect participants incurring a loss on
account of a default by aligning each participant's margin requirements
with the risk of such participant's positions. Such alignment serves to
incentivize the participant to maintain portfolios that present lower
risk, which in turn serves to reduce the risk of such participant's
default and FICC's exposure thereto. Accordingly, by allowing an
Eligible Affiliate to engage in cross-margining activity in a way that
is consistent with the Separate Margining Requirement and the Separate
Margining Amendments, the proposed rule change would serve to promote
both the risk-reducing effects of the Separate Margining Requirements
and the Separate Margining Amendments and those of cross-margining.
They would thus serve to enhance FICC's ability to safeguard the
securities and funds in its control or for which it is responsible.
Second, the proposed rule change would ensure that FICC and CME can
continue to look to the entirety of a Participating Affiliate's cross-
margined positions and all associated margin to satisfy the obligations
arising from the Joint Clearing Member's Cross-Margining Accounts at
FICC and CME.\37\ The Existing Agreement currently allows FICC and CME
to apply to a Joint Clearing Member's obligations arising from its
Cross-Margining Accounts, any of the positions forming part of the
Joint Clearing Member's Cross-Margining Accounts, and any associated
margin, including positions carried by the Joint Clearing Member for an
affiliate. By retaining the ability of FICC and CME to look to those
positions and associated margin to satisfy a Joint Clearing Member's
obligations, the proposed rule change would ensure that allowing
Participating Affiliates to participate in cross-margining in
accordance with FICC's revised account structure would not increase
FICC's or CME's risk exposure in relation to the Cross-Margining
Arrangement. Accordingly, the proposed rule change would serve to limit
FICC's risk related to a default of a Joint Clearing Member or its
Participating Affiliate and thereby enhance FICC's ability to safeguard
funds and securities.
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\37\ Supra note 5.
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Third, the proposed rule change would include provisions to ensure
that the participation of Participating Affiliates would not disrupt
the claims of any non-participating customers of a Joint Clearing
Member under the Customer Protection Regimes for the return of their
funds or securities held at FICC. More specifically, the proposed rule
change would require that an Affiliate Account contains positions
carried for Participating Affiliates, such positions must be positions
of Non-Customers that have not elected margin segregation.\38\ By doing
so, the proposed rule change would ensure that neither Participating
Affiliates nor others whose positions are carried in Affiliate Accounts
are eligible to make claims under the Customer Protection Regimes that
could reduce the property available to satisfy any veritable customer
claims against a Joint Clearing Member. Accordingly, it would ensure
that funds and securities in FICC's control or custody that are held
for customers remain safeguarded for those customers to the same extent
as would be the case in the absence of the Cross-Margining Arrangement.
---------------------------------------------------------------------------
\38\ See id.
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Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions.\39\ For the
reasons set out below, FICC believes that the proposed rule change
would remove impediments to and perfect the mechanism of a national
system for the prompt and accurate
[[Page 22543]]
clearance and settlement of securities transactions.
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\39\ 15 U.S.C. 78q-1(b)(3)(F).
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First, the proposed rule change would permit Eligible Affiliates to
continue participating in the Cross-Margining Arrangement in accordance
with the Separate Margining Requirement. By doing so, the proposed rule
change would serve to maintain the incentives for Joint Clearing
Members and their Eligible Affiliates to submit transactions for
central clearing. Specifically, the proposed rule change would continue
to allow Joint Clearing Members and Participating Affiliates to benefit
from margin efficiencies and savings that arise from cross-margining
and that serve to reduce the costs of Eligible Affiliates to access
FICC's clearance and settlement services and the costs of Joint
Clearing Members to facilitate such access. Therefore, the proposed
rule change would continue encouraging market participants to submit
more Treasury securities transactions to be cleared at FICC. The
maintenance of such incentives to submit transactions for clearance and
settlement at FICC would promote the diversity and scope of market
participants able to utilize FICC's multilateral netting, trade
guaranty and centralized default management services, which would help
reduce the aggregate costs that would be incurred by market
participants to engage in securities transactions. Therefore, the
proposed rule change would serve to promote prompt and accurate
clearance and settlement of securities transactions.\40\
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\40\ Id.
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Second, the proposed rule change would include clarifying changes
to reflect the role of a Participating Affiliate as a principal. These
changes would improve public understanding of how the Cross-Margining
Arrangement works and make it easier for Eligible Affiliates to
consider the benefits and risks of participating in the Cross-Margining
Arrangement, thereby improving the ability of Joint Clearing Members
and Eligible Affiliates to access FICC's clearance and settlement
systems.\41\
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\41\ For the avoidance of doubt, the proposed rule change would
not implicate the inter-affiliate exception under the U.S. Treasury
Clearing Rule because that relates to transactions between a Netting
Member and an affiliate. Supra note 7.
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Given the foregoing, FICC believes that the proposed rule change is
designed to remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions.\42\
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\42\ 15 U.S.C. 78q-1(b)(3)(F).
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Rule 17ad-22(e)(6)(i) under the Act requires that a covered
clearing agency establish a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market and, if the covered clearing agency provides central
counterparty services for U.S. Treasury securities, calculates,
collects, and holds margin amounts from a direct participant for its
proprietary positions in Treasury securities separately and
independently from margin calculated and collected from that direct
participant in connection with U.S. Treasury securities transactions by
an indirect participant that relies on the services provided by the
direct participant to access the covered clearing agency's payment,
clearing, or settlement facilities.\43\ FICC believes that the proposed
rule change would ensure the satisfaction of this Separate Margining
Requirement. This is because the proposed Second A&R Agreement would
require that the FICC-cleared eligible positions of a Participating
Affiliate be carried in an Agent Clearing Member Omnibus Account.\44\
Accordingly, the proposed rule change would ensure that the FICC-
cleared positions of a Participating Affiliate are never netted against
any FICC-cleared positions of its Joint Clearing Member in FICC's
calculation of margin requirements.
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\43\ 17 CFR 240.17ad-22(e)(6)(i).
\44\ See Section 3(b), ``Establishment of Cross-Margining
Accounts'' of the proposed Second A&R Agreement, supra note 5.
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Rule 17ad-22(e)(4)(i) under the Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes by
maintaining sufficient financial resources to cover its credit exposure
to each participant fully with a high degree of confidence.\45\ FICC
believes that the proposed rule change would ensure that FICC continues
to effectively measure and manage its credit exposure to participants
by maintaining sufficient financial resources to cover its exposure
thereto with a high degree of confidence. This is because the proposed
rule change, as discussed above, would include changes to the Common
Member Agreement to ensure that FICC can continue to look to all of the
positions a Joint Clearing Member carries in a Cross-Margining Account
at FICC or CME, and all associated margin, to satisfy that Joint
Clearing Member's obligations in relation to a Cross-Margining Account,
even when those positions are carried for a Participating
Affiliate.\46\ By doing so, the proposed rule change would ensure that
the Separate Margining Requirement and FICC's implementing rules
thereof do not reduce the scope of resources that FICC can rely upon to
satisfy cross-margining exposures.
---------------------------------------------------------------------------
\45\ 17 CFR 240.17ad-22(e)(4)(i).
\46\ Supra note 5.
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Rule 17ad-22(e)(23)(ii) under the Act requires that a covered
clearing agency establish written policies and procedures providing
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.\47\ As described above, the proposed
rule change would include clarifications regarding the types of
indirect participants eligible to participate in the Cross-Margining
Agreement and the role of Participating Affiliates as principals.\48\
The proposed rule change would also include express language making
clear that a Participating Affiliate's positions recorded in a Cross-
Margining Account, and all associated margin, may be used to satisfy
the Joint Clearing Member's obligations in relation to its Cross-
Margining Accounts.\49\ These changes would accordingly provide clarity
to market participants to enable them to evaluate the risks and costs
of participating in the Cross-Margining Arrangement in accordance with
Rule 17ad-22(e)(23)(ii).
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\47\ 17 CFR 240.17ad-22(e)(23)(ii).
\48\ Supra note 5.
\49\ See id.
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Rule 17ad-22(e)(18)(iv)(C) under the Act requires, among other
things, that a covered clearing agency that provides central
counterparty services for transactions in U.S. Treasury securities
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.
As described above, the proposed rule change would ensure that Eligible
Affiliates would continue to be able to participate in the Cross-
Margining Arrangement consistent with the Separate Margining
Requirement and incentivize market participates, including indirect
participants that are Eligible Affiliates, to submit more eligible
secondary market transactions in U.S. Treasury securities for clearing
under the Cross-Margining Arrangement in light of the
[[Page 22544]]
margin efficiency. Therefore, the proposed rule change would continue
to facilitate access to clearance and settlement services of all
eligible secondary market transactions in U.S. Treasury securities,
including those of indirect participants.\50\
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\50\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed rule change to replace the Existing
Agreement with the proposed Second A&R Agreement would promote
competition by ensuring Eligible Affiliates' continued access to the
Cross-Margining Arrangement.
The proposed Second A&R Agreement would ensure that Eligible
Affiliates can continue to participate in the Cross-Margining
Arrangement consistent with the Separate Margining Requirement. Such
undisrupted access would allow Eligible Affiliates to remain on a level
playing field with other market participants, such as Joint Clearing
Members and Cross-Margining Affiliates, which will continue to be
eligible to participate in the Cross-Margining Arrangement for their
proprietary positions in accordance with the Separate Margining
Requirement and Separate Margining Amendments. Accordingly, the
proposed rule change would ensure that the advent of the Separate
Margining Requirement and the adoption of the Separate Margining
Amendments do not place Eligible Affiliates at an undue competitive
disadvantage relative to Joint Clearing Members or Cross-Margining
Affiliates by depriving the former, but not the latter, of the ability
to cross-margin.
Although the proposed rule change would not extend cross-margining
to indirect participants that do not satisfy the definition of Eligible
Affiliates, that does not represent a change. Such indirect
participants are currently unable to participate in cross-margining due
to the account structures, customer protection arrangements, and
regulatory approvals that would be necessary to allow such
participation. The proposed rule change would not change that, but
would merely preserve the status quo of allowing Eligible Affiliates to
participate in cross-margining and remain competitive with Joint
Clearing Members and Cross-Margining Affiliates.
While the proposed rule change would clarify the scope of what
constitutes a Non-Customer and thus the scope of Eligible Participants,
FICC does not believe that this change represents a material
modification of the market participants that are able to engage in
cross-margining. Rather, this change simply aims to clarify what is
currently the case, (i.e., that Eligible Participants do not include
entities eligible for the Customer Protection Regimes). Accordingly,
FICC does not believe this change would materially affect competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
FICC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on How to Submit a Comment, available at <a href="http://www.sec.gov/rules-regulations/how-submit-comment">www.sec.gov/rules-regulations/how-submit-comment</a>. General questions regarding the
rule filing process or logistical questions regarding this filing
should be directed to the Main Office of the Commission's Division of
Trading and Markets at <a href="/cdn-cgi/l/email-protection#b5c1c7d4d1dcdbd2d4dbd1d8d4c7ded0c1c6f5c6d0d69bd2dac3"><span class="__cf_email__" data-cfemail="94e0e6f5f0fdfaf3f5faf0f9f5e6fff1e0e7d4e7f1f7baf3fbe2">[email protected]</span></a> or 202-551-5777.
FICC reserves the right to not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#a5d7d0c9c088c6cac8c8c0cbd1d6e5d6c0c68bc2cad3"><span class="__cf_email__" data-cfemail="681a1d040d450b0705050d061c1b281b0d0b460f071e">[email protected]</span></a>. Please include
file number SR-FICC-2025-014 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to file number SR-FICC-2025-014. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549 on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of FICC and on DTCC's
website (<a href="http://www.dtcc.com/legal/sec-rule-filings">www.dtcc.com/legal/sec-rule-filings</a>). Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-FICC-2025-014 and should be submitted on or
before June 18, 2025.
[[Page 22545]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
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\51\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-09485 Filed 5-27-25; 8:45 am]
BILLING CODE 8011-01-P
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