Notice2025-11422
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Modify the GSD Rulebook Relating to Default Management and Porting With Respect to Indirect Participant Activity
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
June 23, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 118 (Monday, June 23, 2025)</title>
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[Federal Register Volume 90, Number 118 (Monday, June 23, 2025)]
[Notices]
[Pages 26656-26667]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-11422]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103282; File No. SR-FICC-2025-015]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Modify the GSD Rulebook
Relating to Default Management and Porting With Respect to Indirect
Participant Activity
June 17, 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 June 6, 2025, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``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 proposed rule change consists of amendments to FICC's
Government Securities Division (``GSD'') Rulebook (``Rules'' or ``GSD
Rules'') \3\ to (1) enhance the ability of market participants to
understand FICC's default management rules as they apply to the default
of a Sponsoring Member or Sponsored Member; (2) adopt rules that would
govern the default management and related matters applicable to the
Agent Clearing Service that are consistent, as appropriate, with the
default management rules of the sponsored membership service
(``Sponsored Service''); (3) enhance the provisions that govern a
default of FICC by addressing the application of those provisions to
indirect participant activity; (4) adopt rules that facilitate the
porting of indirect participant activity from one intermediary Netting
Member to another intermediary Netting Member; and (5) make other
technical updates and corrections to the GSD Rules.
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\3\ Terms not defined herein are defined in the Rules, available
at <a href="http://www.dtcc.com/legal/rules-and-procedures.aspx">www.dtcc.com/legal/rules-and-procedures.aspx</a>.
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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
The primary purpose of the proposed changes to the GSD Rules is to
improve market participants' understanding of the rules that govern a
default that may occur within one of GSD's indirect access models--the
Sponsored Service \4\ and the Agent Clearing Service.\5\ In connection
with these changes, FICC would also enhance the rules that govern a
default of FICC (defined in the Rules as a ``Corporation Default'') \6\
by addressing the application of those rules to indirect participant
activity. Finally, FICC is proposing to adopt rules that would permit
the porting of indirect participant positions and margin between
intermediaries, both in the regular course of business and following
the default of an intermediary firm.
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\4\ See GSD Rule 3A (Sponsoring Members and Sponsored Members),
id.
\5\ See GSD Rule 8 (Agent Clearing Service), id.
\6\ See GSD Rule 22B (Corporation Default), id.
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FICC, through GSD, serves as a central counterparty 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 involving U.S. Treasury
securities.\7\ GSD's central counterparty services are available
directly to entities that are approved to be Netting Members and
indirectly to other market participants through GSD's indirect access
models--the Sponsored Service and Agent Clearing Service. As a central
counterparty, FICC plays a key role in financial markets by mitigating
counterparty credit risk on Novated transactions that are submitted to
FICC for central clearing. The GSD Rules govern the actions that FICC
could take following the default of its Netting Members, including
those Netting Members that act as intermediaries for other market
participants as either Sponsoring Members or Agent Clearing Members.
These rules are designed to ensure that such default is managed in a
controlled and orderly manner and to minimize losses, thus ensuring the
stability of the overall system. Specifically, the GSD Rules provide
FICC with the authority to take timely action to contain losses and
liquidity demands and to allow FICC to continue to meet its obligations
following the default of a Netting Member.
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\7\ GSD also clears and settles certain transactions on
securities issued or guaranteed by U.S. government agencies and
government sponsored enterprises.
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FICC has recently amended the GSD Rules by adopting and enhancing
the rules that govern GSD's indirect access models in order to
facilitate access to its clearance and settlement services for market
participants.\8\ These prior rule changes included adopting rules that
govern GSD's Agent Clearing Service and amending the rules that govern
its Sponsored Service. FICC believes the changes now being proposed
would further encourage greater utilization of centralized clearing by
providing in the GSD Rules additional information regarding the rights
and obligations of FICC's direct and indirect participants in the event
of a default. By improving the public disclosures of the key aspects of
its default rules and procedures, the rule changes would also allow
both FICC and relevant market participants to be prepared for the
implementation of those procedures. In this way, the rule changes also
facilitate FICC's ability to take timely action to contain losses and
liquidity demands and continue to meet
[[Page 26657]]
its obligations as a central counterparty following a Member or
indirect participant default.
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\8\ See Securities Exchange Act Release No. 101694 (Nov. 21,
2024), 89 FR 93784 (Nov. 27, 2024) (SR-FICC-2024-005).
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The proposed rules to govern the porting of indirect participant
activity between intermediaries would provide indirect participants
with a tool to manage their clearing activity and intermediary
relationships and manage their exposures to a defaulting intermediary.
In this way, these proposed changes would further facilitate access to
GSD's clearance and settlement services.
Background
Overview of GSD's Indirect Participation Access Models
FICC has two indirect access models--the Sponsored Service and the
Agent Clearing Service. As described in GSD Rule 3A, FICC's Sponsored
Service permits Members that are approved to be Sponsoring Members to
sponsor certain institutional firms, referred to as ``Sponsored
Members,'' into GSD membership.\9\ For these relationships, FICC
establishes and maintains a ``Sponsoring Member Omnibus Account'' on
its books where it records the transactions of the Sponsoring Member's
Sponsored Members (``Sponsored Member Trades'').\10\ For purposes of
managing the risks presented by Sponsored Member Trades, activity
recorded in a Sponsoring Member Omnibus Account is margined on a gross,
or Sponsored Member-by-Sponsored Member, basis and cannot be netted
across Sponsored Members.\11\
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\9\ See GSD Rule 3A, supra note 3.
\10\ See GSD Rule 2B (Accounts) and GSD Rule 1 (definition of
``Sponsored Member Trades''), id.
\11\ See GSD Rule 3A, Section 10 and GSD Rule 4 (Clearing Fund
and Loss Allocation), id.
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A Sponsored Member is a limited member of GSD and the legal
counterparty to FICC for any submitted transactions. 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.\12\ 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.
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\12\ See GSD Rule 1 (definition of ``Sponsoring Member
Guaranty'') and Rule 3A, Section 2(c), id.
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FICC's Agent Clearing Service facilitates agent-style trading by
allowing Members that are approved to be Agent Clearing Members to
submit trades of their customers, referred to as ``Executing Firm
Customers,'' into GSD for clearing and settlement.\13\ FICC establishes
and maintains an ``Agent Clearing Member Omnibus Account'' on its books
where it records the transactions of the Agent Clearing Member's
Executing Firm Customers (``Agent Clearing Transactions'').\14\ Unlike
Sponsored Members, Executing Firm Customers do not become limited
members of FICC. Agent Clearing Members act as both processing agent
and credit intermediary for their customers in clearing, and Executing
Firm Customers are identified on Agent Clearing Transactions when such
activity is submitted to FICC. FICC may net the Agent Clearing
Transactions of one or more Executing Firm Customers whose activity is
recorded in the same Agent Clearing Member Omnibus Account for purposes
of calculating the required margin deposits.
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\13\ See GSD Rule 8, id.
\14\ See GSD Rule 2B and GSD Rule 1 (definition of ``Agent
Clearing Transactions''), id.
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The Sponsored Service and the Agent Clearing Service each give
Sponsored Members and Executing Firm Customers (collectively referred
to as ``Indirect Participants'') different options in accessing FICC's
clearance and settlement services, and the benefits of its central
counterparty guaranty, multilateral netting and centralized default
management. The primary differences between the two services are that
(1) Sponsored Members must establish a limited purpose membership with
FICC, whereas Executing Firm Customers do not establish any direct
relationship with FICC; and (2) Sponsored Member Trades are margined on
a gross basis, whereas Agent Clearing Member Transactions of Executing
Firm Customers may be margined on a net basis when recorded in the same
Agent Clearing Member Omnibus Account.
The activity for Indirect Participants must be recorded in Accounts
at GSD that are separate from the Accounts where the intermediary
Netting Members' own Proprietary Transactions are recorded. FICC
recently adopted provisions in GSD Rule 2B that govern the maintenance
of separate Accounts and create a framework for the separate
calculation, collection, and holding of margin supporting a Netting
Member's Proprietary Transactions and the margin supporting the
transactions a Netting Member submits on behalf of Indirect
Participants.\15\ These provisions are designed to address the
requirements of Rule 17ad-22(e)(6)(i) under the Act.\16\ In addition,
both Sponsoring Members and Agent Clearing Members have the option of
designating certain Indirect Participants as Segregated Indirect
Participants. The activity for Segregated Indirect Participants must be
recorded in a separate Segregated Indirect Participant Account, which
allows the Sponsoring Member or Agent Clearing Member to direct FICC to
calculate and segregate margin deposited in connection with these
separate Accounts--referred to in the GSD Rules as Segregated Customer
Margin--in accordance with the conditions recently adopted in
amendments to Note H to Rule 15c3-3a under the Act (``Note H'').\17\
These conditions, addressed principally in Section 1a of GSD Rule 4
(Clearing Fund and Loss Allocation), require, among other things, that
activity of Segregated Indirect Participants be margined on a gross, or
Segregated Indirect Participant-by-Segregated Indirect Participant,
basis and that the Segregated Customer Margin deposits be credited to a
Segregated Customer Margin Custody Account to be used exclusively to
settle and margin transactions in U.S. Treasury securities recorded in
the corresponding Segregated Indirect Participants Account.\18\
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\15\ See GSD Rule 2B, id.
\16\ 17 CFR 240.17ad-22(e)(6)(i).
\17\ 17 CFR 240.15c3-3a.
\18\ See Section 1a of GSD Rule 4, supra note 3.
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In this way, all Segregated Customer Margin deposited with FICC to
support the obligations arising under the transactions recorded in a
given Segregated Indirect Participants Account must be recorded in a
specific Segregated Customer Margin Custody Account maintained by FICC
on its books and records for the Netting Member that deposited such
Segregated Customer Margin, which Account would be separate from any
other Accounts maintained by FICC for the Netting Member, including
fellow Segregated Customer Margin Custody Accounts. Additionally,
Segregated Customer Margin deposits must be met using assets deposited
by the Segregated Indirect Participants with the Netting Member, with a
limited exception of temporary ``prefunding'' by the Netting Member
while a margin call to the Segregated Indirect Participant is
outstanding.\19\
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\19\ See Section 3 of GSD Rule 2B, id.
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[[Page 26658]]
Overview of FICC Default Management Process
The GSD Rules specify the circumstances that constitute a default
of a Netting Member and the consequences of default. Specifically,
under Rule 21 (Restrictions on Access to Services), FICC's Board of
Directors may suspend a Netting Member or prohibit or limit a Netting
Member's access to FICC's services in enumerated circumstances. These
circumstances include, for example, a Netting Member's expulsion or
suspension from a regulatory or self-regulatory organization, default
in delivering funds or securities to FICC, and a Netting Member
experiencing such financial or operational difficulties that FICC
determines, in its discretion, that restriction on access to its
services is necessary for its protection and for the protection of its
membership. The GSD Rules provide FICC with some discretion in
determining what constitutes adequate cause to cease to act for a
Netting Member. Specifically, Rule 22 (Insolvency of a Member)
enumerates the circumstances under which a Netting Member will be
treated as insolvent. If any of the enumerated circumstances arise,
depending upon the facts and situation, FICC may suspend a Member from
any service provided by FICC either with respect to a particular
transaction or transactions or with respect to transactions generally,
or FICC may prohibit or limit such Member's access to services offered
by FICC. When FICC restricts a Netting Member's access to services
generally, FICC is said to have ``ceased to act'' for the Netting
Member.
When FICC ceases to act for a Netting Member (referred to in the
Rules as a ``Defaulting Member''), or suspends or limits its access to
services, FICC notifies the Member and furnishes it with a written
statement of the grounds for the decision, and of the Member's right to
request a hearing with respect to that determination. FICC will also
notify FICC's own supervisors of any decision to cease to act promptly
after such decision is made and will issue an Important Notice to all
Members informing them of the cease to act. Finally, for a Defaulting
Member that is also a member of other clearing agencies with which FICC
has cross-guaranty or other arrangements, FICC will also notify those
clearing agencies as required by those arrangements.
Once FICC has ceased to act for a Defaulting Member, the GSD Rules
provide FICC with the authority to promptly close out and manage the
positions of the Defaulting Member and to apply the Defaulting Member's
collateral. GSD Rule 22A (Procedures for When the Corporation Ceases to
Act) describes the procedures, including actions FICC may take, when it
ceases to act for a Defaulting Member; this includes provisions for the
treatment of core services where Members may have transactions pending
with the Defaulting Member. The GSD Rules identify which actions are
automatic and which are discretionary, and detail how the unsettled
transactions of the Defaulting Member are to be processed. In this
regard, unless determined otherwise, FICC will exclude from further
processing any trade that, at the time FICC ceased to act for the
Defaulting Member, had not compared upon receipt pursuant to the GSD
Rules or that had not been reported by FICC to Members as compared. Any
transactions so excluded are to be settled between the parties and not
through FICC.
The process of closing out open positions starts with the creation
of a ``Final Net Settlement Position'' for each Eligible Netting
Security with a distinct CUSIP Number. This position is a net of all
outstanding Deliver Obligations and Receive Obligations of the
Defaulting Member in each such security. This netting is a critical
part of FICC's default management and allows it to reduce its exposures
in the close-out of a Defaulting Member's open portfolio and,
therefore, contain losses and liquidity demands that may arise in a
default event.
The next step in the close-out process is for FICC to effect market
purchases and sales of the Final Net Settlement Positions; that is,
buying in securities the Defaulting Member was obligated to deliver to
FICC, and selling out securities the Defaulting Member was obligated to
receive from FICC and pay for, or otherwise liquidating the position.
FICC utilizes the services of investment advisors and executing brokers
to facilitate such transactions promptly following FICC's determination
to cease to act. If, after closing out and liquidating a Defaulting
Member's positions, FICC were to suffer a loss, FICC has recourse to
the loss allocation process pursuant to Rule 4.
The default management process governing the Sponsored Service, set
forth in Rule 3A, incorporates the provisions of Rules 21 and 22,
described above. As such, FICC may prohibit or suspend Sponsoring
Members, in their capacity as Sponsoring Members, and Sponsored Members
from access to FICC's services under the same circumstances specified
in those Rules, and would close out the Sponsored Member Trades of a
defaulted Sponsoring Member in a similar manner described above.
Currently Rule 3A provides that FICC shall determine whether to close
out the affected Sponsored Member Trades or permit the Sponsored
Members to complete settlement.\20\ In the latter alternative, the
Sponsored Member Trades would settle pursuant to the GSD Rules in the
normal course of business. GSD Rule 3A also includes provisions that
govern the voluntary liquidation of done-with Sponsored Member Trades
by either the Sponsoring Member or FICC.\21\
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\20\ If the Sponsoring Member is subject to insolvency
proceedings, FICC may need the permission of the relevant bankruptcy
trustee or receiver for the Sponsoring Member (e.g., the Securities
Investor Protection Corporation or Federal Deposit Insurance
Corporation) in order to settle the Sponsored Member Trades that
were Novated to FICC before FICC ceased to act for the Sponsoring
Member.
\21\ See GSD Rule 3A, Section 18, supra note 3. Done-with
transactions refers to transactions that are executed between an
Indirect Participant and Indirect Participant's Sponsoring Member or
Agent Clearing Member.
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Currently, Rule 8, which was recently amended to describe the
operation of the Agent Clearing Service, does not specify the
provisions that would govern the default of an Agent Clearing Member.
Overview of the Corporation Default Rule
The GSD Rules also address the actions that would follow a default
of FICC. GSD Rule 22B (Corporation Default) specifies the circumstances
in which a default by FICC could constitute a ``Corporation Default''
and how transactions that have been Novated by FICC would be treated
following that event. Specifically, following a Corporation Default,
Novated, unsettled transactions are terminated, and Netting Members are
required to take market action to close out those positions and report
the results of such action to the Board of Directors of FICC. GSD Rule
22B is applicable to activity that is cleared through the Sponsored
Service and incorporated into Rule 3A by reference,\22\ but the
provisions of Rule 22B do not specify how Sponsored Member
Transactions, or other Indirect Participant activity, would be treated
following a Corporation Default.
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\22\ See Section 17(a) of GSD Rule 3A, id.
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Proposed Rule Changes
As described below, FICC is proposing to expand the rules that
apply to the Sponsored Service and Agent Clearing Service related to
how FICC would manage activity cleared through these indirect access
models following
[[Page 26659]]
the default of a Netting Member acting as an intermediary and following
the default of FICC.
The proposed rule changes would provide further disclosures
regarding the current operation of these rules as they apply to the
Sponsored Service. The proposed rule changes would also adopt new rules
to govern (1) the application of FICC's default management procedures
to the Agent Clearing Service and (2) the porting of Indirect
Participant activity between intermediary Netting Members both in the
normal course of business and following the default of an intermediary.
I. Default Management Rules Governing the Sponsored Service
The proposed rule changes would revise Rule 3A to expand the
descriptions of default management processes that apply to the
Sponsored Service. These proposed rule changes would not alter the
existing processes but are designed to improve market participants'
understanding in how these processes work. The proposed changes would
also address default management of Sponsored Member Trades of
Segregated Indirect Participants.
a. Sponsoring Member Default
Currently, Sections 14 and 16 of Rule 3A address the default of a
Sponsoring Member by describing the application of Rule 21
(Restrictions on Access to Services), Rule 22 (Insolvency of a Member)
and Rule 22A (Procedures for When the Corporation Ceases to Act) to
Sponsoring Members and Sponsored Member Trades following the default of
a Sponsoring Member.
In order to simplify these rules, FICC would consolidate the
otherwise repetitive provisions of Sections 15 and 16 of Rule 3A into
Sections 13 and 14. FICC would eliminate Sections 15 and 16 and move
provisions related to the requirement that it be notified of the
insolvency of a Sponsoring Member or Sponsored Member into the
remaining Sections 13 and 14, as applicable. The repetitive provisions
in these subsections would be removed from the Rules. With this change,
FICC would re-number the remaining sections of Rule 3A.
The default management provisions in Rule 3A provide that, in the
event of a Sponsoring Member default, FICC would no longer Novate new
Sponsored Member Trades submitted by that Sponsoring Member and would
either settle or close out the Sponsored Member Trades that were
Novated to FICC before FICC ceased to act for the Sponsoring Member.
The proposed rule changes would first expand this provision by
providing a third alternative to the disposition of Sponsored Member
Trades following a Sponsoring Member default--the transfer of those
positions to a different Sponsoring Member pursuant to proposed Rule
26. The proposed rule changes would also include new subsections to
Section 14 of Rule 3A that describe further how Sponsored Member Trades
would be settled or closed out following the default of a Sponsoring
Member.
First, if FICC elects to settle a Sponsored Member Trade that was
Novated to FICC before FICC ceased to act for a Sponsoring Member,
settlement would occur as though no default had occurred and in
accordance with the Rules. That is, FICC, the Sponsored Member, and the
Sponsoring Member (acting through its bankruptcy trustee or receiver,
if applicable) would be required to transfer or cause to be transferred
the relevant cash and securities in accordance with Section 8 of Rule
3A.\23\ FICC is proposing to add a new Section 14(d)(i) to Rule 3A to
provide additional description of the operation of this settlement
process. The new subsection would specify that, if FICC determines to
permit the Sponsored Member of the Defaulting Member to complete
settlement with respect to affected Novated Sponsored Member Trades,
subject to receipt of all necessary and applicable external approvals,
then settlement shall occur in accordance with Section 8 of Rule 3A, as
though the Sponsoring Member was not a Defaulting Member pursuant to
Rule 22A. These proposed changes would not alter the current processes.
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\23\ See Section 8 of GSD Rule 3A, describing settlement of
securities that are cleared through the Sponsored Service, id.
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Second, if FICC elects to close out the Novated Sponsored Member
Trades submitted by a defaulted Sponsoring Member, FICC would do so in
the same manner as it closes out trades of a Netting Member for which
FICC has ceased to act, pursuant to Rule 22A (Procedures for When the
Corporation Ceases to Act). FICC is proposing to add a new Section
14(d)(ii) to Rule 3A to expand the disclosures regarding the close-out
of Sponsored Member Trades. The new subsection would specify that, if
FICC determines to close out the Sponsored Member Trades of a
Defaulting Member that is a Sponsoring Member, it may net the positions
of each Sponsored Member, including each Segregated Indirect
Participant that is a Sponsored Member, in determining a Final Net
Settlement Position, but would not net the positions of one Sponsored
Member (or Segregated Indirect Participant) against the positions of
another Sponsored Member (or Segregated Indirect Participant).
This new subsection would describe FICC's current default
management processes that maintain separate Final Net Settlement
Positions for Sponsored Members following the default of a Sponsoring
Member. This approach is consistent with FICC's risk management
practice to calculate the Sponsoring Member Omnibus Account Required
Fund Deposit for each Sponsored Member on a gross basis, as if each
Sponsored Member was a separate Netting Member. Similarly, the
Segregated Customer Margin is calculated on a gross, or Segregated
Indirect Participant-by-Segregated Indirect Participant, basis, and,
pursuant to Section 1a of Rule 4, Segregated Customer Margin may be
used exclusively to settle and margin transactions recorded in the
corresponding Segregated Indirect Participants Account.
Finally, proposed Section 14(d)(ii) would also provide that, with
respect to any amount due to a Segregated Indirect Participant that is
a Sponsored Member, FICC would make such payment to or as directed by
the Sponsoring Member or its trustee or receiver.
b. Sponsored Member Default and Liquidation of Sponsored Member Trades
Currently, Sections 13 and 15 of Rule 3A address the default of a
Sponsored Member by describing the application of Rule 21 (Restrictions
on Access to Services), Rule 22 (Insolvency of a Member) and Rule 22A
(Procedures for When the Corporation Ceases to Act) to Sponsored
Members and Sponsored Member Trades following the default of a
Sponsored Member. FICC would consolidate these two sections into
Section 13 in order to simplify these rules but is not proposing any
substantive changes to these provisions. The consolidated Section 13 of
Rule 3A would continue to refer to these generally applicable default
management rules, including Rule 22A where provisions regarding the
treatment of Sponsored Member Trades will be enhanced, as described
below.
II. Default Management Rules Governing the Agent Clearing Service
FICC recently renamed and consolidated its correspondent clearing/
prime broker services into the Agent Clearing Service and amended Rule
8 (Agent Clearing Service) to describe the operation and requirements
governing
[[Page 26660]]
the Agent Clearing Service. Since adopting these changes, FICC has
considered which provisions that currently govern the Sponsored Service
would be appropriate to apply to the Agent Clearing Service and where
these provisions should differ between the two indirect access models.
Accordingly, FICC is proposing to adopt additional provisions to
Rule 8 that have analogous provisions in Rule 3A. These proposed
changes would adopt new rules regarding the operation of the Agent
Clearing Service, including following the default of an Agent Clearing
Member. FICC is also proposing new provisions in Rule 8 that would
align the default management process across Indirect Participants,
e.g., Executing Firm Customers using the Agent Clearing Service and
Sponsored Members using the Sponsored Service, where such alignment is
appropriate.
a. Voluntary Termination of Agent Clearing Member Status
FICC is proposing to expand Section 3(g) of Rule 8 to describe a
process for Agent Clearing Members to voluntarily terminate their use
of the Agent Clearing Service. The current provision simply provides
that an Agent Clearing Member may terminate its status as an Agent
Clearing Member by providing notice to FICC. However, this provision
does not provide certainty regarding the treatment of unsettled Agent
Clearing Transactions of that Agent Clearing Member. The proposed
provisions align to the provisions applicable to Sponsoring Members set
forth in Section 2(i) of Rule 3A. Substantive differences between the
two provisions include removing reference to the Sponsoring Member
Guaranty, which is not applicable to the Agent Clearing Service, and
removing the obligation that FICC post an Important Notice when an
Agent Clearing Member terminates its status as such with respect to all
Executing Firm Customers. FICC does not believe this notice is
necessary because Executing Firm Customers are not limited members of
FICC, and FICC does not publish lists of Agent Clearing Members and
their Executing Firm Customer relationships.
Currently, Section 3(g) of Rule 8 states that an Agent Clearing
Member may provide written notice to FICC that it will no longer submit
to FICC trades on behalf of an Executing Firm Customer. FICC is
proposing to expand Section 3(g) to more directly provide that an Agent
Clearing Member may voluntarily elect to terminate its status as an
Agent Clearing Member, with respect to all Executing Firm Customers or
with respect to one or more Executing Firm Customers from time to time,
by providing FICC with a written notice of such termination (``Agent
Clearing Member Voluntary Termination Notice''). The expanded Section
3(g) would provide that the Agent Clearing Member shall specify in the
Agent Clearing Member Voluntary Termination Notice a desired date for
the termination of the Agent Clearing Member's status as such with
respect to the Executing Firm Customer(s) as to which the Agent
Clearing Member has terminated such status (``Former Executing Firm
Customer''), which date shall not be prior to the scheduled final
settlement date of any Agent Clearing Transactions of such Former
Executing Firm Customers, unless otherwise approved by FICC.
In addition, the expanded Section 3(g) would provide that no later
than 10 Business Days after the receipt of the Agent Clearing Member
Voluntary Termination Notice from such Agent Clearing Member, FICC
shall notify the Agent Clearing Member that such notice has been
accepted and the date the termination shall be effective (``Agent
Clearing Member Termination Date''). Section 3(g) would also state
that, as of the Agent Clearing Member Termination Date, the Agent
Clearing Member shall no longer be eligible to submit trades on behalf
of its Former Executing Firm Customers, and each of its Former
Executing Firm Customers shall cease to be an Executing Firm Customer
under the Rules unless it is the Executing Firm Customer of another
Agent Clearing Member. Furthermore, Section 3(g) would provide that if
any trade is submitted to FICC by the Agent Clearing Member on behalf
of its Former Executing Firm Customers that is scheduled to settle on
or after the Agent Clearing Member Termination Date, such Agent
Clearing Member's Agent Clearing Member Voluntary Termination Notice
will be deemed void, and the Agent Clearing Member will remain subject
to Rule 8 as if it had not given such Agent Clearing Member Voluntary
Termination Notice.
The proposed Section 3(g) would provide that an Agent Clearing
Member's voluntary termination of its status as such, in whole or in
part, shall not affect its obligations to FICC, or the rights of FICC,
with respect to Agent Clearing Transactions submitted to FICC before
the applicable Agent Clearing Member Termination Date. Lastly, Section
3(g) would provide that any Agent Clearing Transactions that have been
Novated by FICC shall continue to be processed by FICC.
b. Termination of Executing Firm Customer(s) Access to Agent Clearing
Service
FICC is proposing to add a new Section 3(h) in Rule 8 to provide
FICC with the ability to terminate the access of one or more Executing
Firm Customers to the Agent Clearing Service. Because Executing Firm
Customers are not limited members and do not establish a legal
relationship with FICC, the proposed changes would apply to the Agent
Clearing Members. Specifically, the proposed section would provide that
FICC may, based upon its judgement that adequate cause exists to do so,
provide notice to an Agent Clearing Member that FICC has terminated
that Agent Clearing Members' ability to submit Agent Clearing
Transactions of one or more Executing Firm Customers. The provision
would further provide that the Executing Firm Customer(s) shall cease
to be an Executing Firm Customer under the Rules. FICC may take this
action, for example, if one or more Executing Firm Customers is subject
to sanctions imposed and FICC is restricted or prohibited from
processing transactions for this firm.
c. FICC's Right of Offset With Respect to Agent Clearing Members'
Obligations
FICC is proposing to add a new Section 5(f) in Rule 8 to address
FICC's right to offset obligations of an Agent Clearing Member with
respect to an Executing Firm Customer, with any obligations of FICC to
the Agent Clearing Member with respect to its Proprietary Accounts.
This proposed provision is aligned with Section 11 (Right of Offset) of
Rule 3A and would differ from that provision only by removing
references to the Sponsoring Member Guaranty, which is not applicable
to the Agent Clearing Service.
As with the Sponsored Service, this proposed change would provide
that, in the ordinary course, with respect to satisfaction of any Agent
Clearing Member's obligations under the Rules, the Agent Clearing
Member's Proprietary Accounts and its Agent Clearing Member Omnibus
Account shall be treated separately, as if they were Accounts of
separate entities. The proposed Section 5(f) would also provide that
FICC may, at any time any obligation of an Agent Clearing Member arises
under the Rules to pay or perform thereunder with respect to any
Executing Firm Customer (other than an Executing Firm Customer that is
a Segregated Indirect Participant), exercise a right of offset and net
any
[[Page 26661]]
such obligation of the Agent Clearing Member against any obligations of
FICC to the Agent Clearing Member in respect of such Agent Clearing
Member's Proprietary Accounts. This provision would align the rules
that apply to the Agent Clearing Service with the rules that apply to
the Sponsored Service and would ensure that market participants using
these services understand their rights and obligations with respect to
these services.
d. Application of GSD's Loss Allocation Provisions to Agent Clearing
Service
FICC is proposing to expand the disclosures in Rule 8 to provide
market participants with a better understanding of how FICC's loss
allocation provisions apply to the Agent Clearing Service. The proposed
provisions would be added to Section 7(f) of Rule 8 and would align to
disclosures applicable to the Sponsored Service set forth in Section
12(a) of Rule 3A. These aligned provisions would differ only to exclude
reference to Off-the-Market Transactions, which are not applicable to
Agent Clearing Transactions.
The proposed language would provide that Executing Firm Customers
shall not be obligated for allocations of loss or liability incurred by
FICC pursuant to Rule 4. The proposed language would further provide
that, to the extent a loss or liability is determined by FICC to arise
in connection with Agent Clearing Transactions (i.e., in connection
with the insolvency or default of an Agent Clearing Member), the
Executing Firm Customers shall not be responsible for or considered in
the loss allocation calculation and such obligation would be the
responsibility of an Agent Clearing Member.
e. Agent Clearing Member Default
FICC is proposing to add Section 8 (Restrictions on Access to
Services by an Agent Clearing Member) to Rule 8 to describe the default
management processes that would govern the default of an Agent Clearing
Member. These proposed rules would align with Section 14 (Restrictions
on Access to Services by a Sponsoring Member) of Rule 3A, as
appropriate. By specifying the procedures that apply to an Agent
Clearing Member default and the actions that may be taken with respect
to any affected Agent Clearing Transactions, the proposed rule changes
would allow market participants to better understand the rights and
obligations associated with the use of this indirect access model.
First, Section 8(a) would provide that the provisions of Rule 21
would apply to Agent Clearing Members to provide FICC with the
authority to suspend an Agent Clearing Member in its capacity as an
Agent Clearing Member. In practice, this provision would permit FICC to
suspend an Agent Clearing Member in its capacity as an Agent Clearing
Member in the event that one or more of the factors set forth in
Section 1(a) through (g) of Rule 21 is present with respect to the
Agent Clearing Member. Similarly, Rule 3A incorporates the provisions
of Rule 21 to apply to FICC's authority to terminate a Sponsoring
Member's status as a Sponsoring Member. Proposed Section 8(a) would
also provide that FICC may summarily suspend an Agent Clearing Member
without action of the Board.
Second, proposed Section 8(b) would provide that an Agent Clearing
Member shall be obligated to inform FICC that it is insolvent or that
it will be unable to perform any of its material contracts, obligations
or agreements in the same manner as required by Section 1 of Rule 22
for other Members. The proposed Section 8(b) would also state that, an
Agent Clearing Member shall be treated by FICC in all respects as
insolvent under the same circumstances set forth in Section 2 of Rule
22 for other Members. Furthermore, Section 8(b) would state that
Section 3 of Rule 22 shall apply, in the same manner in which such
section applies to other Members, in the case where FICC treats an
Agent Clearing Member as insolvent. This section would mirror the
language that would be moved from Section 16 of Rule 3A into Section 14
of Rule 3A and would continue to be applied to Sponsoring Members as
well.
Third, proposed Section 8(c) would provide that, if FICC ceases to
act for an Agent Clearing Member in its capacity as an Agent Clearing
Member, Rule 22A shall apply and FICC shall decline to accept or
process data from the Agent Clearing Member on Agent Clearing
Transactions, and FICC shall terminate the ability of such Agent
Clearing Member from submitting Agent Clearing Transactions for all of
its Executing Firm Customers to FICC. The proposed Section 8(c) would
also provide that, if FICC suspends the Agent Clearing Member or ceases
to act for the Agent Clearing Member, FICC shall decline to accept or
process data from the Agent Clearing Member on Agent Clearing
Transactions and shall terminate the ability of such Agent Clearing
Member to submit Agent Clearing Transactions for all of its Executing
Firm Customers to FICC for so long as and to the extent that FICC is
ceasing to act for the Agent Clearing Member. The proposed Section 8(c)
would state that any Agent Clearing Transactions which have been
Novated by FICC shall continue to be processed by FICC. In addition,
the proposed Section 8(c) would state that, FICC shall determine
whether to close out the affected Agent Clearing Transactions pursuant
to Rule 22A, permit the Executing Firm Customers to complete their
settlement, or transfer all or part of the activity of the Defaulting
Member's Executing Firm Customer relationships to another Agent
Clearing Member pursuant to proposed Rule 26. These provisions would be
identical to Section 14(d) in Rule 3A, as it is proposed to be amended
as described above.
Fourth, FICC would include Section 8(d) to provide the right of
Executing Firm Customers to settle Agent Clearing Transactions, if
permitted by FICC following the default of an Agent Clearing Member.
Similar to the clarification changes proposed to Section 14(e) in Rule
3A, as discussed above, the proposed Section 8(d) would provide that,
if FICC determines to permit the Executing Firm Customers of the Agent
Clearing Member to complete settlement with respect to affected Novated
Agent Clearing Transactions, subject to receipt of all necessary and
applicable external approvals, then settlement shall occur in
accordance with Rule 11 (Netting System) and Section 7 (Agent Clearing
Transactions Processing Rules) of Rule 8, as though the Agent Clearing
Member was not a Defaulting Member pursuant to Rule 22A.
Finally, proposed Section 8(e) would provide that, if FICC
determines to close out the Agent Clearing Transactions of a Defaulting
Member that is an Agent Clearing Member, such close-out shall be
completed as provided for in Rule 22A. In this way, this proposed
Section 8(e) would mirror the proposed Section 14(d)(ii) that would be
added to Rule 3A, as discussed above. However, unlike the provision in
Rule 3A, this proposed section would state that FICC may net the
positions of Executing Firm Customers (other than Segregated Indirect
Participants) against the positions of other Executing Firm Customers
that are recorded in the same Agent Clearing Member Omnibus Account in
determining a Final Net Settlement Position. These provisions would
reflect that FICC nets the Agent Clearing Transactions of multiple
Executing Firm Customers that are recorded in the same Agent Clearing
Member Omnibus Account for purposes of calculating the Agent Clearing
Member Omnibus Account Required Fund Deposit for that activity. The
proposed Section 8(e) would further provide that, if any amount is due
to a
[[Page 26662]]
Segregated Indirect Participant that is an Executing Firm Customer,
FICC shall make such payment to such Segregated Indirect Participant or
its applicable trustee or receiver or as otherwise directed by such
Agent Clearing Member, trustee, or receiver.
f. Liquidation of Agent Clearing Transactions
FICC is proposing a new Section 9 (Liquidation of the Agent
Clearing Transactions of an Executing Firm Customer) to Rule 8 to
describe the ability of FICC and Agent Clearing Members to elect to
liquidate the done-with Agent Clearing Transactions of an Executing
Firm Customer and outline the operation of that liquidation. This
proposed section would align to the parallel provisions in Rule 3A that
address the voluntary liquidation of Sponsored Member Trades (currently
in Section 18 of Rule 3A, which would be re-numbered Section 16 of Rule
3A under these proposed rule changes).
Differences between the provisions would include removing
references to the Sponsoring Member Guaranty, which is not applicable
to the Agent Clearing Service, and other adjustments to reflect the
distinction between a Sponsored Member as a limited member of FICC and
Executing Firm Customers, which do not onboard with FICC as a member.
For example, Rule 3A provides that FICC is only able to cause the
termination of Sponsored Member Trades, as described in that section,
if it has ceased to act for the relevant Sponsored Member and the
Sponsoring Member has not performed the obligations of the Sponsored
Member in respect of all positions guaranteed by such Sponsoring
Member. Because Executing Firm Customers are not limited members of
FICC, this limitation would not be included in the proposed Section 9
of Rule 8.
Section 9(a) would provide that the provisions in Section 9, which
would supersede any conflicting provisions of Rule 8 and Rule 22A,
apply only (i) with respect to the liquidation of done-with Agent
Clearing Transactions, (ii) in the event an Agent Clearing Member is
not a Defaulting Member and FICC has not ceased to act for the Agent
Clearing Member and (iii) if a Corporation Default has not occurred.
Section 9(b) would provide that, subject to the provisions of the
proposed Section 9(a), on any Business Day, the Agent Clearing Member
or FICC may, by written notice to the other, cause the immediate
termination of some or all of the long and short Net Settlement
Positions and Forward Net Settlement Positions of the Executing Firm
Customer established in the Agent Clearing Member's Agent Clearing
Member Omnibus Account(s). Proposed Section 9(b) would also provide
that, any such notice shall also cause the immediate termination of all
of the corresponding, offsetting long and short Net Settlement
Positions and Forward Net Settlement Positions of the Agent Clearing
Member established in the Agent Clearing Member's Dealer Account(s). In
addition, Section 9(b) would state that each such termination shall be
effected by the Agent Clearing Member's establishment of a final Net
Settlement Position for each Eligible Netting Security with a distinct
CUSIP number that shall equal the net of all outstanding deliver
obligations and receive obligations of the parties thereto in each such
Eligible Netting Security including those that arise from Forward Net
Settlement Positions (to be referred to in proposed Section 9 as the
``Final Net Settlement Position'').
Section 9(c) would provide that, to liquidate the Final Net
Settlement Positions of any Executing Firm Customer and the
corresponding, offsetting Final Net Settlement Positions of the
Executing Firm Customer established pursuant to proposed Section 9(b),
an Agent Clearing Member shall calculate a liquidation amount, which
may be equal to zero and shall be deemed a Funds-Only Settlement
Amount. The proposed Section 9(c) would state that the liquidation
amount in respect of the Final Net Settlement Positions of an Executing
Firm Customer (to be defined as the ``Executing Firm Customer
Liquidation Amount'') would be due to or from FICC from or to the
Executing Firm Customer. Furthermore, the proposed Section 9(c) would
state that the liquidation amount in respect of the corresponding,
offsetting Final Net Settlement Positions of the Agent Clearing Member
(to be referred to as the ``Agent Clearing Member Liquidation Amount'')
would be due to or from FICC from or to the Agent Clearing Member. In
addition, the proposed Section 9(c) would provide that, if the
Executing Firm Customer Liquidation Amount in respect of the Final Net
Settlement Positions of an Executing Firm Customer is due to FICC, the
Agent Clearing Member Liquidation Amount in respect of the
corresponding Final Net Settlement Positions of the Agent Clearing
Member would be due to the Agent Clearing Member. The proposed Section
9(c) would also state that, if the Executing Firm Customer Liquidation
Amount in respect of the Final Net Settlement Positions of an Executing
Firm Customer is due to the Executing Firm Customer, the Agent Clearing
Member Liquidation Amount in respect of the Final Net Settlement
Positions of the Agent Clearing Member shall be due to FICC.
The proposed Section 9(c) would state that, any Agent Clearing
Member Liquidation Amount calculated by an Agent Clearing Member
pursuant to this proposed Section 9(c) may be based on prices obtained
from a generally recognized source or the most recent closing bid or
offer quotation from such a source and may include the losses
(including costs such as fees, expenses and commissions) and/or gains
realized by the Agent Clearing Member in entering into replacement
transactions and/or entering into or terminating hedge transactions in
connection with or as a result of, and any other loss, damage, cost or
expense directly arising or resulting from, the liquidation of the
Agent Clearing Member's Final Net Settlement Positions. As proposed,
Section 9(c) would provide that the Executing Firm Customer Liquidation
Amount in respect of Final Net Settlement Positions of an Executing
Firm Customer shall equal the Agent Clearing Member Liquidation Amount
in respect of the corresponding Final Net Settlement Positions of the
Agent Clearing Member. The proposed Section 9(c) would also provide
that the Agent Clearing Member's calculation of any Executing Firm
Customer Liquidation Amount or Agent Clearing Member Liquidation Amount
shall be conclusive and binding as between each of the parties and
FICC, absent manifest error and subject to any right of FICC to
indemnification under the Rules.
The proposed Section 9(c) would also state that, if an Executing
Firm Customer Liquidation Amount is due to FICC from the Executing Firm
Customer, the Agent Clearing Member would be obligated to pay such
Executing Firm Customer Liquidation Amount under its obligations set
forth in Rule 8, which obligation shall, notwithstanding anything to
the contrary in Rule 8, be payable without demand and (automatically
and without further action by any Person) be set off against the
obligation of FICC to pay the corresponding Agent Clearing Member
Liquidation Amount to the Agent Clearing Member.
The proposed Section 9(c) would further state that, if an Executing
Firm Customer Liquidation Amount is due to the Executing Firm Customer
from FICC, FICC's sole obligation in respect of any such Executing Firm
Customer Liquidation Amount shall be to transfer such amount to the
applicable account
[[Page 26663]]
of the Agent Clearing Member at the Funds-Only Settling Bank Member
acting on behalf of an Agent Clearing Member (to be referred to as the
``Agent Clearing Funds-Only Omnibus Account''). Furthermore, the
proposed Section 9(c) would state that, FICC hereby instructs the Agent
Clearing Member to discharge its obligation to pay FICC any Agent
Clearing Member Liquidation Amount by transferring such amount to the
Agent Clearing Member's Agent Clearing Funds-Only Omnibus Account for
application to FICC's obligation to pay the corresponding Executing
Firm Customer Liquidation Amount to the Executing Firm Customer. In
addition, the proposed Section 9(c) would state that, to the extent
that the Agent Clearing Member transfers such funds to the Agent
Clearing Funds-Only Omnibus Account as provided in this paragraph, (i)
the obligations of FICC in respect of the Executing Firm Customer
Liquidation Amount shall be discharged and (ii) the obligations of the
Agent Clearing Member in respect of the corresponding Agent Clearing
Member Liquidation Amount shall be discharged. The proposed Section
9(c) would also state that the Agent Clearing Member, on behalf of the
Executing Firm Customer, agrees to accept the transfer of such funds to
the Agent Clearing Funds-Only Omnibus Account in full satisfaction of
the obligation of FICC to pay the Executing Firm Customer Liquidation
Amount to the Executing Firm Customer.
Lastly, the proposed Section 9(d) would provide that the Agent
Clearing Member shall indemnify FICC, and its employees, officers,
directors, shareholders, agents, and Members (to be referred to
collectively as the ``ACM Indemnified Parties''), for any and all
losses, liability, or expenses of an ACM Indemnified Party arising from
any claim by an affected Executing Firm Customer disputing the Agent
Clearing Member's calculation of any Executing Firm Customer
Liquidation Amount or Agent Clearing Member Liquidation Amount pursuant
to the proposed Section 9.
III. Close-Out of Indirect Participant Activity Under Rule 22A
The proposed rule changes would expand the descriptions of FICC's
procedures set forth in Rule 22A that apply following a Netting Member
default (including the default of a Netting Member that is a Sponsoring
Member and/or Agent Clearing Member) (referred to in the Rules as a
``Defaulting Member''). The proposed rule changes would clarify how
these procedures apply to the activity of Indirect Participants. By
publicly disclosing the key aspects of FICC's default management rules
and procedures, the proposed rule changes would provide market
participants with a better understanding of those rules and procedures.
In this way, the proposed changes also facilitate FICC's ability to
take timely action following the default of a Member to contain losses
and liquidity demands, and to continue to meet its obligations as a
central counterparty notwithstanding such default.
First, FICC would amend Section 2(a) of Rule 22A to exclude from
the scope of this rule those Sponsored Member Trades and Agent Clearing
Transactions that FICC determines to settle, pursuant to Rules 3A and
8, respectively.
Second, FICC would amend Section 2(b) of Rule 22A to address the
actions FICC would take to close out Indirect Participant activity that
FICC determines, pursuant to Rules 3A and 8, to close out. The proposed
changes would include positions recorded in an Indirect Participants
Account that would be closed out in accordance with the provisions of
this rule. The proposed changes would then include a description of how
the Final Net Settlement Position(s) would be determined for Indirect
Participant activity of a Defaulting Member. Specifically, the proposed
changes would specify that, in determining a Final Net Settlement
Position, FICC could (i) net the outstanding positions of each
Sponsored Member and Segregated Indirect Participant on a gross, or
Indirect Participant-by-Indirect Participant, basis; and (ii) net the
outstanding positions across Executing Firm Customers. This change
would reiterate the provisions proposed to Rules 3A and 8 and
incorporate those parallel provisions within the process described in
Rule 22A.
Third, the proposed rule changes would amend the description of
FICC's right to take market action with respect to each Final Net
Settlement Position of the Defaulting Member. Specifically, FICC would
provide that its authority to take appropriate market action includes a
right to decline to take market action to the extent that a Final Net
Settlement Position has opposite directionality to a Final Net
Settlement Position established in the same Security in relation to the
Defaulting Member or its Indirect Participants. In the circumstances
described in this provision, FICC would not be required to incur the
costs or risk of market action with respect to offsetting Final Net
Settlement Positions. The proposed rule changes would also provide
that, in making its determination in this regard, FICC would determine
the value of the Final Net Settlement Positions through the other
market actions it would be taking at that time or by reference to
available market data.
The proposed rule changes would also provide that the Indirect
Participants of a Defaulting Member may, but are not obligated to, take
market action to close out any outstanding positions that FICC
determines to close out pursuant to Rules 3A and 8, respectively. The
proposed rule change would also expand a provision that currently
permits FICC to apply any gains realized from its market action to
offset any losses from such market action. Currently this right only
applies to gains or losses realized in connection with a Defaulting
Member's Market Professional Cross-Margining Account. However, FICC
should have the ability to reduce losses that are incurred in
connection with the close-out of the Indirect Participant activity of a
Defaulting Member with any gains realized in connection with the close-
out of that Defaulting Member's Proprietary Transactions. This proposed
change would permit FICC to take action that would contain the losses
resulting from a close-out that would impact the Indirect Participants
of a Defaulting Member.
Lastly, FICC would add language to make it clear that FICC would
include, without limitation, all costs and fees incurred by FICC in
connection with a close-out of all the Final Net Settlement Positions
of a Defaulting Member when determining the resulting loss or liability
of such close-out. This proposed change would elaborate in the existing
rule the scope of such losses and liabilities, without changing the
existing rights or obligations of FICC.
IV. Indirect Participant Activity Under the Corporation Default Rule
22B
Rule 22B addresses the procedures that would be followed if FICC
defaults and a Corporation Default, as defined in the Rules, is
declared. Specifically, this rule provides that Members with Novated,
unsettled activity at the time of a Corporation Default are required to
take market action to close out such positions and report the results
of that activity to the FICC Board of Directors. The Board of Directors
would then apply the procedures set forth in Rule 22A and take account
of any application of the loss allocation provisions in Rule 4 to
determine a net amount that would be owed to or by each such Member.
FICC is proposing changes to Section (a)
[[Page 26664]]
of Rule 22B to specify how Indirect Participant activity would be
treated in the context of a Corporation Default.
First, the proposed changes would clarify that the scope of the
rule includes Indirect Participant activity by clarifying that
references to the Transactions that are subject to the procedures in
Rule 22B include all Sponsored Member Trades and Agent Clearing
Transactions. FICC would also revise this section to make it clear that
references to ``each relevant Member'' in Rule 22B include Sponsored
Members, which are limited members of GSD. The proposed changes would
also clarify that only Members that have outstanding positions arising
from Novated Transactions shall take market action with respect to such
positions under Rule 22B. This proposed change would provide a
clarification of the scope of these provisions but would not change the
operation of this rule.
FICC is also proposing to add language to state that Sponsored
Members may appoint a Sponsoring Member as its agent to conduct market
action on its behalf with respect to the Sponsored Member Trades
submitted by that Sponsoring Member; and would further provide that
Agent Clearing Members may conduct such market action on behalf of
their Executing Firm Customers with respect to relevant Agent Clearing
Transactions, unless an Agent Clearing Member and its Executing Firm
Customers otherwise agree. Related to these changes, the proposal would
also clarify that either a Member or an agent of the Member (which
would include the Sponsoring Member of a Sponsored Member) would report
the results of market actions to the Board of Directors.
Finally, FICC would expand the provisions of Rule 22B to provide
that, in determining the net amount that would be payable to or from a
Member under this rule, (i) an Indirect Participant's net claim against
FICC shall not be netted against amounts owed to FICC by the respective
Sponsoring Member or Agent Clearing Member; (ii) activity recorded in
Agent Clearing Member Omnibus Accounts (other than Segregated Indirect
Participants Accounts) would be netted across all Executing Firm
Customers with activity recorded in an Account; and (iii) activity
recorded in Sponsoring Member Omnibus Accounts and Segregated Indirect
Participants Accounts would be netted on an Indirect Participant-by-
Indirect Participant basis. The proposed changes would also allow for
more than one net amount that may be owed by or to each Member, to
reflect separate amounts that may be calculated for Indirect
Participants of the Member. Collectively, these changes would address
the operation of this rule in connection with these indirect access
models.
In connection with these changes, FICC is also proposing to add a
sentence to Section 17(a) of Rule 3A (to be re-numbered Section 15(a))
to clarify that any payments to be made to a Sponsored Member following
a Corporation Default would be made on a net basis for each Sponsored
Member and Segregated Indirect Participant that is a Sponsored Member
pursuant to Rule 22B. This clarification in Rule 3A would reflect the
changes that are also being proposed to Ruel 22B to ensure the parallel
provisions of these separate rules are consistent.
V. Proposed Rule 26 To Govern Transfers of Indirect Participant
Activity and Margin
FICC is proposing to adopt a new Rule 26 that would describe the
process by which an Indirect Participant's activity and, when
applicable, Segregated Customer Margin could be ported between
Sponsoring Members or Agent Clearing Members. The proposed rule changes
would describe the rights and obligations of the parties to these
transfers and would set forth the conditions necessary and operational
process for effecting these transfers in the normal course of business.
The proposed changes would also provide for the transfer of Indirect
Participant activity and Segregated Customer Margin following the
default of a Sponsoring Member or Agent Clearing Member. These proposed
changes would provide Members and their Indirect Participants with
clear, transparent rules that would govern an important tool for market
participants to manage their clearing relationships and activity.
Section 1 of proposed Rule 26 would describe the operation of a
transfer in the normal course of business and would begin with a
general statement of the service. First, the proposed changes would
establish the ability for all or a portion of an Indirect Participant's
activity to be transferred between Members acting as intermediaries.
The proposed changes would define the originating Sponsoring Member or
Agent Clearing Member as the ``Sending Member'' and the recipient
Sponsoring Member or Agent Clearing Member as the ``Receiving Member''.
The rule change would also provide that Indirect Participants would
only be able to move activity into the same type of Indirect
Participants Account; meaning a Sponsored Member could not move from a
Sponsoring Member to become the Executing Firm Customer of another
Agent Clearing Member. This limitation is important given the unique
onboarding requirements of the two indirect access models and is
reiterated in the conditions to activity transfers, described below.
Second, the proposed changes would describe how a transfer of an
Indirect Participant's activity would be submitted to FICC by a Sending
Member. Specifically, a Sending Member would be required to submit data
on the Sponsored Member Trade(s) and Agent Clearing Transaction(s) to
be transferred to FICC's real-time trade matching system in a form and
subject to procedures that FICC would prescribe. The proposed changes
would require that such trade data be unaltered from the original trade
data, including, for example, trade date, trade price and settlement
date.
Under the proposed rule, a Receiving Member would be deemed to have
accepted a transfer if it submits matching data for comparison in
response to the transfer submission through FICC's real-time trade
matching system in accordance with FICC's procedures. If a Receiving
Member does not submit such matching data by the deadline for intraday
transaction porting (which FICC would publish to Members), the transfer
would pend and be removed from the system, the transfer would not be
processed by FICC, and the Sponsored Member Trade(s) or Agent Clearing
Transaction(s) would continue to be the obligations of the Sending
Member pursuant to the Rules.
The proposed rule would provide that a transfer of Sponsored Member
Trade(s) and Agent Clearing Transaction(s) that is submitted to FICC by
the published deadline would be effective by no later than the close of
business on that Business Day and any transfer that is submitted to
FICC after such deadline would be effective at the start of the next
Business Day. The proposed rule would define the time a transfer is
effective as the ``Transfer Effective Time''. In order to
operationalize these provisions, FICC would publish to its Members the
applicable timeframes and procedures, pursuant to this proposed rule.
Third, the proposed rule change would set forth the conditions
required for transferring Indirect Participant activity. These
conditions would include (1) the Sending Member has submitted the
required data on the activity to be transferred, and the Receiving
Member has taken the actions
[[Page 26665]]
necessary to be deemed to have accepted that transfer pursuant to Rule
26; (2) the Indirect Participant has completed all necessary onboarding
requirements under the Rules such that it is either a Sponsored Member
or Executing Firm Customer of the Receiving Member, as applicable; and
(3) the Sponsored Member Trade(s) and Agent Clearing Transaction(s) to
be transferred have been Novated by FICC, have not yet been included in
a Net Settlement Position of the Sending Member pursuant to GSD Rule 11
(Netting System) \24\ for purposes of settlement, and have a scheduled
final settlement date that is not prior to the Transfer Effective Time.
---------------------------------------------------------------------------
\24\ See GSD Rule 11 (Netting System), id.
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The proposed rules would provide that, if these conditions are met,
FICC would process the transfer of activity by the Transfer Effective
Time. The proposed rules would also provide that FICC's lien on the
Sending Member's Clearing Fund and, subject to a transfer of Segregated
Customer Margin under Rule 26, the Sending Member's Segregated Customer
Margin, would continue to secure the obligations arising from the
transferred activity pursuant to Rule 4 until the Receiving Member has
satisfied the necessary margin requirements with respect to such
transactions.\25\ This provision would allow FICC to continue to manage
the risks presented by the Indirect Participant's activity while a
transfer of that activity is pending under this proposed rule. The
proposed rule would also provide that if the specified conditions are
not met, the transfer would be rejected, and the Sponsored Member
Trade(s) and Agent Clearing Transaction(s) would continue to be the
obligations of the Sending Member.
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\25\ See Section 4 of GSD Rule 4, id.
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Fourth, the proposed changes would describe the conditions
necessary for a Sending Member to transfer the Segregated Customer
Margin deposits of a Segregated Indirect Participant to a Receiving
Member. Under the rules that FICC recently adopted to comply with
recent amendments to Note H of Rule 15c3-3 under the Exchange Act,
Segregated Customer Margin requirements must be funded with the cash
and eligible securities of the Segregated Indirect Participant.\26\
Therefore, because these deposits are the cash and assets of the
Segregated Indirect Participant, FICC is adopting rules that would
permit a Sending Member to transfer those deposits to a Receiving
Member, subject to specified conditions.
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\26\ 17 CFR 240.15c3-3a.
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Such conditions would include that (1) all of the activity of the
Segregated Indirect Participant is transferred from the Sending Member
to a Segregated Indirect Participants Account of the Receiving Member;
(2) the Sending Member has identified to FICC the cash deposit and
Eligible Clearing Fund Securities that will be transferred to the
Receiving Member; and (3) the transfer is submitted to FICC in
accordance with the applicable published timeframes.
The proposed changes would provide that, if these conditions are
met, FICC's books and records would be updated to reflect the movement
of the excess Segregated Customer Margin of the Segregated Indirect
Participant that is on deposit with FICC from the Segregated Customer
Margin Custody Account of the Sending Member to the Segregated Customer
Margin Custody Account of the Receiving Member. Such transfer would be
reflected at the start of business on the Business Day following the
Transfer Effective Time. The proposed rules would further provide that,
if any of the specified conditions are not met, the transfer of
Segregated Customer Margin would not be processed by FICC.
Finally, Section 2 of proposed Rule 26 would provide for transfers
of Indirect Participant activity following the default of a Sponsoring
Member or Agent Clearing Member. As stated above, FICC is proposing to
state in Section 14 of Rule 3A and Section 8 of Rule 8 that, following
the default of a Sponsoring Member or Agent Clearing Member, the
activity of the Defaulting Member's Indirect Participants could be
closed out, settled or transferred pursuant to the proposed Rule 26.
This section would govern such transfers.
Specifically, Section 2 would provide that, upon a default of a
Sponsoring Member or Agent Clearing Member, FICC may, in accordance
with applicable law, act immediately to attempt to transfer to
alternate Sponsoring Member(s) or Agent Clearing Member(s) all or part
of the transactions of the Defaulting Member's Indirect Participants
and, where applicable, associated Segregated Customer Margin. Given the
variety of circumstances that could be present in connection with a
Member default, and FICC's obligation, as a central counterparty, to
ensure the orderly management of such default, it would not be
appropriate for FICC to commit to its ability to transfer such activity
away from the Defaulting Member. For example, FICC would be required to
follow the orders issued by a bankruptcy court in the event a
Defaulting Member is insolvent. However, the proposed changes would
document in the Rules FICC's intention to give effect to such transfers
when it is able and when such action is appropriate.
Section 2 would further provide that, if the transactions of the
Defaulting Member's Indirect Participants are transferred to alternate
Sponsoring Member(s) or Agent Clearing Members(s), FICC's lien on the
Defaulting Member's Clearing Fund, pursuant to Rule 4, would continue
to secure the obligations arising from the transferred transactions
until such time as the Receiving Member satisfies the necessary
Sponsoring Member Omnibus Account Required Fund Deposits or Agent
Clearing Member Omnibus Account Required Fund Deposits with respect to
such transactions.\27\ Again, this provision would allow FICC to
continue to manage the risks of activity that is transferred under this
proposed rule.
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\27\ See Section 4 of GSD Rule 4, supra note 3.
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VI. Technical Updates and Corrections
FICC is proposing to add a defined term for ``Indirect
Participant'' to GSD Rule 1 (Definitions) that would refer to any
Sponsored Member or Executing Firm Customer.
FICC is also proposing to add a reference to proposed Rule 26 to
Section 17(b) of Rule 3A (to be re-numbered Section 15(b)) as an
additional rule that would be applicable to Sponsored Members and
Sponsoring Members. FICC is proposing to change the references of
``Member'' to ``Defaulting Member'' in Rule 22A to reflect a more
appropriate usage of such term as defined in Rule 1. FICC would also
create additional subsections to Section 2 of Rule 22A to improve the
readability of that rule.
FICC would make a grammatical correction in Section 14(a) of Rule
3A, correct a section referenced in Section 18(e) of Rule 3A (to be
renumbered Section 16(e)), and correct a typo in Section 2(b) of Rule
8. FICC would also remove an unnecessary heading at the top of Rule
22B.
2. Statutory Basis
FICC believes the proposed rule change is consistent with Section
17A of the Act \28\ and the rules thereunder applicable to FICC.
Specifically, FICC believes that the proposed rule change is consistent
with Section 17A(b)(3)(F)
[[Page 26666]]
of the Act \29\ and Rules 17ad-22(e)(13) and (e)(23)(i),\30\ each as
promulgated under the Act, for the reasons described below.
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\28\ 15 U.S.C. 78q-1.
\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ 17 CFR 240.17ad-22(e)(13) and (e)(23)(i).
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Section 17A(b)(3)(F) of the Act requires that the Rules be
designed, among other things, to promote the prompt and accurate
clearance and settlement of securities transactions, and to assure the
safeguarding of securities and funds which are in the custody or
control of FICC or for which it is responsible.\31\ The proposed
changes would improve market participants' understanding of the
operation of FICC's default management procedures as those procedures
apply to the GSD indirect access models. By expanding the disclosures
in the GSD Rules in this way, FICC believes that market participants
would be better prepared in the event of a Member default, which would
result in a more orderly management of such an event. The proposed rule
changes would, therefore, minimize default losses and, thereby, reduce
potential risk to FICC and non-defaulting Members. As such, FICC
believes the proposed rule change would assure the safeguarding of
securities and funds which are in the custody and control of FICC or
for which it is responsible, consistent with Section 17A(b)(3)(F) of
the Act.\32\
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\31\ 15 U.S.C. 78q-1(b)(3)(F).
\32\ Id.
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Similarly, the proposed changes to adopt rules that would govern
the transfer of Indirect Participant activity between Members would
provide participants with a tool to manage their clearing relationships
and activity. These proposed changes would encourage participation in
central clearing, particularly by firms that would participate through
indirect access models. Therefore, by encouraging more activity into
central clearing, the proposed changes would promote the prompt and
accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Act.\33\ Finally, the
proposed change to make technical updates and corrections to the Rules
would ensure that the Rules remain accurate and clear, which in turn
would enable all stakeholders to readily understand their rights and
obligations in connection with FICC's clearance and settlement of
securities transactions. Therefore, FICC believes that this proposed
change would promote the prompt and accurate clearance and settlement
of securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\34\
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\33\ Id.
\34\ Id.
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Rule 17ad-22(e)(13) under the Act requires, in part, that FICC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure FICC has the authority and
operational capacity to take timely action to contain losses and
continue to meet its obligations.\35\ The proposed rule changes would
expand the descriptions in the GSD Rules of FICC's default management
procedures, principally by describing how those procedures apply to the
Sponsored Service and Agent Clearing Service. The proposed changes
would also provide for the transfer of Indirect Participant activity
following the default of a Member acting as either a Sponsoring Member
or Agent Clearing Member. The proposed changes would provide market
participants with a better understanding of how FICC would manage the
default of a Member, specifically a Member that acts as a Sponsoring
Member or Agent Clearing Member. Having clear and comprehensive rules
governing the default management process would facilitate a more
effective and orderly administration of those rules, providing FICC
with the authority and operational capacity to take timely action to
contain losses and liquidity demands in the event of a default. This,
in turn, would help FICC to continue to meet its clearance and
settlement obligations as a central counterparty in such an event.
Therefore, FICC believes that the proposed rule changes to enhance the
transparency and consistency of FICC's default management process with
respect to indirect participant activity are consistent with Rule 17ad-
22(e)(13) under the Act.\36\
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\35\ 17 CFR 240.17ad-22(e)(13).
\36\ Id.
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Rule 17ad-22(e)(23)(i) under the Act requires FICC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to publicly disclose all relevant rules and
material procedures, including key aspects of FICC's default rules and
procedures.\37\ The proposed rule changes would expand the description
of FICC's default management procedures in the GSD Rules, principally
by describing the application of those procedures to the GSD indirect
access models. The proposed changes would also adopt rules that would
govern the rights, obligations and operational aspects of a transfer of
Indirect Participant activity and, in some cases, Segregated Customer
Margin deposits. The proposed changes would also make technical
corrections and other updates to the Rules. As such, these proposed
changes would improve the public disclosures in the GSD Rules of
relevant rules and material procedures, in particular the key aspects
of FICC's default rules and procedures as such matters apply to the
indirect access models. Therefore, FICC believes that the proposed rule
changes are consistent with Rule 17ad-22(e)(23)(i) under the Act.\38\
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\37\ 17 CFR 240.17ad-22(e)(23)(i).
\38\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
FICC does not believe that the proposed rule changes to expand its
disclosures regarding how its default management procedures apply to
the GSD indirect access models, adopt rules that would permit the
transfer of Indirect Participant activity, and make technical
corrections to the GSD Rules would impact competition. These changes
would apply equally to all Members. By adopting default management
rules to apply to the Agent Clearing Service that are, where
appropriate, aligned with the default management rules that apply to
the Sponsored Service, the proposed changes would further the
consistent treatment, to the extent practicable and appropriate, of
Indirect Participants in these two indirect access models. As such,
FICC believes that these proposed rule changes would not have any
impact on 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 comments, available at
[[Page 26667]]
<a href="https://www.sec.gov/regulatory-actions/how-to-submitcomments">https://www.sec.gov/regulatory-actions/how-to-submitcomments</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#b4c0c6d5d0dddad3d5dad0d9d5c6dfd1c0c7f4c7d1d79ad3dbc2"><span class="__cf_email__" data-cfemail="aedadccfcac7c0c9cfc0cac3cfdcc5cbdaddeeddcbcd80c9c1d8">[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="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4230372e276f212d2f2f272c3631023127216c252d34"><span class="__cf_email__" data-cfemail="bccec9d0d991dfd3d1d1d9d2c8cffccfd9df92dbd3ca">[email protected]</span></a>. Please include
File Number SR-FICC-2025-015 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-2025-015. 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="http://www.sec.gov/rules/sro.shtml">http://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="https://www.dtcc.com/legal/sec-rule-filings.aspx">https://www.dtcc.com/legal/sec-rule-filings.aspx</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-2025-015 and should be submitted on or
before July 14, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-11422 Filed 6-20-25; 8:45 am]
BILLING CODE 8011-01-P
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