Notice2025-17729
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Establish a New Collateral-in-Lieu Offering Within the Sponsored GC Service, and Expand the Sponsored GC Service To Allow a Sponsoring Member To Submit for Clearing a “Done-Away” Sponsored GC Trade
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
September 15, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 90 Issue 176 (Monday, September 15, 2025)</title>
</head>
<body><pre>
[Federal Register Volume 90, Number 176 (Monday, September 15, 2025)]
[Notices]
[Pages 44408-44424]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-17729]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103940; File No. SR-FICC-2025-019]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Establish a New Collateral-
in-Lieu Offering Within the Sponsored GC Service, and Expand the
Sponsored GC Service To Allow a Sponsoring Member To Submit for
Clearing a ``Done-Away'' Sponsored GC Trade
September 10, 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 August 29, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to the FICC
Government Securities Division (``GSD'') Rulebook (``Rules'') \3\ to
(i) establish a new Collateral-in-Lieu (``CIL'') offering (``CIL
Service'') within the existing Sponsored GC Service, and (ii) expand
the Sponsored GC Service to allow a Sponsoring Member to submit for
clearing a ``done-away'' Sponsored GC Trade (i.e., a Sponsored GC Trade
between its Sponsored Member and either a Netting Member other than the
Sponsoring Member or another Indirect Participant of any Netting
Member). The proposed rule changes are designed to facilitate access to
FICC's clearance and settlement services, including by indirect
participants, in accordance with the requirements of Rule 17ad-
22(e)(18) under the Act.\4\
---------------------------------------------------------------------------
\3\ Capitalized terms not defined herein are defined in the
Rules, available at <a href="http://www.dtcc.com/legal/rules-and-procedures">http://www.dtcc.com/legal/rules-and-procedures</a>.
\4\ 17 CFR 240.17ad-22(e)(18).
---------------------------------------------------------------------------
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
[[Page 44409]]
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 of Proposed Changes
The purpose of the proposed rule change is to amend the Rules to
(i) establish the CIL Service to be available within GSD's Sponsored GC
Service, and (ii) expand the Sponsored GC Service to allow a Sponsoring
Member to submit for clearing a ``done-away'' Sponsored GC Trade (i.e.,
a Sponsored GC Trade between its Sponsored Member and either a Netting
Member other than the Sponsoring Member or another Indirect Participant
of any Netting Member).
The CIL Service would leverage much of the legal and operational
framework applicable to FICC's existing Sponsored GC Service, but with
certain adjustments designed to increase the ability of registered
investment companies (``RICs'') and other cash providers to access
FICC's clearance and settlement system for repurchase transactions. In
particular, the CIL Service would use a lien in favor of FICC on the
Purchased GC Repo Securities to reduce the margin and capital costs of
providing RICs and other cash providers with access to FICC's clearance
and settlement systems, and would facilitate the ability of RICs and
other cash providers to clear transactions executed through joint
trading accounts.
Under the proposed CIL Service, a Sponsoring Member would be
eligible to submit to FICC for clearance and settlement a repurchase
transaction (``Sponsored GC CIL Trade'') entered into by its Sponsored
Member as cash provider (``CIL Funds Lender'') with the Sponsoring
Member (i.e., ``done-with'') or with another Netting Member or any
Netting Member's Indirect Participant (i.e., ``done-away'') and for
such transaction to settle through the tri-party platform operated by a
Sponsored GC Clearing Agent Bank. The Sponsored GC CIL Trade would
generally be treated as a Sponsored GC Trade under the Rules, but with
certain key differences.
First, the Rules would provide for each CIL Funds Lender to grant
FICC a security interest in the Purchased GC Repo Securities subject to
the Sponsored GC CIL Trade to secure the CIL Funds Lender's obligations
under the transaction. The purpose of this lien is to eliminate the
``double margining'' that FICC understands from its engagement with
market participants operates as a constraint on the ability of
Sponsoring Members to provide clearance and settlement services to RICs
and other cash providers.\5\ ``Double margining'' refers to the cost to
a Sponsoring Member associated with funding both (1) a ``haircut'',
which refers to the amount of securities posted to a RIC or other cash
provider in excess of the cash funding provided under a repurchase
transaction, and (2) initial margin posted to FICC with respect to the
same transaction. Market participants have conveyed to FICC that the
combined funding costs of these two sums limit the capacity of
Sponsoring Members to clear Sponsored GC Trades entered into by RICs
and other cash providers.
---------------------------------------------------------------------------
\5\ See Letter from Ken Bentsen, President & CEO, SIFMA, et al.
to Mark Uyeda, Jan. 24, 2025, in Release No. 34-95763, File No. S7-
23-22, at 2, available at <a href="https://www.sifma.org/wp-content/uploads/2025/01/SIFMA-Extension-Request-US-Treasury-Clearing-Mandate-FINAL-Clean.pdf">https://www.sifma.org/wp-content/uploads/2025/01/SIFMA-Extension-Request-US-Treasury-Clearing-Mandate-FINAL-Clean.pdf</a> (describing ``SEC-registered fund rules that effectively
require double margining for cleared repos'' as a critical issue
that needs to be resolved in advance of the compliance date of the
Trade Submission Requirement (as defined below)).
---------------------------------------------------------------------------
The lien granted by the CIL Funds Lender to FICC would serve to
eliminate ``double margining'' by largely obviating the need for FICC
to collect initial margin with respect to a Sponsored GC CIL Trade. The
lien would allow FICC to use the Purchased GC Repo Securities to
complete settlement with the CIL Funds Lender's pre-Novation
counterparty (i.e., the GC Funds Borrower) under the Sponsored GC CIL
Trade in the event the CIL Funds Lender or its Sponsoring Member
defaulted. As a result, it would, with limited exceptions, eliminate
the need for FICC to collect initial margin to address the risk that
the CIL Funds Lender fails to deliver such securities.\6\ In addition,
by ensuring that FICC would be able to obtain the Purchased GC Repo
Securities underlying the Sponsored GC CIL Trade, the lien would
eliminate the need for the Sponsoring Member to guarantee the CIL Funds
Lender's obligations under a Sponsored GC CIL Trade. That, in turn,
would reduce the regulatory capital requirements, and thus the costs to
the Sponsoring Member, of providing the CIL Funds Lender with access to
FICC's clearance and settlement services.
---------------------------------------------------------------------------
\6\ As noted below, FICC would still collect initial margin with
respect to certain done-with Sponsored GC CIL Trades and would
require that Sponsored GC CIL Trades have an Initial Haircut that is
no less than the CIL Required Haircut (as such term would be defined
in the Rules). See Rule 1, supra note 3.
---------------------------------------------------------------------------
Second, the CIL Service would allow a Sponsoring Member to submit
to FICC for clearance and settlement transactions that have been
entered into by multiple RICs or other CIL Funds Lenders using a
``joint trading account.'' FICC understands from its engagement with
market participants that a number of RICs and other cash providers
utilize joint trading accounts because they provide various
efficiencies. However, the Sponsored GC Service does not currently
allow a Sponsoring Member to submit to FICC for clearance and
settlement a transaction entered into through a joint trading account,
unless the investment adviser for the joint trading account's
participants has specified each participant's respective portion of the
transaction. As described in greater detail below, FICC understands
from its engagement with market participants that this process,
generally referred to as ``allocation,'' often cannot be completed
before the FICC submission deadline for the Sponsored GC Service. This
is because an investment adviser generally needs information regarding
the various participants' current cash positions before it can perform
an allocation, and such information takes time to compile and examine.
As a result, participants in a joint trading account are often unable
to have their transactions submitted to FICC for clearing. Accordingly,
FICC believes that allowing Sponsoring Members to submit Sponsored GC
CIL Trades entered into by a joint trading account even before such
transactions have been allocated would facilitate the ability of RICs
and other cash providers to access FICC's clearance and settlement
services.
Lastly, the CIL Service would not require Sponsored Members to
exchange Funds-Only Settlement Amount payments with FICC in relation to
Sponsored GC CIL Trades. FICC understands from its engagement with
market participants that RICs and other cash providers are in many
cases not operationally able to make or receive twice daily Funds-Only
Settlement Amount payments and that a Sponsoring Member's receipt or
collection of such amounts on behalf of a RIC or other cash provider
could implicate various regulatory considerations.\7\ FICC understands
that it is therefore common practice for Sponsoring Members and their
Sponsored Members in the existing Sponsored GC Service to agree for the
[[Page 44410]]
Sponsoring Member to satisfy the relevant Funds-Only Settlement Amount
obligations of the Sponsored Member and to receive any such amounts due
to the Sponsored Member. However, such practice may be infeasible or
expensive at greater scale, particularly if the transactions at issue
are term transactions or ``done-away'' ones. Furthermore, because the
lien in favor of FICC on the Purchased GC Repo Securities ensures that
FICC will be able to look to such securities for the CIL Funds Lender's
performance, FICC does not need to collect Funds-Only Settlement
Amounts to address the possibility of the CIL Funds Lender defaulting
and the need for a replacement transaction.
---------------------------------------------------------------------------
\7\ See, e.g., 15 U.S.C. 80a-17(f).
---------------------------------------------------------------------------
As mentioned above, the CIL Service would allow a Sponsoring Member
to submit to FICC for clearance and settlement Sponsored GC Trades that
have been entered into on a done-with basis (i.e., between a CIL Funds
Lender and its own Sponsoring Member) or on a done-away basis (i.e.,
between its Sponsored Member and either a Netting Member other than the
Sponsoring Member or another Indirect Participant of any Netting
Member). In connection with these changes, FICC is also proposing to
amend the existing Sponsored GC Service to allow Sponsoring Members to
submit transactions entered into by a Sponsored Member on a done-away
basis for clearing. FICC believes that improving the ability of RICs
and other cash providers to engage in done-away transactions can
facilitate access by increasing the available scope of possible
counterparties.\8\ Accordingly, allowing a Sponsoring Member to submit
to FICC through the CIL Service or Sponsored GC Service transactions
entered into by its Sponsored Member either on a done-away or on a
done-with basis should facilitate greater access to FICC's clearance
and settlement systems.
---------------------------------------------------------------------------
\8\ See, e.g., Letter from Joanna Mallers, Secretary, FIA
Principal Traders Group to Vanessa Countryman, Apr. 17, 2024, in
Release No. 34-99844, File No. SR-FICC-2024-007, at 3, available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-459391-1190934.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-459391-1190934.pdf</a> (emphasizing the negative consequences of a lack of
``done-away'' clearing); Letter from Jennifer Han, Executive Vice
President, Chief Counsel and Head of Global Regulatory Affairs,
Managed Funds Association to Vanessa Countryman, Apr. 17, 2024, in
Release No. 34-99844, File No. SR-FICC-2024-007, at 5, available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-461691-1208034.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-461691-1208034.pdf</a> (emphasizing that indirect participants require a robust
``done-away'' clearing market); Letter from Jiri Krol, Deputy CEO,
Global Head of Government Affairs, Alternative Investment Management
Association to Vanessa Countryman, Apr. 23, 2024, in Release No. 34-
99844, File No. SR-FICC-2024-007, at 4, available at <a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-462091-1209374.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-462091-1209374.pdf</a> (noting that indirect participants need done-away
clearing to access clearing and settlement services); Letter from
William Thum, Managing Director and Assistant General Counsel, SIFMA
Asset Management Group to Vanessa Countryman, May 24, 2024, in
Release No. 34-99844, File No. SR-FICC-2024-007, at 5, available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-477851-1366734.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-477851-1366734.pdf</a> (noting that FICC must facilitate ``done-away'' trading
in a manner that fulfills the Access Requirement (as defined
below)).
---------------------------------------------------------------------------
(i) Background
FICC established its Sponsoring Member/Sponsored Member service
(``Sponsored Member Service'') in 2005, allowing certain Netting
Members (``Sponsoring Members'') to sponsor a Person into a limited
FICC/GSD membership as a ``Sponsored Member,'' \9\ and submit to FICC
for comparison, Novation, and netting certain types of eligible
delivery versus payment (``DVP'') securities transactions (``Sponsored
DVP Trades''). In 2021, FICC expanded the Sponsored Member Service to
create the Sponsored GC Service and permit a Sponsoring Member to
submit for clearing a Repo Transaction between the Sponsoring Member
and its Sponsored Member (i.e., a ``done-with'' transaction) involving
securities represented by a Generic CUSIP Number and settled on a
Sponsored GC Clearing Agent Bank's tri-party repo platform (a
``Sponsored GC Trade'', and each of a Sponsored DVP Trade and a
Sponsored GC Trade, a ``Sponsored Member Trade'').\10\ FICC has seen a
steady increase in the volume of Sponsored GC Trades over the past few
years.\11\
---------------------------------------------------------------------------
\9\ See Rule 3A, Section 3(a), supra note 3.
\10\ See Rule 3A, Section 7(b), supra note 3.
\11\ See press release announcing growth in activity cleared
through the Sponsored Member Service, available at <a href="https://www.dtcc.com/news/2025/march/25/dtccs-ficc-now-live-with-new-treasury-clearing-capabilities">https://www.dtcc.com/news/2025/march/25/dtccs-ficc-now-live-with-new-treasury-clearing-capabilities</a>.
---------------------------------------------------------------------------
In December 2023, the Commission adopted rules under the Act to
amend the standards applicable to covered clearing agencies for U.S.
Treasury securities to require that each covered clearing agency (i)
have written policies and procedures reasonably designed to require
that every direct participant of the covered clearing agency submit for
clearance and settlement all eligible secondary market transactions
(``ESMTs'') to which it is a counterparty (``Trade Submission
Requirement''), and (ii) ensure that it has appropriate means to
facilitate access to clearance and settlement services of all ESMTs,
including those of indirect participants (``Access Requirement'').\12\
In furtherance of the Access Requirement, FICC has adopted new access
models and margining arrangements and continues to review how it can
further facilitate access by indirect participants to FICC's clearance
and settlement services of ESMTs.\13\ FICC has also established
multiple advisory councils consisting of a broad spectrum of market
participants and has regularly engaged, both formally and informally,
with direct and indirect participants to identify what further steps
FICC can take to facilitate access to central clearing.
---------------------------------------------------------------------------
\12\ Securities Exchange Act Release No. 99149 (Dec. 13, 2023),
89 FR 2714 (Jan. 16, 2024).
\13\ To address the Access Requirement, FICC filed a proposed
rule change to adopt an Agent Clearing Service (``Access Model
Filing'') and a separate proposed rule change to permit Segregated
Customer Margin arrangements through which a Sponsoring Member may
collect margin from a customer and on-post the margin to FICC
(``Account Segregation Filing''). On November 21, 2024, the
Commission issued orders approving the Access Model Filing and the
Account Segregation Filing. See Securities Exchange Act Release Nos.
101695 (Nov. 21, 2024), 89 FR 93763 (Nov. 27, 2024) (SR-FICC-2024-
007); and 101694 (Nov. 21, 2024), 89 FR 93784 (Nov. 27, 2024) (SR-
FICC-2024-005).
---------------------------------------------------------------------------
Through this engagement, FICC has received feedback that addressing
the following considerations would increase the ability of RICs and
other cash providers to access FICC's clearance and settlement
services:
<bullet> RICs, including money market funds that are very active in
the Treasury repo market, are subject to regulatory restrictions that
constrain their ability to post cash or securities margin to FICC to
support their transactions.\14\ As a result, a RIC's Sponsoring Member
generally must fund such margin obligation in the form of a Clearing
Fund deposit, which funding increases the cost to the Sponsoring Member
of clearing the RIC's transactions. In addition, Sponsoring Members are
generally required to post a haircut to RICs under Sponsored GC Trades
so as to facilitate the RIC's compliance with its regulatory
obligations under Rule 5b-3 of the Investment Company Act of 1940
(``Investment Company Act'').\15\ Market
[[Page 44411]]
participants have described the requirement to post a haircut on top of
Clearing Fund deposits as ``double margining'' and have noted that such
double margining serves to limit Sponsoring Members' clearing capacity
and thus their ability to provide access to RICs and other indirect
participants.\16\
---------------------------------------------------------------------------
\14\ See, e.g., 15 U.S.C. 80a-17(f). In connection with the
Trade Submission Requirement, the Commission issued limited five-
year no-action relief providing that, subject to a number of
conditions, it would not provide a basis for enforcement action
under Section 17(f) of the Investment Company Act if a RIC's cash
and/or securities were placed and maintained in the custody of FICC
for purposes of meeting FICC's margin deposit requirements that may
be imposed for ESMTs in connection with the RIC's participation in
the Sponsored Member Service (``Time-Limited RIC No-Action
Relief''). However, RIC Sponsored Members have informed FICC that
they are largely unable to meaningfully rely on the Time-Limited RIC
No-Action Relief to post margin to FICC in light of the five-year
limitation as well as uncertainties regarding the conditions to this
relief.
\15\ 17 CFR 270.5b-3(c)(1)(i) (providing that, in order for a
repurchase transaction to be ``Collateralized Fully,'' ``[t]he value
of the securities collateralizing the repurchase agreement (reduced
by the transaction costs (including loss of interest) that the
investment company reasonably could expect to incur if the seller
defaults) is, and during the entire term of the repurchase agreement
remains, at least equal to the Resale Price provided in the
agreement''); see also Adam Copeland et al., Repo Intermediation and
Central Clearing: An Analysis of Sponsored Repo (Fed. Rsrv. Bank of
N.Y., Staff Rep. No. 1140, Dec. 2024), available at <a href="https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1140.pdf">https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1140.pdf</a> (noting that ``in some trades with money market funds, on
top of FICC's margin, dealers may be expected to deliver a two
percent haircut to the money market fund to match prevailing
practices in tri-party repo.'').
\16\ See SIFMA, Urgent Action Required: 5 Unresolved Issues in
Treasury Central Clearing Rules (Dec. 10, 2024), available at
<a href="https://www.sifma.org/resources/news/blog/urgent-action-required-5-unresolved-issues-in-treasury-central-clearing-rules/">https://www.sifma.org/resources/news/blog/urgent-action-required-5-unresolved-issues-in-treasury-central-clearing-rules/</a> (suggesting
that the Commission should ``eliminate double margining for
investment [advisers], as it risks reduced trading and
liquidity.'').
---------------------------------------------------------------------------
<bullet> Many RICs and other cash providers utilize ``joint trading
accounts,'' whereby an authorized person of the cash providers, such as
the cash providers' investment adviser (``Joint Account Agent''),
executes a single transaction on behalf of multiple cash providers and
allocates the transaction to the participating cash providers such that
each participating cash provider participates in the transaction
relative to its allocated portion of the transaction.\17\ The Rules
require that, when submitting a Sponsored GC Trade to FICC, a
Sponsoring Member specify each Sponsored Member that is party to such
transaction.\18\ However, the time it takes to render the allocation of
a transaction executed through a joint trading account may be such that
the final allocation is not performed until after the deadline to
submit the transaction to FICC has passed. Such timing mismatch can
effectively preclude the RIC or other cash provider from clearing
transactions executed through a joint trading account.
---------------------------------------------------------------------------
\17\ See 1996 SIFMA Master Repurchase Agreement, Annex IV,
Paragraph 4, available at <a href="https://www.sifma.org/documents/master-repurchase-agreement-mra-2/">https://www.sifma.org/documents/master-repurchase-agreement-mra-2/</a>.
\18\ See Rule 3A, Section 7(b)(ii)(A), supra note 3.
---------------------------------------------------------------------------
<bullet> The Rules require that Funds-Only Settlement Amounts,
including such amounts due with respect to Sponsored GC Trades, be paid
or collected twice daily.\19\ FICC understands from its engagement with
market participants that RICs and other cash providers generally do not
have the operational capability to pay or collect such amounts with
such frequency, and that there may be regulatory considerations under
Section 17(f) of the Investment Company Act or other regulatory regimes
that may limit the ability of certain Sponsoring Members to collect or
hold Funds-Only Settlement Amounts for RICs or other cash
providers.\20\ Therefore, Sponsoring Members typically agree to assume
a Sponsored Member's Funds-Only Settlement Amount obligations, and to
receive a Sponsored Member's Funds-Only Settlement Amount entitlements,
under Sponsored GC Trades.\21\ However, this practice can be costly or
infeasible and introduce questions under regulatory capital
requirements if adopted on a greater scale, particularly in the case of
term transactions or done-away transactions.
---------------------------------------------------------------------------
\19\ See Schedule of Timeframes, supra note 3.
\20\ See, e.g., 15 U.S.C. 80a-17(f); Letter from Ken Bentsen,
supra note 5.
\21\ See 2024 SIFMA Master Treasury Securities Clearing
Agreement: Done-with, Module II, Section 5 (``. . . Customer and
Clearing Member agree that (a) Clearing Member shall satisfy any
obligation of Customer to FICC to pay any Funds-Only Settlement
Amount in respect of the Customer Sponsored GC Trades; and (b) in
consideration of the agreement of Clearing Member not to seek
reimbursement of such amount described in clause (a) from Customer,
Clearing Member shall be entitled to any Funds-Only Settlement
Amount in respect of the Customer Sponsored GC Trades due to
Customer from FICC.''), available at <a href="https://www.sifma.org/resources/general/treasury-clearing-documentation/">https://www.sifma.org/resources/general/treasury-clearing-documentation/</a>.
---------------------------------------------------------------------------
<bullet> Currently, a Sponsoring Member may submit to FICC for
clearing a ``done-away'' Sponsored DVP Trade. However, FICC does not
currently clear any ``done-away'' transactions under the Sponsored GC
Service. Market participants have expressed interest in being able to
clear a ``done-away'' Sponsored GC Trade (i.e., a Sponsored GC Trade
between the Sponsored Member and either a Netting Member other than the
Sponsoring Member or another Indirect Participant of any Netting
Member), so as to increase a Sponsored Member's potential
counterparties and limit the costs and time associated with documenting
clearing arrangements with all potential counterparties.
In light of the feedback and to further support its compliance with
the Access Requirement, FICC proposes to create the CIL Service that
would aim to eliminate ``double margining,'' accommodate transactions
executed through a joint trading account, eliminate Funds-Only
Settlement Amount obligations for Sponsored GC CIL Trades, and
accommodate both done-with and done-away trading. FICC is also
proposing to expand the Sponsored GC Service to allow a Sponsoring
Member to submit for clearing done-away Sponsored GC Trades. FICC
believes that these changes would facilitate the ability of RICs as
well as other cash providers to access FICC's clearance and settlement
services and to improve the ability of Netting Members to submit
transactions to FICC for clearing.
(ii) The CIL Service
The proposed CIL Service would leverage much of the legal and
operational framework applicable to the existing Sponsored GC Service,
including the process for trade submission, the use of Generic CUSIP
Numbers, and the process for settling the transactions through the tri-
party platform of the Sponsored GC Clearing Agent Bank. Accordingly,
the Rules, as proposed to be amended, would generally treat Sponsored
GC CIL Trades as Sponsored GC Trades, with limited exceptions designed
to address the considerations discussed above.
(A) Sponsored GC CIL Trades and Sponsored GC CIL Omnibus Account
1. Overview
FICC proposes to amend the Rules to establish a new type of
transaction, called a ``Sponsored GC CIL Trade.'' A Sponsored GC CIL
Trade would be a Sponsored GC Trade entered into by a Sponsored
Member,\22\ acting as a CIL Funds Lender, and (i) the Sponsored
Member's own Sponsoring Member (i.e., ``done-with'') or (ii) either a
Netting Member other than the Sponsoring Member or another Indirect
Participant of any Netting Member (i.e., ``done-away''). FICC proposes
for such Sponsored GC CIL Trades to be recorded in a new type of
Indirect Participants Account, called a ``Sponsored GC CIL Omnibus
Account.'' The reason FICC is proposing for Sponsored GC CIL Trades to
be recorded in a separate Sponsored GC CIL Omnibus Account separate
from the general Sponsoring Member Omnibus Account is that the margin
requirements for Sponsored GC CIL Trades would be calculated
differently from those for general Sponsored Member Trades. In
addition, since one of the principal purposes of the CIL Service is to
address the inability of CIL Funds Lenders to post margin, and the
[[Page 44412]]
margin for Segregated Indirect Participants Accounts must generally
consist of Indirect Participant assets, the Rules would not permit a
Sponsored GC CIL Omnibus Account to be a Segregated Indirect
Participants Account.
---------------------------------------------------------------------------
\22\ Although certain features of the CIL Service are
specifically designed to address considerations related to the
Investment Company Act, any Sponsored Member would be permitted to
be a CIL Funds Lender, and FICC anticipates that cash providers that
are not RICs may seek to participate in the service (e.g., if they
are participants in joint trading accounts).
---------------------------------------------------------------------------
2. Summary of Proposed Rule Changes
To effectuate the proposed changes described above, FICC proposes
to make the following amendments to its Rules.
New Defined Terms. FICC would revise Rule 1 to add the following
new defined terms: (1) CIL Funds Lender, (2) Sponsored GC CIL Omnibus
Account, and (3) Sponsored GC CIL Trade.
CIL Funds Lender would mean a Sponsored Member that is a GC Funds
Lender in respect of a Sponsored GC CIL Trade.
Sponsored GC CIL Omnibus Account would mean an Account maintained
by FICC for a Sponsoring Member to record Sponsored GC CIL Trades
submitted to FICC by the Sponsoring Member on behalf of its Sponsored
Members.
Sponsored GC CIL Trade would mean a Sponsored GC Trade between a
Sponsored Member, acting as GC Funds Lender, and a Netting Member
(which may be either its Sponsoring Member or another Netting Member)
or another Indirect Participant of any Netting Member that the
Sponsoring Member submits for recordation in a Sponsored GC CIL Omnibus
Account.
Revisions to Defined Terms. In addition, FICC would make conforming
revisions to the following existing defined terms in Rule 1: (1)
Indirect Participants Account, (2) Sponsoring Member Omnibus Account,
and (3) Type of Account, each as described in greater detail below.
FICC proposes to revise the definition of Indirect Participants
Account to include a Sponsored GC CIL Omnibus Account.
FICC proposes to revise the definition of Sponsoring Member Omnibus
Account to make clear that Sponsored GC CIL Trades would not be
recorded in such an Account.
FICC proposes to revise the definition of Type of Account to
include a Sponsored GC CIL Omnibus Account.
Establishment of Sponsored GC CIL Omnibus Account. FICC proposes to
revise Sections 2 and 3 of Rule 2B to provide for the establishment of
a Sponsored GC CIL Omnibus Account as an additional type of Indirect
Participants Account and to make conforming changes. In particular,
FICC proposes to amend Section 2 of Rule 2B to add a new clause (iii)
providing that if a Netting Member is a Sponsoring Member, FICC may
establish and maintain for the Netting Member a Sponsored GC CIL
Omnibus Account for purposes of recording Sponsored GC CIL Trades of
the Sponsoring Member's Sponsored Members. In addition, FICC proposes
to amend Sections 2(i) and 3 of Rule 2B to make clear that a Sponsoring
Member Omnibus Account would not have Sponsored GC CIL Trades recorded
in it and that a Sponsored GC CIL Omnibus Account may not be a
Segregated Indirect Participants Account.
Other conforming changes. FICC proposes to revise Section 8(d) of
Rule 3A, which concerns netting offsetting settlement obligations for
purposes of calculating a Sponsoring Member's Individual Total Amount,
to provide for such provision to apply to Sponsored GC CIL Omnibus
Accounts to the same extent as it applies to Sponsoring Member Omnibus
Accounts. FICC also proposes to revise Sections 10(a) and 10(b) of Rule
3A, which concern Sponsoring Members' Clearing Fund requirements, to
provide for such provisions to apply to Sponsored GC CIL Omnibus
Accounts, as applicable.
(B) Risk and Default Management
1. Overview
To address the ``double margining'' impediment to clearing, FICC
proposes to require each CIL Funds Lender to collect a haircut and to
grant FICC a lien on the Purchased GC Repo Securities subject to the
Sponsored GC CIL Trade. The lien would be documented in a ``CIL
Custodial Agreement Supplement'' between a Sponsored GC Clearing Agent
Bank, a CIL Funds Lender, FICC, and the GC Funds Borrower. The Rules
would require that each CIL Custodial Agreement Supplement include, at
a minimum, the terms set forth in the Rules and no terms inconsistent
with such terms. The CIL Custodial Agreement Supplement would
supplement the existing custodial undertaking or similar agreement
(``Custody Agreement'') governing the account in which the Sponsored GC
Clearing Agent Bank maintains the Purchased GC Repo Securities for the
CIL Funds Lender (``Buyer's GC CIL Trade Account''). While each pairing
of CIL Funds Lender and GC Funds Borrower would be required to enter
into a CIL Custodial Agreement Supplement with FICC and the Sponsored
GC Clearing Agent Bank, FICC plans to work with Sponsored GC Clearing
Agent Banks to develop a streamlined documentation arrangement. Under
this arrangement, an individual participant would be able to execute a
single adherence document that would have the effect of causing the
participant to adhere simultaneously to CIL Custodial Agreement
Supplements in relation to all or a portion of their existing Custody
Agreements. This is similar to approaches that industry associations
have used to allow parties to amend a number of documents
simultaneously.\23\
---------------------------------------------------------------------------
\23\ See ISDA Protocols, available at <a href="https://www.isda.org/protocols/">https://www.isda.org/protocols/</a>.
---------------------------------------------------------------------------
The purpose of the lien would be to allow FICC to acquire the
Purchased GC Repo Securities and use them to settle with the GC Funds
Borrower in the event FICC ceases to act for the CIL Funds Lender or
its Sponsoring Member. In order to facilitate the foregoing, FICC
proposes to amend the Rules to provide that if FICC ceases to act for a
CIL Funds Lender, FICC may, in lieu of closing out the Sponsored GC CIL
Trades (or a portion of any such trades), exercise its right as a
secured party in relation to the Purchased GC Repo Securities and
instruct the Sponsored GC Clearing Agent Bank to remove such Purchased
GC Repo Securities from the account of such CIL Funds Lender. Under the
Rules, FICC would only be permitted to instruct the Sponsored GC
Clearing Agent Bank to remove the Purchased GC Repo Securities from the
account of the CIL Funds Lender in two scenarios. First, FICC would be
able to remove such securities if such removal is against cash in an
amount equal to the amount payable to the CIL Funds Lender (i.e.,
against the repurchase price due back to the CIL Funds Lender in final
settlement of the Sponsored GC CIL Trade). Second, FICC would be able
to remove the amount of Purchased GC Repo Securities necessary to
satisfy the CIL Funds Lender's obligation to return excess Purchased GC
Repo Securities or to return Purchased GC Repo Securities for which the
GC Funds Borrower has exercised its right to make a substitution. The
reason for this instruction right is that the GC Funds Borrower would,
as is currently the case under the Sponsored GC Service, generally be
entitled to the return of, and the CIL Funds Lender would be required
to deliver, Purchased GC Repo Securities that have a market value
greater than the value of the Purchased GC Repo Securities when the
Sponsored GC CIL Trade was first entered into (the ``GC Start Leg
Market Value''). Such excess would generally arise due to an increase
in the market value of the Purchased GC Repo Securities since the
Sponsored GC CIL Trade was executed. In addition, the GC Funds Borrower
would be entitled to effectuate, and a
[[Page 44413]]
CIL Funds Lender would be required to process, a substitution for some
or all of the Purchased GC Repo Securities of the same Generic CUSIP
Number. In order to ensure that FICC is able to perform its obligations
to the GC Funds Borrower in relation to excess Purchased GC Repo
Securities and substitutions, the Rules would permit FICC to instruct
the Sponsored GC Clearing Agent Bank to remove the ``Margin Excess
Amount.'' The Rules would define ``Margin Excess Amount'' as, in
respect of a Sponsored GC Trade, the amount of Purchased GC Repo
Securities necessary to (i) cause the market value of the GC Funds
Lender's GC Collateral Return Obligation to be no greater than the GC
Start Leg Market Value or (ii) effectuate any permitted substitution of
Purchased GC Repo Securities, in each case pursuant to Section 8(b) of
Rule 3A.
So as to ensure that the Sponsored GC Clearing Agent Bank acts on
such instructions and to perfect FICC's security interest in the
Purchased GC Repo Securities, the CIL Custodial Agreement Supplement
would contain an agreement by the Sponsored GC Clearing Agent Bank to
comply with FICC's instructions except following delivery by the CIL
Funds Lender to the Sponsored GC Clearing Agent Bank of a notice of a
Corporation Default (a ``GC CIL Notice of Default''). The reason the
Sponsored GC Clearing Agent Bank would agree not to act on FICC's
instructions following the delivery by the CIL Funds Lender of a CIL GC
Notice of Default is to ensure that, consistent with market practice
and the requirements of Investment Company Act Rule 5b-3, the CIL Funds
Lender would be able to exercise remedies against the Purchased GC Repo
Securities promptly upon a Corporation Default without potential
competing instructions from FICC.\24\ In addition, the CIL Custodial
Agreement Supplement would provide that the CIL Funds Lender, FICC and
the GC Funds Borrower all agree that the Sponsored GC Clearing Agent
Bank would, until the CIL Funds Lender has delivered a GC CIL Notice of
Default to the Sponsored GC Clearing Agent Bank, act upon FICC's
instructions to transfer Purchased GC Repo Securities from the Buyer's
GC CIL Trade Account to an account specified in such instruction (i) in
an amount no greater than the Margin Excess Amount or (ii) against cash
in an amount equal to the amount payable to the CIL Funds Lender at
such time. By virtue of these provisions, FICC would effectively be
able to settle a Sponsored GC CIL Trade by (i) acquiring the Purchased
GC Repo Securities it needs to deliver to the GC Funds Borrower on the
Sponsored GC CIL Trade and (ii) transferring to the CIL Funds Lender
the cash due to it (including the purchase price and accrued price
differentials) under the Sponsored GC CIL Trade.
---------------------------------------------------------------------------
\24\ See 17 CFR 270.5b-3.
---------------------------------------------------------------------------
The ability of FICC to acquire the Purchased GC Repo Securities and
use them to settle with the GC Funds Borrower would, except in limited
circumstances discussed below, eliminate the need for FICC to collect
margin in relation to the CIL Funds Lender's obligations under the
Sponsored GC CIL Trade. In the context of a reverse repurchase
transaction (``reverse repo''), FICC collects margin to ensure that it
has sufficient resources in the event it ceases to act for the reverse
repo buyer or its Sponsoring Member, to purchase the relevant
securities and deliver them to the non-defaulting pre-Novation
counterparty. However, if FICC can acquire the securities without
taking market action by virtue of a lien on such securities, it would
not need margin to secure the CIL Funds Lender's obligations.
In light of FICC's lien and its right to instruct the Sponsored GC
Clearing Agent Bank in relation to the Purchased GC Repo Securities,
FICC would generally be able to settle with the GC Funds Borrower and
CIL Funds Lender even if FICC ceased to act for the CIL Funds Lender's
Sponsoring Member. In such a situation, FICC would simply give the
instruction to the Sponsored GC Clearing Agent Bank to complete
settlement or allow the CIL Funds Lender to do so.
Nonetheless, a default of the Sponsoring Member could prevent FICC
from effectuating such settlement, if the GC Funds Borrower on the
Sponsored GC CIL Trade is the defaulting Sponsoring Member or an
Indirect Participant of that Sponsoring Member or its Affiliate. In
such default scenario, FICC may not be able to settle the Sponsored GC
CIL Trade at all. For example, if the GC Funds Borrower is an Indirect
Participant of the defaulting Sponsoring Member and the Sponsoring
Member's trustee or bankruptcy receiver refuses to perform its
obligation as processing agent for such Indirect Participant to
complete settlement, FICC would not be able to settle. In other cases,
FICC may be able to complete full or partial settlement notwithstanding
the fact that it has ceased to act for the Sponsoring Member. For
instance, if the Sponsoring Member were the GC Funds Borrower but
entered into a back-to-back FICC-cleared transaction involving some or
all of the Purchased GC Repo Securities with a Netting Member or an
Indirect Participant of a third party Netting Member, the Sponsoring
Member's obligations would net out under Rule 22A, and FICC would be
able to complete settlement with the Sponsoring Member's pre-Novation
counterparty on the back-to-back transaction.
To address these possibilities, FICC proposes to provide that, if
FICC ceases to act for the Sponsoring Member, and the GC Funds Borrower
is the defaulting Sponsoring Member or one of its Indirect
Participants, FICC may, as an alternative to effectuating settlement or
exercising rights under its lien, terminate the Sponsored GC CIL Trade
(or portion thereof). In such situation, the CIL Funds Lender would be
permitted to take such market action in relation to the relevant
Purchased GC Repo Securities as it determines in its discretion. In
furtherance of the foregoing, the CIL Custodial Agreement Supplement
would permit the CIL Funds Lender to instruct the Sponsored GC Clearing
Agent Bank in relation to any Purchased GC Repo Securities that FICC
has informed the Sponsored GC Clearing Agent Bank FICC does not intend
to use to complete settlement with the relevant GC Funds Borrower.
Were FICC to terminate a Sponsored GC CIL Trade (or a portion
thereof), FICC would calculate a liquidation amount owing in respect
thereof to Rule 22A. If the liquidation amount is owed by the CIL Funds
Lender to FICC, FICC would require resources to ensure the CIL Funds
Lender can satisfy its obligation to pay such amount. To the extent the
Sponsoring Member posted Clearing Fund to secure the obligations of the
GC Funds Borrower, that Clearing Fund could serve as such resources.
Accordingly, FICC proposes to amend the Rules to allow it to look to
such Clearing Fund deposits to address a CIL Funds Lender's obligations
in the event FICC closes out the Sponsored GC CIL Trades. However, if
the GC Funds Borrower is an Indirect Participant that has posted
Segregated Customer Margin, such margin would only be available to
cover the GC Funds Borrower's obligations and could not be used to
address the obligations of a CIL Funds Lender. FICC would therefore
require other resources to cover such liquidation amount.
FICC proposes to address such need for additional resources in two
ways. First, FICC proposes to require that a Sponsored GC CIL Trade
have an Initial Haircut no less than 2 percent of the Contract Value of
the Start Leg or such other amount determined by FICC (``CIL Required
Haircut''). This requirement
[[Page 44414]]
would be broadly consistent with the market practice of how uncleared
triparty repos of RICs are overcollateralized today.\25\ FICC would
provide Netting Members with at least 30 Business Days' advance notice
of any changes to the CIL Required Haircut. A change to the CIL
Required Haircut may be driven by, for example, a shift in market
practice related to initial haircuts to require a higher initial
haircut to address the requirement within the Investment Company Act
Rule 5b-3 that Sponsored GC CIL Trades be ``Collateralized Fully''.\26\
---------------------------------------------------------------------------
\25\ See supra note 15.
\26\ 17 CFR 270.5b-3(a) (stating that ``the acquisition of a
repurchase agreement may be deemed to be an acquisition of the
underlying securities, provided the obligation of the seller to
repurchase the securities from the investment company is
Collateralized Fully''); 17 CFR 270.5b-3(c)(1) (defining
``Collateralized Fully'').
---------------------------------------------------------------------------
Second, FICC proposes to subject the CIL Funds Lender's Sponsoring
Member to a Clearing Fund requirement for a Sponsored GC CIL Omnibus
Account (``Sponsored GC CIL Omnibus Account Required Fund Deposit'') in
circumstances when such is necessary to ensure that FICC would have
resources, in the form of Clearing Fund deposits or Purchased GC Repo
Securities, no less than the Clearing Fund FICC would otherwise collect
in relation to the transaction. More specifically, FICC would calculate
a Sponsored GC CIL Omnibus Account Required Fund Deposit if (and only
if) (1) the Sponsored GC CIL Omnibus Account has been enabled to record
Sponsored GC CIL Trades for which the GC Funds Borrower is its
Sponsoring Member or a Segregated Indirect Participant of its
Sponsoring Member; and (2) that Sponsoring Member or its Affiliate has
a Segregated Indirect Participants Account. As noted above, only in
that situation would FICC not have clearly available alternative
resources (in the form of other Clearing Fund deposits and Purchased GC
Repo Securities) to cover the obligations of a CIL Funds Lender. In all
other situations, the Sponsoring Member would not be required to post
any Clearing Fund in relation to a Sponsored GC CIL Omnibus Account.
The Sponsored GC CIL Omnibus Account Required Fund Deposit would be
the greater of a $1 million minimum and the sum of all applicable
charges, which would include a VaR Charge, a Portfolio Differential
Charge, and other applicable charges.\27\ The VaR Charge would be
calculated for each CIL Funds Lender as the positive difference between
(1) the amount of VaR Charge that FICC would have collected if the
Sponsored GC CIL Trades of that CIL Funds Lender had been subject to
the calculation of a Sponsoring Member Omnibus Account Required Fund
Deposit, and (2) the aggregate of all CIL Required Haircuts on that CIL
Funds Lender's Sponsored GC CIL Trades.
---------------------------------------------------------------------------
\27\ The Portfolio Differential Charge addresses the variability
of clearing activity submitted to GSD throughout the day by
measuring the period-over-period increase in the VaR Charge of
Members. The additional charges that may be included in a Sponsored
GC CIL Omnibus Account Required Fund Deposit when applicable would
include a Backtesting Charge, Holiday Charge, Margin Liquidity
Adjustment Charge and Intraday Supplemental Deposit. The calculation
of each of these additional charges would be the same as when
calculated with respect to a Sponsoring Member Omnibus Account.
---------------------------------------------------------------------------
FICC's security interest in Purchased GC Repo Securities subject to
Sponsored GC CIL Trades would also generally remove the need for the
Sponsoring Member to guarantee to FICC the performance by the CIL Funds
Lender of its obligations under the Sponsored GC CIL Trades, since
FICC's lien generally would allow it to obtain the Purchased GC Repo
Securities and perform to the GC Funds Borrower. Accordingly, FICC
proposes to amend the Rules to provide that, notwithstanding anything
to the contrary set forth in any Sponsoring Member Guaranty, the
Sponsoring Member does not guarantee to FICC and, except as expressly
set forth in the Rules, shall not be responsible for, the obligations
of a Sponsored Member arising under any Sponsored GC CIL Trade for
which the Sponsored Member is the CIL Funds Lender.
Because FICC would generally anticipate addressing a CIL Funds
Lender default by utilizing the lien to settle with the GC Funds
Borrower, FICC proposes to amend Section 16 of Rule 3A, which generally
allows a Sponsoring Member to liquidate a done-with Sponsored Member
Trade, to provide that a Sponsoring Member may only trigger that
provision if FICC has not exercised its rights as a secured party. In
addition, although as mentioned above, FICC would not generally require
a Sponsoring Member to guarantee the obligations of a CIL Funds Lender,
Section 16 of Rule 3A generally depends on the Sponsoring Member being
responsible for the obligations of the Sponsored Member. Accordingly,
FICC is proposing to amend the Rules to provide that, in the event that
the Sponsoring Member did exercise its rights under Section 16 of Rule
3A to terminate any done-with Sponsored GC CIL Trades, the Sponsoring
Member would be responsible for any Sponsored Member Liquidation Amount
owed by the CIL Funds Lender.
In addition to perfecting FICC's security interest in the Purchased
GC Repo Securities and allowing FICC to give instructions so as to
complete settlement with the GC Funds Borrower, the CIL Custodial
Agreement Supplement would include a number of terms to facilitate the
ability of RICs to conclude that Sponsored GC CIL Trades are
``Collateralized Fully'' within the meaning of Investment Company Act
Rule 5b-3.\28\ In particular, the CIL Custodial Agreement Supplement
would make clear that the Buyer's GC CIL Trade Account is a ``deposit
account'' \29\ in relation to cash and a ``securities account'' \30\ in
relation to securities and other financial assets, and include
acknowledgments from all relevant parties that the CIL Funds Lender is
the ``entitlement holder'' \31\ of each Buyer's GC CIL Trade Account
constituting a securities account, and each financial asset credited
thereto, and the ``bank's customer'' \32\ of each Buyer's GC CIL Trade
Account constituting a ``deposit account,'' \33\ as such terms are used
in the New York Uniform Commercial Code (``UCC''). Accordingly, the CIL
Funds Lender would have ``control'' of each such account and all
security entitlements, securities, financial assets, or cash credited
thereto pursuant to UCC Section 8-106(d)(1) and UCC Section 9-
104(a)(3), as applicable.\34\ Under the UCC, control serves to perfect
a security interest in a securities account or deposit account and all
assets credited thereto.\35\ In addition, the CIL Custodian
[[Page 44415]]
Agreement Supplement would provide the CIL Funds Lender with the
ability to take exclusive control of the Buyer's GC CIL Trade Account
and issue instructions to the Sponsored GC Clearing Agent Bank with
respect to such account upon delivery to the Sponsored GC Clearing
Agent Bank of a CIL GC Notice of Default.\36\
---------------------------------------------------------------------------
\28\ See 17 CFR 270.5b-3(a), supra note 26.
\29\ See UCC 9-102(a)(29) (defining ``deposit account'' to mean
``a demand, time, savings, passbook, or similar account maintained
with a bank'').
\30\ See UCC 8-501(a) (defining ``securities account'' to mean
``an account to which a financial asset is or may be credited in
accordance with an agreement under which the person maintaining the
account undertakes to treat the person for whom the account is
maintained as entitled to exercise the rights that comprise the
financial asset'').
\31\ See UCC 8-102(a)(7) (defining an ``entitlement holder'' to
mean ``a person identified in the records of a securities
intermediary as the person having a security entitlement against the
securities intermediary'').
\32\ See UCC 9-104(a)(3) (providing that a secured party has
control of a deposit account if ``the secured party becomes the
bank's customer with respect to the deposit account'').
\33\ See UCC 9-102(a)(29), supra note 29.
\34\ See UCC 8-106(d)(1) (providing that a purchaser has
``control'' of a security entitlement if ``the purchaser becomes the
entitlement holder''); UCC 9-104(a)(3) (providing that a secured
party has control of a deposit account if ``the secured party
becomes the bank's customer with respect to the deposit account'').
\35\ See UCC 9-314(a) (providing that a security interest in
investment property and deposit accounts ``may be perfected by
control of the collateral'').
\36\ See 17 CFR 270.5b-3(c)(1)(v) (requiring that ``[u]pon an
Event of Insolvency with respect to the seller, the repurchase
agreement would qualify under a provision of applicable insolvency
law providing an exclusion from any automatic stay of creditors'
rights against the seller'').
---------------------------------------------------------------------------
FICC is also proposing in the Rules certain terms that it
understands from RICs are important to facilitate a conclusion that the
Sponsored GC CIL Trades are ``Collateralized Fully.'' Specifically FICC
is proposing to provide in the Rules that, although each Sponsored GC
CIL Trade is a sale and purchase and not a loan, in the event any such
transaction is deemed to be a loan, FICC pledges to the relevant CIL
Funds Lender as security for the performance by FICC of its obligations
under such Sponsored GC CIL Trade, and grants such CIL Funds Lender a
security interest in, all of FICC's rights, title and interest in and
to the securities, financial assets and cash delivered to the CIL Funds
Lender pursuant to such Sponsored GC CIL Trade and from time to time
credited to the Buyer's GC CIL Trade Account, together with all
proceeds of the foregoing.
The proposed CIL Service would not present any additional or new
liquidity risks to FICC. FICC would incorporate Sponsored GC CIL Trades
into its liquidity risk management calculations and into the
calculation of Sponsoring Members' obligations with respect to the
Capped Contingency Liquidity Facility (``CCLF''), as set forth in
Section 2a(b) of Rule 22A, using the same methodology, logic and
parameters that FICC uses with respect to Sponsored GC Trades.
2. Summary of Proposed Rule Changes
To effectuate the proposed changes described above, FICC proposes
to make the following amendments to its Rules.
New defined terms. FICC would revise Rule 1 to add the following
new defined terms: (1) CIL Custodial Agreement Supplement, (2) CIL
Required Haircut, (3) Margin Excess Amount, and (4) Sponsored GC CIL
Omnibus Account Required Fund Deposit.
CIL Custodial Agreement Supplement would mean an agreement between
a Sponsored GC Clearing Agent Bank, a CIL Funds Lender, FICC and a GC
Funds Borrower that includes, at a minimum, the required terms set
forth in a Schedule of Material Terms to the CIL Custodial Agreement
Supplement, to be included in the Rules, and nothing inconsistent with
those terms.
The CIL Custodial Agreement Supplement would be part of the
agreement (often titled a ``Custodial Undertaking'') between the CIL
Funds Lender, the GC Funds Borrower, and the Sponsored GC Clearing
Agent Bank that governs the establishment of the accounts of the CIL
Funds Lender and the GC Funds Borrower at the Sponsored GC Clearing
Agent Bank, the processes for effecting transfers of cash or securities
to or from such accounts, and the rights of the applicable parties
relating to such accounts.
CIL Required Haircut would mean no less than 2 percent of the
Contract Value of the Start Leg or such other amount as FICC may, with
no less than thirty (30) Business Days' advance notice, make available
to Netting Members in an Important Notice (or such other form as FICC
may determine) and communicate to the Sponsored GC Clearing Agent Bank.
Margin Excess Amount would mean, in respect of a Sponsored GC
Trade, the amount of Purchased GC Repo Securities necessary to (i)
cause the market value of the GC Funds Lender's GC Collateral Return
Obligation to be no greater than the GC Start Leg Market Value or (ii)
effectuate any permitted substitution of Purchased GC Repo Securities,
in each case pursuant to Section 8(b) of Rule 3A.
Sponsored GC CIL Omnibus Account Required Fund Deposit would mean
the Sponsoring Member's Required Fund Deposit Portion that is
calculated on the basis of the Sponsoring Member's Sponsored GC CIL
Omnibus Account(s).
Revisions to defined terms. FICC proposes to revise the definition
of Required Fund Deposit Portion to mean each item listed in Section
2(a)(i)-(v) of Rule 4, as a conforming change in light of the addition
of a new clause (v) in Section 2(a) of Rule 4 as described below.
The definition of VaR Charge, set forth in Section 5 of the Margin
Component Schedule, would be revised to provide that, with respect to
each CIL Funds Lender, such charge would be calculated as the positive
difference between (1) the amount of VaR Charge that FICC would have
collected if the Sponsored GC CIL Trades of that CIL Funds Lender had
been subject to the calculation of a Sponsoring Member Omnibus Account
Required Fund Deposit, and (2) the aggregate of all CIL Required
Haircuts on that CIL Funds Lender's Sponsored GC CIL Trades.
Other Amendments. FICC proposes the following additional
amendments.
FICC proposes to amend the last paragraph of Section 1 of Rule 3A
to provide that, notwithstanding anything to the contrary set forth in
any Sponsoring Member Guaranty, the Sponsoring Member does not
guarantee to FICC, and, except as expressly set forth in the Rules,
shall not be responsible for, the obligations of a Sponsored Member
arising under any Sponsored GC CIL Trade for which the Sponsored Member
is the CIL Funds Lender.
FICC proposes to revise Section 7(b)(i) of Rule 3A to specify that
Sponsored GC CIL Trades must have an Initial Haircut no less than the
CIL Required Haircut, and further provide that no modification to the
CIL Required Haircut (as provided for in the definition of the CIL
Required Haircut) would apply to Sponsored GC CIL Trades that have been
Novated to FICC prior to the effectiveness of such modification.
FICC proposes to add a new Section 7(b)(v) to Rule 3A to provide
that, although FICC and each CIL Funds Lender intend that each
Sponsored GC CIL Trade be a sale and purchase and not a loan, in the
event any such transaction is deemed to be a loan, FICC pledges to the
relevant CIL Funds Lender as security for the performance by FICC of
its obligations under such Sponsored GC CIL Trade, and grants such CIL
Funds Lender a security interest in, all of FICC's rights, title and
interest in and to the securities, financial assets and cash delivered
to the CIL Funds Lender pursuant to such Sponsored GC CIL Trade and
from time to time credited to the Buyer's GC CIL Trade Account,
together with all proceeds of the foregoing.
FICC proposes to revise Section 10(c) of Rule 3A to provide that
Sponsored GC CIL Omnibus Account Required Fund Deposit with respect to
obligations of a Sponsoring Member arising under Sponsored GC CIL
Trades would be subject to the same requirements as Sponsoring Member
Omnibus Account Required Fund Deposit, if applicable. The revised
Section 10(c) would also provide that a Netting Member's Actual Deposit
would secure (1) the Netting Member's obligation to provide Sponsored
GC CIL Omnibus Account Required Fund Deposit, if applicable, and (2)
the obligations of the CIL Funds Lender under each Sponsored GC CIL
Trade for which the Netting Member acts as Sponsoring Member.
FICC proposes to revise Section 10(e) of Rule 3A to provide that,
consistent
[[Page 44416]]
with the existing provision under Rule 3A that prohibits Sponsoring
Members from engaging in cross-margining with respect to Sponsoring
Member Omnibus Accounts, a Sponsoring Member would not be eligible to
participate in any Cross-Margining Arrangements with respect to any
Sponsored GC CIL Omnibus Account.
FICC proposes to revise Section 10(f) of Rule 3A to provide that,
unlike for other Sponsored GC Trades, for purposes of the application
of Rule 4 and the Margin Component Schedule to a Sponsoring Member
Omnibus Account, Sponsored GC CIL Trades would not be treated as GCF
Repo Transactions.
FICC proposes to add a new Section 10(g) to Rule 3A to provide
that, to secure the full and timely performance of its obligations to
FICC in connection with each Sponsored GC CIL Trade, each CIL Funds
Lender would be required to execute a CIL Custodial Agreement
Supplement wherein it pledges and grants to FICC, and agrees that FICC
shall have, a continuing lien on and security interest in, all of such
CIL Funds Lender's rights, title and interest in and to all Purchased
GC Repo Securities subject to each outstanding Sponsored GC CIL Trade.
FICC proposes to revise Section 13 of Rule 3A to add a new Section
13(d) to provide that, if FICC ceases to act for a CIL Funds Lender,
FICC may, in lieu of applying the provisions of Rule 22A in relation to
one or more Sponsored GC CIL Trades (or a portion of any such trade),
exercise its rights as a secured party in relation to some or all of
the Purchased GC Repo Securities in respect of the Sponsored GC CIL
Trades of such CIL Funds Lender and, in connection therewith, instruct
the Sponsored GC Clearing Agent Bank to remove such Purchased GC Repo
Securities from the account of such CIL Funds Lender (x) in an amount
no greater than the Margin Excess Amount or (y) in an amount FICC
determines to be equal to the amount payable to the CIL Funds Lender in
connection with its GC Collateral Return Obligation corresponding to
such Purchased GC Repo Securities.
FICC proposes to amend Section 14(d) of Rule 3A to make clear that
the provisions of Section 14(e), rather than the last sentence of
Section 14(d), would specify the actions FICC may take in respect of
Sponsored GC CIL Trades if FICC ceases to act for a Sponsoring Member.
FICC proposes to add a new Section 14(e) to Rule 3A that addresses
the actions FICC may take in respect of Sponsored GC CIL Trades if FICC
ceases to act for a Sponsoring Member. It would provide that, in such
situation, FICC may, in its discretion, either (i) transfer such
Sponsored GC CIL Trades to another Sponsoring Member pursuant to Rule
26, (ii) settle all or a portion of the GC Collateral Return
Obligations arising from such Sponsored GC CIL Trades as well as all
corresponding Margin Excess Amount obligations, (iii) utilize its lien
to achieve such effective settlement, or (iv) if the GC Funds Borrower
to such Sponsored GC CIL Trade was the Sponsoring Member or an Indirect
Participant of such Sponsoring Member, terminate such Sponsored GC CIL
Trade, in which case Rule 22A would apply in relation to such Sponsored
GC CIL Trade.
FICC proposes to revise Section 16 of Rule 3A to provide that the
Sponsoring Member may utilize the close-out mechanism therein for any
done-with Sponsored Member Trade (including any done-with Sponsored GC
Trade and any done-with Sponsored GC CIL Trade) and to add as a
condition to such utilization in the context of a Sponsored GC CIL
Trade (or a portion of any such trade) that FICC has not exercised its
rights set forth in proposed Section 13(e) of Rule 3A, as described
above.
FICC proposes to revise Section 2(a) of Rule 4 regarding the
components of the Required Fund Deposit a Netting Member must make to
add a new clause (v) consisting of an amount calculated with respect to
the Netting Member's Margin Portfolios that include one or more
Sponsored GC CIL Omnibus Accounts, when such amount is applicable
pursuant to the Margin Component Schedule.
FICC also proposes to amend Section 4(a) of Rule 4 to provide that
a Netting Member's Clearing Fund deposit and other collateral pledged
thereunder would secure all obligations and liabilities of the Netting
Member's Sponsored Members in respect of Sponsored GC CIL Trades in the
Netting Member's Sponsored GC CIL Omnibus Account (if applicable).
FICC proposes to revise Section 2 of Rule 22A to provide that FICC
would not close out a Sponsored GC CIL Trade (or a portion thereof) if
it determines to exercise its right as a secured party in relation to
the relevant Purchased GC Repo Securities, and that the CIL Funds
Lender may take market action in relation to the Purchased GC Repo
Securities in respect of a Sponsored GC CIL Trade (or a portion
thereof) in its discretion if FICC determines to terminate the
Sponsored GC CIL Trade (or such portion).
FICC proposes to revise Section 2 of the Margin Component Schedule
to add a new subsection (c) that describes when a Sponsored GC CIL
Omnibus Account Required Fund Deposit may be calculated with respect to
a Sponsored GC CIL Omnibus Account and the components of that
calculation. This subsection would provide that a Sponsored GC CIL
Omnibus Account Required Fund Deposit would only be calculated if (1)
the Sponsored GC CIL Omnibus Account has been enabled to record
Sponsored GC CIL Trades for which the GC Funds Borrower is its
Sponsoring Member or a Segregated Indirect Participant of its
Sponsoring Member; and (2) that Sponsoring Member or its Affiliate has
a Segregated Indirect Participants Account.
FICC proposes to also provide in the new Section 2(c) of the Margin
Component Schedule that, on each Business Day, FICC would determine the
Sponsored GC CIL Omnibus Account Required Fund Deposit, for each Margin
Portfolio that includes one or more Sponsored GC CIL Omnibus Accounts,
as an Unadjusted GSD Margin Portfolio Amount equal to the sum of (i)
the VaR Charge, plus (ii) the Portfolio Differential Charge. This
proposed section would also provide that the following charges may be
added to the Unadjusted GSD Margin Portfolio Amount, when applicable:
(i) Backtesting Charge, (ii) Holiday Charge, (iii) Margin Liquidity
Adjustment Charge, and (iv) Intraday Supplemental Fund Deposit.
FICC proposes to amend Section 2(d) (as renumbered) to provide that
any Sponsored GC CIL Omnibus Account Required Fund Deposit that is
collected would be equal to the greater of (i) the sum of the
Unadjusted GSD Margin Portfolio Amount and all applicable additional
charges; and (ii) a minimum charge of $1 million.
FICC proposes to add a Schedule of CIL Custodial Agreement
Supplement Material Terms to the Rules, which would set forth the
minimum terms that would be required to be included in an agreement for
that agreement to qualify as a CIL Custodial Agreement Supplement
pursuant to the definition of such term in the Rules. Such minimum
terms would include: (i) the establishment of Buyer's GC CIL Trade
Accounts to which all securities transferred pursuant to a Sponsored GC
CIL Trade and proceeds thereof would be credited; (ii) the creation of
FICC's lien in each Buyer's GC CIL Trade Account and assets credited
thereto, and the obligation for the Sponsored GC Clearing Agent Bank to
comply with FICC's instructions with respect thereto, except following
a Corporation Default; (iii) the obligation for the Sponsored GC
[[Page 44417]]
Clearing Agent Bank to comply with certain instructions of the CIL
Funds Lender in connection with the final settlement of a Sponsored GC
CIL Trade, following FICC's decision to terminate a Sponsored GC CIL
Trade after the default of the Sponsoring Member, or upon a Corporation
Default; and (iv) terms to facilitate the ability of CIL Funds Lenders
that are RICs to conclude that Sponsored GC CIL Trades are
``Collateralized Fully'' within the meaning of Investment Company Act
Rule 5b-3, as discussed above.\37\
---------------------------------------------------------------------------
\37\ 17 CFR 270.5b-3(c)(1)(v) (requiring that ``[u]pon an Event
of Insolvency with respect to the seller, the repurchase agreement
would qualify under a provision of applicable insolvency law
providing an exclusion from any automatic stay of creditors' rights
against the seller'').
---------------------------------------------------------------------------
(C) CIL Joint Accounts
1. Overview
FICC understands from its engagement with market participants that
RICs and other cash providers that have engaged a common investment
adviser may seek to enter into triparty repo transactions using ``joint
trading accounts.'' The investment adviser acts as agent for the joint
trading account in accordance with guidance issued by Commission staff.
The obligations of the investment adviser and a cash provider in
relation to the joint trading account are typically set out in an
agreement between the investment adviser and the cash provider.
One of the obligations of an investment adviser that acts on behalf
of a joint trading account is to ``allocate'' transactions entered into
through the joint trading account to the individual participants. FICC
understands that such allocation serves to cause the transaction to
constitute separate individual transactions between the counterparty
and each participant based on the participant's allocated portion. FICC
further understands that, prior to such allocation, the transaction
remains a single transaction, but with each participant having a pro
rata interest in it and being liable for a pro rata share of the
obligations. Regardless of whether a transaction has been allocated or
not, FICC understands that each participant's entitlement to the
purchased securities in the triparty account corresponds to its portion
of the relevant transaction.
To facilitate the ability of CIL Funds Lenders to access FICC's
clearance and settlement systems in relation to transactions executed
through a joint trading account, FICC proposes to permit two or more
CIL Funds Lenders to be represented by an agent (a ``CIL Joint Account
Agent'') that has been approved by FICC. Each such CIL Funds Lender and
CIL Joint Account Agent would need to sign and deliver to FICC a ``CIL
Joint Account Agent Agreement'' in such form as may be prescribed by
FICC. The CIL Joint Account Agent Agreement would require the CIL Funds
Lender and CIL Joint Account Agent to represent that their performance
of their obligations under the CIL Joint Account Agent Agreement and
the Rules is in compliance with all applicable law. FICC further
proposes to amend its Rules to permit a Sponsoring Member to submit to
FICC for Novation a Sponsored GC CIL Trade entered into by a CIL Joint
Account Agent on behalf of multiple CIL Funds Lenders (each such
Sponsored GC CIL Trade, a ``CIL Joint Account Block'').
Each such CIL Funds Lender on whose behalf a CIL Joint Account
Block has been submitted would only be entitled to, and liable for, its
respective portion of the rights and obligations arising under or in
connection with the CIL Joint Account Block. The responsibility to
calculate such portions as well as to engage in the formal allocation
would be on the CIL Joint Account Agent in accordance with the terms of
any investment management or other agreement between the CIL Joint
Account Agent and the CIL Funds Lender. The Rules would provide that,
if the CIL Joint Account Agent has performed such allocation, the
entitlement of each CIL Funds Lender to, and liability of each such CIL
Funds Lender for, the rights and obligations arising under or in
connection with such CIL Joint Account Block shall be limited to the
amount of such CIL Joint Account Block allocated to each such CIL Funds
Lender. If the CIL Joint Account Agent has not performed such
allocation, the CIL Funds Lender would be liable for its pro rata
portion of the transaction.
FICC proposes to adopt amendments to the Rules that would address
how FICC would handle the default of a CIL Funds Lender on whose behalf
a CIL Joint Account Block has been submitted. FICC understands that
RICs are generally subject to regulatory requirements that limit their
ability to agree to have their transactions affected as a result of a
circumstance affecting another firm acting through the same joint
trading account. FICC therefore proposes to provide in the Rules that,
in a default of a CIL Funds Lender on whose behalf a CIL Joint Account
Block has been submitted, FICC would, to the extent it determines doing
so is feasible and consistent with applicable law, exercise remedies in
a way that would have no significant adverse impact on the interest of
any non-defaulting CIL Funds Lender in such CIL Joint Account Block or
the Purchased GC Repo Securities related thereto.
If FICC cannot exercise remedies in a way that does not have a
significant adverse impact on the interest of any non-defaulting CIL
Funds Lender (e.g., if the CIL Joint Account Block has not been
allocated), FICC would, to the extent it determines that doing so is
not prohibited by, and would not prejudice its rights under, applicable
law and is necessary to preserve the interest of any non-defaulting CIL
Funds Lenders, refrain from exercising remedies against the CIL Funds
Lender in relation to such CIL Joint Account Block or Purchased GC Repo
Securities, including its rights under its security interest in the
Purchased GC Repo Securities, except to facilitate the movement of any
Margin Excess Amount or on the maturity date of the CIL Joint Account
Block, at which point FICC would cause the transfer of the Purchased GC
Repo Securities against the amount due under the CIL Joint Account
Block. As discussed above, in relation to a defaulting CIL Funds
Lender, such exercise would constitute an exercise of remedies as a
secured party. In relation to any non-defaulting CIL Funds Lender, such
exercise of remedies would constitute settlement of its portion of the
CIL Joint Account Block in relation to mark-to-market, substitution, or
final settlement obligations with respect thereto.
In order to ensure that FICC knows the respective interests of the
defaulting and non-defaulting CIL Funds Lenders in a CIL Joint Account
Block, FICC proposes to require that a CIL Joint Account Agent provide
FICC with certain information in the event FICC ceases to act for a CIL
Funds Lender on whose behalf a CIL Joint Account Agent acts. In
particular, the Rules would provide that, in the event FICC ceases to
act for a CIL Funds Lender that is a participant in a CIL Joint Account
Block, the relevant CIL Joint Account Agent must promptly notify FICC
whether such CIL Joint Account Block had been allocated and, if so, the
respective allocation to the defaulting CIL Funds Lender. The Rules
would further provide that the CIL Joint Account Agent would not be
permitted to change the allocation information with respect to the
defaulting CIL Funds Lender following such notification. FICC does not
propose to require the CIL Joint Account Agent to provide allocation
information outside the context of a default by a CIL Funds Lender
because, in light of FICC's lien on the Purchased GC Repo Securities
[[Page 44418]]
and instruction right, FICC does not require such information to risk
manage the Sponsored GC CIL Trade or to effectuate settlement thereof.
2. Summary of Proposed Rule Changes
To effectuate the proposed changes described above, FICC proposes
to make the following amendments to its Rules.
New defined terms. FICC would revise Rule 1 to add the following
new defined terms: (1) CIL Joint Account, (2) CIL Joint Account Agent,
(3) CIL Joint Account Agent Agreement, and (4) CIL Joint Account Block.
CIL Joint Account would mean a group of two or more CIL Funds
Lenders represented by a CIL Joint Account Agent.
CIL Joint Account Agent would mean an entity authorized to enter
into Sponsored GC CIL Trades on behalf of two or more CIL Funds
Lenders.
CIL Joint Account Agent Agreement would mean the agreement required
by new Section 3A of Rule 3A (as described below) to be signed and
delivered to FICC by each CIL Funds Lender that would be represented by
a CIL Joint Account Agent and the applicable CIL Joint Account Agent.
CIL Joint Account Block would mean a Sponsored GC CIL Trade entered
into by a CIL Joint Account Agent on behalf of multiple CIL Funds
Lenders.
Other amendments. FICC proposes to add a new Section 3A to Rule 3A
to facilitate the ability of CIL Funds Lenders to clear transactions
executed through joint trading accounts as described above.
Specifically:
Paragraph (a) of proposed Section 3A would provide that two or more
CIL Funds Lenders may be represented by a CIL Joint Account Agent that
has been approved by FICC subject to each such CIL Funds Lender and
such CIL Joint Account Agent signing and delivering a CIL Joint Account
Agent Agreement to FICC in such form as may be prescribed by FICC. If
FICC terminates the CIL Joint Account Agent Agreement, the CIL Joint
Account Agent would no longer be permitted to represent the CIL Funds
Lenders in relation to any new CIL Joint Account Block, except in
respect of any outstanding CIL Joint Account Block(s) that have been
Novated. FICC's termination of the CIL Joint Account Agent Agreement
would not affect such CIL Joint Account Block(s), nor would it affect
the CIL Joint Account Agent's ability to act on behalf of a CIL Funds
Lender in another capacity.
Paragraph (b) of proposed Section 3A would provide that a CIL Joint
Account Agent may enter into, and a Sponsoring Member may submit to
FICC for Novation in accordance with Rule 3A, a CIL Joint Account Block
on behalf of multiple CIL Funds Lenders. Each CIL Funds Lender would be
entitled to, and responsible for, only the rights and obligations
associated with the portion of the CIL Joint Account Block allocated to
it. If any portion of the obligations to FICC remains unallocated, each
represented CIL Funds Lender would be liable for its pro rata share of
those unallocated obligations.
Paragraph (c) of proposed Section 3A would address the exercise of
remedies in the event FICC ceases to act for a CIL Funds Lender on
whose behalf a CIL Joint Account Block has been submitted. In such
event, for each CIL Joint Account Block entered into by a CIL Joint
Account Agent in respect of a CIL Joint Account in which the defaulted
CIL Funds Lender is a participant at the time the CIL Joint Account
Block was entered into, the CIL Joint Account Agent would need to
promptly notify FICC (A) whether the defaulting CIL Funds Lender was a
CIL Funds Lender on behalf of which such CIL Joint Account Agent
entered into such CIL Joint Account Block and (B) for each such CIL
Joint Account Block, (x) the amount of such CIL Joint Account Block
that has been allocated to the defaulting CIL Funds Lender or (y) that
such CIL Joint Account Block was not allocated by the CIL Joint Account
Agent among the defaulting CIL Funds Lender and the other CIL Funds
Lenders represented by such CIL Joint Account Agent in the applicable
CIL Joint Account, in each case as of the time of such notification.
After such notification, the CIL Joint Account Agent would not be
permitted to allocate or reallocate any CIL Joint Account Block or any
portion thereof to or from the defaulting CIL Funds Lender.
Paragraph (c) would further provide that, to the extent FICC
determines it is feasible and consistent with applicable law, FICC
would exercise remedies in a manner that does not have a significant
adverse impact on the interest of any non-defaulting CIL Funds Lender
in the relevant CIL Joint Account Block or the related Purchased GC
Repo Securities. If FICC determines that it is impossible to exercise
remedies against a defaulting CIL Funds Lender without having a
significant adverse impact on the interests of a non-defaulting CIL
Funds Lender (for example, because the CIL Joint Account Block has not
been allocated), FICC would refrain from exercising remedies against
the defaulting party except to facilitate movement of any Margin Excess
Amount or on the maturity date of the CIL Joint Account Block, at which
time FICC would exercise its rights as a secured party to cause the
transfer of the Purchased GC Repo Securities against the amount due
under the CIL Joint Account Block. In relation to any non-defaulting
CIL Funds Lender, such exercise of remedies shall constitute settlement
of its portion of the CIL Joint Account Block. FICC would only be
required to refrain from exercising remedies if it determines that
refraining from exercising such remedies is not prohibited by, and
would not prejudice its rights under, applicable law (including
insolvency laws applicable to the defaulting CIL Funds Lender) and is
necessary to preserve the interests of non-defaulting CIL Funds
Lenders.
(D) Funds-Only Settlement (``FOS'')
1. Overview
Under the existing Sponsored GC Service, the only Funds-Only
Settlement Amounts that the pre-Novation counterparties to a Sponsored
GC Trade are obligated to pay to FICC and entitled to receive from FICC
are the Forward Mark Adjustment Payment and Interest Adjustment
Payment. The reason FICC exchanges such amounts with the pre-Novation
counterparties is to address the risk that the pre-Novation
counterparty (or its Sponsoring Member or Agent Clearing Member, as
applicable) defaults and FICC needs to enter into a replacement
transaction at market interest rates in order to perform to the other
pre-Novation counterparty. In such a situation, ambient interest rates
may have shifted since the date of Novation of the Sponsored GC Trade
such that the cost to FICC of entering into the replacement transaction
at market rates may be greater or less than what the cost would have
been at the time the Sponsored GC Trade was originally Novated. The
Forward Mark Adjustment Payment captures the loss or gain to FICC and
the defaulting pre-Novation counterparty of such greater or lower costs
and thereby ensures that FICC and the pre-Novation counterparty are
made whole in the event FICC ceases to act for the pre-Novation
counterparty. The Interest Adjustment Payment serves to compensate the
payer of the Forward Mark Adjustment Payment for the time value of the
payment.
In the context of the CIL Service, FICC's lien on the Purchased GC
Repo Securities and ability to instruct the Sponsored GC Clearing Agent
Bank to transfer such securities would effectively ensure that FICC
never needs to enter into a replacement transaction to address the
default of a CIL Funds Lender (or its Sponsoring Member). Rather, FICC
would rely upon its lien
[[Page 44419]]
and instruction right to settle with the GC Funds Borrower or, if the
GC Funds Borrower is the Sponsoring Member or its Indirect Participant,
possibly terminate both the transaction with the CIL Funds Lender and
GC Funds Borrower such that no replacement transaction is required.
FICC is therefore proposing for FICC not to pay or collect Funds-
Only Settlement Amounts to or from a CIL Funds Lender (or its
Sponsoring Member) in relation to a Sponsored GC CIL Trade. FICC would
still collect Funds-Only Settlement Amounts from the GC Funds Borrower
in relation to the Sponsored GC CIL Trade because, in the event the GC
Funds Borrower (or its Sponsoring Member or Agent Clearing Member, as
applicable) defaults, FICC might need to enter into a replacement
transaction to perform to the CIL Funds Lender. However, FICC would not
pay Funds-Only Settlement Amounts to the GC Funds Borrower because FICC
would not be collecting such amounts from the CIL Funds Lender.
FICC understands from its engagement with market participants that
eliminating the exchange of Funds-Only Settlement Amounts with CIL
Funds Lenders would facilitate the ability of RICs and other cash
providers to access FICC's clearance and settlement services. This is
because RICs and other cash providers generally do not have the
operational capacity to engage in twice-daily exchanges of Funds-Only
Settlement Amounts and, even if they did, passing such amounts through
a Sponsoring Member may not be consistent with a RIC's obligations
under Section 17(f) of the Investment Company Act, depending on the
identity of the Sponsoring Member.\38\ In light of these challenges,
FICC understands that Sponsoring Members generally assume the
obligation of RICs and other GC Funds Lenders to pay Funds-Only
Settlement Amounts in exchange for the Sponsoring Member being able to
keep any such amounts paid by FICC.\39\ However, expanding that
practice may be infeasible and expensive, particularly in the context
of term or done-away transactions. In term transactions, the Forward
Mark Adjustment Payment may be substantially greater than in overnight
transactions, while in done-away transactions the Forward Mark
Adjustment Payment can have a real liquidity impact on the Sponsoring
Member since the Sponsoring Member will not receive an equivalent
amount from FICC as ``the other side'' of the trade. Furthermore, FICC
understands that requiring Sponsoring Members that do not otherwise
guarantee the obligations of CIL Funds Lenders to cover the CIL Funds
Lender's Funds-Only Settlement Amount obligations could have regulatory
capital implications for Sponsoring Members. In light of the foregoing,
FICC believes that eliminating the need for CIL Funds Lenders or their
Sponsoring Members to post Funds-Only Settlement Amounts would make it
easier for RICs and other cash providers to transact using FICC's CIL
Service.
---------------------------------------------------------------------------
\38\ See, e.g., 15 U.S.C. 80a-17(f); Letter from Ken Bentsen,
supra note 5.
\39\ See 2024 SIFMA Master Treasury Securities Clearing
Agreement: Done-with, Module II, Section 5 (``. . . Customer and
Clearing Member agree that (a) Clearing Member shall satisfy any
obligation of Customer to FICC to pay any Funds-Only Settlement
Amount in respect of the Customer Sponsored GC Trades; and (b) in
consideration of the agreement of Clearing Member not to seek
reimbursement of such amount described in clause (a) from Customer,
Clearing Member shall be entitled to any Funds-Only Settlement
Amount in respect of the Customer Sponsored GC Trades due to
Customer from FICC.'').
---------------------------------------------------------------------------
2. Summary of Proposed Rule Changes
To effectuate the proposed changes described above, FICC proposes
to (i) amend Section 9 of Rule 3A to provide that Sponsored GC CIL
Trades would not be subject to Section 9(b) of Rule 3A, which specifies
the Funds-Only Settlement Amount obligations generally applicable to
Sponsored GC Trades, (ii) renumber existing Section 9(c) of Rule 3A as
Section 9(d), and (iii) add a new Section 9(c) to Rule 3A to provide
that neither a CIL Funds Lender nor its Sponsoring Member shall be
obligated to pay to FICC and/or be entitled to receive from FICC, any
amounts arising in relation to the Sponsored GC CIL Trades under Rule
13. The new Section 9(c) would further provide that each GC Funds
Borrower would be obligated to pay FICC, but would not be entitled to
receive from FICC, any Forward Mark Adjustment Payments and associated
Interest Adjustment Payments in accordance with Rules 13 and 3A in
relation to each Sponsored GC CIL Trade, provided that at the maturity
of such Sponsored GC CIL Trade, FICC would pay to the GC Funds Borrower
any such amounts so collected.
(iii) Done-Away Sponsored GC Trades
(A) Overview
Currently, a Sponsoring Member may submit only ``done-with''
transactions to FICC under the Sponsored GC Service (i.e., transactions
between the Sponsored Member and the Sponsoring Member).\40\ FICC
proposes to amend its Rules to permit a Sponsoring Member to submit to
FICC for clearing under the existing Sponsored GC Service done-away
transactions (i.e., transactions entered into between a Sponsored
Member and either a Netting Member that is not the Sponsoring Member or
an Indirect Participant of any Netting Member). FICC is proposing to
effectuate this change by revising a number of defined terms and
certain sections in Rule 3A to make clear that counterparties to a
Sponsored GC Trade do not need to be a Sponsored Member and its
Sponsoring Member, but instead can be a Sponsored Member and any
Netting Member or its Indirect Participant.
---------------------------------------------------------------------------
\40\ See Rule 1, supra note 3 (defining a Sponsored GC Trade as
``a Sponsored Member Trade that is a Repo Transaction between a
Sponsored Member and its Sponsoring Member involving securities
represented by a Generic CUSIP Number the data on which are
submitted to [FICC] by the Sponsoring Member pursuant to the
provisions of Rule 6A, for Novation to [FICC] pursuant to Section
7(b)(ii) of Rule 3A'' in connection with the Sponsored GC Service;
and defining a Sponsored Member Trade as ``(a) a transaction that
satisfies the requirements of Section 5 of Rule 3A and that is (i)
between a Sponsored Member and its Sponsoring Member or (ii) between
a Sponsored Member and a Netting Member or (b) a Sponsored GC
Trade.'').
---------------------------------------------------------------------------
FICC's risk management and liquidity requirements in respect of
done-away Sponsored GC Trades would not be different from those in
respect of done-away Sponsored DVP Trades. Done-away Sponsored GC
Trades would also be subject to all applicable requirements as done-
with Sponsored GC Trades. Furthermore, as with existing Sponsored
Member Trades, the liquidation provision in Section 18 of Rule 3A would
only be applicable to done-with Sponsored GC Trades.\41\
---------------------------------------------------------------------------
\41\ FICC has proposed rule changes that would include changing
the numbering of Section 18 to Section 16 in Rule 3A. See Securities
Exchange Act Release No. 103282 (June 17, 2025), 90 FR 26656 (June
23, 2025) (SR-FICC-2025-015).
---------------------------------------------------------------------------
In connection with this proposed change, FICC is also proposing to
extend the deadline set forth in the Schedule of Sponsored GC Trade
Timeframes for (i) full settlement of the Start Leg of Sponsored GC
Trades, (ii) substitutions of Purchased GC Repo Securities, and (iii)
satisfaction of GC Collateral Return Obligations and cash payment
obligations associated with GC Collateral Return Entitlements by GC
Funds Lenders and GC Funds Borrowers. The current deadline for these
actions is 5:30 p.m. and the proposal would move this deadline to 7:00
p.m. (New York City times), which would align with the close of the
Fedwire Funds Service at the Federal Reserve Bank of New York.
Currently,
[[Page 44420]]
Sponsored GC Trades for which funds are delivered between 5:30 p.m. and
7:00 p.m. do not settle until the next Business Day. Aligning these two
deadlines would facilitate additional settlement of Sponsored GC
Trades.
(B) Summary of Proposed Rule Changes
Revisions to defined terms. FICC proposes to revise the following
defined terms in Rule 1: (1) GC Collateral Return Entitlement, (2) GC
Collateral Return Obligation, (3) GC Funds Borrower, (4) GC Funds
Lender, (5) Purchased GC Repo Securities, (6) Sponsored GC Trade, and
(7) Sponsored Member Trade, each as described in greater detail below.
FICC proposes to revise the definitions of GC Collateral Return
Entitlement, GC Collateral Return Obligation, GC Funds Borrower, and GC
Funds Lender to (i) replace references to ``a Sponsoring Member or
Sponsored Member'' with references to ``a Netting Member or its
Indirect Participant'', and (ii) provide that only a Sponsored Member
can be the GC Funds Lender and have a GC Collateral Return Obligation
in relation to a Sponsored GC CIL Trade.
FICC proposes to revise the definition of Purchased GC Repo
Securities to replace references to ``Sponsoring Member or Sponsored
Member'' with references to ``GC Funds Borrower.''
FICC proposes to revise the definition of Sponsored GC Trade to
replace ``its Sponsoring Member'' with ``a Netting Member or its
Indirect Participant'' and to eliminate the unnecessary reference
therein to Sponsored Member Trade.
FICC proposes to redefine the term Sponsored Member Trade as a
transaction that satisfies the requirements of Section 5 of Rule 3A or
a Sponsored GC Trade that, in each case, is (i) between a Sponsored
Member and its Sponsoring Member or (ii) between a Sponsored Member and
another Netting Member or an Indirect Participant of the Sponsoring
Member or another Netting Member. FICC would also make conforming
changes to the definition of Same-Day Settling Trade to align with
these revisions.
Conforming and clarifying changes. FICC proposes to make a number
of conforming and clarifying changes in Sections 7, 8, and 16 of Rule
3A, each as described in greater detail below.
FICC proposes to amend Sections 7(b)(iv) and 8(b)(vi) of Rule 3A to
replace the references to ``Sponsoring Member and Sponsored Member''
with references to ``GC Funds Borrower and GC Funds Lender''.
FICC proposes to amend Section 8(a)(iii) of Rule 3A to conform to
the revisions being proposed to the definition of Sponsored Member
Trade and ensure that the statement regarding the availability of the
Pair-Off Service to Sponsored Member Trades other than Sponsored GC
Trades be correct.
FICC proposes to amend Section 8(b)(iv) of Rule 3A to make clear
that FICC would pay GC Daily Repo Interest to ``the GC Funds Lender, if
the repo rate is positive for the relevant Sponsored GC Trade, or to
the GC Funds Borrower, if the repo rate is negative for the relevant
Sponsored GC Trade,'' instead of paying such interest to ``the GC Funds
Lender or GC Funds Borrower, as applicable.''
FICC proposes to amend Section 16(a) of Rule 3A to provide that the
liquidation mechanism under Section 16 is only applicable to done-with
transactions, i.e., Sponsored Member Trades between a Sponsored Member
and its Sponsoring Member.
Implementation Timeframe
Subject to approval by the Commission, FICC would implement the
proposed rule change by no later than 6 months after approval. FICC
would announce the effective date of the proposed changes by an
Important Notice posted to its website.
2. Statutory Basis
FICC believes these proposed changes are consistent with the
requirements of the Act, and the rules and regulations thereunder
applicable to FICC. Specifically, FICC believes that the proposed
changes are consistent with Section 17A(b)(3)(F) of the Act,\42\ and
Rule 17ad-22(e)(4)(i),\43\ Rule 17ad-22(e)(6),\44\ Rule 17ad-
22(e)(18)(ii),\45\ Rule 17ad-22(e)(18)(iv)(C),\46\ Rule 17ad-
22(e)(19),\47\ and Rule 17ad-22(e)(23)(ii),\48\ as promulgated under
the Act, for the reasons stated below.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78q-1(b)(3)(F).
\43\ 17 CFR 240.17ad-22(e)(4)(i).
\44\ 17 CFR 240.17ad-22(e)(6).
\45\ 17 CFR 240.17ad-22(e)(18)(ii).
\46\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
\47\ 17 CFR 240.17ad-22(e)(19).
\48\ 17 CFR 240.17ad-22(e)(23)(ii).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
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.\49\ The proposed amendments would not provide FICC with
custody of any additional securities. The Purchased GC Repo Securities
would remain in the custody of the Sponsored GC Clearing Agent Bank, in
the Buyer's GC CIL Trade Account. However, the proposed CIL Custodial
Agreement Supplement would provide FICC with ``control'' of Purchased
GC Repo Securities subject to a Sponsored GC CIL Trade as a matter of
the Uniform Commercial Code as in effect in the State of New York.\50\
---------------------------------------------------------------------------
\49\ 15 U.S.C. 78q-1(b)(3)(F).
\50\ UCC 8-106(d)(2).
---------------------------------------------------------------------------
FICC believes that the proposed rule changes are designed to assure
the safeguarding of the Purchased GC Repo Securities subject to its
control. As noted above, FICC's lien and control are specifically
designed so that FICC can complete settlement of Sponsored GC CIL
Trades even in a default of the CIL Funds Lender or Sponsoring Member.
In furtherance of the foregoing, the CIL Custodial Agreement Supplement
and proposed changes to the text of the Rules would only permit FICC to
instruct the transfer of the Purchased GC Repo Securities out of the
Buyer's GC CIL Trade Account if such transfer is in connection with the
transfer of any Margin Excess Amount or in the amount equal to any cash
due to the CIL Funds Lender. Furthermore, the CIL Custodial Agreement
Supplement would prohibit any withdrawals of the Purchased GC Repo
Securities by the CIL Funds Lender other than to allow for ordinary
course settlement, in a Corporation Default, or in respect of
securities that FICC does not intend to use to complete settlement with
the GC Funds Borrower on the Sponsored GC CIL Trade. Accordingly, the
proposed changes would ensure that the Purchased GC Repo Securities
subject to FICC's control remain safeguarded in the Buyer's GC CIL
Trade Account at the Sponsored GC Clearing Agent Bank until such time
as they are needed for settlement or the Sponsored GC CIL Trade is
terminated.
More broadly, the proposed changes are designed to ensure that FICC
calculates and has sufficient resources to cover potential losses from
a default on a done-away Sponsored GC Trade or on a Sponsored GC CIL
Trade. Under the proposed rule changes, non-CIL done-away Sponsored GC
Trades, which FICC believes present the same market risk as done-with
Sponsored GC Trades, would be subject to the same margin requirements
as done-with Sponsored GC Trades. The Commission found last year that
such margin requirements ``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.'' \51\
---------------------------------------------------------------------------
\51\ See Securities Exchange Act Release No. 101695 (Nov. 21,
2024), 89 FR 93763 (Nov. 27, 2024) (SR-FICC-2024-007).
---------------------------------------------------------------------------
In the case of Sponsored GC CIL Trades, FICC's perfected security
[[Page 44421]]
interest in the Purchased GC Repo Securities subject to the Sponsored
GC CIL Trades, as supplemented by the Clearing Fund posted by the
Sponsoring Member for its Sponsored GC CIL Omnibus Account, the
mandatory CIL Required Haircut, and any Sponsored GC CIL Omnibus
Account Required Fund Deposit, is designed to ensure that FICC has
sufficient resources to address a default of a CIL Funds Lender or its
Sponsoring Member. As noted above, the perfected security interest as
well as FICC's right to instruct the Sponsored GC Clearing Agent Bank
in relation to such securities would ensure that FICC can settle with
the GC Funds Borrower in a CIL Funds Lender default or the default of
its Sponsoring Member, provided that the Sponsoring Member or its
Indirect Participant is not the GC Funds Borrower. If the Sponsoring
Member or its Indirect Participant is the GC Funds Borrower, FICC may
need to terminate the Sponsored GC Trade in whole or in part and rely
upon the Sponsoring Member's Clearing Fund, the CIL Required Haircut,
or the Sponsored GC CIL Omnibus Account Required Fund Deposit to cover
any losses resulting from the liquidation. Such amounts, however, would
never be less than the Clearing Fund FICC would have available for a
Sponsored GC Trade. FICC therefore believes that the proposed changes
would enhance its ability to safeguard funds and securities which are
in the custody or control of FICC or for which it is responsible.
Section 17A(b)(3)(F) of the Act also requires that the Rules be
designed to foster cooperation and coordination with persons engaged in
the clearance and settlement of securities transactions, remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, and, in general, protect investors and the public
interest.\52\ FICC believes that the proposed changes are designed to
meet these goals.
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
First, FICC understands from its engagement with market
participants that there are currently a number of constraints on the
ability of RICs and other cash providers to access FICC's clearance and
settlement services, including (i) the ``double margining'' arising
from RICs' need for haircuts and inability to post margin to FICC, (ii)
the capital requirements associated with providing the Sponsoring
Member Guaranty, and (iii) the limitations on a Sponsoring Member's
ability to submit to FICC transactions entered into through joint
trading accounts. By creating the CIL Service, FICC would eliminate
``double margining'' by taking a perfected security interest in the
Purchased GC Repo Securities in lieu of some or all of the required
margin. The lien would also allow FICC not to require a Sponsoring
Member to guarantee the obligations of a CIL Funds Lender under a
Sponsored GC CIL Trade. The elimination of such guarantee requirement
would have substantial capital savings for the Sponsoring Member (and
corresponding cost savings for the CIL Funds Lender). FICC would also
accommodate the clearance and settlement of Sponsored GC CIL Trades
entered into through a joint trading account even before such
transactions have been allocated. Accordingly, the proposed changes are
designed to remove these impediments for RICs and other cash providers
to access FICC's clearance and settlement services.
Second, FICC understands from its engagement with market
participants that Sponsoring Members typically agree to assume a
Sponsored Member's Funds-Only Settlement Amount obligations, and to
receive a Sponsored Member's Funds-Only Settlement Amount entitlements,
under Sponsored GC Trades to address operational and regulatory
concerns of RICs and other cash providers. However, as mentioned above,
FICC believes that it may be infeasible or expensive for Sponsoring
Members to do this on a broader scale, particularly in relation to term
transactions or done-away ones. This is because the capital, liquidity,
and cost consequences of satisfying a Sponsored Member's Funds-Only
Settlement Amount obligations in relation to term or done-away
transactions may be substantially greater than for done-with overnight
transactions. Furthermore, any such costs would ultimately not outweigh
the benefits of exchanging Funds-Only Settlement Amounts with a CIL
Funds Lender (or its Sponsoring Member) considering FICC's proposed
lien on the Purchased GC Repo Securities and right to instruct the
Sponsored GC Clearing Agent Bank in relation to such securities would
obviate the risk that such Funds-Only Settlement Amounts are designed
to address. Accordingly, FICC believes that eliminating the need for
FICC to exchange Funds-Only Settlement Amounts with CIL Funds Lenders
would remove potential impediments that could limit access to FICC's
clearance and settlement systems.
Third, FICC understands from its engagement with market
participants that a robust done-away clearing market can promote market
liquidity by allowing for all-to-all trading. In addition, done-away
clearing can eliminate the substantial time and expenses of RICs and
other cash providers needing to enter into clearing documentation with
each and every one of their trading counterparties. The proposed
changes to provide for the clearing of done-away Sponsored GC Trades
would therefore promote cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions,
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions, and protect the
public interest.
Given the foregoing, FICC believes the proposed changes are
designed to foster cooperation and coordination with persons engaged in
the clearance and settlement of securities transactions, remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, and in general, protect investors and the public
interest, consistent with Section 17A(b)(3)(F) of the Act.\53\
---------------------------------------------------------------------------
\53\ Id.
---------------------------------------------------------------------------
Rule 17ad-22(e)(4)(i) under the Act requires that FICC 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.\54\ FICC believes the proposed
changes are consistent with this requirement.
---------------------------------------------------------------------------
\54\ 17 CFR 240.17ad-22(e)(4)(i).
---------------------------------------------------------------------------
First, the proposed changes relating to the risk and default
management mechanism for the CIL Service, i.e., FICC's perfected
security interest in the Purchased GC Repo Securities subject to the
Sponsored GC CIL Trades, supplemented by the Clearing Fund for the
Sponsoring Member's Sponsoring Member Omnibus Account, the mandatory
CIL Required Haircut, and the Sponsored GC CIL Omnibus Account Required
Fund Deposit requirement, would ensure both that the quantum of
resources accessible by FICC to manage the default on a Sponsored GC
CIL Trade would accurately reflect FICC's credit exposures to
participants in the CIL Service and that FICC would be able to use such
resources to cover its exposure in the event of a default by the CIL
Funds Lender or its Sponsoring
[[Page 44422]]
Member. Second, under the proposed changes, the done-away Sponsored GC
Trades (other than Sponsored GC CIL Trades), which present the same
credit and market risk profile as done-with Sponsored GC Trades, would
be margined and risk managed in the same manner as done-with Sponsored
GC Trades using methodologies that have been approved by the
Commission. Meanwhile, done-away Sponsored GC Trades, which present the
same liquidity risks as other done-away transactions, would be treated
identically to such other done-away transactions for purposes of
calculating a Sponsoring Member's Capped Contingency Liquidity Facility
obligations. Therefore, collectively, these changes would enhance the
ability of FICC to manage the risk of the transactions it clears and
settles and cover its credit exposure to its participants with a high
degree of confidence.
Rule 17ad-22(e)(6) under the Act requires, in part, that FICC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system.\55\ The
proposed changes would provide FICC with enough margin to ensure it
will have sufficient resources to perform to non-defaulting
participants in a participant default. In particular, the proposed
changes would provide FICC, in the form of Purchased GC Repo Securities
and Clearing Fund deposits, with resources to address a CIL Funds
Lender default that are equal to, or in excess of, the resources FICC
calculates using its established and approved risk-based models as
necessary to address the default of a Sponsored Member under a
Sponsored GC Trade. Accordingly, the proposed changes would ensure FICC
covers its credit exposures to its participants.
---------------------------------------------------------------------------
\55\ 17 CFR 240.17ad-22(e)(6).
---------------------------------------------------------------------------
Rule 17ad-22(e)(18)(ii) under the Act requires FICC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to establish objective, risk-based, and publicly
disclosed criteria for participation, which require participants to
have sufficient financial resources and robust operational capacity to
meet obligations arising from participation in FICC.\56\ The proposed
changes--which would (i) not impose margin requirements for Sponsored
GC CIL Trades except for Sponsored GC CIL Omnibus Account Required Fund
Deposit, if any, and (ii) make done-away Sponsored GC Trades (other
than Sponsored GC CIL Trades) subject to FICC's existing margin
requirements applicable to done-with Sponsored GC Trades--would provide
objective, risk-based, and publicly disclosed criteria for Sponsoring
Members that would clear Sponsored GC CIL Trades or done-away Sponsored
GC Trades for customers regarding the specific margin requirements to
which they would be subject. In addition, the requirement for CIL Funds
Lenders to execute a CIL Custodial Agreement Supplement as prescribed
by FICC would further provide objective, risk-based, and publicly
disclosed criteria for CIL Funds Lenders, the GC Funds Borrowers, and,
if applicable, their Sponsoring Members on certain operational
requirements for participating in the CIL Service as well as FICC's
lien on the Purchased GC Repo Securities subject to the Sponsored GC
CIL Trades. Therefore, collectively, the proposed changes would improve
public disclosure for participation in FICC's services, including with
respect to the relevant financial and operational requirements in
connection with Sponsored GC CIL Trades.
---------------------------------------------------------------------------
\56\ 17 CFR 240.17ad-22(e)(18)(ii).
---------------------------------------------------------------------------
Rule 17ad-22(e)(18)(iv)(C) requires, in part, that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to 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.\57\ FICC believes that the proposed
changes would very much facilitate access to its clearing and
settlement services for ESMTs by eliminating or ameliorating certain
existing impediments to access that RICs and other cash providers face.
---------------------------------------------------------------------------
\57\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
First, FICC's security interest in the Purchased GC Repo Securities
would eliminate the ``double margining'' that increases the costs (and
thereby decreases the ability of) a Sponsoring Member to provide
clearance and settlement services to RICs and other cash providers. The
lien would also eliminate the need for the Sponsoring Member to
guarantee the obligations of a CIL Funds Lender. FICC understands from
its engagement with market participants that eliminating the guarantee
would reduce the capital requirements associated with a Sponsoring
Member providing access to FICC's clearance and settlement systems, and
thus the costs of providing such access.
Second, the CIL Service would allow a Sponsoring Member to submit
to FICC for clearance and settlement transactions that have been
entered into by multiple RICs or other CIL Funds Lenders using a joint
trading account. Such transactions may be ineligible for submission to
FICC today because investment advisers are unable to complete final
allocations to individual cash providers by the FICC submission
deadline. As a result, the proposed changes would facilitate the
ability of RICs and other cash providers to access FICC's clearance and
settlement services in relation to transactions that they are currently
only able to clear bilaterally.
Third, the CIL Service would not provide for FICC to exchange
Funds-Only Settlement Amounts with a CIL Funds Lender (or its
Sponsoring Member). FICC believes this would facilitate access by
eliminating the possibility of such Funds-Only Settlement Amount
obligations and entitlements giving rise to operational or regulatory
impediments for RICs, other cash providers, and their Sponsoring
Members. As such, FICC believes that adding the CIL Service would
facilitate access to clearance and settlement services of all eligible
secondary market transactions in U.S. Treasury securities, including
those of indirect participants.\58\
---------------------------------------------------------------------------
\58\ Id.
---------------------------------------------------------------------------
Fourth, the inclusion of language in the Rules and the CIL
Custodial Agreement Supplement of various provisions to facilitate the
ability of RICs acting as CIL Funds Lenders to conclude that Sponsored
GC CIL Trades are ``Collateralized Fully'' within the meaning of
Investment Company Act Rule 5b-3 would allow RICs to access FICC's
clearance and settlement services consistently with their regulatory
obligations.
FICC also believes that the proposed changes to provide for
clearing of done-away Sponsored GC Trades and to extend its settlement
deadline for Sponsored GC Trades would promote access to FICC's
clearance and settlement systems in respect of ESMTs. Currently, a
Sponsoring Member may submit only done-with transactions to FICC under
the Sponsored GC Service. Allowing for the submission of done-away
transactions would facilitate greater access by allowing a Sponsored
Member to submit more of their ESMTs and to do so without entering into
clearing agreements with each of their execution counterparties. The
proposed change to align FICC's settlement and substitution deadlines
for Sponsored GC Trades with the close of the Fedwire
[[Page 44423]]
Funds Service at 7:00 p.m. (New York City time) would support the
settlement of additional tri-party activity and, therefore, also
promote access to FICC's clearance and settlement systems in respect of
ESMTs. As such, FICC believes that providing for done-away Sponsored GC
Trades and extending its settlement and substitution deadline for
Sponsored GC Trades, as described above, would facilitate access to
clearance and settlement services of all eligible secondary market
transactions in U.S. Treasury securities.\59\
---------------------------------------------------------------------------
\59\ Id.
---------------------------------------------------------------------------
Rule 17ad-22(e)(19) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify, monitor, and manage the material risks
to the covered clearing agency arising from arrangements in which firms
that are indirect participants in the covered clearing agency rely on
the services provided by direct participants to access the covered
clearing agency's payment, clearing, or settlement facilities.\60\ The
proposed changes relating to the CIL Service contain specific risk
management features relating to FICC's exposure from CIL Funds Lenders,
including (i) a lien on the Purchased GC Repo Securities subject to the
Sponsored GC CIL Trades that would allow FICC to settle with the GC
Funds Borrower even in a CIL Funds Lender default, (ii) clear
provisions describing how FICC would enforce remedies and otherwise
address such a default, and (iii) the Clearing Fund, mandatory CIL
Required Haircut, and Sponsored GC CIL Omnibus Account Required Fund
Deposit that FICC would require to ensure it has sufficient resources
to cover simultaneous default of both a CIL Funds Lender and its
Sponsoring Member. Accordingly, the proposed changes would promote
FICC's ability to identify, monitor, and manage the material risks
arising from indirect participants' access its payment, clearing, or
settlement facilities.
---------------------------------------------------------------------------
\60\ 17 CFR 240.17ad-22(e)(19).
---------------------------------------------------------------------------
Rule 17ad-22(e)(23)(ii) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide sufficient information to enable
participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in the covered clearing
agency.\61\ As described above, the proposed changes would include
clear provisions on the parameters of the CIL Service (including who
could act as a CIL Funds Lender, the requirement to execute a CIL
Custodial Agreement Supplement, the treatment of Funds-Only Settlement
Amounts, and the use of joint trading accounts) as well as how the
Sponsored GC CIL Trades would be risk managed. In addition, the
proposed changes relating to done-away Sponsored GC Trades would
clarify that such transactions would be subject to all applicable
requirements to done-with Sponsored GC Trades, except that the Start
Leg of a done-away Sponsored GC Trade would be eligible for Novation
and the liquidation provision in Section 16 of Rule 3A would only be
applicable to done-with Sponsored GC Trades. These changes would
accordingly provide clarity to market participants to enable them to
evaluate the risks and costs of participating in the CIL Service or
clearing done-away Sponsored GC Trades consistent with Rule 17ad-
22(e)(23)(ii).
---------------------------------------------------------------------------
\61\ 17 CFR 240.17ad-22(e)(23)(ii).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed changes would promote competition
by addressing some of the conditions that make it more difficult and
more expensive for RICs than for certain other cash providers to access
FICC's clearance and settlement system. As mentioned above, due to
their regulatory requirements, including in particular the requirement
to collect haircuts and the limitations on posting margin to FICC under
the Investment Company Act, cleared transactions with RICs are subject
to ``double margining.'' Such double margining makes it more expensive
for Sponsoring Members to offer RICs access to clearing relative to
some other cash providers. By eliminating the double margining through
its security interest on the Purchased GC Repo Securities, FICC
believes the CIL Service would promote competition between RICs and
other cash providers and place them on a more level playing field.
Furthermore, FICC believes that the proposed changes would
encourage the submission of a greater number and variety of securities
transactions, including, in particular, transactions executed by a
Joint Account Agent on behalf of multiple Sponsored Members. As
described above, many RICs currently execute ESMTs through ``joint
trading accounts'' to achieve administrative efficiencies. However, a
Sponsoring Member cannot generally submit such a transaction for
central clearing because the Joint Account Agent is typically unable to
complete the final allocation by the FICC submission deadline. By
eliminating the need for a CIL Joint Account Agent to render such
allocation prior to submission, the proposed CIL Service would promote
competition because it would encourage Sponsored Members, RICs and
other cash providers to submit to FICC a greater number and variety of
securities transactions.
FICC believes that the proposed changes to provide for the clearing
of done-away Sponsored GC Trades would also promote competition because
they would incentivize Sponsoring Members to offer clearing services
for such transactions and facilitate RICs and other cash providers
access to clearance and settlement services, causing them to enter into
a greater number of done-away Sponsored GC Trades and submit such
trades to FICC for clearance and settlement.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
FICC reviewed the proposed rule change with Sponsoring Members and
Sponsored Members in order to benefit from their expertise. Written
comments relating to this proposed rule change received in connection
with such outreach included feedback to the proposal provided by
counsel to an industry association representing regulated investment
funds. Such written comments included (i) recommendations for certain
changes to the text of proposed rule changes and the required terms for
a CIL Custodial Agreement Supplement so as to facilitate the ability of
RICs to conclude that Sponsored GC CIL Trades are ``Collateralized
Fully'' within the meaning of Investment Company Act Rule 5b-3, and
(ii) certain operational questions related to the CIL Service. These
comments and questions have been resolved, which resolution is
reflected in the proposed rule changes described.
If any additional written comments are received by FICC, 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
[[Page 44424]]
how to submit comments, 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 SEC's Division of Trading and Markets at
<a href="/cdn-cgi/l/email-protection#a8dcdac9ccc1c6cfc9c6ccc5c9dac3cddcdbe8dbcdcb86cfc7de"><span class="__cf_email__" data-cfemail="9ce8eefdf8f5f2fbfdf2f8f1fdeef7f9e8efdceff9ffb2fbf3ea">[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#483a3d242d652b2725252d263c3b083b2d2b662f273e"><span class="__cf_email__" data-cfemail="1765627b723a74787a7a727963645764727439707861">[email protected]</span></a>. Please include
file number SR-FICC-2025-019 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FICC-2025-019. 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">www.sec.gov/rules/sro.shtml</a>). Copies
of the filing 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-
019 and should be submitted on or before October 6, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
---------------------------------------------------------------------------
\62\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-17729 Filed 9-12-25; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on September 15, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.