Notice2025-21908
CME Securities Clearing, Inc.; Order Granting an Application for Registration as a Clearing Agency Under Section 17A of the Securities Exchange Act of 1934
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
December 4, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 231 (Thursday, December 4, 2025)</title>
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[Federal Register Volume 90, Number 231 (Thursday, December 4, 2025)]
[Notices]
[Pages 55926-55944]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-21908]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104281; File No. 600-44]
CME Securities Clearing, Inc.; Order Granting an Application for
Registration as a Clearing Agency Under Section 17A of the Securities
Exchange Act of 1934
December 1, 2025.
I. Introduction
On December 13, 2024, CME Securities Clearing, Inc. (``CMESC'')
filed with the Securities and Exchange Commission (``Commission'') an
application on Form CA-1 (``Application'') under Section 17A of the
Securities Exchange Act of 1934 (``Exchange Act'') seeking to register
as a clearing agency to provide central counterparty (``CCP'') services
for transactions involving U.S. Treasury securities.\1\ Notice of the
Application was published for comment in the Federal Register on
January 22, 2025.\2\
[[Page 55927]]
On April 18, 2025, the Commission instituted proceedings pursuant to
Section 19(a)(1)(B) of the Exchange Act to determine whether to grant
or deny the Application.\3\ On July 21, 2025, the Commission designated
a longer period for Commission action on the OIP.\4\ On September 30,
2025, CMESC agreed to extend the time for the Commission's review of
the Application.
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\1\ 15 U.S.C. 78q-1. If CMESC determines in the future to
provide other clearing agency services or to perform the functions
of a clearing agency for transactions in other types of securities,
CMESC would need to amend its application on Form CA-1 to so reflect
and submit any related proposed rule changes as required under
Section 19(b) of the Exchange Act.
\2\ Release No. 34-102200 (Jan. 15, 2025), 90 FR 7713 (Jan. 22,
2025). Non-confidential aspects of the Application, including any
exhibits thereto cited in this order, are available on the
Commission's website at: <a href="https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/cme-form-ca-1">https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/cme-form-ca-1</a>.
\3\ Release No. 34-102889 (Apr. 18, 2025), 90 FR 17269 (Apr. 24,
2025) (``OIP'').
\4\ Release No. 34-103514 (July 21, 2025), 90 FR 34938 (July 24,
2025).
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The Commission received comment letters on the notice of the
Application and on the OIP, as well as response letters from CMESC.\5\
Each comment letter either expressed explicit support for approval of
the Application or generally expressed support for the expansion of
access to the clearing of transactions in U.S. Treasury securities
through the approval of new clearing agencies. Some commenters also
recommended that CMESC consider certain changes to the Application. The
comment letters received, and CMESC's response letters thereto, are
discussed in Part III.
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\5\ The public comment file for the Application is available on
the Commission's website at: <a href="https://www.sec.gov/comments/600-44/600-44.htm">https://www.sec.gov/comments/600-44/600-44.htm</a>. On May 27, 2025, CME Group submitted two letters in one
set, and both letters are included as part of the one entry
reflected on the Commission's website. See letters from Jonathan
Marcus, Senior Managing Director and General Counsel, CME Group,
Inc., dated May 27, 2025 (``CME Response Letter'' and ``CME Fees
Letter''). The CME Response Letter addresses the comment letters
received on the Application, and the CME Fees Letter describes
CMESC's intent with respect to its fee schedule.
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This order grants CMESC's Application for registration as a
clearing agency for the reasons set forth in Part III below.
II. Statutory Standard for Registration as a Clearing Agency
Clearing agencies are broadly defined under the Exchange Act and
undertake a variety of functions,\6\ including providing the services
of a CCP.\7\ Pursuant to Section 17A of the Exchange Act and Rule
17Ab2-1 thereunder, an entity that meets the definition of a clearing
agency must register with the Commission (or obtain from the Commission
an exemption from registration prior to performing the functions of a
clearing agency).\8\ In addition to the requirements set forth in Rule
17Ab2-1, Section 19(a)(1) of the Exchange Act establishes the standard
for Commission review of an application for registration as a clearing
agency. Pursuant thereto, the Commission shall grant registration of a
clearing agency if it finds that the requirements of the Exchange Act
and the rules and regulations thereunder with respect to the applicant
are satisfied.\9\ The Commission shall deny such registration if it
does not make such finding.\10\
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\6\ 15 U.S.C. 78c(a)(23)(A) (providing the definition of
``clearing agency''); see also Release No. 34-78961 (Sept. 28,
2016), 81 FR 70786, 70897 (Oct 13, 2016) (``CCA Standards Adopting
Release'') (stating that clearing agencies are broadly defined in
the Exchange Act and undertake a variety of functions).
\7\ See 17 CFR 240.17ad-22(a)(2) (defining ``central
counterparty'' as a clearing agency that interposes itself between
counterparties to securities transactions, acting functionally as
the buyer to every seller and the seller to every buyer).
\8\ 15 U.S.C. 78q-1(b); 17 CFR 240.17ab2-1 (``Rule 17Ab2-1'').
\9\ 15 U.S.C. 78q-1; 15 U.S.C. 78s(a)(1).
\10\ 15 U.S.C. 78s(a)(1).
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The requirements of the Exchange Act applicable to clearing
agencies are set forth in Section 17A of the Exchange Act and the rules
and regulations thereunder.\11\ Accordingly, to grant CMESC's
application for registration as a clearing agency, the Commission must
find that the Application satisfies the requirements of Section 17A(b)
of the Exchange Act and rules and regulations thereunder, including the
determinations set forth in paragraphs (A) through (I) of Section
17A(b)(3) of the Exchange Act.\12\
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\11\ Rules for registered clearing agencies include
recordkeeping requirements, 17 CFR 240.17a-1; the filing process for
proposed rule changes, 17 CFR 240.19b-4; rules addressing operations
and risk management, governance and conflicts of interest, and plans
for recovery and wind-down at, respectively, 17 CFR 240.17ad-22
(``Rule 17Ad-22''), 240.17ad-25 (``Rule 17Ad-25''), and 240.17ad-26
(``Rule 17Ad-26''); and the requirements set forth in Regulation
Systems Compliance and Integrity, 17 CFR 242.1000 et seq.
(``Regulation SCI''). The Commission conducts ongoing monitoring of
registered clearing agencies through its supervisory program for
registered clearing agencies. The Commission also assesses
compliance with Commission rules by conducting examinations and
investigations. See 15 U.S.C. 78q(b); 15 U.S.C. 78u(a).
\12\ 15 U.S.C. 78s(a); 15 U.S.C. 78q-1(b)(3)(A)-(I). The
determinations are described further below.
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After a clearing agency's application for registration is granted,
the clearing agency must continue to satisfy the requirements of the
Exchange Act and the rules and regulations thereunder. The Commission
has explained that ``[a]n approval of clearing agency registration does
not mean that no further modifications of the applicant's rules,
systems, procedures, or practices are needed.'' \13\ Rather, the
Commission stated that a registered clearing agency's obligation to
continue to satisfy the requirements of the Exchange Act and the rules
and regulations thereunder means that ``[t]he self-regulatory
obligations of [a] fully registered clearing agenc[y] cannot end''
after registration.\14\ To ensure such compliance, the Commission
stated that it ``will continue to use its oversight, inspection, and
enforcement authority as necessary and appropriate to further the
purposes of the [Exchange] Act.'' \15\
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\13\ See Release No. 34-69838 (June 24, 2013), 78 FR 39027,
39029 (June 28, 2013) (``FICC Registration'') (approving an
application by the Fixed Income Clearing Corporation (``FICC'') for
permanent registration as a clearing agency).
\14\ See Release No. 34-20221 (Sept. 23, 1983), 48 FR 45167,
45171 (Oct. 3, 1983) (approving nine applications for permanent
registration as a clearing agency).
\15\ Id.
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III. Review of Application Under Statutory Standard for Registration
Consistent with the requirements in Sections 17A and 19(a)(1) of
the Exchange Act described above, the Commission below discusses how
the Application satisfies each of the statutory requirements to be
registered as a clearing agency.\16\
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\16\ See 15 U.S.C. 78q-1(b)(3)(A)-(I) (describing the statutory
determinations that the Commission must make regarding the rules and
structure of a clearing agency to grant registration). In 1980, the
Commission published a statement of the views and positions of
Commission staff regarding the requirements of Section 17A. See
Release No. 34-16900 (June 17, 1980), 45 FR 41920 (June 23, 1980).
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A. Organization and Capacity
1. Statutory Standard: Section 17A(b)(3)(A)
Section 17A(b)(3)(A) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
such clearing agency is so organized and has the capacity to be able to
facilitate the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions for which it is responsible, to safeguard securities and
funds in its custody or control or for which it is responsible, to
comply with the provisions of the Exchange Act and the rules and
regulations thereunder, to enforce (subject to any rule or order of the
Commission pursuant to Section 17(d) or 19(g)(2) of the Exchange Act)
compliance by its participants with the rules of the clearing agency,
and to carry out the purposes of Section 17A of the Exchange Act.\17\
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\17\ 15 U.S.C. 78q-1(b)(3)(A).
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Consistent with this standard, the Commission does not assess in
this order whether CMESC's ultimate implementation of the rules,
policies, and procedures set forth in its Application will comply with
each of the Commission's rules for clearing agencies, as CMESC is not
yet operating
[[Page 55928]]
as a clearing agency.\18\ Rather, the Commission assesses whether CMESC
is so organized and has the capacity to comply with the provisions of
the Exchange Act and the rules and regulations thereunder,\19\ by
analyzing CMESC's organization and governance, as well as its
operational arrangements.\20\ Under this standard, the registration of
a clearing agency ``depends on a prediction about compliance with the
law.'' \21\ Section 17A assumes that ``an applicant would produce a
business plan that, if faithfully executed, would comply'' with the
Exchange Act.\22\ To make its required statutory determination under
Section 17A(b)(3)(A), the Commission must ``find[ ] that the applicant
is able and likely to comply,'' and upon registration and commencement
of operations as a registered clearing agency, compliance with Section
17A(b)(3)(A) ``is likely to be carried out.'' \23\
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\18\ See supra notes 13-14 and accompanying text (explaining
that approval of clearing agency registration does not mean that no
further modifications of the applicant's rules, systems, procedures,
or practices are needed and that the obligations of a fully
registered clearing agency cannot end after registration).
\19\ With respect to CMESC's ability to safeguard securities and
funds for which it is responsible, the Commission addresses that
topic in Part III.E, in conjunction with discussing Section
17A(b)(3)(F) of the Exchange Act, which requires, among other
things, that the rules of the clearing agency are 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. With
respect to CMESC's ability to enforce compliance by its participants
with the rules of the clearing agency, the Commission addresses that
topic in Part III.F, in conjunction with discussing Section
17A(b)(3)(G) of the Exchange Act, which requires that the rules of
the clearing agency provide that its participants shall be
appropriately disciplined for violation of any provision of the
rules of the clearing agency.
\20\ In Part III.E, the Commission further analyzes CMESC's
capacity to conduct risk management consistent with the statutory
requirements for safeguarding securities and funds set forth in
Section 17A(b)(3)(F) of the Exchange Act.
\21\ Bd. of Trade of City of Chicago v. SEC., 883 F.2d 525, 533
(7th Cir. 1989) (vacating Delta Government Options Corporation
(``Delta'')'s temporary registration as a clearing agency and
remanding to the Commission to decide whether Delta's proprietary
trading system would operate as an unregistered national securities
exchange in violation of Sections 5 and 6 of the Exchange Act).
\22\ Id. at 533-34.
\23\ Id. at 534 (emphasis in original).
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In the OIP, the Commission requested public comment on whether
CMESC is so organized and has the capacity to facilitate prompt and
accurate clearance and settlement, and in particular, whether CMESC's
proposed legal, governance, and operational arrangements enable CMESC
to satisfy the requirements of the Exchange Act and Commission rules
and regulations thereunder.\24\ The comment letters submitted in
response to the OIP stated that the Application meets the Commission's
standards for registration as a clearing agency under the Exchange
Act.\25\
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\24\ See OIP, supra note 3, 90 FR at 17271. In response to the
Notice, some commenters also requested that CMESC obtain legal
opinions relating to certain aspects of CMESC's margin framework.
See letter from William C. Thum and Robert Toomey, SIFMA and SIFMA
Asset Management Group, dated Mar. 10, 2025 (``SIFMA & AMG I''), at
4; letter from Allison Lurton, General Counsel and Chief Legal
Officer, FIA, dated Mar. 10, 2025 (``FIA''), at 4. Legal opinions
can help a clearing agency address questions about the legal
foundation for its proposed activities, which can help to ensure a
clearing agency is so organized and has the capacity to facilitate
prompt and accurate clearance and settlement. Because the comments
were directed to legal opinions for its margin framework, the
Commission has addressed these comments in the context of
safeguarding securities and funds under Section 17A(b)(3)(F), which
is discussed in Part III.E.
\25\ See letter from William C. Thum and Robert Toomey, SIFMA
and SIFMA Asset Management Group, dated May 15, 2025 (``SIFMA & AMG
II''), at 2 (``We believe that CMESC's application meets the
Commission's standards for registration as a clearing agency under
Section 17A of the Securities Exchange Act of 1934''); letter from
Katherine Darras, General Counsel, International Swaps and
Derivatives Association, dated May 15, 2025 (``ISDA II''), at 1-2
(``Upon review, we further believe that CMESC's application meets
the Commission's standards for registration as a clearing agency
under Section 17A of the Securities Exchange Act of 1934'').
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2. Summary of Proposed Operations
The following is an overview of CMESC's proposed clearing agency
operations. In Exhibit J, CMESC describes that its risk management
framework has been designed to identify, measure, monitor, and manage a
range of risks that arise through its clearance and settlement
functions in order to promote prompt clearance and settlement of
securities transactions, and the safeguarding of securities and funds
against operational risk losses. For example, CMESC will have a process
to manage trade submissions in real-time, and allow for communication
of trade submissions, settlement confirmation and failures, and
transfers.\26\ Trade processing will be executed in near real-time, and
CMESC's operations system will allow for ongoing monitoring of
exposures of positions.
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\26\ See Exhibit J of the Application, at 9.
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(a) Types of Transactions Accepted for Clearing
As described in Exhibit J, CMESC will accept three types of
transactions for clearing: tri-party Clear to Hold Transactions, Clear
to Deliver Transactions, and Cash Treasury Transactions.\27\ For tri-
party Clear to Hold Transactions, Members and Users will submit
executed transactions to the Securities Settlement Bank system, as is
current market practice. This Securities Settlement Bank will then
submit the transaction to CMESC for clearing using a SWIFT-based
transaction submission API. For Clear to Deliver Transactions and Cash
Treasury Transactions, Members and Users may submit executed
transactions to CMESC (1) as matched transactions from an Eligible
Platform, (2) as single-sided transactions to be matched in CMESC's
clearing system, or (3) a Member or User may enter and allege a
transaction to another Member or User to claim or decline using CMESC's
user interface. All transactions executed from an Eligible Platform
will be sent to CMESC using a FIXML-based trade submission API. Single-
sided transactions may be submitted via direct entry into the clearing
system's user interface or from an external messaging platform with the
matching to be performed by CMESC. Single-sided trades will be matched
by CMESC when the required relevant attributes submitted to CMESC by
both parties for each transaction correspond. Members and Users will
hold the option to cancel a single-sided trade submitted prior to
novation and may affirm or decline trades that have been alleged to
that Member or User. Pre-matched transactions (i.e., transactions
matched at an Eligible Platform prior to submission to CMESC) will be
received by CMESC as matched trades and cannot be rejected or canceled
by any party other than CMESC. CMESC will send a reject message for any
transactions that do not follow CMESC's specifications (e.g., messaging
specifications or product eligibility). Members and Users may correct
any transaction messages rejected for invalid FIXML specifications and
resubmit the transaction for clearing. Members and Users will be
notified with a message anytime the status of their transaction
changes. Any pending, unmatched single-sided transactions will be
rejected by CMESC at the end of the Business Day. Following novation,
any cancellation or amendment of a submitted transaction will require
the involvement of CMESC. Canceled trades between participants, whether
Members or Users, may be modified and resubmitted.\28\
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\27\ Capitalized terms not defined in this order are defined in
the Application.
\28\ See Exhibit J of the Application, at 10.
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[[Page 55929]]
(b) Novation
According to Exhibit J, upon submission of a pre-matched or a
successful full match of a transaction request, CMESC will validate the
transaction, account level details, and Member limits placed on a
particular Member or User.\29\ Following successful validations, the
trade will be novated and CMESC will become the buyer to each seller
and the seller to each buyer (i.e., the CCP) for each transaction.
CMESC will determine whether to novate a matched transaction submitted
for clearing. As described by CMESC, the novation determination will be
the same irrespective of whether the transaction is matched prior to
submission to CMESC or is matched by CMESC. CMESC will perform a
product validation, account validation, and credit control check on
each submitted trade prior to novation. Any transactions not novated by
the deadlines specified by CMESC will be rejected from clearing, and
Members and Users may resubmit these transactions for the next eligible
clearing date.\30\
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\29\ See Exhibit J of the Application, at 11.
\30\ See id.
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(c) Settlement Process
Members and Users will be responsible to CMESC to settle their
trade exposures, post margin and pay Outstanding Exposure Settlement
(``OES'') obligations.\31\ Clear to Deliver Transaction, Clear to Hold
Transaction, and Cash Treasury Transaction settlements will follow
existing market practices. During each clearing cycle, CMESC will mark
to market all open transactions and will compute margin and settlement
variation (i.e., a component of the OES) requirements for Members and
Users.\32\ Regarding margin, CMESC will compare the calculated margin
requirement against margin collateral held by CMESC for the relevant
Account and will issue a margin call for any deficiency that must be
met in U.S. Dollar cash. CMESC will also facilitate the exchange of
settlement variation among Members and Users during each clearing cycle
and settlement variation requirements will be collected in U.S. Dollar
cash. Members and Users will be able to view the status of a
transaction and their settlement obligations through the clearing
system user interface trade blotter or through reports generated by
CMESC. Members and Users may substitute cash held for initial margin
with other permissible non-cash collateral prior to the deadline.
Reports provided to all Members and Users will include, but are not
limited to, trade register, coupon report, margin report, and
settlement obligation report.\33\
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\31\ The Commission further discusses CMESC's risk management
practices in Part III.E, in the context of the statutory standard
regarding rules for the safeguarding of funds and securities in
Section 17A(b)(3)(F) of the Exchange Act.
\32\ See Exhibit J of the Application, at 12.
\33\ See id.
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In Exhibit J, CMESC describes its ability to settle transactions on
trade date, or ``T+0.'' As described in Exhibit J, to reduce settlement
risk, Repo Transactions that settle on T+0 will be settled in real-time
on a gross basis. Separately, for Members and Users, Cash Treasury
Transactions and Repo Transactions that settle on the day after trade
date (or a ``T+1'' basis) and have identical CUSIPs will be settled on
a net basis. For Clear to Deliver Transactions and Cash Treasury
Transactions, settlement obligations of cash outright and repo
transactions at the CUSIP level with the same settlement date will be
netted by CMESC. Net settlement of next day (T+1) cash outright and
repo transactions will occur at CMESC's end-of-day settlement
price.\34\ With respect to Clear to Hold Transactions, netting will
only occur against additional Clear to Hold transactions in the same
General Collateral Bucket with the same scheduled settlement date. Such
transactions will not net against either Cash Treasury Transactions or
Clear to Deliver Transactions.\35\
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\34\ See Exhibit J of the Application, at 14-15.
\35\ See id.
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(d) Approach to Settlement Fails
Exhibit J describes the steps CMESC will follow in the case of a
settlement fail. For example, with respect both to Clear to Deliver
Transactions and Clear to Hold Transactions, when Members and Users
fail to deliver securities on the Start Leg of a transaction, CMESC
will: (i) allocate the fail to one or more Member(s) or User(s) that
are entitled to receive the same Eligible Securities (for Clear to
Deliver Transactions) or allocate the fail to one or more Member(s) or
User(s) that are entitled to receive the securities in the same General
Collateral Bucket (for Clear to Hold Transactions) that the failing
Member or User was obligated to deliver; (ii) assess against the
failing Member or User the repo rate based on the full delivery
obligation; and (iii) assess against the failing Member or User a fail
charge as determined by CMESC for each day that such Member or User
fails to deliver the Eligible Securities.\36\ CMESC will pay any
amounts collected pro rata to the Member(s) or User(s) to which CMESC
allocates the fail. If a Member or User partially satisfies its
obligation to deliver securities to CMESC on the Start Leg of a
transaction, the Member or User will receive cash equal to the value of
the securities it delivered, subject to the conditions set out in the
Rules.\37\ In a Clear to Hold Transaction, a failure to deliver
securities may be corrected if: (1) the original parties to the
transaction agree to modify the transaction to reflect the amount of
securities delivered; or (2) the Member or User that failed to deliver
the securities will provide cash (instead of securities) as collateral
to fully satisfy its delivery obligation. In a Clear to Deliver
Transaction, a failure to deliver securities may be corrected if the
original parties to the transaction agree to modify the transaction to
reflect the amount of securities actually delivered. CMESC may buy-in a
Member or User that has failed to deliver securities on the Start Leg
of a transaction. After CMESC purchases the securities, the fail-to-
deliver will be extinguished, and, if the buy-in price is less than the
repurchase price, CMESC will pay the difference to the failing Member
or User. Conversely, if the buy-in price exceeds the repurchase price,
the failing Member or User must pay the difference to CMESC.
Additionally, a Member or User to whom a fail has been allocated may
submit a buy-in request to CMESC not earlier than one day after such
allocation has been made, and the Member or User may effect the buy-in
with CMESC's approval. Alternatively, instead of effecting a buy-in, a
Member or User to whom a fail has been allocated may effect a cash
settlement with CMESC's approval.\38\
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\36\ See Exhibit J of the Application, at 12-13.
\37\ See CMESC Rules, at Rule 1506(g).
\38\ See Exhibit J of the Application, at 12-13; see also CMESC
Procedures, at Procedure 15-10 (describing the process for buy-ins).
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(e) Default Management
When a Member or User fails to deliver securities on the Off Leg of
a transaction, CMESC will allocate the fail to one or more Member(s) or
User(s) that are entitled to receive the same Eligible Securities that
the failing Member or User was obligated to deliver, and CMESC may
assess against the failing Member or User a fail charge as determined
by CMESC for each day that such Member or User fails to deliver the
Eligible Securities. CMESC will pay the collected fail charges pro rata
to the Member(s) or User(s) to which CMESC allocates the fail.\39\ If a
Member or User partially satisfies its obligation to deliver securities
on the Off Leg of a
[[Page 55930]]
transaction, the Member or User will receive cash equal to the value of
the securities it delivered, subject to the conditions set out in the
Rules. A Member or User cannot fail to deliver securities on the Off
Leg in Clear to Hold Transactions because the securities will be held
by the Securities Settlement Bank. CMESC may buy in a Member or User
that has failed to deliver securities to CMESC on the Off Leg of a
transaction. After CMESC purchases the securities, the fail-to-deliver
will be extinguished, and, if the buy-in price is less than the
repurchase price, CMESC will pay the difference to the failing Member
or User. Conversely, if the buy-in price exceeds the repurchase price,
the failing Member or User must pay the difference to CMESC.
Additionally, a Member or User to whom a fail has been allocated may
submit a buy-in request to CMESC not earlier than one day after such
allocation has been made, and the Member or User may effect the buy-in
with CMESC's approval. Alternatively, instead of effecting a buy-in, a
Member or User to whom a fail has been allocated may effect a cash
settlement with CMESC's approval.\40\
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\39\ See Exhibit J of the Application, at 13.
\40\ See id.
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As described in Exhibit J, failure to deliver cash in a Clear to
Deliver Transaction or Clear to Hold Transaction may be considered a
Default.\41\ Where CMESC declares an event of Default or ceases to act
for a Member or User, CMESC may take default management (including
liquidity management) actions permitted under its Rules. Where a Member
or User fails to deliver cash on the Start Leg, CMESC may permit
parties to mutually agree to modify the size of the transaction in
order to correct the failure to deliver.\42\ With respect to Cash
Treasury Transactions, when a Member or User fails to deliver
securities on the settlement day of a transaction, CMESC will: (i)
allocate the fail to one or more Member(s) or User(s) that are entitled
to receive the same Eligible Securities; and (ii) assess against the
failing Member or User a fail charge as determined by CMESC for each
day that such Member or User fails to deliver the Eligible Securities.
CMESC will pay any amounts collected to the Member(s) or User(s) to
which CMESC allocates the fail. If a Member or User partially satisfies
its obligation to deliver securities to CMESC, the Member or User will
receive cash equal to the value of the securities it delivered, subject
to the conditions set out in the Rules. CMESC may buy in a Member or
User that has failed to deliver securities to CMESC. After CMESC
purchases the securities, the fail-to-deliver will be extinguished,
and, if the buy-in price is less than the repurchase price, CMESC will
pay the difference to the failing Member or User. Conversely, if the
buy-in price exceeds the repurchase price, the failing Member or User
must pay the difference to CMESC. Additionally, a Member or User to
whom a fail has been allocated may submit a buy-in request to CMESC not
earlier than one day after such allocation has been made, and the
Member or User may effect the buy-in with CMESC's approval.
Alternatively, instead of effecting a buy-in, a Member or User to whom
a fail has been allocated may effect a cash settlement with CMESC's
approval.\43\
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\41\ See id. The Commission further discusses CMESC's default
management procedures in Part III.E, in the context of the statutory
standard regarding rules for the safeguarding of funds and
securities in Section 17A(b)(3)(F) of the Exchange Act.
\42\ See CMESC Rules, at Rule 1503(d); see also CMESC
Procedures, at Procedure 15-8 (describing the process to modify the
transaction).
\43\ See Exhibit J of the Application, at 13.
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(f) Business Continuity Practices
In Exhibit K, CMESC describes its business continuity practices.
CMESC's information technology infrastructure will be made up of SCI
Critical Systems that will be hosted in a virtual private cloud
(``VPC'') environment and in physical datacenters.\44\ One instance of
each of the physically hosted systems will be deployed to a primary
data center. Backups for the physically hosted systems will be
available in another, geographically disparate datacenter. VPC
environment backup systems will also be in geographically disparate
locations. Another geographically disparate location will house
disaster recovery infrastructure and servers hosting backup data from
both the VPC environment and the physical datacenter servers.\45\
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\44\ See Exhibit K of the Application, at 1.
\45\ See Exhibit K of the Application, at 1-2.
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In addition, as described in Exhibit M, CMESC has Business
Continuity Management and disaster recovery requirements that are
governed by CMESC's Operational Resilience Program Policy. CMESC's
infrastructure and systems are built around a multi-layered approach to
resilience and redundancy. If for any reason one of its database server
instances becomes unstable or unavailable, systems are architected to
create a new instance. If a datacenter becomes unavailable for any
reason, systems are architected to automatically redirect all instances
that were operating in that datacenter to another available datacenter.
These actions are designed to occur within the production environment
and are independent of the disaster recovery instance
infrastructure.\46\
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\46\ See Exhibit M of the Application.
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3. Organization, Governance, and Analysis
CMESC is a Delaware corporation, which is wholly owned by its
parent company, CME Group, Inc., itself a Delaware corporation.\47\
Under this structure, CMESC's parent company--which also operates as
its primary service provider in the provision of its services as a
registered clearing agency--serves as its sole shareholder.\48\ Per
Exhibit E-2B, CMESC will be managed by a Board of Directors (``Board'')
consisting of nine directors,\49\ along with specialized committees of
the Board, to include an Audit Committee,\50\ a Regulatory Oversight
Committee,\51\ a Nominating Committee,\52\ and a Risk Management
Committee.\53\ Each board committee has a written charter that lays out
the membership structure and responsibilities of that committee.\54\
According to CMESC, the person who will act on behalf of its sole
shareholder, CME Group, Inc., will be one of CME Group, Inc.'s
authorized officers.
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\47\ See Exhibit C-1 of the Application.
\48\ See Exhibit A of the Application, at 1 (stating that CME
Group Inc. is CMESC's ``direct sole shareholder''); see also Exhibit
C of the Application (stating that CMESC ``is a wholly-owned
subsidiary of'' CME Group, Inc.).
\49\ See Exhibit E-2B of the Application, at 1 (CMESC Board of
Directors Charter, Sections I (``Purpose'') and II (``Board
Composition'')).
\50\ See Exhibit E-2E of the Application, at 1, 2-6 (CMESC Audit
Committee Charter, Sections I (``Purpose'') and IV (``Audit
Committee Meetings, Tasks and Authority'')).
\51\ See Exhibit E-2F of the Application at 1, 2-3 (CMESC
Regulatory Oversight Committee Charter, Sections I (``Purpose'') and
IV (``ROC Meetings, Tasks and Authority'')).
\52\ See Exhibit E-2D of the Application, at 1, 2-5 (CMESC
Nominating Committee Charter, Sections I (``Purpose'') and IV
(``Nominating Committee Meetings, Tasks and Authority'')).
\53\ See Exhibit E-2C of the Application at 1, 2-4 (CMESC Risk
Management Committee Charter, Sections I (``Purpose'') and IV
(``CSRMC Meetings, Tasks and Authority'')).
\54\ See supra notes 50-53.
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With respect to organization and governance, CMESC's Application
demonstrates that it is a corporation in good standing in the State of
Delaware.\55\ As described above and in Exhibit A of the Application,
CMESC's Board of Directors, executives, and sole shareholder are the
persons who will direct the management and policies of CMESC,\56\ In
addition, per Exhibit E-2B,
[[Page 55931]]
the Application sets forth that CMESC has a written board charter
establishing the purpose, composition, chair selection, term, director
election, vacancy, removal and resignation, meetings, committees,
succession procedures, confidentiality, and conflicts of interest
expectations for the Board. These charters are extensive, detailed, and
provide for delineation of roles and responsibilities among the Board,
executives, and the sole shareholder. Per Exhibits E-2C, E-2D, E-2E,
and E-2F, CMESC also has written charters for each board committee,
which include provisions for each board committee addressed to purpose,
membership, meeting schedule, tasks, authority, responsibilities,
reporting structure, confidentiality, and conflicts of interest. Such
delineation of roles and responsibilities of Board committee members is
one way the Application demonstrates that CMESC meets the statutory
standard in Section 17A(b)(3)(A).\57\ Where appropriate, such charters
also establish composition requirements for a majority of independent
directors, consistent with the Commission's rules for clearing agency
governance.\58\ The Board committees have distinguishable areas of
focus and are designed to operate within the larger corporate
framework, which is another way the Application demonstrates that CMESC
meets the statutory standard in Section 17A(b)(3)(A) and would comply
with the Exchange Act and rules and regulations thereunder.\59\
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\55\ See supra note 47.
\56\ See supra notes 48-53 and accompanying text; Exhibit A of
the Application, at 1 (stating that ``the following persons will
control or direct the management and policies'' of CMESC: (i) its
direct sole shareholder (CME Group, Inc.); (ii) its Board of
Directors; (iii) its Audit Committee; (iv) its Risk Management
Committee; (v) its Regulatory Oversight Committee; and (vi) its
executives).
\57\ See id.
\58\ See, e.g., 17 CFR 240.17ad-25(b), (c), (d), (e).
\59\ See supra note 11 (summarizing the Commission rules
applicable to registered clearing agencies).
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Under Exhibit E-2A(2), either the sole shareholder or the CMESC
Board of Directors can amend the corporation's bylaws and board
charters. This presents the Board and the shareholder with concurrent
ability to revise how the corporation operates, even if CMESC's board
and its sole shareholder--its parent company--are likely to have
aligned views. Ultimately, to the extent CMESC seeks to revise its
bylaws and charters to address the potentially overlapping authorities
of the Board and the shareholder (or to revise its bylaws and charters
for any other reason), such revisions are required to be filed with the
Commission as proposed rule changes pursuant to Section 19(b) of the
Exchange Act and rules thereunder, including Rule 19b-4, and the
Commission will review any such changes for consistency with the
Exchange Act and the rules and regulations thereunder.\60\
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\60\ See 15 U.S.C. 78s(b); 17 CFR 240.19b-4.
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CMESC's governance arrangements include a process for classifying
certain directors as independent. In most cases, the Nominating
Committee, which consists of a majority of independent directors,\61\
will make the initial and ongoing determination of director
independence; however, some exceptions apply. Per Section II of Exhibit
E-2D, an independent director of the Nominating Committee can be
removed prior to the end of the term if a majority of the Board of
Directors determines that such person no longer qualifies as
independent, which could cause the Nominating Committee to be composed
of less than a majority of independent directors.\62\ Additionally,
Section IV of Exhibit E-2D refers to the Board's ability to reclassify
a non-independent director as independent, and directs the Nominating
Committee to confirm the Board's decision under Section II of Exhibit
E-2B (the Board of Directors Charter). More specifically, this Section
II states that if CMESC identifies a potential impairment of the
categorization of a director as an independent director, or an
independent director reports to the Secretary of the Board a new
material relationship or a change, the Secretary shall make an
applicable report to the Nominating Committee, and the Nominating
Committee shall be responsible for determining the classification of
the director as an independent director. Section II of Exhibit E-2B
also states that a non-Independent Director may be reclassified as an
Independent Director and requires that the Nominating Committee
determine whether such reclassification is appropriate. Therefore, in
some cases, the Board of Directors makes its own determination of
director independence, and then it directs the Nominating Committee to
review its decision.
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\61\ See Exhibit E-2D of the Application, see also 17 CFR
240.17ad-25(c)(2) (setting forth requirements for the composition of
the Nominating Committee).
\62\ The Nominating Committee charter also provides that, should
the departure of a Director cause the composition of the Board to no
longer comply with applicable requirements under Rule 17Ad-25, the
Nominating Committee shall convene as soon as is practicable to
recommend a suitable candidate to the Board for its approval to fill
such vacancy. See Exhibit E-2D of the Application.
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With respect to its operational arrangements and capacity to
facilitate prompt and accurate clearance and settlement, as generally
described in Part III.A.2 above, CMESC systems and processes will
enable trade submission, matching, novation, netting, settlement and
settlement fails management and will promote business continuity.
CMESC's rules, policies and procedures demonstrate that CMESC has
processes in place to support and oversee these clearing agency
operations via its governance processes. These governance processes
further demonstrate that CMESC is so organized and has the capacity to
facilitate prompt and accurate clearance and settlement and to comply
with the Exchange Act and rules and regulations thereunder. For
example, with respect to CMESC's ability to comply with the provisions
of the Exchange Act and rules and regulations thereunder, Exhibit E-2F
states that CMESC's Chief Compliance Officer will have a reporting line
to the Regulatory Oversight Committee of the Board of Directors. In
addition, the Application describes CMESC's senior managers and their
reporting relationships, including the staff that provides legal
services through CMESC's parent company, CME Group, Inc.\63\ These
elements of the Application demonstrate that CMESC will have multiple
layers of personnel dedicated to addressing legal and regulatory
requirements, including, for example, the requirement to file proposed
rule changes.
---------------------------------------------------------------------------
\63\ See, e.g., Exhibit C of the Application.
---------------------------------------------------------------------------
Additionally, per Exhibit E-2C, the Head of Risk will have a direct
reporting line to the Risk Management Committee of the Board of
Directors, allowing such officer to raise and escalate any issues
pertaining to risk management. Exhibit E-2C provides that the Risk
Management Committee is authorized to engage outside professional
advisors and legal counsel in order to facilitate its discharge of its
duties and responsibilities, including the review and approval of all
risk-related proposed rule changes. Having multiple personnel, layers
of review and reporting, and the ability to access additional resources
in order to proactively manage CMESC's risks is one way the Application
demonstrates that CMESC would be so organized and have the capacity to
comply with the
[[Page 55932]]
provisions of the Exchange Act and the rules and regulations
thereunder.\64\
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\64\ See supra note 11 (summarizing the Commission rules
applicable to registered clearing agencies and the Commission's
tools for the supervision and examination of registered clearing
agencies).
---------------------------------------------------------------------------
For the reasons discussed above, the Commission determines that
CMESC is so organized and has the capacity to be able to facilitate the
prompt and accurate clearance and settlement of securities transactions
and to comply with the provisions of the Exchange Act and the rule are
regulations thereunder.
B. Participation Standards
1. Statutory Standard and Analysis: Section 17A(b)(3)(B)
Section 17A(b)(3)(B) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency provide that any (i) registered broker
or dealer, (ii) other registered clearing agency, (iii) registered
investment company, (iv) bank, (v) insurance company, or (vi) other
person or class of persons as the Commission, by rule, may from time to
time designate as appropriate to the development of a national system
or the prompt and accurate clearance and settlement of securities
transactions may become a participant in such clearing agency.\65\
Section 3(a)(24) of the Exchange Act defines a ``participant'' with
respect to a clearing agency as any person who uses a clearing agency
to clear or settle securities transactions or to transfer, pledge,
lend, or hypothecate securities, and further states that the term does
not include a person whose only use of a clearing agency is (A) through
another person who is a participant or (B) as a pledgee of
securities.\66\
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\65\ Section 17A(b)(3)(B) of the Exchange Act also states that
the rules of the clearing agency are subject to the provisions of
Section 17A(b)(4) of the Exchange Act.
\66\ 15 U.S.C. 78c(a)(24).
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CMESC Rules identify two types of participants: Members and
Users.\67\ Members are able to clear proprietary Eligible Securities
Transactions through CMESC and to authorize Users with respect to
clearing Eligible Securities Transactions through CMESC.\68\ Users must
be authorized by a Member,\69\ but they are contractually bound to
settle directly with the clearing agency.\70\ Specifically, Users can
submit transactions for clearing, post margin, and settle their
transactions directly with CMESC.\71\ In the event a Member defaults,
pursuant to CMESC Rule 412, CMESC can transfer a User's open positions
to a new Member.\72\ Users are further classified as Independent Users
or Supported Users.\73\ An Independent User is obligated to post margin
and make OES payments to CMESC for its Independent User Account; for a
Supported User, the Supported User's authorizing Member is obligated to
post margin and make OES payments to CMESC for the Supported User
Account.\74\
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\67\ CMESC Rules, at Rule 101 (defining ``participant''). For
further discussion of the use of the term ``participant,'' including
the definition of that term set forth in the Exchange Act, see supra
note 66, infra note 81 and accompanying text.
\68\ Exhibit E-3 of the Application (Rules of CME Securities
Clearing Inc.) (``CMESC Rules''), at Rule 101 (defining Member).
CMESC would require only its Members to submit Eligible Secondary
Market Transactions for clearing and settlement. CMESC Rules, at
Rule 202(b); see also CMESC Rules, at Rule 202(a) (defining
``Eligible Secondary Market Transaction'' as that term is defined in
Rule 17Ad-22(a) under the Exchange Act).
\69\ See, e.g., Exhibit O of the Application, at 1 (explaining
that, among other things, a User is any person that (i) a Member,
based on appropriate due diligence, has nominated to CMESC to become
a User, and (ii) has applied to CMESC for approval as a User, been
approved by CMESC as such and has executed a User Agreement).
\70\ CMESC Rules, at Rule 301(b); see letter from Jonathan
Marcus, Senior Managing Director and General Counsel, CME Group
Inc., dated Sept. 8, 2025 (``CMESC Participation Letter'') at 1 &
n.5; see also CMESC Rules, at Rules 305(c) and 311(d); and Exhibit J
to CMESC's Form CA-1, at p. 4 (stating that each Participant--
Member, Independent User or Supported User--has direct contractual
obligations to CMESC to settle its novated Eligible Securities
Transactions and is directly liable for settlement of its cleared
transactions).
\71\ See, e.g., CMESC Rules, at Rules 501, 602, 603.
\72\ See CMESC Rules, at Rule 412; CMESC Response Letter at 6.
\73\ CMESC Rules, at Rule 101 (defining Independent User and
Supported User).
\74\ CMESC Rules, at Rule 501.
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CMESC Rules identify the following persons as those that may be
approved as either Members or Users, provided that they satisfy the
applicable qualifications for participation: (i) broker-dealers
registered pursuant to Sections 15 or 15C of the Exchange Act; (ii)
banks that are subject to the supervision and regulation of their
chartering authority in the U.S. at either federal (i.e., the Federal
Reserve System, the Office of the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation) and/or state level (i.e., state
banking agencies), or for non-U.S. banks, the foreign equivalent to
such chartering authority (or authorities); (iii) futures commission
merchants registered pursuant to the Commodity Exchange Act; (iv)
unregistered investment pools, which are entities primarily engaged in
the business of investing, reinvesting, or trading securities that hold
pools of securities and/or other assets that meet specified criteria;
and (v) proprietary trading firms.\75\ CMESC Rules further provide that
trust companies, registered clearing agencies, registered investment
companies, and insurance companies are eligible to become Users,\76\
provided that they satisfy the applicable qualifications for
participation.
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\75\ CMESC Rules, at Rule 302(a).
\76\ CMESC Rules, at Rule 302(b) (citing Section 17A of the
Exchange Act with respect to registered clearing agencies, Section 8
of the Investment Company Act with respect to registered investment
companies, and Section 2(a)(17) of the Investment Company Act for
its definition of insurance companies).
---------------------------------------------------------------------------
The Commission finds that the Application satisfies the
requirements of Section 17A(b)(3)(B) of the Exchange Act. CMESC Rules
provide that each type of entity specified in Section 17A(b)(3)(B) of
the Exchange Act may be either a Member or a User of CMESC. The
Commission further agrees that both Members and Users would qualify as
``participants'' as defined in Section 3(a)(24) of the Exchange Act.
Although Users must be authorized by a Member to join CMESC as a
User,\77\ Users are contractually bound to settle directly with the
clearing agency and are not reliant on Members to settle their
transactions.\78\ Specifically, pursuant to CMESC Rules, Users can
submit transactions for clearing, post margin, and settle their
transactions directly with CMESC.\79\ In the event that the Member
authorizing a User defaults, CMESC can transfer the User's open
positions to a new Member,\80\ rather than close out those positions as
part of the defaulting Member's portfolio.\81\
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\77\ Users must be nominated by a Member to be admitted as
Users, and before nominating a User, a Member must conduct
reasonable due diligence on such User's credit and liquidity profile
and operational capabilities regarding the User's ability to fund
its obligations to CMESC and, if applicable, to the Member. See
CMESC Rules, at Rule 303(a)(iii). Such a condition is consistent
with Section 17A(b)(4)(B), which states, as discussed further in
Part III.B.2 below, that a registered clearing agency may deny
participation, or condition participation, for persons who do not
meet standards of financial responsibility, operational capability,
experience, and competence.
\78\ See CMESC Participation Letter at 1 & n.5; see also CMESC
Rules, at Rules 305(c) and 311(d); and Exhibit J to CMESC's Form CA-
1, at p. 4 (stating that each Participant--Member, Independent User
or Supported User--has direct contractual obligations to CMESC to
settle its novated Eligible Securities Transactions and is directly
liable for settlement of its cleared transactions).
\79\ See, e.g., CMESC Rules, at Rules 501, 602, 603. As noted
above, pursuant to Rule 501, Independent Users are obligated to post
margin and make OES payments to CMESC for its Independent User
Account. See supra note 74.
\80\ See CMESC Rules, at Rule 412; letter from Jonathan Marcus,
Senior Managing Director and General Counsel, CME Group Inc., dated
May 27, 2025 (``CMESC Response Letter''), at 6.
\81\ The Commission does not view CMESC's decision to treat
Users as ``indirect participants'' for purposes of applying the
requirements of Rule 17Ad-22, see Exhibit J of the Application, at
3, as inconsistent with their status as ``participants'' under
Section 3(a)(24) of the Exchange Act. Consistent with the analysis
in Part III.B.1, in this order the Commission uses ``participant''
to mean both Members and Users as described in the Application, as
Members and Users both meet the definition of ``participant'' as
defined in Section 3(a)(24) of the Exchange Act. In the Treasury
Clearing Adopting Release, the Commission described ``indirect
participants'' as ``generally, [the] customers or clients [of direct
participants], which typically include market participants such as
money market funds, hedge funds, other asset managers, and smaller
banks or broker-dealers,'' which is consistent with how CMESC Rules
define ``User'' and the requirements required to become a
``Member.'' See Release No. 34-99149 (Dec. 13, 2023), 89 FR 2714,
2717 (Jan. 16, 2024) (``Treasury Clearing Adopting Release''); see
also CMESC Rules, at Rule 202(a), (b) (establishing rules for the
submission of Eligible Secondary Market Transactions, pursuant to
Commission Rule 17Ad-22); see also CMESC Rules, at Rule 306(b). The
Commission explained, at the time, that such indirect participants
are ``expressly excluded'' from the Exchange Act definition of
``participant'' because no registered clearing agency then had
organized its rules to enable such market participants to clear and
settle their securities transactions directly with the clearing
agency rather than only through a direct participant. Treasury
Clearing Adopting Release, 89 FR at 2717 n.17. That analysis
continues to apply to those then-existing structures for indirect
participation.
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[[Page 55933]]
2. Statutory Standard and Analysis: Section 17A(b)(4)(B)
Section 17A(b)(4)(B) of the Exchange Act states that a registered
clearing agency may deny participation to, or condition the
participation of, any person if such person does not meet such
standards of financial responsibility, operational capability,
experience, and competence as are prescribed by the rules of the
clearing agency. Section 17A(b)(4)(B) also provides that, a registered
clearing agency may examine and verify the qualifications of an
applicant to be a participant in accordance with procedures established
by the rules of the clearing agency.
With respect to the criteria for participation under Section
17A(b)(4)(B) of the Exchange Act, the Application describes how CMESC's
participant \82\ structure affects its framework for managing risk.
Specifically, CMESC has established requirements for applicants'
financial resources, operational capacity, creditworthiness, and
business experience. With respect to financial resources, the financial
responsibility standards for Members vary depending upon the nature of
the applicant's business,\83\ but CMESC's minimum financial
responsibility standards apply only to Members.\84\ A Member that
authorizes a User is responsible for determining and enforcing minimum
financial responsibility standards that apply to its authorized
Users.\85\ In addition, CMESC's financial standards require, among
other things, that Member applicants have sufficient resources to make
any required clearing fund contributions,\86\ to pay cash settlement
amounts,\87\ to meet any applicable regulatory capital
requirements,\88\ and to satisfy all obligations to CMESC.\89\ CMESC's
operational criteria require prospective applicants (whether Members or
Users) to have adequate personnel, books and records, accounting
systems, and internal procedures to process transactions promptly and
accurately, to communicate with CMESC, and to conform to any conditions
imposed by CMESC.\90\
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\82\ CMESC Rules, at Rule 101 (defining ``participant'' as a
Member or User).
\83\ See CMESC Rules, at Rule 306(b). The rule states that, for
example, a broker-dealer applicant shall have at least twenty
million dollars ($20,000,000) in net capital, as defined in Rule
15c3-1 under the Exchange Act, provided that such amount is greater
than its minimum capital requirement thereunder and, in the case of
a broker-dealer dually registered as a futures commission merchant
under the Commodity Exchange Act, greater than the amount of
adjusted net capital required under CFTC Regulation 1.17 under the
Commodity Exchange Act. See CMESC Rules, at Rule 306(b)(i).
\84\ CMESC Rules, at Rule 307(c).
\85\ Id.
\86\ CMESC Rules, at Rule 306(a)(i).
\87\ Id.
\88\ CMESC Rules, at Rule 306(b)(v).
\89\ CMESC Rules, at Rule 306(a)(i).
\90\ CMESC Rules, at Rules 306(a)(ii)-(v), 306(c), 307(a), (b).
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CMESC has the authority to deny participant status to entities
that, among other things, are subject to statutory disqualification
under Section 3(a)(39) of the Exchange Act,\91\ have violated the anti-
fraud provisions of federal securities laws, or have been convicted of
a criminal offense.\92\
---------------------------------------------------------------------------
\91\ 15 U.S.C. 78c(a)(39).
\92\ CMESC Rules, at Rule 308.
---------------------------------------------------------------------------
CMESC will routinely review its Members and Users to ensure each
adheres to CMESC's participation requirements on an ongoing basis. In
this regard, CMESC requires Members to provide it with interim and
annual financial statements and, periodically, certain regulatory
reports (e.g., the FOCUS reports broker-dealers must file with the
Financial Industry Regulatory Authority).\93\ CMESC has the authority
to conduct due diligence reviews of the financial responsibility and
operational capability of any Member,\94\ and Members must notify CMESC
of any material changes to its organization, operations, or financial
condition.\95\ Members or Users must also furnish to CMESC adequate
assurances of its financial responsibility and operational
capability.\96\ In addition, CMESC has the authority to take action
with respect to Members or Users that fail to maintain CMESC's
participation requirements.\97\ A Member or User that no longer
satisfies CMESC's participation requirements is subject to disciplinary
sanctions, including limitations on its access to CMESC's services, and
possible loss of the privileges of participant status.\98\
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\93\ CMESC Rules, at Rule 309(b)(i); see also CMESC Rules, at
Rules 309(b)(ii)-(v) (regarding the financial reports required to be
submitted by other Member types).
\94\ CMESC Rules, at Rule 309(c).
\95\ CMESC Rules, at Rule 311.
\96\ CMESC Rules, at 309(d); see also CMESC Rules, at 309(e)
(providing a list of examples of documentation that would constitute
adequate assurances).
\97\ CMESC Rules, at Rule 902. With respect to CMESC's ability
to enforce compliance by its participants with the rules of the
clearing agency, the Commission further addresses this topic in Part
III.F, in conjunction with discussing Section 17A(b)(3)(G) of the
Exchange Act, which requires that the rules of the clearing agency
provide that its participants shall be appropriately disciplined for
violation of any provision of the rules of the clearing agency. 15
U.S.C. 78q-1(b)(3)(G).
\98\ CMESC Rules, at Rules 1001, 1002.
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To assist the Commission in determining whether the Application
establishes participation requirements consistent with Section
17A(b)(4)(B) of the Exchange Act, the Commission sought comment as to
whether the Application proposes a sufficient level of surveillance and
monitoring by CMESC of the risks posed by its Members and the two
categories of Users, such that the Application has policies and
procedures that establish objective, risk-based, and publicly disclosed
criteria for participation and that require Members to have sufficient
financial resources. In response, commenters stated that ``[t]he
minimum capital requirement for CMESC Members should be higher than
proposed to ensure that no Member poses an unreasonably high risk to
the other Members,'' \99\ and that CMESC should enhance risk management
of Members by raising the minimum capital requirement for Members and
should be adjusted based on the Member activity level.\100\ Further,
commenters stated that ``[a]n authorizing Member should not be required
to undertake due diligence on its Users beyond the level it deems
necessary for its own risk management purposes,'' \101\ that CMESC
should not require an authorizing Member to undertake specified due
diligence on its Users beyond the Member's own risk management as CMESC
has the primary relationship with such Users, and that CMESC should
clarify that authorizing Members are not responsible for any liability
of any User to CMESC due to
[[Page 55934]]
any disciplinary action against the User.\102\ One commenter also
stated that Rule 306(c) is unclear whether Members need to monitor only
the risks related to a User's clearing activity at CMESC, or risks
arising from all aspects of a User's activity.\103\
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\99\ SIFMA & AMG I at 14-15.
\100\ FIA at 9.
\101\ SIFMA & AMG I at 11.
\102\ FIA at 3.
\103\ Id. at 11.
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In response, CMESC stated that the minimum capital requirements for
Members in Rule 306(b) provide an appropriate baseline for admission
and that these minimum capital requirements are not the only mechanisms
CMESC relies upon to ensure that Members will have sufficient financial
resources and robust operational capacity to meet obligations arising
from their clearing activity at CMESC. CMESC also identified that such
other mechanisms include, but are not limited to, a credit rating
process for Members, daily risk monitoring, margin collection, and OES
exchange. In addition, CMESC stated that it may require a Member to
meet a higher capital requirement as CMESC determines appropriate,
taking into consideration the Member's risk profile, including the
number and type of Users it authorizes and the volume, size and nature
of such Users' cleared transactions.\104\ Further, CMESC stated that it
``recognizes that a Member retains the risk management expertise to
appropriately design their due diligence and risk monitoring practices
for the Users it authorizes with respect to their cleared transactions.
CMESC, in turn, may request to review the Members' due diligence and
risk monitoring policies and procedures to understand the Members'
relationships with Users and the risk controls and mitigants that
Members utilize to manage their risks with respect to such Users in
order to identify and monitor the risks that Members and their User
relationships may pose to CMESC.'' \105\
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\104\ CME Response Letter at 7.
\105\ Id. at 8.
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Because CMESC Rules would establish participation requirements that
include financial standards for Members and operational competency
standards for Members and Users that clearly denote ongoing compliance
obligations and set forth consequences for failing to meet those
obligations, CMESC Rules are sufficient to protect the clearing agency
from the risks that can be associated with Members and Users who would
not otherwise meet such competency standards. In addition, consistent
with the requirements in Rules 17Ad-22(e)(18) and (19), which would
apply to CMESC, it is appropriate for CMESC to request from Members
their due diligence and risk monitoring policies and procedures to
understand how Members are managing their relationships with Users and
the risk controls and other mitigants Members' may choose to apply.
Consistent with Rules 17Ad-22(e)(18) and (19), such requests may also
extend to Users' activity beyond CMESC itself to activity at other
clearing agencies, such as in cases where those Users may be relying on
cross-margining arrangements.
For the reasons discussed above, the Commission determines that the
rules of CMESC regarding participation in the clearing agency are
consistent with the standards set forth in Section 17A(b)(4)(B) of the
Exchange Act.
C. Fair Representation
1. Statutory Standard: Section 17A(b)(3)(C)
Section 17A(b)(3)(C) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency assure a fair representation of its
shareholders (or members) and participants in the selection of its
directors and administration of its affairs.\106\
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\106\ Section 17A(b)(3)(C) of the Exchange Act also states that
the Commission may determine that the representation of participants
is fair if they are afforded a reasonable opportunity to acquire
voting stock of the clearing agency, directly or indirectly, in
reasonable proportion to their use of such clearing agency.
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2. Summary of Application and Analysis
Per Exhibit E-2B, CMESC will have a nine-member Board of Directors,
all of whom are elected by CMESC's sole shareholder, CME Group, Inc.
The shareholder is authorized, per Article III, Section 6 of Exhibit E-
2A(2), to remove any and all members of CMESC's Board of Directors,
with or without cause, at any time. One board member position will be
restricted to a person who is an officer, director, or employee of a
Member of the clearing agency, and one board member position will be
restricted to a person who is an officer, director, or employee of a
User of the clearing agency. In addition, at least five positions of
CMESC's nine-member Board of Directors will be independent
directors.\107\ In its Application, CMESC has not included provisions
for apportioning equity interests (for example, voting stock) in CMESC
to Members or Users.
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\107\ See Exhibit C-2 of the Application.
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Under Section 17A(b)(3)(C) of the Exchange Act, the Commission
considers whether the Application provides fair representation both to
shareholders and to participants. In doing so, the Commission
undertakes an analysis of the documents in the Application that govern
or otherwise affect the selection of directors by the clearing agency
and the administration of its affairs. Such documents include, for
example, the constitution, articles of incorporation, bylaws, rules,
and written policies or procedures. Such analysis considers both
qualitative and quantitative factors, including the number of board
positions reserved for management or to represent participants, as well
as the existence of provisions in governing documents that may impede
participation in the selection of directors or the administration of
affairs. The Commission also considers the overall organization of the
clearing agency, the nature of the products it clears, and the
structure of the market it serves, including the nature of existing
clearing and settlement arrangements in the market served, the
existence of other clearing agencies that would compete to offer
services, and the size of the market served by the applicant, to
evaluate whether the representation proposed by the applicant is
consistent with the requirements of the Exchange Act.\108\
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\108\ Accordingly, the level of participant representation
needed to ensure fair representation consistent with the Exchange
Act may vary depending on the facts and circumstances, including the
market or markets to which the application is directed.
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After performing this analysis, the Commission finds that the
Application provides fair representation for the reasons set forth
below.
With respect to the fair representation of the shareholders in the
selection of its directors and administration of its affairs, CMESC's
parent company is the same legal entity as the sole shareholder of
CMESC. The shareholder cannot select as independent directors
individuals that have a material relationship with the parent company,
as ``material relationship'' and ``affiliate'' are defined in Rule
17Ad-25.\109\ The shareholder does have the right to elect all members
of the Board of Directors, though five of the nine board members must
not have material relationships with such shareholder (because the
shareholder is also an affiliate of CMESC) to meet the
[[Page 55935]]
requirements in Commission rules for independent directors.\110\
Additionally, the shareholder is authorized to remove any and all
members of CMESC's Board of Directors, with or without cause, at any
time. Finally, the Board of Directors will be responsible for the
operations of the clearing agency and will have oversight of the
executives who are managing CMESC, which also allows the shareholder to
obtain fair representation in the administration of CMESC's affairs.
Taken as a whole, these provisions assure a fair representation of the
shareholders of CMESC in the selection of its directors and
administration of its affairs.
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\109\ See 17 CFR 240.17ad-25(a) (defining ``material
relationship'' to mean a relationship, whether compensatory or
otherwise, that could affect the independent judgment or decision-
making of the director and ``affiliate'' to mean a person that
directly or indirectly controls, is controlled by, or is under
common control with the registered clearing agency); see also
Release No. 34-98959 (Nov. 16, 2023), 88 FR, 84454, 84455-56 (Dec.
5, 2023).
\110\ See 17 CFR 240.17ad-25(a).
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With respect to fair representation of the participants of CMESC in
the selection of its directors and administration of its affairs, the
parent company of CMESC is the sole shareholder, and so the Application
includes no provision to make CMESC voting stock available for purchase
to Members or Users. As such, CMESC would operate in a manner that is
different from some other registered clearing agencies, which are
constituted of owner-members.\111\ One position on the Board, however,
will be reserved for a representative of a Member and one position for
a representative of a User. The charter for the CMESC Board of
Directors provides that the composition of the Board, taken as a whole,
shall represent the views of the owners and participants of CMESC,
including a selection of Directors that reflects the range of different
business strategies, models and sizes across participants, as well as
the range of customers and clients the participants serve.\112\ It
further provides that ``at least a majority of the Directors shall be
Independent Directors.'' \113\ In addition, while one position is
reserved each for a representative of a Member and of a User,
representatives from among Members and Users also could be selected for
additional positions on the Board of Directors as CMESC seeks to
satisfy Commission requirements for independent directors under Rule
17Ad-25. For example, representatives from Members and Users could
qualify as independent directors, to the extent that those
representatives do not have material relationships with CMESC under
Rule 17Ad-25.\114\ Such directors would have an opportunity to serve on
the Nominating Committee, which, as previously discussed,\115\ must
make determinations regarding the fitness of nominees and whether
nominees would meet the definition of ``independent director''
consistent with Commission rules. Such ability to influence the
nomination of directors is an important component of participant
representation in the selection of directors. In addition, pursuant to
the charter, the Nominating Committee ``shall nominate all persons who
stand for election as Director.'' \116\ Taken as a whole, the above-
described provisions of the CMESC Application provide Members and Users
with a role in the review and nomination of directors, which provides
fair representation regarding the selection of directors.
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\111\ Securities Acts Amendments of 1975, Report of the Senate
Comm. on Banking, Housing and Urban Affairs to Accompany S. 249, S.
Rep. 94-75, 94th Cong., 1st Sess. 123-24 (1975) (``[T]he bill
establishes no norm as to whether clearing agencies should or should
not be operated for profit. The bill makes no attempt to set up
particular standards of representation or participation. Rather, it
provides that the Commission must assure itself that the rules of
the clearing agency regarding the manner in which decision are made
give fair voice to participants as well as to shareholder . . .
.'').
\112\ See Exhibit E-2B at 1.
\113\ See id.
\114\ See supra note 109 and accompanying text (defining
``material relationship'' under Rule 17Ad-25).
\115\ See supra note 61 and accompanying text (discussing the
responsibilities of the Nominating Committee).
\116\ See Exhibit E-2B at 4.
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In addition, reserving a position on the Board for one Member and
one User--and the absence of provisions that might impede or restrict
these positions to carry out their duties when compared to other board
directors or classes of board directors--ensures representation on the
Board and therefore also helps ensure that Members and Users have
representation in the administration of CMESC's affairs.\117\ As such
CMESC's approach, in reserving positions on the Board of Directors for
a representative of a Member and a representative of a User, is
consistent with fair representation, helping to provide a voice in
CMESC's governance to a range of views from among the customers of the
clearing agency.\118\ Taken as a whole, the provisions of the CMESC
Application described above assure a fair representation of the
participants of CMESC in the selection of its directors and
administration of its affairs.
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\117\ See 17 CFR 240.17ad-25(j) (``Rule 17Ad-25(j)''); Treasury
Clearing Adopting Release, supra note 81, 89 FR at 2755.
\118\ See supra note 111. Commission rules also require,
pursuant to Rule 17Ad-25(j), that registered clearing agencies
provide mechanisms for input from direct and indirect participants,
with respect to material developments in its governance and
operations on a recurring basis. 17 CFR 240.17ad-25(j).
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For the reasons discussed directly above, the Commission determines
that the rules of CMESC assure fair representation in the selection of
its directors and administration of its affairs consistent with Section
17A(b)(3)(C) of the Exchange Act.
D. Fees
1. Statutory Standard: Section 17A(b)(3)(D) and (E)
Section 17A(b)(3)(D) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency provide for the equitable allocation
of reasonable dues, fees, and other charges among its
participants.\119\ Section 17A(b)(3)(E) of the Exchange Act states that
a clearing agency shall not be registered unless the rules of the
clearing agency do not impose any schedule of prices, or fix rates or
other fees, for services rendered by its participants.\120\
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\119\ 15 U.S.C. 78q-1(b)(3)(D).
\120\ 15 U.S.C. 78q-1(b)(3)(E).
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2. Summary of Application and Analysis
CMESC's Application does not include a fee schedule or schedule of
prices; however, CMESC's Application does describe: (i) its authority
to determine and equitably allocate fees; \121\ (ii) its rule and
procedures regarding fees; \122\ and (iii) the status of its proposed
fee schedule,\123\ as subsequently updated in the CMESC Fees Letter.
Separately, the Application states that CMESC ``does not fix prices,
rates, or fees for services rendered by its participants (i.e., its
Members or Users).'' \124\
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\121\ See Exhibit E-2A(2) of the Application, Amended and
Restated By-Laws of CME Securities Clearing Inc. (``CMESC By-
Laws''), at Article X, Section 4.
\122\ See CMESC Rules, at Rule 801; Exhibit E-4 of the
Application, Procedures of CME Securities Clearing Inc. (``CMESC
Procedures''), at Procedure 8-1.
\123\ See Exhibit E-5 of the Application (stating that ``[CMESC]
is developing its fee schedule and intends to charge both Members
and Users. [CMESC] continues to engage the marketplace on its
ultimate fee structure, which [CMESC] plans to finalize as it
approaches the launch date for operating the clearing agency.
[CMESC] notes that cleared repo and cleared U.S. Treasuries will
operate in a competitive environment, which in turn is expected to
impact fees. The fees for Members and Users will be published on
CMESC's website when its clearing services are launched after filing
a proposed rule change with the Commission pursuant to [S]ection
19(b)(3)(A) of the Exchange Act'').
\124\ See Exhibit Q of the Application (responding to the
exhibit's requirement for an applicant for registration as a
clearing agency to ``[a]ttach as Exhibit Q a schedule of any prices,
rates or fees fixed by registrant for services rendered by its
participants''). See also 15 U.S.C. 78q-1 (requiring that the
``rules of the clearing agency do not impose any schedule of prices,
or fix rates or other fees, for services rendered by its
participants'').
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[[Page 55936]]
(a) Authority To Determine and Equitably Allocate Fees
CMESC's Exhibit E-2A(2) includes Section 4 of CMESC's by-laws,
explaining its authority to determine fees (and the limits to this
authority).\125\ This section states that CMESC's Board of Directors
has the authority to determine ``the amount of fees, dues, assessments,
and other charges to be paid by Members and Users and any other persons
using any facility or system that [CMESC] operates or controls.'' \126\
This section also explains that any ``fees, dues, assessments, and
other charges shall be equitably allocated among Members and Users and
any other persons using any facility or system that [CMESC] operates or
controls.'' \127\
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\125\ See CMESC By-Laws, at Article X, Section 4.
\126\ See id.
\127\ See id. (emphasis added).
---------------------------------------------------------------------------
The CMESC Fees Letter identified five factors that CMESC may
consider in developing its fee schedule: (i) market structure and
competition; (ii) transaction volumes and liquidity; (iii) operational
costs; (iv) market participant feedback; and (v) regulatory
considerations.\128\ Regarding market structure and competition, CMESC
stated it ``may consider the structure of the Treasury market and the
competitive landscape, including alternative services offered by
competing clearing agencies, existing transaction costs, incentives for
central clearing and the different categories of Participants (e.g.,
Members vs. Users; Independent Users vs. Supported Users).'' \129\
CMESC stated that it also may consider ``transaction volumes in both
cash market and repo transactions in Treasury securities, open
positions and the overall liquidity of the Treasury markets.'' \130\
Discussing operation costs, CMESC stated possible considerations
include costs related to clearing systems, legal and compliance
functions, risk management requirements, and the liquidity and capital
to support the clearing service.\131\ CMESC also stated it could
consider feedback from market participants in developing its fee
structure.\132\ CMESC stated that regulatory considerations may include
whether its fees, dues, or charges are ``appropriately related to
clearing services'' or ``the administration of the clearing agency.''
\133\ Along with a consideration of these possible factors, CMESC
stated it will design its fee structures to align with the requirements
of the Exchange Act and the rules and regulations thereunder, including
applicable guidance, and establish such fees in accordance with its
Rule 801.\134\
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\128\ Letter from Jonathan Marcus, Senior Managing Director and
General Counsel, CME Group Inc., dated May 27, 2025 (``CMESC Fees
Letter''), at 1-2. CMESC submitted two letters on the same day, May
27, 2025: the CMESC Response Letter and the CMESC Fees Letter. Since
they were received on the same date, both letters appear on the
Commission's website as one entry.
\129\ Id. at 2.
\130\ Id.
\131\ Id.
\132\ Id.
\133\ Id.
\134\ Id.
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(b) CMESC's Rules and Procedures Regarding Fees
CMESC's Rule 801 governs fees (``Charges for Services Rendered'')
\135\ and addresses: (i) its Members and Users' responsibility to pay
fees and charges; \136\ (ii) the approach to ``unusual'' expenses;
\137\ and (iii) billing mechanics.\138\
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\135\ See CMESC Rules, at Rule 801.
\136\ See CMESC Rules, at Rule 801(a) (stating that it is each
Member's and User's responsibility to pay fees ``for services
rendered by [CMESC] as set forth in the Rules and Procedures and
approved by the Board on a reasonable and non-discriminatory basis).
\137\ See CMESC Rules, at Rule 801(b) (explaining that CMESC may
charge a Member or User ``for any unusual expenses caused directly
or indirectly by such Member or User,'' and that unusual expenses
could include ``the cost of producing records pursuant to court
order or other legal process in any litigation or other legal
proceeding, whether or not such Member or User is party to such
litigation or proceeding'').
\138\ See CMESC Rules, at Rule 801(c) (stating that CMESC will
bill its Members and Users on a monthly basis for charges for the
preceding month, billing each Member for charges related to the
Member and its Supported Users, and each Independent User for
charges related to that Independent User).
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Exhibit E-4 sets forth CMESC Procedures, including ``Procedure 8-1.
Product-Specific Fees and Charges,'' \139\ which explains that fees
arising from CMESC's provision of services ``will be set out in a
Schedule of Fees specific to each Eligible Securities Transaction.''
\140\ The exhibit also states that CMESC will publish its ``Schedule of
Fees'' on its website.\141\
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\139\ See CMESC Procedures, at Procedure 8-1.
\140\ See id. (emphasis added).
\141\ See id.
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(c) Comments Received
The Commission received no comments on CMESC's authority, rules, or
procedures for determining fees,\142\ except that CMESC submitted the
CMESC Fees Letter, discussed above, providing an update on the
development of its fee schedule.\143\ CMESC stated that it is
``actively engaging with market participants to inform the design of
its final fee structure.'' \144\ CMESC stated that it expects to
finalize its fee structure ``as [CMESC] approaches the launch date for
Treasury securities clearing services.'' \145\ CMESC stated that, in
finalizing its fee schedule, it will rely upon the experience of its
affiliate (Chicago Mercantile Exchange, Inc.) in setting fees as a
CFTC-regulated derivative clearing organization.\146\
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\142\ The Commission received two comment letters addressing
CMESC's disclosure of costs associated with default management. FIA
at 6-7; SIFMA & AMG I at 14. These comments are unrelated to the
Commission's required analysis of the Application under Section
17A(b)(3)(D) of the Exchange Act, and so are addressed in the
context of Section 17A(b)(3)(F) and discussion of Rule 17Ad-
22(e)(23)(ii) in Part III.E.2.d).
\143\ See CMESC Fees Letter at 1.
\144\ Id.
\145\ Id.
\146\ Id.
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(d) Analysis
As noted above, CMESC is not yet operating as a clearing
agency,\147\ and CMESC ``continues to engage the marketplace on its
ultimate fee structure, which [CMESC] plans to finalize as it
approaches the launch date for operating the clearing agency.'' \148\
CMESC's Application, however, identifies CMESC's existing authority,
rules, and procedures governing any fees that it will assess on its
participants, as described above.\149\ These existing authority, rules,
and procedures require that CMESC's fees are ``equitably allocated,''
``approved on a reasonable and non-discriminatory basis,'' and
``specific to each Eligible Securities Transaction,'' which is
consistent with the requirement that CMESC's rules provide for the
equitable allocation of reasonable dues, fees, and other charges.\150\
Furthermore, the CMESC Fees Letter specifically stated that ``its final
fee schedules will be reasonably designed to satisfy the requirements
of [. . . Section] 17A(b)(3)(D).'' \151\ Separately, any fees, dues or
other charges that CMESC intends to assess must be filed as a proposed
rule change pursuant to Section 19(b) of the Exchange Act and
[[Page 55937]]
Rule 19b-4 thereunder.\152\ Clearing agencies fees are subject to the
requirements of the Exchange Act, including Section 17A(b)(3)(D).\153\
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\147\ See supra notes 13-14 and accompanying text (explaining
that approval of clearing agency registration does not mean that no
further modifications of the applicant's rules, systems, procedures,
or practices are needed and that the obligations of a fully
registered clearing agency cannot end after registration).
\148\ See Exhibit E-5 of the Application.
\149\ See supra III.D.2.a) and b).
\150\ Id.
\151\ See CMESC Fee Letter at 1; see also 15 U.S.C. 78q-
1(b)(3)(D) (requiring that a clearing agency's rules provide for the
equitable allocation of reasonable dues, fees, and other charges
among its participants).
\152\ See 15 U.S.C. 78s(b); 17 CFR 240.19b-4; see also Exhibit
E-5 of the Application (acknowledging its obligations under Section
19(b) and Rule 19b-4).
\153\ 15 U.S.C. 78q-1(b)(3)(D); see also 15 U.S.C. 78s(b)
(requiring proposed rule changes to be filed by the Commission,
which shall publish notice thereof and give interest persons an
opportunity to respond). Some proposed rule changes regarding dues,
fees, or charges take effect upon filing. See 15 U.S.C.
78s(b)(3)(A)(ii); see also 15 U.S.C. 78s(b)(3)(C) (specifying when
the Commission may temporarily suspend the immediate effectiveness
of such filings).
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Accordingly, the Commission determines that the Application is
consistent with Section 17A(b)(3)(D) of the Exchange Act. In addition,
as noted above, CMESC's Application states that CMESC does not ``fix
prices, rates, or fees for services by its participants (i.e., its
Members or Users).'' \154\ The Commission therefore determines that
CMESC's prohibitions against the fixing of prices of its Members and
Users meet the requirements of Section 17A(b)(3)(E) of the Exchange
Act.\155\
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\154\ See supra note 124 and accompanying text.
\155\ 15 U.S.C 78q-1(b)(3)(E).
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E. Rules Designed To Promote Prompt and Accurate Clearance and
Settlement and the Safeguarding of Securities and Funds
1. Statutory Standard: Section 17A(b)(3)(F)
Section 17A(b)(3)(F) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency are designed to promote the prompt and
accurate clearance and settlement of securities transactions and, to
the extent applicable, derivative agreements, contracts, and
transactions, 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, to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions, to
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, to protect investors and the public
interest. It also states that a clearing agency shall not be registered
unless the Commission determines that the rules are not designed to
permit unfair discrimination in the admission of participants or among
participants in the use of the clearing agency, or to regulate by
virtue of any authority conferred by the Exchange Act matters not
related to the purposes of this section or the administration of the
clearing agency.\156\
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\156\ With respect to the provisions in Section 17A(b)(3)(F) of
the Exchange Act requiring that the rules of the clearing agency are
not designed to permit unfair discrimination in the admission of
participants or among participants in the use of the clearing agency
and not regulate by virtue of any authority conferred by the
Exchange Act matters not related to the purposes of the Exchange Act
or the administration of the clearing agency, those topics have been
addressed in Parts III.B and III.G, concerning the statutory
requirements for, respectively, participant standards of the
clearing agency and addressing the clearing agency's burden on
competition. With respect to the provisions requiring that the rules
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions and to remove
impediments to and perfect the mechanism of a national system for
the prompt and accurate clearance and settlement of securities
transactions, those topics have been addressed in Part III.G,
concerning the statutory requirements addressing the clearing
agency's burden on competition.
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2. Summary of Application and Analysis
The Commission has adopted multiple rules that are related to
Section 17A(b)(3)(F), in that they establish requirements related to
financial risk management, default management and loss allocation, and
recovery and orderly wind-down. Specifically, these Commission rules
implicate the safeguarding of securities and funds and promoting the
prompt and accurate clearance and settlement of securities
transactions, including the collection of margin, composition of the
guaranty fund, default management and loss allocation procedures, and
other risks.\157\ To analyze CMESC's Application under Section
17A(b)(3)(F), the Commission has considered CMESC's Rules concerning
its account structures, margin system, guaranty fund, default
management, and loss allocation processes, as set forth in further
detail below.
---------------------------------------------------------------------------
\157\ See 17 CFR 240.17ad-22(e)(4), (e)(6), (e)(13),
(e)(23)(ii); 240.17ad-26.
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As a threshold matter, the CMESC Application establishes a
comprehensive risk management framework consistent with Commission
rules that help ensure CMESC will collect sufficient margin to cover
its exposures, maintain an appropriately sized Guaranty Fund, and will
be able to manage a default and allocate losses appropriately, if or
when needed. CMESC's risk management framework is designed to address
the particular features of CMESC's proposed participation structure,
i.e., to manage the risks presented by Members and Users who have
different obligations to CMESC and access CMESC. For these reasons and
the reasons discussed below, the Commission determines that CMESC's
rules are consistent with the requirements for the prompt and accurate
clearance and settlement of securities and the safeguarding of funds
and securities as set forth in Section 17A(b)(3)(F) of the Exchange Act
and do not regulate by virtue of any authority conferred by the
Exchange Act matters not related to the purposes of Section 17A of the
Exchange Act or the administration of the clearing agency.
(a) Account Structure and Safeguarding of Securities and Funds
In Exhibit L, CMESC explains that, with the exception of initial
margin and Guaranty Fund contributions, it does not maintain custody of
or otherwise safeguard Members' or Users' securities or cash in
clearing transactions, and that only in limited circumstances does
CMESC exercise control of such securities or cash.\158\ According to
CMESC Rules, initial margin posted with CMESC will be received by
Bank(s) designated by CMESC and deposited into separate omnibus
accounts for Members, Supported Users that are registered broker-
dealers, other Supported Users, and Independent Users.\159\ Those
accounts will also be used for deposits related to an OES.\160\ Any
cash posted for margin purposes may be partially or wholly invested in
U.S. Treasury securities with a maturity of one year or less, and any
investment income or losses from cash deposited for margin purposes
shall accrue to CMESC, unless otherwise set forth in the
Procedures.\161\ Per CMESC Rules, Qualified Margin Securities posted
for margin purposes may be posted with CMESC by a Member for its Member
Account, by a Member on behalf of its Supported Users for such
Supported Users' Supported User Accounts, and by an Independent User
for its Independent User Account.\162\
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\158\ Exhibit L at 1.
\159\ CMESC Rules, at Rule 507(a).
\160\ CMESC Rules, at Rule 507(a).
\161\ CMESC Rules, at Rule 505(a)(ii).
\162\ CMESC Rules, at Rule 505(b)(i).
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Pursuant to CMESC Rules, before submitting any Repo Transaction or
Cash Treasury Transaction to CMESC for clearing, a Member or User must
establish a settlement account at CMESC's Securities Settlement Bank
for the relevant transactions.\163\ A Member or User that is a cash
lender must establish a collateral account in its name and for its
exclusive benefit at CMESC's Securities Settlement Bank.\164\ A
Securities Settlement Bank must be subject to supervision under Federal
or
[[Page 55938]]
State banking laws and will be designated by CMESC for the purpose of
facilitating settlement of Eligible Securities Transactions and for
holding collateral for Repo Transactions, as applicable.\165\ The
account structure at a Securities Settlement Bank will be used to
settle Repo Transactions and Cash Treasury Transactions.\166\
---------------------------------------------------------------------------
\163\ CMESC Rules, at Rule 1504(c).
\164\ CMESC Rules, at Rule 1504(c).
\165\ CMESC Rules, at Rule 101.
\166\ CMESC Procedures, at Procedure 5-6.
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One commenter made suggestions regarding risk management procedures
related to the relationship between a Member and its Users, including
with respect to: a Member's responsibility for porting of User
accounts; \167\ a Member's control over aspects of a User's margin;
\168\ a User's done-away transactions; \169\ and a User default.\170\
These suggestions pertain to certain choices CMESC has made in
designing its clearing agency but do not bear on whether CMESC's
Application is consistent with a specific Commission rule, or whether
CMESC's application more generally meets the standard for registration.
---------------------------------------------------------------------------
\167\ FIA at 7, 11-12 (requesting that CMESC explicitly require
all parties to consent prior to porting a User, including the
transferring Member and the receiving Member; and that User
positions only be liquidated in the event of a Member default if
porting cannot be effected).
\168\ Id. at 9 (requesting that CMESC allow Members to obtain a
security interest through control rather than a financing
statement).
\169\ Id. at 7 (requesting that CMESC require Member consent to
cancel or modify a transaction).
\170\ Id. at 4-5, 8 (requesting that CMESC permit a Member to
trigger a User default; that CMESC permit a Member to transfer a
User's transactions to the Member's account upon a User liquidation;
and that CMESC act on the instruction of a Member regarding return
of margin or delivery of a settlement payment in the context of a
User default).
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(b) Margin System
Pursuant to CMESC Rules, CMESC will determine initial margin
requirements for any Eligible Securities Transactions it clears.\171\
CMESC will calculate initial margin amounts under the Portfolio Margin
Collection method, based on a Member's or User's portfolio of Eligible
Securities Transactions in accordance with CMESC's margin model at
least twice daily during the intraday and end-of-day clearing
cycles.\172\
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\171\ CMESC Rules, at Rule 501.
\172\ CMESC Rules, at Rule 502(a); see also CMESC Procedures, at
Procedure 5-2 (further describing the Portfolio Margin Collection
method).
---------------------------------------------------------------------------
In Exhibit J, CMESC describes that margin is calculated in
accordance with CMESC's proprietary risk-based margin model, the SPAN 2
framework, and is designed to cover price movements over the margin
period of risk, which for Eligible Securities Transactions is at least
two business days.\173\ The SPAN 2 framework is designed to achieve the
desired coverage level of 99% over the margin period of risk on an ex
post basis using parameters based on relevant historical data.\174\
Exhibit J further describes that the SPAN 2 methodology generates
scenarios for the risk factors relevant for securities products cleared
by CMESC, such as the change in value of the Treasury securities and
repo rate.\175\ The SPAN 2 framework also includes a liquidity and
concentration risk component to account for the additional risks that
may arise in closing out a concentrated portfolio of a Defaulting
Member or Defaulting User.\176\
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\173\ See Exhibit J of the Application, at 8.
\174\ See id.
\175\ See id.
\176\ See id.
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Pursuant to CMESC Rules, a Member will post margin for its own
account and on behalf of its authorized Supported Users for their
Supported User Accounts.\177\ At least once each business day, each
Member with any authorized Supported User will submit a collateral
value report to CMESC with instructions regarding how to allocate
margin deposited by the Member for Supported Users.\178\ An Independent
User will post margin for its Independent User Account.\179\ Members
and Users must deposit margin in cash or Qualified Margin Securities
and/or such other non-cash form(s) in amounts, and in the manner,
specified by CMESC from time to time.\180\ All initial margin calls
must be met in cash, unless CMESC otherwise approves.\181\ Any cash
posted for margin purposes may be partially or wholly invested in U.S.
Treasury securities with a maturity of one year or less, and investment
income or losses from cash deposited for margin purposes shall accrue
to CMESC.\182\ Qualified Margin Securities posted for margin purposes
will be deemed to be deposited when CMESC confirms receipt, and all
interest, dividends, or gain received or accrued on such securities
before any sale or negotiation thereof, and any proceeds from the
maturity of the securities received by CMESC shall belong to the Member
or User that posted such securities.\183\
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\177\ CMESC Rules, at Rule 501.
\178\ CMESC Rules, at Rule 502(e).
\179\ CMESC Rules, at Rule 501.
\180\ CMESC Rules, at Rule 502(b); see also CMESC Procedures, at
Procedures 5-3 and 5-4.
\181\ CMESC Rules, at Rule 502(b).
\182\ CMESC Rules, at Rule 505(a).
\183\ CMESC Rules, at Rule 505(b).
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One commenter stated that CMESC should limit its discretion in
returning excess margin.\184\ Commission rules do not require specific
practices with respect to the return of excess margin, and so this
comment does not bear on whether CMESC's Application is consistent with
a specific Commission rule, or whether CMESC's application more
generally meets the standard for registration.
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\184\ FIA at 6.
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(c) Guaranty Fund
CMESC Rules provide that Members shall contribute to the Guaranty
Fund.\185\ Each Member's Required Guaranty Fund Contribution shall be
made in cash or U.S. Treasury securities with remaining maturities of
less than ten years, and any Default Assessment shall be met in cash
unless otherwise permitted by CMESC.\186\ Cash and securities posted
for Guaranty Fund purposes shall be deposited in an account in the name
of CMESC in a depository institution selected by CMESC.\187\ Any cash
may be partially or wholly invested in U.S. government obligations or
any other interest-bearing investments which provide safety and
liquidity of the principal invested, as determined by CMESC.\188\
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\185\ CMESC Rules, at Rule 401.
\186\ CMESC Rules, at Rule 403(a).
\187\ CMESC Rules, at Rule 404.
\188\ CMESC Rules, at Rule 404(c).
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Members will be required to contribute to the Guaranty Fund, and a
Member's contribution may be used to cover losses incurred by CMESC as
a result of a Member or User Default.\189\ The Guaranty Fund shall be
maintained in an amount, determined by CMESC using its stress test
methodology and in accordance with CMESC's Procedures, at least equal
to the largest theoretical loss to CMESC in excess of initial margin
resulting from the default of two Member Families.\190\ According to
CMESC Rules, a Member's Required Guaranty Fund Contribution will be
determined based on the Member's proprietary transactions and
transactions of Users authorized by the Member.\191\ Each Member's
Required Guaranty Fund Contribution shall be made in U.S. Dollar cash
or U.S. Treasury securities with remaining maturities of less than ten
years.\192\ Any cash posted may be partially or wholly invested in U.S.
government obligations or any other interest-bearing
[[Page 55939]]
investments which provide safety and liquidity of the principal
invested, and, to the extent not so invested, such cash funds shall be
deposited in an account in the name of CMESC in a depository
institution or institutions selected by CMESC.\193\ Any investment
income or losses to principal from cash deposits to the Guaranty Fund
shall accrue to CMESC, and CMESC shall maintain a list of U.S.
government obligations or any other interest-bearing investments in
which cash in the Guaranty Fund may be invested, and the amounts
invested at any given time.\194\ Securities posted for Guaranty Fund
purposes shall be deposited by the Member, and held by CMESC, in
CMESC's name in a depository institution or institutions selected by
CMESC.\195\ Such securities will be deemed to be posted when CMESC
confirms receipt, and all interest, dividends, or gain received or
accrued on such securities before any sale or negotiation thereof, and
any proceeds from the maturity of the securities received by CMESC
shall belong to the Member that deposited such securities.\196\
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\189\ CMESC Rules, at Rules 401(a), (b).
\190\ CMESC Rules, at Rule 402(a). Member Family is defined as a
group consisting of a Member and any other Member that, directly or
indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with such Member. See
CMESC Rules, at Rule 101.
\191\ CMESC Rules, at Rule 402(b).
\192\ CMESC Rules, at Rule 403(a).
\193\ CMESC Rules, at Rule 404(a).
\194\ CMESC Rules, at Rule 404(a).
\195\ CMESC Rules, at Rule 404(b).
\196\ CMESC Rules, at Rule 404(b).
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Regarding Guaranty Fund sizing, Rule 17Ad-22(e)(4)(iii) under the
Exchange Act requires covered clearing agencies to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to, among other things, maintain additional
financial resources at a minimum to enable it to cover a wide range of
foreseeable stress scenarios that include, but are not limited to, the
default of the participant family that would potentially cause the
largest aggregate credit exposure for the covered clearing agency in
extreme but plausible market conditions. In connection with sizing the
Guaranty Fund, CMESC Rules and Procedures state that it will maintain
resources at least equal to the largest theoretical loss to CMESC
resulting from the default of two Member Families in extreme but
plausible market conditions, covering, as applicable, Member Accounts
and a predefined number of User Accounts with the largest credit
exposures at each Member.\197\ CMESC's approach is consistent with
Commission rules because, CMESC's Guaranty Fund sizing methodology may
produce a Guaranty Fund size larger than the one computed to the
default of the participant family that would potentially cause the
largest aggregate credit exposure. Therefore, the Guaranty Fund sizing
methodology is reasonably designed to be consistent with Rule 17Ad-
22(e)(4)(iii).\198\
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\197\ See CMESC Rules, at Rule 402(a) and (b); CMESC Procedures,
at Procedure 4-1(a) and (c)(i); see also CMESC Rules, at Rule 101
(defining ``cover two standard'').
\198\ However, CMESC's methodology does not consider, as part of
a Member Family's exposure, all a Member's Users' positions. See id.
(referencing a predetermined number of Users). Under CMESC's Rules,
the Member is obligated to satisfy the Guaranty Fund contributions
of its Users and to perform for the User in the event of the User's
default. See CMESC Rules, at Rules 402(b), 301(b), 406(b)(iii).
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In addition, Rule 17Ad-22(c)(1) under the Exchange Act requires
that a registered clearing agency calculate and maintain a record each
fiscal quarter, or any time upon Commission request, of the financial
resources necessary to meet the requirements in Rule 17Ad-22(e)(4).
Consistent with this requirement, CMESC will produce a record that
CMESC calculates and maintains assuming the default of at least the
largest Member Family and reflecting all of the Member Family's
exposures including Users, and Commission staff will be able to
consider that record through its ongoing monitoring of CMESC as part of
the Commission's supervisory program, to consider and assess the
performance of the existing Guaranty Fund sizing methodology over time.
(d) Default Management and Loss Allocation
In Exhibit J, CMESC states that it employs a risk management
framework intended to reduce the potential impact of a Participant
Default via credit risk standards and ongoing monitoring and to ensure
that it has sufficient financial resources to manage a Default of its
largest Participants.\199\ In the event of a Default, CMESC will rely
upon established credit and liquidity ``waterfalls'' to prevent losses
to its Members and Users and minimize the potential for market
disruption.\200\
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\199\ Exhibit J of the Application, at 7. CMESC's Rules provide
for both ``Member Default'' and ``User Default,'' which are defined
terms. See, e.g., CMESC Rules, at Rules 901, 902.
\200\ Exhibit J of the Application, at 8.
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Pursuant to CMESC Rules, upon the occurrence of a Member Default or
User Default, CMESC will notify all Members and, as appropriate,
Users.\201\ CMESC Rules provide that CMESC may hedge open positions of
the defaulter.\202\ CMESC will initiate the close-out process. In the
case of a Defaulting User and time permitting, CMESC may provide the
authorizing Member the opportunity to terminate the Defaulting User's
obligations to CMESC by satisfying them in full.\203\ With respect to
positions of Defaulting Members or any remaining positions of
Defaulting Users and time permitting, potentially impacted non-
Defaulting Members and non-Defaulting Users with open positions may
submit a close-out request to CMESC.\204\ CMESC shall pay such Member
or User any reasonable loss or cost incurred in connection with such
close-out, and such Member or User shall pay CMESC any profit or gain
made in connection therewith.\205\ With respect to any positions that
have not been terminated or closed-out CMESC, in its sole discretion to
meet its settlement obligations, may purchase or sell Eligible
Securities, conduct a Competitive Auctions or auctions, and require
Mandatory Close-Outs or Mandatory Buy-ins.\206\ CMESC may enter into an
offsetting repo transaction with a non-Defaulting Member or non-
Defaulting User that has the effect of extending outstanding settlement
obligations for Repo Transactions or Cash Treasury Transactions by one
Business Day, unless applicable law prohibits the non-Defaulting Member
or non-Defaulting User from being required to enter into such an
offsetting repo transaction.\207\
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\201\ CMESC Rules, at Rule 1507(b).
\202\ CMESC Rules, at Rules 406(a)(i), (b)(i).
\203\ CMESC Rules, at Rule 1507(b).
\204\ CMESC Rules, at Rule 1507(c).
\205\ CMESC Rules, at Rule 1507(c).
\206\ CMESC Rules, at Rule 1507(e).
\207\ CMESC Rules, at Rule 1509.
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CMESC Rules also provide that CMESC will apply financial resources
to manage a Participant Default in accordance with its rules and
procedures.\208\ For a Member Default, the margin posted for open
transactions in the Defaulting Member's Member Account(s), as well as
any other assets of the Defaulting Member held by, pledged to, or
otherwise available to CMESC, including the Defaulting Member's
Required Guaranty Fund Contribution but excluding any assets posted as
margin to any User Account of any User authorized by the Defaulting
Member, shall be applied to discharge any losses or liabilities to
CMESC from the Member Default.\209\ Next, CMESC would apply its
Corporate Contribution of $50 million.\210\ Then non-Defaulting
Members' Guaranty Fund contributions would be applied with the possible
imposition of a Default Assessment.\211\ The maximum Default Assessment
for each Member with respect to each Cooling Off Period would equal
200% of
[[Page 55940]]
a Member's Required Guaranty Fund Contribution then in effect.\212\
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\208\ CMESC Rules, at Rule 405.
\209\ CMESC Rules, at Rule 406(a)(ii).
\210\ CMESC Rules, at Rule 406(a)(iii).
\211\ CMESC Rules, at Rules 406(a)(iv), (v).
\212\ CMESC Rules, at Rule 402(c). Should a Member submit a
voluntary withdrawal during the Cooling Off Period, the Member must
still satisfy its aggregate maximum contribution in effect at the
commencement of the Cooling Off Period. CMESC Rules, at Rule 413(c).
CMESC retains discretion to authorize additional contributions
during the Cooling Off Period. CMESC Rules, at Rule 413(d).
---------------------------------------------------------------------------
Under CMESC Rules, for an Independent User Default, the first
resource applied would be margin posted for open transactions in the
Defaulting User's Independent User Account and any other assets of the
Independent User held by, pledged to, or otherwise available to CMESC
on behalf of that Independent User.\213\ For a Supported User Default,
the first resource applied would be margin posted for open transactions
in the Defaulting User's Supported User Account, and if such
application doesn't fully discharge the obligations, CMESC may apply
any collateral in excess of the margin requirement posted to it for the
Supported User of the authorizing Member that such Member has not
designated to CMESC as Funded Supported User Margin for any other
Supported User Account or Supported User Margin for any other Supported
User Account.\214\ Next, in either type of user default, CMESC shall
require the authorizing Member to provide funds to discharge the losses
and liabilities arising from its authorized User's default.\215\ If the
Member fails to do so, CMESC may declare the Member in default and then
apply the resources in the default waterfall: CMESC's corporate
contribution and non-Defaulting Members' Guaranty Fund Contribution
with a possible Default Assessment.\216\
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\213\ CMESC Rules, at Rule 406(b)(ii)(A).
\214\ CMESC Rules, at Rule 406(b)(ii)(B).
\215\ CMESC Rules, at Rule 406(b)(iii).
\216\ CMESC Rules, at Rule 406(b)(iii).
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Under CMESC Rules, if CMESC deems it appropriate to obtain
financing necessary to satisfy its settlement obligations, CMESC may
enter into repo transactions involving Eligible Securities intended to
be delivered to a Defaulting Member or Defaulting User and those
Qualified Margin Securities of the Defaulting Member or Defaulting User
with any market participant so willing, and no Member or User shall
take any action to interfere intentionally with such repo
transactions.\217\ CMESC may enter master repurchase agreements with an
entity or multiple entities, including any depository institution, if
CMESC deems it necessary or desirable to obtain and maintain a
committed repo financing line.\218\ Each Member is required to enter a
``Capped Liquidity Facility'' (``CLF'') Master Repurchase Agreement
with CMESC on terms substantially similar to those set out by
CMESC.\219\ In the event of a Member Default or a User Default and
where CMESC's standard sources of liquidity are determined by CMESC to
be insufficient or likely to be insufficient to meet CMESC's liquidity
needs, CMESC may declare a CLF Event, notify its Members, and enter
into one or more CLF Event Transactions with applicable Member(s) of
its choosing.\220\ CMESC will inform each Member selected to
participate in a CLF Event Transaction of the amount, rate and any
additional pertinent information.\221\
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\217\ CMESC Rules, at Rule 408.
\218\ CMESC Rules, at Rule 409.
\219\ CMESC Rules, at Rule 410.
\220\ CMESC Rules, at Rule 409.
\221\ CMESC Rules, at Rule 410(d).
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Regarding default management, commenters stated that CMESC's
corporate contribution to the default waterfall should be more than $50
million and be sized dynamically.\222\ Under CMESC Rule 406, CMESC
would contribute $50 million of its own funds in a default waterfall
before applying the guaranty fund contributions of non-defaulting
Members. The commenters provided several reasons for believing that the
corporate contribution should be increased: (i) the size of the U.S.
Treasury market and expected activity of CMESC; (ii) the requirement of
a covered clearing agency (``CCA'') to maintain additional financial
resources to cover a wide range of foreseeable stress scenarios under
Rule 17Ad-22(e)(4)(iii); and (iii) the larger size of the ``skin-in-
the-game'' contributions by other CCAs as well as by CMESC clearing
affiliates in other markets.\223\ One commenter expressed support for
finding a balance between the incentives relevant to a CCA and its
participants, suggesting that ``skin-in-the-game'' could be useful in
achieving such balance.\224\ The commenters further recommended that
CMESC's contribution should be dynamic to incorporate a variety of
factors and be able to adjust as its service offerings grow.\225\ CMESC
responded to these commenters stating its belief that the corporate
contribution demonstrates its strong commitment to its offering and
risk management practices.\226\ CMESC further stated that it is
unnecessary to set a higher amount or utilize a dynamic calculation to
comply with Rule 17Ad-22(e)(4).\227\
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\222\ SIFMA & AMG I at 15; FIA at 10. A covered clearing
agency's contribution of its own funds to its default waterfall is
often referred to as ``skin in the game.'' See CCA Standards
Adopting Release, supra note 6, 81 FR at 70805.
\223\ SIFMA & AMG I at 15-16; FIA at 10.
\224\ SIFMA & AMG I at 15.
\225\ Id. at 16; FIA at 10.
\226\ CMESC Response Letter at 7.
\227\ Id.
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The appropriate amount of a clearing agency's own contribution to
its default management process varies depending on the structure of the
clearing agency, the characteristics of the assets cleared, and the
markets served by the clearing agency, and registered clearing agencies
have taken different approaches to applying their own resources to the
default management process. The Commission does not require that a CCA
have ``skin-in-the-game'' to address or allocate losses, and Rule 17Ad-
22(e)(4)(iii), which was cited by commenters to support their argument
for greater ``skin-in-the-game,'' does not require any particular
amount of ``skin-in-the-game.'' \228\ Previously, the Commission has
considered commenters' views regarding requirements for ``skin-in-the-
game,'' stating that such new requirements can help successfully manage
the divergent incentives of a CCA's owners and participants and could
be appropriate in the future.\229\ However, as the Commission has also
stated, it is appropriate to provide a CCA with flexibility, subject to
its responsibilities as a self-regulatory organizations (``SRO'') under
the Exchange Act, to structure its default management processes to take
into account the particulars of its financial resources, ownership
structures, and risk management frameworks.\230\ Furthermore, the
proper alignment of incentives is an important element of a CCA's risk
management practices, and ``skin-in-the-game'' may play a role in those
risk management practices in many instances but in other instances may
not be essential to a governance framework.\231\ CMESC is afforded this
flexibility under the CCA regulatory framework and has the discretion
to size its corporate contribution subject to its obligations and
responsibilities as an SRO under the Exchange Act. Setting aside the
size of the corporation contribution CMESC determines to
[[Page 55941]]
include in its default waterfall, CMESC is required by Rule 17Ad-
22(e)(4)(iii) to maintain written policies and procedures reasonably
designed to maintain financial resources to cover a wide range of
foreseeable stress scenarios, including the default of the largest
participant family in extreme but plausible market conditions.\232\ For
the reasons previously discussed in Part III.E.2.c), CMESC Rules are
consistent with the requirements of Rule 17Ad-22(e)(4)(iii).
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\228\ See Covered Clearing Agency Resilience and Recovery and
Orderly Wind-Down Plans, Release No. 34-101446 (Oct. 25, 2024), 89
FR 91000, 91037 (Nov. 18, 2024) (``RWP Adopting Release''); CCA
Standards Adopting Release, supra note 6, 81 FR at 70805-06.
\229\ See RWP Adopting Release, supra note 228, 89 FR at 91037;
Clearing Agency Governance and Conflicts of Interest, Release No.
34-98959 (Nov. 16, 2023), 88 FR 84454, 84504 (Dec. 5, 2023); CCA
Standards Adopting Release, supra note 6, 81 FR at 70806.
\230\ See CCA Standards Adopting Release, supra note 6, 81 FR at
70806.
\231\ See id.
\232\ See 17 CFR 240.17ad-22(e)(4)(iii).
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Two commenters requested that CMESC obtain legal opinions relating
to the default management aspects of CMESC's margin framework (i.e.,
confirming the bankruptcy remoteness of a participant's margin held by
CMESC).\233\ CMESC responded that it believes its rules are ``built on
a well-founded, transparent and enforceable legal basis, consistent
with Rule 17Ad-22(e).'' \234\ Regarding legal opinions, the Commission
has previously stated that ``[b]ecause the appropriate use of legal
opinions will vary on a case-by-case basis, the Commission does not
believe it is appropriate to modify Rule 17Ad-22(e)(1) to include a
specific requirement for legal opinions addressing particular
matters.'' \235\ Accordingly, CMESC's response is consistent with
Commission rules.
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\233\ See SIFMA & AMG I at 4; FIA at 4. These requests for legal
opinions relate to CMESC's ability to safeguard securities and funds
for which it is responsible, which implicate the Commission's
required determination in Section 17A(b)(3)(F) of the Exchange Act.
See supra note 24 and accompanying text.
\234\ CMESC at 9-10.
\235\ See CCA Standards Adopting Release, supra note 6, 81 FR at
70801-02.
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In addition, with respect to certain commenters' views regarding
the costs of default management, Rule 17Ad-22(e)(23)(ii) under the
Exchange Act requires covered clearing agencies 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.\236\ Two commenters sought clarity regarding
whether CMESC's rules addressing the costs associated with default
management were consistent with the requirements in Rule 17Ad-
22(e)(23)(ii).\237\ One commenter requested additional clarity
regarding CMESC's assessment of Member obligations under default
management rules to ensure its compliance with Rule 17Ad-
22(e)(23)(ii).\238\ First, the commenter stated a concern that, after a
voluntary withdrawal from CMESC, a resigning Member's potential
obligation to CMESC in respect of the Guaranty Fund could extend over a
period of unknown duration.\239\ The commenter suggested that CMESC
specify when withdrawals become effective to help CMESC comply with
Rule 17Ad-22(e)(23)(ii).\240\ Next, the commenter requested that CMESC
include more specific information about its assessments for its CLF
after a Member default.\241\ Citing the lack of clarity about CMESC's
CLF calculations, the commenter stated that further information would
be consistent with CMESC's obligations under Rule 17Ad-
22(e)(23)(ii).\242\
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\236\ 17 CFR 240.17ad-22(e)(23)(ii).
\237\ FIA at 6-7; SIFMA & AMG I at 14.
\238\ FIA at 5-6, 14.
\239\ See id. at 5-6; see also SIFMA & AMG I at 6 (further
noting that a voluntary withdrawal is permitted with ten business
days' notice, but that withdrawals are not effective until they have
been accepted by CMESC).
\240\ See FIA at 6.
\241\ See id. at 6-7.
\242\ See id.
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Another commenter cited Rule 17Ad-22(e)(23)(ii) in its request that
CMESC provide participants with more specific information about its
Members' required contributions under its CLF.\243\ Specifically, the
commenter stated that ``[a]t a minimum, CMESC should provide
significantly more clarity'' on how its CLF will work.\244\ The
commenter stated that CMESC must provide this information to comply
with Rule 17Ad-22(e)(23)(ii) so its participants may be able to
``identify and evaluate the risks, fees, and other material costs they
incur by participating in CMESC's clearing and settlement services.''
\245\
---------------------------------------------------------------------------
\243\ See SIFMA & AMG I at 14.
\244\ See id.
\245\ See SIFMA & AMG I at 14.
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CMESC submitted a response to these commenters regarding the
sufficiency of information provided for its default management rules
(specifically, regarding costs to Members: (i) under the CLF; and (ii)
after submitting a Member Withdrawal).\246\ Regarding requests for more
specific information about its CLF, CMESC stated that it designed its
CLF to meet the requirements of Rule 17Ad-22(e)(7).\247\ CMESC also
explained that, while it believes its rules are consistent with Rule
17Ad-22(e)(23)(ii), CMESC recognizes the importance of continued
engagement with market participants on the operations of its CLF.\248\
Regarding requests for more specific information about Members'
obligations to continue Guaranty Fund contributions and Default
Assessments after submitting a Member Withdrawal, CMESC stated that it:
(i) ``will continue to consider them;'' and (ii) ``not[es] that they
are unrelated to whether CMESC's default management rules are
consistent with the Exchange Act and the rules and regulations
thereunder, which they are.'' \249\
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\246\ See CMESC Response Letter.
\247\ Id. at 5.
\248\ Id.
\249\ Id. at 6.
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Separate from Commission rules regarding default management, Rule
17Ad-22(e)(23)(ii) requires a covered clearing agency 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,\250\ but it allows a covered clearing
agency to consider its unique characteristics and circumstances when
developing its written policies and procedures (including those
addressing the sufficiency of information it provides to its
participants about the costs associated with default management).\251\
Given CMESC's approach to risk management as set forth in its Rules and
Procedures, as described above, CMESC's approach is consistent with
Rule 17Ad-22(e)(23)(ii).
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\250\ 17 CFR 240.17ad-22(e)(23)(ii).
\251\ CCA Standards Adopting Release, supra note 6, 81 FR at
70800 (explaining that these considerations may include ownership
and governance structures, effect on direct and indirect
participants, participant base, markets served, and the risks
inherent in products cleared).
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F. Participant Discipline
1. Statutory Standard and Analysis: Section 17A(b)(3)(G)
Section 17A(b)(3)(G) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency provide that (subject to any rule or
order of the Commission pursuant to Sections 17(d) or 19(g)(2) of the
Exchange Act) its participants shall be appropriately disciplined for
violation of any provision of the rules of the clearing agency by
expulsion, suspension, limitation of activities, functions, and
operations, fine, censure, or any other fitting sanction.
With respect to discipline and sanctions, CMESC Rules provide that
CMESC may discipline any Member or User for a violation of any
provision of CMESC Rules or Procedures, such Member's or User's
agreements with CMESC, or for any error, delay, or other conduct
detrimental to CMESC, or for not providing adequate facilities for such
Member's or User's business with CMESC, by expulsion, suspension,
limitation of or restriction on activities, functions, and operations,
fine or censure, or any other appropriate
[[Page 55942]]
sanction.\252\ CMESC Rules further provide that it may impose a fine,
not to exceed $2,500, on any Member or User for any violation of a
CMESC Rule or Procedure that CMESC determines is minor in nature in
lieu of commencing a disciplinary proceeding.\253\
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\252\ CMESC Rules, at Rule 1001(b).
\253\ CMESC Rules, at Rule 1011(a).
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CMESC has procedures for enforcing rules and disciplining Members
and Users that are consistent with the requirements of the Exchange
Act. CMESC's rules provide it with authority to discipline Members and
Users for rule violations and to impose each of the sanctions
enumerated in the Exchange Act. Accordingly, the Commission determines
that CMESC Rules provide that its participants shall be appropriately
disciplined for violation of any provision of the rules consistent with
the requirements of Section 17A(b)(3)(G) of the Exchange Act.
2. Statutory Standard and Analysis: Section 17A(b)(3)(H)
Section 17A(b)(3)(H) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency, in general, provide a fair procedure
with respect to the disciplining of participants, the denial of
participation to any persons seeking participation therein, and the
prohibition or limitation by the clearing agency of any person with
respect to access to services offered by the clearing agency.\254\
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\254\ Section 17A(b)(3)(H) of the Exchange Act also states that
the rules of the clearing agency must be in accordance with the
provisions of Section 17A(b)(5) of the Exchange Act.
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CMESC Rules state that CMESC shall notify a Member or User in
writing of the specific charges against such Member or User and its
right to a hearing before CMESC imposes any disciplinary sanction on a
Member or User.\255\ In addition, under its rules, CMESC shall notify a
Member, User, or other person in writing of any adverse action to be
taken, the specific grounds for the action under consideration, and
such Member's, User's or other person's right to a hearing for any of
the following adverse actions: (i) disapproving an application for
Member or User status (including the disapproval of an application for
Member or User status with respect to a specific Eligible Securities
Transaction for which CMESC offers clearing services); or (ii) taking
any other action which prohibits or limits access by a Member, User, or
other person to services offered by CMESC (other than imposing a
disciplinary sanction).\256\
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\255\ CMESC Rules, at Rule 1002(a).
\256\ CMESC Rules, at Rule 1002(b).
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Pursuant to CMESC Rules, the Member or User receiving a notice of
disciplinary charges shall have fifteen Business Days after service of
such notice to file a written answer thereto.\257\ The answer shall be
filed with the Secretary of CMESC, and shall include a request for a
hearing.\258\ The answer shall specifically admit or deny each
allegation contained in the notice of charges, and the Member or User,
as Respondent,\259\ shall be deemed to have admitted any allegation not
specifically denied.\260\ With respect to a disciplinary action or
adverse action to be taken against a Respondent, if an answer has been
filed in a timely fashion, then pursuant to its Rules CMESC shall
(unless the Respondent and CMESC have stipulated to the imposition of
an agreed-upon sanction) schedule a hearing on the noticed
charges.\261\ Under CMESC Rules, a hearing panel (``Hearing Panel'')
will be composed of three disinterested members of the Board of
Directors appointed for the purpose by the Chairman of the Board of
Directors.\262\ CMESC's Head of Legal, or their designee, shall serve
as counsel to the Hearing Panel.\263\ The Respondent or Interested
Person shall be given not less than three days advance notice of the
place and time of the hearing.\264\ At the hearing, the Respondent or
Interested Person shall be afforded the opportunity to be heard and to
present evidence on its behalf and may be represented by counsel.\265\
CMESC will be represented by staff or a designee of CMESC.\266\ Upon
request, the Hearing Panel is required to advise the Respondent of its
decision and the grounds upon which its decision is based with a
written statement.\267\ If the decision imposes a disciplinary
sanction, the written statement shall set forth: (i) any act or
practice in which the Respondent has been found to have been engaged or
omitted; (ii) the specific provisions of the Rules or Procedures of
CMESC which any such act, practice, or omission has been deemed to
violate; and (iii) the sanction imposed and the reasons therefor.\268\
Pursuant to its Rules, if CMESC imposes a final disciplinary sanction
or any other adverse action on any Member or User, CMESC shall promptly
file notice thereof with the Commission and the appropriate regulatory
agency for such Member, User, or other person (if other than the
Commission).\269\
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\257\ CMESC Rules, at Rule 1003.
\258\ CMESC Rules, at Rule 1003.
\259\ ``Respondent'' refers to the Member or User receiving a
notice of disciplinary charges under CMESC Rules, Rule 1002. CMESC
Rules, at Rule 1003(a).
\260\ CMESC Rules, at Rule 1003.
\261\ CMESC Rules, at Rule 1004(a).
\262\ CMESC Rules, at Rule 1004(b).
\263\ CMESC Rules, at Rule 1004(b).
\264\ CMESC Rules, at Rule 1004(c). An ``Interested Person''
means a Member, User, or other person receiving notice of an adverse
action by CMESC. CMESC Rules, at Rule 1003(b).
\265\ CMESC Rules, at Rule 1004(d).
\266\ CMESC Rules, at Rule 1004(d).
\267\ CMESC Rules, at Rule 1005(a).
\268\ CMESC Rules, at Rule 1005(b).
\269\ CMESC Rules, at Rule 1013.
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CMESC Rules provide that, prior to the issuance of the written
statement of decision, the Respondent and CMESC may agree to a
settlement resolving the disciplinary action or adverse action.\270\
The proposed settlement must be submitted to a Hearing Panel, and must
include an agreed stipulation of facts and a specified sanction or
adverse action.\271\ Where the Hearing Panel accepts the proposed
settlement, it shall promptly issue a decision consistent with the
terms of such settlement.\272\ Where the Hearing Panel rejects the
proposed settlement, it shall notify the parties and the matter shall
proceed as if the offer had not been made, and the offer and all
documents relating thereto shall not become part of the record.\273\
The decision of the Hearing Panel to accept or reject a proposed
settlement shall be final and not subject to appeal.\274\
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\270\ CMESC Rules, at Rule 1006.
\271\ CMESC Rules, at Rule 1006.
\272\ CMESC Rules, at Rule 1006.
\273\ CMESC Rules, at Rule 1006.
\274\ CMESC Rules, at Rule 1006. In addition, CMESC may at any
time establish procedures for a hearing not otherwise set forth in
CMESC Rules with respect to any action or proposed action of CMESC
so long as the Member, User, or other person is given notice and an
opportunity to be heard and there is a record of the decision along
with the reasons for that decision. CMESC Rules, at Rule 1009.
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Any fine imposed pursuant to CMESC Rules and not contested shall
not be publicly reported, except as may be required by Rule 19d-1 under
the Exchange Act or as may be required by any other regulatory
authority.\275\ In any action taken by CMESC pursuant to CMESC Rules,
the person against whom a fine is imposed shall be served with a
written statement signed by an authorized officer of CMESC, setting
forth: (i) the CMESC Rule or Rules alleged to have been violated; (ii)
the act or omission constituting each such violation; (iii) the fine
imposed for each such violation; and (iv) the date such determination
becomes final and such fines become due and payable, such date to be
not less than fifteen business
[[Page 55943]]
days after the date of service of the written statement.\276\ If any
person against whom a fine is imposed pursuant to CMESC Rules pays the
fine, such payment shall be deemed a waiver by such person of such
person's right to a disciplinary proceeding and any review of the
matter by the Board.\277\ Any person against whom a fine is imposed
pursuant to CMESC Rule 1011 may contest CMESC's determination by filing
a written answer at which point the matter shall become a disciplinary
proceeding.\278\ In any such disciplinary proceeding, if the Hearing
Panel determines that the Member or User is found to have violated
CMESC's Rules or Procedures as charged, the Hearing Panel shall also
determine if the rule violation is minor in nature.\279\ If the Hearing
Panel determines that the rule violation is minor, then the Panel may
only impose sanctions in accordance with the Rules.\280\ If the Hearing
Panel determines that the rule violation is not minor, then it is free
to impose any disciplinary sanctions it deems appropriate.\281\
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\275\ CMESC Rules, at Rule 1011(a).
\276\ CMESC Rules, at Rule 1011(b).
\277\ CMESC Rules, at Rule 1011(c).
\278\ CMESC Rules, at Rule 1011(d).
\279\ CMESC Rules, at Rule 1011(d).
\280\ CMESC Rules, at Rule 1011(d).
\281\ CMESC Rules, at Rule 1011(d).
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CMESC Rules provide any aggrieved party the right to request an
appeal to the full Board of Directors from any decision of a Hearing
Panel of CMESC.\282\ Appeals shall be made by filing a written notice
of a request for an appeal with the Secretary of CMESC within five
business days after notification by CMESC of the decision from which
the request for an appeal is made.\283\ The notice shall state with
particularity the decision complained of, the appellant's reasons for
taking exception to the decision, and the relief sought.\284\ The Board
shall determine whether to grant or deny any request for an appeal
filed with CMESC.\285\ If the Board chooses to grant a request for an
appeal, the Board shall affirm, reverse, modify, or remand for further
consideration the Hearing Panel's decision within ten business days
after the Board receives the notice of appeal.\286\ The Board in its
discretion may determine to open the record for introduction of
evidence or to provide the parties with the opportunity for a further
hearing.\287\ If the Board determines to provide for a further hearing,
the Board shall provide notice to the parties of the place and time of
the hearing at the same time as it provides notice that the Hearing
Panel decision is being reviewed by the Board.\288\ Unless the Board
opens the record for the introduction of evidence or to hear argument,
the Board's review shall be upon the record as certified to the Board
by the Secretary of CMESC.\289\ The Board's decision shall be made in
writing and shall state the reasons for its conclusions.\290\ Copies of
the Board's decisions shall be furnished to the appellant, the
Commission, and the appropriate regulatory agency for the appellant (if
other than the Commission).\291\ Each notice of appeal, together with
the record of the appeal and any decision shall be filed in the
permanent records of CMESC.\292\
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\282\ CMESC Rules, at Rule 1101.
\283\ CMESC Rules, at Rule 1102(a).
\284\ CMESC Rules, at Rule 1102(a).
\285\ CMESC Rules, at Rule 1102(b).
\286\ CMESC Rules, at Rule 1102(c).
\287\ CMESC Rules, at Rule 1103(a).
\288\ CMESC Rules, at Rule 1103(a).
\289\ CMESC Rules, at Rule 1103(a).
\290\ CMESC Rules, at Rule 1103(b).
\291\ CMESC Rules, at Rule 1103(c).
\292\ CMESC Rules, at Rule 1104(b).
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As described, CMESC has established procedures to ensure that any
Member or User assessed with a rule violation receives notice of the
alleged violation, and is afforded an opportunity to contest the
allegations, including by requesting a hearing at which the participant
may be represented by counsel. CMESC's procedures address disciplining
of participants, denial of participation, and prohibitions or
limitations imposed by the clearing agency with respect to access to
services offered by the clearing agency. The Commission therefore
determines that CMESC Rules provide a fair procedure consistent with
Section 17A(b)(3)(H) of the Exchange Act.
G. Burden on Competition
1. Statutory Standard: Section 17A(b)(3)(I)
Section 17A(b)(3)(I) of the Exchange Act states that a clearing
agency shall not be registered unless the Commission determines that
the rules of the clearing agency do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
2. Summary of Application and Analysis
As discussed in Part III.B, CMESC's rules permit all of the
participant categories required by Section 17A(b)(3)(B) of the Exchange
Act to be Members or Users. In addition, as contemplated by Section
17A(b)(4)(B), CMESC's Rules state that CMESC may deny participation, or
condition participation, based on: (i) general operational, and, for
Members, financial requirements; (ii) minimum financial responsibility
standards (specific to business type) for Members and Users; and (iii)
the existence and maintenance of policies and procedures addressing
minimum operational, and, for Members, risk monitoring
requirements.\293\
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\293\ See CMESC Rules, at Rules 302, 306, 307.
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One commenter generally discussed the topic of competition,
requesting clarity about CMESC's ``Trade Submission Requirement.''
\294\ This commenter asked CMESC to clarify that: (i) its rules do not
require a participant to become a participant of a different clearing
agency if CMESC rejects any trade submitted by that participant due to
``operational or clerical errors;'' (ii) in conjunction with the
Commission, that CMESC should explicitly clarify that, ``in general,
the Commission's trade submission rule does not impose an obligation on
U.S. Treasury clearing agencies to require direct participants to
become participants of a different clearing agency in order to ensure
they have the ability to clear the full scope of Eligible Secondary
Market Transactions offered by all U.S. Treasury clearing agencies;''
and (iii) in reference to CMESC's Rule 202, that the Commission
``should make clear that any trade submission requirement for new types
of Eligible Secondary Market Transactions will be subject to procedural
protections, including notice
[[Page 55944]]
by the clearing agency, public comment and delayed effectiveness.''
\295\
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\294\ Letter from Katherine Darras, General Counsel,
International Swaps and Derivatives Association, dated Mar. 10, 2025
(``ISDA I''), at 7. While not directly referencing either Section
17A(b)(3)(I) of the Exchange Act or competition, another comment
addressed participation in CMESC by a specific type of entity
registered with the Commodity Futures Trading Commission (``CFTC'')
(i.e., futures commission merchants (``FCMs'')) and by non-U.S.
banks. FIA at 1, 14-15. Citing Rule 17d-22(e)(18)(iv)(C), the
commenter requests CMESC modify the requirements and
responsibilities of participation for the benefit of FCMs and non-
U.S. banks (e.g., regarding regulatory capital treatment and risk
management). FIA at 1, 2 n.6, 3-4, 10, 15, 20. CMESC responded to
this comment, stating that its rules comply with the Exchange Act
and the rules and regulations thereunder regarding risk management
and that these requests are outside the scope of the Application.
CME Response Letter at 6, 9. The changes sought by the commenter are
not required by Rule 17Ad-22(e)(18)(iv)(C), because the rule does
not require that a CCA provide particular access models. Treasury
Clearing Adopting Release, supra note 81, 89 FR at 2757-58. However,
a CCA in the U.S. Treasury market generally should seek to provide
access in as flexible a means as possible, consistent with its
responsibility to provide sound risk management and comply with
other provisions of the Exchange Act, the Covered Clearing Agency
Standards, and other applicable regulatory requirements, and it
generally should consider a wide variety of 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. Id. at 2760.
\295\ ISDA I at 8; see also CMESC Rules, at Rule 202(a)
(defining an ``Eligible Secondary Market Transaction'' as ``an
`eligible secondary market transaction' as that term is defined in
Rule 17[A]d-22(a) under the [Exchange Act]''); 17 CFR 240.17ad-22(a)
(defining ``Eligible secondary market transaction'').
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CMESC submitted a response to this commenter.\296\ In its response,
CMESC explained that its rules do not require participation in another
clearing agency if CMESC rejects any transaction submitted for
clearing; \297\ rather, CMESC explained that the Member may, for
example, correct and resubmit the trade to CMESC.\298\ Additionally,
CMESC stated that only the Commission would have the ability to delay
the effective date of any future revision to the Commission's ``Trade
Submission Requirement,'' and therefore the request was ``beyond the
scope of [CMESC's A]pplication.'' \299\ The Commission agrees with
CMESC's responses to this commenter; specifically: (i) that neither
CMESC Rules nor Commission rules require a clearing participant to
become a participant at multiple clearing agencies for U.S. Treasury
securities; and (ii) that CMESC does not have authority to delay the
implementation of any future Commission rules (and that any discussion
thereof is outside of CMESC's Application for registration).\300\ Any
futures changes to CMESC Rules that govern Eligible Securities
Transactions (e.g., Rule 202, ``Eligible Secondary Market
Transactions'') must comply with the rule filing requirements under
Section 19(b) of the Exchange Act and Rule 19b-4 thereunder.\301\
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\296\ See CMESC Response Letter.
\297\ CMESC Response Letter at 4 (``Nor does any CMESC Rule or
Procedure impose requirements on Members that would operate in a
manner to compel them to belong to another clearing agency for any
reason, including if CMESC were to reject any transaction submitted
for clearing, in which scenario the Member would control how it
should comply with its obligation.'').
\298\ CMESC Response Letter at 4 (``The Member could resubmit
the transaction to CMESC in accordance with CMESC's Rules, arrange
for the transaction to be cleared at another covered clearing
agency--which does not mean the Member must be a direct participant
of that clearing agency as other indirect means of access may be
available--or take other action to ensure compliance with the
clearing obligation'').
\299\ CMESC Response Letter at 4.
\300\ The commenter also requests that the Transaction
Submission Requirement align with the CFTC framework for mandatory
clearing, which is outside the scope of the Commission's
consideration of CMESC's Application for registration as a clearing
agency. See FIA at 14.
\301\ See 15 U.S.C. 78s(b); 17 CFR 240.19b-4. One commenter, FIA
at 16-17, requested that CMESC explain how it might establish or
support a cross-margining arrangement between CMESC and its Chicago
Mercantile Exchange, Inc., its derivatives clearing organization
affiliate. Such arrangement is not included as part of CMESC's
Application, and does not bear on any Commission rule requirement
or, more generally, the standard for registration as a clearing
agency.
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More generally, in the context of establishing standards for
participation, CMESC's rules may impact competition among market
participants by restricting access of its clearing services for market
participants unable to meet its standards for participation; however,
such a burden on competition can be in furtherance of, and consistent
with, the Exchange Act, including Sections 17A(b)(3)(B), 17A(b)(4)(B),
and 17A(b)(3)(F) thereof.\302\ Consistent with Section 17A(b)(4)(B) of
the Exchange Act, for example, CMESC may deny participation or
condition participation based on its rules' standards for ``financial
responsibility, operational capability, experience, and competence.''
\303\ As discussed in Part III.B, CMESC's participation requirements
distinguish among participant types to allow CMESC to manage the
different risks presented by each participant type. Specifically,
participation requirements that establish financial and operational
competency standards tailored to each entity type (e.g., different
financial standards for broker-dealers than for banks, owing to the
different characteristics of these entity types) and by participation
category (e.g., different operational standards for Members than for
Users, owing to the different ways in which these entity types interact
directly with the clearing agency) help ensure that CMESC Rules ``are
designed to sufficiently protect [CMESC] from risk associated with
failure to meet those competencies.'' \304\ Because such participation
requirements enable CMESC to manage, mitigate, and, where possible,
reduce the risk it faces in its capacity as a CCP, the Commission
determines that CMESC's rules are not designed to permit unfair
discrimination in the admission of participants or among participants
in the use of the clearing agency.\305\ Similarly, should CMESC's
financial and operational competency standards impact competition,
these standards are in the furtherance of assuring CMESC's safeguarding
of securities and funds in CMESC's custody or control. Therefore, the
Commission determines that CMESC's rules do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\306\ Additionally, CMESC's participation standards
may provide a new way to access clearing for transactions in U.S.
Treasury securities for market participants that do not currently
participate in a registered clearing agency for U.S. Treasury
securities.\307\ In expanding such access to the national system for
clearance and settlement, CMESC's participation rules may present new
opportunities for its Members and Users to gain efficiencies from the
cross-margining of their transactions, either within the market for
U.S. Treasury securities specifically or in other markets where the use
of U.S. Treasury securities as collateral helps facilitate the risk
management that supports clearance and functions. Therefore, the
Commission determines, pursuant to Section 17A(b)(3)(F) of the Exchange
Act, that the CMESC Application fosters cooperation and coordination
with persons engaged in the clearance and settlement of securities
transactions and removes impediments to, and perfects the mechanism of
a national system for the prompt and accurate clearance and settlement
of securities transactions.\308\
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\302\ 15 U.S.C. 78q-1(b)(3)(B), (b)(4)(B), (b)(3)(F).
\303\ 15 U.S.C. 78q-1(b)(4)(B).
\304\ See FICC Registration, supra note 13, 78 FR at 39031.
\305\ 15 U.S.C. 78q-1(b)(3)(F).
\306\ 15 U.S.C. 78q-1(b)(3)(F).
\307\ Specifically, a firm may be motivated to enter the U.S.
Treasuries market: (i) as a User, if that firm would be unable
become a Member (and would be unable to access CMESC's clearance and
settlement services if CMESC did not allow User participation); and
(ii) as a Member, if that firm sought the business of potential
Users who require a Member's sponsorship to access CMESC's clearance
and settlement services.
\308\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion
For the reasons discussed above, the Commission finds that CMESC
satisfies the requirements for registration as a clearing agency,
including those requirements set forth in Section 17A of the Exchange
Act and Commission rules and regulations thereunder.\309\
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\309\ 15 U.S.C. 78q-1(b)(3).
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It is hereby ordered that the application for registration as a
clearing agency filed by CME Securities Clearing, Inc. (File No. 600-
44) pursuant to Sections 17A and 19(a) of the Exchange Act be, and
hereby is, approved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-21908 Filed 12-3-25; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on December 4, 2025.
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