Proposed Rule2025-23150
Proposal To Provide Exemptive Relief To Facilitate Cross-Margining of Customer Positions Cleared at Chicago Mercantile Exchange, Inc. and Fixed Income Clearing Corporation
Primary source
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Published
December 17, 2025
Issuing agencies
Commodity Futures Trading Commission
Abstract
The Commodity Futures Trading Commission ("CFTC" or "Commission") is proposing to issue an order pursuant to the Commodity Exchange Act ("CEA") that would provide exemptive relief from the CEA and Commission regulations related to segregation and protection of futures customer funds. The order would permit joint clearing members of the Chicago Mercantile Exchange, Inc. ("CME") and the Fixed Income Clearing Corporation ("FICC") that are dually registered as broker-dealers with the Securities and Exchange Commission ("SEC") and futures commission merchants ("FCMs") with the Commission ("BD-FCMs") to hold futures customer funds in a commingled customer account at FICC.
Full Text
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<title>Federal Register, Volume 90 Issue 240 (Wednesday, December 17, 2025)</title>
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[Federal Register Volume 90, Number 240 (Wednesday, December 17, 2025)]
[Proposed Rules]
[Pages 58525-58539]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-23150]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Proposal To Provide Exemptive Relief To Facilitate Cross-
Margining of Customer Positions Cleared at Chicago Mercantile Exchange,
Inc. and Fixed Income Clearing Corporation
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed order and request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is proposing to issue an order pursuant to the
Commodity Exchange Act (``CEA'') that would
[[Page 58526]]
provide exemptive relief from the CEA and Commission regulations
related to segregation and protection of futures customer funds. The
order would permit joint clearing members of the Chicago Mercantile
Exchange, Inc. (``CME'') and the Fixed Income Clearing Corporation
(``FICC'') that are dually registered as broker-dealers with the
Securities and Exchange Commission (``SEC'') and futures commission
merchants (``FCMs'') with the Commission (``BD-FCMs'') to hold futures
customer funds in a commingled customer account at FICC.
DATES: Comments must be received by January 16, 2026.
ADDRESSES: You may submit comments by any of the following methods:
<bullet> CFTC Comments Portal: <a href="https://comments.cftc.gov">https://comments.cftc.gov</a>. Select
the ``Submit Comments'' link for this proposed order and follow the
instructions on the Public Comment Form.
<bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
<bullet> Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods.
Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
<a href="https://comments.cftc.gov">https://comments.cftc.gov</a>. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (FOIA), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
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\1\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter 1 (2025) and are accessible on the
Commission's website at <a href="https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm">https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm</a>.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse, or remove any or all of
your submission from <a href="https://comments.cftc.gov">https://comments.cftc.gov</a> that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, <a href="/cdn-cgi/l/email-protection#abcecfc4c5c4ddcac5ebc8cddfc885ccc4dd"><span class="__cf_email__" data-cfemail="a0c5c4cfcecfd6c1cee0c3c6d4c38ec7cfd6">[email protected]</span></a>, Robert B. Wasserman, Deputy Director,
202-418-5092, <a href="/cdn-cgi/l/email-protection#4d3f3a2c3e3e283f202c230d2e2b392e632a223b"><span class="__cf_email__" data-cfemail="60121701131305120d010e20030614034e070f16">[email protected]</span></a>, Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581; or Elizabeth Arumilli, Special
Counsel, 312-596-0632, <a href="/cdn-cgi/l/email-protection#086d697a7d6561646461486b6e7c6b266f677e"><span class="__cf_email__" data-cfemail="f2979380879f9b9e9e9bb291948691dc959d84">[email protected]</span></a>, Division of Clearing and
Risk, Commodity Futures Trading Commission, 77 West Jackson Boulevard,
Suite 800, Chicago, IL 60604.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. The Petition
B. Background
II. Section 4(c) of the CEA
III. Segregation of Customer Funds
A. Commingling
B. Protection for the Margin of Cross-Margining Participants in
the Event of a BD-FCM Bankruptcy
C. Protection for the Collateral Posted by Cross-Margining
Customers in the Event of a FICC Bankruptcy or a Proceeding Under
Title II of the Dodd-Frank Act
D. Protection for Customers Not Participating in Cross-Margining
IV. Customer Protection--Permitted Depository
V. Proposed Partial and Conditional Exemption From Section 4d of the
CEA and Commission Regulations 1.20 and 1.49
VI. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost and Benefit Considerations
D. Section 15(a) Factors
VII. Request for Comment
VIII. Proposed Order of Exemption
I. Introduction
A. The Petition
CME and FICC (``Petitioners'') have petitioned the Commission to
grant an exemptive order pursuant to section 4(c) of the CEA. The
exemptive order would provide relief necessary for Petitioners to make
their existing cross-margining arrangement available to certain
customers, as described below.\2\
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\2\ The petition is available at <a href="https://www.cftc.gov/sites/default/files/filings/documents/2025/CME_FICC_XM_4c_Request_">https://www.cftc.gov/sites/default/files/filings/documents/2025/CME_FICC_XM_4c_Request_</a>(Final_5.14.2025).pdf.
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The Commission is proposing to issue an order granting Petitioners
the relief sought, subject to certain conditions discussed below (the
``Proposed Order'').
B. Background
On January 16, 2024, the SEC promulgated a rule that, when
effective, will mandate the central clearing of most U.S. Treasury cash
and repurchase transactions (``Treasury Clearing Requirement'').\3\ The
Treasury Clearing Requirement is designed to reduce risk and increase
operational efficiency by requiring clearing of specified U.S. Treasury
security transactions through a central counterparty. Centralized
clearing reduces the risk of default by imposing a central counterparty
between buyers and sellers. A central counterparty can lower the
potential for a single market participant's failure to destabilize
other market participants or the financial system more broadly by
substituting its own creditworthiness and liquidity for the
creditworthiness and liquidity of the initial counterparties.\4\
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\3\ Standards for Covered Clearing Agencies for U.S. Treasury
Securities and Application of the Broker-Dealer Customer Protection
Rule With Respect to U.S. Treasury Securities, 89 FR 2714 (Jan. 16,
2024).
\4\ Id.
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Currently, only one central counterparty, FICC, provides
centralized clearing services for cash market transactions in U.S.
Treasury securities, and for repurchase and reverse purchase
transactions involving U.S. Treasury securities. FICC is registered as
a clearing agency with the SEC under the Securities Exchange Act of
1934 (``Exchange Act'') \5\ and is subject to regulation under section
17A of the Exchange Act, SEC Rule 17ad-22 (as a ``covered clearing
agency''),\6\ and other SEC rules. FICC is designated by the Financial
Stability Oversight Council (``FSOC'') as a systemically important
financial market utility (``SIFMU'').\7\
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\5\ 15 U.S.C. 78a et seq.
\6\ 17 CFR 240.17ad-22.
\7\ 12 U.S.C. 5463.
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Increasing clearing efficiency will decrease the cost to market
participants of the Treasury Clearing Requirement. One way to increase
clearing efficiency is through cross-margining arrangements that allow
for cross-margining of U.S. Treasury security positions with positions
in related products with correlated price risks held at another
clearing organization. Cross-margining arrangements allow joint members
or affiliated members of two clearing organizations to have their
initial margin requirements reduced by accounting for risk offsets
between positions held at each of the clearing organizations.\8\
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\8\ Efficiencies gained through the ability to net off-setting
risks within cross-margining arrangements may be affected by
existing rules and regulations for other, related resource
requirements. As one example, staff is aware that market
participants have raised potential concerns related to cross product
netting benefits under applicable capital rules.
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[[Page 58527]]
Petitioners have an existing cross-margining arrangement.\9\ CME
clears a variety of U.S. Treasury futures contracts and other interest
rate futures contracts that have price risks that are correlated with
U.S. Treasury security products cleared at FICC. CME is registered as a
derivatives clearing organization (``DCO'') with the Commission and is
subject to regulation under the Commodity Exchange Act (``CEA'') \10\
and Commission regulations. As a DCO, CME clears transactions in
futures contracts and options on futures contracts listed for trading
on the CME Group exchanges (and transactions in other types of
derivatives). CME is also designated by the FSOC as a SIFMU.
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\9\ See The Amended and Restated Cross-Margining Agreement
between FICC and CME dated January 22, 2024 (the ``FICC-CME XM
Agreement'') available at: https://www.dtcc.com/~/media/Files/
Downloads/legal/rules/ficc_cme_crossmargin_agreement.pdf.
\10\ 7 U.S.C. 1 et seq.
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The current cross-margining arrangement between the Petitioners is
offered to their joint clearing members and pairs of affiliated
clearing members for proprietary (non-customer) positions. The cross-
margining arrangement permits a participating joint clearing member or
pair of affiliated clearing members to have initial margin requirements
at FICC and CME reduced in response to risk offsets across positions in
futures on U.S. Treasury securities and other interest rate futures
cleared at CME and eligible Treasury market transactions cleared at
FICC. The arrangement has been approved by the Commission and the
SEC.\11\ Under the cross-margining arrangement, eligible positions of a
participating clearing member are identified and treated as a combined
portfolio for margin calculation purposes. Both FICC and CME use their
own margin models to calculate initial margin requirements for the
combined portfolio, then use the more conservative result to determine
the margin savings percentage to be applied to the portfolio. Each of
FICC and CME then requires the participating clearing member to post
initial margin in an amount calculated using its independent margin
model reduced by that margin savings percentage.
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\11\ See, most recently, CFTC, Request for Approval of Amended
and Restated Cross-margining Agreement and Service Level Agreement
between CME and FICC, (Sept. 1, 2023) available at <a href="https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizationRules/51167">https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizationRules/51167</a>; SEC, Self-Regulatory Organizations,
Fixed Income Clearing Corporation, Order Approving Proposed Rule
Change to Amend and Restate the Cross-Margining Agreement Between
FICC and CME, 90 FR 31043 (Jul. 11, 2025).
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This current cross-margining arrangement is only available for the
proprietary positions of clearing members, and not for the positions of
customers who clear through an intermediary. Excluding customer
positions may increase the costs of central clearing for customers
clearing both Treasury securities transactions and certain Treasury and
interest rate futures, by setting margin requirements that do not
account for the risk offsets of their combined portfolio and are thus
higher than those of clearing members who have access to cross-
margining.
Industry experts have called for expanded access to cross-
margining. The CFTC's Global Markets Advisory Committee (``GMAC'')
recommended that the Commission allow CME and FICC to make the benefits
of cross-margining available to a broad range of customers, including
customers subject to the new Treasury Clearing Requirement. The GMAC's
recommendation covered specific topics such as structure, customer
protection, and implementation.\12\ The Group of Thirty Working Group
on Treasury Market Liquidity also highlighted the need for expansion of
cross-margining to the customer level. In their report related to
Treasury market resilience, they suggested a review be conducted to
``examine impediments to the use of the cross-margining service that
FICC and [CME] have had in place since 2004'' and further opined that
``[w]ider use of cross-margining would reduce the risk that increases
in initial margin requirements on the futures leg of cash-futures basis
trades result in forced sales of Treasury securities . . . .'' \13\
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\12\ See CFTC Global Markets Advisory Committee Advances Key
Recommendations, CFTC Release No. 8860-24 (Feb. 8, 2024). The ``GMAC
Recommendation'' is available at <a href="https://www.cftc.gov/media/9591/gmac_FICC_CME110623/download">https://www.cftc.gov/media/9591/gmac_FICC_CME110623/download</a>.
\13\ See Group of Thirty Working Group on Treasury Market
Liquidity, U.S. Treasury Markets: Steps Toward Increased Resilience
(July 2021), available at: <a href="https://group30.org/publications/detail/4950">https://group30.org/publications/detail/4950</a>.
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Accordingly, CME and FICC seek to expand their existing cross-
margining program to make it available to certain customers.
Specifically, the cross-margining program would be available to
customers of joint clearing members of FICC and CME that are BD-FCMs.
The cross-margined positions and associated margin would be carried in
a futures customer account on the books and records of an eligible BD-
FCM and generally subject to the regulations and protections of the CEA
and Commission regulations, including CEA section 4d and the
Commission's regulations for segregation and protection of futures
customer funds.
This cross-margining expansion to customers, however, would
conflict with applicable legal requirements. Section 4d of the CEA
requires that futures customer funds be segregated and prohibits the
commingling of futures customer funds and futures customer positions
with any other positions and funds. However, section 4d further
provides that, ``in accordance with such terms and conditions as the
Commission may prescribe by rule, regulation, or order,'' futures
customer funds may be commingled with other customer funds.\14\ The
contemplated cross-margining arrangement would require that BD-FCMs
hold securities positions and associated funds in their futures
customer accounts.
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\14\ 7 U.S.C. 6d.
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In addition, section 4d requires that futures customer funds be
held with a bank or trust company, and section 5b(c)(2)(F) of the CEA
requires, in part, that a DCO hold member and participant funds in a
manner by which to minimize the risk of loss or of delay in the access
by the DCO to the assets and funds. Commission Regulations 1.20 and
1.49(d) implement these statutory requirements in part by limiting the
depositories that may hold futures customer funds to a bank or trust
company, an FCM, or a DCO. In the contemplated cross-margining
arrangement, futures customer funds would be held by FICC, a clearing
organization that is not a DCO, and is not a permitted depository for
futures customer funds.
Petitioners have consequently petitioned the Commission to grant an
exemptive order pursuant to section 4(c) of the CEA to provide relief
necessary for them to make their customer cross-margining arrangement
available to certain customers. Specifically, Petitioners seek
exemptive relief to:
<bullet> Permit BD-FCMs \15\ to deposit at FICC, and permit FICC to
hold, customer funds and margin associated with futures positions,
notwithstanding that FICC is not a permitted depository under section
4d of the CEA and Commission Regulations 1.20 and 1.49(d), and to
permit CME to treat FICC as a permissible location to hold customer
funds and margin even though FICC is not a permitted depository
[[Page 58528]]
under section 4d of the CEA and Commission Regulations 1.20 and
1.49(d); and
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\15\ Section 4(c) of the CEA provides that the Commission may
provide an exemption ``on its own initiative or on application of
any person,'' so parties receiving exemptive relief are not limited
to those who directly petition the Commission. 7 U.S.C. 6(c).
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<bullet> Permit BD-FCMs to hold in the futures account, as defined
in Commission Regulation 1.3, of the BD-FCM, securities positions and
associated funds together with the futures customer positions and funds
held by the BD-FCM.
II. Section 4(c) of the CEA
Section 4(c)(1) of the CEA empowers the Commission to ``promote
responsible economic or financial innovation and fair competition'' by
exempting any transaction or class of transactions (including any
person or class of persons offering, entering into, rendering advice or
rendering other services with respect to, the agreement, contract, or
transaction), from any of the provisions of the CEA, subject to
exceptions not relevant here.\16\ In enacting section 4(c), Congress
noted that its goal ``is to give the Commission a means of providing
certainty and stability to existing and emerging markets so that
financial innovation and market development can proceed in an effective
and competitive manner.'' \17\ The Commission may grant such an
exemption by rule, regulation, or order, after notice and opportunity
for hearing, and may do so on application of any person or on its own
initiative.
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\16\ 7 U.S.C. 6(c)(1).
\17\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
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Section 4(c)(2) of the CEA provides that the Commission may grant
exemptions to section 4(a) under section 4(c)(1) only when it
determines that the requirements for which an exemption is being
provided should not be applied to the agreements, contracts, or
transactions at issue; that the exemption is consistent with the public
interest and the purposes of the CEA; that the agreements, contracts,
or transactions will be entered into solely between appropriate
persons; and that the exemption will not have a material adverse effect
on the ability of the Commission or any contract market or derivatives
transaction execution facility to discharge its regulatory or self-
regulatory responsibilities under the CEA.\18\
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\18\ 7 U.S.C. 6(c)(2).
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The Commission preliminarily believes that issuing the Proposed
Order which grants the exemption sought by Petitioners is in the public
interest and would promote responsible economic and financial
innovation and fair competition. While not concluding section 4(c)(2)
applies to the proposed order, the Commission also preliminarily
believes that the proposed order would meet the standards in section
4(c)(2) of the CEA. The discussion below describes why the Commission
has reached this preliminary conclusion.
III. Segregation of Customer Funds
The protection of customers--and the safeguarding of money,
securities, or other property deposited by customers--is a fundamental
component of the regulatory and oversight framework of the futures and
swaps markets. Section 4d(a)(2) of the CEA requires an FCM to segregate
from its own assets all money, securities, and other property deposited
by futures or cleared swaps customers to margin, secure, or guarantee
their futures, options on futures, or cleared swaps positions. Section
4d(a)(2) further requires an FCM to treat customer funds as belonging
to the customer and prohibits an FCM from using the funds deposited by
a customer to margin or extend credit to any person other than the
customer that deposited the funds. Similarly, section 4d(b) of the CEA
prohibits a DCO and any depository that has received such funds from
holding, disposing of, or using such funds as belonging to the
depositing FCM or any person other than the customers of such FCM.
Customer segregation is an essential protection to ensure funds are
held exclusively as the property of customers, even during an FCM
insolvency.
CEA section 4d(a)(2) prohibits commingling futures customer
positions executed on a contract market, and futures customer funds
supporting such positions, with any property not required to be so
segregated. Commingling of futures customer funds with other funds may
take place only in accordance with such terms as the Commission may
provide by rule, regulation, or order. Further, Commission Regulation
1.20 requires FCMs and DCOs to separately account for all futures
customer funds and segregate such funds as belonging to futures
customers, and it requires FCMs and DCOs to deposit futures customer
funds in a manner that identifies them as futures customer funds.
A. Commingling
The customer cross-margining arrangement under the Proposed Order
would allow a BD-FCM to commingle cross-margined securities positions
and associated margin with cross-margined futures positions and
associated margin. Permitting this commingling would allow for
provision of risk offsets for customer positions in futures and
securities cleared at CME and FICC through BD-FCMs.
CME and FICC detail in their petition the structure of the
arrangement they would implement under the Proposed Order and the way
it is designed to protect customer funds. At a high level, a customer
wishing to cross-margin its futures positions cleared at CME with its
securities positions cleared at FICC would elect to have its FICC-
cleared U.S. Treasury securities positions and associated funds held in
a commingled futures account at the BD-FCM, to facilitate margining all
of the positions as a portfolio. The BD-FCM would post funds to support
cross-margined futures positions with CME and funds to support cross-
margined securities positions with FICC. FICC would record cross-
margined securities positions and associated funds (``XM Securities
Customer Property'') in accounts on FICC's books and records, the
margin being recorded on FICC's books and records in margin accounts in
the name of the BD-FCM for the benefit of its cross-margining customers
(``FICC XM Customer Margin Accounts''). FICC would hold the margin in
either a Federal Reserve Bank of New York (``FRBNY'') account (the
``FICC FRBNY Segregated Account'') or at a commercial bank that is
insured by the Federal Deposit Insurance Corporation (a ``FICC
Segregated Bank Account'').
More specifically, the Proposed Order would permit, subject to
relevant terms and conditions, the following structure:
1. The BD-FCM would be required to carry all of a cross-margining
customer's positions and associated margin, including XM Securities
Customer Property held at FICC, in a futures account as defined in
Commission Regulation 1.3, subject to CEA section 4d(a) and related
Commission regulations as modified by the Proposed Order. This would
apply to both required collateral and any excess collateral.
2. The cross-margining customer would be required to: (a) agree to
have its XM Securities Customer Property carried in a futures account;
and (b) enter into a subordination agreement pursuant to which it would
agree that its claim for the return of XM Securities Customer Property
will not receive customer treatment under the Exchange Act or the
Securities Investor Protection Act of 1970 (``SIPA'') \19\ and that
such property will not be treated as ``customer property'' as defined
in section 741, subchapter III (stock broker liquidation) of chapter 7
of the U.S.
[[Page 58529]]
Bankruptcy Code in a liquidation of the BD-FCM.
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\19\ 15 U.S.C. 78aaa-78lll.
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3. FICC would record a cross-margining customer's cross-margined
securities positions in an account on its books and records for
recording a BD-FCM's cross-margining customers' transactions (``FICC XM
Customer Position Account'').
4. FICC would credit margin it collects from a BD-FCM for the BD-
FCM's cross-margining customers to an account on its books and records
in the name of the BD-FCM for the benefit of its customers (``FICC XM
Customer Margin Account''). FICC would hold all funds credited to the
FICC XM Customer Margin Accounts either in: (a) the FICC FRBNY
Segregated Account; \20\ or (b) a FICC Segregated Bank Account, each of
which would be opened in the name of FICC and clearly labeled, and for
accounts at a commercial bank, acknowledged as held for the benefit of
cross-margining customers.
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\20\ The CFTC has recognized important benefits to a clearing
organization of using Federal Reserve bank accounts. See 81 FR
53467, 53468 (noting the lower credit and liquidity risks with a
deposit at a Federal Reserve Bank than a deposit at a commercial
bank). As a SIFMU, FICC is permitted to have an account at a Federal
Reserve Bank, subject to requirements of the Federal Reserve,
particularly 12 CFR 234.5. FICC has an existing FRBNY bank account
currently used to maintain securities customer collateral that is
not associated with cross-margining (``Treasury Securities
Segregated Margin'').
FICC represents it is unable to obtain another separate Federal
Reserve account to hold cross-margining customer collateral. In
order to hold cross-margining customer collateral in an account at a
Federal Reserve Bank, FICC will need to, if permitted to do so, co-
locate securities customer collateral and cross-margining customer
collateral in the same FRBNY bank account to deposit both types of
collateral in a Federal Reserve Bank. As discussed further below in
section III.C, because FICC is not a registered DCO, and thus a FICC
bankruptcy would not be governed by subchapter IV of chapter 7 of
the Bankruptcy Code, 11 U.S.C. 761 et. seq., the implications of
such co-location of customer collateral are different than if FICC
were a registered DCO.
In connection with the customer cross-margining framework under
the Proposed Order, FICC would (if permitted by the Federal Reserve
to hold cash cross-margining customer collateral in the FRBNY
Segregated Account) amend its rules to provide that the FICC FRBNY
Segregated Account may hold cash cross-margining customer margin in
addition to (SEC regulated) segregated customer margin (but no other
assets) and the FRBNY account notice would be amended to specify
that the cash in the FICC FRBNY Segregated Account is also held
pursuant to the Proposed Order and the corresponding related SEC
order. Otherwise, FICC will hold such cash cross-margining customer
collateral in a Segregated Bank Account that would only hold cross-
margining customer collateral and would be at a commercial bank.
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5. FICC's accounts referred to in A.4 above would be separate
accounts from the accounts holding (a) FICC's own assets, (b) margin
for the BD-FCM's proprietary positions, and (c) except as discussed in
footnote 19 above, margin for positions of the BD-FCM's customers that
do not participate in cross-margining. Although FICC itself is not a
registered DCO and is not a permitted depository under Commission
Regulation 1.49(d), as discussed in more detail below, FICC would hold
cross-margining customer margin (``XM Customer Margin'') consistently
with all requirements under Commission Regulations 1.20 and 1.49 as
applicable to DCOs \21\ as well as with the requirements of Commission
Regulations 39.15(b)(1) and (c) and 39.36(g).
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\21\ Funds held in the FICC FRBNY Segregated Account will be
held subject to the exception for FICC Treasury Securities
Segregated Margin discussed in footnote 14 above.
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6. FICC would amend its rules \22\ so that: (a) all assets credited
to the FICC XM Customer Margin Accounts will be treated as ``financial
assets'' \23\ credited to a ``securities account;'' (b) FICC will be a
``securities intermediary'' for that margin account and each BD-FCM,
acting on behalf of its customers, will be an ``entitlement holder''
and have a ``security entitlement'' with respect to assets it deposits
in such margin account; (c) the FICC XM Customer Margin Accounts and
the account(s) holding Treasury Securities Segregated Margin discussed
in footnote 19 above will be the only types of securities accounts, as
that term is defined in section 8-501(a) of the NYUCC, that FICC
maintains, and FICC will not establish any additional such securities
accounts without obtaining the permission of both the CFTC and the SEC.
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\22\ Pursuant to section 19(b) of the Securities Exchange Act,
15 U.S.C. 78s(b), a self-regulatory organization such as FICC must
submit any proposed change in its rules to the SEC for approval. The
Proposed Order requires FICC to, consistent with section 19(b),
amend its rulebook as necessary to implement the undertakings set
forth in the petition. Thus, the relief set forth in the Proposed
Order can only become effective if FICC proposes, and the SEC
approves, such amendments to the FICC rulebook.
\23\ All quoted terms in this paragraph refer to such terms as
defined in Article 8 of the New York Uniform Commercial Code
(``NYUCC'').
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7. CME would continue to hold margin posted to CME as required by
CEA section 4d and Commission Regulations 1.20, 1.49, 39.15(b)(1) and
(c), and 39.36(g) in the same manner as it treats all other futures
customer margin.
B. Protection for the Margin of Cross-Margining Participants in the
Event of a BD-FCM Bankruptcy <SUP>24</SUP>
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\24\ As a technical matter, an insolvency of a broker-dealer
(including a BD-FCM) that has customers that are neither insiders
nor a broker-dealer or bank that is not trading on behalf of
customers that are themselves neither a broker-dealer or a bank,
would proceed under the Securities Investors Protection Act, 15
U.S.C. 78aaa et. seq. (``SIPA''). See id. sections 5(a)(3), 9(a), 15
U.S.C. 78eee(a)(3), 78fff-3(a). However, a trustee under SIPA is
subject to the same duties as a trustee under chapter 7 of the
Bankruptcy Code, including (in the case of a BD-FCM), subchapter IV
of chapter 7, the commodity broker liquidation provisions. SIPA
section 7(b), 15 U.S.C. 78fff-1(b). Accordingly, such a proceeding
is referred to herein as a ``BD-FCM bankruptcy.''
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The cross-margining framework under the Proposed Order would seek
to protect cross-margined customer funds in the event of the bankruptcy
of a participating BD-FCM. Participating customers' funds would be
protected by ensuring that claims for cross-margined positions and
related collateral are treated as customer claims under subchapter IV
of chapter 7 of the Bankruptcy Code and Part 190 of the Commission's
regulations (``Part 190'') regarding bankruptcy. For the reasons
discussed below, the Commission preliminarily concludes that the cross-
margining customers would thus have the same priority right to receive
distribution on their allowed claims against the customer property as
other customers of the insolvent BD-FCM in the futures account class.
Futures customers of each participating BD-FCM are protected as a
group by ensuring, consistent with the Proposed Order, that commingled
customer funds, including those held by FICC, are treated as ``customer
property'' held by the BD-FCM in its capacity as an FCM, thus
supporting the goal that all claims for customer property are paid in
full.
1. FICC-Held Customer Property as Futures Customer Property Under Part
190
Three points support the treatment of FICC-held customer property
as futures customer property under part 190. First, part 190 includes
within the scope of customer property any property held by or for the
account of the debtor, from or for the account of a customer, including
property received, acquired, or held to margin, guarantee, secure,
purchase or sell a commodity contract.\25\ As discussed above, and
required by the Proposed Order, FICC will credit margin it collects in
connection with a cross-margining customer's positions to a FICC XM
Customer Margin Account in the name of the BD-FCM for the benefit of
its cross-margining customers, which are futures customers. Similarly,
FICC would record a cross-margining customer's positions in a FICC XM
Customer Position Account, which would be an account of the BD-FCM that
is established for the purpose of
[[Page 58530]]
recording the transactions of cross-margining customers. The BD-FCM
will also record on its books and records the XM Securities Customer
Property as being held in the BD-FCM's futures customer account, and
such property will be intended to serve as collateral for futures
positions.
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\25\ Commission Regulation 190.09(a)(1)(i)(A).
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Moreover, pursuant to section 7 of the FICC-CME XM Agreement
(``Agreement''), if the BD-FCM defaults, and its cross-margined
customer positions at both CME and FICC are liquidated, under
circumstances where CME is ``worse-off'' (as such term is defined in
the Agreement) than FICC, some or all of the margin at FICC will be
payable to CME. Thus, the collateral in a FICC XM Customer Margin
Account in fact is held by or for the account of the BD-FCM, from or
for the account of the BD-FCM's cross-margining customers as property
received, acquired, or held to margin, guarantee, secure, purchase or
sell the commodity contracts in the BD-FCM's cross-margining customer
accounts at CME.\26\
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\26\ Also, as required by the Proposed Order, a BD-FCM would be
required to pledge its interest in the XM Securities Customer
Property to CME to secure the obligations of the BD-FCM with respect
to the customer's futures positions cleared by CME. The BD-FCM would
likewise require each cross-margining customer to pledge XM
Securities Customer Property to the BD-FCM to collateralize the
cross-margining customer's obligations arising under its CME-cleared
customer positions. Accordingly, this provides further basis for the
XM Securities Customer Property to constitute customer property on
account of being ``property received, acquired, or held to margin,
guarantee, secure, purchase or sell a commodity contract.''
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For these reasons, the Commission preliminarily concludes that,
because of this structure, the XM Securities Customer Property would be
appropriately viewed as customer property pursuant to Commission
Regulation 190.09(a)(1)(i)(A).
Second, pursuant to paragraph (2)(ii) of part 190's definition of
``account class,'' the securities positions and associated collateral
held in a BD-FCM's futures account pursuant to this (presumptively
Commission-approved) cross-margining program will be treated as being
held in the futures account class.\27\ Moreover, the XM Securities
Customer Property would also constitute ``customer property'' under
part 190 to the extent it consists of securities held in a portfolio
margining account carried as a futures account.\28\
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\27\ Commission Regulation 190.01.
\28\ Commission Regulation 190.09(a)(1)(i)(G).
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Third, XM Securities Customer Property held at FICC would also
qualify as ``customer property'' under part 190 by virtue of being
cash, securities, or other property that would be segregated for
customers on the filing date.\29\ As described above, FICC would credit
margin posted for cross-margining customers' positions to a FICC XM
Customer Margin Account on its books and records. This account would
hold exclusively margin for cross-margining customers, and (as noted
above) would also serve as collateral for associated futures positions
at CME. XM Customer Margin would also be segregated in terms of its
custody. Lastly, the BD-FCM would be required, consistent with
Commission Regulation 1.20, to separately account for all cross-
margining customers' margin and positions. As a result of this
consistent segregation, the Commission preliminarily concludes that XM
Securities Customer Property would be appropriately considered
segregated for customers on the filing date and therefore ``customer
property'' under part 190.
---------------------------------------------------------------------------
\29\ Commission Regulation 190.09(a)(1)(ii)(A).
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2. Customer Claims for the FICC-Held Customer Positions and Margin at
FICC as Allowable Claims Under Part 190
Property is allocated in bankruptcy to the customers of a bankrupt
FCM based on account and customer class and based on net equity
claims.\30\ For the reasons discussed below, the Commission
preliminarily concludes that a cross-margining customer's claims for XM
Securities Customer Property would be allowable claims under part 190
against customer property in the futures account class because they
would be within the scope of the ``net equity'' definition of the
Bankruptcy Code, and also because they would be incorporated into step
1 of the ``net equity'' calculation set out in Commission Regulation
190.08(b).
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\30\ Commission Regulation 190.09.
---------------------------------------------------------------------------
A customer's ``net equity'' is defined in the Bankruptcy Code to
include the balance remaining in such customer's accounts immediately
after the transfer, liquidation, or identification for delivery of the
customer's positions and offset of the customer's obligations.\31\
Under the cross-margining framework permitted by the Proposed Order,
the BD-FCM would be required to credit XM Securities Customer Property
to a futures customer account within the meaning of Commission
Regulation 1.3. Accordingly, the Commission preliminarily concludes
that independent of part 190 of the Commission's regulations, such
amounts would give rise to cross-margining customer net equity claims
under section 761(17) of the Bankruptcy Code, since such amounts would
constitute part of the balance remaining in such customers' accounts.
---------------------------------------------------------------------------
\31\ 11 U.S.C. 761(17).
---------------------------------------------------------------------------
In addition, the definition of ``net equity'' in section 761(17) of
the Bankruptcy Code states that it is subject to such rules and
regulations as the Commission promulgates under the CEA. Moreover,
section 20(a)(5) of the CEA \32\ provides that, notwithstanding the
Bankruptcy Code, the Commission may provide, with respect to a
commodity broker that is a debtor under chapter 7 of the Bankruptcy
Code, by rule or regulation, how the net equity of a customer is to be
determined.
---------------------------------------------------------------------------
\32\ 7 U.S.C. 24(a)(5).
---------------------------------------------------------------------------
Commission Regulation 190.08 prescribes a five-step process for
calculating a customer's net equity based on the customer property,
including any commodity contracts, held by the debtor for or on behalf
of such customer less any indebtedness of the customer to the debtor.
The first step of that process, set out in Commission Regulation
190.08(b)(1), requires consideration of the sum of: the ledger balance;
the open trade balance; and the realizable market value, determined as
of the close of the market on the last preceding market day, of any
securities or other property held by or for the debtor from or for such
account, plus accrued interest, if any.
The ``ledger balance'' is calculated by (A) adding, among other
things, (1) cash deposited to purchase, margin, guarantee, secure, or
settle a commodity contract, (2) cash proceeds of liquidations of any
securities or other property held by or for the debtor from or for the
futures account plus accrued interest, and (3) gains realized on
trades; and (B) subtracting, among other things, losses realized on
trades.\33\ The ``open trade balance'' is calculated by subtracting the
unrealized loss in value of the open commodity contracts held by or for
the customer's futures account from the unrealized gain in value of the
open commodity contracts held by or for such account.\34\
---------------------------------------------------------------------------
\33\ Commission Regulation 190.08(b)(1)(ii).
\34\ Commission Regulation 190.08(b)(1)(iii).
---------------------------------------------------------------------------
For purposes of these calculations, securities positions and
associated collateral held in a futures account pursuant to a
Commission-approved cross-margining program are treated as customer
property held in a futures account class.\35\ Accordingly, under part
190, cross-margining customers' claims with respect to cash margin held
at FICC would form part of the ledger balance because they are for cash
deposited to margin and secure commodity
[[Page 58531]]
contracts,\36\ while the securities margin and in-the-money securities
positions would be property held by the insolvent BD-FCM for the cross-
margining customers' futures account. The cross-margining customers'
securities positions could also be viewed as part of the open trade
balance because they would be securities positions held in a futures
account pursuant to a Commission-approved cross-margining program. To
the extent open securities transactions were liquidated or otherwise
resulted in realized gains, those amounts would form part of the ledger
balance. Therefore, under both section 761 of the Bankruptcy Code and
Part 190, cross-margining customers would have allowable net equity
claims for XM Securities Customer Property and the Commission
preliminarily concludes that they would receive adequate protection in
bankruptcy.
---------------------------------------------------------------------------
\35\ Commission Regulation 190.01 (paragraph (2)(ii) of the
definition of ``account class'').
\36\ Commission Regulation 190.08(b)(1)(ii)(A)(1).
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3. FICC Would Make Customer Positions Portable
Commission Regulation 190.07(a) provides, inter alia, that a DCO
may not have rules that interfere with the acceptance by its clearing
members of transfers of commodity contracts, and the property margining
or securing such contracts, from an FCM that is a debtor, if such
transfers have been approved by the Commission, subject to certain
provisos. FICC intends to amend its current rules to expressly allow
the porting of cleared positions and associated margin at FICC in the
event a clearing member becomes insolvent.\37\ Pursuant to section
(e)(viii) of the Proposed Order, FICC would be required to amend its
rules to provide that, as required under Commission Regulation
190.07(a), FICC would not interfere with transfers of XM Securities
Customer Property that are approved by the Commission pursuant to part
190 (subject to FICC's right to liquidate positions and manage risk).
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\37\ See Letter from Laura Klimpel, Managing Director, Head of
Fixed Income and Financing Solutions, The Depository Trust &
Clearing Corporation (Aug. 1, 2024) at 25, available at <a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-500915-1465682.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-500915-1465682.pdf</a>. Changes to FICC's rules must be approved by the SEC.
See section 19(b) of the Securities Exchange Act, 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
C. Protection for the Collateral Posted by Cross-Margining Customers in
the Event of a FICC Bankruptcy or a Proceeding Under Title II of the
Dodd-Frank Act
FCM customer funds that are held at a registered DCO, such as CME,
would be protected in the unlikely event of the bankruptcy of that DCO
under subchapter IV of chapter 7 of the Bankruptcy Code, pertaining to
commodity brokers.\38\ The term ``commodity broker'' includes both FCMs
and DCOs.\39\ Subchapter IV, and the Commission's part 190 regulations
implementing those statutory provisions, provide a reticulated and
comprehensive set of protections for customer funds in the context of
futures accounts, cleared swaps accounts, and foreign futures accounts,
each of which falls under an account class. However, FICC is not a DCO,
and so customer funds held at FICC would not be protected under
subchapter IV in the event of FICC's bankruptcy. Nor are funds held at
FICC protected under the Securities Investor Protection Act \40\ or
subchapter III of chapter 7 of the Bankruptcy Code,\41\ both of which
apply only to broker-dealers, and not to securities clearing agencies.
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\38\ 11 U.S.C. 761 et seq.
\39\ See 11 U.S.C. 101(6), 761(2).
\40\ 15 U.S.C. 78aaa et seq.
\41\ 11 U.S.C. 741 et seq.
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For the reasons discussed below, the Commission preliminarily
concludes that cross-margining customers' margin held at FICC would
nonetheless be protected and not available to creditors in the unlikely
event of a FICC bankruptcy, except for margining or settling eligible
customer positions, and would not form part of FICC's estate.
This protection would be implemented using NYUCC \42\ Article 8, as
applied to FICC's rulebook as it would be amended. Specifically, the
Proposed Order would require FICC to take steps that the Commission
preliminarily concludes would ensure that participating BD-FCMs, on
behalf of their customers, would be ``entitlement holders'' within the
meaning of Article 8, with respect to all components of the cross-
margining margin. Moreover, the only other entitlement holders would be
BD-FCM members of FICC with respect to (non-cross-margined) segregated
customer margin deposited by a BD-FCM (on behalf of securities
customers). As explained further below, entitlement holders with
respect to a particular type (e.g., issue) of financial asset have
priority claims with respect to all interests in that financial asset
held by FICC.
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\42\ See generally NY CLS UCC, Art. 8. FICC is located in New
York.
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As an SEC-registered clearing agency, FICC is a ``clearing
corporation,'' and thus falls within the definition of a ``securities
intermediary'' in the NYUCC.\43\
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\43\ See NYUCC 8-102(a)(5)(i) (definition of ``clearing
corporation''), 8-102(14)(i) (definition of ``securities
intermediary'').
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Under the NYUCC, a ``securities account'' means an account to which
a financial asset is or may be credited in accordance with an agreement
under which the person maintaining the account undertakes to treat the
person for whom the account is maintained as entitled to exercise the
rights that comprise the financial asset. Section (e)(v) of the
Proposed Order requires that FICC shall, consistent with section 19(b)
of the Securities Exchange Act,\44\ amend FICC's rules to provide that
any assets credited to a FICC XM Customer Margin Account will be used
exclusively to settle and margin the customer positions and for no
other purpose. Further, section (e)(iv) requires FICC to amend FICC's
rules to provide that all assets credited to a FICC XM Customer Margin
Account would be treated as ``financial assets'' \45\ credited to a
``securities account.'' \46\
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\44\ 15 U.S.C. 78s(b).
\45\ FICC Rule 4, section 1a, currently provides in relevant
part that ``[a]ll assets credited to each Segregated Customer Margin
Custody Account shall be treated as `financial assets' within the
meaning of Article 8 of the NYUCC.'' The Commission preliminarily
concludes that this would include both securities and cash--while
securities are included within the term ``financial assets'' by
statute, NYUCC 8-102(9)(a)(i), that term also includes any property
that is held by a securities intermediary for another person in a
securities account ``if the securities intermediary has expressly
agreed with the other person that the property is to be treated as a
financial asset under this Article.''
\46\ The Commission preliminarily concludes that treatment of
the FICC XM Customer Margin Account as a ``securities account''
under the NYUCC does not depend on, nor affect, the treatment of
such account as a futures account for purposes of the proposed
customer cross-margining framework. See NYUCC 8-101, legislative
intent (``Except as otherwise expressly provided in this act, the
provisions of this act are not intended to change or to control the
definitions of the terms `security' and `commodity' contained in any
other laws[.]''); 8-501, cmt 1 (``A securities account is a
consensual arrangement in which the intermediary undertakes to treat
the customer as entitled to exercise the rights that comprise the
financial asset'' and ``[t]he effect of concluding that an
arrangement is a securities account is that the rules of [the NYUCC]
apply.'').
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Under the NYUCC, with exceptions not relevant here, a person
acquires a security entitlement if a securities intermediary either (1)
indicates by book entry that a financial asset has been credited to the
person's securities account, or (2) receives a financial asset from the
person and accepts it for credit to the person's securities
account.\47\ A person who is either identified in the records of a
securities intermediary as having a security entitlement against the
securities intermediary, or acquires a securities entitlement by virtue
of section 8-501(b)(2), is an entitlement holder. The Commission
preliminarily
[[Page 58532]]
concludes that, in each case, both prongs would apply and the BD-FCM,
acting on behalf of its customers, would be the entitlement holder and
would have a security entitlement with respect to the assets credited
to the FICC XM Customer Margin Account.
---------------------------------------------------------------------------
\47\ See NYUCC 8-501(b)(1) and (2).
---------------------------------------------------------------------------
Among the entitlement holder's rights is the right to have
financial assets held by the securities intermediary returned and not
be subject to the claims of general creditors. Per NYUCC section 8-
503(a), to the extent necessary for a securities intermediary to
satisfy all security entitlements with respect to a particular
financial asset, all interests in that financial asset held by the
securities intermediary are held by the securities intermediary for the
entitlement holders, are not property of the securities intermediary,
and are not subject to claims of creditors of the securities
intermediary, except as otherwise provided in section 8-511. The
relevant exception under NYUCC section 8-511(c) for ``a creditor of the
clearing corporation who has a security interest in that financial
asset'' would not be inconsistent with this approach, since FICC would
be required by section (e)(vi) of the Proposed Order to amend its rules
to provide that FICC shall not grant a security interest in either XM
Customer Margin (except with respect to CME's security interest
discussed below) or FICC Treasury securities customer margin. Thus, the
Commission preliminarily concludes that, under the NYUCC, the assets
credited to the FICC XM Customer Margin Account would not form part of
FICC's estate but would instead be reserved for BD-FCMs for the benefit
of their futures customers, subject to CME's security interest as
discussed in more detail below.\48\
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\48\ See NYUCC 8-102. The Bankruptcy Code points to otherwise
applicable non-bankruptcy law (such as the NYUCC) to determine
whether the debtor has an interest in an asset such that the asset
forms part of the debtor's estate. See, e.g., Butner v. U.S., 440
U.S. 48, 54-55 (1979), Collier on Bankruptcy Sec. 541.03. Under
Title II of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, the FDIC as receiver of a covered financial
company is bound to respect security entitlements in a number of
relevant ways. See, e.g., 12 U.S.C. 5390 (a)(1)(D) (FDIC resolution
subject to legally enforceable securities entitlements), (b)(5)
(``This section shall not affect secured claims or security
entitlements in respect of assets or property held by the covered
financial company, except to the extent that the security is
insufficient to satisfy the claim, and then only with regard to the
difference between the claim and the amount realized from the
security''), (c)(12)(B) (security entitlements not avoidable).
As a result, the Commission preliminarily concludes that NYUCC
8-503 would ensure that margin posted to FICC by BD-FCMs to secure
cross-margining customer positions would not form part of FICC's
estate in a bankruptcy, and the rights of the BD-FCM on behalf of
its cross-margining customers with respect to such margin would not
be disturbed in a resolution under Title II of Dodd-Frank.
Petitioners note that Article 8 of the NYUCC is also the basis on
which the Depository Trust Company, banks that hold securities for
customers, and numerous other custodians depend to ensure that
securities and other assets they hold for their clients will not
form part of their respective estates.
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Because FICC would not use XM Customer Margin or Treasury
Securities Segregated Margin other than for purposes of securing or
settling cross-margining customer cross-margined positions or the
positions of customers that posted segregated customer margin,
respectively, it is less likely there would ever be a shortfall in the
particular financial assets (here, individual issues of Treasury
securities or cash) needed to satisfy the security entitlements related
to either type of margin.\49\ Moreover, FICC has represented that the
FICC XM Customer Margin Accounts and the account(s) holding FICC
Treasury Securities Segregated Margin will be the only types of
securities accounts that FICC maintains and, as a result, the only
entitlement holders that FICC would have would be Netting Members \50\
acting on behalf of customers who posted XM Customer Margin in relation
to the FICC XM Customer Margin Accounts or Treasury Securities
Segregated Margin in relation to the account(s) holding Treasury
Securities Segregated Margin.\51\ Section (i)(1) of the Proposed Order
provides that FICC shall not establish any additional securities
accounts without obtaining the consent of the Commission and the SEC.
The Commission preliminarily concludes that, under NYUCC section 8-501,
only a person with a securities account at a securities intermediary
can have a security entitlement with respect to that intermediary.
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\49\ The rights of entitlement holders under Article 8 work
differently than the rights of customers of an FCM or DCO under
subchapter IV. In the latter case, the customers have a pro rata
interest in customer property considered on an omnibus basis. By
contrast, an entitlement holder's property interest under NYUCC 8-
503 is an interest with respect to a specific issue of securities or
financial assets. NYUCC 8-503 comment 1. The Commission is
preliminarily of the view that, in light of the overall structure of
the program, this distinction does not entail a materially increased
degree of risk to futures customers.
\50\ ``Netting Member'' is used herein as defined in FICC's
Government Securities Division Rulebook. A Netting Member is a FICC
member that is a member of FICC's Comparison System and Netting
System.
\51\ Petition at 14.
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Because the rights of entitlement holders are tied to particular
issues of securities (e.g., CUSIPs) or financial assets (here, pursuant
to FICC rules, including cash) rather than particular accounts, it
would appear that if there were a shortfall in respect of a particular
security or cash in either the FICC XM Customer Margin Accounts or the
account(s) holding Treasury Securities Segregated Margin, the rights of
customers who posted XM Customer Margin or Treasury Securities
Segregated Margin would apply to any of those particular securities (or
cash) held by FICC.\52\ This would include those particular securities
(or cash) which might otherwise be traceable to FICC members that are
not entitlement holders. This further reduces the likelihood of any
deficit.
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\52\ See NYUCC 8-503(b) (``An entitlement holder's property
interest with respect to a particular financial asset under
subsection (a) is a pro rata property interest in all interests in
that financial asset held by the securities intermediary, without
regard to the time the entitlement holder acquired the security
entitlement or the time the securities intermediary acquired the
interest in that financial asset.'').
---------------------------------------------------------------------------
If, despite the foregoing, any such deficit were to arise with
respect to a particular financial asset, NYUCC section 8-503(b)
provides for all entitlement holders of a securities intermediary with
respect to that particular financial asset to share such deficit on a
pro rata basis.
D. Protection for Customers Not Participating in Cross-Margining
The Commission preliminarily believes that the cross-margining
arrangement permitted by the Proposed Order does not present
unacceptable risk to customers not participating in cross-margining.
The Commission preliminarily believes that a variety of protections,
described by Petitioners and detailed below, would mitigate the risk of
a shortfall of available assets for distribution resulting from
customers' participation in cross-margining.
The first protection is Petitioners' cross-margining margin
calculation methodology. Under the cross-margining arrangement
permitted by the Proposed Order, eligible positions of a participating
customer would be identified and considered as a combined portfolio.
Each of CME and FICC would use its own margin model to determine the
amount of margin savings percentage resulting from combining the
portfolio and then would jointly apply the more conservative result.
Thus, under the framework, both CME and FICC would use, as part of
calculating the margin requirement, the same methodology developed by
CME under the supervision of the Commission for non-cross-margined
positions, unless the margin methodology developed by FICC under the
supervision of the SEC provides a more conservative result. The margin
the BD-FCM would collect after cross-margining would at no time be less
than what would be required by
[[Page 58533]]
CME's margin methodology, because the margin requirement applied would
be the more conservative of the requirement calculated by either FICC
or CME's margin model. Thus, the risk that the BD-FCM would hold
inadequate margin for cross-margining positions is no different in
kind, and no greater, than the risk that the BD-FCM would hold
inadequate margin for other types of positions.
Second, the Commission preliminarily believes that futures
customers of each participating BD-FCM would be protected from a loss
during a BD-FCM bankruptcy because, as discussed above, all customer
funds, including cross-margining customer funds held by FICC, would be
treated as ``customer property'' for purposes of applying subchapter IV
of chapter 7 of the Bankruptcy Code and part 190 of the Commission's
regulations regarding bankruptcy. This ensures that during a BD-FCM
bankruptcy, all commingled customer funds in the futures account would
receive similar protections, and non-participating customers would not
experience a shortfall of the commingled customer funds caused by
different treatment of cross-margining futures customer funds in
bankruptcy.
Third, as described above, the risk that in the event of FICC's
bankruptcy there would be any shortfall in the funds needed to satisfy
the entitlements of cross-margining customers is low, given the
protections provided under NYUCC Article 8 and the rule changes that
FICC has undertaken to make, in particular, the fact that only the
segregated accounts (for cross-margining customers and securities
customers) would be entitlement holders. In addition, in order to allow
the Commission to confirm that FICC would be at all times holding
sufficient funds in its segregated accounts to satisfy all security
entitlements, FICC would provide the Commission and the SEC each
business day with reporting on the cash and, by CUSIP, securities (a)
owed to BD-FCMs on behalf of their cross-margining customers or
securities customers and (b) maintained in such accounts. This
constitutes an additional protection that would minimize the risk FICC
would pose to customers not participating in cross-margining.
Fourth, CME would have a security interest in the FICC customer
property, and CME and FICC cross-guaranty to pay the other amounts
owing by a defaulted clearing member in accordance with an agreed
calculation methodology. In the event that CME faces a deficit based on
amounts owed to CME by a defaulted BD-FCM with respect to its cross-
margining customers' positions cleared at CME, FICC would guarantee
those obligations up to the value of the relevant customers' FICC
customer property. Petitioners designed these features to allow CME to
look to the FICC customer property to satisfy deficits owing to CME by
the cross-margining customers, reducing the risk of a shortfall that
could adversely impact non-participating customers.
Finally, the Commission preliminarily believes that the
availability of customer-level cross-margining under the customer
cross-margining framework should not adversely affect the portability
of non-participating futures customers. The part 190 regulations permit
a bankruptcy or SIPA trustee of a failed BD-FCM to transfer the margin
and positions of a non-participant customer even if it cannot similarly
transfer a cross-margining customer's positions and margin.\53\
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\53\ See Commission Regulation 190.07(d)(2) (``if all eligible
commodity contract accounts held by a debtor cannot be transferred
under this section, a partial transfer may nonetheless be made.'').
---------------------------------------------------------------------------
The Commission preliminarily accepts that, given the protections
described above, CME and FICC should not be required to subordinate the
claims of cross-margining customers relative to other futures customers
pursuant to the special distribution framework in framework 1 of
appendix B to the Commission's part 190 regulations.\54\ That framework
would effectively subordinate the claims of cross-margining customers
relative to other customers.\55\ In light of the foregoing, the
Commission preliminarily concludes that the risks posed to the BD-FCM
futures customer account from the proposed cross-margining program are
not materially greater in degree or kind than the risks posed by other
futures positions and portfolio margining. Accordingly, under the
Proposed Order, the special distribution framework would not be applied
to the cross-margining framework thereunder, and BD-FCMs would be
permitted to hold cross-margining customers' assets commingled with
non-cross-margining futures customers' assets.
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\54\ This is consistent with the approach set forth in the GMAC
Recommendation, III.2, at p. 3.
\55\ Under that framework, if the percentage shortfall for
cross-margining customers, considered alone, would be greater than
that for non-cross-margining customers, considered alone, then the
cross-margining customers would be treated separately from non-
cross-margining customers, thus protecting the non-cross-margining
customers. If, instead, the percentage shortfall for non-cross-
margining customers is equal to or greater than the percentage
shortfall for cross-margining customers, then the cross-margining
customers and the non-cross-margining customers will be paid pro
rata over the same pool, to the disadvantage of the cross-margining
customers.
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IV. Customer Protection--Permitted Depository
The CEA and Commission regulations also protect futures customer
funds by requiring that the funds be held only at a permitted
depository. Pursuant to Commission Regulation 1.20(b), FCMs are only
permitted to hold futures customer funds with a bank or trust company,
a DCO, or another FCM. Similarly, under Commission Regulation 1.20(g),
DCOs are only permitted to hold futures customer funds with a bank or
trust company, which may include a Federal Reserve Bank with respect to
deposits by DCOs that have been designated as SIFMUs by the FSOC.
Moreover, pursuant to Commission Regulation 1.49(d), a depository in
the United States holding customer funds required to be segregated
pursuant to the CEA and Commission regulations must: (A) be a bank or
trust company, a DCO, or an FCM; and (B) provide appropriate written
acknowledgment as required under Commission Regulations 1.20 and 1.26.
Because FICC is not a bank, trust company, DCO, or FCM, it is not a
permitted depository under Commission Regulations 1.20 and 1.49.
As discussed above, the customer cross-margining framework under
the Proposed Order would require BD-FCMs to post to FICC, and FICC to
hold, XM Customer Margin. The Commission preliminarily agrees with
Petitioners that it is consistent with the public interest to permit
FICC to hold XM Customer Margin subject to the terms and conditions of
the Proposed Order. As a designated SIFMU and an SEC covered clearing
agency,\56\ FICC is subject to requirements and safeguards, including
in relation to capital requirements and risk management, pursuant to
SEC regulations, that are broadly similar to those that apply under the
CFTC's regulations to a systemically important DCO.\57\ Furthermore,
the Commission preliminarily agrees with Petitioners that FICC would
hold XM Customer Margin in a manner that is consistent with how DCOs
are required to hold futures customer funds under CEA section
4d(b).\58\ Further, as required by section (e)(vii) of the Proposed
Order, FICC would deposit cross-margining customer funds in accounts at
the
[[Page 58534]]
FRBNY, or at a commercial bank, with names that clearly identify the
accounts as holding futures customer funds. Moreover, the Commission
preliminarily believes that the design and safeguards of the customer
cross-margining framework under the Proposed Order is intended, as
described above,\59\ will leverage both part 190 and commercial law,
and in particular the NYUCC, effectively to ensure that XM Customer
Margin held at FICC is available either to CME to satisfy shortfalls in
its futures customer account and/or returned to customers regardless of
the solvency of FICC. Thus, the Commission preliminarily concludes that
FICC as a depository offers similar safeguards and financial security
as a DCO registered with the Commission, which is a permitted
depository under Commission Regulations 1.20 and 1.49. Accordingly, the
Commission is preliminarily persuaded that allowing BD-FCMs to deposit
customer funds with FICC, and FICC to hold such funds in the manner
described herein, is consistent with the objectives of the CEA and
Commission regulations promulgated thereunder.
---------------------------------------------------------------------------
\56\ See Section 3(a)(23)(A) of the Exchange Act, 15 U.S.C.
78c(a)(23)(A); SEC Rule 17Ab2-1.
\57\ Compare, e.g., 17 CFR 39.33(a)(1) and 240.17ad-
22(e)(4)(ii); 17 CFR 39.11(e), 39.33(c), and 240.17ad-22(e)(7)(i)
and (ii).
\58\ See section III.A., supra, Commingling.
\59\ See section III.B, supra, BD-FCM Bankruptcy Protection for
Cross-Margining Participants.
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V. Proposed Partial and Conditional Exemption From Section 4d of the
CEA and Commission Regulations 1.20 and 1.49
In light of the foregoing, the Commission proposes to exempt CME,
FICC, and BD-FCM members of CME and FICC from section 4d of the CEA and
Commission Regulations 1.20 and 1.49, subject to the conditions
detailed above, to the extent necessary to permit the customer cross-
margining framework described herein. The Commission proposes to allow
the commingling of futures customer funds and futures customer
positions with cross-margined securities assets held at BD-FCMs, for
the purpose of customer cross-margining between positions held at CME
and FICC. Further, the Commission proposes to permit CME and the BD-FCM
members to deposit with FICC, and FICC to receive and hold, such
futures customer funds even though FICC is not a permitted depository
under Commission regulations.
The Commission has in the past permitted FCMs to commingle customer
futures or swap positions with cleared positions in other products for
the purposes of achieving risk offsets and portfolio margining, subject
to specific terms and conditions designed to protect both participating
and non-participating customers.\60\ As discussed above, the Commission
preliminarily believes that CME and FICC would hold the commingled
customer funds in a manner consistent with the customer protections
intended by the CEA and Commission regulations. Customer assets would
be segregated from other assets, and other customer protections in
Commission regulations, such as the written acknowledgement from a
depository regarding its obligations with regard to customer funds,
would apply.
---------------------------------------------------------------------------
\60\ See, e.g., Order, Treatment of Funds Held in Connection
with Clearing by ICE Clear Credit of Credit Default Swaps (Jan. 14,
2013); Order, Treatment of Funds Held in Connection with Clearing by
ICE Clear Europe Limited of Contracts Traded on ICE Futures Europe,
ICE Futures US, and ICE Endex (Mar. 26, 2015).
---------------------------------------------------------------------------
The Commission preliminarily believes the Proposed Order contains
the terms necessary to ensure adequate protection for futures customer
funds. The Proposed Order provides for the safe treatment of cross-
margining customer funds through terms requiring FICC and CME to carry
cross-margining customer assets separately and treat them as belonging
to the customers of the BD-FCM.\61\ The Proposed Order also contains
terms supporting the bankruptcy treatment for cross-margining customer
funds described above, including a term requiring BD-FCMs to enter into
agreements with participating customers acknowledging their assets'
bankruptcy treatment; terms on FICC holding customer margin segregated
in a ``securities account'' at appropriate depositories and agreeing to
treat such margin as ``financial assets,'' as such terms are defined
under NYUCC Article 8; and a term requiring FICC to permit the porting
of customer property.\62\ The Proposed Order further requires
Petitioners to have the rules and agreements necessary to ensure
customer cross-margining functions as described above, by having rules
on customer and position eligibility and on the granting of security
interests in cross-margining customer property.\63\ The Proposed Order
also contains terms to ensure adequate margin is collected under the
customer cross-margining program and to ensure adequate regulatory
oversight.\64\
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\61\ Proposed Order, sections (b), (d) and (e)(v).
\62\ Proposed Order, sections (c), (e)(iv), (e)(vii) and
(e)(viii).
\63\ Proposed Order, sections (e)(i)-(iii) and (e)(vi).
\64\ Proposed Order, sections (f)-(k).
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The Commission preliminarily believes that the cross-margining
framework under the Proposed Order would make it likely that customer
funds will receive adequate protection during a BD-FCM bankruptcy. As
described above, the customer funds held by FICC would constitute
``customer property'' held by the BD-FCM in its capacity as an FCM for
the purposes of distribution in bankruptcy and would be available to
customers. This is designed to ensure that cross-margining customers
would have the same priority right to receive distribution on their
allowed claims against the customer property as other customers of the
insolvent BD-FCM in the futures account class. In addition, FICC and
CME would provide for the porting of the commingled cross-margined
positions in the event of a clearing member default.
As described in section III.B above, the risks to cross-margining
customers posed by a FICC bankruptcy would be addressed. FICC would,
consistent with the Proposed Order, take steps to ensure any assets
credited to a FICC XM Customer Margin Account would be available for
distribution to customers in a FICC bankruptcy or a proceeding under
Title II of the Dodd-Frank Act. For the reasons discussed in section
III.C above, under applicable law, customer property would not be used
to satisfy the claims of FICC's creditors, except for margining or
settling customer positions, and would not form part of FICC's estate.
Accordingly, the Commission preliminarily believes cross-margining
customer funds would be adequately protected in a FICC bankruptcy or
Title II proceeding.
For the reasons discussed in section III.D above, the Commission
also preliminarily believes customers who do not participate in cross-
margining are unlikely to be impacted by the cross-margining
arrangement. As described above, the more conservative cross-margining
margin methodology of either CME or FICC would be applied. Also,
customer funds are likely to be effectively protected in the unlikely
event of a FICC bankruptcy, making it unlikely non-participating
customers would experience losses in that case. Further, portability
for non-participating customers is not adversely affected by other
customers participating in cross-margining. The Commission
preliminarily does not believe the risks posed to the BD-FCM futures
customer account from the cross-margining program under the Proposed
Order are materially greater in degree or kind than the risks posed by
other futures positions and portfolio margining. Thus, the Commission
does not propose to impose via its order the special distribution
framework in framework 1 of appendix B to the Commission's part 190
regulations.
The Commission also preliminarily believes, for the reasons
discussed in
[[Page 58535]]
section IV above, that customers would not be harmed by allowing FICC
to act as a depository for customer funds. As discussed above, FICC
would offer similar safeguards and financial security as a DCO
registered with the Commission, because it is a designated SIFMU and an
SEC covered clearing agency. BD-FCMs depositing customer funds with
FICC, and FICC holding such funds, is consistent with safety and
security purposes of the Commission regulations requiring that only
certain depositories hold customer funds.
The Commission preliminarily believes the participants will be
appropriate persons. The definition of ``appropriate person'' under
section 4(c)(3) of the CEA includes specified categories of persons as
well as ``other persons that the Commission determines to be
appropriate in light of their financial or other qualifications, or the
applicability of appropriate regulatory protections'' (emphasis added).
Each of FICC, CME, and the eligible BD-FCMs is an appropriate
person under prong (F), (I), or (J) of the definition.
The Commission determines cross-margining customers should be
treated as appropriate persons for purposes of section 4(c)(3) of the
CEA in light of the existing and appropriate regulatory protections for
eligible customers under the CEA and Commission regulations as well as
the safeguards under the proposed customer cross-margining framework.
Specifically, the Commissioner preliminarily accepts Petitioners'
assertion that each eligible customer would be a person that is
permitted to transact through a BD-FCM. In other words, such customers
are already persons that Congress and regulators have determined to be
appropriate to engage in such transactions. Allowing eligible customers
to opt into cross-margining under the proposed customer cross-margining
framework would not unduly expose such customers to additional risk.
Additionally, the customer cross-margining framework under the Proposed
Order and the Proposed Order itself include the customer protection and
risk management safeguards discussed above to ensure that the requested
relief would not cause any material adverse effect on the Commission's
or CME's ability to fulfill its regulatory or self-regulatory duties.
Finally, the Commission preliminarily concludes that, in light of
the risk mitigants and customer protections discussed above, customer
cross-margining under the Proposed Order would support the stability of
the broader financial system. Cross-margining would lower the cost of
central clearing for Treasury securities transactions and certain
Treasury and interest rate futures, by decreasing customers' initial
margin requirements to reflect the risk of a combined portfolio.
Lowering clearing costs would support the implementation, and lower the
financial burden, of the Treasury Clearing Requirement, which itself
supports financial stability by increasing central clearing. In light
of the foregoing, the Commission preliminarily believes the Proposed
Order would promote responsible economic and financial innovation and
fair competition, and would be consistent with the public interest, as
that term is used in section 4(c) of the CEA.
VI. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \65\ requires that
agencies consider whether the proposed exemption will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact. The Commission believes that the proposed exemption will not
have a significant economic impact on a substantial number of small
entities.
---------------------------------------------------------------------------
\65\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
The Proposed Order will directly impact three categories of
entities: CME (a DCO), FICC (a clearing agency registered with the SEC)
and BD-FCM members of both CME and FICC. The Commission has previously
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its actions on small entities in
accordance with the RFA.\66\ The Commission has previously determined
that DCOs, are not small entities for purposes of the RFA.\67\ Further,
the Commission has previously determined that registered FCMs are not
small entities for the purpose of the RFA,\68\ and BD-FCMs are, by
definition, FCMs.
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\66\ See 47 FR 18618, 18618-18621 (Apr. 30, 1982).
\67\ See 66 FR 45604, 45609 (Aug. 29, 2001).
\68\ See 47 FR 18618, 18619 (Apr. 30, 1982).
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With respect to FICC, the SEC has established threshold definitions
in its regulations governing when clearing agencies registered with the
SEC qualify as small entities. Specifically, the SEC's regulations
provide that, when used with reference to a clearing agency, the terms
``small business'' or ``small organization'' shall include a clearing
agency that: (i) compared, cleared, and settled less than $500 million
in securities transactions during the preceding fiscal year; (ii) had
less than $200 million of funds and securities in its custody or
control at all times during the preceding fiscal year (or at any time
that it has been in business, if shorter); and (iii) is not affiliated
with any person (other than a natural person) that is not a small
business or small organization.\69\ The Commission notes that FICC
processed $11.8 trillion on a single day, June 30, 2025,\70\ and, as of
December 31, 2024, held in excess of $76 billion in post-haircut
clearing fund contributions from its participants.\71\
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\69\ 17 CFR 240.0-10(d).
\70\ See <a href="https://www.dtcc.com/news/2025/july/02/ficc-successfully-processes">https://www.dtcc.com/news/2025/july/02/ficc-successfully-processes</a>.
\71\ See https://www.dtcc.com/-/media/Files/Downloads/legal/
policy-and-compliance/CPMI-IOSCO-Public-Quantitative-Disclosures_-
Q4-2024.pdf at 8.
---------------------------------------------------------------------------
The Commission also believes the exemption will not have a
substantial impact on a substantial number of small entity customers.
Participation in cross-margining is voluntary. Further, the exemption
proposed by the Commission will lower costs for customers with
positions at both CME and FICC, reducing the cost of clearing to
reflect that of the total portfolio. As discussed above, the Commission
expects that under the proposed cross-margining framework,
participating cross-margining customers' funds will still receive the
level of protection mandated by the CEA and Commission regulations.
Finally, as discussed above, non-participating customers will not be
meaningfully impacted by the other customers participating in cross-
margining.
Accordingly, the Commission does not expect the proposed exemption
to have a significant impact on a substantial number of small entities.
Therefore, the Acting Chairman, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the proposed exemption
would not have a significant economic impact on a substantial number of
small entities. The Commission invites the public to comment on whether
there is a significant impact on a substantial number of small
entities.
B. Paperwork Reduction Act
The purposes of the Paperwork Reduction Act of 1995 (``PRA'') \72\
are, among other things, to minimize the paperwork burden to the
private sector, ensure that any collection of information by a
government agency is put to the greatest possible uses, and minimize
duplicative information
[[Page 58536]]
collections across the government. The PRA applies to all information,
``regardless of form or format,'' whenever the government is
``obtaining, causing to be obtained [or] soliciting'' information, and
requires ``disclosure to third parties or the public, of facts or
opinions,'' when the information collection calls for ``answers to
identical questions posed to, or identical reporting or recordkeeping
requirements imposed on, ten or more persons.'' The PRA would not apply
in this case given that the exemption would not impose any new
recordkeeping or information collection requirements, or other
collections of information, on ten or more persons that require
approval of the Office of Management and Budget.
---------------------------------------------------------------------------
\72\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
C. Cost and Benefit Considerations
The Commission recognizes that the proposed order may impose costs.
The Commission has endeavored to assess the expected costs and benefits
of the proposed order in quantitative terms, where possible. In
situations where the Commission is unable to quantify the costs and
benefits, the Commission identifies and considers the costs and
benefits of the applicable proposed amendments in qualitative terms.
The Commission generally requests comment on all aspects of its
cost-benefit considerations, including the identification and
assessment of any costs and benefits not discussed herein; data and any
other information to assist or otherwise inform the Commission's
ability to quantify or qualitatively describe the costs and benefits of
the proposed order; and substantiating data, statistics, and any other
information to support positions posited by commenters with respect to
the Commission's discussion.
1. Baseline
The Commission identifies and considers the benefits and costs of
the proposed order relative to a baseline standard of those generated
by the current statutory and regulatory framework applicable to futures
contracts, i.e., the status quo. This framework includes the provisions
in section 4d of the CEA and current Commission Regulations 1.20 and
1.49(d). The specific elements of the baseline that would be impacted
by the proposed amendments are discussed in more detail below.
2. Costs
The proposed exemption would conditionally exempt CME and FICC from
limited aspects of sections 4d of the CEA and from the permitted
depository requirements in Commission Regulations 1.20 and 1.49. While
complying with the Commission's order would entail compliance costs for
CME, FICC, and eligible BD-FCMs, the order would not mandate
participation in cross-margining and the assumption of these costs. To
the extent CME, eligible BD-FCMs, and futures customers elect to
participate in cross-margining, they are electing to assume any
associated costs. Moreover, the conditions to the order are consistent
with the design of the cross-margining program proposed by the
Petitioners and are necessary to achieve the risk mitigants and
customer protections that are the basis of that program.
The cross-margining program that would be permitted under the
Proposed Order is an instance of a portfolio margining system.
Portfolio margining is widely used throughout the futures industry,
both within individual DCOs and in cross-margining programs between
clearing organizations (such as the existing proprietary cross-
margining program between the Petitioners).
Portfolio margining establishes margin levels by assessing the
market risk of a ``portfolio'' of positions in securities or
commodities. Under a portfolio margining system, the amount of required
margin is determined by analyzing the risk of each component position
in a customer account (e.g., a class of option with the same expiration
date) and by recognizing any risk offsets in an overall portfolio of
positions (e.g., across options and futures on the same underlying
instrument). So that adequate margin is deposited to cover
extraordinary market events, one or more additional adjustments may be
applied in calculating a customer's required margin.\73\
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\73\ Customer Margin Rules Relating to Security Futures, 67 FR
53146, 53148 (Aug. 14, 2002).
---------------------------------------------------------------------------
The calculation of the risk offsets that are recognized in a
portfolio margining system is based on a combination of statistical
analysis of the correlation between the components of the portfolio and
judgment, and is subject to rigorous risk management, including through
back-testing.
Nonetheless, inherent in any portfolio margining system is the
possibility that, during a particular stressed market movement, the
losses experienced on the combined position will exceed the margin
requirement remaining after including those risk offsets, leading to a
margin deficiency that is greater than would have been the case had the
risk offset not been recognized.
If such an event were to occur within the context of the cross-
margining program that is the subject of the Proposed Order, and the
margin deficiency within the futures or securities customer accounts of
a participating BD-FCM were to exceed the capital and other resources
available to that BD-FCM, leading to bankruptcy, then customers might
suffer losses in the bankruptcy of that BD-FCM that would be larger
than if that cross-margining program were not enabled. This possibility
is a cost of granting the Proposed Order.
However, the likelihood of such losses is low if the risks are well
managed as required in the proposed customer cross-margining framework.
Given the highly regulated and resilient natures of CME as a DCO and
FICC as a securities clearing agency, the experience the two clearing
organizations have in implementing portfolio margining and in
particular cross-margining programs, the risk management requirements
described in section III.D, and the protections included in the
proposed customer cross-margining framework, the Commission estimates
that the circumstances that may give rise to such costs would be very
remote. The costs associated with these risks are difficult to quantify
because they depend on unknown and unlikely future events to
materialize, but the Commission acknowledges some residual risk remains
that could impose costs on Petitioners, clearing members and customers.
3. Benefits
The proposed exemption would benefit market participants by
reducing the costs of clearing Treasury securities transactions in a
manner that aligns the margin required for a portfolio of risk-related
positions, involving positions cleared at CME and positions cleared at
FICC, with the risk of the portfolio considered as a whole. Individual
market participants participating in cross-margining will benefit from
the reduced margin costs for their overall portfolio. BD-FCMs will also
benefit from more efficient clearing, as they, and in turn FICC and
CME, will reduce their risk exposure to the cross-margining customer.
The proposed exemption will also benefit the broader financial
system. By making Treasury security clearing less costly, the proposed
exemption is expected to incentivize clearing of Treasury security
transactions. As discussed above, centralized clearing reduces the risk
of default by imposing a central counterparty between buyers and
sellers, and can lower the potential for a single market participant's
failure to destabilize other market participants
[[Page 58537]]
or the financial system more broadly. The Commission considers central
clearing through a highly regulated clearing organization to be highly
supportive of financial stability. Thus, the proposed customer cross-
margining framework benefits the public interest because it will
support the stability of the broader financial system.
D. Section 15(a) Factors
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its action before issuing an order under the
CEA.\74\ Section 15(a) requires the Commission to consider the costs
and benefits of its action in light of five broad areas of market and
public concern: (1) protection of market participants and the public;
(2) efficiency, competitiveness, and financial integrity of futures
markets; (3) price discovery; (4) sound risk management practices; and
(5) other public interest considerations. The Commission considers the
costs and benefits resulting from its discretionary determinations with
respect to the section 15(a) factors. The Commission may in its
discretion give greater weight to any one of the five enumerated areas
and could in its discretion determine that, notwithstanding its costs,
a particular order is necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the CEA.
---------------------------------------------------------------------------
\74\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
1. Protection of Market Participants and the Public
The Commission believes the proposed exemption will benefit the
public and market participants while not adversely affecting
protections. The proposed exemption would serve the public by
encouraging the clearing of Treasury securities transactions, thus
increasing financial stability, which serves the public's interest
generally. Market participants' individual financial interests are also
served by making clearing less expensive and more efficient.
The Commission does not believe that the exemption would adversely
impact the security of market participants' assets. As discussed above,
the conditions to the proposed order that would permit the proposed
cross-margining framework implement safeguards to protect futures
customer funds. The cross-margined funds will be segregated from any
proprietary funds and will still receive the protections found in the
CEA and Commission regulations. The futures customer funds will be
subject to the CEA's protections in a potential bankruptcy of a
participating BD-FCM (or CME) and will be protected under NYUCC Article
8 in a potential bankruptcy of FICC. In addition, the Commission
believes the risks to non-participating customers, such as clearing in
an account class in which other participants have margin set through
portfolio margining incorporating Treasury securities, are similar to
the risks posed by customers clearing in a class where others hold
futures positions and have their positions portfolio margined. Finally,
FICC, as a depository regulated as a covered clearing agency and a
SIFMU by the SEC, is comparable as a matter of safety to other
permitted depositories, so no material additional risk is added for
market participants by the Commission permitting FICC as a depository.
2. Efficiency, Competitiveness, and Financial Integrity
The Commission believes that the proposed exemption will benefit
the efficiency, competitiveness, and financial integrity of the
derivatives markets. The proposed exemption will make clearing more
efficient by permitting cross-margining of Treasury futures with
Treasury securities. Cross-margining enables CME and FICC to lower
margin requirements to reflect the risk of the total portfolio instead
of the separate futures and securities positions, increasing the
competitiveness of their offering.
The proposed exemption also benefits financial integrity. The
proposed exemption will support the implementation of the Treasury
Clearing Requirement, a mandate implemented to increase the financial
integrity of the Treasury securities market through expanded use of
central clearing. A more stable Treasury securities market also
benefits the financial integrity of the financial system (including the
derivatives markets) more broadly.
3. Price Discovery
The Commission does not anticipate the proposed exemption to have
an impact on price discovery.
4. Sound Risk Management Practices
The Commission believes that the proposed exemptive order, in light
of the conditions included, reflects sound risk management practices.
Encouraging central clearing supports sound risk management. As stated
above, centralized clearing through a highly regulated clearing agency
decreases the risk of default and risk of market destabilization.
Additionally, cross-margining reflects sound risk management because
margin costs will represent the risks for futures customers' overall
portfolios.
The Commission further notes that, notwithstanding the proposed
exemption, cross-margining futures customers would receive protections
comparable to what they would have received absent the exemption. Risks
to customer funds will be managed and minimized according to the
standards set forth in the CEA.
5. Other Public Interest Considerations
The Commission believes the relevant public interest considerations
are already discussed in the foregoing.
VII. Request for Comment
The Commission requests comment on all aspects of the proposed
exemption, including, without limitation, the Commission's
determination that the proposed exemption is consistent with the public
interest, and the Commission's consideration of the costs and benefits
of the proposed exemption.
VIII. Proposed Order of Exemption
After considering the above factors, the Commission proposes to
issue the following:
Proposed Order
The Commission, pursuant to its authority under section 4(c) of the
CEA, 7 U.S.C. 6(c), and subject to the conditions below, hereby grants
(A) a limited exemption to Commission Regulations 1.20 and 1.49 to
permit dually-registered BD-FCMs that are clearing members at both CME
and FICC to deposit at FICC, and to permit FICC to hold, customer funds
and margin associated with customer cross-margining, and to permit CME
to treat FICC as a permissible location to hold the foregoing; and (B)
a limited exemption to section 4d(a)(2) of the CEA and Commission
regulations thereunder to permit eligible BD-FCMs to hold, in a futures
account, eligible securities positions and associated money,
securities, and property of eligible customers, together with the
futures positions and futures customer funds held by the eligible BD-
FCM.
The relief granted above is subject to FICC, CME, and the relevant
Eligible BD-FCMs complying with the requirements set forth below as
applicable to each:
(a) Definitions.
i. ``Customer'' has the meaning set forth in Commission Regulation
1.3.
ii. ``Eligible BD-FCM'' means an entity that is (1) a Netting
Member (as
[[Page 58538]]
such term is defined in FICC Rule 1 of the FICC Government Securities
Division Rulebook); (2) a clearing member of CME; (3) registered with
the Commission as a futures commission merchant; and (4) registered
with the Securities and Exchange Commission as a broker-dealer.
iii. ``Eligible Customer Positions'' means Eligible Futures
Positions and Eligible Securities Positions.
iv. ``Eligible Futures Positions'' means Customer positions in the
CME products listed as ``CME Eligible Products'' in Exhibit A to the
Amended and Restated Cross-Margining Agreement between FICC and CME
dated January 22, 2024, as that exhibit may be amended from time to
time.
v. ``Eligible Securities Positions'' means Customer positions in
U.S. Treasury Notes and Bonds held in a cross-margining account at
FICC.
vi. ``FRBNY'' means the Federal Reserve Bank of New York.
vii. ``NYUCC'' means the New York Uniform Commercial Code.
viii. ``Segregated Customer Margin'' means margin deposited by a
BD-FCM pursuant to Item 15 of 17 CFR 240.15c3-3a.
ix. ``XM Securities Customer Property'' means Eligible Securities
Positions and associated margin held in a cross-margining account at
FICC.
x. ``XM Customer Margin'' means customer property deposited to
margin, secure, or guarantee Eligible Customer Positions.
(b) BD-FCM Treatment of Customer Positions and Margin. All assets
received by an BD-FCM to margin, guarantee, or secure Eligible Customer
Positions, or accruing as a result of such trades or contracts, and
held subject to the terms of the Order shall be carried by the BD-FCM
in a futures account for or on behalf of the cross-margining customers
and shall be deemed to have been received by the Eligible BD-FCM and be
accounted for and treated and dealt with as belonging to the cross-
margining customers of the eligible BD-FCM consistent with section
4d(a)(2) of the Commodity Exchange Act and the Commission's regulations
thereunder.
(c) BD-FCM Cross-Margining Customer Agreements. Each Eligible BD-
FCM shall enter into a participation agreement with each cross-
margining customer prior to the cross-margining customer's
participation in cross-margining under the customer cross-margining
framework, pursuant to which the cross-margining customer shall
specifically agree and acknowledge that:
i. Its XM Securities Customer Property will not receive customer
treatment under the Securities Exchange Act of 1934 or SIPA or be
treated as ``customer property'' as defined in 11 U.S.C. 741 in a
liquidation of the Eligible BD-FCM;
ii. Its Eligible Securities Positions and associated margin held in
a cross-margining account at FICC (i.e., XM Securities Customer
Property) will be subject to any applicable protections under
subchapter IV of chapter 7 of Title 11 of the United States Code and
rules and regulations thereunder; and
iii. Claims to ``customer property'' as defined in SIPA or 11
U.S.C. 741 against the Eligible BD-FCM with respect to its Eligible
Securities Positions and associated FICC-held margin will be
subordinated to the claims of all other customers, as the term
``customer'' is defined in 11 U.S.C. 741 or SIPA.
(d) FICC Operations. FICC shall operate the cross-margining program
in accordance with the following:
i. FICC will record all of a BD-FCM's customers' Eligible
Securities Positions in an account on its books and records for
recording the BD-FCM's cross-margining customers' transactions.
ii. FICC will credit margin it collects to collateralize a BD-FCM's
customers' Eligible Securities Positions to an account as specified in
section (e) below.
(e) FICC and DCO Rules. FICC shall, consistent with section 19(b)
of the Securities Exchange Act, 15 U.S.C. 78s(b), and CME shall,
consistent with section 5c(c) of the Commodity Exchange Act, 7 U.S.C.
7a-2(c) and part 40 of the Commission's Regulations, 17 CFR part 40,
amend their rulebooks (and shall comply with the relevant portions of
such rulebooks), and the two organizations shall amend their
proprietary cross-margining agreement, as may be necessary to effect
the customer cross-margining framework as described in CME and FICC's
petition and the terms of this Order. This specifically includes
addressing the following:
i. Cross-margining is available to Eligible Customer Positions only
if both the eligible customer and its Eligible BD-FCM agree to
participate;
ii. Positions of an eligible customer shall be eligible for cross-
margining if and only if such positions are otherwise eligible
positions under the existing proprietary cross-margining arrangement;
iii. Each BD-FCM shall grant to CME a security interest in the
value of each cross-margining customer's Eligible Securities Positions
and associated margin held in a cross-margining account at FICC;
iv. FICC shall credit margin received in connection with Eligible
Securities Positions to a ``securities account'' and agree in its rules
to treat such margin as ``financial assets,'' as such terms are defined
under NYUCC Article 8;
v. FICC rules will provide that any collateral received from a BD-
FCM as XM Securities Customer Property and credited to a FICC cross-
margining customer margin account will be used exclusively to settle
and margin the Eligible Securities Positions of the BD-FCM and for no
other purpose;
vi. FICC rules will provide that FICC shall not grant a security
interest in either XM Securities Customer Property (subject in this
case to the proviso that the BD-FCM can grant CME and FICC a lien to
implement the cross-margining program) or FICC Treasury securities
customer margin;
vii. FICC rules will provide that it shall hold all XM Customer
Margin in an account of FICC at either a bank that is insured by the
Federal Deposit Insurance Corporation or at the FRBNY. Such account
shall be:
1. Segregated from any other account of FICC and shall be used
exclusively to hold XM Customer Margin, except that the account at the
FRBNY may also hold Segregated Customer Margin.
2. In the case of a bank other than the FRBNY, subject to a written
notice by the bank, provided to and retained by FICC, that the
Segregated Customer Margin in the account is being held by the bank
pursuant to the order of the Commission under section 4(c) of the
Commodity Exchange Act and is being kept separate from and not
commingled with any other accounts maintained by FICC or any other
person at the bank.
3. In the case of FRBNY, subject to a written notice provided to
and retained by FICC that the Segregated Customer Margin in the account
is being held by the bank pursuant to SEC Rule 15c3-3 and the order of
the Commission under section 4(c) of the Commodity Exchange Act and is
being kept separate from and not commingled with any other accounts
maintained by FICC or any other person at the bank.
4. Each such account shall also be subject to a written contract
between FICC and the bank or FRBNY which provides that the Segregated
Customer Margin in the account is subject to no right, charge, security
interest, lien, or claim of any kind in favor of the bank or FRBNY or
any person claiming through the bank or FRBNY.
viii. FICC rules will provide that, consistent with the requirement
applied to registered derivatives clearing organizations under
Commission Regulation 190.07(a), FICC would not interfere with the
acceptance by a BD-FCM of transfers of XM Securities
[[Page 58539]]
Customer Property from a BD-FCM that is either required to transfer
accounts pursuant to 17 CFR 1.17(a)(4) or from a BD-FCM that is a
debtor as defined in 17 CFR 190.01 (in the latter case if the transfer
has been approved by the Commission pursuant to Commission Regulation
190.07(a)(3)), in either case subject to FICC's contractual right to
liquidate or transfer positions and ability adequately to manage risk.
(f) Margin Requirements. Each of FICC and CME shall calculate
initial margin requirements for Eligible Customer Positions on a gross
(i.e., customer-by-customer) basis using a Commission reviewed
methodology (in the case of CME) or a methodology reviewed by the
Securities and Exchange Commission (in the case of FICC), and hold such
initial margin collected from the Eligible BD-FCMs in a manner
generally consistent with Commission Regulation 1.20(g),
notwithstanding that FICC is not a permitted depository under
Commission Regulations 1.20 and 1.49, provided that, with respect to
FICC, the requirements with respect to acknowledgement letters set out
in Commission Regulation 1.20(g)(4) shall be replaced with those set
forth in paragraph (e)(vii) above.
(g) BD-FCM Margin Collection. Each Eligible BD-FCM shall collect
from each of its cross-margining customers, at a minimum, the aggregate
amount of initial margin required by each of FICC and CME in respect of
the cross-margining customer's Eligible Customer Positions.
(h) FICC's Regulatory Status. FICC shall maintain its status as a
covered clearing agency registered with the Securities and Exchange
Commission.
(i) FICC Article 8 Securities Accounts.
1. FICC shall not establish any additional ``securities accounts''
(beyond those for Segregated Customer Margin and XM Customer Margin)
for purposes of the NYUCC without obtaining the consent of the
Commission and the Securities and Exchange Commission.
2. The Commission delegates its authority under paragraph (i)(1) of
this Order to the Director of the Division of Clearing and Risk in
consultation with the General Counsel.
(j) FICC Reporting of Financial Assets Held and Owed. FICC shall,
on every business day, report to the staff of the Division of Clearing
and Risk and to the Securities and Exchange Commission, the amount of
cash and, by CUSIP, securities that are:
1. Held in its accounts for Segregated Customer Margin or XM
Customer Margin at (i) FRBNY and (ii) any bank insured by the Federal
Deposit Insurance Corporation in which such margin is deposited or
custodied; and
2. Owed to BD-FCMs on behalf of their cross-margining customers or
securities customers.
(k) General Compliance. CME and each Eligible BD-FCM must continue
to comply with all other applicable requirements under the CEA and
Commission regulations.
This order is based upon the analysis set forth above and the
information contained in the petition. Any material change in law or
circumstances pursuant to which this order is granted might require the
Commission to reconsider its finding that the exemption contained
herein is appropriate and/or consistent with the public interest and
purposes of the CEA. Further, the Commission reserves the right, in its
discretion, to revisit any of the terms and conditions of the relief
provided herein, including but not limited to, making a determination
that certain entities described herein should be subject to the
Commission's full jurisdiction, and to condition, suspend, terminate,
or otherwise modify or restrict the exemption granted in this order, as
appropriate, upon its own motion.
Issued in Washington, DC, on December 15, 2025, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Proposal To Provide Exemptive Relief To Facilitate Cross-
Margining of Customer Positions Cleared at Chicago Mercantile Exchange,
Inc. and Fixed Income Clearing Corporation--Commission Voting Summary
On this matter, Acting Chairman Pham voted in the affirmative. No
Commissioner voted in the negative.
[FR Doc. 2025-23150 Filed 12-16-25; 8:45 am]
BILLING CODE 6351-01-P
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</html>Indexed from Federal Register on December 17, 2025.
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