Notice2025-23285
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change, as Modified by Partial Amendment No. 1, To Establish a New Collateral-in-Lieu Offering Within the Sponsored GC Service, and Expand the Sponsored GC Service To Allow a Sponsoring Member To Submit for Clearing a “Done-Away” Sponsored GC Trade
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 18, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 241 (Thursday, December 18, 2025)</title>
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[Federal Register Volume 90, Number 241 (Thursday, December 18, 2025)]
[Notices]
[Pages 59225-59234]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-23285]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104374A; File No. SR-FICC-2025-019]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change, as Modified by Partial Amendment
No. 1, To Establish a New Collateral-in-Lieu Offering Within the
Sponsored GC Service, and Expand the Sponsored GC Service To Allow a
Sponsoring Member To Submit for Clearing a ``Done-Away'' Sponsored GC
Trade
December 12, 2025.
On August 29, 2025, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-FICC-2025-019 pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder to modify FICC's Government Securities Division
(``GSD'') Rulebook (``GSD Rules'') \3\ to incorporate rules to
establish a new Collateral-in-Lieu offering within the Sponsored GC
Service, and expand the Sponsored GC Service to allow a Sponsoring
Member to submit for clearing a ``done-away'' Sponsored GC Trade. The
proposed rule change was published for public comment in the Federal
Register on September 15, 2025.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The GSD Rules are available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf. Terms not otherwise
defined herein are defined in the GSD Rules or in the proposed rule
change.
\4\ See Exchange Act Release No. 103940 (Sept. 10, 2025), 90 FR
44408 (Sept. 15, 2025) (File No. SR-FICC-2025-019) (``Notice of
Filing'').
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On September 26, 2025, pursuant to Section 19(b)(2) of the Exchange
Act,\5\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the proposed rule change.\6\
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\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 104085 (Sept. 26, 2025),
90 FR 46981 (Sept. 30, 2025) (File No. SR-FICC-2025-019).
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On September 29, 2025, FICC filed Partial Amendment No. 1 to the
proposed rule change \7\ to make conforming changes to GSD Rule 3A
liquidation provisions for consistency with a separate pending proposed
rule change that FICC amended after the Notice of Filing.\8\ The
Proposed Rule Change was published for public
[[Page 59226]]
comment in the Federal Register on November 20, 2025.\9\
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\7\ Text of the proposed changes made by the Partial Amendment
No. 1 to the proposed rule change is available at <a href="https://www.sec.gov/comments/sr-ficc-2025-019/srficc2025019-664907-1986975.pdf">https://www.sec.gov/comments/sr-ficc-2025-019/srficc2025019-664907-1986975.pdf</a>. The proposed rule change, as modified by Partial
Amendment No. 1, is hereinafter referred to as the ``Proposed Rule
Change.''
\8\ Specifically, FICC amended proposed rule change SR-FICC-
2025-015 to include express language regarding the ability of a
Sponsoring Member or FICC to liquidate an indirect participant's
done-away positions and to describe two ways that a Sponsoring
Member may liquidate done-away transactions pursuant to FICC's
default management rules. See Securities Exchange Act Release No.
104001 (Sept. 18, 2025), 90 FR 45850 (Sept. 23, 2025) (File No. SR-
FICC-2025-015). See also Securities Exchange Act Release No. 103282
(June 17, 2025), 90 FR 26656 (June 23, 2025) (File No. SR-FICC-2025-
015).
\9\ Securities Exchange Act Release No. 104193 (November 17,
2025), 90 FR 52466 (Nov. 20, 2025) (File No. SR-FICC-2025-019).
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The Commission has received no comments regarding the substance of
the Proposed Rule Change. For the reasons discussed below, the
Commission is approving the Proposed Rule Change.
I. Description of the Proposed Rule Change
A. Background
FICC, through GSD, serves as a central counterparty (``CCP'') and
provides real-time trade matching, clearing, risk management and
netting for cash purchases and sales and repurchase and reverse
repurchase transactions (``repos'') involving U.S. Treasury securities.
Market participants that are not direct members of FICC may access
FICC's clearing services indirectly through a FICC direct member (i.e.,
Netting Member). Through the Sponsored Service, one of FICC's indirect
participation offerings, FICC permits Netting Members, approved under
the GSD Rules as ``Sponsoring Members,'' to sponsor certain firms,
referred to as ``Sponsored Members,'' into a limited form of GSD
membership.\10\ A Sponsoring Member is permitted to submit to FICC, for
comparison, novation, and netting, certain eligible securities
transactions of its Sponsored Members. FICC requires each Sponsoring
Member to establish an omnibus account at FICC (separate from its
regular netting account) for Sponsored Member trading activity. For
operational and administrative purposes, a Sponsored Member appoints
its Sponsoring Member to act as processing agent with respect to the
Sponsored Member's satisfaction of its securities and funds-only
settlement obligations.\11\
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\10\ See Rule 3A, supra note 3.
\11\ See GSD Rule 3A, supra note 3. An entity that chooses to
become a Sponsoring Member retains its status as a Netting Member
and can continue to submit any non-Sponsored Member activity to FICC
as such.
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A Sponsored Member is the legal counterparty to FICC for any
submitted transactions.\12\ However, the Sponsoring Member
unconditionally guarantees to FICC the Sponsored Member's performance
under a Sponsoring Member Guaranty, which guarantees to FICC the
payment and performance of a Sponsored Member's obligations to
FICC.\13\ Therefore, FICC relies on the financial resources of the
Sponsoring Member as guarantor.
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\12\ See GSD Rule 3A, section 7 (describing novation of
Sponsored Member Trades) and section 2 (identifying membership
types), supra note 3.
\13\ See GSD Rule 3A, section 2 (describing the operation of the
Sponsoring Member Guaranty) and GSD Rule 1 (defining the Sponsoring
Member Guaranty), supra note 3.
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General collateral \14\ triparty repos between Sponsoring Members
and Sponsored Members (i.e., ``done-with'' trades) are eligible for
clearing under FICC's Sponsored GC Service within FICC's Sponsored
Service (``Sponsored GC Trades'').\15\ After the Start Leg settles away
from FICC, the End Leg, or the concluding Sponsored GC Trade (i.e., the
``repurchase''), is novated to FICC and is eligible for netting against
all other eligible trades of the GSD Member.\16\ FICC states that, to
protect against the non-performance of the End Leg, certain cash
lenders, such as registered investment companies (``RICs''), generally
charge cash borrowers a haircut as additional collateral above 100% of
the cash value lent at settlement of the Start Leg (hereinafter
``collateral haircut'').\17\ Currently, this haircut is charged away
from FICC and is distinct from FICC's margin charge.\18\ Furthermore,
FICC charges margin (i.e., the member's Clearing Fund Requirement) on
all trades, including any Sponsored GC Trades, novated to FICC.
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\14\ General collateral, or GC, refers to a set of high-quality,
liquid security issues, which trade in the repo market at the same
or a very similar repo rate. These security issues can therefore be
substituted for one another without changing the repo rate. In other
words, the buyer in a general collateral repo is indifferent to
which of the general collateral securities she will receive. The
basket of security issues that form a particular general collateral
repo market belong to the same class (e.g., government bonds) or
sub-class (e.g., government bonds with no more than five years
remaining to maturity). See International Capital Market
Association, [FAQ] 8. What is General Collateral (GC)?, ICMA ERCC
Publications (Jan. 2019), available at <a href="https://www.icmagroup.org/market-practice-and-regulatory-policy/repo-and-collateral-markets/icma-erccpublications/frequently-asked-questions-on-repo/8-what-is-general-collateral-gc">https://www.icmagroup.org/market-practice-and-regulatory-policy/repo-and-collateral-markets/icma-erccpublications/frequently-asked-questions-on-repo/8-what-is-general-collateral-gc</a>.
\15\ See GSD Rule 3A, supra note 3. The Start Leg, or the
initial trade of the general collateral triparty repo, is not
centrally cleared and is settled on a trade-for-trade basis on the
triparty repo platform of a Sponsored GC Clearing Agent Bank. BNY
currently operates the tri-party platform that facilitates trades
conducted through the Sponsored GC Service.
\16\ See GSD Rule 3A, supra note 3. Sponsored GC Trades are
settled on the triparty repo platform of a Sponsored GC Clearing
Agent Bank.
\17\ FICC states the haircut amount typically is set at 102%,
although this amount may vary based on the commercial terms agreed
upon by the counterparties involved. See Notice of Filing, supra
note 4, at 44413.
\18\ See Notice of Filing, supra note 4, at 44411.
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FICC states that certain market participants have identified a
number of constraints on the ability of RICs and other cash providers
to access FICC's clearance and settlement services.\19\ First,
Sponsoring Members, who are either borrowing cash or intermediating the
trade on behalf of a cash borrower on a done-with basis, currently are
charged a collateral haircut by the RIC or other cash provider, away
from FICC.\20\ Because that collateral haircut cannot be on-posted to
FICC, Sponsoring Members must also pay margin to FICC in relation to
the cash provider's obligations under the Sponsored GC Trade.\21\
Second, FICC states Sponsoring Members face regulatory capital
requirements associated with providing the Sponsoring Member Guaranty
on behalf of the RICs and other cash providers it sponsors into FICC
membership, which may limit Sponsoring Members' ability to provide
clearing services for these trades on either a done-with or done-away
basis.\22\ Third, FICC understands certain RICs and other cash
providers may face operational constraints on making or receiving
Funds-Only Settlement Amount payments twice daily; therefore, it is
common practice for the Sponsoring Member to agree to pay the amounts
due on behalf of the Sponsored Member.\23\ Fourth, there are timing
constraints around allocations that limit a Sponsoring Member's ability
to submit to FICC triparty repo transactions entered into through joint
trading accounts, as detailed below.\24\ Additionally, market
participants have expressed interest in being able to clear ``done-
away'' Sponsored GC Trades between the Sponsored Member and either a
Netting Member other than the Sponsoring Member or another Indirect
Participant of any Netting Member.\25\
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\19\ See Notice of Filing, supra note 4, at 44421.
\20\ See Letter from Ken Bentsen, President & CEO, SIFMA, et al.
to Mark Uyeda, Jan. 24, 2025, in Release No. 34-95763, File No. S7-
23-22, at 2, available at <a href="https://www.sifma.org/wp-content/uploads/2025/01/SIFMA-Extension-Request-USTreasury-Clearing-Mandate-FINAL-Clean.pdf">https://www.sifma.org/wp-content/uploads/2025/01/SIFMA-Extension-Request-USTreasury-Clearing-Mandate-FINAL-Clean.pdf</a> (describing ``SEC-registered fund rules that effectively
require double margining for cleared repos'' as a critical issue
that needs to be resolved in advance of the compliance date of the
Commission's Treasury Clearing Rule).
\21\ See id.
\22\ See Notice of Filing, supra note 4, at 44421.
\23\ See id.
\24\ See Notice of Filing, supra note 4, at 44417.
\25\ See, e.g., Letter from Joanna Mallers, Secretary, FIA
Principal Traders Group to Vanessa Countryman, Apr. 17, 2024, in
Release No. 34-99844, File No. SR-FICC-2024-007, at 3, available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-459391-1190934.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-459391-1190934.pdf</a> (emphasizing the negative consequences of a lack of
``done-away'' clearing); Letter from Jennifer Han, Executive Vice
President, Chief Counsel and Head of Global Regulatory Affairs,
Managed Funds Association to Vanessa Countryman, Apr. 17, 2024, in
Release No. 34-99844, File No. SR-FICC-2024-007, at 5, available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-461691-1208034.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-461691-1208034.pdf</a> (emphasizing that indirect participants require a robust
``done-away'' clearing market); Letter from Jiri Krol, Deputy CEO,
Global Head of Government Affairs, Alternative Investment Management
Association to Vanessa Countryman, Apr. 23, 2024, in Release No. 34-
99844, File No. SR-FICC-2024-007, at 4, available at <a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-462091-1209374.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-462091-1209374.pdf</a> (noting that indirect participants need done-away
clearing to access clearing and settlement services); Letter from
William Thum, Managing Director and Assistant General Counsel, SIFMA
Asset Management Group to Vanessa Countryman, May 24, 2024, in
Release No. 34-99844, File No. SR-FICC-2024-007, at 5, available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-477851-1366734.pdf">https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007-477851-1366734.pdf</a> (noting that FICC must facilitate ``done-away'' trading
in a manner that fulfills the Access Requirement).
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[[Page 59227]]
B. Proposed Changes <SUP>26</SUP>
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\26\ For a detailed description of each proposed change, please
refer generally to the Notice of Filing, supra note 4.
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FICC proposes two sets of changes to address these issues. First,
FICC proposes to expand its Sponsored Service to add a new Collateral-
in-Lieu offering to its Sponsored GC Service, in which FICC will take a
lien on the collateral in lieu of charging margin. The lien on
collateral generally will obviate FICC's need to collect margin or the
Funds Only Settlement Amount payments and to obtain the Sponsoring
Member Guaranty on these trades.\27\ Second, FICC proposes to allow a
Sponsoring Member to submit for clearance and settlement a ``done-
away'' Sponsored GC Trade. As discussed further below, the purpose of
this expansion is to facilitate access to central clearing for market
participants, particularly RICs including money market funds and other
cash providers.\28\
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\27\ See Notice of Filing, supra note 4, at 44410.
\28\ See id.
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1. Expand the Sponsored GC Service for a New Collateral-in-Lieu
Offering (``CIL Service'')
CIL Service Offering
Under the proposed CIL Service, a Sponsoring Member would be
eligible to submit to FICC for clearance and settlement a GC triparty
repo (``Sponsored GC CIL Trade'') entered into by its Sponsored Member
as cash provider (``CIL Funds Lender'').\29\ FICC proposes that
Sponsored GC CIL Trades would be recorded in a new type of Indirect
Participants Account, called a ``Sponsored GC CIL Omnibus Account.''
FICC states the reason for the separate Sponsored GC CIL Omnibus
Account is that the margin requirements for Sponsored GC CIL Trades
would be calculated differently from those for general Sponsored Member
Trades.\30\ In addition, since one of the principal purposes of the CIL
Service is to address the inability of CIL Funds Lenders to post
margin, and the margin for Segregated Indirect Participants Accounts
must generally consist of Indirect Participant assets, the Rules would
not permit a Sponsored GC CIL Omnibus Account to be a Segregated
Indirect Participants Account.\31\
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\29\ FICC states that by proposing the CIL Service under its
existing Sponsored GC Service, it would leverage much of the legal
and operational framework applicable to the existing Sponsored GC
Service, including the process for trade submission, the use of
Generic CUSIP Numbers, and the process for settling the transactions
through the triparty platform of the Sponsored GC Clearing Agent
Bank. See Notice of Filing, supra note 4, at 44409.
\30\ See id. at 44411.
\31\ See id. at 44411-12.
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Risk Management Under New CIL Service
FICC proposes to require each CIL Funds Lender to collect a haircut
and to grant FICC a lien on the Purchased GC Repo Securities subject to
the Sponsored GC CIL Trade. FICC states that the purpose of the lien
would be to allow FICC to acquire the Purchased GC Repo Securities and
use them to settle with the GC Funds Borrower in the event FICC ceases
to act for the CIL Funds Lender or its Sponsoring Member.\32\ FICC
proposes to amend the Rules to provide that if FICC ceases to act for a
CIL Funds Lender, FICC may, in lieu of closing out the Sponsored GC CIL
Trades (or a portion of any such trades), exercise its right as a
secured party in relation to the Purchased GC Repo Securities and
instruct the Sponsored GC Clearing Agent Bank to remove such Purchased
GC Repo Securities from the account of such CIL Funds Lender.
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\32\ See id. at 44412.
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Once FICC ceases to act for a CIL Funds Lender, FICC would only be
permitted, under the GSD Rules, to instruct the Sponsored GC Clearing
Agent Bank to remove the Purchased GC Repo Securities from the account
of the CIL Funds Lender in two scenarios. First, FICC would be able to
remove such securities if such removal is against cash in an amount
equal to the amount payable to the CIL Funds Lender (i.e., against the
repurchase price due back to the CIL Funds Lender in final settlement
of the Sponsored GC CIL Trade). Second, FICC would be able to remove
the amount of Purchased GC Repo Securities necessary to satisfy the CIL
Funds Lender's obligation to return excess Purchased GC Repo Securities
\33\ or to return Purchased GC Repo Securities for which the GC Funds
Borrower has exercised its right to make a substitution.\34\
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\33\ FICC states that this instruction right is consistent with
the Sponsored GC Service in which the cash borrower is generally
entitled to the return of excess margin. Such excess would generally
arise due to an increase in the market value of the Purchased GC
Repo Securities since the Sponsored GC CIL Trade was executed. See
Notice of Filing, supra note 4, at 44412.
\34\ The GC Funds Borrower would be entitled to effectuate, and
a CIL Funds Lender would be required to process, a substitution for
some or all of the Purchased GC Repo Securities of the same Generic
CUSIP Number.
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To ensure that the Sponsored GC Clearing Agent Bank acts on such
instructions and to perfect FICC's security interest in the Purchased
GC Repo Securities, the CIL Custodial Agreement Supplement would
contain an agreement by the Sponsored GC Clearing Agent Bank to comply
with FICC's instructions except following delivery by the CIL Funds
Lender to the Sponsored GC Clearing Agent Bank of a notice of a
Corporation Default (a ``GC CIL Notice of Default'').\35\ FICC states
the reason the Sponsored GC Clearing Agent Bank would agree not to act
on FICC's instructions following the delivery by the CIL Funds Lender
of a CIL GC Notice of Default is to ensure that, the CIL Funds Lender
would be able to exercise remedies against the Purchased GC Repo
Securities promptly upon a Corporation Default without potential
competing instructions from FICC.\36\
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\35\ The lien would be documented in a ``CIL Custodial Agreement
Supplement'' between a Sponsored GC Clearing Agent Bank, a CIL Funds
Lender, FICC, and the GC Funds Borrower. The Rules would require
that each CIL Custodial Agreement Supplement include, at a minimum,
the terms set forth in the Rules and no terms inconsistent with such
terms. The CIL Custodial Agreement Supplement would supplement the
existing custodial undertaking or similar agreement (``Custody
Agreement'') governing the account in which the Sponsored GC
Clearing Agent Bank maintains the Purchased GC Repo Securities for
the CIL Funds Lender (``Buyer's GC CIL Trade Account''). See Notice
of Filing, supra note 4, at 44412.
\36\ See Notice of Filing, supra note 4, at 44413.
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FICC states that the lien on the Purchased GC Repo Securities
generally will obviate FICC's need to collect margin or the Funds Only
Settlement Amount payments and to obtain the Sponsoring Member Guaranty
on these trades.\37\ In the context of a reverse repurchase transaction
(``reverse repo''), FICC collects margin to ensure that it has
sufficient resources in the event it ceases to act for the reverse repo
buyer or its Sponsoring Member, to purchase the relevant securities and
deliver them to the non-defaulting pre-Novation counterparty.\38\
However, if FICC can acquire the securities without taking market
action by virtue of a lien on such securities, FICC states that it
would not
[[Page 59228]]
need margin to secure the CIL Funds Lender's obligations because FICC
would generally be able to settle with the GC Funds Borrower and CIL
Funds Lender even if FICC ceased to act for the CIL Funds Lender's
Sponsoring Member.\39\
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\37\ See id.
\38\ See id.
\39\ See id.
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FICC states that, nonetheless, certain limited circumstances could
prevent FICC from effectuating such settlement, namely, if the GC Funds
Borrower on the Sponsored GC CIL Trade is the defaulting Sponsoring
Member or an Indirect Participant of that Sponsoring Member or its
Affiliate.\40\ In such a default scenario, FICC may not be able to
settle the Sponsored GC CIL Trade at all.\41\ In other cases, FICC may
be able to complete only partial settlement notwithstanding the fact
that it has ceased to act for the Sponsoring Member.\42\
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\40\ See id.
\41\ See id. For example, if the GC Funds Borrower is an
Indirect Participant of the defaulting Sponsoring Member and the
Sponsoring Member's trustee or bankruptcy receiver refuses to
perform its obligation as processing agent for such Indirect
Participant to complete settlement, FICC would not be able to
settle. See Notice of Filing, supra note 4, at 44413.
\42\ See id. For instance, if the Sponsoring Member were the GC
Funds Borrower but entered into a back-to-back FICC-cleared
transaction involving some of the Purchased GC Repo Securities with
a Netting Member or an Indirect Participant of a third party Netting
Member, the Sponsoring Member's obligations would net out, and FICC
would not? be able to complete settlement with the Sponsoring
Member's pre-Novation counterparty on the back-to-back transaction.
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To address these possibilities, FICC proposes to provide that, if
FICC ceases to act for the Sponsoring Member, and the GC Funds Borrower
is the defaulting Sponsoring Member or one of its Indirect
Participants, FICC may, as an alternative to effectuating settlement or
exercising rights under its lien, terminate the Sponsored GC CIL Trade
(or portion thereof). In that situation, the CIL Funds Lender would be
permitted to take such market action in relation to the relevant
Purchased GC Repo Securities as it determines in its discretion.\43\
Were FICC to terminate a Sponsored GC CIL Trade (or a portion thereof),
FICC would calculate a liquidation amount owing in respect thereof
pursuant to GSD Rule 22A. If the liquidation amount is owed by the CIL
Funds Lender to FICC, FICC would require resources to ensure the CIL
Funds Lender can satisfy its obligation to pay such amount.\44\
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\43\ In furtherance of the foregoing, the CIL Custodial
Agreement Supplement would permit the CIL Funds Lender to instruct
the Sponsored GC Clearing Agent Bank in relation to any Purchased GC
Repo Securities that FICC has informed the Sponsored GC Clearing
Agent Bank FICC does not intend to use to complete settlement with
the relevant GC Funds Borrower.
\44\ To the extent the Sponsoring Member posted Clearing Fund to
secure the obligations of the GC Funds Borrower, that Clearing Fund
could serve as such resources. Accordingly, FICC proposes to amend
the Rules to allow it to look to such Clearing Fund deposits to
address a CIL Funds Lender's obligations in the event FICC closes
out the Sponsored GC CIL Trades. However, if the GC Funds Borrower
is an Indirect Participant that has posted Segregated Customer
Margin, such margin would only be available to cover the GC Funds
Borrower's obligations and could not be used to address the
obligations of a CIL Funds Lender. FICC would therefore require
other resources to cover such liquidation amount. See Notice of
Filing, supra note 4, at 44413.
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FICC proposes to address such need for additional resources in two
ways. First, FICC proposes to require that a Sponsored GC CIL Trade
have an Initial Haircut no less than 2 percent of the Contract Value of
the Start Leg or such other amount determined by FICC (``CIL Required
Haircut''). FICC states that this requirement would be broadly
consistent with the market practice of how uncleared triparty repos of
RICs are overcollateralized today.\45\ FICC would provide Netting
Members with at least 30 Business Days' advance notice of any changes
to the CIL Required Haircut.
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\45\ See id.
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Second, FICC proposes to subject the CIL Funds Lender's Sponsoring
Member to a Clearing Fund requirement for a Sponsored GC CIL Omnibus
Account (``Sponsored GC CIL Omnibus Account Required Fund Deposit'')
when necessary to ensure that FICC would have resources, in the form of
Clearing Fund deposits or Purchased GC Repo Securities, no less than
the Clearing Fund FICC would otherwise collect in relation to the
transaction.\46\
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\46\ FICC states this would only occur in situations where (1)
the Sponsored GC CIL Omnibus Account has been enabled to record
Sponsored GC CIL Trades for which the GC Funds Borrower is its
Sponsoring Member or a Segregated Indirect Participant of its
Sponsoring Member; and (2) that Sponsoring Member or its Affiliate
has a Segregated Indirect Participants Account. See id.
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The Sponsored GC CIL Omnibus Account Required Fund Deposit would be
the greater of a $1 million minimum and the sum of all applicable
charges, with margin calculated in the same manner as when calculated
with respect to a Sponsoring Member Omnibus Account. The VaR Charge
would be calculated for each CIL Funds Lender as the positive
difference between (1) the amount of VaR Charge that FICC would have
collected if the Sponsored GC CIL Trades of that CIL Funds Lender had
been subject to the calculation of a Sponsoring Member Omnibus Account
Required Fund Deposit, and (2) the aggregate of all CIL Required
Haircuts on that CIL Funds Lender's Sponsored GC CIL Trades.\47\
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\47\ In addition to the VaR Charge, the Sponsored GC CIL Omnibus
Account Required Fund Deposit would include a Portfolio Differential
Charge, Backtesting Charge, Holiday Charge, Margin Liquidity
Adjustment Charge and Intraday Supplemental Deposit. See GSD Margin
Component Schedule, supra note 3.
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FICC states that its security interest in Purchased GC Repo
Securities subject to Sponsored GC CIL Trades would also generally
remove the need for the Sponsoring Member to guarantee to FICC the
performance by the CIL Funds Lender of its obligations under the
Sponsored GC CIL Trades, since FICC's lien generally would allow it to
obtain the Purchased GC Repo Securities and perform to the GC Funds
Borrower.\48\ Accordingly, FICC proposes to amend the Rules to provide
that, notwithstanding anything to the contrary set forth in any
Sponsoring Member Guaranty, the Sponsoring Member does not guarantee to
FICC and, except as expressly set forth in the Rules, shall not be
responsible for, the obligations of a Sponsored Member arising under
any Sponsored GC CIL Trade for which the Sponsored Member is the CIL
Funds Lender.
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\48\ See id., at 44414.
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Because FICC would generally anticipate addressing a CIL Funds
Lender default by utilizing the lien to settle with the GC Funds
Borrower, FICC proposes to amend Section 16 of Rule 3A, which generally
allows a Sponsoring Member to liquidate a done-with Sponsored Member
Trade,\49\ to provide that a Sponsoring Member may only trigger that
provision if FICC has not exercised its rights as a secured party. In
addition, FICC is proposing to amend the GSD Rules to provide that, in
the event that the Sponsoring Member did exercise its rights to
terminate any done-with Sponsored GC CIL Trades, the Sponsoring Member
would be responsible for any Sponsored Member Liquidation Amount owed
by the CIL Funds Lender.
---------------------------------------------------------------------------
\49\ See GSD Rule 3A, Section 16, supra note 3.
---------------------------------------------------------------------------
FICC states that the CIL Service would not present additional or
new liquidity risks to FICC.\50\ FICC would incorporate Sponsored GC
CIL Trades into its liquidity risk management calculations and the
calculation of Sponsoring Members' obligations for the Capped
Contingency Liquidity Facility (``CCLF''), using the same methodology,
logic and parameters that FICC uses with respect to Sponsored GC
Trades.\51\
---------------------------------------------------------------------------
\50\ See Notice of Filing, supra note 4, at 44415.
\51\ See GSD Rule 22A Section 2a(b), supra note 3.
---------------------------------------------------------------------------
Under the existing Sponsored GC Service, the only Funds-Only
[[Page 59229]]
Settlement Amounts that the pre-Novation counterparties to a Sponsored
GC Trade are obligated to pay to FICC and entitled to receive from FICC
are the Forward Mark Adjustment Payment \52\ and Interest Adjustment
Payment.\53\ FICC exchanges such amounts with the pre-Novation
counterparties to address the risk that the pre-Novation counterparty
(or its Sponsoring Member or Agent Clearing Member, as applicable)
defaults and FICC needs to enter into a replacement transaction at
market interest rates, which may have changed since the date of
Novation, in order to perform to the other pre-Novation
counterparty.\54\
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\52\ FICC states that the Forward Mark Adjustment Payment
captures the loss or gain to FICC and the defaulting pre-Novation
counterparty of such greater or lower costs and thereby ensures that
FICC and the pre-Novation counterparty are made whole in the event
FICC ceases to act for the pre-Novation counterparty. See Notice of
Filing, supra note 4, at 44418.
\53\ FICC states that the Interest Adjustment Payment serves to
compensate the payer of the Forward Mark Adjustment Payment for the
time value of the payment. See id.
\54\ See id.
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According to FICC, in the context of the CIL Service, FICC's lien
on the Purchased GC Repo Securities and ability to instruct the
Sponsored GC Clearing Agent Bank to transfer such securities would
effectively ensure that FICC never needs to enter into a replacement
transaction to address the default of a CIL Funds Lender (or its
Sponsoring Member). Rather, FICC would rely upon its lien and
instruction right to settle with the GC Funds Borrower or, if the GC
Funds Borrower is the Sponsoring Member or its Indirect Participant,
possibly terminate both the transaction with the CIL Funds Lender and
GC Funds Borrower such that no replacement transaction is required.\55\
FICC is therefore proposing for FICC not to pay or collect Funds-Only
Settlement Amounts to or from a CIL Funds Lender (or its Sponsoring
Member) in relation to a Sponsored GC CIL Trade.\56\ FICC states that,
in turn, this change would facilitate the ability of RICs and other
cash providers to access FICC's clearance and settlement services
because, without the need for these obligations, Sponsoring Members
would have more capacity and therefore could be better able provide
access to clearance and settlement services for these indirect
participants.\57\
---------------------------------------------------------------------------
\55\ See id.
\56\ FICC states it would still collect Funds-Only Settlement
Amounts from the GC Funds Borrower in relation to the Sponsored GC
CIL Trade because, in the event the GC Funds Borrower (or its
Sponsoring Member or Agent Clearing Member, as applicable) defaults,
FICC might need to enter into a replacement transaction to perform
to the CIL Funds Lender. However, FICC would not pay Funds-Only
Settlement Amounts to the GC Funds Borrower because FICC would not
be collecting such amounts from the CIL Funds Lender. See id.
\57\ See Notice of Filing, supra note 4, at 44411.
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Joint Trading Accounts Under the CIL Service
FICC states that RICs and other cash providers that have engaged a
common investment adviser may seek to enter into triparty repo
transactions using joint trading accounts.\58\ The investment adviser
acts as agent for the joint trading account, and the obligations of the
investment adviser and a cash provider in relation to the joint trading
account are typically set out in an agreement between the investment
adviser and the cash provider.\59\
---------------------------------------------------------------------------
\58\ See Notice of Filing, supra note 4, at 44417.
\59\ See id.
---------------------------------------------------------------------------
FICC states that one of the obligations of an investment adviser
that acts on behalf of a joint trading account is to ``allocate''
transactions entered into through the joint trading account to the
individual participants.\60\ The allocation serves to cause the
transaction to constitute separate individual transactions between the
counterparty and each participant based on the participant's allocated
portion.\61\ However, prior to such allocation, the transaction remains
a single transaction, with each participant having a pro rata interest
in it and being liable for a pro rata share of the obligations.\62\
Regardless of whether a transaction has been allocated, each
participant's entitlement to the purchased securities in the triparty
account corresponds to its portion of the relevant transaction.
---------------------------------------------------------------------------
\60\ See id.
\61\ See id.
\62\ See id.
---------------------------------------------------------------------------
To facilitate the ability of CIL Funds Lenders to access FICC's
clearance and settlement systems in relation to transactions executed
through a joint trading account, FICC proposes to permit two or more
CIL Funds Lenders to be represented by an agent (a ``CIL Joint Account
Agent'') that has been approved by FICC. Each such CIL Funds Lender and
CIL Joint Account Agent would need to sign and deliver to FICC a ``CIL
Joint Account Agent Agreement'' in such form as may be prescribed by
FICC. FICC further proposes to amend its Rules to permit a Sponsoring
Member to submit to FICC for Novation a Sponsored GC CIL Trade entered
into by a CIL Joint Account Agent on behalf of multiple CIL Funds
Lenders (each such Sponsored GC CIL Trade, a ``CIL Joint Account
Block'').
Each such CIL Funds Lender on whose behalf a CIL Joint Account
Block has been submitted would only be entitled to, and liable for, its
respective portion of the rights and obligations arising under or in
connection with the CIL Joint Account Block. The GSD Rules would
provide that, if the CIL Joint Account Agent has performed such
allocation, the entitlement of each CIL Funds Lender to, and liability
of each such CIL Funds Lender for, the rights and obligations arising
under or in connection with such CIL Joint Account Block shall be
limited to the amount of such CIL Joint Account Block allocated to each
such CIL Funds Lender. If the CIL Joint Account Agent has not performed
such allocation, the CIL Funds Lender would be liable for its pro rata
portion of the transaction.
FICC proposes to provide in the GSD Rules that, in a default of a
CIL Funds Lender on whose behalf a CIL Joint Account Block has been
submitted, FICC would, to the extent it determines doing so is feasible
and consistent with applicable law, exercise remedies in a way that
would have no significant adverse impact on the interest of any non-
defaulting CIL Funds Lender in such CIL Joint Account Block or the
Purchased GC Repo Securities related thereto.\63\ As discussed above,
in relation to a defaulting CIL Funds Lender, such exercise would
constitute an exercise of remedies as a secured party. In relation to
any non-defaulting CIL Funds Lender, such exercise of remedies would
constitute settlement of its portion of the CIL Joint Account Block in
relation to mark-to-market, substitution, or final settlement
obligations with respect thereto.
---------------------------------------------------------------------------
\63\ If FICC determines that its exercise of remedies would have
a significant adverse impact on the interest of any non-defaulting
CIL Funds Lender (e.g., if the CIL Joint Account Block has not been
allocated), then FICC would refrain from exercising its remedies
against the CIL Funds Lender in relation to such CIL Joint Account
Block or Purchase GC Repo Securities, including its rights under its
security interest in the Purchased GC Repo Securities, as long as it
determines that such non-action is allowed, and would not prejudice
its rights under, applicable law and is necessary to preserve the
interest of any non-defaulting CIL Funds Lenders. In this scenario,
the only actions FICC would take would be to (1) facilitate the
movement of an Margin Excess Amount or (2) cause the transfer of the
Purchased GC Repo Securities against the amount due under the CIL
Joint Account Block. See Notice of Filing, supra note 4, at 44417.
---------------------------------------------------------------------------
In order to ensure that FICC knows the respective interests of the
defaulting and non-defaulting CIL Funds Lenders in a CIL Joint Account
Block, FICC proposes to require that a CIL Joint Account Agent provide
FICC with certain information in the event FICC ceases to act for a CIL
Funds Lender on whose behalf a CIL Joint Account Agent acts. In
particular, the Rules would
[[Page 59230]]
provide that, in the event FICC ceases to act for a CIL Funds Lender
that is a participant in a CIL Joint Account Block, the relevant CIL
Joint Account Agent must promptly notify FICC whether such CIL Joint
Account Block had been allocated and, if so, the respective allocation
to the defaulting CIL Funds Lender. The Rules would further provide
that the CIL Joint Account Agent would not be permitted to change the
allocation information with respect to the defaulting CIL Funds Lender
following such notification. FICC does not propose to require the CIL
Joint Account Agent to provide allocation information outside the
context of a default by a CIL Funds Lender because, in light of FICC's
lien on the Purchased GC Repo Securities and instruction right, FICC
does not require such information to risk manage the Sponsored GC CIL
Trade or to effectuate settlement thereof.\64\
---------------------------------------------------------------------------
\64\ See Notice of Filing, supra note 4, at 44417-18.
---------------------------------------------------------------------------
2. Expand the Sponsored GC Service To Allow for ``Done-Away'' Trades
Currently, a Sponsoring Member may submit only done-with
transactions to FICC under the Sponsored GC Service.\65\ FICC proposes
to amend its Rules to permit a Sponsoring Member to submit to FICC for
clearing under the existing Sponsored GC Service done-away
transactions. FICC is proposing to effectuate this change by revising a
number of defined terms and certain sections in Rule 3A to make clear
that counterparties to a Sponsored GC Trade do not need to be a
Sponsored Member and its Sponsoring Member, but instead can be a
Sponsored Member and any Netting Member or its Indirect Participant.
FICC states that allowing for the submission of done-away transactions
should facilitate greater access by allowing a Sponsored Member to
submit more of their eligible secondary market transactions and to do
so without entering into clearing agreements with each of their
execution counterparties.\66\
---------------------------------------------------------------------------
\65\ See Rule 1, supra note 3 (defining a Sponsored GC Trade as
``a Sponsored Member Trade that is a Repo Transaction between a
Sponsored Member and its Sponsoring Member involving securities
represented by a Generic CUSIP Number the data on which are
submitted to [FICC] by the Sponsoring Member pursuant to the
provisions of Rule 6A, for Novation to [FICC] pursuant to Section
7(b)(ii) of Rule 3A'' in connection with the Sponsored GC Service;
and defining a Sponsored Member Trade as ``(a) a transaction that
satisfies the requirements of Section 5 of Rule 3A and that is (i)
between a Sponsored Member and its Sponsoring Member or (ii) between
a Sponsored Member and a Netting Member or (b) a Sponsored GC
Trade.'').
\66\ See Notice of Filing, supra note 4, at 44422.
---------------------------------------------------------------------------
FICC states that its risk management and liquidity requirements in
respect of done-away Sponsored GC Trades would not be different from
those in respect of other done-away sponsored trades.\67\ Done-away
Sponsored GC Trades would be subject to all applicable requirements as
done-with Sponsored GC Trades. Furthermore, as with existing Sponsored
Member Trades, the liquidation provision in the GSD Rules would only be
applicable to done-with Sponsored GC Trades.\68\
---------------------------------------------------------------------------
\67\ See Notice of Filing, supra note 4, at 44419.
\68\ See Rule 3A, Section 18, supra note 3.
---------------------------------------------------------------------------
In connection with this proposed change, FICC is also proposing to
extend the deadline set forth in the Schedule of Sponsored GC Trade
Timeframes for (i) full settlement of the Start Leg of Sponsored GC
Trades, (ii) substitutions of Purchased GC Repo Securities, and (iii)
satisfaction of GC Collateral Return Obligations and cash payment
obligations associated with GC Collateral Return Entitlements by GC
Funds Lenders and GC Funds Borrowers. The current deadline for these
actions is 5:30 p.m. and the proposal would move this deadline to 7:00
p.m. (New York City times), which would align with the close of the
Fedwire Funds Service at the Federal Reserve Bank of New York.
Currently, Sponsored GC Trades for which funds are delivered between
5:30 p.m. and 7:00 p.m. do not settle until the next Business Day. FICC
states that aligning these two deadlines would facilitate additional
settlement of Sponsored GC Trades.\69\
---------------------------------------------------------------------------
\69\ See Notice of Filing, supra note 4, at 44420.
---------------------------------------------------------------------------
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act \70\ directs the Commission
to approve a proposed rule change of a self-regulatory organization if
it finds that such proposed rule change is consistent with the
requirements of the Exchange Act and rules and regulations thereunder
applicable to such organization. After carefully considering the
Proposed Rule Change, the Commission finds that the Proposed Rule
Change is consistent with the requirements of the Exchange Act \71\ and
the rules and regulations thereunder applicable to FICC.\72\ In
particular, the Commission finds that the Proposed Rule Change is
consistent with Sections 17A(b)(3)(F) \73\ of the Exchange Act and
Rules 17ad-22(e)(4)(i), (e)(6), (e)(7), (e)(18)(iv)(C), (e)(19), and
(e)(21) thereunder.\74\
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\70\ 15 U.S.C. 78s(b)(2)(C).
\71\ 15 U.S.C. 78q-1(b)(3)(F).
\72\ 17 CFR 240.17ad-22(e)(4)(i), (6), (18)(ii), (e)(18)(iv)(C),
(e)(19), and (e)(23)(ii).
\73\ 15 U.S.C. 78q-1(b)(3)(F).
\74\ 17 CFR 240.17ad-22(e)(4)(i), (6), (18)(ii), (e)(18)(iv)(C),
(e)(19), and (e)(23)(ii).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act \75\ requires that the
rules of a clearing agency, such as FICC, be designed to, among other
things, (i) promote the prompt and accurate clearance and settlement of
securities transactions, (ii) assure the safeguarding of securities and
funds which are in the custody or control of the clearing agency or for
which it is responsible, and (iii) protect investors and the public
interest.
---------------------------------------------------------------------------
\75\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above in Section I.B., the Proposed Rule Change
changes to the GSD Rules that are designed to encourage and facilitate
a greater number of market participants to utilize GSD's clearance and
settlement systems for transactions in U.S. securities, including for
done-with and done-away transactions. As described above in Section
I.A, and as market participants have indicated to the Commission, RICs
and other cash providers may face certain issues when seeking to access
FICC's clearance and settlement services.\76\ As described above in
Section I.B, by creating the CIL Service, FICC generally would
eliminate margin requirements and Funds Only Settlement Payments by
taking a perfected security interest in the Purchased GC Repo
Securities. The lien would also allow FICC not to require a Sponsoring
Member to guarantee the obligations of a CIL Funds Lender under a
Sponsored GC CIL Trade. The elimination of such guarantee requirement
would have substantial capital savings for the Sponsoring Member (and
corresponding cost savings for the CIL Funds Lender). FICC would also
accommodate the clearance and settlement of Sponsored GC CIL Trades
entered into through a joint trading account even before such
transactions have been allocated. Accordingly, the proposed changes are
designed to address these issues for RICs and other cash providers to
access FICC's clearance and settlement services, which should increase
the
[[Page 59231]]
number of triparty repo trades centrally cleared by FICC. In turn, this
would promote the prompt and accurate clearance and settlement of
securities transactions because securities transactions that might
otherwise be conducted outside of central clearing would benefit from
FICC's risk management and guarantee of settlement.\77\
---------------------------------------------------------------------------
\76\ See Letter from Eric J. Pan, President & CEO, and Paul
Cellupica, General Counsel, ICI to Mark Uyeda, Feb. 21, 2025, in
Release No. 34-95763, File No. S7-23-22, available at <a href="https://www.ici.org/system/files/2025-02/25-cl-extension-treasury-compliance-dates.pdf">https://www.ici.org/system/files/2025-02/25-cl-extension-treasury-compliance-dates.pdf</a> (describing ``margin issues associated with
registered funds' Treasury repo transactions'' and ``to develop
done-away capabilities'' as critical issues that need to be resolved
in advance of the compliance date of the Commission's Treasury
Clearing Rule).
\77\ See Letter from Robert Toomey, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association (June 18, 2021) at 2 (commenting on the benefits to
market participants resulting from the expected increase in greater
central clearing of tri-party repos via the Sponsored GC Service).
---------------------------------------------------------------------------
The Proposed Rule Change would encourage and facilitate greater
participation in central clearing, while still providing sound risk
management which would promote the prompt and accurate clearance and
settlement of securities transactions, and would protect investors and
the public interest. On December 13, 2023, the Commission adopted
amendments to the standards applicable to covered clearing agencies,
such as FICC,\78\ requiring each such clearing agency for U.S. Treasury
securities to have written policies and procedures reasonably designed
to, among other things, ensure that it has appropriate means to
facilitate access to clearance and settlement services of all eligible
secondary market transactions in U.S. Treasury securities, including
those of the clearing agency's indirect participants.\79\ As the
Commission explained when adopting the Treasury Clearing Rules, U.S.
Treasury securities play a critical and unique role in the U.S. and
global economy, serving as a significant investment instrument and
hedging vehicle for investors, a risk-free benchmark for other
financial instruments, and an important mechanism for the Federal
Reserve's implementation of monetary policy.\80\ Consequently,
confidence in the U.S. Treasury market, and in its ability to function
efficiently is critical to the stability of the global financial
system. In central clearing, through novating transactions (i.e.,
becoming the counterparty to both sides of a transaction), a CCP
addresses concerns about counterparty risk by substituting its own
creditworthiness and liquidity for the creditworthiness and liquidity
of the counterparties.\81\ A CCP thereby enables market participants to
effectively reduce costs, increase operational efficiency, and manage
risks.\82\ Moreover, a CCP provides a centralized system of default
management that can mitigate the potential for a single market
participant's failure to destabilize other market participants or the
financial system more broadly.\83\ The Commission adopted the Treasury
Clearing Rules, in part, to help reduce contagion risk to the CCP and
bring the benefits of central clearing to more transactions involving
U.S. Treasury securities, thereby lowering overall systemic risk in the
market.\84\
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\78\ A ``covered clearing agency'' is, among other things, a
registered clearing agency that provides the services of a CCP, and
a CCP is a clearing agency that interposes itself between the
counterparties to securities transactions, acting functionally as
the buyer to every seller and the seller to every buyer. 17 CFR
240.17ad-22(a); see also 15 U.S.C. 78c(a)(23) (defining a clearing
agency). FICC is a clearing agency registered with the Commission
under Section 17A of the Exchange Act (15 U.S.C. 78q-1), and it acts
as a CCP.
\79\ 17 CFR 240.17ad-22(e)(18)(iv)(C). See Securities Exchange
Act Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16, 2024)
(``Adopting Release,'' and the rules adopted therein referred to
herein as ``Treasury Clearing Rules'').
\80\ See id. at 2715-17.
\81\ See id. at 2716.
\82\ See id. (citing Covered Clearing Agency Standards Proposing
Release, Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR
29507, 29587 (May 27, 2014) (``CCA Standards Proposing Release'')).
\83\ See id. at 2716 (citing Order Granting Temporary Exemptions
Under the Securities Exchange Act of 1934 in Connection with Request
of Liffe Administration and Management and Lch.Clearnet Ltd. Related
to Central Clearing of Credit Default Swaps, and Request for
Comments, Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139,
140 (Jan. 2, 2009) (``Liffe Order'')).
\84\ See id. at 2716 (citing Proposing Release, 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, Exchange Act Release No. 95763
(Sept. 14, 2022), 87 FR 64610, 64614 (Oct. 25, 2022) (``Proposing
Release'')).
---------------------------------------------------------------------------
Furthermore, CCP rules that are clear and comprehensible, increase
operational efficiency, and more effectively manage risks, like the
Proposed Rule Change, should encourage a broader scope of market
participants to utilize the CCP's services, thereby promoting the
prompt and accurate clearance and settlement of securities
transactions, and protecting investors and the public interest,
consistent with Section 17A(b)(3)(F) of the Exchange Act. The Proposed
Rule Change is consistent with those objectives because it encourages
and supports greater participation in GSD's central clearing services
for RICs and other cash lenders and for done-away transactions.
Accordingly, the Proposed Rule Change would promote the prompt and
accurate clearance and settlement of securities transactions, and
protect investors and the public interest, because by encouraging
greater participation in central clearing, the proposals would extend
the benefits of operational efficiency and risk management to a greater
segment of the U.S. Treasury securities market.
In addition, although the proposed amendments would not provide
FICC with custody of any additional securities, as described above in
Section I.B.1, the proposed CIL Custodial Agreement Supplement would
provide FICC with ``control'' of Purchased GC Repo Securities subject
to a Sponsored GC CIL Trade.\85\ FICC's lien and control are
specifically designed so that FICC can complete settlement of Sponsored
GC CIL Trades even in a default of the CIL Funds Lender or Sponsoring
Member. Furthermore, the CIL Custodial Agreement Supplement would
prohibit any withdrawals of the Purchased GC Repo Securities by the CIL
Funds Lender other than to allow for ordinary course settlement, in a
Corporation Default, or in respect of securities that FICC does not
intend to use to complete settlement with the GC Funds Borrower on the
Sponsored GC CIL Trade. Accordingly, the proposed changes should ensure
that the Purchased GC Repo Securities subject to FICC's control remain
safeguarded in the Buyer's GC CIL Trade Account at the Sponsored GC
Clearing Agent Bank until such time as they are needed for settlement
or the Sponsored GC CIL Trade is terminated.
---------------------------------------------------------------------------
\85\ Control would be established as a matter of the Uniform
Commercial Code as in effect in the State of New York. UCC 8-
106(d)(2).
---------------------------------------------------------------------------
More broadly, the proposed changes are designed to ensure that FICC
calculates and has sufficient resources to cover potential losses from
a default on a done-away Sponsored GC Trade or on a Sponsored GC CIL
Trade.\86\ In the case of Sponsored GC CIL Trades, FICC's perfected
security interest in the Purchased GC Repo Securities subject to the
Sponsored GC CIL Trades, as supplemented by the Clearing Fund posted by
the Sponsoring Member for its Sponsored GC CIL Omnibus Account, the
mandatory CIL Required Haircut, and any Sponsored GC CIL Omnibus
Account Required Fund Deposit, is designed to ensure that FICC has
sufficient resources to address a default of a CIL Funds Lender or its
Sponsoring Member. As noted above, the perfected security interest as
well as FICC's right to instruct the Sponsored GC Clearing Agent Bank
in relation to such securities would ensure that FICC can settle with
the GC Funds Borrower in a CIL Funds Lender default or the default of
its
[[Page 59232]]
Sponsoring Member, provided that the Sponsoring Member or its Indirect
Participant is not the GC Funds Borrower. If the Sponsoring Member or
its Indirect Participant is the GC Funds Borrower, FICC may need to
terminate the Sponsored GC Trade in whole or in part and rely upon the
Sponsoring Member's Clearing Fund, the CIL Required Haircut, or the
Sponsored GC CIL Omnibus Account Required Fund Deposit to cover any
losses resulting from the liquidation. Such amounts, however, would
never be less than the Clearing Fund FICC would have available for a
Sponsored GC Trade. Therefore, the proposed changes would enhance
FICC's ability to safeguard funds and securities which are in the
custody or control of FICC or for which it is responsible.
---------------------------------------------------------------------------
\86\ See Securities Exchange Act Release No. 101695 (Nov. 21,
2024), 89 FR 93763 (Nov. 27, 2024) (SR-FICC-2024-007) (stating the
margin requirements of done-away trades ``limit FICC's risk to a
Netting Member or indirect participant default and thereby enhance
its ability to safeguard securities and funds in its control and for
which it is responsible'').
---------------------------------------------------------------------------
For the foregoing reasons, the Commission finds that the Proposed
Rule Change is designed to promote the prompt and accurate clearance
and settlement of securities transactions, safeguard securities and
funds that are in the custody or control of FICC, and protect investors
and the public interest, consistent with Section 17A(b)(3)(F) of the
Exchange Act.\87\
---------------------------------------------------------------------------
\87\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17ad-22(e)(4)(i)
Rule 17ad-22(e)(4)(i) under the Act requires that FICC establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to participants and those arising from its
payment, clearing, and settlement processes by maintaining sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence.\88\
---------------------------------------------------------------------------
\88\ 17 CFR 240.17ad-22(e)(4)(i).
---------------------------------------------------------------------------
First, as described above in Section I.B.1, the proposed changes
relating to the risk and default management mechanism for the CIL
Service, i.e., FICC's perfected security interest in the Purchased GC
Repo Securities subject to the Sponsored GC CIL Trades, supplemented by
the Clearing Fund for the Sponsoring Member's Sponsoring Member Omnibus
Account, the mandatory CIL Required Haircut, and the Sponsored GC CIL
Omnibus Account Required Fund Deposit requirement, should ensure that
the resources available to FICC to manage the default on a Sponsored GC
CIL Trade would accurately reflect FICC's credit exposures to
participants in the CIL Service, and that FICC would be able to use
such resources to cover its credit exposure in the event of a default
by the CIL Funds Lender or its Sponsoring Member.
Second, as described in Section I.B.2, the done-away Sponsored GC
Trades (other than Sponsored GC CIL Trades), which present the same
credit and market risk profile as done-with Sponsored GC Trades, would
be margined in the same manner as done-with Sponsored GC Trades using
methodologies that have been approved by the Commission.\89\
---------------------------------------------------------------------------
\89\ See Exchange Act Release No. 92808 (Aug. 30, 2021), 86 FR
49580 (Sept. 3, 2021) (File No. SR-FICC-2021-003) (``2021 Sponsored
GC Order'').
---------------------------------------------------------------------------
Therefore, collectively, these changes should enhance the ability
of FICC to cover its credit exposure to its participants with a high
degree of confidence. Accordingly, the Proposed Rule Change is
consistent with Rule 17ad-22(e)(4)(i) under the Act.
C. Consistency With Rule 17ad-22(e)(6)
Rule 17ad-22(e)(6) under the Act requires, in part, that FICC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system.\90\ As
described in Section I.B.1, the Proposed Rule Change is designed to
ensure that FICC has sufficient resources to perform to non-defaulting
participants in a participant default. In particular, the proposed
changes would provide FICC, in the form of its lien on Purchased GC
Repo Securities and the potential to require Clearing Fund deposits as
needed in circumstances described above, with resources to address a
CIL Funds Lender default that are equal to, or in excess of, the
resources FICC calculates using its established and approved risk-based
models as necessary to address the default of a Sponsored Member under
a Sponsored GC Trade. Additionally, as described above in Section
I.B.2, the done-away Sponsored GC Trades (other than Sponsored GC CIL
Trades), which present the same credit and market risk profile as done-
with Sponsored GC Trades, would be margined in the same manner as done-
with Sponsored GC Trades using methodologies that have been approved by
the Commission.\91\
---------------------------------------------------------------------------
\90\ 17 CFR 240.17ad-22(e)(6).
\91\ See 2021 Sponsored GC Order, supra note 92.
---------------------------------------------------------------------------
Accordingly, the Proposed Rule Change would ensure FICC covers its
credit exposures to its participants consistent with Rule 17ad-22(e)(6)
under the Act.
D. Consistency With Rule 17ad-22(e)(7)
Rule 17Ad-22(e)(7) under the Act requires a covered clearing
agency, such as FICC, to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by the covered clearing agency.\92\
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\92\ 17 CFR 240.17Ad-22(e)(7).
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As discussed above in Section I.B.1, FICC would incorporate
Sponsored GC CIL Trades into its liquidity risk management calculations
and into the calculation of Sponsoring Members' obligations with
respect to CCLF, using the same methodology, logic and parameters that
FICC uses with respect to Sponsored GC Trades.\93\ Additionally, as
discussed above in Section I.B.2, done-away Sponsored GC Trades, which
present the same liquidity risks as other done-away transactions, would
be treated identically to such other done-away transactions for
purposes of calculating a Sponsoring Member's CCLF obligations.
Therefore, collectively, these changes should enhance FICC's ability to
manage the liquidity risks arising from the Sponsored GC CIL Trades it
clears and settles.
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\93\ See 2021 Sponsored GC Order, supra note 92.
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Accordingly, the Proposed Rule Change is consistent with Rule 17ad-
22(e)(7) under the Act.
E. Consistency With Rule 17ad-22(e)(18)(iv)(C)
Rule 17ad-22(e)(18)(iv)(C) under the Exchange Act requires that a
covered clearing agency, such as FICC, when providing CCP services for
transactions in U.S Treasury securities, establish objective, risk-
based, and publicly disclosed criteria for participation, which ensure
that it has appropriate means to facilitate access to clearance and
settlement services of all eligible secondary market transactions in
U.S. Treasury securities, including those of indirect participants.\94\
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\94\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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As described above in Section I.B.1, the Proposed Rule Change is
designed to facilitate increased access to FICC's clearing and
settlement services for triparty repo transactions by eliminating or
ameliorating certain existing impediments to access that RICs and other
cash providers face.
First, FICC's security interest in the Purchased GC Repo Securities
would address what market participants have referred to as ``double
margining'' that increases the costs (and thereby decreases the ability
of) a Sponsoring
[[Page 59233]]
Member to provide clearance and settlement services to RICs and other
cash providers.\95\ The lien would also eliminate the need for a
Sponsoring Member to guarantee the obligations of a CIL Funds Lender.
The elimination of the guarantee should reduce the capital requirements
associated with a Sponsoring Member providing access to FICC's
clearance and settlement systems, and thus the costs of providing such
access.
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\95\ See Letter from Ken Bentsen, supra note 23.
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Second, the CIL Service would allow a Sponsoring Member to submit
to FICC for clearance and settlement transactions that have been
entered into by multiple RICs or other CIL Funds Lenders using a joint
trading account. Such transactions may be ineligible for submission to
FICC today because investment advisers are unable to complete final
allocations to individual cash providers by the FICC submission
deadline. As a result, the proposed changes should facilitate the
ability of RICs and other cash providers to access FICC's clearance and
settlement services in relation to transactions that they are currently
only able to clear bilaterally.
Third, the CIL Service would not include the exchange of Funds-Only
Settlement Amounts between FICC and a CIL Funds Lender (or its
Sponsoring Member). This proposed change should facilitate access to
central clearing by eliminating the possibility of such Funds-Only
Settlement Amount obligations and entitlements giving rise to
operational or regulatory impediments for RICs, other cash providers,
and their Sponsoring Members. As such, the CIL Service would facilitate
access to clearance and settlement services of all eligible secondary
market transactions in U.S. Treasury securities, including those of
indirect participants.\96\
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\96\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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Moreover, as described in Section 1.B.2, the proposed changes to
provide for clearing of done-away Sponsored GC Trades and to extend its
settlement deadline for Sponsored GC Trades would promote access to
FICC's clearance and settlement systems in respect of eligible
secondary market transactions in U.S. Treasury securities. Currently, a
Sponsoring Member may submit only done-with transactions to FICC under
the Sponsored GC Service. Allowing for the submission of done-away
transactions should facilitate greater access by allowing a Sponsored
Member to submit more of their eligible secondary market transactions
and to do so without entering into clearing agreements with each of
their execution counterparties. The proposed change to align FICC's
settlement and substitution deadlines for Sponsored GC Trades with the
close of the Fedwire Funds Service at 7:00 p.m. (New York City time)
would support the settlement of additional tri-party activity and,
therefore, also promote access to FICC's clearance and settlement
systems in respect of eligible secondary market transactions. As such,
these proposed changes should facilitate access to clearance and
settlement services of all eligible secondary market transactions in
U.S. Treasury securities.\97\
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\97\ Id.
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Accordingly, for the reasons above, the Proposed Rule Change is
consistent with Rule 17ad-22(e)(18)(iv)(C).\98\
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\98\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
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F. Consistency With Rule 17ad-22(e)(19)
Rule 17ad-22(e)(19) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify, monitor, and manage the material risks
to the covered clearing agency arising from arrangements in which firms
that are indirect participants in the covered clearing agency rely on
the services provided by direct participants to access the covered
clearing agency's payment, clearing, or settlement facilities.\99\ The
proposed changes relating to the CIL Service contain specific risk
management features to address FICC's exposure to CIL Funds Lenders,
including (i) a lien on the Purchased GC Repo Securities subject to the
Sponsored GC CIL Trades, (ii) provisions describing how FICC would
enforce remedies and otherwise address such a default, and (iii) the
Clearing Fund, mandatory CIL Required Haircut, and Sponsored GC CIL
Omnibus Account Required Fund Deposit that FICC would require. These
risk management features should ensure that FICC has sufficient
resources to cover simultaneous default of both a CIL Funds Lender and
its Sponsoring Member and would allow FICC to settle with the GC Funds
Borrower even in a CIL Funds Lender default.
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\99\ 17 CFR 240.17ad-22(e)(19).
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Because of these features, the proposed changes would promote
FICC's ability to identify, monitor, and manage the material risks
arising from indirect participants' (i.e., the CIL Funds Lenders)
access to its payment, clearing, or settlement facilities and is
therefore consistent with Rule 17ad-22(e)(19).
G. Consistency With Rule 17ad-22(e)(21)
Rule 17Ad-22(e)(21) under the Act requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to be efficient and effective in
meeting the requirements of its participants and the markets it serves,
including the clearing agency's clearing and settlement arrangements
and the scope of products cleared or settled.\100\
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\100\ 17 CFR 240.17Ad-22(e)(21).
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As described above in Sections I.A. and I.B.1, market participants
have stated that FICC's current Sponsored GC Service does not
accommodate certain aspects of how RICs and other cash providers
currently conduct repo transactions in U.S. Treasury securities,
including current industry practices in which RICs and other cash
providers collect a haircut from cash borrowers. The proposed changes
relating to the CIL Service contain features to address these issues,
including a lien on the Purchased GC Repo Securities subject to the
Sponsored GC CIL Trades that generally would obviate FICC's need to
collect margin or Fund-Only Settlement Amounts from CIL Funds Lenders
or their Sponsors as well as the need to obtain a Sponsoring Member
Guaranty on Sponsored GC CIL Trades. Moreover, by providing FICC a lien
on the Purchased GC Repo Securities in lieu of FICC margin charges
generally, the proposed changes would accommodate current industry
practices in which RICs and other cash providers collect a haircut from
cash borrowers. Additionally, as described above in Section I.B.2,
FICC's proposed CIL Service would accommodate both done-with and done-
away Sponsored GC CIL Trades.
By expanding the Sponsored GC Service in these ways, the Proposed
Rule Change is designed to address the feedback FICC has received from
market participants regarding their needs to facilitate access to
FICC's clearance and settlement services through a Sponsoring Member.
For these reasons, the Proposed Rule Change is consistent with Rule
17Ad-22(e)(21) \101\ because it is responsive to the requests from
FICC's members for the ability to trade centrally cleared tri-party
repos in a manner that is efficient and effective in meeting the
operational requirements of FICC's members.
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\101\ Id.
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed
[[Page 59234]]
Rule Change is consistent with the requirements of the Exchange Act and
in particular with the requirements of Section 17A of the Exchange Act
\102\ and the rules and regulations promulgated thereunder.
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\102\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act \103\ that proposed rule change SR-FICC-2025-019, be, and
hereby is, APPROVED.\104\
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\103\ 15 U.S.C. 78s(b)(2).
\104\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\105\
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\105\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-23285 Filed 12-17-25; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on December 18, 2025.
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