Notice2025-23333
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Modify the GSD Rulebook Relating to Default Management and Porting With Respect to Indirect Participant Activity
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 19, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 242 (Friday, December 19, 2025)</title>
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[Federal Register Volume 90, Number 242 (Friday, December 19, 2025)]
[Notices]
[Pages 59618-59634]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-23333]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104412; File No. SR-FICC-2025-015]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change, as Modified by Amendment No. 1,
To Modify the GSD Rulebook Relating to Default Management and Porting
With Respect to Indirect Participant Activity
December 16, 2025.
On June 6, 2025, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-FICC-2025-015 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 enhance and clarify FICC's
default management rules as they apply to the Sponsored Service and
Agent Clearing Service, and to facilitate the porting of indirect
participant activity from one intermediary Netting Member to another
intermediary Netting Member. The proposed rule change was published for
public comment in the Federal Register on June 23, 2025.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Terms not defined herein are defined in the GSD Rules,
available at <a href="http://www.dtcc.com/legal/rules-and-procedures.aspx">www.dtcc.com/legal/rules-and-procedures.aspx</a>.
\4\ Securities Exchange Act Release No. 103282 (June 17, 2025),
90 FR 26656 (June 23, 2025) (File No. SR-FICC-2025-015) (``Notice of
Filing'').
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The Commission has received comments regarding the substance of the
changes proposed in the proposed
[[Page 59619]]
rule change.\5\ In addition, the Commission has received a letter from
FICC in response to the public comments.\6\ On July 31, 2025, pursuant
to Section 19(b)(2) of the Exchange Act,\7\ 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.\8\
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\5\ Comments on the Proposed Rule Change are available at
<a href="https://www.sec.gov/comments/sr-ficc-2025-015/srficc2025015.htm">https://www.sec.gov/comments/sr-ficc-2025-015/srficc2025015.htm</a>.
\6\ See Letter from Laura Klimpel, Managing Director, Head of
Fixed Income and Financing Solutions, The Depository Trust &
Clearing Corporation (``DTCC'') (Sept. 29, 2025) (``FICC Letter''),
supra note 5.
\7\ 15 U.S.C. 78s(b)(2).
\8\ Securities Exchange Act Release No. 103557 (July 28, 2025),
90 FR 36088 (July 31, 2025) (File No. SR-FICC-2025-015).
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On September 16, 2025, FICC filed Amendment No. 1 to the proposed
rule change. Notice of FICC's filing of Amendment No. 1 was published
for public comment in the Federal Register on September 23, 2025,
whereupon the Commission also instituted proceedings to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment No. 1.\9\ For the reasons discussed below, the Commission
is approving the proposed rule change, as modified by Amendment No. 1.
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\9\ Securities Exchange Act Release No. 104001 (Sept. 18, 2025),
90 FR 45850 (Sept. 23, 2025) (File No. SR-FICC-2025-015) (``Notice
of Amendment No. 1'').
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I. Description of the Proposed Rule Change
A. Background
FICC, through GSD, serves as a central counterparty (``CCP'') and
provider of clearance and settlement services for transactions in U.S.
Treasury securities. As a CCP, FICC novates transactions between two
counterparties, effectively becoming the buyer to every seller and the
seller to every buyer, and guarantees settlement of the novated
transactions. GSD's CCP services are available directly to entities
that are approved under the GSD Rules to be Netting Members and
indirectly to other market participants through GSD's indirect access
models, the Sponsored Service and Agent Clearing Service, described
more fully below.
A CCP is exposed to a number of risks that arise from novating
trades, including counterparty credit risk, because the CCP guarantees
the performance of every novated trade and thereby becomes the entity
exposed to potential financial loss if a counterparty defaults on its
obligations to deliver cash and/or securities. FICC addresses these
risks through a risk management framework that governs, among other
things, various actions that FICC may take following the default of its
Netting Members, including those Netting Members that act as
intermediaries for indirect participants as either Sponsoring Members
or Agent Clearing Members.
As described more fully below, FICC believes that enhancing the GSD
Rules regarding default management (particularly for Agent Clearing
Members) and porting would encourage greater participation in central
clearing by improving market participants' understanding of how GSD
would manage a default that may occur within GSD's indirect access
models.\10\
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\10\ See Notice of Filing, supra note 4, 90 FR at 26656-57.
During the Commission's review of FICC's recent proposed rule change
to adopt and enhance GSD Rule provisions regarding access models
(See Securities Exchange Act Release No. 101694 (Nov. 21, 2024), 89
FR 93784 (Nov. 27, 2024) (SR-FICC-2024-005)), the Commission
received comments requesting that FICC disclose more information
regarding the governance of default management under the various
access models, indicating that the absence of explicit default
management provisions in the GSD Rules presents an obstacle to
greater participation in central clearing. Comments are available at
<a href="https://www.sec.gov/comments/sr-ficc-2024-005/srficc2024005.htm">https://www.sec.gov/comments/sr-ficc-2024-005/srficc2024005.htm</a>.
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GSD's Indirect Access Models
The GSD Rules provide for two indirect access models, the Sponsored
Service and the Agent Clearing Service.\11\ The Sponsored Service and
the Agent Clearing Service provide Indirect Participants with different
options to access FICC's clearance and settlement services. The primary
differences between the two services are that (1) Indirect Participants
within the Sponsored Service must establish a limited purpose GSD
membership, whereas Indirect Participants within the Agent Clearing
Service do not establish any such membership, and (2) Sponsored Member
Trades are margined on a gross basis, whereas Agent Clearing
Transactions may be margined on a net basis when recorded in the same
Agent Clearing Member Omnibus Account.
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\11\ See GSD Rule 3A and GSD Rule 8, supra note 3.
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As described in GSD Rule 3A, the Sponsored Service permits Members
that are approved to be Sponsoring Members to sponsor certain
institutional firms (i.e., Sponsored Members) into GSD membership.\12\
For these relationships, FICC establishes and maintains a ``Sponsoring
Member Omnibus Account'' on its books where it records the transactions
of the Sponsoring Member's Sponsored Members (``Sponsored Member
Trades'').\13\ For purposes of managing the risks presented by
Sponsored Member Trades, activity recorded in a Sponsoring Member
Omnibus Account is margined on a gross (i.e., Sponsored Member-by-
Sponsored Member) basis and cannot be netted across Sponsored
Members.\14\
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\12\ See GSD Rule 3A, supra note 3.
\13\ See GSD Rule 2B and GSD Rule 1 (definition of ``Sponsored
Member Trade''), supra note 3.
\14\ See Section 10 of GSD Rule 3A and GSD Rule 4, supra note 3.
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Although a Sponsored Member is a limited member of GSD and the
legal counterparty to FICC for any submitted transactions, the
Sponsoring Member unconditionally guarantees to FICC the payment and
performance of a Sponsored Member's obligations to FICC (``Sponsoring
Member Guaranty'').\15\ Therefore, FICC relies on the financial
resources of the Sponsoring Member in relying upon the Sponsoring
Member Guaranty.
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\15\ See GSD Rule 1 (definition of ``Sponsoring Member
Guaranty'') and Section 2(c) of GSD Rule 3A, supra note 3.
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FICC's Agent Clearing Service facilitates agent-style trading by
allowing Members that are approved to be Agent Clearing Members to
submit trades of their customers (i.e., Executing Firm Customers) to
GSD for clearance and settlement.\16\ FICC establishes and maintains an
``Agent Clearing Member Omnibus Account'' on its books where it records
the transactions of the Agent Clearing Member's Executing Firm
Customers (``Agent Clearing Transactions'').\17\ Unlike Sponsored
Members, Executing Firm Customers do not become limited members of GSD.
Agent Clearing Members act as both processing agent and credit
intermediary for their customers in clearing, and Executing Firm
Customers are identified on Agent Clearing Transactions when such
activity is submitted to FICC. FICC may net the Agent Clearing
Transactions of one or more Executing Firm Customers whose activity is
recorded in the same Agent Clearing Member Omnibus Account for purposes
of calculating the required margin deposits.
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\16\ See GSD Rule 8, supra note 3.
\17\ See GSD Rule 2B and GSD Rule 1 (definition of ``Agent
Clearing Transactions''), supra note 3.
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The activity for Indirect Participants must be recorded in GSD
accounts that are separate from the accounts in which the intermediary
Netting Members' own proprietary transactions are recorded.\18\
[[Page 59620]]
Additionally, both Sponsoring Members and Agent Clearing Members have
the option of designating certain Indirect Participants as Segregated
Indirect Participants. The activity for Segregated Indirect
Participants must be recorded in a separate Segregated Indirect
Participant Account, which allows the Sponsoring Member or Agent
Clearing Member to direct FICC to calculate and segregate margin
deposited in connection with these separate Accounts (``Segregated
Customer Margin'') in accordance with the conditions in Note H to Rule
15c3-3a under the Exchange Act (``Note H'').\19\ In this way, all
Segregated Customer Margin deposited with FICC to support the
obligations arising under the transactions recorded in a given
Segregated Indirect Participants Account must be recorded in a specific
Segregated Customer Margin Custody Account maintained by FICC on its
books and records for the Netting Member that deposited such Segregated
Customer Margin, which account would be separate from any other
accounts maintained by FICC for the Netting Member, including fellow
Segregated Customer Margin Custody Accounts. Finally, Segregated
Customer Margin deposits must be met using assets deposited by the
Segregated Indirect Participants with the Netting Member, with a
limited exception of temporary ``prefunding'' by the Netting Member
while a margin call to the Segregated Indirect Participant is
outstanding.\20\
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\18\ GSD Rule 2B governs the maintenance of separate Accounts
and creates a framework for the separate calculation, collection,
and holding of margin supporting a Netting Member's Proprietary
Transactions and the margin supporting the transactions a Netting
Member submits on behalf of Indirect Participants. See GSD Rule 2B,
supra note 3.
\19\ See 17 CFR 240.15c3-3a. These conditions require, among
other things, that activity of Segregated Indirect Participants be
margined on a gross (i.e., Segregated Indirect Participant-by-
Segregated Indirect Participant) basis, and that the Segregated
Customer Margin deposits be credited to a Segregated Customer Margin
Custody Account to be used exclusively to settle and margin
transactions in U.S. Treasury securities recorded in the
corresponding Segregated Indirect Participants Account. See Section
1a of GSD Rule 4, supra note 3.
\20\ See Section 3 of GSD Rule 2B, supra note 3.
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Default Management in the Current GSD Rules
The GSD Rules currently include default management provisions that
describe the circumstances that would allow FICC to suspend, prohibit,
or limit a Member's access to FICC's services.\21\ GSD Rule 21
enumerates the circumstances that would provide cause for FICC's Board
of Directors (``Board'') to suspend, prohibit, or limit a Member's
access to FICC's services.\22\ Additionally, GSD Rule 22 enumerates the
circumstances that would cause a Member to be treated as insolvent.\23\
If any of the enumerated circumstances arise, FICC may suspend a Member
from any service provided by FICC, either with respect to one or more
particular transactions or with respect to transactions generally, or
FICC may prohibit or limit such Member's access to services offered by
FICC.\24\ When FICC restricts a Member's access to services pursuant to
GSD Rule 22A, FICC is said to have ``ceased to act'' for a Defaulting
Member.\25\
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\21\ See GSD Rule 21, supra note 3.
\22\ See id. Such circumstances include a Member's failure to
perform any of its obligations to FICC, violation of the GSD Rules
or any agreement with FICC, fraudulent or dishonest conduct,
significant financial or operational difficulties, lack of bank
credit, or suspension, prohibition, or limitation has been
determined by FICC's Board to be necessary to protect FICC or its
membership. See id.
\23\ See GSD Rule 22, supra note 3.
\24\ See id.
\25\ See GSD Rule 1 (definition of ``Defaulting Member''), supra
note 3.
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GSD Rule 22A describes the general default management procedures
FICC follows once it has ceased to act for a Defaulting Member,
including provisions for the treatment of the Defaulting Member's
pending transactions.\26\ Unless FICC's Board determines otherwise,
from the time that FICC has ceased to act for the Defaulting Member,
FICC would not process any trades that are not Compared Trades \27\ to
which the Defaulting Member is a party.\28\ GSD Rule 22A also sets
forth the close-out process that FICC would follow upon ceasing to act
for a Defaulting Member.\29\ The close-out process starts with the
creation of a ``Final Net Settlement Position'' for each Eligible
Netting Security with a distinct CUSIP Number.\30\ This position is a
net of all outstanding Deliver Obligations and Receive Obligations of
the Defaulting Member in each such security.\31\ FICC then buys, sells,
or otherwise liquidates the Final Net Settlement Positions.\32\
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\26\ See GSD Rule 22A, supra note 3.
\27\ The term Compared Trade means a trade, the data on which
has been compared or deemed compared in the Comparison System
pursuant to the GSD Rules, and the GSD Rules describe how a Compared
Trade is Novated. See GSD Rule 1 (definition of Compared Trade) and
5, Section 8(a) (describing Novation of Compared Trades), supra note
3.
\28\ See Section 2(a) of GSD Rule 22A, supra note 3.
\29\ See Section 2(a) of GSD Rule 22A, supra note 3.
\30\ See id.
\31\ See id.
\32\ See id.
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GSD Rule 3A incorporates the default management provisions
described above into the Sponsored Service.\33\ Thus, FICC may suspend,
prohibit, or limit access to FICC's services by Sponsoring Members and
Sponsored Members when any of the applicable circumstances enumerated
in GSD Rule 21 would provide cause for such action.\34\ If FICC ceases
to act for a Sponsoring Member or Sponsored Member, the relevant
provisions of GSD Rule 22A would apply.\35\ Additionally, if FICC
ceases to act for a Sponsoring Member, GSD Rule 3A provides FICC with
the discretion to determine whether to close-out any affected Sponsored
Member Trades and/or permit the Sponsored Members to complete their
settlement.\36\ If FICC determines to complete settlement, the
Sponsored Member Trades would settle pursuant to the GSD Rules in the
normal course of business.\37\ GSD Rule 3A also includes provisions
that govern the voluntary liquidation of done-with Sponsored Member
Trades by either the Sponsoring Member or FICC.\38\
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\33\ See Sections 13-18 of GSD Rule 3A, supra note 3.
\34\ See id.
\35\ See Sections 13-14 of GSD Rule 3A, supra note 3.
\36\ See Section 14(c) of GSD Rule 3A, supra note 3.
\37\ See id.
\38\ See Section 18 of GSD Rule 3A, supra note 3. Done-with
transactions are those executed between an Indirect Participant and
Indirect Participant's Sponsoring Member or Agent Clearing Member.
Done-away transactions are those executed between an Indirect
Participant and a party other than the Indirect Participant's
Sponsoring Member of Agent Clearing Member (i.e., either another
Netting Member or Indirect Participant).
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The GSD Rules that describe the Agent Clearing Service currently do
not contain provisions that would govern the default of an Agent
Clearing Member.\39\
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\39\ See GSD Rule 8, supra note 3.
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The GSD Rules currently do not contain provisions that would permit
the porting of indirect participant positions and margin between
Netting Member intermediaries, neither in the regular course of
business nor following the default of a Netting Member intermediary.
Finally, GSD Rule 22B describes the circumstances that would
constitute a default by FICC (``Corporation Default'') and the actions
that would follow such an event, including how novated transactions
would be treated.\40\ Specifically, following a Corporation Default,
novated, unsettled transactions would be terminated, and Members would
be required to take market action to close-out those positions and
report the results of such action to FICC's Board.\41\ GSD Rule 22B
applies to activity that is cleared through the
[[Page 59621]]
Sponsored Service and is incorporated into GSD Rule 3A by
reference,\42\ but the provisions of GSD Rule 22B currently do not
specify how Sponsored Member Transactions, or other Indirect
Participant activity, would be treated following a Corporation
Default.\43\
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\40\ See GSD Rule 22B, supra note 3.
\41\ See id.
\42\ See Section 17(a) of GSD Rule 3A, supra note 3.
\43\ See GSD Rule 22B, supra note 3.
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B. Proposed Changes
FICC proposes to expand the default management provisions in the
GSD Rules applicable to the Sponsored Service and Agent Clearing
Service to more fully address the default scenarios of Netting Member
intermediaries, Indirect Participants, and FICC. Additionally, FICC
proposes to add provisions to the GSD Rules that govern the porting of
Indirect Participant activity between intermediary Netting Members,
both in the normal course of business and following the default of an
intermediary. Finally, FICC proposes several non-substantive technical
updates and corrections to the GSD Rules.
FICC states that the proposed changes would encourage greater
utilization of central clearing on the part of market participants by
providing additional information in the GSD Rules regarding the rights
and obligations of FICC's direct and indirect participants in the event
of a default.\44\ Additionally, FICC states that adding new porting
provisions to the GSD Rules would provide indirect participants with a
tool to manage their clearing activity and intermediary relationships
and to manage their exposures to a defaulting intermediary.\45\ FICC
states that the proposed changes would thereby further facilitate
access to GSD's clearance and settlement services.\46\
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\44\ See Notice of Filing, supra note 4, 90 FR at 26656.
\45\ See Notice of Filing, supra note 4, 90 FR at 26657.
\46\ See id.
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1. Default Management Rules Governing the Sponsored Service
Sponsoring Member or Sponsored Member Default
Currently, Sections 13 through 16 of GSD Rule 3A address the
default of a Sponsoring Member or Sponsored Member by incorporating GSD
Rules 21, 22, and 22A, making those provisions applicable to Sponsoring
Members, Sponsored Members, and Sponsored Member Trades.\47\
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\47\ See Sections 14 and 16 of GSD Rule 3A, supra note 3. FICC
also proposes to streamline these provisions by removing repetitive
language and relocating the consolidated language in Sections 13 and
14 of GSD Rule 3A. See Notice of Filing, supra note 4, 90 FR at
26659.
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As described above, in the event FICC ceases to act for a
Sponsoring Member, Section 14(c) of GSD Rule 3A currently provides FICC
with the discretion to either close-out affected Sponsored Member
Trades and/or permit the Sponsored Members to complete their
settlement.\48\ FICC proposes to add a third alternative to the
disposition of Sponsored Member Trades following a Sponsoring Member
default--the porting (i.e., transfer) of those positions to a different
Sponsoring Member pursuant to proposed GSD Rule 26, discussed more
fully below.\49\
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\48\ See Section 14(c) of GSD Rule 3A, supra note 3.
\49\ See Notice of Filing, supra note 4, 90 FR at 26659.
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FICC also proposes to add a new Section 14(d)(i) to GSD Rule 3A to
provide additional information regarding the operation of the
settlement process.\50\ Specifically, if FICC determines to permit the
Sponsored Member of a defaulting Sponsoring Member to complete
settlement with respect to affected Sponsored Member Trades, such
settlement shall occur in accordance with Section 8 of GSD Rule 3A, as
though the Sponsoring Member was not a Defaulting Member pursuant to
GSD Rule 22A.\51\
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\50\ See id.
\51\ See id.
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FICC also proposes to add a new Section 14(d)(ii) to GSD Rule 3A to
provide additional information regarding the close-out process of
Sponsored Member Trades.\52\ Specifically, if FICC determines to close-
out the Sponsored Member Trades of a defaulting Sponsoring Member, FICC
may net the positions of each Sponsored Member (including each
Segregated Indirect Participant that is a Sponsored Member), in
determining a Final Net Settlement Position.\53\ However, FICC would
not net the positions of one Sponsored Member (or Segregated Indirect
Participant) against the positions of another Sponsored Member (or
Segregated Indirect Participant).\54\
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\52\ See id.
\53\ See id.
\54\ See id.
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Additionally, as originally filed, proposed Section 14(d)(ii) of
GSD Rule 3A would provide that, with respect to any amount due to a
Segregated Indirect Participant that is a Sponsored Member, FICC would
make such payment to or as directed by the Sponsoring Member or its
trustee or receiver.\55\ In Amendment No. 1, FICC proposes to amend
proposed Section 14(d)(ii) of GSD Rule 3A to clarify its applicability
to Sponsored Members in general.\56\ FICC's proposals to change Section
14(d) of GSD Rule 3A would not alter FICC's current processes.\57\
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\55\ See id.
\56\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45852.
\57\ See id.
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Sponsoring Member's Ability To Close-Out Sponsored Member Trades
Currently, Section 18(b) of GSD Rule 3A allows a Sponsoring Member
to terminate all, but not fewer than all, of a Sponsored Member's
positions and corresponding positions in the Sponsoring Member's Dealer
Account.\58\ In Amendment No. 1, FICC proposes to amend Section 18 (re-
numbered Section 16) of GSD Rule 3A to provide Sponsoring Members the
ability to close-out some or all of the relevant Sponsored Member
Trades.\59\ FICC states that providing such flexibility would better
facilitate the ability of Sponsoring Members to provide clearing
services to Sponsored Members.\60\
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\58\ See Section 18(b) of GSD Rule 3A, supra note 3.
\59\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45852.
\60\ See id.
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Description of Additional Liquidation Mechanisms
Currently, Section 18 of GSD Rule 3A includes a provision that
governs the voluntary liquidation of done-with Sponsored Member Trades
by either the Sponsoring Member or FICC.\61\ In Amendment No. 1, FICC
proposes to amend Section 18 (re-numbered Section 16) of GSD Rule 3A to
describe additional mechanisms through which Sponsoring Members may
liquidate both done-with and done-away transactions of Sponsored
Members.\62\
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\61\ See Section 18 of GSD Rule 3A, supra note 3.
\62\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45851-52.
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Specifically, FICC proposes to add a provision to Section 18 (re-
numbered Section 16) of GSD Rule 3A that would describe two additional
liquidation mechanisms (``SMP Liquidation Actions'') available to
Sponsoring Members to liquidate both done-with and done-away Sponsored
Member Trades of a Sponsored Member.\63\ First, to liquidate positions
resulting from Sponsored Member Trades other than Sponsored GC Trades,
the Sponsoring
[[Page 59622]]
Member may submit to FICC (to be recorded in the Sponsoring Member
Omnibus Account) another Sponsored Member Trade that offsets, in whole
or in part, any Net Settlement Position or Forward Net Settlement
Position established in such Sponsoring Member Omnibus Account (the
``Offsetting Transaction Mechanism'').\64\ Second, for any Sponsored
Member Trades, the Sponsoring Member may instruct FICC to transfer to a
Proprietary Account of the Sponsoring Member any Net Settlement
Position or Forward Net Settlement Position established in a Sponsoring
Member Omnibus Account (the ``Transfer Mechanism''). As a result of
such instruction, the positions would become the proprietary positions
of the Sponsoring Member.\65\
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\63\ See id. FICC states that both liquidation mechanisms are
currently operationally available to Sponsoring Members. Amendment
No. 1 would provide for these mechanisms explicitly in the GSD
Rules, improving market participants' understanding of the actions
available for Sponsoring Members to liquidate Sponsored Member
Trades. See id.
\64\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45852. This offsetting mechanism would not be available for
Sponsored GC Trades because FICC settles Sponsored GC Trades on a
gross basis and, therefore, an offsetting trade would not
effectively liquidate a Sponsored GC Trade. See id.
\65\ See id.
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2. Default Management Rules Governing the Agent Clearing Service
As described above, current GSD Rule 8 does not address default
management within the Agent Clearing Service.\66\ FICC proposes to
adopt new provisions in GSD Rule 8 to govern the default of an Agent
Clearing Member.\67\ FICC also proposes to adopt new provisions in GSD
Rule 8 that would align the default management processes across
Indirect Participants (i.e., Executing Firm Customers using the Agent
Clearing Service and Sponsored Members using the Sponsored Service)
where such alignment is appropriate.\68\
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\66\ See GSD Rule 8, supra note 3.
\67\ See Notice of Filing, supra note 4, 90 FR at 26660.
\68\ See id.
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Voluntary Termination of Agent Clearing Member Status
Section 3(g) of GSD Rule 8 currently provides that an Agent
Clearing Member may terminate its status as an Agent Clearing Member by
providing notice to FICC.\69\ However, this provision does not provide
certainty regarding the treatment of the terminated Agent Clearing
Member's unsettled Agent Clearing Transactions.\70\ FICC proposes to
expand Section 3(g) of GSD Rule 8 to include provisions aligned with
those in Section 2(i) of GSD Rule 3A applicable to the voluntary
termination of Sponsoring Member status.\71\ However, proposed Section
3(g) of GSD Rule 8 would reflect substantive differences between the
voluntary termination of an Agent Clearing Member and a Sponsoring
Member, including: (1) the Sponsoring Member Guaranty is not applicable
within the Agent Clearing Service; and (2) FICC need not post an
Important Notice when an Agent Clearing Member voluntarily terminates
its status as such with respect to all Executing Firm Customers because
FICC does not publish lists of Agent Clearing Members and their
Executing Firm Customer relationships.\72\ Additionally, FICC proposes
to expand Section 3(g) of GSD Rule 8 to include a more detailed
description of the actions to be taken by both the Agent Clearing
Member and FICC when an Agent Clearing Member voluntarily terminates
its status as such.\73\
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\69\ See Section 3(g) of GSD Rule 8, supra note 3.
\70\ See id.
\71\ See Notice of Filing, supra note 4, 90 FR at 26660.
\72\ See id.
\73\ See id.
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Termination of Executing Firm Customer(s) Access to the Agent Clearing
Service
FICC proposes to add a new Section 3(h) to GSD Rule 8 that would
permit FICC to terminate the access of one or more Executing Firm
Customers to the Agent Clearing Service.\74\ FICC states that it may
take such action, for example, if an Executing Firm Customer is subject
to sanctions that would restrict or prohibit FICC from processing the
Executing Firm Customer's transactions.\75\
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\74\ See id.
\75\ See id.
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FICC's Right To Offset Agent Clearing Member Obligations
FICC proposes to add a new Section 5(f) to GSD Rule 8 to provide
that when any obligation of an Agent Clearing Member arises under the
GSD Rules to pay or perform with respect to an Executing Firm Customer,
FICC may exercise a right to offset and net any such obligation against
any obligations of FICC to the Agent Clearing Member in respect of such
Agent Clearing Member's Proprietary Accounts.\76\ This provision would
align with Section 11 of GSD Rule 3A applicable to the Sponsored
Service, except with respect to the Sponsoring Member Guaranty, which
is not applicable to the Agent Clearing Service.\77\
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\76\ See Notice of Filing, supra note 4, 90 FR at 26660-61.
\77\ See id.
---------------------------------------------------------------------------
Application of GSD's Loss Allocation Provisions to the Agent Clearing
Service
FICC proposes to expand Section 7(f) of GSD Rule 8 to state that
Executing Firm Customers shall not be obligated for allocations of loss
or liability incurred by FICC pursuant to GSD Rule 4.\78\ To the extent
a loss or liability is determined by FICC to arise in connection with
Agent Clearing Transactions (i.e., in connection with the insolvency or
default of an Agent Clearing Member), the Executing Firm Customers
shall not be responsible for, or considered in, the loss allocation
calculation and such obligation would be the responsibility of the
Agent Clearing Member.\79\ These provisions would align with Section
12(a) of GSD Rule 3A applicable to the Sponsored Service, except with
respect to Off-the-Market Transactions, which are not applicable to
Agent Clearing Transactions.\80\
---------------------------------------------------------------------------
\78\ See Notice of Filing, supra note 4, 90 FR at 26661.
\79\ See id.
\80\ See id.
---------------------------------------------------------------------------
Agent Clearing Member Default
FICC proposes to add Section 8 to GSD Rule 8 to describe the
default management process that would govern the default of an Agent
Clearing Member.\81\ These proposed provisions would align with Section
14 of GSD Rule 3A applicable to the Sponsored Service, as
appropriate.\82\ Section 8 of GSD Rule 8 would address an Agent
Clearing Member default by incorporating GSD Rules 21, 22, and 22A,
making those provisions applicable to Agent Clearing Members and Agent
Clearing Transactions.\83\ Additionally, in the event FICC ceases to
act for an Agent Clearing Member, Section 8(c) of GSD Rule 8 would
provide FICC with the discretion to either close-out affected Agent
Clearing Transactions, permit the Executing Firm Customers to complete
their settlement, or port (i.e., transfer) all or part of those
positions to a different Agent Clearing Member pursuant to proposed GSD
Rule 26, discussed more fully below.\84\ Section 8(d) of GSD Rule 8
would provide that if FICC determines to permit the Executing Firm
Customers of the defaulting Agent Clearing Member to complete
settlement with respect to affected Agent Clearing Transactions,
settlement shall occur as if the Agent Clearing Member was not a
Defaulting Member pursuant to GSD Rule 22A.\85\ Section 8(e) of GSD
Rule 8 would provide that FICC may net the positions of Executing Firm
Customers (other than
[[Page 59623]]
Segregated Indirect Participants) against the positions of other
Executing Firm Customers that are recorded in the same Agent Clearing
Member Omnibus Account in determining a Final Net Settlement
Position.\86\ Finally, Section 8(e) of GSD Rule 8 would provide that
with respect to any amount due to a Segregated Indirect Participant
that is an Executing Firm Customer, FICC would make such payment to or
as directed by the Agent Clearing Member or its trustee or
receiver.\87\
---------------------------------------------------------------------------
\81\ See Notice of Filing, supra note 4, 90 FR at 26661-62.
\82\ See id.
\83\ See id.
\84\ See Notice of Filing, supra note 4, 90 FR at 26661.
\85\ See id.
\86\ See id.
\87\ See Notice of Filing, supra note 4, 90 FR at 26661-62.
---------------------------------------------------------------------------
Liquidation of Agent Clearing Transactions
FICC proposes to add a new Section 9 to GSD Rule 8 to describe the
ability of FICC and Agent Clearing Members to liquidate the done-with
Agent Clearing Transactions of an Executing Firm Customer and outline
the operation of that liquidation.\88\ Overall, proposed Section 9 of
GSD Rule 8 would align with the parallel provisions in GSD Rule 3A that
address the voluntary liquidation of Sponsored Member Trades, except
with respect to the Sponsoring Member Guaranty and to reflect that
unlike Sponsored Members, Executing Firm Customers are not GSD
members.\89\
---------------------------------------------------------------------------
\88\ See Notice of Filing, supra note 4, 90 FR at 26662-63.
\89\ See id.
---------------------------------------------------------------------------
Section 9(a) of GSD Rule 8 would provide that liquidation can only
occur if the Agent Clearing Member is not a Defaulting Member, FICC has
not ceased to act for the Agent Clearing Member, and no Corporation
Default has occurred.\90\ Section 9(b) of GSD Rule 8 would provide that
either the Agent Clearing Member or FICC may terminate the long and
short Net Settlement Positions and Forward Net Settlement Positions of
the Executing Firm Customer and the corresponding positions of the
Agent Clearing Member.\91\ Section 9(b) of GSD Rule 8 would further
provide that terminations would be finalized through the creation of a
Final Net Settlement Position, representing the net obligations of the
parties for each Eligible Netting Security.\92\ As originally filed,
Section 9 of GSD Rule 8 would allow FICC to terminate some or all of
the done-with Agent Clearing Transactions of an Executing Firm
Customer. In Amendment No. 1, FICC would amend Section 9 of GSD Rule 8,
as originally proposed, to remove FICC's ability to liquidate Agent
Clearing Transactions under this provision.\93\ Unlike Sponsored
Members, Executing Firm Customers are not limited members of FICC.\94\
Therefore, under the amended proposal, FICC would only have the ability
to settle, close-out, or (if the proposed rule change is approved)
transfer Agent Clearing Transactions in the event FICC has ceased to
act for an Agent Clearing Member.\95\
---------------------------------------------------------------------------
\90\ See Notice of Filing, supra note 4, 90 FR at 26662.
\91\ See id.
\92\ See id.
\93\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45853.
\94\ See id.
\95\ See id.
---------------------------------------------------------------------------
Section 9(c) of GSD Rule 8 would provide for the calculation and
settlement of liquidation amounts.\96\ Specifically, the Executing Firm
Customer Liquidation Amount and the corresponding Agent Clearing Member
Liquidation Amount would be determined based on net positions, market
prices, and any gains, losses, or costs incurred by the Agent Clearing
Member.\97\ Additionally, payments would be processed through a
designated Agent Clearing Funds-Only Omnibus Account, with obligations
automatically set off between FICC and the Agent Clearing Member.\98\
Section 9(d) of GSD Rule 8 would require the Agent Clearing Member to
indemnify FICC against any claims by Executing Firm Customers
challenging the liquidation calculations.\99\
---------------------------------------------------------------------------
\96\ See Notice of Filing, supra note 4, 90 FR at 26662-63.
\97\ See id.
\98\ See id.
\99\ See Notice of Filing, supra note 4, 90 FR at 26663.
---------------------------------------------------------------------------
As originally filed, Section 9 of GSD Rule 8 describes how Agent
Clearing Members may liquidate an Executing Firm Customer's done-with
Agent Clearing Transactions. In Amendment No. 1, FICC would amend
Section 9 of GSD Rule 8, as originally proposed, to describe additional
mechanisms through which Agent Clearing Members may liquidate both
done-with and done-away transactions of Executing Firm Customers.\100\
FICC proposes to add a new Section 9(c) to GSD Rule 8 regarding the
Agent Clearing Service to include the same two additional liquidation
mechanisms (i.e., the Offsetting Transaction Mechanism and the Transfer
Mechanism, collectively, the ``ACM Liquidation Actions'') that FICC
proposes to add to GSD Rule 3A regarding the Sponsored Service
described above.\101\
---------------------------------------------------------------------------
\100\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45851-52.
\101\ See id.
---------------------------------------------------------------------------
3. Close-Out Rules for Indirect Participant Activity
FICC proposes to expand the descriptions of the procedures set
forth in GSD Rule 22A that apply following a Netting Member
Default.\102\ Specifically, Section 2(a) of GSD Rule 22A would exclude
from scope any Sponsored Member Trades or Agent Clearing Transactions
that FICC determines to settle pursuant to GSD Rule 3A or GSD Rule
8.\103\ Section 2(b) of GSD Rule 22A would address how FICC would
close-out Indirect Participant activity.\104\ These provisions would
apply the close-out procedures to positions recorded in an Indirect
Participants Account and specify how Final Net Settlement Positions
would be determined, permitting FICC to net positions on an Indirect
Participant-by Indirect Participant (i.e., gross) basis and across
Executing Firm Customers in a manner consistent with the proposed
parallel provisions in GSD Rules 3A and 8 described above.\105\
---------------------------------------------------------------------------
\102\ See Notice of Filing, supra note 4, 90 FR at 26663.
\103\ See id.
\104\ See id.
\105\ See id.
---------------------------------------------------------------------------
Additionally, FICC proposes to amend GSD Rule 22A to refine its
authority to take market action on each Final Net Settlement Position
of a Defaulting Member, including the discretion to decline to take
market action when a Final Net Settlement Position has opposite
directionality to another position established in the same security for
the Defaulting Member or its Indirect Participants.\106\ In such
circumstances, FICC would determine the value of the positions through
other market actions or by reference to available market data.\107\
---------------------------------------------------------------------------
\106\ See id.
\107\ See id.
---------------------------------------------------------------------------
FICC also proposes to clarify that Indirect Participants may, but
are not obligated to, take market action to close-out any outstanding
positions that FICC determines to close-out pursuant to GSD Rule 3A or
GSD Rule 8.\108\ In Amendment No. 1, FICC would clarify its treatment
of market action by Indirect Participants.\109\ Specifically, Amendment
No. 1 would amend GSD Rule 22A to provide that, with respect to any
market action taken by an Indirect Participant, FICC will not require
the Indirect Participant to report the data on any such market action
to FICC (except to the extent otherwise set
[[Page 59624]]
forth in the GSD Rules).\110\ Additionally, FICC will not incorporate
such data into its calculation of any amount owing by or to the
Defaulting Member or Indirect Participant to any greater extent than it
would have done so in the absence of the statement proposed to be added
to GSD Rule 22A by the proposed rule change.\111\
---------------------------------------------------------------------------
\108\ See id.
\109\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45853.
\110\ See id.
\111\ See id.
---------------------------------------------------------------------------
FICC further proposes to expand the existing provision that allows
FICC to offset losses with gains, which currently applies only to a
Defaulting Member's Market Professional Cross-Margining Account, to
provide that FICC may use gains realized from closing-out a Defaulting
Member's Proprietary Transactions to offset losses associated with the
close-out of Indirect Participant activity.\112\ Finally, GSD Rule 22A
would specify that FICC would include, without limitation, all costs
and fees incurred in closing-out Final Net Settlement Positions when
determining any resulting loss or liability, without changing FICC's
existing rights or obligations.\113\
---------------------------------------------------------------------------
\112\ See Notice of Filing, supra note 4, 90 FR at 26663.
\113\ See id.
---------------------------------------------------------------------------
4. Default Management Rules Governing a Corporation Default
FICC proposes to amend GSD Rule 22A to clarify how Indirect
Participant activity would be treated in the event of a Corporation
Default.\114\ Specifically, GSD Rule 22B would apply to all Sponsored
Member Trades and Agent Clearing Transactions, and the phrase ``each
relevant Member'' would include Sponsored Members.\115\ Additionally,
only Members with outstanding Novated Transactions would be required to
take market action.\116\ Sponsored Members may appoint Sponsoring
Members as agent to act on their behalf, and Agent Clearing Members may
act for their Executing Firm Customers unless otherwise agreed.\117\
Either the Member or its agent would report market action results to
FICC's Board.\118\
---------------------------------------------------------------------------
\114\ See Notice of Filing, supra note 4, 90 FR at 26663-64.
\115\ See Notice of Filing, supra note 4, 90 FR at 26664.
\116\ See id.
\117\ See id.
\118\ See id.
---------------------------------------------------------------------------
FICC also proposes to expand GSD Rule 22B to clarify how net
amounts payable to or from a Member would be calculated.\119\ Indirect
Participant claims would not be netted against amounts owed by their
Sponsoring Member or Agent Clearing Member.\120\ Activity in Agent
Clearing Member Omnibus Accounts (excluding Segregated Indirect
Participant Accounts) would be netted across all Executing Firm
Customers.\121\ Activity in Sponsoring Member Omnibus Accounts and
Segregated Indirect Participant Accounts would be netted on an Indirect
Participant-by-Indirect Participant (i.e., gross) basis.\122\ Multiple
net amounts may be calculated for a Netting Member intermediary to
reflect separate amounts for its Indirect Participants.\123\ Finally,
FICC proposes to make corresponding changes to Section 17(a) (re-
numbered Section 15(a)) of GSD Rule 3A to ensure payments to Sponsored
Members following a Corporation Default would be made on a net basis
for each Sponsored Member and Segregated Indirect Participant.\124\
---------------------------------------------------------------------------
\119\ See id.
\120\ See id.
\121\ See id.
\122\ See id.
\123\ See id.
\124\ See id.
---------------------------------------------------------------------------
5. Porting Indirect Participant Activity
FICC proposes to adopt a new GSD Rule 26 that would describe the
process by which an Indirect Participant's activity and, when
applicable, Segregated Customer Margin, could be transferred between
Sponsoring Members or Agent Clearing Members, both in the normal course
of business and following the default of a Sponsoring Member or Agent
Clearing Member.\125\
---------------------------------------------------------------------------
\125\ See Notice of Filing, supra note 4, 90 FR at 26664-65.
---------------------------------------------------------------------------
Porting in the Normal Course of Business
Section 1 of GSD Rule 26 would govern the transfer of an Indirect
Participant's activity and, where applicable, Segregated Customer
Margin between Sponsoring Members or Agent Clearing Members in the
normal course of business.\126\ Section 1 of GSD Rule 26 would permit
the transfer of all or part of an Indirect Participant's activity from
a Sending Member (i.e., the originating Sponsoring Member or Agent
Clearing Member) to a Receiving Member (i.e., the recipient Sponsoring
Member or Agent Clearing Member).\127\ Indirect Participants would only
be able to transfer activity within the same type of Indirect
Participants Account.\128\ A Sending Member would submit the trades to
FICC's real-time trade matching system, and the Receiving Member would
be deemed to accept the transfer by submitting matching data by the
published deadline.\129\ Transfers submitted by the deadline would be
effective by the close of business on that day, while later submissions
would take effect the following business day.\130\
---------------------------------------------------------------------------
\126\ See id.
\127\ See Notice of Filing, supra note 4, 90 FR at 26664.
\128\ See id.
\129\ See id.
\130\ See id.
---------------------------------------------------------------------------
Section 1 of GSD Rule 26 would establish conditions for the
transfer of Indirect Participant Activity, including (1) the Indirect
Participant has completed onboarding with the Receiving Member, (2) the
trades have been novated but not yet included in a Net Settlement
Position, and (3) the Sending Member and Receiving Member have
submitted and accepted the required trade data.\131\ FICC would
maintain its lien on the Sending Member's Clearing Fund and, where
applicable, Segregated Customer Margin until the Receiving Member
satisfies the relevant margin requirements.\132\
---------------------------------------------------------------------------
\131\ See Notice of Filing, supra note 4, 90 FR at 26664-65.
\132\ See Notice of Filing, supra note 4, 90 FR at 26665.
---------------------------------------------------------------------------
Additionally, Section 1 of GSD Rule 26 would establish conditions
necessary for a Sending Member to transfer the Segregated Customer
Margin deposits of a Segregated Indirect Participant to a Receiving
Member.\133\ Such conditions include that (1) all of the activity of
the Segregated Indirect Participant is transferred from the Sending
Member to a Segregated Indirect Participants Account of the Receiving
Member, (2) the Sending Member has identified to FICC the cash deposit
and Eligible Clearing Fund Securities to be transferred to the
Receiving Member, and (3) the transfer is submitted to FICC in
accordance within the applicable timeframes.\134\ FICC would not
process the transfer of Segregated Customer Margin if any of the
foregoing conditions are not met.\135\
---------------------------------------------------------------------------
\133\ See id. Note H of Rule 15c3-3 under the Exchange Act
requires Segregated Customer Margin to be funded with the cash and
eligible securities of the Segregated Indirect Participant. See 17
CFR 240.15c3-3a.
\134\ See Notice of Filing, supra note 4, 90 FR at 26665.
\135\ See id.
---------------------------------------------------------------------------
Porting Following a Sponsoring Member or Agent Clearing Member Default
Section 2 of GSD Rule 26 would govern the transfer of Indirect
Participant activity and, where applicable, Segregated Customer Margin,
following the default of a Sponsoring Member or Agent Clearing
Member.\136\ Subject to applicable law,
[[Page 59625]]
FICC would attempt to transfer all or part of the Defaulting Member's
Indirect Participant transactions to alternate Sponsoring Members or
Agent Clearing Members.\137\ FICC would retain discretion over such
transfers, recognizing that circumstances such as bankruptcy court
orders could limit FICC's ability to transfer activity, but the
provisions would document in the GSD Rules FICC's intention to effect
such transfers when possible and appropriate.\138\
---------------------------------------------------------------------------
\136\ See id.
\137\ See id.
\138\ See id.
---------------------------------------------------------------------------
Section 2 of GSD Rule 26 would also provide that FICC's lien on a
Defaulting Member's Clearing Fund would continue to secure the
obligations of any transferred activity until the Receiving Member
meets the required Sponsoring Member or Agent Clearing Member omnibus
account deposits.\139\ This provision would enable FICC to continue to
manage the risks of such transferred activity.\140\
---------------------------------------------------------------------------
\139\ See id.
\140\ See id.
---------------------------------------------------------------------------
As originally filed, Section 2 of GSD Rule 26 does not define what
constitutes a ``default'' of a Netting Member intermediary that may
result in involuntary porting of Indirect Participant positions. In
Amendment No. 1, FICC would clarify that proposed Section 2 of GSD Rule
26 would apply in the event FICC ceases to act for a Sponsoring Member
or Agent Clearing Member under the GSD Rules.\141\ Amendment No. 1
would also clarify that any transfer under Section 2 of GSD Rule 26
would require the consent of the Receiving Member.\142\
---------------------------------------------------------------------------
\141\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45853.
\142\ See id.
---------------------------------------------------------------------------
6. Technical Updates and Corrections
FICC proposes several non-substantive technical changes and
corrections to the GSD Rules.\143\ FICC proposes to add a defined term
for ``Indirect Participant'' to GSD Rule 1 that would refer to any
Sponsored Member or Executing Firm Customer.\144\ FICC also proposes to
add a reference to proposed GSD Rule 26 in Section 17(b) (re-numbered
Section 15(b)) of GSD Rule 3A applicable to Sponsoring Members and
Sponsored Members.\145\ Additionally, FICC proposes to change existing
references to the term ``Member'' in GSD Rule 22A to ``Defaulting
Member'' for accuracy.\146\ FICC proposes to create additional
subsections in Section 2 of GSD Rule 22A to improve its
readability.\147\
---------------------------------------------------------------------------
\143\ See Notice of Filing, supra note 4, 90 FR at 26665.
\144\ See id.
\145\ See id.
\146\ See id.
\147\ See id.
---------------------------------------------------------------------------
Finally, FICC would make a grammatical correction to Section 14(a)
of GSD Rule 3A, correct a section reference in Section 18(e) (re-
numbered Section 16(e)) of GSD Rule 3A, correct a typographical error
in Section 2(b) of GSD Rule 8, and remove an unnecessary heading at the
top of GSD Rule 22B.\148\
---------------------------------------------------------------------------
\148\ See id.
---------------------------------------------------------------------------
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act \149\ 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, as modified by Amendment No. 1, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with the requirements of the Exchange
Act and the rules and regulations thereunder applicable to FICC. In
particular, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with Section 17A(b)(3)(F) of
the Exchange Act \150\ and Rules 17ad-22(e)(13), (e)(18)(iv)(C),
(e)(19), and (e)(23)(i) thereunder.\151\
---------------------------------------------------------------------------
\149\ 15 U.S.C. 78s(b)(2)(C).
\150\ 15 U.S.C. 78q-1(b)(3)(F).
\151\ 17 CFR 240.17Ad-22(e)(13), 17 CFR 240.17Ad-
22(e)(18)(iv)(C), 17 CFR 240.17Ad-22(e)(19), and 17 CFR 240.17Ad-
22(e)(23)(i).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F)
Section 17A(b)(3)(F) of the Exchange Act requires that the rules of
a clearing agency, such as FICC, be designed to, among other things,
promote the prompt and accurate clearance and settlement of securities
transactions, and assure the safeguarding of securities and funds which
are in the control of the clearing agency or for which it is
responsible, and protect investors and the public interest.\152\
---------------------------------------------------------------------------
\152\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above in Section I.B., FICC proposes to expand the
default management provisions in the GSD Rules applicable to the
Sponsored Service and Agent Clearing Service to more fully address the
default scenarios of Netting Member intermediaries, Indirect
Participants, and FICC. Additionally, FICC proposes to add provisions
to the GSD Rules that govern the porting of Indirect Participant
activity between intermediary Netting Members, both in the normal
course of business and following the default of an intermediary.
Finally, FICC proposes several non-substantive technical updates and
corrections to the GSD Rules.
As described above in Section I.B., FICC proposes changes to the
GSD Rules that are designed to encourage and facilitate the utilization
of GSD's clearance and settlement services by a greater number of
market participants for transactions in U.S. Treasury securities,
including for done-with and done-away transactions. Specifically, the
proposed changes to adopt and expand the default management provisions
in the GSD Rules would encourage participation in central clearing by
improving market participants' understanding of FICC's default
management procedures applicable to indirect access models and should
help market participants better evaluate the fitness of such models for
their individual needs. Currently, the GSD rules do not address the
default of an Agent Clearing Member. These proposed changes should make
clear how such a default would be administered. Additionally, the
proposed changes to adopt rules that would govern porting Indirect
Participant activity between intermediary Netting Members would further
encourage participation in central clearing by providing market
participants with a useful tool to manage their clearing relationships
and trading activity.
The proposed changes should help extend the benefits of central
clearing to a broader segment of the market, particularly to firms that
would offer or participate through FICC's indirect access models.
Bringing more securities transactions into central clearing would
promote the prompt and accurate clearance and settlement of such
transactions, providing benefits to FICC, FICC's participants, and the
broader market. To the extent that the proposed changes would encourage
greater participation in central clearing and improved understanding of
the default management processes at FICC, the overall amount of
counterparty credit risk in the securities markets would decrease. FICC
would be able to risk-manage more transactions centrally, pursuant to
risk management procedures that the Commission has reviewed and
approved,\153\ and FICC
[[Page 59626]]
would guarantee trade settlement in the event of a default.
---------------------------------------------------------------------------
\153\ See Section 19(b) of the Exchange Act and Rule 19b-4
thereunder.
---------------------------------------------------------------------------
Additionally, more central clearing would help market participants
avoid potential disorderly default scenarios. A CCP, which has
guaranteed both sides of a trade, is uniquely positioned to coordinate
a defaulting participant's trades. The CCP's non-defaulting
participants can rely on the CCP to complete the defaulting
participant's trades and cover any resulting losses using the
defaulting participant's resources and/or other default management
tools. By contrast, defaults in bilaterally settled trades are likely
to be less orderly and subject to variable default management
techniques because bilaterally settled trades are not subject to
default management processes that are required to be in place and
publicly disclosed by a CCP, such as FICC.\154\ Moreover, the increased
specificity regarding FICC's default management processes should
promote prompt and accurate clearance and settlement of securities
transactions by ensuring that FICC and its participants can manage a
default smoothly and with less risk to the market.
---------------------------------------------------------------------------
\154\ A covered clearing agency, such as FICC, is required to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, ensure that it has
the authority and operational capacity to contain losses and
liquidity demands and continue to meet its obligations, which must
be tested annually, and publicly disclose all relevant rules and
material procedures, including key aspects of its default rules and
procedures. See Rule 17ad-22(e)(13) and (e)(23)(i). See also Covered
Clearing Agency Standards Proposing Release, Exchange Act Release
No. 71699 (Mar. 12, 2014), 79 FR 29507, 29545 (May 27, 2014)
(stating that a CCP's default management procedures would provide
certainty and predictability about the measures available to a CCP
in the event of a default which would, in turn facilitate the
orderly handling of member defaults and would enable members to
understand their obligations to the CCP in extreme circumstances).
---------------------------------------------------------------------------
CCP rules that are clear, comprehensible, and more effectively
describe the CCP's risk management procedures to market participants
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.\155\ The proposed rule change, as modified by Amendment No. 1, is
consistent with those objectives because improving market participants'
understanding of FICC's default management procedures and providing
market participants with porting tools to manage their clearing
relationships and trading activity would encourage greater
participation in central clearing, thereby ensuring that a greater
proportion of securities transactions are subject to the risk
mitigation benefits of central clearing described above.
---------------------------------------------------------------------------
\155\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Moreover, the proposed changes to adopt and expand the default
management provisions in the GSD Rules would provide clarity to better
prepare market participants to deal with a participant default,
resulting in a more orderly management of such an event, minimizing
default losses and reducing potential risk to FICC and its non-
defaulting participants. Accordingly, the proposed changes would ensure
the safeguarding of securities and funds in FICC's custody or control,
consistent with Section 17A(b)(3)(F) of the Exchange Act.\156\
---------------------------------------------------------------------------
\156\ See id.
---------------------------------------------------------------------------
Finally, FICC's proposed technical updates and corrections to the
GSD Rules would promote the prompt and accurate clearance and
settlement of securities transactions and protect investors and the
public interest by ensuring that the GSD Rules are clear and
comprehensible, which would enable market participants to readily
understand their rights and obligations in connection with FICC's
clearance and settlement services.\157\
---------------------------------------------------------------------------
\157\ See id.
---------------------------------------------------------------------------
1. Comments on Default Management Provisions for Done-Away Trades
As described above in Section I.B., the proposed rule change, as
originally filed, would include default management provisions
explicitly in the GSD Rules for cleared done-with trades. In that
regard, commenters support the proposed rule change.\158\
---------------------------------------------------------------------------
\158\ See Letter from Allison Lurton, General Counsel and Chief
Legal Officer, FIA (July 14, 2025) (``FIA Letter'') at 2-3, supra
note 5; Letter from Katherine Darras, General Counsel, ISDA (July
14, 2025) (``ISDA Letter I'') at 1, supra note 5.
---------------------------------------------------------------------------
However, commenters request that FICC amend the proposed rule
change to provide liquidation mechanisms in the GSD Rules for cleared
done-away trades as well.\159\ One such commenter states that FICC
should amend the GSD Rules to provide default procedures and close-out
rules for done-away trading similar to those already established by
derivatives clearing organizations, where done-away clearing is the
norm.\160\ The commenter requests that FICC amend the GSD Rules to
expressly permit Netting Member intermediaries to either settle,
transfer, liquidate, or offset a defaulting customer's done-away
trades.\161\
---------------------------------------------------------------------------
\159\ See ISDA Letter I at 2, supra note 158 (stating that such
rules would be critical to ensuring the viability of done-away
clearing at FICC); FIA Letter at 2-8, supra note 158 (stating that
the absence of such rules would: leave Netting Member intermediaries
without clear authority to close-out or otherwise manage a
defaulting customer's done-away trades; render done-away clearing
unacceptably risky because Netting Member intermediaries would be
unable to effectively plan for a customer default; create doubts as
to whether done-away trades would be treated as subject to a
``qualifying master netting agreement'' (``QMNA'')--a precondition
to obtaining favorable netting and regulatory capital treatment; and
make it more challenging to price done-away clearing services
because Netting Member intermediaries would not know their
protections in a customer default scenario).
\160\ See FIA Letter at 6-7 (citing the rulebooks of LCH
SwapClear (``LCH'') and ICE Clear Credit (``ICE''), supra note 158.
\161\ See FIA Letter at 2, 5-8 (stating that Netting Member
intermediaries should have the ability to: transfer one or more
positions of a defaulting customer to the Netting Member's
proprietary account; transfer one or more positions of a defaulting
customer to the proprietary account of another Netting Member or
another Netting Member's customer; credit one or more positions to
the customer's account that would offset or otherwise flatten the
customer's open positions; or immediately settle the customer's
positions by entering into offsetting trades (effectively
liquidating such positions)); see also Letter from Katherine Darras,
General Counsel, ISDA (Oct. 14, 2025) (``ISDA Letter II'') at 2
(stating that Agent Clearing Members should have the ability to:
cause FICC to transfer positions between the Agent Clearing Member's
proprietary account and its Agent Clearing Member Omnibus Account;
and continue to settle in the ordinary course one or more
positions), supra note 5.
---------------------------------------------------------------------------
Although FICC disagrees that the absence of express language in the
GSD Rules regarding a Netting Member intermediary's ability to
liquidate a customer's done-away trades precludes intermediaries from
engaging in done-away clearing,\162\ FICC acknowledges that adding such
provisions to the GSD Rules can further facilitate done-away clearing
by providing market participants with greater clarity on the
subject.\163\ Accordingly, in Amendment No. 1 to the proposed rule
change, FICC proposes to amend the GSD Rules to expressly provide for
done-away clearing.\164\ As described above in Section I.B., FICC
proposes to add language to the GSD Rules that describes the SMP
Liquidation Actions that Netting Member intermediaries may take to
liquidate done-away transactions, i.e., the Offsetting Transaction
Mechanism and the Transfer Mechanism. FICC states that the Offsetting
Transaction Mechanism is the principal means that clearing members at
other CCPs have historically used to liquidate done-away customer
positions.\165\ FICC states that the Transfer Mechanism is an
alternative
[[Page 59627]]
preferred by market participants in certain circumstances.\166\
---------------------------------------------------------------------------
\162\ See FICC Letter at 5 (highlighting that a number of CCPs
either do not include express liquidation mechanisms in their
rulebooks, or include substantially more limited provisions than the
commenter requests from FICC), supra note 6.
\163\ See FICC Letter at 5, supra note 6.
\164\ See Notice of Amendment No. 1, supra note 9, 90 FR at
45851-52.
\165\ See FICC Letter at 7, supra note 6.
\166\ See id. (describing situations in which a customer's
portfolio is too large and complex, such that transferring the
portfolio to the clearing member's proprietary account would enable
the clearing member to use portfolio hedges and macro-unwinds rather
than offsetting transactions or in which the customer is from a
jurisdiction where the legal regime does not clearly support an
offsetting mechanism).
---------------------------------------------------------------------------
FICC states that it is not necessary, at this time, to describe
additional liquidation mechanisms in the GSD Rules to facilitate done-
away clearing.\167\ Regarding the commenter's specific requests (e.g.,
liquidation via settlement), FICC states that the commenter has not
described how such mechanisms would function or what use-case such
mechanisms would serve.\168\ FICC acknowledges the possibility that
other mechanisms may be necessary or beneficial to provide market
participants with greater flexibility or to address particular
regulatory or operational requirements.\169\ However, before proposing
an additional liquidation mechanism in the GSD Rules, FICC cites the
need to ensure that it has the operational capacity to support such
mechanism and an understanding of how the mechanism would operate from
a risk-management, legal, operational, and practical perspective.\170\
---------------------------------------------------------------------------
\167\ See FICC Letter at 7-8, supra note 6.
\168\ See id.
\169\ See id.
\170\ See id.
---------------------------------------------------------------------------
The proposed changes in Amendment No. 1 to include explicit
liquidation provisions for done-away transactions in the GSD Rules
largely address the commenters' requests.\171\ The Commission agrees
that the proposed changes in Amendment No. 1 provide greater clarity
and certainty to enable market participants to offer and engage in
done-away clearing.
---------------------------------------------------------------------------
\171\ Indeed, following FICC's filing of Amendment No. 1, one
commenter submitted a supportive follow-up comment letter, urging
the Commission's approval and FICC's implementation of the amended
proposed rule change. See ISDA Letter II at 1, supra note 161.
---------------------------------------------------------------------------
Additionally, the Commission agrees that FICC need not amend the
GSD Rules to include additional liquidation mechanisms for done-away
transactions at this time. First, express liquidation provisions are
not necessary to permit Netting Member intermediaries to effect
transactions otherwise permitted under the GSD Rules. As cited by FICC
above, the GSD Rules currently permit a Netting Member intermediary to
liquidate a customer's positions by entering into offsetting
transactions in the customer's account or settling a customer's
transactions.\172\ Second, FICC expresses a willingness to consider
adding other liquidation mechanisms to the GSD Rules in the future,
based on fully developed use-cases and analyses of the risk-management,
legal, operational, and practical implications of such mechanisms.\173\
The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that the proposed rule change is
consistent with the Exchange Act and the rules thereunder.\174\ The
absence of additional done-away liquidation mechanisms from the GSD
Rules does not render the proposed rule change inconsistent with the
Exchange Act or the rules thereunder.
---------------------------------------------------------------------------
\172\ See FICC Letter at 5-6 (citing Section 6-9 of GSD Rule 3A
and Sections 5(a), 6(b), and 6(d) of GSD Rule 8), supra note 6.
\173\ See FICC Letter at 7-8, supra note 6.
\174\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
One commenter requests that FICC amend the GSD Rules to contain
provisions allowing Netting Member intermediaries to engage in any
liquidation mechanism without the consent of a defaulting customer. In
response, FICC states that the bilateral agreement between the Netting
Member and its customer should govern such terms between the parties,
not the GSD Rules.\175\
---------------------------------------------------------------------------
\175\ See FICC Letter at 8-9, supra note 6.
---------------------------------------------------------------------------
The Commission agrees that FICC need not amend the GSD Rules to
expressly permit Netting Member intermediaries to liquidate customer
positions without customer consent. Market participants should
generally have the flexibility to determine the negotiable aspects of
their relationships in their bilateral agreements.\176\
---------------------------------------------------------------------------
\176\ See e.g., 2024 SIFMA Master Treasury Securities Clearing
Agreement: Done-With (``SIFMA Treasury Clearing Agreement''),
Section 4(b)(i), available at <a href="https://www.sifma.org/wp-content/uploads/2024/09/2024-SIFMA-Master-Treasury-Securities-Clearing-Agreement-Done-With.pdf">https://www.sifma.org/wp-content/uploads/2024/09/2024-SIFMA-Master-Treasury-Securities-Clearing-Agreement-Done-With.pdf</a> (providing the Clearing Member sole
discretion to exercise termination, liquidation, and other rights in
the event of a customer default); see also Account Treatment for UST
Repo Transactions Cleared Through FICC, (Sept. 11, 2025), available
at <a href="https://www.sifma.org/wp-content/uploads/2025/09/Public-SIFMA-Accounting-UST-Clearing-Whitepaper_final.pdf">https://www.sifma.org/wp-content/uploads/2025/09/Public-SIFMA-Accounting-UST-Clearing-Whitepaper_final.pdf</a> (``Accounting White
Paper'') at 2 (assuming that the bilateral agreement between
intermediaries and customers would permit intermediaries to
liquidate customer positions without customer consent in the event
of a customer default).
---------------------------------------------------------------------------
Commenters also request that FICC amend the GSD Rules to clarify
that a Netting Member intermediary acts as principal (i.e., not as
agent) for a defaulting customer when the Netting Member intermediary
closes-out or otherwise takes action with respect to the defaulting
customer's trades.\177\ Commenters state that this clarification would
ensure the enforceability of the Netting Member's remedies across an
array of jurisdictions.\178\
---------------------------------------------------------------------------
\177\ See FIA Letter at 2, 7-8, supra note 158; ISDA Letter II
at 1, supra note 161.
\178\ See id.
---------------------------------------------------------------------------
In response, FICC states that whether a Netting Member intermediary
acts as an agent for its customer or as principal generally depends on
the bilateral agreement and substance of the relationship between the
two parties, not on the views or intent of a third party, such as
FICC.\179\ To support its position, FICC cites the absence of such
provisions from other CCP rulebooks.\180\ Additionally, FICC notes that
the Accounting Committee Working Group of the Securities Industry and
Financial Markets Association (``SIFMA'') recently published a white
paper to facilitate market participants' accounting analyses of FICC-
cleared transactions including done-away trades.\181\ The Accounting
White Paper's conclusions are premised on certain assumptions and
understandings regarding the capacity in which an Agent Clearing Member
acts when submitting, carrying, and clearing Agent Cleared Transactions
and the terms contained in the bilateral agreement between the Agent
Clearing Member and its Executing Firm Customer.\182\ FICC states that
it would not be appropriate or consistent with FICC's regulatory
requirements to prescribe capacity requirements that could disrupt or
raise a question about a Netting Member intermediary's ability to
structure its relationship in a manner consistent with the Accounting
White Paper.\183\
---------------------------------------------------------------------------
\179\ See id.
\180\ See FICC Letter at 9-10, supra note 6 (citing the
rulebooks of CME, ICE, and OCC), supra note 158.
\181\ See id. (citing Accounting White Paper), supra note 176.
\182\ See FICC Letter at 9-10, supra note 6.
\183\ See id.
---------------------------------------------------------------------------
The Commission agrees that FICC need not amend the GSD Rules to
expressly provide that a Netting Member acts as principal (i.e., not as
agent) when liquidating a customer's transactions. Market participants
should generally have the flexibility to determine the negotiable
aspects of their relationships in their bilateral agreements.\184\ This
is consistent with
[[Page 59628]]
the Commission's discussion in the Treasury Clearing Rules Adopting
Release regarding the importance of not removing the ability of such
intermediaries to determine which risks to take with respect to
guaranteeing transactions to a CCP, in order to encourage Netting
Member intermediaries to provide services that enable customers to
access central clearing.\185\
---------------------------------------------------------------------------
\184\ See e.g., SIFMA Treasury Clearing Agreement, Section
4(b)(i) (providing the Clearing Member sole discretion to exercise
termination, liquidation, and other rights in the event of a
customer default), supra note 176; see also Accounting White Paper
at 2 (assuming that the bilateral agreement between intermediaries
and customers would permit intermediaries to liquidate customer
positions without customer consent in the event of a customer
default), supra note 176.
\185\ 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'') at 2756-57 (rejecting a commenter's suggestion that would
require clearing agencies to require their direct participants to
transact with their customers in specific ways and limit their
ability to offer certain types of pricing services).
---------------------------------------------------------------------------
2. Comments on ``Market Action'' in Close-Out Scenarios
As described above in Section I.B., the proposed rule change, as
originally filed, would amend GSD Rule 22A to clarify that FICC's right
to take market action with respect to each Final Net Settlement
Position of a Defaulting Member would include the right to decline to
take market action to the extent that such position has opposite
directionality to another position established in the same security for
the Defaulting Member or its Indirect Participants. One commenter
supports this clarification to the extent it provides greater detail
regarding FICC's default management procedures.\186\
---------------------------------------------------------------------------
\186\ See FIA Letter at 8, supra note 158.
---------------------------------------------------------------------------
However, the commenter notes that the term ``market action'' is not
a defined term in the GSD Rules.\187\ Additionally, the proposed rule
change, as originally filed, would amend GSD Rule 22A to allow--but not
require--the Indirect Participants of a Defaulting Netting Member
intermediary to take market action to close-out any outstanding
positions that FICC has determined to close-out. The commenter states
that without defining the term ``market action,'' the proposed rule
change creates confusion and could create a chaotic wind-down
process.\188\ The commenter states that FICC's use of the Indirect
Participant's market actions to determine the price of closed-out
securities when FICC calculates Final Net Settlement Positions could
yield inaccurate results and potential losses to FICC.\189\ Moreover,
the commenter states that there is no need for the GSD Rules to allow
Indirect Participants to take market action because they are already
free to do so when such action does not otherwise violate the GSD
Rules.\190\ Accordingly, the commenter requests that FICC amend the GSD
Rules to define the term market action to clarify the actions that
Indirect Participants and FICC may take pursuant to the relevant
provisions of GSD Rule 22A.\191\
---------------------------------------------------------------------------
\187\ See FIA Letter at 8-9, supra note 158.
\188\ See id. Specifically, confusion stems from the possibility
that Indirect Participants might arrive at different pricing using a
variety of methods with little visibility, consistency, or clarity.
\189\ See id.
\190\ See id.
\191\ See id.
---------------------------------------------------------------------------
FICC agrees that Indirect Participants are generally free to
utilize cash and securities they receive under FICC-cleared
transactions as they see fit, and that the proposed language in GSD
Rule 22A to allow Indirect Participants to take market action to close-
out positions would not alter their rights under the GSD Rules.\192\
However, FICC states that market participants have indicated it would
be helpful for the GSD Rules to specify the circumstances in which an
Indirect Participant may wish to take market action to limit its losses
after FICC has ceased to act for the Indirect Participant's Netting
Member intermediary.\193\ Additionally, FICC states that nothing in the
proposed rule change would provide for FICC to incorporate the results
of any market action taken by an Indirect Participant into FICC's
calculation of any amount owing by or to the Defaulting Member,
contrary to the commenter's concerns.\194\ Nonetheless, FICC states
that adding further clarifying language to GSD Rule 22A regarding the
treatment of market action by Indirect Participants would help market
participants better understand FICC's intent.\195\ Accordingly, as
described above in Section I.B., Amendment No. 1 to the proposed rule
would clarify GSD Rule 22A to provide that an Indirect Participant
shall not (except to the extent otherwise set forth in the GSD Rules)
be required to report the data on any market action taken pursuant to
GSD Rule 22A to FICC, and FICC shall not incorporate such data into its
calculation of any amount owing by or to the Defaulting Member or
Indirect Participant to any greater extent than it would in the absence
of the explicit language in the GSD Rules authorizing the Indirect
Participant to take such market actions.
---------------------------------------------------------------------------
\192\ See FICC Letter at 11, supra note 6.
\193\ See id.
\194\ See id.
\195\ See id.
---------------------------------------------------------------------------
Furthermore, FICC states that it would not be appropriate or
consistent with its regulatory obligations to dictate the manner in
which an Indirect Participant may take market action.\196\ FICC states
that based on its engagement with market participants, FICC understands
that the standards to be followed by customers when taking market
action following the default of a Netting Member intermediary is a
matter that market participants may wish to negotiate between
themselves within the context of their bilateral agreements.\197\
---------------------------------------------------------------------------
\196\ See FICC Letter at 12, supra note 6.
\197\ See FICC Letter at 12-13 (citing SIFMA Treasury Clearing
Agreement, Sections 4(f)(i) and 4(g), which address these matters
and allow the parties to select certain options and agree on their
preferred terms), supra note 6.
---------------------------------------------------------------------------
The Commission agrees that if Indirect Participants have indicated
that it is not always clear when they may wish to take market action to
mitigate their losses, it is reasonable for FICC to clarify GSD Rule
22A to provide that the Indirect Participant may--but would not be
required to--take market action after FICC has ceased to act for the
Netting Member intermediary. Additionally, by explicitly clarifying GSD
Rule 22A to provide that FICC would neither request nor use data
regarding Indirect Participant market action, FICC's proposal in
Amendment No. 1 should address the commenter's concern that FICC might
use such data to determine Final Net Settlement Positions following a
Netting Member intermediary default. Finally, consistent with the
Commission's position that Netting Member intermediaries should have
the flexibility to determine which risks to take when providing their
customers access to central clearing,\198\ the Commission agrees that
Netting Member intermediaries and their customers should have the
flexibility to determine between themselves the allowable types of
market action Indirect Participants may take, rather than FICC
prescribing a set of standards in the GSD Rules.
---------------------------------------------------------------------------
\198\ See Adopting Release at 2756-57, supra note 185.
---------------------------------------------------------------------------
3. Comments on Porting
As described above in Section I.B., the proposed rule change, as
originally filed, would add provisions to the GSD Rules that govern the
porting of Indirect Participant activity between Netting Member
intermediaries, both in the normal course of business and following an
intermediary default. One commenter generally supports having clear,
pre-established porting rules and arrangements in the GSD Rules.\199\
However, the commenter states that some of the porting provisions, as
proposed in the original filing, would magnify risk for Netting Member
[[Page 59629]]
intermediaries and, therefore, need revision.\200\
---------------------------------------------------------------------------
\199\ See FIA Letter at 10, supra note 158.
\200\ See id.
---------------------------------------------------------------------------
a. Default Porting; Receiving Member's Consent
Proposed Section 2 of GSD Rule 26 (regarding porting following an
intermediary default), as originally filed, would not require a
Receiving Member's consent to a Sending Member's transfer of Indirect
Participant activity. The commenter requests that FICC revise the
proposed rule change to require, as a condition of transfer under
Section 2 of GSD Rule 26, the Receiving Member's consent to the
transfer of the Indirect Participant's activity.\201\ This
clarification would help market participants avoid uncertainty and
ensure that the necessary documentation and account structure is in
place between the Indirect Participant and Receiving Member.\202\
---------------------------------------------------------------------------
\201\ See id.
\202\ See id.
---------------------------------------------------------------------------
FICC agrees that the commenter's suggestion would provide greater
clarity regarding its default porting provisions and proposes to revise
the GSD Rules accordingly.\203\ Specifically, as described above in
Section I.B., Amendment No. 1 would revise proposed Section 2 of GSD
Rule 26 to clarify that any transfer would require the Receiving
Member's consent. The Commission agrees that the proposed changes in
Amendment No. 1 provide greater clarity and address the commenter's
request.
---------------------------------------------------------------------------
\203\ See FICC Letter at 16, supra note 6.
---------------------------------------------------------------------------
b. Indirect Participants Designating Preferred Receiving Members
The commenter requests that FICC revise the proposed rule change to
permit Indirect Participants to designate, as a preference, another
Netting Member intermediary as Receiving Member in the event FICC
chooses to port the Indirect Participant's activity following an
intermediary default.\204\ The commenter states that this revision
would make porting more predictable for Indirect Participants, the
Receiving Member, and FICC.\205\
---------------------------------------------------------------------------
\204\ See FIA Letter at 10, supra note 158.
\205\ See FIA Letter at 10-11, supra note 158.
---------------------------------------------------------------------------
FICC states that before proposing a specific mechanism to designate
a preferred Receiving Member, FICC and market participants should
engage to determine how to structure such a mechanism to ensure it
achieves its intended purpose and the costs would not outweigh the
benefits.\206\ FICC notes that it currently does not interface directly
with Indirect Participants.\207\ Therefore, FICC would either need to
build a system to enable an Indirect Participant to notify FICC of its
designation, or FICC would need to receive such designation from the
Indirect Participant's current Netting Member intermediary, which could
be challenging given the commercially sensitive nature of the
designation.\208\ Additionally, FICC states that in a default scenario,
FICC would likely need to transfer the positions of a potentially large
number of Indirect Participants in an extremely short timeframe.\209\
FICC states that such challenges may limit the benefits of Indirect
Participants designating their preferred Receiving Members.\210\
Nonetheless, FICC states that such designations could facilitate either
bulk or individual transfers to preferred Receiving Members, thereby
assisting FICC in managing a default and enabling Indirect Participants
to face their preferred Receiving Members.\211\
---------------------------------------------------------------------------
\206\ See FICC Letter at 15, supra note 6.
\207\ See id.
\208\ See id.
\209\ See id.
\210\ See id.
\211\ See id.
---------------------------------------------------------------------------
The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that the proposed rule change is
consistent with the Exchange Act and the rules thereunder.\212\ The
absence of a provision in the GSD Rules allowing Indirect Participants
to designate their preferred Receiving Members would not render the
proposed rule change inconsistent with the Exchange Act or the rules
thereunder.
---------------------------------------------------------------------------
\212\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
c. Default Porting; All or Part of Indirect Participant's Transactions
Proposed Section 2 of GSD Rule 26, as originally filed, provides
that FICC may transfer all or part of an Indirect Participant's
transactions of a defaulting intermediary, along with associated
Segregated Customer Margin. The commenter states that FICC's transfer
of some Indirect Participant activity could result in a margin
deficiency or otherwise expose the defaulting intermediary to
additional loss.\213\ Accordingly, the commenter requests that FICC
revise the proposed rule change to provide that FICC may only transfer
Indirect Participant activity to the extent it would not result in a
margin deficiency and would be risk-mitigating for the defaulting
intermediary.\214\
---------------------------------------------------------------------------
\213\ See FIA Letter at 11 (describing a scenario in which a
Defaulting Member's Sponsored Member has two offsetting Sponsored
Member Trades, of which FICC decides to transfer only one to another
Netting Member, causing the Defaulting Member to incur margin
obligations for the trade that was not transferred), supra note 158.
\214\ See id.
---------------------------------------------------------------------------
FICC states that such a restriction on its ability to effectuate a
transfer is unnecessary considering that FICC's regulatory obligations
already preclude FICC from unnecessarily increasing risk to itself or
its participants.\215\ FICC also states that such a restriction is not
appropriate because managing a default requires flexibility.\216\ FICC
states that in light of its regulatory obligations to minimize
risk,\217\ FICC would not generally anticipate effectuating porting in
a way that would result in a margin deficiency or otherwise increase
risk to FICC or a Defaulting Member.\218\ However, considering the
potential volatility of a default scenario, FICC states it would not be
beneficial from a risk management perspective to constrain its ability
to port positions as the commenter suggested.\219\ Instead, FICC states
that it needs flexibility (within its regulatory guiderails) to address
unique default scenarios in a manner that would limit losses to FICC
and its participants.\220\
---------------------------------------------------------------------------
\215\ See FICC Letter at 13-15, supra note 6.
\216\ See id.
\217\ See e.g., 17 CFR 240.17ad-22(e)(3) (requirement to
maintain a sound risk management framework for comprehensively
managing . . . risks that arise in or are borne by the covered
clearing agency); 17 CFR 240.17ad-22(e)(6) (requirement to cover
credit exposures to participants by establishing a risk-based margin
system); 17 CFR 240.17ad-22(e)(16) (requirement to safeguard its own
and its participants' assets); 17 CFR 240.17ad-22(e)(19)
(requirement to identify, monitor, and manage the material risks to
the covered clearing agency arising from arrangements in which firms
that are indirect participants . . . rely on the services provided
by direct participants to access its payment, clearing, or
settlement facilities).
\218\ See FICC Letter at 13-15, supra note 6.
\219\ See id.
\220\ See id.
---------------------------------------------------------------------------
The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that the proposed rule change is
consistent with the Exchange Act and the rules thereunder.\221\ The
lack of provisions in the GSD Rules that FICC may only transfer
Indirect Participant activity to the extent it would not result in a
margin deficiency and would be risk-mitigating for the defaulting
intermediary is not inconsistent with the Act and the rules thereunder.
---------------------------------------------------------------------------
\221\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
The Commission agrees that FICC's regulatory obligations would
generally preclude FICC from taking action that would unnecessarily
cause a participant's margin deficiency or otherwise expose the
participant to
[[Page 59630]]
additional loss.\222\ Additionally, Section 17A(b)(3)(F) of the
Exchange Act requires that the rules of a clearing agency, such as
FICC, be designed to, among other things, assure the safeguarding of
securities and funds which are in the control of the clearing agency or
for which it is responsible.\223\ The Commission agrees that FICC
should be able to manage a default flexibly, consistent with its
regulatory obligations.
---------------------------------------------------------------------------
\222\ See supra note 217.
\223\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
d. Normal Course Porting; All Segregated Customer Margin
Proposed Section 1(a) of GSD Rule 26 (regarding voluntary porting
in the normal course of business), as originally filed, provides that
all or a portion of an Indirect Participant's activity may be ported to
a Receiving Member. However, proposed Section 1(d) of GSD Rule 26 only
permits a transfer of Segregated Customer Margin if all of the Indirect
Participant's activity is ported to the Receiving Member. The commenter
states it does not understand why FICC believes all of the activity
must be ported to effect the transfer of Segregated Customer
Margin.\224\ Additionally, the commenter states that limiting the
ability of an Indirect Participant to transfer a portion of its
Segregated Customer Margin could result in delays and uncertainty
because the Receiving Member would likely need to recalculate the
associated Segregated Customer Margin Requirement and send it
separately.\225\ Accordingly, the commenter requests that FICC revise
the proposed rule change to allow the transfer of a portion of an
Indirect Participant's Segregated Customer Margin.\226\
---------------------------------------------------------------------------
\224\ See FIA Letter at 11-12, supra note 158.
\225\ See id.
\226\ See id.
---------------------------------------------------------------------------
In response, FICC notes that Segregated Customer Margin is
calculated on a portfolio basis (i.e., in a way that recognizes risk
offsets across the Segregated Indirect Participant's positions).\227\
As a result, if a portion of the Segregated Indirect Participant's
positions were ported, the aggregate margin requirement for the ported
and remaining positions would likely change.\228\ Accordingly, the
partial transfer of Segregated Customer Margin would give rise to
complexities regarding how to calculate that portion.\229\ FICC would
also need to consider the risks to itself and its participants, as well
as its regulatory obligations and potentially significant operational
changes to FICC's collateral management and risk systems.\230\
Moreover, FICC disagrees with the commenter's assertion that the
limitation on partial porting of Segregated Customer Margin would cause
delays due to the need for a Receiving Member to recalculate margin
requirements.\231\ First, as explained above, the Segregated Customer
Margin requirement applicable to the ported positions would already
need to be recalculated based on the risk profile of the resulting
portfolio. Second, FICC performs such calculations, not the Receiving
Member.
---------------------------------------------------------------------------
\227\ See FICC Letter at 17, supra note 6.
\228\ See id. For example, if the ported positions offset the
risk of the remaining positions, the transfer could cause the
aggregate margin requirements to increase.
\229\ See FICC Letter at 17, supra note 6.
\230\ See id.
\231\ See id.
---------------------------------------------------------------------------
The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that the proposed rule change is
consistent with the Exchange Act and the rules thereunder.\232\ The
absence of provisions in the GSD Rules allowing the transfer of a
portion of an Indirect Participant's Segregated Customer Margin would
not render the proposed rule change inconsistent with the Exchange Act
or the rules thereunder.
---------------------------------------------------------------------------
\232\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
e. Excess Segregated Customer Margin
Proposed Section 1(a) of GSD Rule 26, as originally filed, provides
for the movement of excess Segregated Customer Margin from the Sending
Member to the Receiving Member. The commenter states this it is unclear
what FICC means by ``excess'' in that context.\233\ Therefore, the
commenter requests that FICC revise the proposed rule change to remove
the word ``excess'' and instead, provide that FICC will update its
books and records to reflect the movement of Segregated Customer Margin
associated with the ported activity of the Segregated Indirect
Participant.\234\
---------------------------------------------------------------------------
\233\ See FIA Letter at 11-12, supra note 158.
\234\ See id.
---------------------------------------------------------------------------
FICC explains that pursuant to proposed Section 1(a) of GSD Rule
26, Segregated Customer Margin would transfer from Sending Member to
Receiving Member at the start of the Business Day following the
Transfer Effective Time.\235\ At that time, the margin would be excess
Segregated Customer Margin from the perspective of the Sending
Member.\236\ Accordingly, FICC states that the word ``excess'' provides
important clarity and should remain in proposed Section 1(a) of GSD
Rule 26.\237\
---------------------------------------------------------------------------
\235\ See FICC Letter at 17, supra note 6.
\236\ See id.
\237\ See id.
---------------------------------------------------------------------------
The Commission agrees that the use of the word ``excess'' provides
clarity regarding the operation of the proposed porting rules.
f. Transferring Proprietary U.S. Treasury Securities
The commenter notes that a Netting Member intermediary is permitted
to temporarily use proprietary U.S. Treasury securities to meet its
Segregated Customer Margin Requirement in accordance with Section
(b)(1)(iii) of Note H to SEC Rule 15c3-3a and Section 3 of GSD Rule 2B.
The commenter requests that FICC clarify that any transfer of
Segregated Customer Margin pursuant to proposed GSD Rule 26 would not
include such proprietary U.S. Treasury securities (or any other assets
that the SEC may permit Netting Member intermediaries to use
temporarily for purposes of Note H).\238\
---------------------------------------------------------------------------
\238\ See FIA Letter at 12, supra note 158.
---------------------------------------------------------------------------
FICC states that such a prohibition would not be appropriate
because it would constrain the ability of Netting Member intermediaries
and their customers to agree bilaterally upon the circumstances and
conditions of a transfer.\239\ As an example, FICC cites the SIFMA
Treasury Clearing Agreement, which provides flexibility for
intermediaries and their customers to agree on porting provisions,
including limitations on the ability of customers to transfer prefunded
margin.\240\ FICC also notes that other major U.S. CCP rulebooks do not
prescribe such limitations.\241\ Additionally, as noted above, proposed
Section 1(d) of GSD Rule 26 would not allow partial transfers of
Segregated Customer Margin. Therefore, a requirement that the entirety
of transferred Segregated Customer Margin consist of Indirect
Participant assets could limit or eliminate the ability of Indirect
Participants to port their Segregated Customer Margin.\242\ Finally,
FICC states that imposing the commenter's requested limitation would
require a significant operational build because FICC currently does not
track whether Segregated Customer Margin contains such proprietary
securities.\243\
---------------------------------------------------------------------------
\239\ See FICC Letter at 18, supra note 6.
\240\ See id.; SIFMA Treasury Clearing Agreement, Section
3(e)(iv), supra note 176.
\241\ See FICC Letter at 18, supra note 6.
\242\ See id.
\243\ See id.
---------------------------------------------------------------------------
The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that
[[Page 59631]]
the proposed rule change is consistent with the Exchange Act and the
rules thereunder.\244\ The absence of provisions in the GSD Rules
precluding the transfer of proprietary U.S. Treasury securities as
Segregated Customer Margin would not render the proposed rule change
inconsistent with the Exchange Act or the rules thereunder.
---------------------------------------------------------------------------
\244\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
g. Timing of Receiving Member's Margin Obligations
Proposed Section 1(c) of GSD Rule 26, as originally filed, provides
that a Sending Member's Clearing Fund and Segregated Customer Margin
will continue to secure obligations arising from transferred Indirect
Participant activity until the Receiving Member satisfies those
requirements. The commenter expresses concern that the Sending Member
would be required to fund the Receiving Member's margin obligations
with respect to the transferred activity despite no longer carrying
such activity.\245\ Therefore, the commenter requests that FICC revise
the proposed rule change to provide that the transfer of Indirect
Participant activity is conditional on the Receiving Member's posting
sufficient margin to support the transferred activity by the Transfer
Effective Time.\246\
---------------------------------------------------------------------------
\245\ See FIA Letter at 12, supra note 158.
\246\ See id.
---------------------------------------------------------------------------
FICC states that such a condition would not be appropriate because
it would constrain the ability of Netting Member intermediaries and
their customers to agree bilaterally upon the circumstances and
conditions of a transfer.\247\ While intermediaries may prefer the
commenter's condition, FICC explains that a customer may not, because
waiting for the Receiving Member to post margin could delay the
transfer, thereby diminishing the utility of the porting
provisions.\248\ FICC states that such matters should be determined
bilaterally between the parties based on their commercial, operational,
regulatory, and risk requirements.\249\
---------------------------------------------------------------------------
\247\ See FICC Letter at 19, supra note 6.
\248\ See id.
\249\ See id.
---------------------------------------------------------------------------
The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that the proposed rule change is
consistent with the Exchange Act and the rules thereunder.\250\ The
absence of provisions in the GSD Rules precluding the transfer of
proprietary U.S. Treasury securities as Segregated Customer Margin
would not render the proposed rule change inconsistent with the
Exchange Act or the rules thereunder.
---------------------------------------------------------------------------
\250\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
h. Defaulting Member Status
Proposed Section 2 of GSD Rule 26, as originally filed, does not
define what constitutes a ``default'' of a Netting Member intermediary
that may result in involuntary porting of Indirect Participant
positions. The commenter requests that FICC revise the proposed rule
change to clarify that Section 2 of rule 26 would only apply in the
event a Netting Member intermediary is a Defaulting Member as defined
in the GSD Rules.\251\
---------------------------------------------------------------------------
\251\ See FIA Letter at 12-13, supra note 158.
---------------------------------------------------------------------------
FICC agrees that the commenter's suggestion would provide greater
clarity regarding its default porting provisions and proposes to revise
the GSD Rules accordingly.\252\ Specifically, as described above in
Section I.B., Amendment No. 1 would revise the proposed rule change to
clarify that Section 2 of GSD Rule 26 would apply in the event FICC
ceases to act for a Netting Member intermediary. The Commission agrees
that the proposed changes in Amendment No. 1 provide greater clarity
and address the commenter's request.
---------------------------------------------------------------------------
\252\ See FICC Letter at 16, supra note 6.
---------------------------------------------------------------------------
4. Other Comments
a. FICC Liquidation of Agent Clearing Transactions
As described above in Section I.B., proposed Section 9 of GSD Rule
8, as originally filed, would allow FICC to terminate some or all of
the done-with Agent Clearing Transactions of an Executing Firm
Customer, provided that the Agent Clearing Member is not a Defaulting
Member, FICC has not ceased to act for the Agent Clearing Member, and a
Corporation Default has not occurred. In contrast, the parallel
provision in GSD Rule 3A regarding the Sponsored Service allows FICC to
terminate the done-with Sponsored Member Trades if similar conditions
are met, plus the additional condition that the Sponsoring Member has
not performed its obligations under the Sponsoring Member
Guaranty.\253\ In the Notice of Filing, FICC explains that it did not
propose a similar limitation in proposed Section 9 of GSD Rule 8
because there is no equivalent to the Sponsoring Member Guaranty in the
Agent Clearing Service.\254\
---------------------------------------------------------------------------
\253\ See Section 18(a)-(b) of GSD Rule 3A, supra note 3.
\254\ See Notice of Filing, supra note 4, 90 FR at 26662.
---------------------------------------------------------------------------
One commenter expresses concern that FICC's discretion to liquidate
done-with Agent Clearing Transactions is too broad.\255\ Therefore, the
commenter requests that FICC revise the proposed rule change to provide
that FICC shall only have the right to terminate the positions of an
Executing Firm Customer if (1) FICC has provided the notice described
in proposed Section 3(h) of GSD Rule 8, and (2) the Agent Clearing
Member has not performed its obligations relating to the Agent Clearing
Transactions done on behalf of that Executing Firm Customer.\256\
Additionally, the commenter states FICC should not have the ability to
terminate ``some or all'' of the positions of an Executing Firm
Customer, even if FICC revises the proposed rule change to include the
commenter's requested limitation above, because FICC's termination of
some positions could result in the Agent Clearing Member facing a
margin deficiency or other form of loss.\257\ Accordingly, the
commenter requests that FICC revise proposed Section 9 of GSD Rule 8 to
provide that FICC is permitted to terminate ``all, but not fewer than
all,'' of the positions of an Executing Firm Customer.\258\
---------------------------------------------------------------------------
\255\ See FIA Letter at 13, supra note 158.
\256\ See id.
\257\ See FIA Letter at 13-14, supra note 158.
\258\ See id.
---------------------------------------------------------------------------
FICC responds that its intent in proposed Section 9 of GSD Rule 8
was for the liquidation mechanism to be available exclusively to Agent
Clearing Members, not FICC.\259\ Accordingly, as described above in
Section I.B., Amendment No. 1 would revise the proposed rule change to
remove the language allowing FICC to trigger a termination under
Section 9 of GSD Rule 8. The Commission agrees that the proposed
changes in Amendment No. 1 address the commenter's concern.
---------------------------------------------------------------------------
\259\ See FICC Letter at 20, supra note 6. FICC states that it
would resolve the default of an Agent Clearing Member pursuant to
other applicable GSD Rules (e.g., GSD Rule 22A, proposed GSD Rule
26), pursuant to which FICC may cease to act for an Agent Clearing
Member. See id.
---------------------------------------------------------------------------
b. Intermediary Ability To Liquidate Some or All Positions
As described above in Section I.B., proposed Section 9 of GSD Rule
8, as originally filed, would allow an Agent Clearing Member to
terminate some or all of the done-with Agent Clearing Transactions of
an Executing Firm Customer and corresponding positions in the Agent
Clearing Member's Dealer Account. However, the parallel provision in
Section 18(b) of GSD Rule 3A currently allows a Sponsoring Member to
terminate all, but not fewer than all, of a Sponsored Member's
positions and corresponding positions
[[Page 59632]]
in the Sponsoring Member's Dealer Account.\260\ One commenter notes
that FICC provides no explanation for this distinction between the
Sponsored Service and Agent Clearing Service.\261\ The commenter states
that the flexibility to close-out some or all of an Indirect
Participant's positions would benefit both types of Netting Member
intermediaries.\262\ Accordingly, the commenter requests that FICC
revise Section 18(b) of GSD Rule 3A to allow a Sponsoring Member to
terminate some or all of a Sponsored Member's positions.\263\
---------------------------------------------------------------------------
\260\ See Section 18(b) of GSD Rule 3A, supra note 3.
\261\ See FIA Letter at 14, supra note 158.
\262\ See id.
\263\ See id.
---------------------------------------------------------------------------
FICC agrees that the flexibility in proposed Section 9 of GSD Rule
8 that would allow an Agent Clearing Member to liquidate some or all
Agent Clearing Transactions should also be available to Sponsoring
Members.\264\ Accordingly, as described above in Section I.B.,
Amendment No. 1 would revise Section 18 (re-numbered Section 16) of GSD
Rule 3A to provide Sponsoring Members the ability to liquidate some or
all of the relevant Sponsored Member Trades. The Commission agrees that
the proposed changes in Amendment No. 1 address the commenter's
request.
---------------------------------------------------------------------------
\264\ See FICC Letter at 20-21, supra note 6.
---------------------------------------------------------------------------
c. Offsetting Agent Clearing Transactions and Sponsored Member Trades
One commenter notes that an Indirect Participant could be the
customer of a Netting Member intermediary under both the Sponsored
Service and the Agent Clearing Service.\265\ When such an Indirect
Participant has amounts owing to or by FICC, the commenter states that
to offset such amounts would be consistent with FICC's default
management goals.\266\ The commenter requests that FICC revise the GSD
Rules to allow a Netting Member intermediary to offset an Executing
Firm Customer's Liquidation Amount against a Sponsored Member
Liquidation Amount with respect to the same Indirect Participant.\267\
---------------------------------------------------------------------------
\265\ See FIA Letter at 14-15, supra note 158.
\266\ See id.
\267\ See id.
---------------------------------------------------------------------------
FICC disagrees and states that the ability of a Netting Member
intermediary to net amounts owed between Agent Clearing Transactions
and Sponsored Member Trades is not relevant to FICC's default
management because FICC risk manages those portfolios separately and
FICC's netting rights are independent of those of the
intermediary.\268\ Additionally, FICC states that whether or not an
intermediary may net such amounts is a question that should be resolved
between the intermediary and its customer in their bilateral
agreement.\269\ Specifically, the parties should determine between
themselves whether the intermediary may look to one portfolio of
positions to satisfy the obligations arising from a separate portfolio
based on the parties' respective legal, credit, regulatory, commercial,
and other considerations.\270\ FICC does not believe it should
prescribe rules that would prevent market participants from resolving
such issues bilaterally.\271\
---------------------------------------------------------------------------
\268\ See FICC Letter at 21, supra note 6.
\269\ See id.
\270\ See id.
\271\ See id.
---------------------------------------------------------------------------
The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that the proposed rule change is
consistent with the Exchange Act and the rules thereunder.\272\ The
absence of provisions in the GSD Rules for netting amounts owed between
an Indirect Participant's separate portfolios in the Agent Clearing
Service and the Sponsored Service would not render the proposed rule
change inconsistent with the Exchange Act or the rules thereunder.
---------------------------------------------------------------------------
\272\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
d. Clarification of Trade Status
One commenter requests that FICC revise the GSD Rule to clarify
which done-with Sponsored Member Trades and Agent Clearing Transactions
are eligible to be liquidated and which are considered settled.\273\
For example, the commenter states that FICC could clarify whether
trades of an Indirect Participant that are in opposite directions on
the same CUSIP offset or are considered settled (by virtue of their
offset), and whether a trade is considered settled if the Netting
Member intermediary's proprietary position with FICC originally linked
with the Indirect Participant has settled.\274\
---------------------------------------------------------------------------
\273\ See FIA Letter at 15, supra note 158.
\274\ See id.
---------------------------------------------------------------------------
FICC responds that it does not understand what clarification the
commenter seeks, but FICC expresses a willingness to engage further
with the commenter (and other market participants) to address the
commenter's specific concern.\275\
---------------------------------------------------------------------------
\275\ See FICC Letter at 22, supra note 6.
---------------------------------------------------------------------------
The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that the proposed rule change is
consistent with the Exchange Act and the rules thereunder.\276\ The
absence of clarification in the GSD Rules regarding which done-with
Sponsored Member Trades and Agent Clearing Transactions are eligible to
be liquidated and which are considered settled would not render the
proposed rule change inconsistent with the Exchange Act or the rules
thereunder.
---------------------------------------------------------------------------
\276\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------
e. Remove Reference to Segregated Indirect Participants
As described above in Section I.B., proposed Section 14(d)(ii) of
GSD Rule 3A (regarding the close-out of Sponsored Member Trades), as
originally filed, provides that ``if any amount is due to a Segregated
Indirect Participant that is a Sponsored Member, the Corporation shall
make such payment to or as directed by the Sponsoring Member or its
trustee or receiver.'' One commenter states that FICC's intent is
unclear because payment to a Segregated Indirect Participant that is a
Sponsored Member would always be directed by the Sponsoring Member, its
trustee, or receiver.\277\ Therefore, the commenter requests that FICC
clarify the intent of that provision.\278\
---------------------------------------------------------------------------
\277\ See FIA Letter at 15, supra note 158.
\278\ See id.
---------------------------------------------------------------------------
FICC agrees that if an amount is calculated and owing to the
Sponsored Member, FICC would pay such amount to or as directed by the
Sponsoring Member or its trustee or receiver, regardless of whether the
Sponsored Member is a Segregated Indirect Participant.\279\
Accordingly, as described above in Section I.B., Amendment No. 1 would
revise Section 14(d)(ii) of GSD Rule 3A to apply to Sponsored Members.
The Commission agrees that the proposed changes in Amendment No. 1
address the commenter's request.
---------------------------------------------------------------------------
\279\ See FICC Letter at 22, supra note 6.
---------------------------------------------------------------------------
5. Conclusion
The proposed rule change, as modified by Amendment No. 1, would
encourage greater participation in central clearing by improving market
participants' understanding of FICC's default management procedures and
providing market participants with porting tools to manage their
clearing relationships and trading activity. Greater participation in
central clearing would ensure that more securities transactions are
subject to the risk mitigation benefits of central clearing.
Accordingly, the proposed rule change, as modified by Amendment No. 1,
is
[[Page 59633]]
consistent with Section 17A(b)(3)(F) of the Exchange Act because
extending the benefits of central clearing to more securities
transactions would ensure the prompt and accurate clearance and
settlement of those transactions.\280\
---------------------------------------------------------------------------
\280\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Additionally, the proposed rule change, as modified by Amendment
No. 1, would better prepare market participants to deal with default
scenarios, resulting in more orderly management of such events,
minimizing default losses and reducing potential risk to FICC and its
non-defaulting participants. Accordingly, the proposed rule change, as
modified by Amendment No. 1, would ensure the safeguarding of
securities and funds in FICC's custody or control, consistent with
Section 17A(b)(3)(F) of the Exchange Act.\281\
---------------------------------------------------------------------------
\281\ See id.
---------------------------------------------------------------------------
B. Consistency With Rule 17ad-22(e)(13)
Rule 17ad-22(e)(13) under the Exchange Act requires that a covered
clearing agency, such as FICC, establish, implement, maintain, and
enforce written policies and procedures reasonably designed to ensure
that the covered clearing agency has the authority and operational
capacity to take timely action to contain losses and liquidity demands
and continue to meet its obligations.\282\
---------------------------------------------------------------------------
\282\ 17 CFR 240.17ad-22(e)(13).
---------------------------------------------------------------------------
As described above in Section I.B., FICC proposes to expand the
default management provisions in the GSD Rules applicable to the
Sponsored Service and Agent Clearing Service to more fully address the
default scenarios of Netting Member intermediaries, Indirect
Participants, and FICC. Additionally, FICC proposes to add provisions
to the GSD Rules that govern the porting of Indirect Participant
activity between intermediary Netting Members, both in the normal
course of business and following the default of an intermediary.
Expanding the default management provisions in the GSD Rules would
improve market participants' understanding of FICC's default management
procedures. Adding provisions to the GSD Rules that govern porting
would provide market participants with useful tools to manage their
clearing relationships and trading activity, including in default
scenarios. Together, FICC's proposals would better prepare market
participants to deal with default scenarios, resulting in more orderly
management of such events, minimizing default losses and reducing
potential risk to FICC and its non-defaulting participants.
Accordingly, the proposed rule change, as modified by Amendment No.
1, is consistent with Rule 17ad-22(e)(13) because implementing rules
that govern default management procedures would help ensure that FICC
has the authority and capacity to take timely action to contain losses
and liquidity demands and continue to meet its obligations.\283\
---------------------------------------------------------------------------
\283\ See 17 CFR 240.17ad-22(e)(13).
---------------------------------------------------------------------------
C. 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, establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
establish objective, risk-based, and publicly disclosed criteria for
participation, which, when the covered clearing agency provides central
counterparty services for transactions in U.S. Treasury securities,
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.\284\
---------------------------------------------------------------------------
\284\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
As described above in Section I.B., FICC proposes to expand the
default management provisions in the GSD Rules applicable to the
Sponsored Service and Agent Clearing Service to more fully address the
default scenarios of Netting Member intermediaries, Indirect
Participants, and FICC. Additionally, FICC proposes to add provisions
to the GSD Rules that govern the porting of Indirect Participant
activity between intermediary Netting Members, both in the normal
course of business and following the default of an intermediary.
As described above in Section I.A., the Commission received
comments on FICC's recent access model enhancement proposal requesting
that FICC provide greater detail in the GSD Rules regarding the default
management procedures under the indirect access models, including the
ability to port Indirect Participant positions and margin between
intermediaries.\285\ Commenters suggested that the absence of GSD Rule
provisions that provide certainty to market participants regarding
FICC's default management procedures (including porting) presents an
obstacle to greater participation in central clearing.\286\
---------------------------------------------------------------------------
\285\ See supra note 10.
\286\ See id.
---------------------------------------------------------------------------
By enhancing the GSD Rules regarding the default management
provisions applicable to FICC's indirect access models, the proposed
rule change, as modified by Amendment No. 1, would encourage greater
participation in central clearing by improving market participants'
understanding of how GSD would manage a default that may occur within
GSD's indirect access models. Accordingly, the proposed rule change, as
modified by Amendment No. 1, is consistent with Rule 17ad-
22(e)(18)(iv)(C) because it would help facilitate access to FICC's
clearance and settlement services of all eligible secondary market
transactions in U.S. Treasury securities, including those of indirect
participants.\287\
---------------------------------------------------------------------------
\287\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
D. Consistency With Rule 17ad-22(e)(19)
Rule 17ad-22(e)(19) under the Exchange Act requires that a covered
clearing agency, such as 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.\288\
---------------------------------------------------------------------------
\288\ 17 CFR 240.17ad-22(e)(19).
---------------------------------------------------------------------------
As described above in Section I.B., FICC proposes to expand the
default management provisions in the GSD Rules applicable to the
Sponsored Service and Agent Clearing Service to more fully address the
default scenarios of Netting Member intermediaries, Indirect
Participants, and FICC. Additionally, FICC proposes to add provisions
to the GSD Rules that govern the porting of Indirect Participant
activity between intermediary Netting Members, both in the normal
course of business and following the default of an intermediary.
Expanding the default management provisions in the GSD Rules would
improve market participants' understanding of FICC's default management
procedures. Adding provisions to the GSD Rules that govern porting
would provide market participants with useful tools to manage their
clearing relationships and trading activity, including in default
scenarios. Together, FICC's proposals would better prepare market
participants to deal with default scenarios, resulting in more orderly
management of such events, minimizing default losses and reducing
potential risk to FICC and its non-defaulting participants.
[[Page 59634]]
Accordingly, the proposed rule change, as modified by Amendment No.
1, is consistent with Rule 17ad-22(e)(19) because enhancing the GSD
Rules regarding the default management provisions applicable to FICC's
indirect access models would better enable FICC to manage the material
risks arising from arrangements in which indirect participants rely on
direct participants to access FICC's payment, clearing, and settlement
facilities.\289\
---------------------------------------------------------------------------
\289\ See 17 CFR 240.17ad-22(e)(19).
---------------------------------------------------------------------------
E. Consistency With Rule 17ad-22(e)(23)(i)
Rule 17ad-22(e)(23)(i) under the Exchange Act requires that a
covered clearing agency, such as FICC, establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
provide for publicly disclosing all relevant rules and material
procedures, including key aspects of its default rules and
procedures.\290\
---------------------------------------------------------------------------
\290\ 17 CFR 240.17ad-22(e)(23)(i).
---------------------------------------------------------------------------
As described above in Section I.B., FICC proposes to expand the
default management provisions in the GSD Rules applicable to the
Sponsored Service and Agent Clearing Service to more fully address the
default scenarios of Netting Member intermediaries, Indirect
Participants, and FICC. Additionally, FICC proposes to add provisions
to the GSD Rules that govern the porting of Indirect Participant
activity between intermediary Netting Members, both in the normal
course of business and following the default of an intermediary.
The proposed rule change, as modified by Amendment No. 1, is
consistent with Rule 17ad-22(e)(23)(i) because it would more fully
disclose key aspects of FICC's default rules and procedures.\291\
---------------------------------------------------------------------------
\291\ See 17 CFR 240.17ad-22(e)(23)(i).
---------------------------------------------------------------------------
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the requirements of the Exchange Act and in particular with the
requirements of Section 17A of the Exchange Act \292\ and the rules and
regulations promulgated thereunder.
---------------------------------------------------------------------------
\292\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act \293\ that proposed rule change SR-FICC-2025-015, as
modified by Amendment No. 1, be, and hereby is, approved.\294\
---------------------------------------------------------------------------
\293\ 15 U.S.C. 78s(b)(2).
\294\ 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.\295\
---------------------------------------------------------------------------
\295\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-23333 Filed 12-18-25; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on December 19, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.