Notice2026-11381
Self-Regulatory Organizations; CME Securities Clearing Inc.; Notice of Filing of Proposed Rule Change To Support Members' Risk Management of and Enhance Their Ability To Authorize Persons as Users
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
June 8, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 91 Issue 109 (Monday, June 8, 2026)</title>
</head>
<body><pre>
[Federal Register Volume 91, Number 109 (Monday, June 8, 2026)]
[Notices]
[Pages 34666-34675]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-11381]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-105605; File No. SR-CMESC-2026-004]
Self-Regulatory Organizations; CME Securities Clearing Inc.;
Notice of Filing of Proposed Rule Change To Support Members' Risk
Management of and Enhance Their Ability To Authorize Persons as Users
June 3, 2026.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 21, 2026, CME Securities Clearing Inc. (``CMESC'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change described in Items I, II, and III below, which
Items have been primarily prepared by CMESC. CMESC filed the proposed
rule change pursuant to Section 19(b)(2) of the Act.\3\ The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
I. CMESC's Statement of the Terms and Substance of the Proposed Rule
Change
The proposed rule change of CME Securities Clearing Inc.
(``CMESC'') is in an Exhibit 5 and consists of modifications to the
CMESC Rulebook (the ``Rules'') \4\ to (i) support Members' risk
management of and enhance their ability to authorize persons as Users,
by providing Members the means to enforce contractual termination
rights against their authorized Users under their contractual
arrangements with their authorized Users; (ii) create legal structures
to provide security entitlement to an authorizing Member in each
Supported User Account
[[Page 34667]]
associated with such Member's authorization and to grant secondary
security interests in and liens against Independent User funds held by
CMESC while affirming CMESC's first priority and unencumbered lien and
security interest in such User funds; and (iii) strengthen and clarify
Members' ability to participate in the close-out (liquidation) of
positions of Users they authorize in the event of the User's Default.
The proposed rule change includes proposed new Rule 316 (Member
Exercise of Contractual Rights Against an Authorized User) and new Rule
317 (Member Second Priority Lien Against Independent User Margin) and
modifications to Rule 101 (Definitions), Rule 405 (Default Management
Process), Rule 513 (Margin Deposited for Supported Users Using the Repo
or Cash Treasury Clearing Services), Rule 602 (Submission of
Transaction Data), and Rule 1507 (Default Management). Each
modification is described in more detail below. These modifications
will support Members' risk management of their authorized Users and are
designed to support Members' ability and capacity to authorize Users.
This, in turn, will support CMESC's efforts to attract and to on-board
Members and Users prior to CMESC's launch of its Clearing Services and
on an ongoing basis thereafter by enhancing the attractiveness of
CMESC's Clearing Services offering for prospective Members, thereby
promoting the prompt and accurate clearance and settlement of
transactions in or involving U.S. Treasury securities. The proposed
revisions to the CMESC Rules are in an Exhibit 5.
---------------------------------------------------------------------------
\4\ Capitalized terms used herein and not defined have the
meanings assigned to such terms in the Rules, as applicable,
available at <a href="https://www.cmegroup.com/rulebook/CMESC/CMESC%20Rulebook.pdf">https://www.cmegroup.com/rulebook/CMESC/CMESC%20Rulebook.pdf</a>.
---------------------------------------------------------------------------
II. CMESC's Statement of the Purpose of, and Statutory Basis for the
Proposed Rule Change
In its filing with the Commission, CMESC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. CMESC has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. CMESC's Statement of the Purpose of, and Statutory Basis for the
Proposed Rule Change
2. Purpose
Background
On December 1, 2025, the Securities and Exchange Commission
(``Commission'' or ``SEC'') issued an order approving CMESC's Form CA-1
(``Application'') for registration as a clearing agency to provide
central counterparty services for transactions involving U.S. Treasury
securities, finding the Application satisfies the requirements of the
Securities Exchange Act of 1934, as amended (``Act'') and rules and
regulations thereunder.\5\ Based on engagement with market participants
and trade associations during the Commission's review of the
Application, CMESC has identified enhancements to its Rules designed to
enhance Members' risk management flexibility and mitigate potential
constraints on their ability to authorize Users due to potential
capital constraints. More specifically, the proposed rule change is
designed to further support prompt close-out of a User's positions,
whether the User is subject to a termination event under binding
contractual terms between it and its authorizing Member or the User is
in Default to CMESC under the Rules.
---------------------------------------------------------------------------
\5\ Release No. 34-104281 (Dec. 1, 2025), 90 FR 55926 (Dec. 4,
2025), available at <a href="https://www.federalregister.gov/documents/2025/12/04/2025-21908/cme-securities-clearing-inc-order-granting-an-application-for-registration-as-a-clearing-agency">https://www.federalregister.gov/documents/2025/12/04/2025-21908/cme-securities-clearing-inc-order-granting-an-application-for-registration-as-a-clearing-agency</a>.
---------------------------------------------------------------------------
1. Member Risk Management Considerations
As provided in the Rules, a person may become a Participant to
utilize CMESC's Clearing Services as a Member or a User.\6\ Members may
clear proprietary Eligible Securities Transactions through CMESC \7\
and may authorize Users to clear their own proprietary Eligible
Securities Transactions through CMESC.\8\ A person may become a User
only with the authorization of a Member but is contractually bound to
settle its Eligible Securities Transactions directly with CMESC.\9\
Users may participate in CMESC's Clearing Services as Independent Users
or Supported Users.\10\ An Independent User is obligated to post margin
and make Outstanding Exposure Settlement payments to CMESC for its
Independent User Account.\11\ In contrast, for a Supported User, the
Member authorizing the Supported User is obligated to post margin and
make Outstanding Exposure Settlement payments to CMESC for the
Supported User Account associated with the Member's authorization.\12\
---------------------------------------------------------------------------
\6\ See e.g., Rule 301.
\7\ Id.
\8\ See e.g., 302(a) and 305(c).
\9\ See e.g., Rules 305(d) and 1504(b).
\10\ See e.g., Rule 301(b).
\11\ See e.g., Rules 501 (margin) and 506 (Outstanding Exposure
Settlement).
\12\ See e.g., Rules 501 and 513 (margin) and 506 (Outstanding
Exposure Settlement).
---------------------------------------------------------------------------
A Member has certain obligations under the Rules with respect to
persons admitted as Users pursuant to the Member's authorization. An
authorizing Member must establish, maintain, and enforce User Due
Diligence Policies and Procedures that demonstrate the Member's ability
to, among other things, determine the risk profile of each User it
authorizes and monitor the risks associated with clearing Eligible
Securities Transactions by its authorized Users through CMESC.\13\ In
the event of a User Default, if any losses remain after CMESC applies
the margin posted to the Account of the Defaulting User associated with
the Member's authorization as well as certain other assets available to
CMESC as provided in the Rules,\14\ the authorizing Member will be
required to provide funds to discharge such remaining losses pursuant
to Rule 406(b)(iii) (User Default). If the Member fails to do so, CMESC
may declare the Member in Default pursuant to Rule 406(b)(iii) and then
apply the resources in the financial resources waterfall as provided
for and in the priority specified in Rule 406(a) (Member Default),
including such Defaulting Member's contribution to the Guaranty Fund.
---------------------------------------------------------------------------
\13\ See Rule 306(c)(iii).
\14\ When the Defaulting User is an Independent User, CMESC may
also apply any other assets of the Independent User held by, pledged
to, or otherwise available to the Corporation on behalf of that
Independent User. See Rule 406(b)(ii)(A). When the Defaulting User
is a Supported User, CMESC may also apply any collateral in excess
of the margin requirement posted to it for the Supported User of the
authorizing Member that such Member has not designated to CMESC as
Funded Supported User Margin for any other Supported User Account or
Supported User Margin for any other Supported User Account. See Rule
406(b)(ii)(B).
---------------------------------------------------------------------------
A Member must enter into an Authorization Agreement with each User
it authorizes pursuant to which the Member agrees to authorize the
User, as provided in Rule 305(c) (Member Authorization Agreement
Between a Member and Authorized User). The Authorization Agreement is a
commercial matter between the Member and authorized User, though its
terms must be consistent with the Member's and User's respective rights
and obligations to CMESC and to one another under the Rules. As
provided in Rule 306(d) (Notice of Termination of User Authorization),
a Member or User must provide CMESC with ten Business Days' advance
notice of its termination of the Authorization Agreement for any
reason, subject to CMESC's discretion to provide a shorter notification
period. CMESC understands that Members want the certainty that its
authorization of a given User will terminate immediately
[[Page 34668]]
upon notification to CMESC in certain circumstances, in order to
further support such Members' ability to manage risk arising from its
authorized Users' cleared activity.
2. Bank Regulatory Capital Considerations for Certain Members
CMESC understands that for a bank or firm affiliated with a bank
that becomes a Member, it is beneficial for the Member to have explicit
means to enforce any contractual rights it may have under its
agreement(s) governing its relationship with an authorized User to
terminate all the authorized User's Eligible Securities Transactions
cleared through CMESC in the User Account associated with the Member's
authorization, so that such agreement(s) may be treated as qualified
master netting agreements \15\ under bank regulatory capital
requirements.\16\ CMESC further understands there may be regulatory
capital benefits for a Member that is a bank or bank affiliate if such
Member has a security interest, secondary to CMESC's, in the margin or
other funds posted to the Account of an authorized User and to have
assurance that in the event of an authorized User Default, the
Defaulting User's open positions at CMESC will be closed out (i.e.,
liquidated or terminated) promptly.
---------------------------------------------------------------------------
\15\ See 12 CFR 50.3 (definition of ``qualifying master netting
agreement'').
\16\ Pursuant to the relevant capital rules, we understand that
a banking organization is only permitted to recognize the effects of
financial collateral or offsetting transactions for capital purposes
if the banking organization satisfies certain requirements,
including that the banking organization must have the right to
terminate the transaction and set off or apply collateral ``promptly
upon an event of default'' under the bilateral agreement between the
banking organization and its client. We further understand from
comment letters submitted on CMESC's application for registration as
a clearing agency that if a covered Member is unable to meet these
requirements, it must hold capital without regard to such collateral
or offsetting transactions, i.e., against its ``gross exposure'' to
the customer and further, that the significant costs associated with
gross exposure capital calculations could make the costs of offering
clearing services to clients prohibitively expensive for relevant
Members. See e.g. letter from Allison Lurton, General Counsel and
Chief Legal Officer, FIA, dated Mar. 10, 2025, on SEC Notice of
Filing of an Application for Registration as a Clearing Agency Under
Section 17A of the Securities Exchange Act of 1934 [Release No. 34-
102200 (Jan. 15, 2025), 90 FR 7713 (Jan. 22, 2025); File No. 600-
44].
---------------------------------------------------------------------------
Thus, CMESC is filing the proposed rule change to address each of
these considerations for prospective Members. Specifically, the
proposed modifications will enhance Members' abilities to enforce
contractual termination rights and contractual liens against a User's
margin or other funds held by CMESC (subordinate to CMESC's rights
thereto) that Members may have under their contractual arrangements
with their authorized Users, provided that neither the authorizing
Member nor its User is in Default to CMESC. The proposed rule change
will also further strengthen and clarify a Member's ability to
participate in the liquidation of an authorized User's positions in the
event of the User's Default.
The proposed changes are described in detail as follows.
Description of the Proposed Rule Change
1. Proposed Changes Relating to a Member's Contractual Termination
Rights Outside an Authorized User's Default to CMESC
CMESC proposes two changes to its Rules to further facilitate a
Member's enforcement of its contractual termination rights in relation
to a User it authorizes. First, CMESC proposes adopting new Rule 316
(Member Exercise of Contractual Rights Against an Authorized User),
which sets out a process whereby a Member may, pursuant to a request to
CMESC and subject to certain conditions, immediately assume an
authorized User's positions pursuant to the Member's contractual
termination rights, provided that neither the User nor the Member is in
Default to CMESC. Second, CMESC proposes changes to Rule 602
(Submission of Transaction Data) to recognize explicitly that a Member
may submit transactions for an authorized User's Account if the User
has given the Member the authority to do so, provided again that
neither the User nor the Member is in Default. The proposed changes to
Rule 602 will cover trade submission by a Member both as a routine
matter and as a potential means for a Member to exercise contractual
termination rights in relation to an authorized User by submitting
liquidating transactions for the authorized User's Account.
As noted, proposed Rule 316 sets out the process and conditions for
a Member to assume an authorized User's positions pursuant to
contractual termination rights as between the Member and the User.
Proposed Rule 316(a) applies to the circumstance when a User is in
default to its authorizing Member, or is otherwise subject to a
termination event, under one or more binding agreements between the
Member and User and neither party is in Default (as that term is
defined in the Rules). Proposed Rule 316(a) introduces the term
``Contractual Terms'' to refer to such binding agreement(s) and the
terms ``Affected Member'' and ``Affected User'' to refer to the Member
and to the User, respectively, when this circumstance arises. It also
introduces the term ``Affected User Account'' for purposes of proposed
Rule 316 and defines the term separately in relation to an Affected
User that is a Supported User and an Affected User that is an
Independent User. When the Affected User is a Supported User, the
Affected User Account is the Account that CMESC maintains in the name
of the Affected Member for the exclusive benefit of the Affected
Supported User. For an Independent User as the Affected User, the term
covers the Independent User's Account associated with the Affected
Member's authorization of the User.
Proposed Rule 316(b) sets out that an Affected Member may submit a
written request to CMESC, in such form as CMESC may prescribe, to
promptly transfer all the positions in Eligible Securities Transactions
in the Affected User Account to the Account of the Affected Member. The
Member's request may also request the transfer of initial margin or
other funds in the Affected User Account to the Account of the Affected
Member. CMESC will promptly effect the requested transfer, provided the
conditions set out in other paragraphs of Rule 316 are met. Proposed
Rule 316(b) explicitly sets out that each Eligible Securities
Transaction that is transferred is novated to the Affected Member, such
that the transaction is terminated in the Affected User's Account and
an equivalent position is established as a cleared position booked to
the Account of the Affected Member, with the Affected Member
substituted as CMESC's counterparty to the Eligible Securities
Transaction.
Proposed Rule 316(c) sets out the condition that transfers pursuant
to the proposed Rule will only occur if the Affected User is not in
Default to CMESC at the time of the request or at the time the
transfers are to be effected. If a User is subject to a Default to
CMESC under the Rules, CMESC's default management rules will govern
and, as acknowledged in this part of the proposed Rule, the authorizing
Member(s) will have the opportunity to close-out the Defaulting User's
positions as permitted under and in accordance with the proposed
changes to Rule 405(c) and Rule 1507(b), as explained below.
Proposed Rule 316(d) sets forth certain conditions that apply when
an Affected Member submits a written request to transfer the Affected
User's positions pursuant to the Rule. A Member's request to transfer
an Affected User's positions pursuant to proposed
[[Page 34669]]
Rule 316 is deemed by CMESC to constitute an election of the Member to
terminate its Authorization Agreement with the User with immediate
effectiveness, and thus, the Member is ceasing to authorize the
Affected User. Proposed Rule 316(d) also eliminates the need for the
Member to separately submit advance notice of termination of the
Authorization Agreement pursuant to Rule 311(d) (Notice of Termination
of User Authorization).
The predicate for proposed Rule 316 is that the Member requesting
the transfer of the Affected User's positions has the contractual right
to do so under the Contractual Terms. CMESC is not a party to the
Contractual Terms, and the negotiation of such terms is a commercial
matter between the Member and its authorized User. Accordingly, Rule
316(d) sets out that when an Affected Member submits a written request
to CMESC to effect a transfer pursuant to this Rule, the Affected
Member is deemed to represent, warrant and covenant to CMESC that the
Affected User is in default to the Affected Member, or subject to a
termination event, under the Contractual Terms, and that it has the
authority under the Contractual Terms to request CMESC to take such
action. The Affected Member also is deemed to represent to CMESC that
the Affected Member has reasonably determined that it will be able to
meet its initial margin and other obligations on all positions in its
Member Account following completion of the transfer of positions to
such Account covered by the request, and that its exercise of its
rights under the Contractual Terms and Rule 316 is consistent with, and
does not and will not cause the Affected Member to be in violation of,
its obligations to the Affected User under applicable law.
It is important that CMESC be protected in the event a dispute
arises between an Affected Member and Affected User when CMESC acts
upon the Affected Member's request given that CMESC is adopting Rule
316 to facilitate a Member's rights under Contractual Terms between the
Affected Member and Affected User to which CMESC is not a party.
Indeed, the Contractual Terms may well govern aspects of the
relationship between a Member and a User beyond the Member's
authorization of the User or even extend to relationships with or among
their respective affiliates. Thus, proposed Rule 316(e) sets out that
CMESC has no liability to the Affected Member or the Affected User for
any loss or costs that they may incur in connection with the transfer
of any positions from the Affected User Account to the Account of the
Affected Member pursuant to the proposed Rule. Proposed Rule 316(e)
also provides that the Affected Member will indemnify CMESC and its
affiliates and their respective officers, employees and agents against
any and all losses, liabilities, damages, claims, costs or expenses
they may suffer or incur arising out of or in connection with any
dispute between the Affected Member and Affected User regarding any
action taken or not taken pursuant to proposed Rule 316.
As noted, as an alternative to the transfer of all the positions in
Eligible Securities Transactions in the Affected User Account, CMESC
also proposes changes to Rule 602 to facilitate a Member's ability to
liquidate an authorized User's transactions pursuant to its contractual
termination rights by submitting liquidating transactions for the
authorized User's Account associated with the Member's authorization.
Specifically, CMESC is proposing to add a new sentence to existing Rule
602 to provide that transaction data may be submitted by a Member for
the Account of a User that it authorizes, provided that the User is not
in Default. CMESC believes it is beneficial to clarify explicitly in
Rule 602 that a Member may submit transaction data for the Account of a
User that it authorizes only when the User is not in Default. This is
consistent with proposed Rule 316(c), which provides that CMESC will
not effect any transfer of positions in the Affected User's Account to
the Affected Member's Account if the Affected User is subject to a
Default under the Rules. CMESC believes that if an authorized User is
in Default, no transaction data should be submitted to the Defaulting
User's Account and the Rules regarding default management, e.g., Rule
405(c) and 1507(b), should apply to facilitate the prompt close-out
(e.g., liquidation) of the Defaulting User Positions, as described
below.
In addition, a Member could submit transactions on behalf of an
authorized User either as a routine matter or in connection with
contractual termination rights pursuant to the proposed changes to Rule
602. To assure the Member has the authority to submit transactions for
the User's Account, proposed changes to Rule 602 set out that, when the
Member submits transaction data for an authorized User, the Member is
deemed to represent that it has the authority to do so. As the Member's
authority to submit transactions for a User it authorizes is a matter
between the Member and authorized User, the proposed changes to Rule
602 further provide that the Member indemnifies CMESC and its
affiliates and their respective officers, employees and agents against
any and all losses, liabilities, damages, claims, costs or expenses
they may suffer or incur arising out of or in connection with any
dispute between the Member and User regarding such action taken by the
Member.
2. Proposed Changes Relating to a Member's Subordinate Security
Interest in User Collateral
This section describes CMESC's proposed modifications to its Rules
with respect to a Member's rights to margin or other funds posted to
the User Account of a User it has authorized. The purpose of the
proposed changes is to establish explicit structures whereby the
authorizing Member will have a claim to the return of any excess margin
of the User associated with the Member's authorization that remain
following CMESC's default management process for a Defaulting User or
following the termination of a Member's authorization of a User and
satisfaction of the User's obligations to CMESC. The legal approach
differs for a Supported User and an Independent User, each of which is
discussed below.
First, CMESC is proposing modifications to Rule 513, which governs
the treatment of margin deposited with CMESC for Supported User
Accounts, to add new paragraph (c) to provide explicitly that CMESC
will maintain a Supported User Account as a ``securities account''
under Article 8 of the New York Uniform Commercial Code (proposed Rule
513(c) uses the defined term ``NY UCC'') and that CMESC is the
securities intermediary in relation to the Member that establishes the
Supported User Account in its name for the benefit of the Supported
User of the Member.
As explained above, the authorizing Member for a Supported User is
responsible for posting initial margin (and Outstanding Exposure
Settlement) for the Account of the Supported User. Thus, as set out in
existing Rule 513, CMESC will establish within its books and records a
Supported User Account for each Supported User of the authorizing
Member, in the name of the Member for the benefit of the Supported
User.\17\ Under existing Rule 504
[[Page 34670]]
(Corporation Lien), each Member and each User grants to CMESC to secure
its obligations to CMESC a first priority and unencumbered security
interest and lien against any property, cash, securities, or collateral
deposited with, held by, pledged to, or otherwise available to, CMESC
by such Member or User, and thus, CMESC has a first priority and
unencumbered security interest in and lien against the initial margin
and other funds deposited in the Supported User Account. By providing
that CMESC will maintain a Supported User Account as a ``securities
account'' under Article 8 of the NY UCC and that CMESC is the
securities intermediary in relation to the Member that establishes the
Supported User Account for the benefit of the Supported User, the
Member will be the entitlement holder for the Supported User Account
and be entitled to the return of any excess margin or other funds
remaining following CMESC's default management process and termination
of the Member's authorization of the Supported User and satisfaction of
CMESC's first priority claim.
---------------------------------------------------------------------------
\17\ See Rule 513(b)(i). If the authorizing Member is a broker-
dealer, CMESC will also maintain a master grouping of the Supported
User Accounts designated as a ``Special Account for the Exclusive
Benefit of the Supported Users as Customers of [name of broker-
dealer Member].'' See Rule 513(b)(iv).
---------------------------------------------------------------------------
Proposed Rule 513(c) also clarifies that all margin, whether in the
form of cash or Qualified Margin Securities, or other funds credited to
the Supported User Account for the benefit of a Supported User of the
Member are treated as ``financial assets'' within the meaning of
Article 8 of the NY UCC, that New York is the ``securities
intermediary's jurisdiction'' for purposes of the NY UCC, and that New
York law will govern all issues specified in Article 2(1) of the Hague
Securities Convention (which if not overridden means the Hague
Securities Convention would determine the law applicable to such
issues).\18\ As a related change, CMESC is proposing to add a
definition to Rule 101 of the term ``NY UCC,'' which is used in
proposed new paragraph (c) of Rule 513. As defined, the term means
``the Uniform Commercial Code enacted by the State of New York as in
effect from time to time.''
---------------------------------------------------------------------------
\18\ Article 2(1) of the Hague Securities Convention states:
This Convention determines the law applicable to the following
issues in respect of securities held with an intermediary--(a) the
legal nature and effects against the intermediary and third parties
of the rights resulting from a credit of securities to a securities
account; (b) the legal nature and effects against the intermediary
and third parties of a disposition of securities held with an
intermediary; (c) the requirements, if any, for perfection of a
disposition of securities held with an intermediary; (d) whether a
person's interest in securities held with an intermediary
extinguishes or has priority over another person's interest; (e) the
duties, if any, of an intermediary to a person other than the
account holder who asserts in competition with the account holder or
another person an interest in securities held with that
intermediary; (f) the requirements, if any, for the realisation of
an interest in securities held with an intermediary; (g) whether a
disposition of securities held with an intermediary extends to
entitlements to dividends, income, or other distributions, or to
redemption, sale or other proceeds.
---------------------------------------------------------------------------
A different approach is taken with respect to Independent Users, as
they will establish Accounts in their own name with CMESC and are
responsible for posting initial margin (and Outstanding Exposure
Settlement) directly to CMESC. Thus, CMESC is proposing new Rule 317
under which CMESC will recognize and accommodate the grant of a second
priority security interest to a Member by an authorized Independent
User in initial margin or other funds credited to the User's
Independent User Account.
Under proposed Rule 317, a Member and an Independent User
authorized by the Member may enter into an Authorization Agreement or
other appropriate related agreement (such as a control agreement) that
contains a provision whereby the authorized Independent User grants the
Member a second priority security interest and lien against any initial
margin or other funds credited to the relevant Independent User
Account. For purposes of proposed Rule 317, such credited initial
margin or other funds are referred to as the ``Independent User
Funds.'' As provided in proposed Rule 317(a), the agreement under which
the security interest is granted must contain certain minimum terms
described below to assure that the agreement does not contain terms
that conflict with CMESC's first priority security interest in and lien
against such funds or CMESC's application of such funds in connection
with the management of any Default of the Independent User.
First, in order for CMESC to recognize the Member's second priority
security interest in the Independent User Funds, the agreement between
the Member and authorized Independent User must contain the Member's
acknowledgment of CMESC's first priority and unencumbered security
interest in and lien against property, cash, securities, or collateral
deposited with, held by, pledged to, or otherwise available to CMESC to
secure the Independent User's obligations to CMESC created under Rule
504 (Corporation Lien). This acknowledgement reinforces CMESC's
priority claim to Independent User Funds ahead of the authorizing
Member under the Rules and is intended to avoid competing claims to
Independent User Funds between CMESC and the authorizing Member.
Second, consistent with the Member's required acknowledgment of
CMESC's first priority and unencumbered security interest and lien
described above and again in the context of CMESC recognizing a
Member's second priority security interest, the agreement between the
Member and authorized Independent User must provide that the Member
will ``exercise control over the Independent User Funds only following
(A) the occurrence of a User Default of the Independent User and
subject to the condition that the Member will refrain from taking any
action that could interfere with the Corporation's management of such
User Default (it being understood that the Member's election to
participate in the management of the User Default pursuant to and in
accordance with Rule 405(c) and Rule 1507(b) does not constitute
interference) or (B) following the effective date of termination of the
Authorization Agreement between the Member and the Independent User and
satisfaction of all obligations owing to the Corporation relating to
the Independent User's Account associated with the Member's
authorization of the Independent User and subject to the condition that
the Independent User is not in Default.'' (As explained in the
following section, CMESC is proposing revisions to Rules 405(c) and
1507(b).) These are important contractual terms that reinforce CMESC's
priority claim to apply Independent User Funds under the Rules and are
intended to avoid competing claims to Independent User Funds between
CMESC and the authorizing Member.
Third, the agreement must provide that ``the Member will assert its
security interest and lien only over those Independent User Funds that
may remain following, as applicable, (A) completion of the
Corporation's management of the Independent User's User Default or (B)
closing of the Independent User's Account associated with the Member's
authorization of the Independent User and satisfaction of all
obligations related thereto, and (C) the Corporation's exercise in
either case of its rights pursuant to its security interest and lien
created under Rule 504.'' As with the other minimum required terms,
these are important contractual terms that reinforce CMESC's priority
claim to apply Independent User Funds under the Rules and are intended
to avoid competing claims to Independent User Funds between CMESC and
the authorizing Member.
For clarity, CMESC is including paragraph (b) in proposed Rule 317
to reaffirm that an Independent User may not grant any party a security
interest in or lien against the initial margin or other funds credited
to its User Account to
[[Page 34671]]
any person other than CMESC or its authorizing Member associated with
the User Account, and may only grant the lien to the authorizing Member
in accordance with Rule 317.
Finally, paragraph (c) of proposed Rule 317 provides that CMESC
will ``cooperate with the Member and Independent User to execute such
documents as the Member may reasonably request to perfect its security
interest and enforce its lien, provided, however, that any such
documentation and the terms thereof must be acceptable to the
Corporation in its sole discretion.'' This provision recognizes that
CMESC may have to execute documentation (such as a control agreement)
to enable the Member to perfect its secondary security interest in and
have an enforceable lien against the Independent User Funds
(subordinate to CMESC's) and confirms that CMESC will cooperate with
the Member to give effect to the purpose of proposed Rule 317, provided
the terms of the documentation are acceptable to CMESC, e.g., that they
are consistent with (or as appropriate contain) the minimum required
terms described above.
3. Proposed Changes Relating to a Member's Rights To Participate in the
Liquidation of an Authorized User's Positions in the Event of the
User's Default
CMESC is proposing changes to three Rules to further delineate and
clarify a Member's right to participate in the close-out of an
authorized User's positions in the event of the User's Default: (i)
changes to Rule 405(c) (User Default); (ii) related conforming and
clarifying changes to Rule 1507(b); and (iii) changes to the definition
of the term ``close-out'' in Rule 101.
Rules 405 and 1507 together address the process that CMESC will
follow in the event of the Default of a Member or User. CMESC is
proposing changes to Rule 405 and related changes to Rule 1507(b) to
set out explicitly that CMESC will promptly provide an authorizing
Member the opportunity to participate in the close-out of the
Defaulting User's positions on CMESC's behalf and to provide more
detail with respect to how the Member may participate and the Member's
obligations if it elects to participate. CMESC believes there are
benefits both to CMESC and to the Member for the Member of an
authorizing User to have the opportunity to participate in the close-
out of the positions of a Defaulting User it has authorized, given the
Member's obligation under Rule 406(b)(iii) to cover any losses that
exceed the Defaulting User's initial margin and other assets available
to CMESC and the incentive that creates for the Member to seek to
minimize losses in closing out the Defaulting User's positions on
CMESC's behalf.
Also, a core objective in managing the Default of a User is that
the Defaulting User's positions be closed out promptly. Although this
is implicit in Rule 405, to provide clarity and certainty, CMESC
proposes to set out explicitly in Rule 405(c) that when the authorizing
Member declines to close out the positions, CMESC will liquidate them
promptly in accordance with the Rule. The proposed changes to Rule
1507(b) reiterate the prompt liquidation standard, both when CMESC is
responsible for closing out the positions and when the authorizing
Member participates in the close-out.
CMESC is proposing numerous changes in Rule 405(c), which governs a
User Default. CMESC is proposing to modify subparagraph (c)(i) to set
out explicitly that CMESC will, pursuant to Rule 1507(b), promptly
notify each authorizing Member of a Defaulting User that the Member may
participate in the close-out of the positions in each User Account
associated with the Member's authorization. Proposed Rule 405(c)(i)
refers to the positions of a Defaulting User in each User Account
associated with the Member's authorization as the ``Defaulting User
Positions.'' CMESC also proposes changes to clarify that after CMESC
notifies a Member of its opportunity to participate in closing out the
Defaulting User Positions on behalf of CMESC, the Member should
promptly respond within the period CMESC prescribes and will be deemed
to decline the opportunity to participate if the Member has not
responded within such time.
CMESC is also proposing to delete the last sentence in Rule
405(c)(i), which sets out that a Member that agrees to liquidate the
Defaulting User's portfolio on behalf of CMESC ``will be directly and
primarily responsible for meeting the financial and settlement
obligations of the Corporation with respect to open positions of the
Defaulting User authorized by that Member.'' Upon further
consideration, CMESC believes that this sentence may create ambiguity
in relation to a Member's potential obligation under Rule 406(b)(iii)
to cover any losses that exceed the Defaulting User's initial margin
and other assets available to CMESC, which is the operative standard,
in the event of the Default of a User it has authorized. This sentence
also becomes unnecessary in light of the other proposed changes to Rule
405, explained below.
CMESC proposes adding new subparagraph (ii) to Rule 405(c) to
provide additional detail regarding how a Member may participate in the
close-out of the Defaulting User Positions if it elects to do so. As
set forth in proposed Rule 405(c)(ii), the Member may participate in
the manner established in this part of the Rule (i.e., Rule 405(c)(ii)
and its subparts) or in another manner, both of which would be
determined in consultation with CMESC. Proposed Rule 405(c)(ii) sets
out two manners for a Member to participate in the close-out of the
Defaulting User Positions. As provided in subparagraph (A), the
Defaulting User Positions could be liquidated promptly in the
Defaulting User's Account and reestablished in the Member's Account,
whereby positions equivalent to the liquidated Defaulting User
Positions (i.e., equivalent to the cleared positions in the Defaulting
User's Account) are novated to the Member and established as cleared
positions booked to the Member's Account. Under this approach, the
following conditions must be met.
<bullet> First, because the Member will be party to the positions
reestablished in the Member's Account (i.e., positions equivalent to
those that were cleared in the Defaulting User's Account), the Member
must represent to CMESC that the Member will be able to meet its
initial margin and settlement obligations on all positions in its
Member Account following reestablishment of the Defaulting User
Position in its Member Account under proposed Rule 405(c)(ii)(A)I.
<bullet> Second, proposed Rule 405(c)(ii)(A)II. sets out that the
Member, acting in a commercially reasonable manner and consistent with
market convention, is responsible for determining the liquidation value
of the portfolio of the Defaulting User Positions as of the date the
positions are liquidated and reestablished in the Member's Account as
equivalent cleared positions, which date is referred to for purposes of
Rule 405(c)(ii) as the ``Liquidation Date.'' Promptly following the
Liquidation Date, the Member must provide a detailed written statement
to CMESC, with supporting documentation, of the Member's calculation of
such liquidation value, which must be satisfactory to CMESC. As between
the Defaulting User and CMESC, if as of the Liquidation Date the
liquidation value is less than the value of the portfolio of positions
that are reestablished in the Member's Account (which as noted are
reestablished as positions equivalent to those that were cleared in the
Defaulting User's Account), the difference is fixed as the
[[Page 34672]]
amount of the losses on such positions and if such liquidation value is
greater than the value of the portfolio of positions reestablished in
the Member's Account as of the Liquidation Date, the difference is
fixed as the amount of gains on such positions.
<bullet> Finally, consistent with CMESC's rights under Rule
406(b)(ii) and other Rules to apply initial margin and other assets
held by CMESC to losses associated with a User's Default, proposed Rule
405(c)(ii)(A)III. sets out that CMESC will credit the Member for the
amount of any losses fixed pursuant to Rule 405(c)(ii)(A)II., with such
amount credited using and limited to the Defaulting User's initial
margin and other assets CMESC holds in respect of the Defaulting User's
Account associated with the Member's authorization. If the amount to be
credited to the Member exceeds the Defaulting User's margin and other
assets held by CMESC in respect of the Defaulting User's Account, then
the Member would incur such loss in acquiring the positions, but that
would be consistent with the Member's obligation under Rule 406(b)(iii)
to cover the losses that exceed the Defaulting User's initial margin
and other assets available to CMESC. Conversely, CMESC will debit the
Member for the amount of any gains fixed pursuant to Rule
405(c)(ii)(A)II. After the Liquidation Date, any gains or losses on the
Defaulting User Positions that are liquidated in the Defaulting User's
Account and reestablished in the Member's Account will belong to the
Member, as provided in proposed Rule 405(c)(ii)(A)III.
As provided in proposed Rule 405(c)(ii)(B), the second manner in
which CMESC proposes to allow a Member to participate in the close-out
of the Defaulting User Positions is specific to the liquidation of any
Defaulting User Position that is a Repo Transaction for which the
Member is the contra party on the original transaction (i.e., a ``done-
with'' Repo Transaction). In this scenario, the Member may agree to
terminate the position by accelerating the Off-Leg Settlement Date to a
new Off-Leg Settlement Date that is on or before a date that CMESC
specifies, consistent with the core objective that the Defaulting User
Positions be liquidated promptly. Similar to the process in proposed
Rule 405(c)(ii)(A) described above, the Member must determine the
liquidation value of the original (i.e., pre-accelerated) Defaulting
User Position as of the accelerated Off-Leg Settlement Date, which is
used as the Liquidation Date, in the same manner as it would calculate
the liquidation value for positions reestablished in its Account
pursuant to Rule 405(c)(ii)(A)II. This liquidation value will be used
to fix the loss or gain on the position as between CMESC and the
Defaulting User and if multiple Repo Transactions between the Member
and Defaulting User are accelerated pursuant to proposed Rule
405(c)(ii)(B), the losses or gains will be determined on an aggregate
basis for such positions. CMESC will credit or debit the Member for the
losses or gains fixed pursuant to this Rule 405(c)(ii)(B) in the manner
provided in Rule 405(c)(ii)(A)III. CMESC believes a Member may find the
approach outlined in proposed Rule 405(c)(ii)(B) an effective way to
reduce losses realized upon the close-out of any Defaulting User
Positions that are ``done-with'' Repo Transactions with the Member and
is including this approach to provide additional flexibility to
determine (in consultation with CMESC) the appropriate mean(s) for the
Member to participate in the close-out of the Defaulting User
Positions.
The proposed changes described above to elaborate on how a Member
may participate in closing out the Defaulting User Positions do not
change the Member's obligation under Rule 406(b)(iii) to cover any
losses that exceed the Defaulting User's initial margin and other
assets available to CMESC. Therefore, CMESC proposes adding a new
subparagraph (iii) under Rule 405(c) to clarify that the Member's
obligation under Rule 406(b)(iii) to fully discharge the losses and
liabilities to CMESC associated with the User's Default in each User
Account associated with the Member's authorization, once such losses
and liabilities are finalized, remains in effect, notwithstanding the
Member's decision to participate in the close-out of the Defaulting
User Positions. As noted above, Rule 406(b)(iii) is the operative
provision that governs the Member's potential liability in relation to
the Default of a User it has authorized.
CMESC also proposes changes to existing subparagraph (ii) of Rule
405(c), which is proposed to be renumbered as Rule 405(c)(iv), to align
with the revised provisions discussed above regarding the actions that
CMESC will take to close-out, including liquidation of, the Defaulting
User Positions in relation to any authorizing Member that declines to
participate in the close-out of the Defaulting User Positions
associated with the Member's authorization. CMESC proposes to clarify
that CMESC will promptly initiate the close-out process described in
the Rules for the User Account of the Defaulting User associated with
the Member's authorization. CMESC also proposes to delete the last
sentence, which is a ``for avoidance of doubt'' provision that is
adequately explained in Rule 406(b)(iii), as described above.
CMESC also proposes changes to existing subparagraph (iii) of Rule
405(c), which is proposed to be renumbered as Rule 405(c)(v), to set
out more directly that CMESC will apply the financial resources
described in Rule 406(b), in the order provided in and subject to Rule
406(b), to the Defaulting User's obligations owed to CMESC, regardless
whether the authorizing Member elects to participate in the close-out
of the Defaulting User Positions pursuant to Rule 405(c).
As a result of the proposed changes to Rule 405 described above,
CMESC is proposing conforming and clarifying changes to Rule 1507(b).
First, existing Rule 1507(b) provides that in the case of a User
Default, before CMESC takes any of the actions described in Rule
1507(e), CMESC will notify the Defaulting User's authorizing Member(s)
that the Member may ``terminate the Defaulting User's obligations to
the Corporation by satisfying them in full,'' but subject to the
qualification ``if time permits.'' CMESC proposes to delete ``if time
permits'' and ``terminate the Defaulting User's obligations to the
Corporation by satisfying them in full,'' and to add new text to Rule
1507(b) to specify that CMESC will promptly notify the authorizing
Member(s) of the Member's right to close-out the Defaulting User's
positions pursuant to and in accordance with Rule 405(c), noting
parenthetically that the Member and CMESC will act promptly to effect
the close-out.
Finally, CMESC is proposing clarifying changes to the definition of
``close-out'' in Rule 101. The current definition covers extinguishing
a Member's or User's cash receipt entitlement in relation to the sale
of Eligible Securities under a Repo Transaction. The term is used in
the proposed changes to Rule 405(c) and 1507(b) in the broader sense of
liquidating or terminating any cleared Eligible Securities Transaction.
Thus, CMESC proposes to modify the definition of the term ``close-out''
to mean the liquidation or termination of a cleared Eligible Securities
Transaction. This definition is consistent with how the term is used in
other CMESC Rules.
2. Statutory Basis
For the reasons set forth below, CMESC believes the proposed rule
change is consistent with Section 17A of
[[Page 34673]]
the Act,\19\ SEC Rule 17ad-22(e)(13),\20\ SEC Rule 17ad-22(e)(18),\21\
SEC Rule 17ad-22(e)(19),\22\ and SEC Rule 17ad-22(e)(21)(i).\23\
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78q-1(b)(3)(F).
\20\ 17 CFR 240.17ad-22(e)(13).
\21\ 17 CFR 240.17ad-22(e)(18).
\22\ 17 CFR 240.17ad-22(e)(19).
\23\ 17 CFR 240.17ad-22(e)(21)(i).
---------------------------------------------------------------------------
Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, to remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, and, in general, to protect investors and the public
interest.\24\ CMESC believes that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act because it will further
support Members' management of risks associated with authorizing
persons as Users and enhance Members' ability to authorize Users by
addressing potential constraints imposed by bank regulatory capital
requirements and enhancing Members' abilities to enforce contractual
termination rights and secondary lien rights against authorized Users'
margin or other funds held by CMESC that Members may have under their
contractual arrangements with their authorized Users. The proposed rule
change will also further strengthen and clarify a Member's ability to
participate in the liquidation of an authorized User's positions in the
event of the User's Default. These modifications will thus support
Members' ability to participate in and authorize Users in CMESC's
Clearing Services, which will promote the prompt and accurate clearance
and settlement of transactions in or involving U.S. Treasury securities
(including eligible secondary market securities transactions that
market participants may be required to centrally clear pursuant to the
rules of a covered clearing agency adopted pursuant to SEC Rule 17ad-
22(e)(18)(iv)).\25\
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78q-1(b)(3)(F).
\25\ 17 CFR 240.17ad-22(e)(18)(iv).
---------------------------------------------------------------------------
Consistency With Rule 17ad-22(e)(13)
SEC Rule 17ad-22(e)(13) requires, in part, that the rules of a
covered clearing agency be reasonably designed to ensure 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. CMESC believes that the proposed rule change is
consistent with Rule 17ad-22(e)(13) because the proposed changes to
Rule 405(c) and Rule 1507(b) are designed to achieve the core objective
in default management that the Defaulting User's positions be closed
out promptly to minimize losses and liquidity demands and continue to
meet CMESC's settlement obligations. The requirement to take prompt
action to close-out, including liquidate, the Defaulting User's
positions is reflected in multiple places in the proposed rule change.
Specifically, proposed Rule 405(c) provides that CMESC will promptly
notify each authorizing Member of a Defaulting User that the Member may
participate in closing out the positions in each User Account
associated with the Member's authorization. CMESC also proposes changes
to clarify that, after CMESC notifies a Member of its opportunity to
participate in closing out the Defaulting User Positions, the Member
should promptly respond within the period CMESC prescribes and will be
deemed to decline the opportunity if the Member has not responded
within such time. In addition, proposed Rule 405(c)(ii) provides two
non-exclusive manners in which authorizing Members may participate in
closing out positions of Defaulting Users they authorize, both
requiring that the Defaulting User Positions be closed out promptly and
that the Member provide a detailed written statement of its calculation
of the liquidation value promptly following the Liquidation Date.
Similarly, if the authorizing Member declines to participate in the
close-out of the Defaulting User's positions associated with the
Member's authorization, proposed Rule 405(d)(iv) requires CMESC to
promptly initiate the close-out process described in the Rules for the
User Account of the Defaulting User. Finally, proposed changes to Rule
1507(b) specify that CMESC will ``promptly'' notify the authorizing
Member of the Member's right to close-out the Defaulting User's
positions and make clear that the Member and CMESC will act promptly to
effect the close-out pursuant to and in accordance with proposed
changes to Rule 405(c).
All of the above proposed changes are reasonably designed to ensure
that CMESC will have the authority and operational capacity to take
timely action to promptly close-out a Defaulting User's positions. In
addition, as described in detail above, by proposing changes to Rule
405(c) to provide the authorizing Member the opportunity to participate
in a prompt close-out of the User's positions, CMESC believes that the
proposed changes to Rule 405(c) will help minimize losses from the User
Default and, thus, contain losses and liquidity demands, enabling CMESC
to continue to meet its obligations. Therefore, CMESC believes that the
proposed rule change is consistent with SEC Rule 17ad-2(e)(13).
Consistency With Rule 17ad-22(e)(18)(iv)(C)
CMESC believes that the proposed rule change is consistent with SEC
Rule 17ad-22(e)(18)(iv)(C), which requires, in part, a covered clearing
agency that provides central counterparty services for transactions in
U.S. Treasury securities to ensure that it has appropriate means to
facilitate access to clearance and settlement services for eligible
secondary market transactions in U.S. Treasury securities, including
those of indirect participants such as Independent Users and Supported
Users. As detailed above, the proposed rule change consists of (i)
proposed new Rule 316 and proposed changes to Rule 602 designed to
support Members' risk management and enhance their ability and capacity
to authorize persons as Users, by providing Members the clear means to
enforce contractual termination rights under their contractual
arrangements with authorized Users in circumstances when the authorized
Users are not in Default under CMESC's Rules; (ii) proposed changes to
Rule 513 to create a legal structure to provide an authorizing Member
with a securities entitlement under the NY UCC to excess assets in the
Supported User Account associated with such Member's authorization and
proposed new Rule 317 to provide a Member the means to obtain and
perfect a secondary security interest in and lien against Independent
User Funds held by CMESC for the Independent User Account associated
with the Member's authorization, while affirming CMESC's first priority
and unencumbered security interest in and lien against the Independent
User funds; and (iii) proposed changes to Rules 405(c) and 1507(b)
designed to strengthen and clarify Members' abilities to participate in
the close-out of positions of Users they authorize in the event of an
authorized User's Default. These proposed changes are designed to
enhance the ability and capacity of Members to authorize Users, which
will support CMESC's efforts to attract and to on-board Members and
Users prior to CMESC commencing operations of its Clearing Services and
on an ongoing basis thereafter and enhance access to
[[Page 34674]]
CMESC's Clearing Services for prospective Members and Users. As such,
CMESC believes that the proposed rule change is reasonably designed to
provide appropriate means to facilitate access to clearance and
settlement services for eligible secondary market transactions in U.S.
Treasury securities, including those of indirect participants,
consistent with Rule 17ad-22(e)(18)(iv)(C).
Consistency With Rule 17ad-22(e)(19)
SEC Rule 17ad-22(e)(19) requires that the rules of a covered
clearing agency identify, monitor and manage material risks to the
clearing agency arising from arrangements that indirect participants
have with direct participants to access the clearing agency's clearing
and settlement services. The existing Rules define a Member's rights
and obligations with respect to any User it authorizes while at the
same time recognizing (in Rule 306(c)) that a Member and an authorized
User may enter into separate commercial terms between them. Those
features are unchanged. Rather, the proposed rule change provides a
means for a Member to enforce contractual liquidation rights and any
secondary rights to User collateral it may negotiate with an authorized
User, subject to terms that protect CMESC's ability to manage risk
pursuant to its Rules. In this respect, as conditions to liquidate an
authorized User's positions under proposed Rule 316 or under Rule 602
as proposed to be revised, a Member represents that it has the
contractual authority to do so and indemnifies CMESC and related
parties against any losses, liabilities, damages, claims or expenses
they may incur arising out of any dispute between the Member and its
authorized User or in the case of action under proposed Rule 316
regarding any action taken or not taken pursuant to that Rule. With
respect to a Member's rights to collateral of an authorized User, the
proposed rule change establishes structures whereby the Member's claim
is secondary to CMESC's rights as explained above. In this respect, a
Member's claim to such collateral is limited to the return of any
excess margin or other funds remaining following CMESC's default
management process if the User is in Default or following termination
of the Member's authorization of the User and satisfaction of the
User's obligations to CMESC. For these reasons, CMESC believes that the
proposed rule change is appropriate to manage potential risks to CMESC
arising from arrangements that its Users have with Members and is
consistent with SEC Rule 27ad-22(e)(19).
Consistency With Rule 17ad-22(e)(21)(i)
SEC Rule 27ad-22(e)(21)(i) requires that a covered clearing agency
have clearing and settlement arrangements that are efficient and
effective in meeting the requirements of its participants and the
markets the clearing agency services. CMESC believes the proposed rule
change is consistent with Rule 27ad-22(e)(21)(i), meeting the needs of
Members and Users, in that it will enhance Members' ability to
authorize Users by addressing potential constraints imposed by bank
regulatory capital requirements and will further support the
enforceability of certain contractual terms that are separately
negotiated between a Member and an authorized User.
B. CMESC's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \26\ requires that the rules of a
clearing agency not impose any burden on competition that are not
necessary or appropriate in furtherance of the purposes of the Act.
CMESC believes that the proposed rule change would not impose a burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act. CMESC believes that the proposed rule change
may enhance competition because, as detailed above, the proposed rule
change would further support Members' risk management of Users they
authorize and enhance Members' ability and capacity to authorize Users,
thereby facilitating access to CMESC's Clearing Services for eligible
secondary market transactions in U.S. Treasury securities. CMESC also
believes that the proposed rule change would indirectly benefit Users
and prospective Users by enhancing their abilities to access CMESC by
supporting Members' capabilities to authorize Users.
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
CMESC recognizes that various Members may perceive varying degrees
of benefits of the proposed rule change conferred on them, depending on
each Member's regulatory status and its entity type. CMESC believes
that the effect of the proposed rule change on competition is
distributed equally among all types of prospective Members because it
will apply to all Member types and would not disadvantage or favor any
particular type of Member in relationship to the other types of
potential Members. As such, CMESC believes that the proposed rule
change would promote competition and does not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
C. CMESC's Statement on Comments on the Proposed Rule Change Received
From Members, Participants, or Others
CMESC currently does not have any Members or Users and has not
received nor solicited any written comments from others related to this
proposal. CMESC has not received any unsolicited written comments from
any interested parties. If any written comments are received, they will
be publicly filed as an Exhibit 2 to this filing, as required by Form
19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
<a href="/cdn-cgi/l/email-protection#8cf8feede8e5e2ebede2e8e1edfee7e9f8ffccffe9efa2ebe3fa"><span class="__cf_email__" data-cfemail="681c1a090c01060f09060c05091a030d1c1b281b0d0b460f071e">[email protected]</span></a> or 202-551-5777. CMESC reserves the right to
not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
[[Page 34675]]
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#5022253c357d333f3d3d353e2423102335337e373f26"><span class="__cf_email__" data-cfemail="691b1c050c440a0604040c071d1a291a0c0a470e061f">[email protected]</span></a>. Please include
File Number SR-CMESC-2026-004 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, Station Place, 100 F Street NE, Washington, DC
20549.
All submissions should refer to File Number SR-CMESC-2026-004. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>). Copies of the
filing also will be available for inspection and copying at the
principal office of CMESC and on CMESC's website (<a href="https://www.cmegroup.com/market-regulation/rule-filings.html">https://www.cmegroup.com/market-regulation/rule-filings.html</a>). Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to File Number SR-CMESC-2026-004 and should be submitted
on or before June 29, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
---------------------------------------------------------------------------
\27\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-11381 Filed 6-5-26; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on June 8, 2026.
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.