[Federal Register Volume 77, Number 98 (Monday, May 21, 2012)]
[Notices]
[Pages 30032-30038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-12181]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66989; File No. SR-FICC-2012-03]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Expand the One-Pot Cross-
Margining Program With New York Portfolio Clearing, LLC to Certain 
``Market Professionals''

May 15, 2012.

I. Introduction

    On March 20, 2012, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-FICC-2012-03 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\ 
thereunder. The proposed rule change was published for comment in the 
Federal Register on April 4, 2012.\3\ The Commission received one 
comment letter on the proposed rule change.\4\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 66679 (March 29, 2012), 
77 FR 20445 (April 4, 2012).
    \4\ Letter from Adam Cooper, Senior Managing Director and Chief 
Legal Officer, Citadel LLC (April 23, 2012).
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II. Description

    This rule change consists of modifications to certain rules of the 
Government Securities Division (``GSD'') of FICC in order to expand 
FICC's existing one-pot cross-margining program with New York Portfolio 
Clearing, LLC (``NYPC'') \5\ (``Proprietary Cross-Margining Program'') 
to include eligible positions held by GSD Netting Members and NYPC 
Clearing Members for certain ``market professionals.'' \6\
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    \5\ See Securities Exchange Act Release No. 34-63986 (February 
28, 2011), 76 FR 12144 (March 4, 2011).
    \6\ The NYPC-FICC ``market professional'' cross-margining 
program aims to closely replicate the Options Clearing Corporation 
(``OCC'')--Chicago Mercantile Exchange (``CME'') cross-margining 
program, which was first approved in 1989 (Securities Exchange Act 
Release No. 34-27296 (September 26, 1989), 54 FR 41195 (October 5, 
1989)) and was expanded in 1991 to include market professionals 
(Securities Exchange Act Release No. 34-29991 (November 26, 1991), 
56 FR 61458 (December 3, 1991)). Since that time, the Commission has 
approved several similar ``market professional'' cross-margining 
programs, including most recently in 2008. They include: OCC--
Intermarket Clearing Corporation (``ICC'') Securities Exchange Act 
Release No. 34-30041 (December 5, 1991), 56 FR 68424 (December 12, 
1991); OCC-ICC-CME Securities Exchange Act Release No. 34-32534 
(June 28,1993), 58 FR 36234 (July 6, 1993); OCC-Board of Trade 
Clearing Corporation Securities Exchange Act Release No. 34-32681 
(July 27, 1993), 58 FR 41302 (August 3, 1993); OCC-Kansas City Board 
of Trade Clearing Corporation (``KCBOT'') Securities Exchange Act 
Release No. 34-32708 (August 2, 1993), 58 FR 42586 (August 10, 
1993); OCC-ICC--Commodity Clearing Corporation (``CCC'') Securities 
Exchange Act Release No. 34-33272 (December 2, 1993), 58 FR 64997 
(December 10, 1993); OCC-ICC, OCC-ICC-CME, OCC-KCBOT Securities 
Exchange Act Release No. 34-36819 (February 7, 1996), 61 FR 5594 
(February 13, 1996); OCC-CME--Securities Exchange Act Release No. 
34-38584 (May 8, 1997), 62 FR 26602 (May 14, 1997); and OCC-ICE 
Clear Securities Exchange Act Release No. 34-57118 (January 9, 
2008), 73 FR 2970 (January 16, 2008).
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Overview

    In its present form, the Proprietary Cross-Margining Program is 
limited to cross-margining of proprietary accounts.

[[Page 30033]]

Specifically, from NYPC's perspective, only a member's proprietary or 
``house'' account is eligible for cross-margining; from GSD's 
perspective, all accounts maintained by GSD for its Netting Members are 
deemed proprietary.\7\ The proposed rule change expands the Proprietary 
Cross-Margining Program to non-proprietary accounts carried by 
participating GSD Netting Members on behalf of ``Market Professionals'' 
(``Market Professional Cross-Margining Program''). The proposed rule 
change defines ``Market Professional'' as an entity, other than a 
``non-customer,'' \8\ that is a member of a designated contract market 
and that actively trades for its own account products that are eligible 
under the cross-margining agreement between FICC and NYPC (``FICC-NYPC 
Cross-Margining Agreement'') \9\ for cross-margining (``Eligible 
Products'').\10\ Positions and collateral held for Market Professionals 
will be maintained in accounts that are distinct from both proprietary 
cross-margining accounts and non-cross-margining accounts.\11\
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    \7\ The GSD does not have segregated accounts for Netting 
Members' customers. In contrast, NYPC currently maintains both 
proprietary and segregated customer accounts for its Clearing 
Members in compliance with applicable Commodity Futures Trading 
Commission (``CFTC'') regulations. Only NYPC Clearing Members' 
proprietary accounts at NYPC are eligible for participation in the 
Proprietary Cross-Margining Program. The present proposal would 
introduce a third type of account at NYPC that NYPC Clearing Members 
may maintain, i.e., the Market Professional account. The present 
proposal also introduces a second type of account at GSD, i.e., the 
Market Professional account.
    \8\ Consistent with previously approved market professional 
cross-margining programs, FICC's rules define ``Non-Customer'' as 
GSD Netting Members and other persons whose accounts with GSD 
Netting Members would not be the accounts of ``customers'' within 
the meaning of SEC Rules 8c-1 and 15c2-1.
    \9\ The FICC-NYPC Cross-Margining Agreement was approved by the 
Commission as part of FICC's Rule Filing No. SR-FICC-2010-09. See 
note 5, supra.
    \10\ As defined in the FICC-NYPC Cross-Margining Agreement, the 
term ``Eligible Products'' includes U.S. Government securities, 
securities of U.S. federal agencies and U.S. Government-sponsored 
enterprises, financing products and certain mortgage-backed 
securities cleared by FICC, and futures contracts and options on 
futures contracts, including U.S. dollar-denominated interest rate 
and fixed income futures contracts and options on futures contracts, 
cleared by NYPC. Formal inclusion of options on futures in the 
program will be the subject of a separate rule filing with the 
Commission.
    \11\ As described above, GSD Netting Members who wish to 
participate in the Market Professional Cross-Margining Program will 
need to open an additional account for their Market Professionals. 
Likewise, NYPC Clearing Members wishing to participate in the 
program will need to open an additional account for their Market 
Professionals, which will be required to be separate and distinct 
from both their proprietary and segregated customer accounts.
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    As with the current Proprietary Cross-Margining Program, the 
proposed Market Professional Cross-Margining Program would be available 
to GSD Netting Members that carry accounts of Market Professionals and 
that are also clearing members of NYPC (``Joint Member'') or that have 
an affiliate that is a clearing member of NYPC (``Affiliated Member''). 
Members do not have to be participating in the Proprietary Cross-
Margining Program in order to participate in the proposed Market 
Professional Cross-Margining Program (or vice versa).
    The proposed rule change necessitates revisions to the FICC-NYPC 
Cross-Margining Agreement, which are described in detail below. 
Additional participant agreements have been added as appendices to the 
FICC-NYPC Cross-Margining Agreement for this purpose.

Segregation and Liquidation Considerations

    The proposed Market Professional Cross-Margining Program addresses 
concerns regarding segregation and liquidation procedures under the 
Commodity Exchange Act (``CEA''),\12\ Title 11 of the United States 
Code (``Bankruptcy Code'') \13\ and the Securities Investor Protection 
Act (``SIPA'').\14\ The CEA requires that the property of customers 
must be segregated from the proprietary property of a futures 
commission merchant. Because Market Professionals are considered 
``customers'' under CFTC regulations, the cross-margined positions of 
the Market Professionals and all property related thereto must be 
segregated from the cross-margined positions and property of the GSD 
Netting Member that carries their accounts.
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    \12\ 7 U.S.C. 1-27f as amended.
    \13\ 11 U.S.C. 101-1532 as amended.
    \14\ 15 U.S.C. 78aaa-78lll as amended.
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    Under the proposed rule change, each GSD Netting Member electing to 
participate in the Market Professional Cross-Margining Program must 
execute a Cross-Margining Participant Agreement for Market Professional 
Accounts and must establish a separate cross-margining account for the 
benefit of Market Professionals for whom it carries cross-margined 
positions (``Market Professional Cross-Margining Account''). GSD 
Netting Members and NYPC Clearing Members who establish Market 
Professional Cross-Margining Accounts must also obtain the consent of 
each Market Professional whose cross-margined positions are carried in 
such account to the commingling of the Market Professional's assets 
with those of other electing Market Professionals of the same GSD 
Netting Member and NYPC Clearing Member (or permitted margin affiliate 
at NYPC); provided, however, that consistent with the requirements of 
CFTC Regulation 39.13(g)(8)(i) (gross margin for customer accounts), 
the positions of a Market Professional cleared by FICC will only be 
cross-margined with the derivatives positions of the same Market 
Professional cleared by NYPC. Moreover, because Section 4d(a)(2) of the 
CEA prohibits commingling futures and securities in the absence of a 
CFTC rule, regulation or order to the contrary, it will be necessary 
for NYPC to obtain from the CFTC an order stating that Eligible 
Products that are cleared by FICC and property received by a 
participating GSD Netting Member to margin, guarantee, or secure trades 
or positions in or accruing as a result of such Eligible Products may 
be commingled in a Market Professional Cross-Margining Account with 
Eligible Products cleared by NYPC and with property received by a 
participating NYPC Clearing Member to margin, guarantee, or secure 
trades or positions in or accruing as a result of such Eligible 
Products that would otherwise be required by the CFTC to be segregated 
under the CEA.
    FICC has established procedures to facilitate the segregation of 
the funds and securities deposited or received by GSD Netting Members 
regarding their Market Professional cross-margining activity. For 
example, each GSD Netting Member must establish separate bank accounts 
for the purpose of making daily funds-only settlement of its 
proprietary cross-margining activity and for the purpose of making 
daily funds-only settlement of its Market Professional cross-margining 
activity. In addition, FICC and NYPC will establish and use separate 
bank accounts for paying and collecting cash margin and funds-only 
settlement amounts resulting from members' proprietary cross-margining 
activities and for paying and collecting such amounts resulting from 
members' market professional cross-margining activity. FICC will not 
permit the netting of obligations arising out of a GSD Netting Member's 
proprietary cross-margining activity with those arising out of its 
Market Professional cross-margining activity.
    FICC has also taken steps to assure the segregation of securities 
that are deposited with FICC or its agents to satisfy Clearing Fund 
requirements in Market Professional Cross-Margining Accounts and 
proprietary cross-margining accounts. For example, FICC and NYPC will 
establish and use

[[Page 30034]]

separate custody accounts to hold securities deposited as margin by 
members for proprietary cross-margining activity and to hold securities 
deposited as margin by members for Market Professional cross-margining 
activity.
    FICC's proposal also addresses the potential for conflict between 
SIPA, Subchapter IV of chapter 7 of the Bankruptcy Code,\15\ and 
corresponding CFTC bankruptcy regulations,\16\ in the event of the 
liquidation and distribution of the property and funds of a GSD Netting 
Member that is a registered broker-dealer.\17\ To establish uniform 
results in the event of the bankruptcy or liquidation of a broker-
dealer GSD Netting Member under SIPA, FICC will require each Netting 
Member that chooses to participate in the Market Professional Cross-
Margining Program to require that the GSD Netting Member's 
participating Market Professionals agree that in the event of the 
bankruptcy or liquidation of the GSD Netting Member carrying its cross-
margined positions, the Market Professional will subordinate its cross-
margining related claims to the claims of the firm's non-cross-
margining customers.\18\ Similarly, each participating Market 
Professional must acknowledge that all of the assets carried in a GSD 
Netting Member's Market Professional Cross-Margining Account on the 
Market Professional's behalf will not be deemed ``customer property'' 
for purposes of SIPA or give rise to any claim thereunder. This means 
that in the event of a GSD Netting Member bankruptcy, all claims to 
assets in cross-margining accounts will be determined under Subchapter 
IV of chapter 7 of the Bankruptcy Code and applicable CFTC regulations. 
FICC believes these measures reduce the possibility that assets in a 
GSD Netting Member's Market Professional Cross-Margining Account will 
be subject to two conflicting schemes of distribution.
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    \15\ 11 U.S.C. 761-767.
    \16\ 17 CFR Part 190.
    \17\ Some Market Professionals could be deemed to be 
``customers'' under SIPA and Exchange Act Rule 15c3-3. Consistent 
with previously approved cross-margining programs, however, Market 
Professionals will be required to agree to subordinate their claims, 
in the event of the bankruptcy of a GSD Netting Member or an NYPC 
member, to the claims of other customers. See Securities Exchange 
Act Release No. 34-29991 (November 26, 1991), 56 FR 61458 (December 
3, 1991) n.23.
    \18\ Under SIPA, SIPC satisfies the claims of ``customers'' 
against insolvent broker-dealers up to predetermined limits. 15 
U.S.C. 78fff-3. Under SIPA, however, the term ``customer'' does not 
include any person to the extent that such person has a claim for 
cash or securities which, by agreement, is subordinated to the 
claims of any or all creditors of the debtor. 15 U.S.C. 
78lll(2)(C)(ii). Because a Market Professional will be required to 
subordinate its cross-margin related claims against a GSD Netting 
Member to those of the GSD Netting Member's non-cross-margining 
customers, it will not fall within the protections afforded by SIPA. 
See Securities Exchange Act Release No. 34-29991 (November 26, 
1991), 56 FR 61458 (December 3, 1991) n.24.
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    In the event of a default of a member that chooses to participate 
in the Market Professional Cross-Margining Program, FICC and NYPC will 
follow the remedies outlined in the FICC-NYPC Cross-Margining Agreement 
to liquidate or transfer the proprietary and Market Professional Cross-
Margining Accounts. Any deficit in the Market Professional Cross-
Margining Account would, absent a deficit in any NYPC segregated 
customer account of the defaulting member, be offset against any credit 
in any proprietary cross-margining account of the defaulting member. 
Non-cross-margining accounts at NYPC would be liquidated or transferred 
pursuant to NYPC procedures as they exist today. FICC and NYPC will not 
offset a credit in a Market Professional Cross-Margining Account with a 
deficit in a proprietary cross-margin account or with any other account 
FICC or NYPC maintains for the defaulting member. Thus, any surplus in 
the Market Professional Cross-Margining Account will be returned to the 
member or its representative.
    In the event of a member bankruptcy, the Bankruptcy Code exempts 
FICC and NYPC from the automatic stay and permits FICC and NYPC to 
liquidate any assets held for the insolvent member \19\ and offset 
those assets against the member's liabilities.\20\ Assets of the member 
held in the Market Professional Cross-Margining Account will only be 
set-off against related Market Professional cross-margining 
liabilities. Any assets remaining after such a set-off will be 
transferred to the bankruptcy trustee for administration and 
distribution.\21\
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    \19\ 11 U.S.C. 555, 556, 560, and 561.
    \20\ 11 U.S.C. 362(b)(6), 362(b)(17), 362(b)(27), and 561.
    \21\ In the situation where an Affiliated Member becomes 
insolvent, assets in the Market Professional Cross-Margin Accounts 
of FICC and NYPC will be set-off by FICC and NYPC against related 
liabilities in such accounts.
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    If a member becomes insolvent, the Securities Investor Protection 
Corporation (``SIPC'') may and probably will file for a protective 
decree under SIPA.\22\ SIPC will then appoint a trustee charged with 
liquidating the bankrupt estate, consistent with SIPA. Under SIPA, the 
trustee must, to the extent not inconsistent with SIPA, administer the 
assets of the member held as a commodity broker in accordance with the 
Bankruptcy Code's commodity broker liquidation requirements and 
applicable CFTC regulations.\23\ Even if SIPC does not exercise its 
power to seek appointment of a trustee and SIPA does not apply to the 
liquidation, a Market Professional's claims to assets in the Market 
Professional Cross-Margining Account will be determined in accordance 
with the Bankruptcy Code's commodity broker liquidation scheme 
contained in Subchapter IV of chapter 7 and applicable CFTC 
regulations.
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    \22\ 11 U.S.C. 742.
    \23\ 15 U.S.C. 78fff-1(b) states in part: ``To the extent 
consistent with the provisions of this chapter or as otherwise 
ordered by the court, a trustee shall be subject to the same duties 
as a trustee in a case under chapter 7 of Title 11, including, if 
the debtor is a commodity broker, as defined under section 101 of 
such title, the duties specified in subchapter IV of such chapter 
7.''
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    Generally, applicable sections of the Bankruptcy Code and CFTC 
regulations provide for the trustee to distribute ``customer property'' 
\24\ pro rata among ``customers'' \25\ according to account class and 
generally give priority to customer claims over all others, except 
those dealing with the administration of the bankrupt estate.\26\ Also, 
assuming the trustee does not transfer customer accounts to another 
firm and determines to liquidate customer accounts, the trustee will 
distribute customer property to the claimants.\27\ If there is a 
shortfall in the Market Professional Cross-Margining Account and there 
is no shortfall or a lesser shortfall in the non-cross-margining 
customer account, Market Professionals will have a claim against the 
Market Professional Cross-Margining Account and will be able to claim 
against the non-cross-margining customer account only after all non-
cross-margining customer claims have been satisfied. If the shortfall 
in the non-cross-margining customer account is equal to or greater than 
the shortfall in the Market Professional Cross-Margining Account, the 
two accounts will be combined and Market Professionals and non-cross-
margining customers will share on a pro rata basis.\28\
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    \24\ As defined in 11 U.S.C. 761(10) and 17 CFR 190.01(n).
    \25\ As defined in 11 U.S.C. 761(9).
    \26\ 11 U.S.C. 766(h); see 17 CFR 190.08.
    \27\ See generally 11 U.S.C. 766 and 17 CFR 190.08.
    \28\ See 17 CFR part 190, appendix B (Framework 1).
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Proposed Changes to the FICC-NYPC Cross-Margining Agreement

    In addition to certain technical corrections and conforming 
changes, the FICC-NYPC Cross-Margining Agreement would be substantively 
amended as described below in order to incorporate the proposed Market 
Professional Cross-Margining Program.

[[Page 30035]]

Capitalized terms used in this section have the meanings given to them 
in the FICC-NYPC Cross-Margining Agreement.
Recitals
    The Recitals to the FICC-NYPC Cross-Margining Agreement would be 
amended to describe the proposed expansion of the existing FICC-NYPC 
Cross-Margining Agreement to provide for the cross-margining of the 
accounts of Market Professionals, and also to reflect the fact that the 
current FICC-NYPC Cross-Margining Agreement was executed on March 4, 
2011, after receipt of the necessary regulatory approvals by FICC and 
NYPC.
Section 1. Definitions

Section 1(f) (Available Assets) and Section 1(tt) (Margin)

    The ``Available Assets'' definition would be amended to include as 
assets available in the event of a default any margin posted to the 
Defaulting Member's Proprietary Cross-Margining Account, as well as any 
margin posted to the Defaulting Member's Market Professional Cross-
Margining Account. The ``Margin'' definition would be similarly amended 
to include original margin, option premiums and other margin collateral 
held by or for the account of FICC or NYPC to secure the obligations of 
a Cross-Margining Participant's Proprietary Cross-Margining Account 
and/or its Market Professional Cross-Margining Account.
    The ``Available Assets'' definition would be further amended to 
clarify that, consistent with the distributional convention established 
in Appendix B to Part 190 of the CFTC's Regulations, the NYPC Guaranty 
Fund deposits of a Defaulting Member would first be applied to any 
deficit in the Customer Funds Account of the Defaulting Member carried 
by NYPC, and then, after any such deficit has been completely 
satisfied, to any Cross-Margin Loss in the Defaulting Member's Market 
Professional Cross-Margining Account carried by NYPC, and then finally 
to any Cross-Margin Loss in the Defaulting Member's Proprietary Cross-
Margining Account carried by NYPC.

Section 1(t) (Cross-Margin Gain) and Section 1(u) (Cross-Margin Loss)

    For ease of reference and to facilitate understanding of the loss 
allocation mechanism in the event of the liquidation of the cross-
margined positions carried for a Defaulting Member by FICC and NYPC, 
the definitions of Cross-Margin Gain and Cross-Margin Loss would become 
a new subsection (b) of Section 7 of the FICC-NYPC Cross-Margining 
Agreement (Suspension and Liquidation of Cross-Margining Participant).

Section 1(y) (Customer Funds Account)

    The term ``Segregated Funds Account'' in the existing FICC-NYPC 
Cross-Margining Agreement would be replaced by the term ``Customer 
Funds Account'' and modified in order to clearly distinguish non-cross-
margining ``customer'' accounts established by NYPC from both Market 
Professional Cross-Margining Accounts and Proprietary Cross-Margining 
Accounts.

Section 1(ww) (Market Professional)

    As described above, consistent with previously approved cross-
margining programs, the term ``Market Professional'' would be defined 
as an entity, other than a ``Non-Customer'' (described below), that is 
a member of a designated contract market and that actively trades for 
its own account Eligible Products that are eligible for cross-margining 
under the FICC-NYPC Cross-Margining Agreement.

Section 1(bbb) (Non-Customer)

    As described above, ``Non-Customers'' would be excluded from the 
definition of a Market Professional. With respect to a GSD Netting 
Member, the term ``Non-Customer'' would be defined as such GSD Netting 
Member or other person whose account with such GSD Netting Member would 
not be the account of a ``customer'' within the meaning of SEC Rules 
8c-1 and 15c2-1.

Section 1(sss) (Securities Custody Account) and 1(uuu) (Settlement 
Account)

    For ease of reference, the term ``Cross-Margining Securities 
Account'' would be replaced with the term ``Securities Custody 
Account'' and would be expanded to include a custody account to hold 
Margin in the form of securities deposited by a Cross-Margining 
Participant in respect of a Proprietary Cross-Margining Account or a 
Market Professional Cross-Margining Account.
    Similarly, the definition of ``Settlement Account'' would be 
expanded to include a bank account established to hold cash Margin 
deposited by a Cross-Margining Participant in respect of a Proprietary 
Cross-Margining Account or a Market Professional Cross-Margining 
Account.
Section 2. Participation
    Section 2(a) would be amended and Section 2(b) and 2(c) would be 
added in order to accommodate the additional documentation required to 
establish a Set of Market Professional Cross-Margining Accounts by 
either a Joint Clearing Member or by a Clearing Member and its Cross-
Margining Affiliate.
Section 5. Forms of Margin; Holding Margin
    Section 5(b) would be amended to reflect the fact that separate 
Settlement Accounts and Securities Custody Accounts would be maintained 
for proprietary and Market Professional cross-margining activity.
    Section 5(c) would be amended to allow FICC and NYPC to hold cash 
and securities posted with respect to cross-margining activity in 
either separate accounts or, consistent with previously approved cross-
margining programs, joint accounts titled in the names of FICC and 
NYPC.
Section 7. Suspension and Liquidation of Cross-Margining Participant
    Section 7(a) would be amended to clarify that the positions and 
Margin of a Defaulting Member may be liquidated or transferred to one 
or more non-defaulting Clearing Members.
    A new Section 7(b) would be added to define ``Cross-Margin Gain'' 
and ``Cross-Margin Loss,'' as described above. New Section 7(b) would 
also make clear that in calculating its Cross-Margin Gain (or Cross-
Margin Loss) or Net Gain (or Net Loss) FICC and NYPC would be required 
to make separate calculations with respect to the Defaulting Member's 
Proprietary Cross-Margining Account and its Market Professional Cross-
Margining Account.
    Section 7(g) would be amended to provide that to the extent that 
pursuant to the loss allocation prescribed in Section 7, both FICC and 
NYPC owe payments to each other, i.e., one clearing organization owes a 
payment with respect to the Proprietary Cross-Margining Account of a 
Defaulting Member and the other owes a payment with respect to the 
Defaulting Member's Market Professional Cross-Margining Account, those 
two payments may be netted and setoff against each other.

Proposed Changes to Clearing Member Agreements

    The FICC-NYPC Cross-Margining Agreement is solely between FICC and 
NYPC. Members of FICC and of NYPC that wish to participate in the 
Cross-Margining Program must become party to a Clearing Member Cross-
Margining Agreement which, among other things, reflects the Clearing 
Member's agreement to be bound by the Rules applicable to cross-
margining and to the provisions of the FICC-NYPC Cross-

[[Page 30036]]

Margining Agreement (``Clearing Member Agreements''). Capitalized terms 
used in this section have the meanings given to them in the proposed 
Clearing Member Agreements.
    The current FICC-NYPC Cross-Margining Agreement includes two forms 
of Clearing Member Agreement--one for joint Clearing Members (i.e., 
entities that are members of both FICC and NYPC), the other for 
Clearing Members that are Affiliates of each other (i.e., a Clearing 
Member of either FICC or NYPC that directly or indirectly controls, is 
controlled by, or under common control with a Clearing Member of the 
other Clearing Organization). Those agreements, which are set forth as 
Appendix A and Appendix B to the FICC-NYPC Cross-Margining Agreement, 
would be renamed as Clearing Member Cross-Margining Agreement (Joint 
Clearing Member--Proprietary Accounts) and Clearing Member Cross-
Margining Agreement (Affiliated Clearing Members--Proprietary 
Accounts), and references in those agreements to a ``Member'' would be 
replaced with references to a ``Clearing Member'' for consistency with 
the terminology used in the FICC-NYPC Cross-Margining Agreement.
    The Clearing Member Agreements for Proprietary Accounts are 
proposed to be further modified to make clear that a Set of Proprietary 
Cross-Margining Accounts would be combined and treated as a single 
account for purposes of calculating Margin. This change is reflective 
of the current practice of the Clearing Organizations pursuant to the 
Cross-Margining Agreement and is proposed to be set out solely for 
purposes of clarity.
    The Clearing Member Agreements would additionally be modified to 
reflect the practice of the Clearing Organizations regarding the use of 
Clearing Data (as that term is defined in the Clearing Member Cross-
Margining Agreements). Specifically, the Clearing Member Agreements 
would be modified to provide that Clearing Data may only be disclosed 
(i) To an Affiliated Clearing Member, where applicable, (ii) in 
accordance with the provisions of Section 10 of the Cross-Margining 
Agreement, and (iii) in aggregated form, provided that such aggregated 
Clearing Data does not identify of the Clearing Member or Affiliated 
Clearing Members, as applicable, as the source thereof.
    The termination provisions of the Clearing Member Agreements for 
Proprietary Accounts would also be modified to make clear that the 
required acknowledgment of a Clearing Member's termination of the 
Agreement will be given by the Clearing Organizations promptly after 
the two Business Day notice period required by the Clearing Member 
Agreements. The termination provisions would additionally be modified 
to make explicit that a Clearing Member's continuing obligations under 
the Clearing Member Agreements and the Cross-Margining Agreement 
survive the termination of the Clearing Member Agreement only to the 
extent those obligations arose prior to such termination.
    Finally, the Clearing Member Cross-Margining Agreement (Affiliated 
Clearing Members--Proprietary Accounts) is proposed to be amended to 
include a waiver of the Clearing Members' and the Clearing 
Organizations' right to jury trial in any dispute arising in connection 
with that agreement. A comparable provision already is included in the 
Clearing Member Cross-Margining Agreement (Joint Clearing Member--
Proprietary Accounts). The remaining revisions to the Clearing Member 
Agreements for Proprietary Accounts are non-substantive or conforming.
    While it is anticipated that some Clearing Members will elect to 
participate in cross-margining for their Proprietary Accounts and also 
act as Clearing Member for Market Professionals, a Clearing Member 
could elect to act in only one of those capacities. The Clearing Member 
Agreements in Appendices A and B to the FICC-NYPC Cross-Margining 
Agreement, therefore, would be complemented by a Clearing Member Cross-
Margining Agreement (Joint Clearing Member--Market Professional 
Accounts) and Clearing Member Cross-Margining Agreement (Affiliated 
Clearing Members--Market Professional Accounts), respectively, and a 
Clearing Member that elected to maintain a Set of Proprietary Cross-
Margining Accounts and a Set of Market Professional Cross-Margining 
Accounts would be required to enter into Clearing Member Cross-
Margining Agreements for both its Proprietary Accounts and for its 
Market Professional Accounts.
    The proposed Clearing Member Agreements for Market Professional 
Accounts (Appendices C and D to the FICC-NYPC Cross-Margining 
Agreement) are based upon the Clearing Member Agreements for 
Proprietary Accounts, but have been modified as appropriate. For 
example, the Clearing Member Agreements for Market Professional 
Accounts would make explicit that the Set of Market Professional Cross-
Margining Accounts that would be established by the Clearing 
Organizations for a Clearing Member are to be limited to transactions 
and positions established by Market Professionals who have signed a 
Market Professional Agreement for Cross-Margining in the form set forth 
as Exhibit A to Appendices C and D, respectively.\29\
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    \29\ Similar to the Clearing Member Agreements for Proprietary 
Accounts, the Clearing Member Agreements for Market Professional 
Accounts would require the Clearing Member to pledge, for itself and 
for each Market Professional on whose behalf positions are carried 
in a Set of Market Professional Cross-Margining Accounts, the 
positions and Margin in the Set of Market Professional Cross-
Margining Accounts. Consistent therewith and with the Clearing 
Member Agreements for Proprietary Accounts, the Clearing Member 
Agreements for Market Professional Accounts would include 
representations and warranties by the Clearing Member to the effect 
that it has the power to grant the foregoing security interest and 
that it is the sole owner of or otherwise has the right to transfer 
collateral to the Clearing Organizations.
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    The Market Professional Agreements are derived from the form of 
Market Professional's Agreement for Cross-Margining that has previously 
been approved by the Commission.\30\ The FICC-NYPC Market Professional 
Agreements differ from the forms of agreement that have previously been 
approved in that they would be modified to reference the Eligible 
Products that are available for cross-margining under the FICC-NYPC 
Cross-Margining Agreement. The FICC-NYPC Market Professional Agreements 
additionally would be modified to reference the definitions of the term 
``Market Professional'' that would be set forth in the Rules of FICC 
and NYPC, and to require a Market Professional to represent and warrant 
that it does, in fact, qualify as such. Moreover, the FICC-NYPC Market 
Professional Agreements would be amended to provide that, consistent 
with the requirements of CFTC Regulation 39.13(g)(8)(i) (gross margin 
for customer accounts), the positions of a Market Professional cleared 
by FICC will only be cross-margined with the derivatives positions of 
the same Market Professional cleared by NYPC. The only other 
substantive change from the form of agreement previously approved by 
the Commission would be the elimination of a provision that would have 
conditioned the effectiveness of the Market Professional Agreements on 
the receipt of all necessary approvals by the Commission and the CFTC. 
FICC believes that a provision of this nature

[[Page 30037]]

is unnecessary, given that FICC and NYPC will not permit Clearing 
Members to enter into Market Professional Agreements until all 
necessary regulatory approvals have been obtained.
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    \30\ See Exhibits 5F and 5G to Release No. 34-57118 (January 9, 
2008) (Options Clearing Corporation--ICE Clear U.S. market 
professional cross-margining); see also Securities Exchange Act 
Release No. 34-29991 (November 26, 1991), 56 FR 61458 (December 3, 
1991) (Options Clearing Corporation--Chicago Mercantile Exchange 
market professional cross-margining).
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Proposed FICC Rule Changes

    In addition to the proposed changes to the FICC-NYPC Cross-
Margining Agreement, FICC is proposing the following GSD rule changes 
to effectuate the Market Professional Cross-Margining Program. 
Capitalized terms used in this section have the meanings given to them 
in the GSD Rules.
Rule 1 (Definitions)
    New definitions are being added for the following terms: ``Market 
Professional,'' ``Market Professional Agreement for Cross-Margining,'' 
``Market Professional Cross-Margining Account,'' ``Non-Customer,'' 
``NYPC Market Professional Account,'' and ``NYPC Proprietary Account'' 
(which retains the current definition of ``NYPC Account''). ``NYPC 
Account,'' an existing term, is now proposed to be amended to encompass 
the two new terms of ``NYPC Market Professional Account'' and ``NYPC 
Proprietary Account.'' In addition, changes are proposed to the 
following definitions to reference the concepts associated with the 
Market Professional Cross-Margining Program: ``Account,'' ``Cross-
Margining Affiliate,'' ``Cross-Margining Agreement'' and ``Margin 
Portfolio.'' A technical change is being proposed to the definition of 
``Cross-Margining Payment.''
Rule 3 (On-Going Membership Requirements)
    FICC is proposing to amend Section 11 of Rule 3, which covers 
additional accounts requested by Members, to provide for the opening of 
market professional accounts and to make clear that such accounts must 
meet the requirements of the Cross-Margining Agreement and the GSD 
Rules (as with all other accounts carried by FICC for its Members).
Rule 4 (Clearing Fund and Loss Allocation)
    FICC is proposing to amend Section 1b and Section 2 of Rule 4 to 
provide that the market professional account will have its own Clearing 
Fund calculations separate from the main account of the Netting Member, 
and that the rules applicable to the Clearing Fund calculations and the 
requirements of the Required Fund Deposit also apply Clearing Fund 
calculations and Required Fund Deposits associated with the market 
professional accounts.
Rule 13 (Funds-Only Settlement)
    FICC is proposing to amend Section 1 and Section 5a to provide that 
funds-only settlement amounts will be calculated separately for the 
member's market professional account and that net-net funds only 
credits/debits will also apply to the market professional accounts of a 
Member (or its permitted margin affiliate) across FICC and NYPC, as is 
the case currently with the proprietary accounts.
Rule 22A (Procedures for When the Corporation Ceases to Act)
    FICC is proposing to amend Section 2 of Rule 22A to provide that a 
liquidation gain in a Netting Member's proprietary account will be used 
to offset any resulting liquidation loss in such Member's Market 
Professional Cross-Margining Account.
Rule 29 (Release of Clearing Data)
    FICC is proposing to amend Rule 29 to make clear that a Member's 
Clearing Data will be released to a futures clearing organization 
(``FCO'') with which FICC has a Cross-Margining Arrangement and that 
such data will include data regarding the Member's market professional 
customers.
Rule 43 (Cross-Margining Arrangements)
    FICC is proposing to amend Rule 43 to provide for the requirement 
for Netting Members who wish to participate in the Market Professional 
Cross-Margining Program to execute the appropriate participation 
agreements which are appended to the FICC-NYPC Cross-Margining 
Agreement as discussed above.

III. Comments

    The Commission received one comment to the proposed rule change 
from Citadel, LLC.\31\ The commenter supports the proposed rule change, 
stating that the proposed rule change would allow market professionals 
to more effectively manage risk by recognizing the value of offsetting 
positions cleared by NYPC and FICC. The commenter believes that the 
proposed rule change will allow market professionals to use their 
capital more efficiently and will reduce systemic risk by removing 
excess interconnectedness from the marketplace and optimizing 
collateral balances. Furthermore the commenter believes that the 
proposed rule change will further encourage competition in the US 
futures markets and provides for consumer protection in the event of 
the bankruptcy of a clearing member in accordance with the CFTC's 
rules.
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    \31\ See supra note 4.
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IV. Discussion

    Section 19(b)(2)(B) of the Act \32\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization. In Section 17A(a)(2)(A)(ii) of the Act,\33\ Congress 
directs the Commission to use its authority to facilitate the 
establishment of linked or coordinated facilities for clearance and 
settlement of transactions in securities, securities options, contracts 
of sale for future delivery and options thereon, and commodity options. 
Sections 17A(b)(3)(A) and (F) of the Act \34\ require that a clearing 
agency be organized and its rules designed to facilitate the prompt and 
accurate clearance and settlement of securities transactions and 
derivative agreements, contracts, and transactions for which it is 
responsible and to safeguard securities and funds in its custody or 
control or for which it is responsible. The Commission has carefully 
considered the proposed rule change and the comment thereto and the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder.\35\
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    \32\ 15 U.S.C. 78s(b)(2)(B).
    \33\ 15 U.S.C. 78a-1 (a)(2)(A)(ii).
    \34\ 15 U.S.C. 78q-1(b)(3)(A), (F)
    \35\ In approving this proposed rule change, the Commission 
notes and FICC agrees that FICC will adhere to the conditions to 
provide information and reports on an ongoing basis that are set 
forth in the Commission's Order Granting Approval of a Proposed Rule 
Change to Introduce Cross-Margining of Certain Positions Cleared at 
the Fixed Income Clearing Corporation and Certain Positions Cleared 
at New York Portfolio Clearing, LLC, to the extent applicable to 
``Market Professionals.'' See note 5, supra.
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    As the Commission noted in approving the FICC-NYPC Proprietary 
Cross-Margining Program, the Commission has encouraged cross-margining 
arrangements as a way to promote more efficient risk management across 
product classes.\36\ Furthermore, cross-margining arrangements are 
consistent with Section 17A(b)(3)(F) in that they may strengthen the 
safeguarding of assets through effective risk controls that more 
broadly take into account offsetting positions of participants in both 
the cash and futures markets, and promote prompt and

[[Page 30038]]

accurate clearance and settlement of securities through increased 
efficiencies. The Commission agrees with the commenter that the 
proposed rule change will help promote effective risk management and 
provides for increased efficiencies by taking into account offsetting 
positions. Moreover, the Commission has repeatedly found that similar 
cross-margining programs for ``Market Professionals'' are consistent 
with clearing agency requirements under Section 17A of the Act.\37\ 
Because the Market Professional Cross-Margining Program being approved 
by this Order helps further linked or coordinated facilities for 
clearance and settlement of transactions while facilitating their 
prompt and accurate clearance and settlement and safeguards securities 
and funds in FICC's custody or control or for which it is responsible, 
the Commission believes that the proposed rule change is consistent 
with Section 17A of the Act and, therefore, is approving FICC's 
proposed rule change.
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    \36\ See note 5, supra.
    \37\ See note 6, supra.
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \38\ and the 
rules and regulations thereunder.
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    \38\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) \39\ of the 
Act, that the proposed rule change (File No. SR-FICC-2012-03) be, and 
hereby is, approved.\40\
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    \39\ 15 U.S.C. 78s(b)(2).
    \40\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact of efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12181 Filed 5-18-12; 8:45 am]
BILLING CODE 8011-01-P