[Federal Register Volume 88, Number 177 (Thursday, September 14, 2023)]
[Notices]
[Pages 63185-63189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19839]



[[Page 63185]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98327; File No. SR-FICC-2023-010]


Self-Regulatory Organizations; the Fixed Income Clearing 
Corporation; Order Granting Approval of Proposed Rule Change To Amend 
and Restate the Cross-Margining Agreement Between FICC and CME

September 8, 2023.

I. Introduction

    On July 17, 2023, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-FICC-2023-010 (``Proposed Rule Change'') 
pursuant to section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to change the 
terms of its cross-margining arrangement with the Chicago Mercantile 
Exchange Inc. (``CME'').\3\ The Proposed Rule Change was published for 
public comment in the Federal Register on July 28, 2023.\4\ The 
Commission has received no comments regarding the Proposed Rule Change. 
This order approves the Proposed Rule Change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, at 88 FR 48926.
    \4\ Securities Exchange Act Release No. 97969 (July 24, 2023), 
88 FR 48926 (July 28, 2023) (File No. SR-FICC-2023-010) (``Notice of 
Filing'').
---------------------------------------------------------------------------

II. Background

    FICC is a central counterparty (``CCP''), which means it interposes 
itself as the buyer to every seller and seller to every buyer for the 
financial transactions it clears. FICC operates two divisions: the 
Government Securities Division (``GSD'') and the Mortgage-Backed 
Securities Division (``MBSD''). GSD provides trade comparison, netting, 
risk management, settlement, and central counterparty services for the 
U.S. Government securities market. As such, FICC is exposed to the risk 
that one or more of its members may fail to make a payment or to 
deliver securities.
    A key tool that FICC uses to manage its credit exposures to its 
members is the daily collection of margin from each member. A member's 
margin is designed to mitigate potential losses associated with 
liquidation of the member's portfolio in the event of that member's 
default. The aggregated amount of all GSD members' margin constitutes 
the GSD Clearing Fund, which FICC would be able to access should a 
defaulted member's own margin be insufficient to satisfy losses to FICC 
caused by the liquidation of that member's portfolio. Each member's 
margin consists of a number of applicable components, including a 
value-at-risk (``VaR'') charge (``VaR Charge'') designed to capture the 
potential market price risk associated with the securities in a 
member's portfolio. The VaR Charge is typically the largest component 
of a member's margin requirement. The VaR Charge is designed to cover 
FICC's projected liquidation losses with respect to a defaulted 
member's portfolio at a 99 percent confidence level.
    Margin requirements are typically designed, in part, to recognize 
the potential relationship between products in a member's portfolio 
(e.g., some products may naturally gain value when others lose value). 
Members may, however, hold assets or enter into transactions that 
reduce risk, but are not visible to the CCP. For example, a market 
participant might purchase a debt security, and at the same time, 
contract to sell the same security in the future. The risk to the 
market participant is combination of these two offsetting transactions 
as opposed to the risk of each added together because it is unlikely 
that both positions would lose value at the same time under normal 
market conditions.
    To recognize potential offsets in the risk presented by related 
products, FICC has an ongoing cross-margining arrangement with CME, 
which acts as a CCP for futures related to the debt instruments that 
FICC clears.\5\ The cross-margining arrangement is governed by a 
contract (the ``Existing Agreement'') that, among other things, defines 
the methodology by which FICC and CME determine offsets between cleared 
products that could reduce the margin requirement of an FICC member.\6\ 
FICC and CME have negotiated a new agreement (the ``Restated 
Agreement'') that FICC proposes to adopt to govern the cross-margining 
arrangement between FICC and CME.
---------------------------------------------------------------------------

    \5\ CME provides central counterparty services for futures, 
options, and swaps. See Financial Stability Oversight Council 
(``FSOC'') 2012 Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited July 17, 
2023).
    \6\ The Existing Agreement is incorporated in the GSD Rules 
available at www.dtcc.com/legal/rules-and-procedures.aspx. Unless 
otherwise specified, capitalized terms not defined herein shall have 
the meanings ascribed to them in the GSD Rules, which includes the 
Existing Agreement.
---------------------------------------------------------------------------

III. Description of the Proposed Rule Change

    The proposed changes to the cross-margining arrangement are 
primarily designed to (i) expand the scope of CME products eligible for 
cross-margining, (ii) replace the methodology for calculating the 
margin reductions available to FICC's members; \7\ and (iii) improve 
the default management and loss sharing processes that FICC and CME 
would engage in if a common member were to default. FICC also proposes 
relocating certain timing and operational aspects of the cross-margin 
arrangement to a supporting service level agreement (the ``SLA'').\8\ 
For example, the SLA would cover operational issues such as the 
creation and maintenance of special accounts for managing settlement 
and liquidation of a defaulting common member's cross margin positions 
as well as the operational steps involved in managing the default of a 
common member. The SLA would also define the times by which FICC and 
CME would be expected to exchange certain information and reports.
---------------------------------------------------------------------------

    \7\ FICC provided data demonstrating that the proposal would 
likely increase the range of potential reduction in margin related 
to cross-margining positions. FICC provided its analysis of the 
potential effects on margin requirements to the Commission in a 
confidential Exhibit 3 to File No. SR-FICC-2023-010.
    \8\ FICC provided the SLA in a confidential Exhibit 3 to File 
No. SR-FICC-2023-010.
---------------------------------------------------------------------------

    The following sections describe the proposed changes to the cross-
margining arrangement in more detail.

A. Products Eligible for Cross-Margining

    The margin reductions provided by FICC and CME to common members 
are based on the relationship between the products that each CCP 
clears. Only products specified in the Existing Agreement currently may 
be considered when determining margin reductions (the ``Eligible 
Products''). As noted above, in the Restated Agreement, FICC proposes 
to expand the scope of CME products eligible for cross-margining.\9\ 
FICC also proposes to reduce the scope of products it clears that would 
be eligible for cross-margining.\10\ The

[[Page 63186]]

combined effect of the proposed changes to products eligible for cross-
margining would expand the potential reductions members could receive 
through cross-margining program.\11\ The new set of products eligible 
for cross-margining would be listed in exhibits to the Restated 
Agreement.\12\
---------------------------------------------------------------------------

    \9\ The following CME products would become eligible for cross-
margining: CBT 3YR 3-year T-Notes Futures, CBT TN Ultra Ten-Year T-
Note Futures, CBT UBE Ultra U.S. Treasury Bond Futures, CBT TWE 20-
Year U.S. Treasury Bond Futures, CBT 41 30 Day Federal Funds 
Futures, CME SR1 One-Month SOFR Futures, and CME SR3 Three-Month 
SOFR Futures. See Notice of Filing, 88 FR at 48928, n.14. At the 
same time, certain CME products would no longer be eligible due to 
lack of use under the current arrangement. Id.
    \10\ The following FICC products will no longer be eligible for 
cross-margining with CME products: Treasury bills (maturity of one 
year or less) and Treasury Inflation-Protected Securities (TIPS). 
See Notice of Filing, 88 FR at 48929, n.29. U.S. Treasury notes and 
bonds cleared by FICC would continue to be eligible for cross-
margining. See Notice of Filing, 88 FR at 48929.
    \11\ FICC provided data demonstrating that the proposed change 
in eligible products would have reduced the average daily margin 
requirements by approximately 1.33 percent for the small set of 
members who participated in the cross-margining program. FICC 
provided its analysis of the potential effects on margin 
requirements to the Commission in a confidential Exhibit 3 to File 
No. SR-FICC-2023-010.
    \12\ Future changes to FICC's rules, such as the terms of the 
Restated Agreement, are outside the scope of this proposal. The 
Restated Agreement and the SLA provide a mechanism for changing the 
list of Eligible Products; however, the agreement would not alter 
FICC's filing obligations pursuant to section 19(b) of the Exchange 
Act or section 806(e) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010. See 15 U.S.C. 78s(b) and 12 U.S.C. 
5465(e).
---------------------------------------------------------------------------

B. Methodology for Margining Cross-Margin Portfolios

    In addition to changing the set of products eligible for cross-
margining, FICC proposes replacing the methodology for calculating 
margin requirements for cross-margined positions. The proposed 
methodology is designed to more accurately estimate the risk presented 
by the cross-margined positions. Margin requirements set by the 
proposed methodology would allow for, on average, a wider range of 
margin reductions; \13\ however, because of the increased accuracy, the 
proposed methodology would not reduce FICC's ability to cover the 
credit risk posed by its members.\14\
---------------------------------------------------------------------------

    \13\ For the small set of members involved in cross-margining, 
the proposed change would widen the potential range of margin 
reductions. See Notice of Filing, 88 FR at 48927. Specifically, the 
average range of reductions to total margin was 0.1 percent to 17.4 
percent under the current methodology, and would have been 0 percent 
to 36.6 percent under the proposed methodology. Id. The overall 
reduction to margin at FICC would have been significantly smaller 
because cross-margining related margin requirements account for only 
small amount of total margin requirements on average. See Notice of 
Filing, 88 FR at 48927, n.10.
    \14\ Backtesting data showed that, even with the broadened range 
of margin reductions, FICC's ability to cover exposures presented by 
members would have improved. FICC provided backtesting data in a 
confidential Exhibit to File No. SR-FICC-2023-010.
---------------------------------------------------------------------------

    The proposed methodology is also less complex than the current 
methodology. FICC proposes to calculate the margin reduction from 
cross-margining based on the combined portfolio of eligible products of 
a common member (i.e., both the products cleared at FICC and the 
related products cleared at CME) with a VaR methodology. The proposed 
methodology calculates portfolio margin reductions based on 
correlations at the security level. FICC and CME would separately 
calculate the potential margin reduction resulting from offsetting 
positions in a common member's portfolio using their respective margin 
methodologies and agree to reduce the member's margin requirement by 
the more conservative amount (i.e., the smaller reduction). Further, 
FICC proposes to apply such a margin reduction only if it exceeds a 
minimum threshold.\15\
---------------------------------------------------------------------------

    \15\ The threshold would initially be set at 1 percent to 
prevent any negatively correlated portfolios or portfolios with 
little to no correlation to receive cross-margin benefit because of 
the operational coordination required to provide such benefit. See 
Notice of Filing, 88 FR at 48930, n.40. Additionally, FICC provided 
information pertaining to thresholds for the maximum margin 
reduction allowable under the proposed rule change as well. See 
Notice of Filing, 88 FR at 48927, n.10.
---------------------------------------------------------------------------

    Conversely, the current methodology involves a series of steps to 
allow FICC and CME to separately consider offsets for their respective 
products. Such steps include the conversion of products into other 
products to facilitate comparison of a common member's Treasury and 
futures contracts (e.g., FICC would convert CME products into 
equivalent FICC products). The current methodology also requires FICC 
and CME to group products by maturity into ``Offset Classes'' to 
facilitate the calculation of a member's margin reduction. As noted 
above, the current process is complex and produces less accurate 
offsets that could negatively affect FICC's ability to cover the 
exposures presented by its members.

C. Default Management and Loss Sharing

    FICC proposes to strengthen its default management coordination 
with CME and to simplify the sharing of losses arising out of a common 
member default. The Restated Agreement would provide three potential 
default management paths and would favor joint action by FICC and CME 
as a first, best option. In contrast, the Existing Agreement merely 
seeks to align the time at which the CCPs liquidate a common member's 
positions. With regard to loss sharing, the Restated Agreement provides 
for a relatively simple division of gains and losses. Further, the 
Restated Agreement would align cashflows through the exchange of 
variation margin, which is not contemplated by the Existing Agreement.
    Default Management Coordination: The proposed changes would 
simplify the scenario in which only one of the CCPs suspends a common 
member by requiring the common member to repay the margin reduction 
realized under the cross-margin arrangement.\16\ If the common member 
fails to pay back the margin reduction, then the CCPs must both suspend 
and liquidate the member's portfolio.\17\ In the event that both FICC 
and CME suspend a common member, the Restated Agreement is designed to 
facilitate joint liquidation of common member's cross-margin portfolio. 
The Existing Agreement requires only that FICC and CME make reasonable 
efforts to coordinate when off-setting positions are closed out and to 
report losses to each other. In contrast, the Restated Agreement would 
require in the first instance a good faith attempt to jointly transfer, 
liquidate, or close-out positions. The Restated Agreement would further 
describe alternatives where joint liquidation is either infeasible or 
inadvisable, including separate liquidation similar to what is 
contemplated under the Existing Agreement.\18\
---------------------------------------------------------------------------

    \16\ For example, assume that FICC suspends Member A, but CME 
does not. CME must require Member A to pay both the margin reduction 
provided by FICC (which CME passes to FICC) and the margin reduction 
provided by CME (which is retained by CME). Such a payment would 
provide each CCP with the collateral it would have collected if the 
common member did not participate in the cross-margining 
arrangement.
    \17\ In contrast, the provisions of the Existing Agreement set 
out a complex series of conditional statements and calculations that 
flow into further loss sharing provisions in the event that only one 
CCP suspends a common member.
    \18\ The Restated Agreement would allow for either FICC or CME 
to buy-out the other with regard to the cross-margined positions of 
the defaulter. Failing joint action or buy-out, the Restated 
Agreement allows for separate liquidation followed by loss sharing, 
similar to the provisions of the Existing Agreement.
---------------------------------------------------------------------------

    Loss Sharing. The Restated Agreement would simplify loss sharing in 
the event of a common member default and would introduce a new feature 
to align cashflows during default management. As stated above, the 
Restated Agreement is designed to facilitate joint default management 
by FICC and CME. In the event the CCPs jointly transfer, liquidate, or 
close-out the common member's cross-margin positions, if one CCP faces 
a loss greater than (or gain less than) their share of total losses (or 
gains), the other CCP would pay the difference to ensure that each CCP 
was responsible for its respective portion of losses or gains.\19\
---------------------------------------------------------------------------

    \19\ Specifically, FICC and CME would each calculate their 
respective net gain or loss as well as the overall combined gain or 
loss across the CCPs to determine their respective allocation of 
losses or gains arising out the liquidation.
---------------------------------------------------------------------------

    In the case of a joint liquidation, the Restated Agreement would 
also provide for an exchange of variation margin.

[[Page 63187]]

Such an exchange would improve the efficiency of the default management 
process by aligning cashflows in a scenario in which either CME or FICC 
has a payment obligation arising out of cross-margin positions that 
could be covered by the variation margin gains on offsetting cross-
margin positions held by the other CCP. The Existing Agreement does not 
contemplate any exchange of variation margin between FICC and CME.
    The Restated Agreement would also simplify the sharing of losses 
where FICC and CME liquidate the defaulter's cross-margin positions 
separately. In the case of separate liquidations, if either FICC or CME 
has a net gain and the other has a net loss, then the CCP with the net 
gain would make a payment to the CCP with the net loss. Such payment 
would be the lesser of the net gain or net loss realized by the 
CCPs.\20\
---------------------------------------------------------------------------

    \20\ In the event that either FICC or CME buys out the other's 
cross-margin positions and related collateral, no loss sharing would 
occur.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\21\ After carefully 
considering the Proposed Rule Change, the Commission finds that the 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to FICC. More 
specifically, the Commission finds that the proposal is consistent with 
section 17A(b)(3)(F) of the Exchange Act,\22\ and Rules 17Ad-22(e)(6) 
and (e)(20) \23\ thereunder, as described in detail below.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(2)(C).
    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(e)(6) and 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed to remove 
impediments to and help perfect the mechanism of a national system for 
the prompt and accurate clearance and settlement of securities 
transactions; and to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions.\24\
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission has historically supported and approved cross-
margining at clearing agencies and has recognized the potential 
benefits of cross-margining systems, which include freeing capital 
through reduced margin requirements, reducing clearing costs by 
integrating clearing functions, reducing clearing agency risk by 
centralizing asset management, and harmonizing liquidation 
procedures.\25\ The Commission has encouraged cross-margining 
arrangements as a way to promote more efficient risk management across 
product classes.\26\ Cross-margining arrangements may be 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 accurate clearance and 
settlement of securities through increased efficiencies.\27\
---------------------------------------------------------------------------

    \25\ See Securities Exchange Act Release No. 63986 (Feb. 28, 
2011), 76 FR 12144, 12153 (Mar. 4, 2011) (File No. SR-FICC-2010-09) 
(approving the introduction of cross-margining for positions held at 
FICC and New York Portfolio Clearing, LLC) (citations omitted) 
(``NYPC Order'').
    \26\ See id. (citations omitted).
    \27\ See id.
---------------------------------------------------------------------------

    The Commission continues to view cross-margining programs as 
consistent with clearing agency responsibilities under section 17A of 
the Exchange Act.\28\ Cross-margining programs enhance member liquidity 
and systemic liquidity both in times of normal trading and in times of 
market stress by reducing margin requirements for members, which could 
prove crucial in maintaining member liquidity during periods of market 
volatility, and enhancing market liquidity as a whole.\29\ By enhancing 
market liquidity, cross-margining arrangements remove impediments to 
and help perfect the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions.\30\ Based 
on a review of the record, and for the reasons described below, the 
Commission believes that the Proposed Rule Change is consistent with 
removing of impediments to and helping to perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions as well as fostering cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions.
---------------------------------------------------------------------------

    \28\ See Securities Exchange Act Release No. 90464 (Nov. 19, 
2020), 85 FR 75384, 75386 (Nov. 25, 2020 (File No. SR-OCC-2020-010) 
(approving a second amended and restated cross-margining agreement 
between the Options Clearing Corp. and CME); Securities Exchange Act 
Release No. 38584 (May 8, 1997), 62 FR 26602, 26604-05 (May 14, 
1997) (File No. SR-OCC-97-04) (establishing a cross-margining 
agreement with the Options Clearing Corp., CME, and the Commodity 
Clearing Corporation).
    \29\ See id.
    \30\ See id. See also NYPC Order at 12153.
---------------------------------------------------------------------------

    As described above, FICC proposes to expand the set of products 
accepted as part of its cross-margining arrangement with CME. Expanding 
the set of Eligible Products will increase the opportunities to reduce 
member margin requirements, which could support the maintenance of 
market participants' liquidity during periods of market volatility. The 
expansion of product eligibility would also support market 
participants' use of the national system for the prompt and accurate 
clearance and settlement without being impeded by the market structure 
in which different CCPs serve different asset classes.
    Also as described above, the proposed changes would reduce margin 
requirements overall by a small amount without reducing FICC's ability 
to cover the credit risk posed by its members. Although the margin 
reductions provided by the proposed changes would not diminish FICC's 
ability to cover the credit risk posed by its members, the link 
represented by the cross-margining arrangement necessitates cooperation 
not only during normal operations, but also following the default of a 
common member. The proposed Restated Agreement details the processes 
for default management and loss sharing. The Restated Agreement favors 
joint liquidation by the parties and also contemplates alternative 
default management scenarios in which a joint liquidation is not 
feasible or advisable. The Proposed Rule Change would also introduce 
variation margin sharing across the CCPs to facilitate default 
management.
    The Commission finds, therefore, that the Proposed Rule Change is 
consistent with the requirements of section 17A(b)(3)(F) of the 
Exchange Act.\31\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(6) Under the Exchange Act

    Rule 17Ad-22(e)(6)(v) under the Exchange Act requires that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to cover, if the 
covered clearing agency provides central counterparty services, its 
credit exposures to its participants by establishing a risk-based 
margin system that, at a minimum, uses an appropriate method for 
measuring credit exposure that accounts for relevant product risk

[[Page 63188]]

factors and portfolio effects across products.\32\ In adopting Rule 
17Ad-22(e)(6), the Commission provided guidance that a covered clearing 
agency generally should consider in establishing and maintaining 
policies and procedures for margin.\33\ The Commission stated that a 
covered clearing should consider, in calculating margin requirements, 
whether it allows offsets or reductions in required margin across 
products that it clears or between products that it an another clearing 
agency clear, if the risk of one product is significantly and reliably 
correlated with the risk of the other product; and where two or more 
clearing agencies are authorized to offer cross-margining, whether they 
have appropriate safeguards and harmonized overall risk management 
systems.\34\
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17Ad-22(e)(6)(v).
    \33\ See Standards for Covered Clearing Agencies, Exchange Act 
Release No. 78961, 81 FR 70786, 70819 (Oct. 13, 2016) (File No. S7-
03-14) (``Standards for Covered Clearing Agencies'').
    \34\ See id.
---------------------------------------------------------------------------

    The Proposed Rule Change would support the continued allowance of 
margin reductions in recognition of the correlation between products 
cleared by CME and FICC. Whether the reduced margin represents an 
appropriate measure of the credit exposure posed to FICC may be viewed 
in terms of whether such margin is sufficient to cover the potential 
losses associated with cross-margined positions following a member 
default. As described above, backtesting data demonstrates that the 
proposed margin methodology would not reduce FICC's ability to cover 
the credit risk posed by its members within the context of cleared 
products eligible for cross-margining under the Restated Agreement.\35\ 
Further, the Restated Agreement includes provisions to safeguard FICC 
against a scenario in which it ceases to act for a common member, but 
CME does not. Specifically, the Restated Agreement would require the 
payment to FICC of the margin reduction granted under the cross-
margining arrangement, which would avoid a mismatch between the margin 
collected and the portfolio to be liquidated.
---------------------------------------------------------------------------

    \35\ Supra note 14.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that the proposed model changes 
are consistent with Rule 17Ad-22(e)(6)(v) under the Exchange Act.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(20) Under the Exchange Act

    Rule 17Ad-22(e)(20) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to identify, monitor, and 
manage risks related to any link the covered clearing agency 
establishes with one or more other clearing agencies, financial market 
utilities, or trading markets.\37\ The term financial market utility 
means any person that manages or operates a multilateral system for the 
purpose of transferring, clearing, or settling payments, securities, or 
other financial transactions among financial institutions or between 
financial institutions and the person.\38\ For the purposes of Rule 
17Ad-22(e)(20), link means, among other things, a set of contractual 
and operational arrangements between two or more clearing agencies, 
financial market utilities, or trading markets that connect them 
directly or indirectly for the purposes of cross margining.\39\
---------------------------------------------------------------------------

    \37\ 17 CFR 240.17Ad-22(e)(20).
    \38\ 12 U.S.C. 5462(6)(A).
    \39\ 17 CFR 240.17Ad-22(a)(8).
---------------------------------------------------------------------------

    In adopting Rule 17Ad-22(e)(20), the Commission provided guidance 
that a covered clearing agency generally should consider in 
establishing and maintaining policies and procedures that address 
links.\40\ Notably, the Commission stated that a covered clearing 
should consider whether a link has a well-founded legal basis, in all 
relevant jurisdictions, that supports its design and provides adequate 
protection to the covered clearing agencies involved in the link.\41\ 
The Commission further stated that, when in a CCP link arrangement, a 
covered clearing agency should consider whether it is able to cover, at 
least on a daily basis, its current and potential future exposures to 
the linked CCP and its participant, if any, fully with a high degree of 
confidence without reducing the covered clearing agency's own ability 
to fulfill its obligations to its own participants at any time.\42\
---------------------------------------------------------------------------

    \40\ See Standards for Covered Clearing Agencies, 81 FR at 
70841.
    \41\ Id.
    \42\ Id.
---------------------------------------------------------------------------

    CME is a CCP for futures contracts and also meets the definition of 
a financial market utility.\43\ The cross-margin arrangement between 
FICC and CME, therefore, is a link for the purposes of Rule 17Ad-
22(e)(20), as defined in Rule 17Ad-22(a)(8). As described above, FICC 
proposes to adopt the Restated Agreement to amend its cross-margining 
arrangement with CME. The terms of the Restated Agreement, which would 
replace the Existing Agreement, would continue to specify, among other 
matters, which members may participate in the arrangement, which 
products are eligible for consideration under the arrangement, how 
margin requirements will be set for positions considered under the 
arrangement, and how FICC and CME would manage the default of member 
who participates in the arrangement. The Restated Agreement would also 
address issues of indemnification, information sharing, and other 
routine terms currently addressed in the Existing Agreement. Further, 
the Restated Agreement would also provide for the use of an SLA that 
would provide additional supporting detail with regard to timing and 
certain operational processes related to the cross-margining 
arrangement. The Commission believes that the Restated Agreement would 
continue to support the design of the cross-margin arrangement between 
FICC and CME by addressing matters currently covered in the Existing 
Agreement as well as those changes to the structure of the cross-margin 
arrangement described above (e.g., product eligibility, margin 
requirements, default management).
---------------------------------------------------------------------------

    \43\ See FSOC 2012 Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited July 17, 
2023).
---------------------------------------------------------------------------

    Further, the incorporation of certain timing and operational 
aspects of the cross-margining arrangement in a separate SLA would 
streamline the language of the Restated Agreement and more clearly 
present operational details, such as those related to daily settlement 
procedures. The CCPs would also have the ability to review the service 
level details separately and modify them without requiring changes to 
the full agreement. Simplifying the presentation and maintenance of 
such operational details would serve to reduce risks associated with 
the link between FICC and CME.
    The Proposed Rule Change also addresses margin reductions, default 
management, and loss sharing. With regard to margin, backtesting data 
demonstrates that the proposed margin methodology would not reduce 
FICC's ability to cover the credit risk posed by its members.\44\ The 
Commission believes that such backtesting data suggests that the 
proposed changes would support FICC's ability to cover its current and 
potential future exposures to its participants. The Proposed Rule 
Change would support FICC's ability to meet its obligations by 
providing for the exchange of variation margin between FICC and CME 
during the management of a common member default. With regard to 
default management, the Restated Agreement explicitly

[[Page 63189]]

prioritizes coordination and joint management of a common member 
default. The Commission believes that such default management and loss 
sharing provisions as those proposed in the Restated Agreement would 
further support FICC's ability to cover its current and potential 
future exposures without reducing its ability to fulfill its 
obligations to its own participants.
---------------------------------------------------------------------------

    \44\ Supra note 14.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that the proposed model changes 
are consistent with Rule 17Ad-22(e)(20) under the Exchange Act.\45\
---------------------------------------------------------------------------

    \45\ 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of section 17A of the 
Exchange Act \46\ and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \46\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\47\ that the Proposed Rule Change (SR-FICC-2023-010) be, 
and hereby is, approved.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
---------------------------------------------------------------------------

    \48\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-19839 Filed 9-13-23; 8:45 am]
BILLING CODE 8011-01-P