[Federal Register Volume 89, Number 10 (Tuesday, January 16, 2024)]
[Rules and Regulations]
[Pages 2714-2830]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-27860]



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Vol. 89

Tuesday,

No. 10

January 16, 2024

Part II





Securities and Exchange Commission





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17 CFR Part 240





Standards for Covered Clearing Agencies for U.S. Treasury Securities 
and Application of the Broker-Dealer Customer Protection Rule With 
Respect to U.S. Treasury Securities; Final Rule

  Federal Register / Vol. 89 , No. 10 / Tuesday, January 16, 2024 / 
Rules and Regulations  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240

[Release No. 34-99149; File No. S7-23-22]
RIN 3235-AN09


Standards for Covered Clearing Agencies for U.S. Treasury 
Securities and Application of the Broker-Dealer Customer Protection 
Rule With Respect to U.S. Treasury Securities

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting rules under the Securities Exchange Act of 1934 (``Exchange 
Act'') to amend the standards applicable to covered clearing agencies 
for U.S. Treasury securities to require that such covered clearing 
agencies have written policies and procedures reasonably designed to 
require that every direct participant of the covered clearing agency 
submit for clearance and settlement all eligible secondary market 
transactions in U.S. Treasury securities to which it is a counterparty. 
In addition, the Commission is adopting additional amendments to the 
Covered Clearing Agency Standards with respect to risk management. 
These requirements are designed to protect investors, reduce risk, and 
increase operational efficiency. Finally, the Commission is amending 
the broker-dealer customer protection rule to permit margin required 
and on deposit with covered clearing agencies for U.S. Treasury 
securities to be included as a debit in the reserve formulas for 
accounts of customers and proprietary accounts of broker-dealers 
(``PAB''), subject to certain conditions.

DATES: 
    Effective date: March 18, 2024.
    Compliance date: The applicable compliance dates are discussed in 
Part III of this release.

FOR FURTHER INFORMATION CONTACT: Elizabeth L. Fitzgerald, Assistant 
Director, and Robert Zak, Special Counsel, Office of Clearance and 
Settlement at (202) 551-5710, Division of Trading and Markets; Michael 
A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. 
McGowan, Associate Director, at (202) 551-5521; Randall W. Roy, Deputy 
Associate Director, at (202) 551-5522; Raymond Lombardo, Assistant 
Director, at 202-551-5755; Sheila Dombal Swartz, Senior Special 
Counsel, at (202) 551-5545; or Nina Kostyukovsky, Special Counsel, at 
(202) 551-8833, Office of Broker-Dealer Finances, Division of Trading 
and Markets; U.S. Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: First, the Commission is amending 17 CFR 
240.17ad-22(e)(18) (``Rule 17ad-22(e)(18)'') to require covered 
clearing agencies that provide central counterparty (``CCP'') services 
for U.S. Treasury securities to establish, implement, maintain and 
enforce written policies and procedures reasonably designed, as 
applicable, to establish objective, risk-based and publicly disclosed 
criteria for participation, which require that any direct participant 
of such a covered clearing agency submit for clearance and settlement 
all the eligible secondary market transactions in U.S. Treasury 
securities to which such direct participant is a counterparty. In 
addition, these policies and procedures must be reasonably designed, as 
applicable, to identify and monitor the covered clearing agency's 
direct participants' submission of transactions for clearing as 
required above, including how the covered clearing agency would address 
a failure to submit transactions. These policies and procedures must 
also be reasonably designed, as applicable, to ensure that the covered 
clearing agency has appropriate means to facilitate access to clearance 
and settlement services of all eligible secondary market transactions 
in U.S. Treasury securities, including those of indirect participants, 
which policies and procedures the board of directors of such U.S. 
Treasury securities covered clearing agency (``CCA'') must review 
annually. The Commission is defining an eligible secondary market 
transaction as a secondary market transaction in U.S. Treasury 
securities of a type accepted for clearing by a registered covered 
clearing agency that is either a repurchase or reverse repurchase 
agreement collateralized by U.S. Treasury securities, in which one of 
the counterparties is a direct participant, or certain specified 
categories of cash purchase or sale transactions, including certain 
exclusions for transactions with sovereign entities, international 
financial institutions, natural persons, inter-affiliate repo 
transactions, state/local governments, and other clearing 
organizations. Second, the Commission is amending 17 CFR 240.17ad-
22(e)(6)(i) (``Rule 17ad-22(e)(6)(i)'') to require that a covered 
clearing agency providing central counterparty services for U.S. 
Treasury securities establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable, 
calculate, collect, and hold margin for transactions in U.S. Treasury 
securities submitted on behalf of an indirect participant separately 
from those submitted on behalf of the direct participant. Third, the 
Commission is amending Rule 17ad-22(e)(18) to require that a covered 
clearing agency providing central counterparty services for U.S. 
Treasury securities establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable, ensure 
that it has appropriate means to facilitate access to clearance and 
settlement services of all eligible secondary market transactions in 
U.S. Treasury securities, including those of indirect participants, 
which policies and procedures the board of directors of such covered 
clearing agency reviews annually. In connection with these proposed 
amendments, the Commission is including as part of 17 CFR 240.17ad-
22(a) (``Rule 17ad-22(a)'') definitions of ``U.S. Treasury security,'' 
``central bank,'' ``eligible secondary market transaction,'' 
``international financial institution,'' ``sovereign entity,'' ``state 
and local government,'' and ``affiliated counterparty.'' As part of 
this rulemaking, the Commission is also amending the CFR designation of 
Rule 17Ad-22 to Rule 17ad-22.\1\ Fourth, the Commission is amending 17 
CFR 240.15c3-3a (``Rule 15c3-3a'') to permit margin required and on 
deposit at covered clearing agencies providing central counterparty 
services for U.S. Treasury securities to be included by broker-dealers 
as a debit in the customer and PAB reserve formulas, subject to certain 
conditions.
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    \1\ See note 71 infra for further discussion of this amendment. 
The Commission refers to the redesignated Rule 17ad-22 throughout 
this release.
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Table of Contents

I. Introduction
II. Discussion of Comments Received and Final Rules
    A. U.S. Treasury Securities CCA Membership Requirements
    1. Requirement To Clear Eligible Secondary Market Transactions
    a. Comments Regarding the Requirement To Clear Eligible 
Secondary Market Transactions
    b. Comments Regarding the Concentration of Risk in One Covered 
Clearing Agency
    c. Final Rule
    2. Definition of Eligible Secondary Market Transactions
    a. Repo Transactions
    i. Triparty Repo
    ii. Repos by Registered Funds
    iii. Repos by Other Clearing Organizations
    iv. Repos by FCMs
    v. Repos Involving ``End Users''

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    vi. Interaffiliate Repos
    vii. Repos by State and Local Governments
    viii. Other Repo Comments
    ix. Final Rule
    b. Purchases and Sales of U.S. Treasury Securities
    i. Comments Regarding Cash Clearing Generally
    ii. IDB Transactions
    iii. Other Cash Transactions
    iv. Comments Regarding Cash Transactions for Registered Funds
    v. Final Rule
    3. Other Exclusions From the Definition of an Eligible Secondary 
Market Transaction
    4. Policies and Procedures Regarding U.S. Treasury Securities 
CCA's Monitoring of Its Direct Participants' Transactions
    5. Alternative Approaches Proposed by Commenters
    B. Additional Changes to Covered Clearing Agency Standards
    1. Netting and Margin Practices for House and Customer Accounts
    2. Facilitating Access to U.S. Treasury Securities CCAs
    a. Comments Supporting the Commission's Proposed Rule
    b. Comments Regarding the Commission's Authority To Require a 
CCA To Accept Done Away Transactions
    c. Other Comments Regarding Access
    d. Final Rule
    C. Amendments to Rule 15c3-3a
    1. Introduction
    2. Credit Items
    3. New Debit Item
    4. Note to New Debit Item
    a. First Condition--Permitted Collateral
    b. Second Condition--Customer Position Margin
    c. Third Condition--Rules of U.S. Treasury Securities CCA
    d. Fourth Condition--Commission Approval of Rules of U.S. 
Treasury Securities CCA
    5. PAB Reserve Computation
III. Compliance Dates
IV. Economic Analysis
    A. Broad Economic Considerations
    B. Baseline
    1. U.S. Treasury Securities
    2. U.S. Treasury Repurchase Transactions
    3. Clearance and Settlement of U.S. Treasury Security 
Transactions
    a. Cash Market
    i. Interdealer
    ii. Dealer-to-Customer
    b. U.S. Treasury Repo Market
    i. Non-Centrally Cleared Bilateral Repo
    ii. Centrally Cleared Bilateral Repo
    iii. Non-Centrally Cleared Repo Settled on a Triparty Platform
    iv. Centrally Cleared Repo Settled on a Triparty Platform
    v. Inter-Affiliate Repo
    4. Central Clearing in the U.S. Treasury Securities Market
    5. Margin Practices in U.S. Treasury Secondary Markets
    6. Disruptions in the U.S. Treasury Securities Market
    a. COVID-19 Shock of March 2020
    b. September 2019 Repo Market Disruptions
    c. October 2014 Flash Rally
    7. Affected Parties
    a. Covered Clearing Agencies for U.S. Treasury Securities: FICC
    b. Direct Participants at U.S. Treasury Securities CCAs: FICC 
Netting Members
    c. Interdealer Brokers
    d. Other Market Participants
    i. Broker-Dealers That Are Not Direct Participants/FICC Netting 
Members
    ii. Hedge Funds, Family Offices, and Separately Managed Accounts
    iii. Registered Investment Companies (RICs) Including Money 
Market Funds, Other Mutual Funds, and ETFs
    iv. Principal Trading Firms (PTFs)
    v. State and Local Governments
    vi. Private Pensions Funds and Insurance Companies
    e. Triparty Agent: Bank of New York Mellon
    f. Custodian Banks/Fedwire Securities Service (FSS)
    C. Analysis of Benefits, Costs, and Impact on Efficiency, 
Competition, and Capital Formation
    1. Benefits
    a. U.S. Treasury Securities CCA Membership Requirements
    i. Scope of the Requirement To Clear Eligible Secondary Market 
Transactions
    ii. Application of the Requirement To Clear Eligible Repo 
Transactions
    iii. Application of the Requirement To Clear Eligible Secondary 
Market Transactions to Purchases and Sales of U.S. Treasury 
Securities
    iv. Exclusions From the Requirement To Clear Eligible Secondary 
Market Transactions
    b. Other Changes to Covered Clearing Agency Standards
    i. Policies and Procedures Regarding Direct Participants' 
Transactions
    ii. Netting and Margin Practices for House and Customer Accounts
    iii. Facilitating Access to U.S. Treasury Securities CCAs
    c. Amendments to Rules 15c3-3 and 15c3-3a
    2. Costs
    a. Costs to FICC and Its Members of the Requirement To Clear 
Eligible Secondary Market Transactions
    i. Costs Attendant to an Increase in CCLF
    ii. Costs of the Requirement To Clear Eligible Secondary Market 
Transactions in Terms of Increased Margining for Existing FICC 
Members
    iii. Other Costs
    b. Costs to Non-Members of a U.S Treasury Securities CCA as a 
Result of the Requirement To Clear Eligible Secondary Market 
Transactions
    c. Other Changes to Covered Clearing Agency Standards
    i. Netting and Margin Practices for House and Customer Accounts
    ii. Facilitating Access to U.S. Treasury Securities CCAs
    d. Amendments to Rules 15c3-3 and 15c3-3a
    e. Other Costs
    3. Effect on Efficiency, Competition, and Capital Formation
    a. Efficiency
    i. Price Transparency
    ii. Operational and Balance Sheet Efficiency
    b. Competition
    c. Capital Formation
    D. Reasonable Alternatives
    1. Require U.S. Treasury Securities CCAs To Have Policies and 
Procedures Requiring Only IDB Clearing Members To Submit U.S. 
Treasury Securities Cash Trades With Non-Members for Central 
Clearing
    2. Require U.S. Treasury Securities CCAs To Have Policies and 
Procedures Requiring the Submission of All Repurchase Agreements 
Without Requirements for the Submission of Cash Transactions
    3. Include All Cash Transactions Within the Scope of Eligible 
Secondary Market Transactions With Exceptions for Central Banks, 
Sovereign Entities, International Financial Institutions, and 
Natural Persons
    4. Require U.S. Treasury Securities CCAs To Change CCA Access 
Provisions and Netting and Margin Practices for House and Customer 
Accounts and Rule 15c3-3
V. Paperwork Reduction Act
    A. Proposed Changes to Covered Clearing Agency Standards
    1. Amendment to Rule 17ad-22(e)(6)
    2. Amendment to Rule 17ad-22(e)(18)(iv)
    B. Broker-Dealers
VI. Regulatory Flexibility Act
    A. Clearing Agencies
    B. Broker-Dealers
    C. Certification
VII. Other Matters
Statutory Authority

I. Introduction

    The Commission is responsible for facilitating the establishment of 
a national system for the prompt and accurate clearance and settlement 
of securities transactions.\2\ This responsibility includes the 
authority to regulate clearing agencies engaged in the clearance and 
settlement of government securities transactions, including U.S. 
Treasury securities.\3\ This inclusion of government securities, 
including U.S. Treasury securities, within the Commission's authority 
for the national system of clearance and settlement underscores the 
importance of, among other things, the U.S. Treasury market.
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    \2\ See 15 U.S.C. 78q-1.
    \3\ Government Securities Act of 1986, section 102(a); 15 U.S.C. 
78c(a)(12)(B)(i).
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    U.S. Treasury securities play a critical and unique role in the 
U.S. and global economy, serving as a significant investment instrument 
and hedging vehicle for investors, a risk-free benchmark for other 
financial instruments, and an important mechanism for the Federal 
Reserve's

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implementation of monetary policy.\4\ Consequently, confidence in the 
U.S. Treasury market, and in its ability to function efficiently, even 
in times of stress, is critical to the stability of the global 
financial system.\5\
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    \4\ See, e.g., Staffs of the U.S. Department of the Treasury, 
Board of Governors of the Federal Reserve System, Federal Reserve 
Bank of New York, U.S. Securities and Exchange Commission, and U.S. 
Commodity Futures Trading Commission, Recent Disruptions and 
Potential Reforms in the U.S. Treasury Market: A Staff Progress 
Report, at 1 (Nov. 2021), available at https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf (``Inter-Agency Working 
Group for Treasury Market Surveillance (``2021 IAWG Report''); 
Staffs of the U.S. Department of the Treasury, Board of Governors of 
the Federal Reserve System, Federal Reserve Bank of New York, U.S. 
Securities and Exchange Commission, and U.S. Commodity Futures 
Trading Commission, Joint Staff Report: The U.S. Treasury Market on 
October 15, 2014, at 1, 8 (2015), available at https://home.treasury.gov/system/files/276/joint-staff-report-the-us-treasury-market-on-10-15-2014.pdf (``Joint Staff Report''). These 
reports represent the views of Commission and other Federal 
regulatory staff. The reports are not a rule, regulation, or 
statement of the Commission. The Commission has neither approved nor 
disapproved the content in the reports. These reports, like all 
staff reports, have no legal force or effect: they do not alter or 
amend applicable law, and they create no new or additional 
obligations for any person.
    \5\ Group of Thirty Working Group on Treasury Market Liquidity, 
U.S. Treasury Markets: Steps Toward Increased Resilience, at 1 
(2021), available at https://group30.org/publications/detail/4950 
(``G-30 Report'').
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    CCPs provide an important role for securities markets, interposing 
themselves between the counterparties to securities transactions, 
acting functionally as the buyer to every seller and the seller to 
every buyer. The Commission regulates CCPs as covered clearing agencies 
(``CCA'').\6\ The Commission historically has acknowledged the benefits 
that a CCP brings to the markets it serves. By novating transactions 
(that is, becoming the counterparty to both sides of a transaction), a 
CCP addresses concerns about counterparty risk by substituting its own 
creditworthiness and liquidity for the creditworthiness and liquidity 
of the counterparties.\7\ Further, the Commission has recognized that 
``the centralization of clearance and settlement activities at covered 
clearing agencies allows market participants to reduce costs, increase 
operational efficiency, and manage risks more effectively.'' \8\ A CCP 
also provides a centralized system of default management that can 
mitigate the potential for a single market participant's failure to 
destabilize other market participants or the financial system more 
broadly.\9\ However, the Commission has also recognized that this 
centralization of activity at clearing agencies makes risk management 
at such entities a critical function.
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    \6\ See Rule 17ad-22(a) (defining covered clearing agency and 
central counterparty) and Exchange Act Section 3(a)(23) (defining 
clearing agency).
    \7\ See, e.g., Order Granting Temporary Exemptions Under the 
Securities Exchange Act of 1934 in Connection with Request of Liffe 
Administration and Management and Lch.Clearnet Ltd. Related to 
Central Clearing of Credit Default Swaps, and Request for Comments, 
Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139, 140 (Jan. 
2, 2009) (``Liffe Order'').
    \8\ Covered Clearing Agency Standards Proposing Release, 
Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR 29507, 29587 
(May 27, 2014) (``CCA Standards Proposing Release'').
    \9\ See, e.g., Liffe Order, supra note 7, 74 FR 140.
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    Because of the importance of risk management at CCPs and to further 
the establishment of linked and coordinated facilities for clearance 
and settlement of securities transactions, in 2016, the Commission 
adopted the Covered Clearing Agency Standards.\10\ These standards 
address all aspects of a CCP's operations, including financial risk 
management, operational risk, default management, governance, and 
participation requirements.\11\ The Commission has had the opportunity 
to administer this new regulatory framework, considering many rule 
filings with respect to proposed rule changes filed by CCAs pursuant to 
their rule filing obligations as self-regulatory organizations 
(``SROs'') under Section 19(b) of the Exchange Act that address how the 
proposed rule changes are consistent with the Exchange Act and the 
Covered Clearing Agency Standards thereunder.
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    \10\ See Covered Clearing Agency Standards Adopting Release, 
Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR 70786 (Oct. 
13, 2016) (``CCA Standards Adopting Release'').
    \11\ See generally id.
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    The Commission also has had the opportunity to observe the U.S. 
Treasury market, including with respect to the clearance and settlement 
of U.S. Treasury security transactions in both the cash and repo 
market. In particular, the Commission understands that the proportion 
of transactions that are centrally cleared has declined over the past 
years. One recent analysis by the Treasury Market Practice Group \12\ 
estimates that only 13 percent of the overall volume in U.S. dollars of 
U.S. Treasury cash transactions were centrally cleared as of the first 
half of 2017, and that an additional 19 percent were what the TMPG 
refers to as ``hybrid'' clearing, that is, executed on an interdealer 
broker platform (as discussed in parts II.A.1 and II.A.2.b.ii infra) in 
which one counterparty is a member of a CCA and submits its transaction 
with the interdealer broker for central clearing, while the other 
counterparty is not a member of a CCA and bilaterally clears its 
transaction with the interdealer broker.\13\ This use of both centrally 
cleared and not centrally cleared transactions introduces risk into the 
market, because bilateral clearing involves varying risk management 
practices that are less uniform and less transparent to the broader 
market and may be less efficient with regard to netting exposures and 
use of collateral as compared to central clearing.
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    \12\ The Treasury Market Practices Group (``TMPG'') is a group 
of ``market professionals committed to supporting the integrity and 
efficiency of the Treasury, agency debt, and agency mortgage-backed 
securities markets.'' See Treasury Mark Practice Group, About the 
TMPG, available at https://www.newyorkfed.org/TMPG/index.html. The 
TMPG is sponsored by the Federal Reserve Bank of New York. Id.
    \13\ TMPG, White Paper on Clearing and Settlement in the 
Secondary Market for U.S. Treasury Securities, at 12 (July 2019), 
available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf (``TMPG White Paper''). These 
estimates use FR2004 data, which are reports provided to the Federal 
Reserve Bank of New York regarding primary dealer market activity in 
U.S. Government securities, covering the first half of 2017 and are 
based on various assumptions specified in the TMPG White Paper. See 
also FR2004, Government Securities Dealer Reports, available at 
https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZq2f74T6b1cw.
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    Therefore, the Commission proposed amendments to Rule 17ad-
22(e)(18) to help reduce contagion risk to the CCA and bring the 
benefits of central clearing to more transactions involving U.S. 
Treasury securities, thereby lowering overall systemic risk in the 
market.\14\ Specifically, the Commission proposed amendments that would 
require CCAs for the U.S. Treasury market to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to require that their direct participants submit for clearance 
and settlement certain eligible secondary market transactions, both for 
repos and certain categories of cash transactions. In addition, the 
Commission proposed amendments to address certain other issues that 
could help facilitate increased central clearing in the U.S. These 
proposed changes included amending Rule 17ad-22(e)(6)(i) to require 
that a CCA establish, implement, maintain and

[[Page 2717]]

enforce written policies and procedures reasonably designed to 
calculate, collect, and hold proprietary margin separate from customer 
margin, amending Rule 17ad-22(e)(18) to require that CCAs establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to ensure that they have appropriate means to 
facilitate access to clearance and settlement services of all eligible 
secondary market transactions in U.S. Treasury securities, including 
those of indirect participants, and amending Rule 15c3-3 to permit 
margin required and on deposit at covered clearing agencies providing 
central counterparty services for U.S. Treasury securities to be 
included by broker-dealers as a debit in the customer and PAB reserve 
formulas.
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    \14\ Proposing Release, Standards for Covered Clearing Agencies 
for U.S. Treasury Securities and Application of the Broker-Dealer 
Customer Protection Rule With Respect to U.S. Treasury Securities, 
Exchange Act Release No. 95763 (Sept. 14, 2022), 87 FR 64610 (Oct. 
25, 2022) (``Proposing Release''). See also Report of the Joint 
Treasury-Federal Reserve Study of the U.S. Government Securities 
Market (Apr. 1969), available at https://fraser.stlouisfed.org/title/joint-treasury-federal-reserve-study-us-government-securities-market-318/report-joint-treasury-federal-reserve-study-us-government-securities-market-6282.
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    The Commission received many comments on the proposal.\15\ Having 
considered the comments received, the Commission is adopting the 
proposed new rules and rule amendments with modifications, as discussed 
further below.
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    \15\ Copies of all comment letters received by the Commission 
are available at https://www.sec.gov/comments/s7-23-22/s72322.htm.
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II. Discussion of Comments Received and Final Rules

A. U.S. Treasury Securities CCA Membership Requirements

1. Requirement To Clear Eligible Secondary Market Transactions
    Proposed Rule 17ad-22(e)(18)(iv)(A) would require that U.S. 
Treasury securities CCAs establish, implement, maintain and enforce 
written policies and procedures reasonably designed to, as applicable, 
establish objective, risk-based, and publicly disclosed criteria for 
participation, which require that the direct participants of such 
covered clearing agency submit for clearance and settlement all of the 
eligible secondary market transactions to which they are a 
counterparty. The proposed amendment would apply to ``direct 
participants'' in a U.S. Treasury securities CCA, which distinguishes 
entities that access a CCA directly (i.e., members of the CCA) from 
indirect participants who ``rely on the services provided by direct 
participants to access the covered clearing agency's payment, clearing 
or settlement facilities.'' \16\ For purposes of the Covered Clearing 
Agency Standards, ``participants'' of a CCA are referred to as 
``members'' or ``direct participants'' to differentiate these entities 
from ``direct participants' customers'' or ``indirect participants.'' 
\17\ Consequently, for purposes of this amendment and consistent with 
the terminology already used in the Covered Clearing Agency 
Standards,\18\ the term ``direct participants'' refers to the entities 
that directly access a U.S. Treasury securities CCA (generally banks 
and broker-dealers), and the term ``indirect participants'' would refer 
to those entities which rely on a direct participant to clear and 
settle their U.S. Treasury securities transactions with the U.S. 
Treasury securities CCA (generally their customers or clients, which 
typically include market participants such as money market funds, hedge 
funds, other asset managers, and smaller banks or broker-dealers).\19\
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    \16\ 17 CFR 240.17ad-22(e)(19). See also CCA Standards Proposing 
Release, supra note 8, at 29553 (noting that some market 
participants would not meet a covered clearing agency's direct 
participation requirements and proposing risk management 
requirements for indirect and tiered participants).
    \17\ See, e.g., 17 CFR 240.17ad-22(e)(6) (referring to 
participants) and (e)(2)(vi) (referring to direct participants' 
customers). In addition, the Exchange Act defines a participant of a 
clearing agency as ``any person who uses a clearing agency to clear 
or settle securities transactions or to transfer, pledge, lend, or 
hypothecate securities.'' 15 U.S.C. 78c(a)(24). Indirect 
participants are expressly excluded from the Exchange Act definition 
of a ``participant'' of a clearing agency because the Exchange Act 
provides that a person whose only use of a clearing agency is 
through another person who is a participant or as a pledgee of 
securities is not a ``participant'' of the clearing agency. Id.
    \18\ See 17 CFR 240.17ad-22(e)(19) (referring to firms that are 
indirect participants in a covered clearing agency as those that 
``rely on the services provided by direct participants to access the 
covered clearing agency's payment, clearing, or settlement 
facilities'').
    \19\ For example, FICC maintains the Sponsored Service. See 
Fixed Income Clearing Corporation, Government Securities Division 
Rulebook, Rule 3A, available at https://www.dtcc.com/~/media/Files/
Downloads/legal/rules/ficc_gov_rules.pdf (``FICC Rule''). Because 
sponsored members cannot clear or settle government securities 
transactions without a sponsoring member, the Commission believes 
that these sponsored members are not ``direct participants.'' As 
noted above, such persons are referred to in this release as 
``indirect participants'' or ``customers.''
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    Moreover, persons who provide services in connection with clearance 
and settlement, such as settlement agent, settlement bank, or clearing 
bank services, and do not submit trades for clearing to a U.S. Treasury 
securities CCA would not be ``direct participants'' or ``indirect 
participants'' within the meaning of this amendment and the terminology 
used in the Covered Clearing Agency Standards.\20\
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    \20\ The Commission recognizes that some entities may access 
more limited services of a U.S. Treasury securities CCA without use 
of its CCP services. For example, FICC provides ``comparison only'' 
services for a certain membership type. See FICC Rule 8, supra note 
19. Consistent with the definition of a ``participant'' under the 
Exchange Act, such entities would not be considered participants of 
a CCA and therefore would not be subject to any rules with respect 
to the clearing of eligible secondary market transactions that a CCA 
may adopt for its direct participants.
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    In the Proposing Release, the Commission stated that it believes 
that the requirement to clear eligible secondary market transactions 
would promote the prompt and accurate clearance and settlement of U.S. 
Treasury securities transactions, providing several benefits to the 
market for U.S. Treasury securities as a whole,\21\ which are 
summarized briefly here.
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    \21\ See generally Proposing Release, supra note 14, 87 FR 
64626-29; see also part IV.C.1 infra.
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    First, the Commission stated that it believes that the requirement 
to clear eligible secondary market transactions would decrease the 
overall amount of counterparty credit risk in the secondary market for 
U.S. Treasury securities. Because a U.S. Treasury securities CCA would 
novate and guarantee each transaction submitted for central clearing, 
it would become a counterparty to each transaction, as the buyer to 
every seller and the seller to every buyer. The U.S. Treasury 
securities CCA would be able to risk manage these transactions 
centrally, pursuant to risk management procedures that the Commission 
has reviewed and approved,\22\ and would guarantee settlement of the 
trade in the event of a direct participant default.
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    \22\ See Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder.
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    In particular, the requirement to clear eligible secondary market 
transactions is designed to reduce the amount of ``contagion risk'' to 
a U.S. Treasury securities CCA arising from what has been described as 
``hybrid clearing,'' as discussed in more detail in part II.A.2.b.iii. 
With this type of clearing, a direct participant's transactions that 
are not submitted for central clearing pose an indirect risk to the 
covered clearing agency, as any default on a bilaterally settled 
transaction could impact the direct participant's financial resources 
and ability to meet its obligations to the covered clearing agency. The 
Commission stated that it believes that requiring U.S. Treasury 
securities CCAs to impose, as a condition of membership, an obligation 
on their direct participants to submit all eligible secondary market 
transactions for central clearing should address the transactions most 
likely to cause contagion risk to the CCA.
    Second, the Commission stated that it believes that the requirement 
to clear eligible secondary market transactions would also help any 
U.S. Treasury securities CCA to avoid a potential disorderly member 
default. Defaults in bilaterally settled transactions are likely

[[Page 2718]]

to be less orderly and subject to variable default management 
techniques because bilaterally settled transactions are not subject to 
the default management processes that are required to be in place and 
publicly disclosed at a CCP.\23\ Centralized default management is a 
key feature of central clearing.\24\ Because the CCP has novated and 
guaranteed the transactions, it is uniquely positioned to coordinate 
the default of a member for trades that it has centrally cleared, and 
the non-defaulting members can rely on the CCP to complete the 
transactions of the defaulting member and cover any resulting losses 
using the defaulting member's resources and/or its default management 
tools. Even in a situation where two CCPs have to coordinate the 
default of a joint member, that coordination should result in more 
efficiency and market confidence than multiple bilateral settlements.
---------------------------------------------------------------------------

    \23\ A covered clearing agency, including a U.S. Treasury 
securities CCA, is required to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable, ensure the CCA has the authority and operational 
capacity to contain losses and liquidity demands and continue to 
meet its obligations, which must be tested annually, and publicly 
disclose all relevant rules and material procedures, including key 
aspects of its default rules and procedures. See Rule 17ad-22(e)(13) 
and (e)(23)(i).
    \24\ CCA Standards Proposing Release, supra note 8, 79 FR 29545 
(a CCP's default management procedures would provide certainty and 
predictability about the measures available to a covered clearing 
agency in the event of a default which would, in turn facilitate the 
orderly handling of member defaults and would enable members to 
understand their obligations to the covered clearing agency in 
extreme circumstances).
---------------------------------------------------------------------------

    Third, the Commission stated that it believes that the requirement 
to clear eligible secondary market transactions will further the prompt 
and accurate clearance and settlement of U.S. Treasury securities by 
increasing the multilateral netting of transactions in these 
instruments, thereby reducing operational and liquidity risks, among 
others. Central clearing of transactions nets down gross exposures 
across participants, which reduces firms' exposures while positions are 
open and reduces the magnitude of cash and securities flows required at 
settlement.\25\ As the Commission stated in the Proposing Release, 
FICC's failure to receive all eligible trading activity of an active 
market participant reduces the value of its vital multilateral netting 
process and causes FICC to be less well-situated to prevent future 
market crises.\26\
---------------------------------------------------------------------------

    \25\ 2021 IAWG Report, supra note 4, at 30.
    \26\ Proposing Release, supra note 14, 87 FR 64628 & n. 182 
(citing Self-Regulatory Organizations; Fixed Income Clearing 
Corporation; Order Granting Approval of a Proposed Rule Change 
Relating to Trade Submission Requirements and Pre-Netting, Exchange 
Act Release No. 51908 (June 22, 2005), 70 FR 37450 (June 29, 2005) 
(describing a rule designed to bring additional transactions into 
FICC's netting system as ``clearly designed to promote the prompt 
and accurate clearance and settlement of those transactions and to 
preserve the safety and soundness of the national clearance and 
settlement system.'')).
---------------------------------------------------------------------------

    The benefits of multilateral netting flowing from central clearing 
can improve market safety by lowering exposure to settlement failures, 
which would also tend to promote the prompt and accurate clearance and 
settlement of U.S. Treasury securities transactions.\27\ Multilateral 
netting can also reduce the amount of balance sheet required for 
intermediation and could also enhance dealer capacity to make markets 
during normal times and stress events because existing bank capital and 
leverage requirements recognize the risk-reducing effects of 
multilateral netting of trades that CCP clearing accomplishes.\28\
---------------------------------------------------------------------------

    \27\ Darrell Duffie, Still the World's Safe Haven Redesigning 
the U.S. Treasury Market After the COVID-19 Crisis, Hutchins Center 
Working Paper # 62 (Brookings Inst.) at 15 (June 2020), available at 
https://www.brookings.edu/wp-content/uploads/2020/05/WP62_Duffie_v2.pdf (``Duffie'').
    \28\ 2021 IAWG Report, supra note 4, at 30; Nellie Liang & 
Patrick Parkinson, Enhancing Liquidity of the U.S. Treasury Market 
Under Stress, at 9 (Dec. 16, 2020), available at https://www.brookings.edu/wp-content/uploads/2020/12/WP72_Liang-Parkinson.pdf (``Liang & Parkinson''); Duffie, supra note 27, at 16-
17.
---------------------------------------------------------------------------

    Fourth, the Commission stated that the potential benefits 
associated with the multilateral netting of transactions at a CCP that 
the requirement to clear eligible secondary market transactions is 
designed to bring about could, in turn, help to unlock further 
improvements in U.S. Treasury market structure. For example, the 
increase in clearing and consequent reduction in counterparty credit 
risk could ``enhance the ability of smaller bank and independent 
dealers to compete with the incumbent bank dealers.'' \29\ Similarly, 
decreased counterparty credit risk--and potentially lower costs for 
intermediation--could result in narrower spreads, thereby enhancing 
market quality.\30\ The Commission also stated that increased 
accessibility of central clearing in U.S. Treasury markets could 
support movement toward all-to-all trading, even potentially in the 
repo market, which would further improve market structure and 
resiliency, although a movement in that direction is not assured.\31\ 
This potential movement would stem from the fact that increased central 
clearing of U.S. Treasury securities transactions would, in turn, 
result in decreased counterparty risk, making all-to-all trading more 
attractive, that is, a market participant would be more willing to 
trade with any counterparty if a CCP were to serve as its ultimate 
counterparty.
---------------------------------------------------------------------------

    \29\ Liang & Parkinson, supra note 28, at 9.
    \30\ G-30 Report, supra note 5, at 13.
    \31\ 2021 IAWG Report, supra note 4, at 30; Duffie, supra note 
27, at 16; G-30 Report, supra note 5, at 13. All-to-all trading 
would be characterized by the ability for a bid or offer submitted 
by one market participant to be accepted by any other market 
participant, with trades executed at the best bid or offer. See, 
e.g., Liang & Parkinson, supra note 28, at 9. All-to-all trading 
could improve the quality of trade execution in normal market 
conditions and broaden and stabilize the supply of market liquidity 
under stress. See, e.g., G-30 Report, supra note 5, at 10.
---------------------------------------------------------------------------

    Finally, the Commission stated that increased central clearing 
should enhance regulatory visibility in the critically important U.S. 
Treasury market. Specifically, central clearing increases the 
transparency of settlement risk to regulators and market participants, 
and in particular allows a CCP to identify concentrated positions and 
crowded trades, adjusting margin requirements accordingly, which should 
help reduce significant risk to the CCP and to the system as a 
whole.\32\ In light of the role of U.S. Treasury securities in 
financing the Federal Government, it is important that regulators 
improve their visibility into this market. Increased central clearing 
would also allow for a more aggregated view of market activity in one 
place.
---------------------------------------------------------------------------

    \32\ Duffie, supra note 27, at 15;2021 IAWG Report, supra note 
4, at 30 (centralization of transactions at a CCP ``can simplify 
data collection and improve visibility into market conditions for 
the authorities and, to some degree, for market participants'').
---------------------------------------------------------------------------

a. Comments Regarding the Requirement To Clear Eligible Secondary 
Market Transactions
    Some commenters generally supported the proposal and its approach 
to requiring additional central clearing of transactions in U.S. 
Treasury securities.\33\ However, other commenters generally opposed 
the proposed requirement to clear eligible

[[Page 2719]]

secondary market transactions, arguing that there was not sufficient 
information on the costs and benefits of such a requirement, that the 
Commission should do further study, and/or that the Commission should 
incentivize additional clearing instead of requiring it.\34\
---------------------------------------------------------------------------

    \33\ See generally Letter from Americans for Financial Reform 
Education Fund (Dec. 27, 2022) (``AFREF Letter''); Letter from 
Stephen W. Hall, Legal Director and Securities Specialist, and Scott 
Farnin, Legal Counsel, Better Markets, Inc. (Dec. 23, 2022) 
(``Better Markets Letter''); Letter from Murray Pozmanter, Managing 
Director, President of DTCC Clearing Agency Services, Head of Global 
Business Operations, and Laura Klimpel, General Manager of FICC, 
Head of SIFMU Business Development, Depository Trust and Clearing 
Corporation and Fixed Income Clearing Corporation (Dec. 27, 2022) 
(``DTCC/FICC Letter''); Letter from Robin Vince, President and Chief 
Executive Officer, The Bank of New York Mellon Corporation (Dec. 22, 
2022) (``BNY Mellon Letter''); Letter from Rachel Goldberg, Head of 
Government Relations and Regulatory Strategy, Americas, London Stock 
Exchange Group (Dec. 27, 2022) (``LSEG Letter''); Letter from Chris 
Edmonds, Chief Development Officer, Intercontinental Exchange, Inc. 
(Jan. 12, 2023) (``ICE Letter'').
    \34\ The Commission discusses the comments on incentives in its 
discussion of alternative approaches to a clearing requirement in 
part II.A.5 infra.
---------------------------------------------------------------------------

    One commenter also referenced the need to assess the potential 
impact of an increased volume of cleared repo transactions on the 
Secured Overnight Financing Rate (``SOFR''), given its importance as a 
reference rate replacing LIBOR and because SOFR is calculated largely 
based on implied financing rates of repo transactions cleared at 
FICC.\35\ SOFR is calculated as a volume-weighted median, which is the 
rate associated with transactions at the 50th percentile of transaction 
volume.\36\ Specifically, the volume-weighted median rate is calculated 
by ordering the transactions from lowest to highest rate, taking the 
cumulative sum of volumes of these transactions, and identifying the 
rate associated with the trades at the 50th percentile of dollar 
volume. Such volume weighting should allow preparation of the rate to 
take into account any increased transaction volume arising from 
additional central clearing in response to a requirement to clear 
eligible secondary market transactions, thereby making further study 
unnecessary.
---------------------------------------------------------------------------

    \35\ Letter from William C. Thum, Managing Director and 
Assistant General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA'') Asset Management Group, at 7 (Dec. 23, 2022) 
(``SIFMA AMG Letter'').
    \36\ Additional Information about Reference Rates Administered 
by the New York Fed, available at https://www.newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates#tgcr_bgcr_sofr_calculation_methodology.
---------------------------------------------------------------------------

    With respect to costs and benefits, one commenter stated that the 
increased costs of centrally clearing U.S. Treasury security 
transactions may reduce liquidity and diversity in the Treasury market 
if firms reduce activity, leave the market, or if barriers to entry are 
too high, given the significant costs of clearing for market 
participants.\37\ The commenter identified several types of costs, 
including initial margin requirements, clearing fees, obligations with 
respect to FICC's Capped Contingent Liquidity Facility (``CCLF''), the 
operational build necessary to access central clearing either as a 
direct or indirect participant, and legal costs and time associated 
with onboarding customers for indirect central clearing, including, 
e.g., the need for Sponsoring Members to file UCC financing statements 
with respect to Sponsored Members under the Sponsored Member program. 
The commenter stated that the impact of these costs would be 
disproportionately felt by small and mid-sized participants in the U.S. 
Treasury market, and that these costs would reduce diversity in the 
market and further increase concentration among market participants 
(which may increase systemic risk) if such participants leave the 
market.\38\
---------------------------------------------------------------------------

    \37\ Letter from Robert Toomey, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association, and Michelle Meertens, Deputy General Counsel, 
Institute of International Bankers, at 8 (Dec. 22, 2022) (``SIFMA/
IIB Letter'').
    \38\ SIFMA/IIB Letter, supra note 37, at 8.
---------------------------------------------------------------------------

    As discussed in more detail in part IV.C.2, increased transaction 
costs will generally reduce the expected return of a particular 
investment. If the amendments regarding eligible secondary market 
transactions resulted only in such increased costs, then the potential 
risk/return tradeoff would worsen, resulting in decreased transaction 
volumes and decreased liquidity. However, central clearing provides 
other benefits, including those described in part IV.C.1, many of which 
could accrue to small and mid-sized market participants. Moreover, 
increased cost does not necessarily mean that firms will reduce 
activity or leave the market.
    The commenter also stated that these costs may incentivize non-
direct participants of a U.S. Treasury securities CCA to look for ways 
to trade away from direct participants in order to not have to 
centrally clear U.S. Treasury transactions, undermining the policy 
goals of the proposal.\39\ The Commission acknowledges that the 
proposed requirement for U.S. Treasury securities CCAs to require their 
members to submit eligible secondary market transactions for clearing 
and settlement does not limit the ability of market participants to 
transact in U.S. Treasury securities transactions away from CCAs. This 
requirement is not a mandate to clear all transactions in U.S. Treasury 
securities, regardless of who executes the transaction, and differs 
from the swaps mandate imposed by Congress in the Dodd-Frank Act in 
2010.\40\ However, given current market structure and requirements 
applicable to certain market participants, it would be challenging for 
market participants to simply shift all their activity to transact away 
from CCAs. For example, primary dealers, which serve as trading 
counterparties of the New York Fed in its implementation of monetary 
policy, are required to maintain a substantial presence as a market 
maker that provides two-way liquidity in U.S. government securities, 
particularly Treasury cash and repo operations.\41\ These primary 
dealers must be participants in FICC, as the CCP for the government 
securities market, to support clearing of primary market 
transactions.\42\ Therefore, if a market participant wants to transact 
with a primary dealer which is required to be a direct participant of 
FICC, it would have to determine an appropriate way to submit such 
transactions for clearing and settlement. Primary dealers are 
responsible for a significant portion of market activity in the U.S. 
Treasury market (see part IV.B infra), and therefore, market 
participants likely would continue to transact with such primary 
dealers.
---------------------------------------------------------------------------

    \39\ SIFMA/IIB Letter, supra note 37, at 8.
    \40\ Dodd-Frank Act section 723; 15 U.S.C. 3C(a).
    \41\ See Primary Dealers, available at https://www.newyorkfed.org/markets/primarydealers (``In order to be eligible 
as a primary dealer, a firm must . . . Be a participant in the 
central counterparty service for the government securities market--
DTCC's FICC-GSD--to support clearing of primary market 
transactions.'').
    \42\ Id.
---------------------------------------------------------------------------

    In addition, the commenter stated that central clearing can have 
procyclical effects in times of market stress due to the margin 
requirements of clearing agencies, further reducing liquidity when it 
is most needed.\43\ The commenter stated that, depending on the 
applicable margin models, clearing can be procyclical in times of 
market turmoil, as increased margin requirements (including intraday 
and ad hoc calls) drive demand for liquid assets, which, in turn, 
increases the scarcity of those assets and further drives market 
stress. The commenter described FICC's rules as allowing FICC to 
demand, at any time in its discretion, additional margin from its 
members in times of market volatility, including through intraday 
calls, to safeguard the clearing infrastructure.\44\ The commenter 
suggested that the Commission should engage in additional study on the 
procyclical effects of central clearing before implementing a central 
clearing requirement, focusing on the appropriate balance from a 
systemic risk perspective of rigorously managing the risk of positions 
cleared through a CCP as compared to minimizing liquidity strains on 
the U.S. Treasury market.\45\
---------------------------------------------------------------------------

    \43\ SIFMA/IIB Letter, supra note 37, at 9.
    \44\ SIFMA/IIB Letter, supra note 37, at 9.
    \45\ SIFMA/IIB Letter, supra note 37, at 9.
---------------------------------------------------------------------------

    The Commission acknowledges that, in times of market stress, margin 
calls

[[Page 2720]]

may increase to address the ongoing market volatility. This is by 
design, as margin models are built to be responsive to current market 
conditions. The Commission has specifically required that CCAs have the 
authority and operational capacity to make intraday margin calls in 
defined circumstances.\46\ This ability is important to the CCA's 
ability to manage the risk and cover the credit exposures that its 
participants may bring to the CCA. When considering a CCA's authority 
with respect to intraday margin, the Commission may consider its 
potential procyclicality.\47\ In addition, the Commission may consider 
the transparency of the margin model, such that market participants can 
understand when the CCA may make margin calls.\48\ In addition to the 
FICC rules cited by the commenter, FICC has provided additional 
transparency regarding how it determines the need for intraday margin 
calls, including the specific criteria that it uses to assess the 
need.\49\ FICC is also subject to Rule 17ad-22(e)(23), which requires 
certain levels of public disclosure regarding FICC's margin methodology 
and the costs of participating in FICC, as discussed further in part 
II.B.2 infra. The Commission's ongoing consideration of the role and 
function of intraday margin calls, as well as market participants' 
ability to understand such calls, obviates the need for separate study 
in connection with this proposal.\50\
---------------------------------------------------------------------------

    \46\ 17 CFR 240.17ad-22(e)(6)(ii).
    \47\ See, e.g., Self-Regulatory Organizations; Fixed Income 
Clearing Corporation; Order Approving a Proposed Rule Change to 
Modify the Calculation of the MBSD VaR Floor to Incorporate a 
Minimum Margin Amount, Exchange Act Release No. 92303, at 32 (June 
30, 2021) (discussing commenter's concern regarding potential 
procyclical nature of a margin methodology change); Self-Regulatory 
Organizations; The Options Clearing Corporation; Order Granting 
Approval of Proposed Rule Change Concerning The Options Clearing 
Corporation's Margin Methodology for Incorporating Variations in 
Implied Volatility, Exchange Act Release No. 95319, at 3 (July 19, 
2022) (referencing the impact of a change to margin methodology on 
procyclicality of margin).
    \48\ See, e.g., Self-Regulatory Organizations; National 
Securities Clearing Corporation; Order Approving a Proposed Rule 
Change to Enhance National Securities Clearing Corporation's 
Haircut-Based Volatility Charge Applicable to Illiquid Securities 
and UITs and Make Certain Other Changes to Procedure XV, Exchange 
Act Release No. 34-90502, at 56-59 (Nov. 24, 2020) (discussing 
commenter's concerns regarding transparency of change to margin 
methodology).
    \49\ See Self-Regulatory Organizations; Fixed Income Clearing 
Corporation; Notice of Filing of Proposed Rule Changes to the 
Required Fund Deposit Calculation in the Government Securities 
Division Rulebook, Exchange Act Release No. 82588 (Jan. 26, 2018) 
(identifying the following specific parameter breaks: (i) a dollar 
threshold that evaluates whether a Netting Member's Intraday VaR 
Charge equals or exceeds a set dollar amount (then set at 
$1,000,000) when compared to the VaR Charge that was included in the 
most recently collected Required Fund Deposit including, any 
subsequently collected Intraday Supplemental Fund Deposit; (ii) a 
percentage threshold, that evaluates whether the Intraday VaR Charge 
equals or exceeds a percentage increase (then set at 100%) of the 
VaR Charge that was included in the most recently collected Required 
Fund Deposit including, if applicable, any subsequently collected 
Intraday Supplemental Fund Deposit; (iii) the coverage target, that 
evaluates whether a Netting Member is experiencing backtesting 
results below the 99% confidence level). FICC has updated this 
information via Important Notices to its participants. See, e.g., 
Important Notice GOV1244-22, GSD Intraday Supplemental Fund Deposit 
Parameter Change (Apr. 11, 2022), available at https://www.dtcc.com/-/media/Files/pdf/2022/4/11/GOV1244-22.pdf (raising the coverage 
target).
    \50\ See also Proposed Rule, Covered Clearing Agency Resilience 
and Recovery and Wind-Down Plans, Exchange Act Release No. 97516 
(May 17, 2023), 88 FR 34708 (May 30, 2023) (proposing additional 
requirements with respect to intraday margin that CCAs require 
intraday monitoring of their exposures and specifying particular 
circumstances in which the CCA should make intraday margin calls).
---------------------------------------------------------------------------

b. Comments Regarding the Concentration of Risk in One Covered Clearing 
Agency
    Commenters also mentioned the potential concentration risk that 
would arise as a result of the requirement to clear eligible secondary 
market transactions, specifically because only one covered clearing 
agency currently provides such services. One commenter stated that 
concentrating such significant levels of settlement, operational, 
liquidity and credit risk in one institution means that were there 
operational or liquidity stress at FICC, widespread dysfunction in the 
Treasury markets could result.\51\ Another commenter which analyzed 
market views of the proposal identified increased concentration risk as 
a primary concern for market participants, who cited potential 
technical issues at FICC that would result in a ``pause [of] 
counterparty trade transactions and lead to substantial losses for 
market participants.'' However, the commenter also acknowledged that a 
smaller group of market participants explained that they were not 
opposed to a single clearinghouse model through FICC, stating that FICC 
has adequate risk models and that the concentration in one CCP is not 
of concern in the futures or derivatives markets, which, like FICC, 
also only have one CCP to serve their respective markets.\52\
---------------------------------------------------------------------------

    \51\ SIFMA/IIB Letter, supra note 37, at 10.
    \52\ Comment Submission from SIA Partners, entitled CENTRAL 
CLEARING OF U.S. TREASURIES & REPO, A Study on the Impact to the 
Market and Market Participants, at 79-80 (Mar. 2023) (``SIA Partners 
Comment''); see also id. at 8.
---------------------------------------------------------------------------

    In addition, one commenter stated that the Commission should only 
impose a clearing mandate once FICC and at least a second covered 
clearing agency are able to offer access to clearing solutions that 
will fulfill the enhanced rule requirements and meet the needs of 
market participants.\53\ The commenter noted that the existence of one 
covered clearing agency serving the U.S. Treasury market is highly 
problematic as it creates enormous concentration risk for market 
participants, and highlighted that, given the importance of the U.S. 
Treasury market to the overall global economy, there needs to be a 
compelling reason for increasing the concentration of cleared trading 
activity in a single clearing house that is member owned and operated 
on a for-profit basis, particularly when there is no alternative or 
fallback venue should the clearing house experience a disruption to its 
operations or more significantly were it to fail.\54\
---------------------------------------------------------------------------

    \53\ SIFMA/AMG Letter, supra note 37, at 3, 9.
    \54\ SIFMA/AMG Letter, supra note 37, at 9.
---------------------------------------------------------------------------

    The Commission acknowledges that, currently, there is only one U.S. 
Treasury securities CCA, FICC, and that this does create concentration 
risk for the clearing of U.S. Treasury securities transactions. 
However, this concentration risk is mitigated by the existence of a 
supervisory framework for the existing U.S. Treasury securities CCA, 
and it is not uncommon for one CCA to serve a particular market.\55\ 
The Commission therefore disagrees with the commenter that the 
existence of two CCAs is necessary for this requirement to be 
implemented. Moreover, the Commission is not requiring that the 
additional central clearing of U.S. Treasury securities transactions be 
concentrated in one clearing house. But, if that remains the case going 
forward, the benefits expected to arise from this additional clearing, 
as discussed further in part IV.C.1 infra, constitute a sufficient 
compelling reason to adopt the final rule, even if such concentration 
is present, which, as discussed, is subject to the appropriate 
mitigation of risk arising from the regulatory framework applicable to 
CCAs as discussed in this section.
---------------------------------------------------------------------------

    \55\ For example, there is only one CCA in the U.S. equities 
market and in the U.S. listed derivatives market.
---------------------------------------------------------------------------

    FICC has been designated by the Financial Stability Oversight 
Council as systemically important under Title VIII of the Dodd-Frank 
Act. This designation means that FICC is subject to heightened 
supervision and examination by the Commission, in consultation with the 
Board of Governors of the Federal Reserve System (``Board of 
Governors''.

[[Page 2721]]

FICC is subject to the Covered Clearing Agency Standards, which address 
the various types of risk that FICC faces as a CCP, including 
settlement, operational, liquidity, and credit risk.
    A CCA must be able to meet the requirements of the Covered Clearing 
Agency Standards regardless of the presence or absence of other CCAs. 
The Covered Clearing Agency Standards specifically address a CCA's 
obligations in 23 specific areas, many of which directly relate to the 
CCA's ability to manage the risks presented to it as a CCA. For 
example, a CCA must have policies and procedures in place to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes, including by, among other things, maintaining 
sufficient financial resources to cover its credit exposure to each 
participant fully with a high degree of confidence and maintain 
additional financial resources to enable it to cover a wide range of 
foreseeable stress scenarios, including the default of the largest or 
two largest participant families (depending on the nature of the CCA's 
activities). A CCA also must have policies and procedures in place to 
effectively measure, monitor, and manage the liquidity risk that arises 
in or is borne by the CCA, including measuring, monitoring, and 
managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity, by, among other things, 
holding qualifying liquid resources in an amount sufficient to effect 
same-day and, where appropriate, intraday and multiday settlement of 
payment obligations with a high degree of confidence under a wide range 
of foreseeable stress scenarios that includes, but is not limited to, 
the default of the largest participant family in extreme but plausible 
market conditions. With respect to both its credit and liquidity 
resources, the CCA is required to, among other things, test the 
sufficiency of such resources at least once each day using standard and 
predetermined parameters and assumptions, conduct a comprehensive 
analysis on at least a monthly basis of the existing scenarios, models, 
and underlying parameters and assumptions used to ensure that they are 
appropriate for determining the CCA's needs and resources in light of 
current and evolving market conditions, and to perform a model 
validation of the models used for such testing at least annually.\56\
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17ad-22(e)(4)(vi) and (vii) and (e)(7)(vi) and 
(vii).
---------------------------------------------------------------------------

    In addition, a CCA is required to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
cover its credit exposures to its participants by establishing a risk-
based margin system that, at a minimum and among other things, 
calculates margin sufficient to cover its potential future exposure to 
participants in the interval between the last margin collection and the 
close out of positions following a participant default, and is 
monitored by management on an ongoing basis and is regularly reviewed, 
tested, and verified by conducting backtests of its margin model at 
least once each day using standard predetermined parameters and 
assumptions and conducting a sensitivity analysis of its margin model 
and a review of its parameters and assumptions for backtesting on at 
least a monthly basis, among other things.\57\ A CCA also is required 
to have policies and procedures reasonably designed to establish 
objective, risk-based, and publicly disclosed criteria for 
participation, which permit fair and open access by direct and, where 
relevant, indirect participants and other financial market utilities, 
require participants to have sufficient financial resources and robust 
operational capacity to meet obligations arising from participation in 
the clearing agency, and monitor compliance with such participation 
requirements on an ongoing basis; and identify, monitor, and manage the 
material risks to the CCA arising from arrangements in which firms that 
are indirect participants in the CCA rely on the services provided by 
direct participants to access the CCA's payment, clearing, or 
settlement facilities.\58\
---------------------------------------------------------------------------

    \57\ 17 CFR 240.17ad-22(e)(6).
    \58\ 17 CFR 240.17ad-22(e)(18) and (19).
---------------------------------------------------------------------------

    These requirements should ensure that a CCA is able to accommodate 
the market needs for its clearance and settlement activity and that a 
CCA can appropriately risk manage the activity that its participants 
submit for clearing and settlement, which should, in turn, mitigate the 
potential concentration risk arising from the existence of only one CCA 
for a particular asset class.
    Further, regarding the comments raising concerns about potential 
operational or technical issues at a single CCA, the Covered Clearing 
Agency Standards include Rule 17ad-22(e)(17), which requires written 
policies and procedures reasonably designed to manage the covered 
clearing agency's operational risks by (i) identifying the plausible 
sources of operational risk, both internal and external, and mitigating 
their impact through the use of appropriate systems, policies, 
procedures, and controls; (ii) ensuring that systems have a high degree 
of security, resiliency, operational reliability, and adequate, 
scalable capacity; and (iii) establishing and maintaining a business 
continuity plan that addresses events posing a significant risk of 
disrupting operations.\59\ In addition, CCAs, as registered clearing 
agencies, are subject to the requirements of Regulation Systems 
Compliance Integrity (``Regulation SCI''). Regulation SCI is designed 
to strengthen the infrastructure of the U.S. securities markets, reduce 
the occurrence of systems issues in those markets, improve their 
resiliency when technological issues arise, and implement an updated 
and formalized regulatory framework, thereby helping to ensure more 
effective Commission oversight of such systems.\60\ As entities subject 
to Regulation SCI, CCAs are required to have written policies and 
procedures reasonably designed to ensure that their key automated 
systems have levels of capacity, integrity, resiliency, availability, 
and security adequate to maintain their operational capability and 
promote the maintenance of fair and orderly markets, and that such 
systems operate in accordance with the Exchange Act and the rules and 
regulations thereunder and the entities' rules and governing documents, 
as applicable.\61\ These requirements should work to mitigate the 
possibility that a CCA would experience an interruption to its 
operations. In the event that a CCA were to fail, it is required to 
have policies and procedures to establish a recovery and wind-down plan 
to address that situation.\62\
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    \59\ 17 CFR 240.17ad-22(e)(17).
    \60\ Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 
79 FR 72252, 72253, 72256 (Dec. 5, 2014).
    \61\ See 17 CFR 242.1001.
    \62\ 17 CFR 240.17ad-22(e)(3)(ii). In the event of a wind-down 
in which the result is that the U.S. Treasury securities CCA no 
longer exists, Rule 17ad-22(e)(18)(iv) would not apply, as there 
would be no CCA to impose such membership requirements. The 
requirement to clear eligible secondary market transactions arises 
under the CCA's rules and is not a mandate to clear based on the 
nature of the security.
---------------------------------------------------------------------------

    FICC also must meet its obligations under both Section 19(b) of the 
Exchange Act, as a self-regulatory organization, and Title VIII of the 
Dodd-Frank Act. This means that the Commission has the opportunity to 
review any proposed rule changes and imposes specific additional filing 
obligations for an entity designated as systemically important under 
Title VIII

[[Page 2722]]

of the Dodd-Frank Act to provide advance notice to the Commission, 
which must consult with the Board of Governors, of any change to the 
entity's procedures that may materially alter the nature or level of 
risk presented.\63\ This overall supervisory framework, including the 
Covered Clearing Agency Standards, should help ensure that FICC 
continues to be subject to robust supervision and oversight and to be 
able to manage the risks presented to it, even those arising from 
increased Treasury clearing. In light of the robust regulatory 
framework applicable to CCAs, the fact that only one CCA serves the 
market should not preclude the imposition of a requirement to clear 
eligible secondary market transactions.
---------------------------------------------------------------------------

    \63\ 12 U.S.C. 5465(e); 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Further, the Commission is not persuaded that the ownership or 
organizational structure of the present U.S. Treasury securities CCA 
has an effect on its ability to serve the market. The Commission has 
not imposed particular requirements for the ownership or corporate 
structure of CCAs, and CCAs currently exhibit a variety of ownership 
and corporate structures. For example, FICC is wholly owned by the 
Depository Trust & Clearing Corporation (``DTCC''), which is, in turn, 
owned by the members of the clearing agencies owned by the DTCC.\64\ 
FICC operates on a cost plus low-margin model, meaning that its fees 
are cost-based plus a markup as approved by the Board or management and 
that this markup or ``low margin'' is applied to recover development 
costs and operating expenses and to accumulate capital sufficient to 
meet regulatory and economic requirements.\65\ Nevertheless, a CCA's 
status as a for-profit organization does not preclude its ability to 
meet its requirements under the Covered Clearing Agency Standards.
---------------------------------------------------------------------------

    \64\ The members of such clearing agencies are required to 
purchase common shares under DTCC's Shareholders Agreement as a 
condition to use the clearing agencies' services and facilities. 
See, e.g., FICC Rule 49, section 2, supra note 19. This differs from 
other clearing agencies or clearing organizations in which the 
shareholders are not limited to the participants of the clearing 
agency and the clearing agency may be owned by a publicly traded 
company.
    \65\ See, e.g., Self-Regulatory Organizations; Fixed Income 
Clearing Corporation; Notice of Filing and Immediate Effectiveness 
of Proposed Rule Change to Amend Certain MBSD Fees, Exchange Act 
Release No. 96575 (Dec. 22, 2022). In addition, because FICC is 
member-owned, members may receive rebates when FICC collects excess 
net income, which is defined as either income of FICC or one 
business line of FICC after application of expenses, capitalization 
costs, and applicable regulatory requirements. See FICC Rules, Fee 
Structure, Section XII, supra note 19.
---------------------------------------------------------------------------

    An additional commenter stated its belief that relinquishing 
control of credit approval to a single entity poses a significant 
problem, particularly, with all transactions going through FICC and 
where margin requirements can be changed at any time. The commenter 
stated that every firm has a different risk appetite and quantitative 
and qualitative perspectives as it relates to credit analysis, which 
are part of the professional services and expertise that well-run firms 
offer, and that by inserting FICC into the center of the credit 
approval process, firms lose their ability to apply their deeply 
informed market views and differentiate themselves from 
competitors.\66\
---------------------------------------------------------------------------

    \66\ Letter from the Independent Dealer & Trader Association, at 
9 (Dec. 27, 2022) (``IDTA Letter'').
---------------------------------------------------------------------------

    The Commission disagrees that the requirement to clear eligible 
secondary market transactions, which currently can be done only at 
FICC, will remove firms' ability to differentiate themselves from their 
competitors. FICC has no role in the relationship between a direct 
participant and the direct participant's customers, and, indeed, the 
Exchange Act provides that its rules cannot impose any schedule of 
prices, or fix rates or other fees, for its participants' services.\67\ 
FICC's direct participants will remain free to determine what services 
they will offer to their customers, and at what price, thereby 
providing the ability for the direct participants to differentiate 
themselves from their competitors.
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78q-1(b)(3)(E).
---------------------------------------------------------------------------

    The Commission also disagrees that margin requirements at FICC can 
change at any time. FICC's margin methodology is part of its rules that 
have been approved by the Commission, and changes to that methodology 
must be filed with and reviewed by the Commission because of FICC's 
status as a self-regulatory organization. The margin methodology, which 
is part of FICC's approved rules, does provide some flexibility to FICC 
to manage risk, and potentially increase margin requirements, in times 
of market volatility and to guard against exposure to the CCP, but this 
flexibility is not equivalent to FICC being able to alter its margin 
requirements at any time. Pursuant to the Commission's rules, FICC 
would be obligated to file for Commission review any proposed change to 
its margin methodology and to file an advance notice of any proposed 
change to its rules in the event that the change would materially alter 
the nature or level of risk presented by the CCA, with both of these 
processes involving notice and the opportunity for public comment.\68\
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78s(b); Dodd-Frank Act Section 806(e); 17 CFR 
240.19b-4.
---------------------------------------------------------------------------

    Finally, one commenter also stated that any final rule should 
expressly acknowledge the potential for multiple U.S. Treasury 
securities CCAs and prohibit a clearing agency's rules from restricting 
or impeding in any way their members' ability to clear U.S. Treasury 
securities cash or repo transactions at another CCA.\69\ Such 
clarification is unnecessary. The requirements being adopted apply to 
any U.S. Treasury securities CCA and do not rely on the existence of 
only one U.S. Treasury securities CCA. The Commission acknowledges that 
there is the potential for multiple clearing agencies serving the U.S. 
Treasury market under its regulatory framework, and that the existence 
of additional U.S. Treasury securities CCAs would lower the 
concentration risk that currently exists due to having a single CCA for 
that market. Moreover, a rule prohibiting a clearing agency from 
restricting or impeding in any way its member's ability to clear at 
another CCA is also unnecessary because to be registered under Section 
17A of the Exchange Act, a clearing agency's rules must not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of Section 17A.\70\
---------------------------------------------------------------------------

    \69\ ICE Letter, supra note 33, at 2-3.
    \70\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

c. Final Rule
    For the reasons discussed in parts II.A.1.a and b supra, the 
Commission is adopting Rule 17ad-22(e)(18)(iv) as proposed.\71\ This 
requirement applies to all types of transactions that are of a type 
currently accepted for clearing at a U.S. Treasury securities CCA; it 
does not impose a requirement on a U.S. Treasury securities CCA to 
offer additional products for clearing.
---------------------------------------------------------------------------

    \71\ The Commission also amends the CFR designation of Rule 
17Ad-22 in order to ensure the regulatory text conforms more 
consistently with section 2.13 of the Document Drafting Handbook. 
See Office of the Federal Register, Document Drafting Handbook (Aug. 
2018 Edition, Revision 2.1, dated Oct. 2023), available at https://www.archives.gov/files/federal-register/write/handbook/ddh.pdf. In 
particular, the Commission amends the CFR section designation for 17 
CFR 240.17Ad-22 (Rule 17Ad-22) to replace the uppercase letter with 
the corresponding lowercase letter, such that the rule is 
redesignated as 17 CFR 240.17ad-22 (Rule 17ad-22).
---------------------------------------------------------------------------

2. Definition of Eligible Secondary Market Transactions
    As part of Rule 17ad-22(a), the Proposing Release set forth a 
definition of an eligible secondary market

[[Page 2723]]

transaction in U.S. Treasury securities \72\ subject to the requirement 
to submit for clearance and settlement discussed in part II.A.1 above. 
Specifically, the definition of an eligible secondary market 
transaction \73\ would include:
---------------------------------------------------------------------------

    \72\ The Commission did not receive any comments on its proposed 
definition of ``U.S. Treasury security'' and is adopting that 
definition as proposed.
    \73\ As the Commission stated in the Proposing Release, the 
amendment does not apply to the primary market, i.e., the issuance 
and sale of a U.S. Treasury security to a primary dealer or other 
bidder in a U.S. Treasury auction. Proposing Release, supra note 14, 
87 FR 64621. Further, as the Commission also stated in the Proposing 
Release, because trading in when-issued securities occurring the day 
after the auction shares similar characteristics to secondary market 
transactions and because such trading is already reported as a 
secondary market transaction, the definition of an eligible 
secondary market transaction would apply to when-issued trades that 
occur the day after the auction and are considered on-the-run on 
some IDBs, to the extent that such when-issued trades otherwise meet 
the definition of an eligible secondary market transaction, as 
discussed further in part II.A.2.ii infra. Id. However, because 
when-issued trading occurring before and on the day of the auction 
does not share these characteristics and is primarily used as a tool 
for price discovery leading to the auction, such transactions would 
not be encompassed by the definition. Id.
---------------------------------------------------------------------------

     Repurchase agreements and reverse repurchase agreements in 
which one of the counterparties is a direct participant;
     Any purchases and sales entered into by a direct 
participant if the direct participant (A) brings together multiple 
buyers and sellers using a trading facility (such as a limit order 
book) and (B) is a counterparty to both the buyer and seller in two 
separate transactions; and
     Any purchases and sales of U.S. Treasury securities 
between a direct participant and a counterparty that is a registered 
broker-dealer, government securities dealer, or government securities 
broker, a hedge fund, or an account at a registered broker-dealer, 
government securities dealer, or government securities broker where 
such account may borrow an amount in excess of one-half of the value of 
the account or may have gross notional exposure of the transactions in 
the account that is more than twice the value of the account.
    The Commission is adopting this rule, with modifications related to 
repos by other clearing organizations (see part II.A.2.a.iii), inter-
affiliate repo transactions (see part II.A.2.a.vi), and state and local 
government repo transactions (see part II.A.2.a.vii) and related to 
cash transactions by hedge funds and leveraged accounts (see part 
II.A.2.b.iii). The Commission discusses the proposed definitions and 
the comments received thereupon in the following sections.
a. Repo Transactions
    The proposed definition of an eligible secondary market transaction 
would include, among other things, all U.S. Treasury repurchase and 
reverse repurchase agreements entered into by a direct participant of a 
U.S. Treasury securities CCA, subject to the exclusions discussed in 
part XX infra. As explained in the Proposing Release, in a U.S. 
Treasury repo transaction, one party sells a U.S. Treasury security to 
another party (often referred to as the ``start leg'') and commits to 
repurchase the security at a specified price on a specified later date 
(often referred to as the ``end leg''), and a reverse repo transaction 
is the same transaction from the buyer's perspective.\74\
---------------------------------------------------------------------------

    \74\ Proposing Release, supra note 14, 87 FR 64616. The effect 
of a repo transaction is similar to a cash loan, using U.S. Treasury 
securities as collateral. Id. However, standard industry 
documentation classifies the start and end legs of the repo 
transaction as purchases and sales of securities. See, e.g., SIFMA, 
Master Repurchase Agreement (September 1996 Version), available at 
https://www.sifma.org/wp-content/uploads/2017/08/MRA_Agreement.pdf. 
In this release, the term ``seller'' refers to the party selling 
U.S. Treasury securities on the start leg of the transaction and 
repurchasing them on the end leg of the transaction. The term 
``buyer'' refers to the party purchasing the U.S. Treasury 
securities on the start leg of the transaction and selling them on 
the end leg of the transaction.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that the available 
data indicates that the volume of repo transactions that are 
bilaterally cleared and settled remains substantial.\75\ Because of 
this, FICC lacks visibility into its members' non-centrally cleared 
repo trades, and the default of one counterparty can have cascading 
effects on multiple other market participants, including members of 
FICC, thereby risking contagion to the CCP.
---------------------------------------------------------------------------

    \75\ Proposing Release, supra note 14, 87 FR 64616 (citing 2021 
IAWG Report, supra note 4, at 29 (stating that non-centrally cleared 
bilateral repo represents a significant portion of the market, 
roughly equal in size to centrally cleared repo) (citing a 2015 
pilot program by the Treasury Department); TMPG, Clearing and 
Settlement Practices for Treasury Secured Financing Transactions 
Working Group Update (``TMPG Repo White Paper''), at 1 (Nov. 5, 
2021), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CSP_SFT_Note.pdf; Katy Burne, ``Future 
Proofing the Treasury Market,'' BNY Mellon Aerial View, at 7 (Nov. 
2021), available at https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/aerial-view/future-proofing-the-us-treasury-market.pdf.coredownload.pdf (noting that 63% of repo transactions 
remain non-centrally cleared according to Office of Financial 
Research data as of Sept. 10, 2021); Sebastian Infante et al., 
Insights from revised Form FR2004 into primary dealer securities 
financing and MBS activity (Aug. 5, 2022), available at https://www.federalreserve.gov/econres/notes/feds-notes/insights-from-revised-form-fr2004-into-primary-dealer-securities-financing-and-mbs-activity-20220805.htm (recent research with respect to primary 
dealers indicates that 38% of their repo and 60% of their reverse 
repo activity is not centrally cleared, and, overall, that 20% of 
all their repo and 30% of their reverse repo activity is centrally 
cleared through FICC)).
---------------------------------------------------------------------------

    The Commission also stated its belief that, particularly with 
respect to banks and dealers, an important potential benefit of repo 
central clearing stems from mitigating the constraints on 
intermediaries' balance sheets under the existing accounting and 
regulatory capital rules.\76\ The Commission further stated that it 
believes that the benefit of this resulting additional balance sheet 
capacity could be shared by all market participants through improved 
market liquidity and smooth market functioning.\77\
---------------------------------------------------------------------------

    \76\ In effect, accounting rules allow purchases and sales of 
the same security to be netted but do not allow repos of the same 
security to be netted, unless the repos are with the same 
counterparty and the trades have been documented under a master 
netting agreement. See, e.g., Proposing Release, supra note 14, 87 
FR 64621 (citing G-30 Report, supra note 5, at 13; Program on 
International Financial Systems, Mandatory Central Clearing for U.S. 
Treasuries and U.S. Treasury Repos, at 25-27 (Nov. 2021), available 
at https://www.pifsinternational.org/wp-content/uploads/2021/11/PIFS-Mandatory-Central-Clearing-for-U.S.-Treasury-Markets-11.11.2021.pdf (``PIFS Paper'')). Thus, if a dealer's repos are all 
with a U.S. Treasury securities CCA, greater netting is allowed.
    \77\ See Committee on the Global Financial System, Repo Market 
Functioning, at 24 (Apr. 2017), available at https://www.bis.org/publ/cgfs59.pdf.
---------------------------------------------------------------------------

    The Commission also referenced that, as with cash markets, risk 
management practices in the bilateral clearance and settlement of repos 
are not uniform across market participants and are not transparent.\78\ 
Indeed, a recent publication stated that competitive pressures in the 
bilaterally settled market for repo transactions have exerted downward 
pressure on haircuts, sometimes to zero.\79\ The reduction of haircuts, 
which serve as a counterparty credit risk mitigant in bilateral repos, 
could result in greater exposure to potential counterparty default risk 
in non-centrally cleared repos. The Commission stated that by contrast, 
a U.S. Treasury securities CCA is subject to the Commission's risk 
management requirements addressing financial, operational, and legal 
risk management, which include, among other things, margin requirements 
commensurate with the risks and particular attributes of each relevant 
product, portfolio, and market.\80\ Therefore, repos cleared at a U.S. 
Treasury securities CCA would be subject to transparent risk management 
standards that are publicly available and

[[Page 2724]]

applied uniformly and objectively to all participants in the CCA.
---------------------------------------------------------------------------

    \78\ TMPG Repo White Paper, supra note 75, at 1.
    \79\ G-30 Report, supra note 5, at 13.
    \80\ 17 CFR 240.17ad-22(e)(6).
---------------------------------------------------------------------------

    Many commenters supported the definition of an eligible secondary 
market transaction as it relates to repo and reverse repo 
transactions.\81\ These commenters encouraged a broad and comprehensive 
definition to limit market fragmentation and avoidance of central 
clearing. Several other commenters that did not support a requirement 
to clear eligible secondary market transactions still acknowledged that 
repos were the most appropriate scope for such a requirement if one 
were to be adopted. For example, one commenter agreed that a clearing 
mandate applied to bilateral repo transactions would be beneficial, 
pointing to the balance sheet efficiency resulting from repo clearing, 
but stressing that this requirement be put in place only after the 
Commission has strengthened the ability for market participants to 
access central clearing.\82\ Another commenter stated that while the 
case for clearing repos is ``marginally stronger'' than the case for 
clearing cash transactions, it is ``far from convincing.'' \83\
---------------------------------------------------------------------------

    \81\ See Letter from Jir[iacute] Kr[oacute]l, Deputy CEO, Global 
Head of Government Affairs, Alternative Investment Management 
Association, at 6-7 (Dec. 22, 2022) (``AIMA Letter''); AFREF Letter, 
supra note 33, at 3; see generally Better Markets Letter, supra note 
33; DTCC/FICC Letter, note 33; Letter from Ryan Sheftel, Global Head 
of Fixed Income, GTS Securities, LLC (Jan. 6, 2023) (``GTS 
Securities Letter''); LSEG Letter, supra note 33; Letter from ARB 
Trading Group LP, Citadel Securities, DRW Holdings, LLC, Eagle Seven 
LLC, Geneva Trading USA, LLC, Hard Eight Futures, LLC, Hudson River 
Trading LLC, IMC Trading, Jump Trading Group, Kore Trading LLC, 
Optiver, Quantlab Financial, LLC, WH Trading LLC, and XR Trading 
LLC, at 4 (Dec. 27, 2022) (``ARB et al. Letter''); Letter from 
Manfred E. Will, Founder & CEO, MEW Consul (Oct. 24, 2022); Letter 
from Shiv Rao, Chairman, Sunthay Holdings LLC, at 2 (Dec. 27, 2022); 
and Letter from Elisabeth Kirby, Head of U.S. Market Structure, 
Tradeweb Markets Inc. (Dec. 27, 2022). One commenter, while broadly 
supporting the definition of an eligible secondary market repo and 
reverse repo transaction, recommended excluding Derivatives Clearing 
Organizations (``DCO'') registered with the CFTC. See Letter from 
Jonathan Marcus, Senior Managing Director and General Counsel, CME 
Group Inc., at 6-7 (Dec. 27, 2022) (``CME Letter'') and part 
II.A.2.iii infra. Other commenters, while broadly supporting the 
definition, recommended excluding transactions executed on the 
triparty repo platform. See Letter from Stephen John Berger, 
Managing Director, Global Head of Government & Regulatory Policy, 
Citadel and Citadel Securities (Dec. 27, 2022) (``Citadel Letter''), 
Letter from Jennifer W. Han, Executive Vice President, Chief Counsel 
& Head of Global Regulatory Affairs, Managed Funds Association at 6, 
14 (Dec. 21, 2022) (``MFA Letter''), and part II.A.2.i infra.
    \82\ MFA Letter, supra note 81, at 13 (supporting inclusion of 
bilateral repo and reverse repo).
    \83\ SIFMA AMG Letter, supra note 35, at 11.
---------------------------------------------------------------------------

    Other commenters questioned the need for a requirement with respect 
to repo, noting that the balance sheet netting efficiencies already 
exist, providing a natural incentive to centrally clear such 
transactions.\84\ The Commission agrees that centrally cleared repo 
already benefits from favorable treatment on balance sheet, but also 
recognizes that, by definition, a requirement to clear repo 
transactions should result in more transactions being centrally 
cleared. Thus, there would still be benefits from the requirement, 
despite the currently existing balance sheet treatment, as discussed 
further in part IV.C.1.a.ii.
---------------------------------------------------------------------------

    \84\ See, e.g., SIFMA AMG Letter, supra note 35, at 4; SIFMA-IIB 
Letter, supra note 37, at 4.
---------------------------------------------------------------------------

    In addition, some commenters supported excluding particular types 
of repos from the definition, and other commenters supported excluding 
particular types of market participants engaging in repos from the 
definition. The Commission discusses these comments in the following 
parts.
i. Triparty Repo
    Several commenters supported excluding triparty repos from the 
definition of an eligible secondary market transaction.\85\ One 
commenter suggested that the cost of including triparty repos would 
outweigh the benefits, and other commenters raised similar 
concerns.\86\ The discussion of additional costs and benefits arising 
from the inclusion of triparty repos within the definition of an 
eligible secondary market transaction is provided in part IV.C.2 infra. 
Several commenters argued that including triparty repos would not 
significantly reduce the risks that the proposal seeks to address 
because the current triparty market infrastructure inherently mitigates 
the associated risks.\87\ Specifically, these commenters argue that 
credit risk in the triparty market is mitigated by the triparty agent's 
provision of custodial, collateral management, and settlement 
services.\88\
---------------------------------------------------------------------------

    \85\ See MFA Letter, supra note 81, at 6, 14; SIFMA-IIB Letter, 
supra note 37, at 20-21; SIFMA AMG Letter, supra note 35, at 6, 11; 
Letter from Sarah A. Bessin, Deputy General Counsel, and Nhan 
Nguyen, Assistant General Counsel, Investment Company Institute at 
22-23 (Dec. 23, 2022) (``ICI Letter''); Citadel Letter, supra note 
81, at 6; Letter from Deborah A. Cunningham, Executive Vice 
President, Chief Investment Officer of Global Liquidity Markets, and 
Senior Portfolio Manager, Susan R. Hill, Senior Vice President, 
Senior Portfolio Manager and Head of Government Liquidity, and David 
R. McCandless, Corporate Counsel, Federated Hermes at 5 (Dec. 28, 
2022) (``Federated Letter''); Letter from Sebastian Crapanzano, 
Managing Director, Morgan Stanley, at 2 (Nov. 15, 2023) (``Morgan 
Stanley Letter'').
    \86\ See MFA Letter, supra note 81, at 6, 14; see also SIFMA/IIB 
Letter, supra note 37, at 20; ICI Letter, supra note 85, at 11; 
Federated Letter, supra note 85, at 5.
    \87\ See MFA Letter, supra note 81, at 14; SIFMA/AMG Letter, 
supra note 35, at 11; ICI Letter, supra note 85, at 12, 22; Citadel 
Letter, supra note 81, at 6; Federated Letter, supra note 85, at 5.
    \88\ See id.
---------------------------------------------------------------------------

    Moreover, one commenter stated that the infrastructure underlying 
the triparty repo market is robust and provides credit protections, 
operational safeguards, and strict internal controls akin to central 
clearing.\89\ One commenter stated that the triparty agent's ability to 
handle the settlement of triparty repos through its collateral 
allocation system has resulted in a well-functioning process that 
operates under severe time constraints.\90\ One commenter added that 
the triparty market is relatively safe from credit risk because the 
triparty agent is subject to prudential regulation.\91\ One commenter 
added that settlement risk in the triparty market is nearly eliminated 
because collateral posted to the triparty platform cannot generally be 
repledged outside the platform.\92\ The commenter stated, therefore, 
that the only significant source of settlement risk is the rare 
occurrence of a counterparty's nonpayment of the repurchase price, 
which is generally attributable to operational risk as opposed to 
credit risk.\93\ Another commenter stated that these types of triparty 
repos, described as secured funding transactions where the funding 
counterparty has no rehypothecation rights, do not appear to raise 
concerns discussed in the proposal regarding the use of transactions to 
generate leverage that would warrant imposition of the requirement to 
clear eligible secondary market transactions.\94\
---------------------------------------------------------------------------

    \89\ See ICI Letter, supra note 85, at 22.
    \90\ See Federated Letter, supra note 85, at 3.
    \91\ See MFA Letter, supra note 81, at 14.
    \92\ See Federated Letter, supra note 85, at 5.
    \93\ See Federated Letter, supra note 85, at 5.
    \94\ Morgan Stanley Letter, supra note 85, at 2.
---------------------------------------------------------------------------

    Despite supporting the exclusion of triparty repos from the 
definition of an eligible secondary market transaction, one commenter 
acknowledged that the triparty agent ``does not fulfill a CCP role--it 
does not guarantee either counterparty's performance through novation 
or otherwise and does not assume counterparty risk.'' \95\ For this 
reason, triparty repos will not be excluded from the definition of an 
eligible secondary market transaction.
---------------------------------------------------------------------------

    \95\ ICI Letter, supra note 85, at 33.
---------------------------------------------------------------------------

    The Commission recognizes that the current triparty market 
infrastructure incorporates credit protections, operational safeguards, 
and strict internal controls. The Commission also recognizes that the 
triparty agent's current processes for handling the settlement of 
triparty repos generally

[[Page 2725]]

function well. However, the triparty agent does not serve as a central 
counterparty, meaning that it does not guarantee either counterparty's 
performance through novation or assume counterparty risk, and 
therefore, the Commission disagrees with the contention that the 
current market infrastructure incorporates controls equivalent to those 
available through central clearing. The Commission recognizes that the 
triparty agent is subject to heightened prudential regulation.\96\ 
However, the triparty agent is not subject to regulatory supervision as 
a CCP, which entails additional protections against the risk of many 
market participants acting to liquidate similar collateral in the event 
of a default in a non-centrally cleared environment. A U.S. Treasury 
securities CCA is subject to the Commission's risk management 
requirements addressing financial, operational, and legal risk 
management, which include, among other things, margin requirements 
commensurate with the risks and particular attributes of each relevant 
product, portfolio, and market and also include certain requirements 
applicable only to covered clearing agencies that are serving as 
central counterparties.\97\ In contrast, a triparty agent is not 
equipped with a mechanism to manage the risk of collateral fire-sale in 
the aftermath of a counterparty default.\98\ As a result, a U.S. 
Treasury securities CCA is better positioned to handle a large, 
unexpected default than a triparty agent. The possibility that a direct 
participant in a U.S. Treasury securities CCA with large, unsettled 
trading volumes (bilateral or triparty) could fail creates contagion 
risk to the CCA, as well as to the market as a whole. This rulemaking 
is designed to ameliorate that contagion risk, at least in part. 
Accordingly, the Commission does not believe that the current triparty 
market infrastructure alone mitigates the aforementioned contagion risk 
sufficiently to warrant excluding triparty repos from the definition of 
an eligible secondary market transaction. In response to the commenter 
who stated that most risks are eliminated because collateral cannot be 
posted outside the triparty platform, the Commission disagrees. 
Significant risks exist if concerns emerge regarding the financial 
condition of sellers in the triparty market.\99\ In such scenarios, 
even though collateral stays within the triparty platform, the buyer 
could still experience distress following a sudden default of a 
triparty repo counterparty.\100\ For example, a triparty repo default 
may leave a money market fund holding long-dated Treasury securities 
collateral, which may cause the money market fund to no longer meet 
requirements under rule 2a-7 relating to the weighted average life to 
maturity of the fund's portfolio.\101\ A spike in market volatility 
accompanying an event of default and potential collateral liquidation 
activity by buyers could cause liquidity stress for the financial 
system leading to decline in collateral value even for the most 
creditworthy assets such as U.S. Treasury securities. A U.S. Treasury 
securities CCA is better positioned to manage a repo counterparty 
default by employing a range of available pre-funded resources without 
reliance on repo collateral liquidation.\102\ In contrast, the triparty 
platform is not designed to manage risks associated with a repo 
counterparty default and a potential collateral liquidation following 
the default. In a triparty repo transaction, the triparty custodian 
bank holds the collateral on behalf of the buyer. However, the buyer is 
responsible for initiating and managing the collateral liquidation 
process, including Treasury securities, if the liquidation is 
necessary.\103\
---------------------------------------------------------------------------

    \96\ The triparty agent is supervised and/or regulated by, among 
others, New York State Department of Financial Services, and the 
Federal Reserve Bank of New York. See https://www.bnymellon.com/us/en/disclaimers/business-disclaimers. Additionally, the triparty 
agent is designated as a Global Systemically Important Bank by the 
Financial Stability Board. See https://www.fsb.org/wp-content/uploads/P211122.pdf.
    \97\ 17 CFR 240.17ad-22(e)(6).
    \98\ See, e.g, Brian Begalle et al., The Risk of Fire Sales in 
the Tri-Party Repo Market, N.Y. Fed Staff Report No. 616 (``Begalle 
et al.''), at 9-14, available at, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr616.pdf.
    \99\ See 2013 Annual Report of the Financial Stability Oversight 
Council, at 4, 12-13, 133-134, available at https://home.treasury.gov/system/files/261/FSOC-2013-Annual-Report.pdf 
(``FSOC 2013 Annual Report''); Begalle et al., supra note 98 
(discussing concern that stress caused by a potential default of a 
triparty repo counterparty can lead to either pre-default fire sales 
of assets by the counterparty or post-default fire sales of 
collateral by the triparty repo investor and the related financial 
stability concerns). See also 2019 Annual Report of the Financial 
Stability Oversight Council, at 11, available at https://home.treasury.gov/system/files/261/FSOC2019AnnualReport.pdf 
(highlighting that the possibility of fire sales of collateral by 
creditors of a defaulted counterparty in the triparty repo market 
remains a financial system vulnerability despite the triparty repo 
infrastructure reform).
    \100\ See FSOC 2013 Annual Report, supra note 99, at 12-13 
(recognizing that a major broker-dealer's default could threaten 
financial stability as the broker-dealers' creditors liquidate the 
collateral pledged against their tri-party repo lending, with the 
fire sales of this collateral potentially destabilizing financial 
markets and amplifying the negative consequences of such a default).
    \101\ See 17 CFR 270.2a-7(d)(1). In addition, the money market 
fund holding the collateral may cause liquidity concerns under rule 
2a-7. See 17 CFR 270.2a-7(d)(4).
    \102\ 17 CFR 240.17ad-22(e)(13).
    \103\ Baklanova, et al., Reference Guide to U.S. Repo and 
Securities Lending Markets, OFR Working Paper No15-17 (Sept. 2015), 
available at: https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf.
---------------------------------------------------------------------------

    One commenter argued that including triparty repos in the 
definition of an eligible secondary market transaction would likely 
impair the cash and collateral management processes of hedge funds and 
alternative asset managers.\104\ Specifically, the commenter suggested 
that such firms currently conduct same-day bilateral transactions that 
they would not be able to conduct with a direct participant of a U.S. 
Treasury securities CCA required to centrally clear its repo 
transactions.\105\ Similarly, another commenter argued that including 
triparty repos would prevent participants, such as money market funds, 
from conducting transactions on a short term (i.e., overnight) basis 
when U.S. Treasury securities CCAs are at full capacity.\106\
---------------------------------------------------------------------------

    \104\ See MFA Letter, supra note 81, at 17.
    \105\ See id.
    \106\ See ICI Letter, supra note 85, at 12, 22.
---------------------------------------------------------------------------

    The Commission disagrees with these commenters. In its supervisory 
capacity, the Commission is aware that registered funds, hedge funds, 
and alternative asset managers currently conduct centrally cleared 
triparty repo transactions. For example, the Commission is aware that 
numerous hedge funds conduct such same-day transactions as sponsored 
members of FICC. Therefore, the existing operational infrastructure 
supports centrally cleared triparty repo transactions. The FICC 
novation window for all delivery-versus-payment trades, including the 
sponsored repo service, remains open until 8 p.m. (ET) and therefore is 
available for a later-day trading.\107\ Additionally, the Commission 
disagrees that there is a finite ``full capacity'' at a U.S. Treasury 
securities CCA. The Commission understands that increased demand for a 
CCA service may lead to a higher volume of trading activity by existing 
members and, in certain circumstances, reduce members' ability or 
willingness to facilitate their clients' access to central clearing, if 
such members do not wish to grow this line of business. However, higher 
demand for access to central clearing could also present an opportunity 
for dealers that

[[Page 2726]]

do not currently offer such services to enter the market, resulting in 
growing CCA capacity, more competition among its members, and a wider 
range of available repo counterparties. The Commission also understands 
that the existing U.S. Treasury securities CCA may consider, as 
appropriate, additional changes to their operational infrastructure and 
trading capacity, including revisions to the eligibility criteria for 
sponsored membership and an extension of the trade submission and 
novation windows later in the day,\108\ to enhance their ability to 
accommodate any increase in the volume of centrally cleared triparty 
repo transactions resulting from this rulemaking.
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    \107\ See DTCC, Looking to the Horizon: Assessing a Potential 
Expansion of U.S. Treasury Central Clearing, Sept. 2023 (``DTCC 2023 
White Paper''), available at https://www.dtcc.com/-/media/Files/Downloads/WhitePapers/Accessing-Potential-Expansion-US-Treasury-Clearing-White-Paper.pdf.
    \108\ Id.
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    One commenter expressed concern that the centrally cleared triparty 
repo market has only been available since 2021 and is therefore, 
relatively untested.\109\ Therefore, the commenter suggested that the 
Commission should delay its decision whether to include triparty repos 
in the definition of an eligible secondary market transaction until 
after the Commission has had an opportunity to evaluate the 
effectiveness of the centrally cleared triparty repo 
infrastructure.\110\ The Commission disagrees. While FICC expanded its 
Sponsored Service in 2021 to enable sponsored members (e.g., registered 
funds) to conduct centrally cleared triparty repo transactions,\111\ 
FICC has been facilitating such transactions for its direct 
participants via the General Collateral Finance (``GCF'') Repo Service 
since 1998.\112\ Additionally, although the expanded Sponsored Service 
is relatively new, the infrastructure is operational, and its usage 
appears to be increasing. Data provided by the Federal Reserve show a 
significant increase in the gross value of Treasury securities traded 
in GCF Repo since March 2020.\113\ Additionally, as stated above, the 
Commission understands that the U.S. Treasury securities CCA is 
consulting with market participants and is considering steps to further 
enhance its operational infrastructure to support any increase in the 
volume of centrally cleared triparty repo transactions resulting from 
this rulemaking.\114\
---------------------------------------------------------------------------

    \109\ See MFA Letter, supra note 81, at 12, 14.
    \110\ See id.
    \111\ Securities Exchange Act Release No. 92799 (Aug. 27, 2021), 
86 FR 49387 (Sept. 2, 2021) (SR-FICC-2021-801); Securities Exchange 
Act Release No. 92014 (May 25, 2021), 86 FR 29334 (June 1, 2021) 
(SR-FICC-2021-003).
    \112\ Securities Exchange Act Release No. 40623 (Oct. 30, 1998), 
63 FR 59831 (Nov. 5, 1998) (SR-GSCC-98-02).
    \113\ Federal Reserve, GCF Repo (showing that the daily snapshot 
of the Treasury securities value traded in the GCF repo segment was 
under $120 billion on Mar. 10, 2020. The value reported on June 9, 
2023 was over $320 billion, which includes sponsored activity), 
available at https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo#interactive/tripartygcf.
    \114\ See DTCC 2023 White Paper, supra note 107.
---------------------------------------------------------------------------

    Finally, commenters argued for the exclusion from the definition of 
an eligible secondary market transaction of triparty repos involving 
purchased securities that include both Treasury CUSIPs and securities 
with other CUSIPs or where permitted substitution may be made in CUSIPs 
other than Treasury CUSIPs. According to the commenters, the fact that 
some CUSIPs in a mixed triparty repo are U.S. Treasury security CUSIPs 
should not bring that transaction into the definition of an eligible 
secondary market transaction if it were of a type that is entered into 
in the ordinary course of business or otherwise in connection with a 
legitimate business purpose. The commenters stated that without such an 
exemption, the definition of an eligible secondary market transaction 
could scope in transactions of which U.S. Treasury securities only 
represent a small component, which would exceed the regulatory 
objective behind the proposal, and stated that such transactions do 
have margin collected.\115\
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    \115\ See SIFMA/IIB Letter, supra note 37, at 20-21; Letter from 
Jiri Krol, Deputy CEO, Global Head of Government Affairs, 
Alternative Investment Management Association (Oct. 20, 2023) at 3 
(``AIMA Letter II''); see also Citadel Letter, supra note 81, at 6 
(supporting that the Commission exclude triparty repos at this 
stage, noting that they may include both Treasury and non-Treasury 
securities as collateral).
---------------------------------------------------------------------------

    The Commission understands that market participants may use U.S. 
Treasury securities as permissible substitutions for other types of 
collateral and generally should not consider mixed CUSIP triparty repos 
resulting from such a permissible substitution as within the scope of 
part (i) of the definition of an eligible secondary market transaction. 
Collateral substitution allows a repo seller to complete trade 
settlement even if the type of collateral securities agreed upon at the 
time of trade initiation is no longer available. Typically, Treasury 
securities or cash can be permissible substitution.\116\ However, to 
the extent that a mixed CUSIP triparty repo contains U.S. Treasury 
CUSIPs from the outset of the transaction, such a transaction would be 
included in the scope of part (i) of the definition of an eligible 
secondary market transaction. An exclusion for such transactions is not 
necessary because the counterparties specifically structured the 
transaction to include U.S. Treasury securities; therefore, such a 
transaction is within the scope of the definition. Data submitted by 
money market funds on Form N-MFP shows that the holdings reported as 
U.S. Government Agency Repurchase Agreements are typically 
collateralized by U.S. government agency securities and are also 
partially collateralized by Treasury securities.\117\ Collateral 
management practices may evolve to better delineate collateral types in 
light of the definition of an eligible secondary market transaction.
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    \116\ For example, money market fund filings of portfolio data 
show that, on average, Treasury securities account for around 3% of 
collateral backing investments in non-government repos.
    \117\ Money market fund filings of portfolio data show that, on 
average, Treasury securities account for around 20% of collateral 
backing investments in U.S. government agency repos.
---------------------------------------------------------------------------

ii. Repos by Registered Funds
    Registered investment companies, or registered funds, that is, 
those entities that are registered under the Investment Company Act of 
1940 (``1940 Act''), including money market funds and exchange-traded 
funds, are important participants in the U.S. Treasury repo market. 
Filings of Form N-MFP by money market funds show that, as of September 
30, 2023, these funds invested approximately $2.2 trillion in Treasury 
repos.\118\ In addition, mutual funds invested $37 billion in 
repurchase agreements, including those backed by Treasury 
securities.\119\ Generally, commenters acknowledged that central 
clearing of Treasury repos and reverse repos through the FICC Sponsored 
Service, which has been available to registered funds since 2005, 
provides additional collateral supply.\120\ FICC data shows that at the 
end of November 2023, the daily volume of sponsored ``delivery-versus-
payment'' Treasury repo activity was approximately $820 billion, while 
the daily volume of sponsored activity in the triparty GCF repo was 
close to $130 billion.\121\
---------------------------------------------------------------------------

    \118\ Of this amount, approximately $1.5 trillion was invested 
in the Federal Reserve's overnight reverse repo facility. See U.S. 
Securities and Exchange Commission, Money Market Fund Statistics 
(Sept. 2023), available at https://www.sec.gov/divisions/investment/mmf-statistics. Repo transactions with the central bank are excluded 
from the scope of Eligible Secondary Market Transactions.
    \119\ Federal Reserve, Financial Accounts of the United States, 
Table L.207 Federal Funds and Security Repurchase Agreements (2023 
Q2).
    \120\ ICI Letter, supra note 85, at 13; Federated Letter, supra 
note 85, at 2; DTCC/FICC Letter, supra note 33, at 17.
    \121\ See DTCC, Sponsored DVP and Sponsored GC Activity, 
available at https://www.dtcc.com/charts/membership, which also 
shows data over a longer timeframe for reference.

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[[Page 2727]]

    Several commenters stated that they did not support including repo 
transactions with registered funds as a counterparty in the definition 
of an eligible secondary market transaction, which, as proposed, would 
include repo transactions with all counterparties.\122\ One commenter 
stated that the Commission should not, at this time, require that repos 
between a fund and a direct participant of a U.S. Treasury securities 
CCA be subject to a clearing requirement because the current clearing 
framework is not sufficiently developed to support such a mandate.\123\ 
The commenter identified several issues to be addressed prior to 
adopting such a requirement, which are discussed in the following 
paragraphs.
---------------------------------------------------------------------------

    \122\ ICI Letter, supra note 85, at 12-28; Federated Letter, 
supra note 85, at 2-6.
    \123\ ICI Letter, supra note 85, at 12.
---------------------------------------------------------------------------

    First, the commenter stated that the Commission should encourage 
FICC to enhance its Sponsored Service in several ways, to address 
regulatory, structural, and operational issues raised by the proposal. 
The commenter stated that the Commission should encourage FICC to 
further develop a ``give up'' structure to facilitate best execution. 
The commenter described this as a ``critically important step'' to 
incentivize voluntary clearing, because it would generate increased 
competition among market participants, which may result in more 
efficient pricing. The commenter also stated that a ``give up'' 
structure would be essential under a requirement to centrally clear 
eligible secondary market transactions because the Sponsored Service 
may not be able to meet the increased capacity requirements due to the 
limited number of sponsoring members and the increased demand for 
sponsored clearing under such a requirement. The commenter suggested 
that the infrastructure currently used by FICC for prime brokerage 
clearing could be leveraged to develop a give up model, stating that 
any such model will need to provide for standardized documentation that 
facilitates additions and deletions of approved brokers, agreed-upon 
terms for rejection of trades by a sponsoring member, and centralized 
storage of delegation.\124\
---------------------------------------------------------------------------

    \124\ ICI Letter, supra note 85, at 13-14.
---------------------------------------------------------------------------

    The commenter requested that the SEC encourage FICC to establish a 
feature allowing (but not requiring) registered fund sponsored members 
to support their obligations by having margin posted with FICC (``FICC 
registered fund margin arrangement'') rather than by paying fees to the 
sponsoring member.\125\ FICC's rules currently provide that each 
sponsoring member must make a deposit to FICC's Clearing Fund based on 
the activity of its sponsored members.\126\ The contributions of all 
Netting Members, including those that are sponsoring members, are 
commingled in the Clearing Fund and are available to FICC for, among 
other things, securing members' obligations and providing liquidity to 
meet its settlement obligations.\127\ While the commenter stated that 
the Sponsored Service under current FICC rules does not raise custody 
issues for registered funds under the 1940 Act because registered funds 
are not required to post margin to FICC, if a fund's margin were 
permitted to be posted with FICC, that could raise custody issues for 
funds unless such funds receive relief from certain provisions of the 
1940 Act.\128\ The commenter stated that permitting registered funds' 
margin to be posted with FICC could reduce costs for registered funds 
and facilitate their use of cleared reverse repos and term repos.\129\ 
The commenter also stated that the final rule should require FICC to 
establish margin rules that ensure that margin is held in a segregated 
manner, not commingled with any direct participant's house margin, and 
not be subject to loss mutualization associated with other direct 
participants.\130\ Finally, the commenter stated that in order to 
address concerns regarding the security of registered fund assets under 
a Treasury repo clearing mandate, FICC rules addressing margin posting 
would need to be amended to provide for enhanced recordkeeping, 
internal controls, and transparency around the positions and related 
margin.\131\
---------------------------------------------------------------------------

    \125\ ICI Letter, supra note 85, at 14; Letter from Jennifer W. 
Han, Executive Vice President, Chief Counsel & Head of Global 
Regulatory Affairs, Managed Funds Association (Dec. 4, 2023), at 4 
(``MFA Letter II''). See also MFA Letter, supra note 81, at 7 
(noting that ``an indirect participant should have the ability 
(although not the obligation) to fund the margin obligations of the 
direct participant clearing on its behalf which are attributable to 
the indirect participant. In such case, the margin posted by the 
indirect participant should be segregated from the direct 
participant's house margin, and it should not be subject to loss 
mutualization vis-[agrave]-vis other direct participants. Given that 
many indirect participants have fiduciary obligations to their own 
clients, it is crucial that indirect participants are able to post 
margin on a segregated basis such that their clients are not subject 
to the credit risk of others (and, likewise, that their funds are 
not subject to loss mutualization).''); SIFMA/IIB Letter, supra note 
37, at 12-13 (noting that ``it will be difficult to support 
expanding cleared trading in U.S. Treasury securities until we have 
a framework which ensures customers can access clearing solutions 
where their margin and collateral will be adequately protected, 
including from loss mutualization by the clearing agency'').
    \126\ FICC Rule 3A, section 10, supra note 19.
    \127\ FICC Rule 4, supra note 19.
    \128\ Section 17(f) of the 1940 Act (providing that ``[e]very 
registered management company shall place and maintain its 
securities and similar investments in the custody of (A) a bank or 
banks having the qualifications prescribed in paragraph (1) of 
section 26(a) of this title for the trustees of unit investment 
trusts; or (B) a company which is a member of a national securities 
exchange as defined in the Securities Exchange Act of 1934, subject 
to such rules and regulations as the Commission may from time to 
time prescribe for the protection of investors; or (C) such 
registered company, but only in accordance with such rules and 
regulations or orders as the Commission may from time to time 
prescribe for the protection of investors.''). See also rule 17f-1 
under the 1940 Act (permitting registered funds to custody assets 
with a member of a national securities exchange as defined in the 
1934 Act pursuant to certain conditions).
    \129\ ICI Letter, supra note 85, at 14.
    \130\ Id.
    \131\ See id. (``Enhanced recordkeeping and related controls are 
critical to appropriately identifying ownership of assets during a 
Treasury repo or reverse repo transaction particularly since, unlike 
a typical derivates or cash transaction, ownership of the Treasury 
securities underlying a repo or reverse repo change owners during 
the transaction.'').
---------------------------------------------------------------------------

    In order to support a clearing requirement for eligible secondary 
market transactions, the Commission is taking the position that, for a 
period of five years, registered funds utilizing such an arrangement in 
a manner consistent with the circumstances described below would not 
provide a basis for enforcement action under Section 17(f) of the 1940 
Act. The Commission takes this position to recognize the unique 
circumstances facing registered funds in the context of entering into 
eligible secondary market transactions using FICC's Sponsored Program.
    Our staff has previously stated that it would not recommend 
enforcement action under the custody provisions of the 1940 Act in the 
context of certain registered fund trading activities.\132\ For 
example, the staff issued the Delta Letter in connection with Delta's 
options clearing service, which provided assurances that the staff 
would not recommend enforcement action under

[[Page 2728]]

Section 17(f) of the 1940 Act if registered investment companies 
deposited margin with Delta.\133\ One representation in the Delta 
Letter was that Delta was permitted to withdraw the margin provided 
``only upon the investment company's default on the option contract.'' 
\134\ Other previous staff no-action positions have been provided in 
different contexts. In one such no-action position, FICC represented 
that a registered fund's margin would not be used to cover another 
client's default and segregating fund assets from the custodian's 
proprietary assets and other customers' assets.\135\ These types of 
features would help protect fund client assets consistent with the 1940 
Act under the FICC registered fund margin arrangement, and we have 
included similar types of features for purposes of our position that 
follows below.
---------------------------------------------------------------------------

    \132\ See e.g., Delta Government Options Corp. No-Action Letter 
(pub. avail. Sept. 27, 1990) (``Delta Letter''); cf. CME Group, Inc. 
No-Action Letter (pub. avail. Dec. 19, 2017); FICC No-Action Letter 
(pub. avail. Mar. 13, 2003) (``FICC 2003 Letter''). In the FICC 
Letter, the staff observed certain operational features of FICC's 
Mortgage-Backed Securities Division (``MBSD''), which differ from 
the current circumstances of FICC's Government Securities Division, 
such as registered funds being direct participants in MBSD's 
clearing scheme and participant trades not being novated to MBSD. 
Any staff statements cited represent the views of the staff. They 
are not a rule, regulation, or statement of the Commission. 
Furthermore, the Commission has neither approved nor disapproved 
their content. These staff statements, like all staff statements, 
have no legal force or effect: they do not alter or amend applicable 
law; and they create no new or additional obligations for any 
person.
    \133\ Delta Letter.
    \134\ Id.
    \135\ See FICC 2003 Letter.
---------------------------------------------------------------------------

    While the final rules do not require registered funds' margin to be 
posted with FICC, and no current U.S. Treasury securities CCA has rules 
imposing such a requirement, as discussed above, a commenter requested 
that the Commission encourage FICC to establish a FICC registered fund 
margin arrangement.\136\ The Commission agrees that facilitating the 
ability for a registered fund's margin to be posted at FICC as an 
alternative to the sponsoring member posting the margin and passing the 
cost of doing so through to the registered fund may lower the cost of 
trading for the fund, and the Commission position below will help 
facilitate the posting of registered fund margin \137\ to satisfy a 
U.S. Treasury securities CCA's margin deposit requirements.
---------------------------------------------------------------------------

    \136\ See ICI Letter, supra note 85, at 14.
    \137\ The Commission position is intended to address certain 
considerations under the 1940 Act specific to registered funds. 
Other types of buy-side participants may have different 
considerations to address in connection with their participation in 
the Sponsored Program beyond the scope of the 1940 Act.
---------------------------------------------------------------------------

    Specifically, the Commission takes the position that, for a period 
of five years beginning on the effective date of this adopting release, 
if a registered investment fund's cash and/or securities are placed and 
maintained in the custody of FICC for purposes of meeting FICC's margin 
deposit requirements that may be imposed for eligible secondary market 
transactions in connection with the fund's participation in the 
Sponsored Program, it would not provide a basis for enforcement action 
under Section 17(f) of the 1940 Act so long as: \138\
---------------------------------------------------------------------------

    \138\ To the extent a registered fund becomes aware that its 
custodial arrangement is no longer consistent with the FICC 
registered fund margin framework, the registered fund may not 
utilize the FICC registered fund margin framework to enter into 
eligible secondary market transactions.
---------------------------------------------------------------------------

     FICC withdraws the margin provided by a sponsored member 
registered fund only upon that registered fund's default; \139\
---------------------------------------------------------------------------

    \139\ For the avoidance of doubt, FICC may only withdraw margin 
provided by a registered fund in the event that the registered fund 
defaults on a transaction that has been novated to FICC.
---------------------------------------------------------------------------

     The margin provided by a registered fund is not commingled 
with, and is kept separate from, FICC's assets; \140\
---------------------------------------------------------------------------

    \140\ See FICC Letter; see also Institutional Equity Fund No-
Action Letter (pub. avail. Feb. 27, 1984) (stating that the staff 
would not recommend enforcement action under Section 17(f) of the 
1940 Act if, among other things, the assets of a registered fund 
participating in the Options Clearing Corporation's program were 
held in a ``non-proprietary account at OCC which does not include 
any assets held by the Clearing Member agent other than as a 
fiduciary, custodian or otherwise for customers'').
---------------------------------------------------------------------------

     FICC segregates on its books and records the margin 
provided by a registered fund (or series thereof, as applicable), and 
identifies a value of margin in its books and records as being 
attributable to the registered fund;
     The entity that FICC uses to custody such margin is an 
eligible fund custodian under the 1940 Act and the applicable rules 
thereunder; \141\
---------------------------------------------------------------------------

    \141\ See Section 17(f) of the 1940 Act and the rules 
thereunder.
---------------------------------------------------------------------------

     The margin provided by a registered fund is not subject to 
loss mutualization \142\ or allocation; \143\
---------------------------------------------------------------------------

    \142\ See FICC 2003 Letter at n. 18.
    \143\ See e.g., FICC Rule 4, supra note 19.
---------------------------------------------------------------------------

     The margin provided by a registered fund is not used by 
FICC for any purpose other than in connection with that registered 
fund's default as a sponsored member; \144\
---------------------------------------------------------------------------

    \144\ For purposes of this Commission position, FICC is not 
permitted to use registered fund margin for default liquidity 
purposes.
---------------------------------------------------------------------------

     Registered funds receive quarterly statements of accounts 
concerning the margin provided in connection with eligible secondary 
market transactions showing, at a minimum, the name of the account, 
asset movements during the quarter, and quarter-end positions; and
     The account into which a registered fund's margin is 
deposited is governed by a contract by and among the registered fund, 
its sponsoring member, and FICC providing for an arrangement consistent 
with this Commission position, (together, the ``FICC registered fund 
margin framework'').\145\
---------------------------------------------------------------------------

    \145\ The Commission notes that this position only applies with 
respect to the custody of registered fund margin, and does not apply 
to cash or collateral received under a sponsored repo or reverse 
repo trade. Further, this position does not impact any other 
obligation that a registered fund has in connection with its 
participation in the Sponsored Program or under the 1940 Act and 
rules thereunder.
---------------------------------------------------------------------------

    In general, Section 17(f) of the 1940 Act and the rules thereunder 
govern the safekeeping of investment company assets.\146\ The FICC 
registered fund margin framework is designed to protect fund investor 
assets, consistent with the principles of the 1940 Act.\147\ The 
framework would seek to adequately protect registered fund assets by 
isolating them from FICC's proprietary assets and segregating them on 
FICC's books and records from the sponsoring member's other customers, 
preventing registered fund assets from being used to cover any 
obligation other than an obligation of that registered fund, limiting 
FICC's ability to use registered fund margin for any purpose other than 
an obligation of the registered fund as a sponsored member, and 
prohibiting registered fund assets from being subject to loss 
mutualization or allocation.\148\ Five years is intended to provide 
sufficient time for FICC to develop and file any proposed rule changes 
under Section 19(b) of the Exchange Act that may be relevant to 
facilitate a registered fund's ability to have its margin posted at 
FICC consistent with the FICC registered fund margin framework. The 
Commission will consider any proposed rule changes consistent with its 
obligations under Section 19(b) of the Exchange Act in the event that 
FICC submits any proposal to facilitate a registered fund's ability to 
have its margin posted at FICC consistent with the FICC registered fund 
margin framework in the future, and providing this position for five 
years will also provide sufficient time for the Commission to determine 
if extending or revising this position is appropriate. Five years is 
intended to provide sufficient time for market participants to consider 
other potential frameworks for the posting of registered fund margin to 
satisfy FICC's margin deposit requirements and to gain insight into the 
merits of such frameworks.\149\
---------------------------------------------------------------------------

    \146\ The legislative history of section 17(f) indicates that 
Congress intended the assets of investment companies to be kept by a 
financially secure entity that has sufficient safeguards against 
misappropriation. See Investment Trusts and Investment Companies: 
Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking 
and Currency, 76th Cong., 3d Sess. 264 (1940).
    \147\ See e.g., ICI Letter, supra note 85, at 14.
    \148\ Cf. infra part II.C.2.
    \149\ We note that a U.S. Treasury securities CCA could develop 
a different mechanism for a registered fund to post margin. For 
example, the Options Clearing Corporation has a ``deposits in lieu 
of margin'' framework whereby a customer of a clearing member makes 
a deposit in lieu of margin through OCC's escrow deposit program, 
and the relevant positions are excluded from the clearing member's 
margin requirement to OCC. See OCC Rules 610, 610A, 610B, and 610C; 
see also Self-Regulatory Organization: The Options Clearing 
Corporation: Notice of Filing of Advance Notice Concerning the 
Options Clearing Corporation's Escrow Deposit Program, Securities 
Exchange Act Rel. No. 34-78334 (Sept. 14, 2016), 81 FR 64537-38 
(Sept. 20, 2016). Although there are fundamental differences in the 
purpose and use of margin in the OCC's deposit in lieu of margin 
framework, a U.S. Treasury securities CCA could use the principles 
underlying the OCC's program by analogy in developing its own margin 
posting framework.

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

[[Page 2729]]

    A registered fund may wish to use a member of a national securities 
exchange as a sponsoring member. Such a sponsoring member that receives 
and posts margin to a U.S. Treasury securities CCA on behalf of 
registered funds may be deemed to have custody of fund assets and 
implicate Rule 17f-1 under the 1940 Act. Therefore, the Commission 
takes the position, for a period of five years from the effective date 
of this adopting release, that if a registered fund's cash and/or 
securities are placed and maintained with a sponsoring member that is a 
member of a national securities exchange, solely in connection with 
facilitating the posting of margin to FICC on behalf of a registered 
fund in connection with the registered fund's participation in the 
Sponsored Program, it would not provide the basis for an enforcement 
action against a registered fund under Section 17(f) of the 1940 Act so 
long as: (i) the fund complies with Rule 17f-1(a), (b)(5), and (d), and 
(ii) the contract between the registered fund and the member of the 
national securities exchange provides for the following:
     The margin provided by a registered fund is not commingled 
with, and is kept separate from, the sponsoring member's assets; \150\
---------------------------------------------------------------------------

    \150\ See note 140 supra.
---------------------------------------------------------------------------

     The sponsoring member segregates on its books and records 
the margin provided by a registered fund (or series thereof, as 
applicable), and identifies a value of margin in its books and records 
as being attributable to the registered fund;
     The registered fund's provision of margin is consistent 
with the FICC registered fund margin framework; and
     The sponsoring member does not hold registered fund assets 
that exceed the amount that is required to be deposited as margin to 
FICC with respect to the registered fund's outstanding eligible 
secondary market transactions.\151\
---------------------------------------------------------------------------

    \151\ This Commission position would not apply to the extent 
that the sponsoring member holds an amount of registered fund assets 
that exceeds the registered fund's margin obligations. If a 
sponsoring member were to hold registered fund assets in an amount 
that exceeds the registered fund's margin obligations, then the 
sponsoring member would need to return such excess to the registered 
fund as promptly as possible or promptly comply with all 
requirements of Rule 17f-1 under the 1940 Act.
---------------------------------------------------------------------------

    As above, such an approach is intended to accomplish a similar 
purpose as the FICC registered fund margin framework and additionally 
limit the amount of assets held in custody at a sponsoring member that 
is a member of a national securities exchange to an amount of margin 
that is required by FICC.
    More generally, the Commission understands that the commenter which 
raised issues regarding the ability of registered funds to post margin 
to the CCA is referring to clearing models whereby an indirect 
participant in a U.S. Treasury securities CCA executes a transaction 
with a counterparty and then ``gives up'' the transaction to another 
party to submit for clearance and settlement. The Commission agrees 
with the commenter that the use of a ``give up'' model could be helpful 
in further facilitating the increased demand for central clearing under 
a potential clearing requirement. The Commission understands that FICC 
currently has certain models that facilitate ``give up'' style 
clearing, and, consistent with the requirement discussed in part II.B.2 
infra, encourages U.S. Treasury securities CCAs to consider how best to 
facilitate ``give up'' clearing.
    The Commission's ability to ``encourage'' FICC, a covered clearing 
agency, must be considered in context of the relevant regulatory 
framework. Covered clearing agencies are SROs for purposes of the 
Exchange Act,\152\ meaning that, as an SRO, a covered clearing agency 
is required to file with the Commission any proposed rule or proposed 
change in its rules, including additions or deletions from its 
rules.\153\ The Commission publishes all proposed rule changes for 
comment.\154\ When considering whether to approve or disapprove a 
proposed rule change, the Commission shall approve the proposed rule 
change 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 the particular type of SRO.\155\
---------------------------------------------------------------------------

    \152\ 17 CFR 240.17ad-22(a)(5) (defining a covered clearing 
agency); 15 U.S.C. 78c(a)(26) (defining an SRO to include a 
registered clearing agency).
    \153\ An SRO must submit proposed rule changes to the Commission 
for review and approval pursuant to Rule 19b-4 under the Exchange 
Act. A stated policy, practice, or interpretation of an SRO, such as 
its written policies and procedures, would generally be deemed to be 
a proposed rule change. See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4. 
See 15 U.S.C. 78s(b)(3)(A) (setting forth the types of proposed rule 
changes that take effect upon filing with the Commission). The 
Commission may temporarily suspend those rule changes within 60 days 
of filing and institute proceedings to determine whether to approve 
or disapprove the rule changes. 15 U.S.C. 78s(b)(3)(C).
    \154\ See 15 U.S.C. 78s(b)(1). Proposed rule changes are 
generally required to be approved by the Commission prior to going 
into effect; however, certain types of proposed rule changes take 
effect upon filing with the Commission.
    \155\ 15 U.S.C. 78s(b)(1)(C)(i). On the other hand, the 
Commission shall disapprove a proposed rule change if it cannot make 
such a finding. 15 U.S.C. 78s(b)(1)(C)(ii).
---------------------------------------------------------------------------

    In addition, clearing agencies registered with the Commission are 
financial market utilities, as defined in section 803(6) of the Dodd-
Frank Act.\156\ A clearing agency that has been designated by the 
Financial Stability Oversight Council as systemically important or 
likely to become systemically important, and for which the Commission 
is the Supervisory Authority (``designated clearing agency''), is 
required to file 60-days advance notice with the Commission of changes 
to rules, procedures, and operations that could materially affect the 
nature or level of risk presented by the designated clearing agency 
(``advance notice'').\157\ Such an advance notice also requires 
consultation with the Board of Governors.\158\ The Clearing Supervision 
Act authorizes the Commission to object to changes proposed in such an 
advance notice, which would prevent the clearing agency from 
implementing its proposed change(s).\159\
---------------------------------------------------------------------------

    \156\ See 12 U.S.C. 5462(6).
    \157\ The Dodd-Frank Act defines a ``designated clearing 
entity'' as a designated financial market utility that is either a 
derivatives clearing organization registered under section 5b of the 
Commodity Exchange Act (7 U.S.C. 7a-1) or a clearing agency 
registered with the Securities and Exchange Commission under section 
17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1). See 12 
U.S.C. 5462(3). The Commission is the Supervisory Agency, as defined 
in 12 U.S.C. 5462(8), for four designated clearing agencies (the 
Depository Trust Company, the National Securities Clearing 
Corporation, the Fixed Income Clearing Corporation, and the Options 
Clearing Corporation). See 12 U.S.C. 5465(e)(1)(A). The Commission 
published a final rule concerning the filing of advance notices for 
designated clearing agencies in 2012. See 17 CFR 240.19b-4(n); 
Exchange Act Release No. 34-67286 (June 28, 2012), 77 FR 41602 (July 
13, 2012).
    \158\ See 12 U.S.C. 5465(e)(1)(B).
    \159\ See 12 U.S.C. 5465(e)(1)(E) and (F).
---------------------------------------------------------------------------

    These statutory requirements applicable to covered clearing 
agencies mean that the Commission must consider proposed rule changes 
as they are filed. The Commission does not dictate particular proposed 
rule changes that a CCA should adopt, although a CCA may determine that 
it should propose certain rule changes in response to a new or amended 
Commission rule. In response to this

[[Page 2730]]

commenter, and as discussed in part II.B.2 infra, the Commission will 
consider any proposed rule changes filed by FICC, or any other U.S. 
Treasury securities CCA, in due course, consistent with its obligations 
under Section 19(b) of the Exchange Act. The Commission does not have 
the ability to revise particular aspects of the rules of an SRO that is 
a registered clearing agency, like a CCA.\160\
---------------------------------------------------------------------------

    \160\ 15 U.S.C. 78s(c) (establishing the Commission's authority 
to, by rule, abrogate, add to, and delete from the rules of an SRO 
other than a registered clearing agency).
---------------------------------------------------------------------------

    Second, the commenter discussed potential custody issues for 
registered funds under Section 17(f) of the 1940 Act and Rule 17f-4 
thereunder. Section 17(f) requires that a registered fund maintain its 
securities and similar investments in a bank, a company which is a 
member of a national securities exchange, or its own custody.\161\ The 
commenter stated that substantially all funds use a bank custodian, and 
that a bank custodian is particularly beneficial to funds in the 
context of repo and reverse repo transactions with respect to 
custodying both securities and cash.\162\
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 80a-17(f)(1).
    \162\ ICI Letter, supra note 85, at 15.
---------------------------------------------------------------------------

    The Commission has adopted rules that specify required 
qualifications for entities other than those named in Section 17(f) to 
act as custodians of fund assets, including Rule 17f-4 which permits a 
registered fund to deposit the securities it owns in a securities 
depository, under certain conditions.\163\ A ``securities depository'' 
is defined to include a clearing corporation that is registered with 
the Commission under Section 17A of the Exchange Act.\164\ The 
commenter observed that FICC is registered as a clearing agency, but 
that FICC has stated that it is not a securities depository and does 
not provide securities depository services.\165\ The commenter asserted 
that, because FICC is not deemed to be a securities depository eligible 
to custody fund assets, expanding the Sponsored Service for funds would 
require addressing Section 17(f) ``if the offering would require margin 
posting by funds,'' and stated that one way to do this would be for 
FICC to obtain Commission relief to hold fund margin as an eligible 
securities depository within the meaning of Rule 17f-4.\166\
---------------------------------------------------------------------------

    \163\ 17 CFR 270.17f-4.
    \164\ 17 CFR 270.17f-4.
    \165\ ICI Letter, supra note 85, at 15.
    \166\ ICI Letter, supra note 85, at 15-16.
---------------------------------------------------------------------------

    The Commission is not opining on whether FICC's Government 
Securities Division could currently be considered a ``securities 
depository'' for purposes of Rule 17f-4.\167\ However, the amendments 
to Rule 17ad-22(e) do not require that registered funds post margin 
directly to a U.S. Treasury securities CCA, meaning that this issue is 
not implicated at this time. Therefore, the Commission does not believe 
that such concerns are ripe for consideration, as no U.S. Treasury 
securities CCA has proposed particular rules that would require the 
posting of registered funds' securities at the CCA and such an 
arrangement is not specifically required by the requirement to clear 
eligible secondary market transactions. Moreover, as discussed in this 
part above, the Commission has taken the position regarding the FICC 
registered fund margin framework in light of the commenter's concern.
---------------------------------------------------------------------------

    \167\ The commenter's assertion that FICC has stated that it is 
not a securities depository and does not provide securities 
depository services comes from a statement in FICC's Disclosure 
Framework concerning a different regulatory regime. Specifically, 
the statement concerns whether FICC is a ``central securities 
depository'' or provides ``central securities depository'' services, 
for purposes of discussing FICC's obligation to comply with Rule 
17ad-22(e)(10), which applies to CCAs that provide central 
securities depository services. ``Central securities depository'' is 
a defined term in the Covered Clearing Agency Standards, meaning a 
clearing agency that is a securities depository as described in 
Section 3(a)(23)(A) of the Act (15 U.S.C. 78c(a)(23)(A). Section 
3(a)(23)(A) defines a securities depository, in turn, as who (i) 
acts as a custodian of securities in connection with a system for 
the central handling of securities whereby all securities of a 
particular class or series of any issuer deposited within the system 
are treated as fungible and may be transferred, loaned, or pledged 
by bookkeeping entry without physical delivery of securities 
certificates, or (ii) otherwise permits or facilitates the 
settlement of securities transactions or the hypothecation or 
lending of securities without physical delivery of securities 
certificates.
---------------------------------------------------------------------------

    The Commission's definition of an eligible secondary market 
transaction and the requirement to clear such transactions does not, on 
its own, mandate particular changes to FICC's membership models, 
including the Sponsored Service. FICC has not proposed any rule changes 
with respect to the Sponsored Service in this regard at this time. The 
Commission will consider any proposed rule changes consistent with its 
obligations under Section 19(b) of the Exchange Act in the event that 
FICC submits any such proposal in the future.
    Third, the commenter stated that FICC's rules addressing margin 
posting will need to be amended to provide for enhanced recordkeeping, 
internal controls, and transparency around the positions and related 
margin, to address fund concerns regarding the security of fund assets 
under a requirement to clear certain transactions. The commenter stated 
that enhanced recordkeeping and related controls are critical to 
appropriately identifying ownership of assets during a repo transaction 
particularly since, unlike a typical derivatives or cash transaction, 
ownership of the U.S. Treasury securities underlying a repo transaction 
changes during the transaction. The commenter asserted that FICC 
currently relies on its broker-dealer members and, in certain cases, 
designated agency banks to maintain records regarding margin positions, 
and that FICC has indicated that it is not able to identify positions 
or possess the assets of its members' customers. The commenter states 
that notwithstanding FICC's current lack of infrastructure, ``the 
Proposal relies heavily on FICC to intermediate transactions under a 
clearing mandate and contemplates that this approach will provide a 
higher level of safety to the market than the current bilateral market, 
which relies on a well-diversified group of credit-worthy banks to hold 
collateral, including through robust tri-party arrangements, and 
utilizes an industry standard agreement that is well understood by 
market participants.'' \168\
---------------------------------------------------------------------------

    \168\ ICI Letter, supra note 85, at 16-17.
---------------------------------------------------------------------------

    However, no U.S. Treasury securities CCA has proposed particular 
rules that would require the posting of registered funds' securities at 
the CCA. The Commission's definition of an eligible secondary market 
transaction and the requirement to clear such transactions does not, on 
its own, mandate particular changes to FICC's membership models, 
including the Sponsored Service. The Commission will consider any 
proposed rule changes consistent with its obligations under Section 
19(b) of the Exchange Act in the event that FICC submits any such 
proposal in the future.
    The Commission disagrees with the commenter's assertion that FICC 
has indicated that it is not able to identify positions or possess the 
assets of its members' customers. FICC currently is able to maintain 
position data for customer positions in all its indirect access 
models.\169\ In addition, under the amendments being adopted in this 
release, FICC will, as discussed in section II.B.1 infra, be required 
to separately calculate and hold customer margin (which it currently 
does for the Sponsored Service), which addresses

[[Page 2731]]

the commenter's concern that FICC calculate and hold customer margin 
separately.
---------------------------------------------------------------------------

    \169\ FICC Buyside FAQ at 4, available at https://www.dtcc.com/ustclearing/-/media/Files/Downloads/Microsites/Treasury-Clearing/FICC-GSD-FAQ.pdf (``FICC records positions of Sponsored Members and 
positions of Executing Firms of a Prime Broker as long as the Prime 
Broker submits the trades to FICC using a unique client identifier 
called the ``Executing Firm symbol.'') (``FICC Buyside FAQ'').
---------------------------------------------------------------------------

    Fourth, the commenter highlighted its support for strong 
protections for fund assets, including ``legally segregated, 
operationally commingled'' (``LSOC'') protections. In addition, another 
commenter asserted that, without an exclusion from the definition of an 
eligible secondary market transaction for repos with registered funds, 
such funds could be subject to greater counterparty credit risk because 
the existing Sponsored Member clearing model at FICC has no requirement 
to segregate customer assets, while at present most registered funds 
use third-party custodians to hold securities and cash.\170\ The 
Commission addresses these comments in more detail in part II.B.1 
below.
---------------------------------------------------------------------------

    \170\ SIFMA AMG Letter, supra note 35, at 5.
---------------------------------------------------------------------------

    Fifth, the commenter stated that the Commission and FICC must 
address the bankruptcy treatment of certain fund assets. Specifically, 
the commenter stated that FICC's rules should confirm that agreements 
entered into by repo counterparties will be enforceable against both 
parties, notwithstanding that the transactions are cleared, and provide 
a clear process for closeout of transactions by FICC, including both 
the start and end legs of the transaction. The commenter also stated 
that FICC's rules need to address what happens upon the insolvency of a 
sponsoring member in a variety of factual circumstances, including 
providing for prompt replacement of the sponsoring member by its 
sponsored members and handling of other functions typically performed 
by the sponsoring member to ensure that transactions by the sponsored 
member are maintained and allowing the sponsored member the authority 
to receive certain reports directly and to post to the clearing fund to 
preserve pending trades. The commenter also stated that FICC's rules 
should provide clarity regarding how non-defaulting parties, such as 
funds, can exercise closeout rights, including those available under 
Sections 555, 559, 561, and similar sections of the U.S. Bankruptcy 
Code. The commenter stated that if, in the future, FICC decides to 
expand the Sponsored Service to permit (but not require) sponsored 
members to post margin, then the Commission and FICC should clarify 
that the margin posted by a sponsored member with its sponsoring member 
for on-posting with FICC would be eligible for customer treatment under 
the Securities Investor Protection Act (``SIPA''). The commenter also 
argues that clarification of FICC's rules regarding closeout rights--
particularly in respect to ``done away'' trades--is important to 
clarify a repo counterparty's rights under different insolvency regimes 
applicable to cleared transactions.\171\
---------------------------------------------------------------------------

    \171\ ICI Letter, supra note 85, at 20-21.
---------------------------------------------------------------------------

    Regarding these bankruptcy-related comments, FICC's rules already 
address the issues raised by the commenter. For example, with respect 
to the enforceability of the agreements entered into by repo 
counterparties, FICC requires applicants for membership to execute a 
Membership Agreement, in which the applicant agrees to be bound by 
FICC's Rules, and FICC further requires applicants for membership to 
provide a legal opinion regarding the membership agreement, which 
incorporates FICC's Rules.\172\ Novation consists of the termination of 
the deliver, receive, and related payment obligations between the 
parties to a trade, and their replacement with identical obligations to 
and from FICC in accordance with the Rules. Once it novates a 
transaction, FICC contractually replaces the original counterparties' 
obligations to each other with two sets of obligations, both of which 
include FICC and one of the original counterparties.\173\ FICC is not a 
party to the pre-novation bilateral agreements between a Sponsoring 
Member and its Sponsored Members, and therefore, it cannot guarantee 
performance of those contracts.
---------------------------------------------------------------------------

    \172\ FICC Rule 2A, Section 7, supra note 19; FICC Disclosure 
Framework, Principle 1, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf.
    \173\ FICC Rule 5, section 8 (regarding novation generally) and 
Rule 3A, section 7(a) (regarding novation in the Sponsored Service), 
supra note 19.
---------------------------------------------------------------------------

    In addition, with respect to FICC's need to establish a process for 
closeout, FICC's Rules contain these processes. Upon ceasing to act for 
an insolvent member, FICC may promptly close out and manage the 
member's positions, including with respect to the member's pending 
transactions with non-defaulting members.\174\ Specifically, FICC would 
terminate and net all of the insolvent member's positions, after which 
FICC would liquidate the net positions through market action and 
determine a single net amount owed to or from the insolvent member from 
or to FICC.\175\ After closing out the insolvent member's final net 
positions, FICC's Rules provide for the timely settlement of all 
deliver, receive, and related payment obligations that would have 
arisen had FICC not ceased to act for the insolvent member (i.e., FICC 
would seek to fulfill its settlement obligations with respect to the 
insolvent member's pending transactions with non-defaulting members.) 
\176\ Similarly, in the event that FICC determines to treat a 
Sponsoring Member as insolvent, FICC would cease to act for the 
Sponsoring Member.\177\ FICC would determine whether to close-out the 
affected Sponsored Member Trades and/or permit the Sponsored Members to 
complete their settlement.\178\ In the event that it closes out the 
Sponsored Member's transactions, it would follow the same closeout 
process.\179\
---------------------------------------------------------------------------

    \174\ FICC Rule 22A, Section 2, supra note 19.
    \175\ See id.
    \176\ See id.
    \177\ FICC Rule 3A, Section 16(b), supra note 19.
    \178\ Id.
    \179\ Id.
---------------------------------------------------------------------------

    Moreover, these comments generally relate to particular features of 
FICC's Sponsored Service, including how the sponsored member is able to 
interact with FICC, FICC's ability to settle the transactions in the 
event of a Sponsoring Member default, and the operation of certain 
bankruptcy provisions. For the reasons discussed in more detail in part 
II.B.2 infra, the Commission cannot change the rules governing the 
Sponsored Service.
    Sixth, the commenter identified issues for registered funds that 
would arise if additional clearing were to require funds to contribute 
to FICC's CCLF. The commenter explained that contribution by a 
registered fund to the CCLF could result in a prohibited joint 
transaction in violation of: Section 17(d) of the 1940 Act if 
affiliates of the fund (e.g., other funds managed by the same 
investment adviser) also contribute to the fund; Section 18 of the 1940 
Act, which prohibits a registered fund from issuing ``senior 
securities;'' Section 17(f) of the 1940 Act; the fund's investment 
purpose, policies, and organization documents; or the fiduciary duties 
of the fund's board and its investment adviser. The commenter asserts 
that the Commission would need to carefully evaluate the ability of a 
registered fund to become a FICC netting member and contribute to the 
CCLF, as well as amending its rules to confirm that view, or that, in 
the alternative, FICC could create a special category of netting member 
that would not require a fund to contribute to the CCLF.\180\
---------------------------------------------------------------------------

    \180\ ICI Letter, supra note 85, at 22.
---------------------------------------------------------------------------

    In response to this commenter, any requirement for a U.S. Treasury 
securities CCA to have policies and procedures requiring its direct 
participants to clear eligible secondary market transactions does not, 
on its

[[Page 2732]]

own, require any particular market participant to become a direct 
participant of a U.S. Treasury securities CCA, thereby taking on the 
membership obligations of such participation, including contribution to 
the CCLF. The Commission acknowledges the commenter's view that certain 
regulatory provisions applicable to registered funds could effect a 
registered fund's ability to join a U.S. Treasury securities CCA 
directly, but the Commission does not believe that these concerns 
should impact its consideration of the proposal as the proposal would 
not impose such requirements. Consistent with its obligations under 
Section 19 of the Exchange Act, in its review of any rule filings, the 
Commission would consider issues related to the ability of market 
participants, including registered funds, to participate in FICC.
    Seventh, the commenter stated that bilateral tri-party repo should 
be exempted from the definition of an eligible secondary market 
transaction. The Commission has considered this comment in part 
II.A.2.a.i supra.
    In addition, certain commenters also provided specific arguments 
regarding money market funds subject to Rule 2a-7 under the 1940 
Act.\181\ One commenter stated that the Commission should not include 
repos with money market funds subject to Rule 2a-7 within the 
definition of an eligible secondary market transaction, noting that the 
current ability to transact in Treasury repurchase agreements across a 
variety of clearance and settlement platforms allows these funds to be 
invested in a manner that is in the best interest of their 
shareholders. The commenter also referred to the planning and tools 
that have been developed that seek to avoid a disorderly default in 
repurchase agreement markets. The commenter also stated that the likely 
insolvency regimes for the major repurchase agreement participants that 
would be facilitated by a receiver (either the Federal Deposit 
Insurance Corporation or the Securities Investor Protection 
Corporation) allow the receiver to transfer or wind down repurchase 
agreements in an orderly manner.\182\
---------------------------------------------------------------------------

    \181\ Federated Letter, supra note 85, at 3; ICI Letter, supra 
note 85, at 5-8.
    \182\ Federated Letter, supra note 85, at 3 (citing SEC. & EXCH. 
COMM'N, DIV. OF INV. MGMT GUIDANCE UPDATE: COUNTERPARTY RISK 
MANAGEMENT PRACTICES WITH RESPECT TO TRI-PARTY REPURCHASE AGREEMENTS 
(July 2013), available at https://www.sec.gov/divisions/investment/guidance/im-guidance-2013-03.pdf).
---------------------------------------------------------------------------

    Two commenters raised questions with respect to regulatory 
diversification requirements, that is, whether registered funds, 
including money market funds, will continue to meet the definition of a 
``collateralized fully'' repurchase agreement under Rule 5b-3 under the 
Investment Company Act of 1940 if Treasury repo investments through the 
Sponsored Service grow significantly.\183\ Commenters explained that 
meeting the definition of a ``collateralized fully'' repurchase 
agreement under Rule 5b-3 is necessary for Treasury repurchase 
agreements to remain permissible investments for a government money 
market fund and for achieving ``look through'' treatment for certain 
diversification requirements imposed under the 1940 Act and Internal 
Revenue Code.\184\ One commenter asked that the Commission confirm 
through rulemaking or guidance that repo clearing offerings made 
available by FICC to registered funds ``would continue to satisfy'' the 
``collateralized fully'' standard set forth in Rules 5b-3 and 2a-7 
under the 1940 Act and would allow funds to achieve ``look through 
treatment'' for diversification purposes.\185\
---------------------------------------------------------------------------

    \183\ 17 CFR 270.5b-3(c)(1). Federated Letter, supra note 85, at 
6; ICI Letter, supra note 85, at 23-24.
    \184\ Federated Letter, supra note 85, at 6; ICI Letter, supra 
note 85, at 23-24.
    \185\ ICI Letter, supra note 85, at 23-24.
---------------------------------------------------------------------------

    One commenter also referenced the need for relief for reverse repo 
transactions. The commenter stated that, unlike Treasury repo 
agreements that are ``collateralized fully,'' Treasury reverse repo 
transactions entered into by funds (i.e., where a fund is the seller) 
currently are not eligible for look-through treatment. The commenter 
concludes that this means that, under the proposal, absent additional 
rulemaking or relief, most money market funds would be limited to 
investing no more than 5% of their total assets in reverse repo 
agreements because funds would face FICC as the counterparty, and that 
diversified non-money market funds would be limited to investing either 
no more than 25% of their total assets in reverse repo agreements or no 
more than 5%, with respect to 75% of their total assets, in reverse 
repo agreements. The commenter stated that registered funds may use 
Treasury reverse repo agreements as a form of short-term financing to 
facilitate shareholder redemption requests.\186\
---------------------------------------------------------------------------

    \186\ ICI Letter, supra note 85, at 25.
---------------------------------------------------------------------------

    The Commission acknowledges that the final rule could limit the 
extent to which some registered funds enter into Treasury reverse repo 
agreements. However, the Commission believes that this effect will be 
limited because a relatively small number of funds report Treasury 
reverse repo agreements on Form N-PORT, and funds generally have other 
available means to generate cash to meet shareholder redemption 
requests, such as lines of credit, securities lending, interfund 
lending, or selling portfolio investments, as applicable. The combined 
effect of the final rule and the diversification requirements in 
section 5(b) of the 1940 Act could practically limit the amount some 
funds may invest in Treasury reverse repo.\187\
---------------------------------------------------------------------------

    \187\ Section 5(b) divides management investment companies into 
``diversified companies'' and ``non-diversified companies.'' Under 
this section, (i) a ``diversified company'' means a management 
company which meets the following requirements: At least 75 per 
centum of the value of its total assets is represented by cash and 
cash items (including receivables), Government securities, 
securities of other investment companies, and other securities for 
the purposes of this calculation limited in respect of any one 
issuer to an amount not greater in value than 5 per centum of the 
value of the total assets of such management company and to not more 
than 10 per centum of the outstanding voting securities of such 
issuer and (ii) a ``non-diversified company'' means any management 
company other than a diversified company. See section 5 of the 1940 
Act.
---------------------------------------------------------------------------

    The commenter separately suggested that the final rule would affect 
money market funds' use of Treasury reverse repo agreements, in light 
of additional diversification requirements for those funds. However, 
money market funds are not permitted to rely on rule 18f-4 under the 
1940 Act to enter into reverse repo transactions.\188\ Moreover, money 
market funds historically have not reported holdings of reverse repo 
agreements in their portfolio reports filed with the Commission.
---------------------------------------------------------------------------

    \188\ See Use of Derivatives by Registered Investment Companies 
and Business Development Companies, Investment Company Act Release 
No. 34084 (Nov. 2, 2020), 85 FR 83162 (Dec. 21, 2020); 17 CFR 
270.18f-4. Rule 18f-4 establishes a framework for funds' use of 
derivatives and certain other transactions, including reverse 
repurchase agreements. Money market funds are not permitted to rely 
on rule 18f-4 for these transactions.
---------------------------------------------------------------------------

    The Commission's definition of an eligible secondary market 
transaction and the requirement to clear such transactions does not 
mandate particular changes to FICC's membership models, including the 
Sponsored Service. FICC has not proposed any rule changes with respect 
to the Sponsored Service in this regard at this time. The Commission 
will consider any proposed rule changes consistent with its obligations 
under Section 19(b) of the Exchange Act in the event that FICC submits 
any such proposal in the future. In the event that any U.S. Treasury 
securities CCA proposes a clearing model in which

[[Page 2733]]

registered funds would be required to place and maintain assets to 
effect eligible secondary market transactions at the CCA, the 
Commission would consider the applicability of Section 17(f) of the 
1940 Act.
    One commenter explained that registered funds' access to the 
Treasury repo market could be restricted by the number or willingness 
of the FICC netting members to provide sponsoring services with 
attending negative effect on the market liquidity.\189\ Although 
increases in demand for the Sponsored Service may put pressure on 
existing sponsoring members and reduce their ability or willingness to 
onboard additional clients, this could also present an opportunity for 
dealers that currently do not offer the Sponsored Service to enter the 
market, resulting in more competition and a wider range of 
counterparties. This is supported by an observation of a growing number 
of dealers offering the Sponsored Service and the growing volume of 
sponsored repo indicating increased adoption of this service by a wider 
range of market participants.\190\
---------------------------------------------------------------------------

    \189\ ICI Letter, supra note 85, at 30-31.
    \190\ See Sponsored DVP and GC Repo Activity, available at 
https://www.dtcc.com/charts/membership.
---------------------------------------------------------------------------

    Several commenters raised concerns about the potential effect of 
the proposal and a potential resultant high level of exposure to the 
U.S. Treasury securities CCA on ratings assigned to certain money 
market funds by Nationally Recognized Statistical Rating Organizations 
(NRSROs).\191\ The commentators explained that NRSROs typically 
establish exposure limits that a rated money market fund may have to 
any particular CCA and, if these limits are breached, a fund may not be 
able to maintain the currently assigned rating.\192\ The Commission 
does not have the authority to adjust the NRSROs' rating criteria and 
methodologies, and it cannot anticipate how NRSROs may adjust their 
rating criteria and methodologies in response to the U.S. Treasury 
market infrastructure changes resulting from the adoption of the 
Membership Definition.
---------------------------------------------------------------------------

    \191\ Federated Letter, supra note 85, at 6-7; ICI Letter, supra 
note 85, at 25-26; SIFMA AMG Letter, supra note 35, at 14.
    \192\ Id.
---------------------------------------------------------------------------

iii. Repos by Other Clearing Organizations
    Several commenters supported a limited exclusion from the 
definition of an eligible secondary market transaction for U.S. 
securities transactions entered into by a derivatives clearing 
organization (``DCO''). A DCO is an entity that is regulated by the 
CFTC and is defined as a clearinghouse, clearing association, clearing 
corporation, or similar entity, facility, system, or organization that, 
with respect to an agreement, contract, or transaction (i) enables each 
party to the agreement, contract, or transaction to substitute, through 
novation or otherwise, the DCO's credit for the credit of the parties; 
(ii) arranges or provides, on a multilateral basis, for the settlement 
or netting of obligations resulting from such agreements, contracts, or 
transactions executed by the DCO's participants; or (iii) otherwise 
provides clearing services or arrangements that mutualize or transfer 
among the DCO's participants the credit risk arising from such 
agreements, contracts, or transactions executed by the 
participants.\193\ Generally, DCOs perform similar functions as CCAs, 
but for commodities as opposed to securities.
---------------------------------------------------------------------------

    \193\ 7 U.S.C. 1a(15) (defining DCO) and 7a-1(a) (establishing 
DCO registration requirement).
---------------------------------------------------------------------------

    One commenter recognized that DCOs are not specifically enumerated 
as an entity type subject to the expanded clearing requirement, but 
stated that, in practice, it would be impractical for DCOs to avoid 
entering into repos with direct participants of U.S. Treasury CCAs, 
which would therefore be included in the definition of an eligible 
secondary market transaction.\194\ First, the commenter stated that an 
exclusion for DCOs was necessary to allow DCOs to retain the 
flexibility necessary to effectively manage risk when managing the 
default of a participant of the DCO, with respect both to access to the 
appropriate counterparties and to pressing time considerations. The 
commenter stated that requiring the central clearing of repos entered 
into for default management by a DCO could undermine the effectiveness 
of the DCO's default management practices. Second, the commenter 
asserted that including transactions with a DCO within the definition 
of an eligible secondary market transaction would threaten DCOs' 
effective cash management. The commenter stated that DCOs regularly 
receive U.S. dollar cash as margin from their clearing members and then 
enter into reverse repos, as permitted under the applicable CFTC 
regulations. However, the commenter expressed concern that the 
permissible counterparties and counterparty concentration limits 
included in CFTC Rule 1.25 would appear to be in tension with the 
requirement to clear eligible secondary market transactions because a 
clearing agency, which would become the counterparty to any transaction 
that is centrally cleared, is not a permissible counterparty. Finally, 
the commenter stated that allowing transactions with DCOs to be scoped 
into the definition of an eligible secondary market transaction would 
be inconsistent with the spirit, and the letter, of Section 5b(f)(1) of 
the Commodity Exchange Act, which states that ``under no circumstances 
shall a [DCO] be compelled to accept the counterparty credit risk of 
another clearing organization.'' \195\
---------------------------------------------------------------------------

    \194\ CME Letter, supra note 81, at 6.
    \195\ CME Letter, supra note 81, at 6-7.
---------------------------------------------------------------------------

    An additional commenter made similar arguments. This commenter 
stated that the rule as proposed could create contagion risk by 
increasing linkages between CCPs, stating that this risk would 
crystallize if a CCP clearing its investment trades contributed to the 
mutualized financial resources of another CCP via its default fund or 
was otherwise exposed to loss in the event of a member default of the 
other CCP. The commenter further stated that existing regulations under 
both U.S. and European regulatory frameworks recognize the potential 
financial stability risks of inter-CCP linkages and prohibit them from 
accepting the counterparty credit risk of another CCP. According to the 
commenter, one such conflict arises under the Commodity Exchange Act 
where, to minimize systemic risk, there is a requirement that ``[. . .] 
under no circumstances shall a derivatives clearing organization be 
compelled to accept the counterparty credit risk of another clearing 
organization.'' Finally, the commenter states that a clearing model 
tailored to meet CCPs' bespoke collateral management requirements would 
need to be developed before they could operationally clear investment 
trades.\196\
---------------------------------------------------------------------------

    \196\ Letter from Rachel Goldberg, Head of Government Relations 
and Regulatory Strategy, Americas, London Stock Exchange Group, at 
2-3 (June 15, 2023).
---------------------------------------------------------------------------

    The Commission understands that reverse repos are used heavily by 
central counterparties as a means of investing their cash.\197\ The 
Commission also agrees that entities that provide central counterparty 
services, like DCOs and clearing agencies, must be able to effectively 
manage the default of a participant.\198\ In the event of a participant 
default, the need for such entities to be able to react within 
potentially compressed timeframes, including by engaging in repos of 
U.S.

[[Page 2734]]

Treasury securities held as margin to create liquidity, may be 
essential to their default management processes. The Commission agrees 
that including such transactions within the scope of an eligible 
secondary market transaction might have systemic risk implications and 
counteract the goals of effective and efficient default management by 
CCPs in such scenarios. Accordingly, it is appropriate to exclude repos 
entered into by an entity acting as a central counterparty from the 
definition of an eligible secondary market transaction.\199\
---------------------------------------------------------------------------

    \197\ See BIS, Committee on the Global Financial System, Repo 
Market Functioning, Apr. 2017.
    \198\ Proposing Release, supra note 14, 87 FR at 64627.
    \199\ The Commission is not opining on the proposal's 
consistency with the Commodity Exchange Act or other regulatory 
regimes, but the commenter's concern is moot in light of the 
modification to the definition of an eligible secondary market 
transaction that the Commission is adopting.
---------------------------------------------------------------------------

    To do so, the Commission is modifying the definition of an eligible 
secondary market transaction in Rule 17ad-22(a) to exclude any 
repurchase or reverse repurchase agreement collateralized by U.S. 
Treasury securities in which one counterparty is a covered clearing 
agency providing central counterparty services, a derivatives clearing 
organization (see 7 U.S.C. 7a-1 and 17 CFR 39.3), or is regulated as a 
central counterparty in its home jurisdiction. With respect to a 
counterparty that is regulated as a central counterparty in its home 
jurisdiction, this portion of the exclusion encompasses entities that 
may serve as central counterparties in their home jurisdiction and may 
transact in repos with direct participants of a U.S. Treasury 
securities CCA. Although commenters did not specifically suggest this 
exclusion for a counterparty that is regulated as a CCP in its home 
jurisdiction, this aspect of the exclusion is appropriate to ensure 
that entities serving as central counterparties in other jurisdictions 
are similarly excepted from the definition of an eligible secondary 
market transaction as repo counterparties.
iv. Repos by FCMs
    Two commenters asked the Commission to adopt an exemption that 
would allow Futures Commission Merchants (``FCMs'') to continue to 
engage in eligible secondary market transactions in U.S. Treasury 
securities outside of central clearing, and another commenter 
acknowledged the potential interaction between the proposal and the 
regulatory framework governing FCMs.\200\ An FCM is an entity engaged 
in soliciting or accepting orders for the purchase or sale of 
commodities, futures, swaps, or other instruments regulated by the 
CFTC.\201\ FCMs can also be registered with the Commission as broker-
dealers.\202\ In their role as market intermediaries, FCMs hold 
customer funds and securities. The commenter explained that as of 
October 31, 2022, FCMs held an aggregate amount of more than $500 
billion in segregated customer accounts, a substantial percentage of 
which is held in the form of U.S. Treasury securities.\203\
---------------------------------------------------------------------------

    \200\ See comments from Walt L. Lukken, President and Chief 
Executive Officer, Futures Industry Association, at 2-7 (Dec. 23, 
2022) (``FIA Letter''). See also SIFMA/IIB Letter, supra note 37, at 
30-31 (recognizing that the absent an exemption for FCMs from the 
central clearing requirement, FCMs engaging in repo transactions 
would be placed in the untenable position of violating either the 
SEC's proposal or existing CFTC regulations). See also DTCC/FICC 
Letter, supra note 33, at 25 (recognizing that CFTC regulations 
currently limit FCM access to central clearing by preventing FCMs 
from entering into FICC-cleared repo transactions using customer 
property).
    \201\ See 7 U.S.C. 1a(28)(A).
    \202\ One commenter states that the majority of FCMs are dually 
registered as FCMs and broker-dealers. See FIA Letter, supra note 
200, at 2.
    \203\ See FIA Letter, supra note 200, at 4.
---------------------------------------------------------------------------

    As the commenter noted, FCMs are required under the Commodity 
Exchange Act \204\ and the regulations promulgated thereunder \205\ to 
assure the protection of customer funds. Specifically, as the commenter 
explained, FCMs are required to hold customer funds and securities in 
segregated accounts with a bank or other permitted depository that 
acknowledges such customer assets ``will be separately accounted for 
and segregated'' from the FCM's own funds and ``must otherwise be 
treated in accordance with the provisions of the [CEA]'' and CFTC 
rules.\206\ The commenter highlighted that neither the bank/depository 
nor the FCM may use the FCM's customer funds to ``secure or guarantee 
any obligations'' that the FCM might owe to the bank/depository or make 
the funds ``subject to any right of offset or lien for or on account of 
any indebtedness, obligations, or liabilities'' the FCM may owe the 
bank/depository.\207\ The commenter expressed concern as to whether the 
account structure provided by FICC would be consistent with these 
rules.
---------------------------------------------------------------------------

    \204\ 7 U.S.C. 1-26.
    \205\ 17 CFR 1.1-190.19.
    \206\ See FIA Letter, supra note 200, at 3 (discussing 17 CFR 
1.20 (regarding futures traded on U.S. futures exchanges) and 17 CFR 
22.4 (regarding cleared swaps)).
    \207\ FIA Letter, supra note 200, at 3-4 (discussing 17 CFR 
1.20, 22.2, and 30.7).
---------------------------------------------------------------------------

    As an initial matter, the requirement for direct participants of a 
U.S. Treasury securities CCA to clear eligible secondary market 
transactions does not require that an FCM post customer assets directly 
to the U.S. Treasury securities CCA. An FCM could access central 
clearing through a customer model, such as the Sponsored Service or the 
Prime Broker/Correspondent clearing models, that allows the customer/
FCM to hold customer assets elsewhere (such as at the Sponsoring 
Member) and does not require that the FCM post customer assets to the 
U.S. Treasury securities CCA. Therefore, the ability of the CCA to 
provide an account structure consistent with the CFTC Rules should not 
prevent an FCM's transactions from being submitted to central clearing.
    Moreover, in light of the requirements regarding the segregation of 
house and customer margin, as discussed in part II.B.1 infra, and the 
amendments to Rule 15c3-3, as discussed in part II.C infra, U.S. 
Treasury securities CCAs will have to ensure that they have adopted 
policies and procedures to separate house and customer margin and to 
establish certain types of segregated accounts. The Commission 
encourages FCMs seeking the ability to post customer funds directly to 
the CCP to engage with the CCAs to consider whether such new account 
structures may be sufficient to comply with the provisions of the CFTC 
regulations that the commenter has identified or whether such 
structures could be leveraged to meet the commenter's needs. For 
example, the Commission understands that the existing U.S. Treasury 
securities CCA recently has indicated that it would develop customer 
clearing account structures in which each customer's margin would be 
calculated on a gross basis and held physically segregated from all 
other FICC margin and would also be legally segregated from FICC member 
as well as fellow customer exposures.\208\
---------------------------------------------------------------------------

    \208\ DTCC 2023 White Paper, supra note 107, at 22-23.
---------------------------------------------------------------------------

    One of the commenters also explained that FCMs are permitted to 
invest customer funds in certain securities determined by the CFTC to 
be ``consistent with the objectives of preserving capital and 
maintaining liquidity.'' \209\ The commenter stated that permitted 
investments include, among other things, U.S. Treasury securities, and 
investments with U.S. Treasury securities may be made by either direct 
purchase or sale or by entering into repo transactions.\210\ The 
commenter further explained that, for repo transactions, an FCM's 
``permitted

[[Page 2735]]

counterparties are limited to a bank . . . , securities broker-dealer, 
or government securities dealer registered with the [Commission],'' and 
a clearing agency is not a permitted counterparty.\211\
---------------------------------------------------------------------------

    \209\ FIA Letter, supra note 200, at 4-5 (discussing 17 CFR 
1.25(b)).
    \210\ FIA Letter, supra note 200, at 4-5 (discussing 17 CFR 
1.25(a)).
    \211\ FIA Letter, supra note 200, at 5 (discussing 17 CFR 
1.25(d)(2)).
---------------------------------------------------------------------------

    The commenter stated that, absent relief, conflict between the CFTC 
rules and the proposal would effectively prohibit FCMs from entering 
into U.S. Treasury security transactions pursuant to CFTC Rule 
1.25.\212\ The commenter explained that a U.S. Treasury securities CCA 
interposes itself between the counterparties to a securities 
transaction through novation, acting functionally as the buyer to every 
seller and seller to every buyer.\213\ Therefore, according to the 
commenter, if an FCM were to conduct a cleared transaction, the CCA 
would become the FCM's counterparty. Since a CCA is not a permitted FCM 
counterparty under the CFTC rules, the commenter states that FCMs are 
prohibited from conducting such cleared transactions.\214\ The 
commenter contended that if the Commission adopts the requirement to 
clear eligible secondary transactions as proposed, an FCM would lose 
its current ability to conduct transactions in U.S. Treasury securities 
with a direct participant of a U.S. Treasury securities CCA in 
compliance with CFTC rules.\215\
---------------------------------------------------------------------------

    \212\ FIA Letter, supra note 200, at 6.
    \213\ FIA Letter, supra note 200, at 6; see also Proposing 
Release, supra note 14, 87 FR at 64612.
    \214\ FIA Letter, supra note 200, at 6 (citing 17 CFR 
1.25(d)(2)).
    \215\ See FIA Letter, supra note 200, at 6.
---------------------------------------------------------------------------

    The Commission recognizes that if the FCM were to access a U.S. 
Treasury securities CCA through a model like FICC's Sponsored Service, 
the CCA would novate the transaction and become the counterparty to the 
FCM, which, as the commenter has described it, would not be consistent 
with Rule 1.25(d)(2) with respect to permitted counterparties. However, 
the requirement to clear eligible secondary market transactions does 
not require that the FCM use a particular type of model that would make 
the FCM a counterparty to a CCA. The FCM could access central clearing 
through an agent clearing model like FICC's Prime Broker or 
Correspondent Clearing models, in which it would essentially ``give 
up'' its transaction to a direct participant for submission without 
becoming a counterparty to the CCA, which should be consistent with the 
FCM's obligations under Rule 1.25(d)(2). Therefore, this requirement to 
clear eligible secondary market transactions does not obligate the FCM 
to use a model that would necessarily result in a transaction with a 
clearing agency as the counterparty to the FCM.
    The Commission recognizes this apparent tension between the 
application of Rule 1.25(d)(2), as described by the commenter, and the 
requirement to clear repos as part of the definition of eligible 
secondary market transactions.\216\ However, as discussed in the 
Proposing Release, when Congress added section 17A to the Exchange Act 
as part of the Securities Acts Amendments of 1975, it directed the 
Commission to facilitate the establishment of (i) a national system for 
the prompt and accurate clearance and settlement of securities 
transactions (other than exempt securities) and (ii) linked or 
coordinated facilities for clearance and settlement of securities 
transactions, and the Government Securities Act of 1986 specifically 
included government securities within the scope of section 17A.\217\ 
The Commission therefore has the ability to make rules governing 
central clearing in the U.S. Treasury market, which may affect a 
diverse group of market participants, including FCMs. The Commission 
encourages interested parties to work with the CCA to identify any 
modifications to its client clearing models to better allow FCMs to 
access central clearing in the U.S. Treasury market. In addition, FCMs 
could enter into repos with market participants that are not direct 
participants of a U.S. Treasury securities CCA.\218\
---------------------------------------------------------------------------

    \216\ See CFTC Global Market Advisory Committee (``GMAC''), 
Global Market Structure Subcommittee, CFTC Rule1.25(d)(2) 
Recommendation (discussing the impact of Rule 1.25(d)(2) on FCMs' 
ability to participate in cleared repo), available at https://www.cftc.gov/PressRoom/Events/opaeventgmac110623. The CFTC's GMAC 
voted in favor of this recommendation to amend Rule 1.25(d)(2) to 
include CCAs as permitted counterparties.
    \217\ Proposing Release, supra note 14, 88 FR at 64617.
    \218\ CFTC Rule 1.25(a)(1) also identifies additional types of 
permitted investments available to an FCM for its customer funds, 
including municipal bonds, corporate bonds, and interests in money 
market mutual funds.
---------------------------------------------------------------------------

    The commenter also notes that CFTC rules require that securities 
transferred to an FCM's customer segregated custodial account must be 
``made on a delivery versus payment [(DVP)] basis in immediately 
available funds.'' \219\ Even if a U.S. Treasury securities CCA would 
be a permitted FCM counterparty under the CFTC rules, the commenter 
expressed concern that upon the sale or resale of securities in a repo 
transaction, the FCM's customer segregated cash account may not receive 
same-day funds credited simultaneously with the delivery or transfer of 
securities.\220\ The Commission does not believe that such concerns are 
warranted. FICC clears all transactions DVP meaning that payment of 
cash is made at the same time as delivery of securities.
---------------------------------------------------------------------------

    \219\ FIA Letter, supra note 200, at 5 (discussing 17 CFR 
1.25(d)(9)).
    \220\ See id.
---------------------------------------------------------------------------

    Finally, the commenter also explained that CFTC rules require that 
the agreement between an FCM and a repo counterparty must ``make[ ] 
clear that, in the event of the [FCM's] . . . bankruptcy, any 
securities purchased with customer funds that are subject to an 
agreement may be immediately transferred. The agreement [must] also 
make[ ] clear that, in the event of an [FCM's] . . . bankruptcy, the 
counterparty has no right to compel liquidation of securities subject 
to an agreement or to make a priority claim for the difference between 
current market value of the securities and the price agreed upon for 
resale of the securities to the counterparty, if the former exceeds the 
latter.'' \221\ The commenter also expressed concern that there is no 
assurance that a U.S. Treasury securities CCA would agree to the 
bankruptcy provisions in the CFTC rules applicable to FCMs described 
above.\222\ However, as stated in the discussion above, the requirement 
to clear eligible secondary market transactions does not require that 
the FCM enter into a repo agreement with the CCA.
---------------------------------------------------------------------------

    \221\ FIA Letter, supra note 200, at 5 (discussing 17 CFR 
1.25(d)(13)).
    \222\ See id. The commenter also noted that the CFTC has advised 
that ``in-house transactions'' in which an FCM receiving customer 
collateral that is not acceptable at a Derivatives Clearing 
Organization (``DCO'') or foreign board of trade may, independent of 
CFTC Rule 1.25 requirements, exchange that collateral for acceptable 
collateral to the extent necessary to meet margin requirements. The 
commenter requested confirmation from the Commission that such ``in-
house transactions'' would similarly not be subject to the proposed 
clearing requirement were an FCM to conduct transactions with a 
participant of a U.S. Treasury securities CCA. If such transactions 
are with a participant of a U.S. Treasury securities CCA and 
otherwise meet the definition of an eligible secondary market 
transaction, then they would be subject to the requirement.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission does not believe 
that an exclusion for FCMs is necessary to accommodate the relevant 
provisions of the CFTC Rules. Moreover, an exclusion for FCMs would be 
inconsistent with the purpose of the rule which is to help reduce 
contagion risk to the CCA and bring the benefits of central clearing to 
more transactions involving U.S. Treasury securities, particularly in 
light of their significance to the Treasury market.

[[Page 2736]]

v. Repos Involving ``End Users''
    One commenter argued that transactions by commercial entities 
participating in the Treasury repo market solely for investing their 
extra cash balances should be excluded from the definition of an 
eligible secondary market transaction. The commenter stated that 
corporations are often required under their credit agreements to invest 
cash in specified cash equivalents, which typically include Treasury 
repos, and that these transactions are likely to be quite limited in 
size.\223\ The commenter suggested that the Commission could leverage 
the definition of commercial end user in the uncleared security-based 
swap margin rules or non-financial end user in the uncleared swap 
margin rules (which both similarly contain exemptions for such 
entities).\224\
---------------------------------------------------------------------------

    \223\ SIFMA/IIB Letter, supra note 37, at 22.
    \224\ Id. (citing 17 CFR 240.18a-3(b)(2), and 23.151; 12 CFR 
45.2).
---------------------------------------------------------------------------

    Another commenter requested a similar exclusion, stating that 
commercial entities that enter into cash or repo transactions do so for 
various, legitimate purposes, but that these entities' trading is 
rarely large in size and the costs of these transactions being cleared 
would ultimately outweigh the benefits. The commenter also stated that 
such an exclusion would be consistent with the exemption in the 
Commission's uncleared swap margin rules.\225\ An additional commenter 
requested the same exclusion for non-financial commercial end users, 
such as corporations and municipalities. The commenter stated that 
these types of entities typically transact in U.S. Treasury repos for 
funding and liquidity management purposes, and that the increased costs 
of centrally clearing such transactions may outweigh the willingness of 
these types of entities to continue to use U.S. Treasury securities for 
funding and liquidity management purposes, thus eliminating an 
effective corporate management tool without advancing the Commission's 
stated policy objectives.\226\
---------------------------------------------------------------------------

    \225\ AIMA Letter II, supra note 115, at 3.
    \226\ See Morgan Stanley Letter, supra note 85, at 2.
---------------------------------------------------------------------------

    The Commission understands that in addition to cash assets obtained 
through credit agreements, other sources of corporate cash exist that 
do not typically have accompanying investment limitations, such as 
equity capital, retained earnings, sales of assets, and legal 
settlements, among others. Investments of the combined surplus cash by 
corporate treasurers are typically aligned with the firm's projected 
cash needs and may include a range of investment options in addition to 
Treasury repos.\227\ As of June 30, 2023, balances of liquid assets 
held by nonfinancial corporations are estimated at approximately $6.9 
trillion.\228\ While the commenter stated that such an exclusion may be 
warranted because the Treasury repo investments are likely to be 
limited in size, commercial end-users could change the size of their 
Treasury repo investments, including by entering into large Treasury 
repo investments, or by using alternative options for the short-term 
investment of cash that share a similar risk profile, such as a money 
market fund, depending on many firm-specific and market factors. For 
example, commercial end-users may increase allocations to U.S. Treasury 
repos for credit diversification, particularly at times of market 
stress. U.S. Treasury repos may offer higher yields, particularly at 
times when issuance of Treasury securities increases and dealers seek 
financing to complete settlement by borrowing more cash in the repo 
market. The high liquidity of Treasury repos could also be attractive 
to commercial end-users, especially if a significant amount of 
liquidity needs to be accumulated to complete a corporate transaction 
such as a merger or an acquisition.
---------------------------------------------------------------------------

    \227\ Association of Finance Professionals, 2023 AFP Liquidity 
Survey, available at https://www.afponline.org/publications-data-tools/reports/survey-research-economic-data/Details/liquidity-survey.
    \228\ Federal Reserve, Financial Accounts of the United States, 
L.103 Nonfinancial Corporate Business (the broad measure of liquid 
assets includes cash held in banks' accounts and deposits, and cash 
invested in various liquid financial assets), available at https://www.federalreserve.gov/releases/z1/20230908/html/l103.htm.
---------------------------------------------------------------------------

    An exemption for end users could permit commercial entities to 
enter into Treasury repo investments without the risk-reducing benefits 
of central clearing. In addition, due to the variety of sources of cash 
available to commercial entities besides those obtained through credit 
agreements and the size of corporate liquid assets held by commercial 
entities, excluding commercial entities from the scope of the 
definition of an eligible secondary market transaction would not be 
consistent with the intent to reduce risk and enhance efficiency of the 
U.S. Treasury market.\229\ The Commission also disagrees with the 
contention that the increased costs arising from the clearing mandate 
would impede the willingness of commercial entities to continue to use 
the Treasury repo market for funding and liquidity management purposes. 
As discussed in part I supra, central clearing allows market 
participants to reduce costs and increase operational efficiency, among 
other benefits, which would, in turn, lead to lower funding costs in 
the repo market and greater availability of liquidity for all market 
participants, including commercial end-users.
---------------------------------------------------------------------------

    \229\ Association of Finance Professionals, 2023 AFP Liquidity 
Survey, available at https://www.afponline.org/publications-data-tools/reports/survey-research-economic-data/Details/liquidity-survey.
---------------------------------------------------------------------------

    Moreover, the Commission disagrees with the commenter's suggestion 
that it could leverage the definitions used in exempting certain end 
users from swap clearing requirements. The commercial end user in the 
uncleared security-based swap margin rules is defined as a counterparty 
to the swap that is (i) is not a financial entity; (ii) is using swaps 
to hedge or mitigate commercial risk; and (iii) meets certain reporting 
obligations associated with entering into non-cleared swaps.\230\ The 
exemption is intended to ensure that certain types of commercial 
entities are able to continue to use swaps to manage their specific 
commercial risks and are not unduly burdened by the need to post 
margin. The end-user exemption from clearing for swaps may not be 
available to all commercial entities entering swaps. When implementing 
the exemption, the CFTC specifically required, among other things, that 
the end user must be using the swap to hedge or mitigate commercial 
risk, and that the swap that is hedging or mitigating commercial risk 
cannot be used for a purpose that is in the nature of speculation, 
investing, or trading.\231\ In addition, the counterparty that elected 
the end-user exception must provide reports relating to its ability to 
meet financial obligations associated with entering into non-cleared 
swaps.\232\
---------------------------------------------------------------------------

    \230\ Commodity Exchange Act section 2(h)(7); Exchange Act 
section 3C(g).
    \231\ 17 CFR 50.50(a)(1)(ii) and (c)(2)(i).
    \232\ 17 CFR 50.50(b).
---------------------------------------------------------------------------

    In contrast, the commercial end user activity in the U.S. Treasury 
repo market is unrelated to the commercial activity of these users. 
Investment of surplus cash is an activity similar to that of 
institutional asset managers such as registered funds or other managed 
investments. As discussed above, investing is a type of activity that 
would not qualify the end-user exemption in the swap market. For the 
reasons here and above, the Commission does not believe that an 
exception for commercial end users is appropriate in the Treasury repo 
market.
vi. Interaffiliate Repos
    One commenter recommended that the Commission exempt transactions 
in

[[Page 2737]]

U.S. Treasury securities between affiliates from any central clearing 
requirement. The commenter stated that inter-affiliate transactions are 
important to corporate groups, which may use them to achieve efficient 
risk and capital allocation and obtain flexibility for addressing 
customer demands.\233\
---------------------------------------------------------------------------

    \233\ SIFMA/IIB Letter, supra note 37, at 21-22.
---------------------------------------------------------------------------

    The commenter further stated that requiring inter-affiliate 
transactions to be centrally cleared would impose additional costs with 
limited benefits, for two reasons. First, if an inter-affiliate 
transaction is part of a ``back-to-back arrangement,'' meaning that the 
related external transaction between the affiliated counterparty and a 
non-affiliated counterparty is not centrally cleared, then subjecting 
the inter-affiliate transaction to a central clearing requirement does 
nothing to reduce the contagion risk presented by the non-affiliated 
counterparty. The commenter further asserted that if that external 
transaction is already centrally cleared, the contagion risk would 
already be addressed and requiring the inter-affiliate transaction to 
be cleared would not create additional benefits. Second, a direct 
participant's affiliate's credit risk is already part of the group-wide 
financial risks to which the Treasury CCP is exposed, and central 
clearing of inter-affiliate transactions is unlikely to meaningfully 
impact the risk profile.\234\ The commenter stated that, for similar 
reasons, the CFTC has exempted inter-affiliate swaps from the swap 
mandatory clearing rules.\235\
---------------------------------------------------------------------------

    \234\ SIFMA/IIB Letter, supra note 37, at 21-22.
    \235\ See id. at 22 n. 66 (citing generally 17 CFR 50.52).
---------------------------------------------------------------------------

    Additional commenters made similar arguments. For example, one 
commenter stated that the definition of an eligible secondary market 
transaction should not apply to transactions between a direct 
participant of a U.S. Treasury securities CCA and its affiliates. The 
commenter explained that a CCA's direct participants provide a range of 
risk management, collateral management, asset-liability management, and 
funding and liquidity services to their affiliates, including 
affiliated U.S. broker-dealers, and that imposing the definition of 
those direct participants' transactions with affiliates would be 
potentially disruptive and unnecessary to advance the Commission's 
stated policy objectives.\236\ Another commenter stated that a 
requirement to clear transactions between affiliates would create new, 
unnecessary costs without any benefits.\237\
---------------------------------------------------------------------------

    \236\ See Morgan Stanley Letter, supra note 85, at 1-2.
    \237\ AIMA Letter II, supra note 115, at 3.
---------------------------------------------------------------------------

    As discussed in more detail in part IV.B, the Commission 
understands that inter-affiliate transactions represent an important 
tool to transfer liquidity and risk within an affiliated group. These 
transactions may serve different purposes, including, but not limited 
to, providing U.S. Treasury securities for delivery when an affiliate 
has taken a long or short position in U.S. Treasury securities as a 
hedge against other exposures, allowing the movement of U.S. Treasury 
securities to allow them to be posted as margin on an affiliate's 
transaction, ensuring that U.S. Treasury securities can serve as a 
liquidity buffer for an affiliated bank,\238\ or to meet liquidity 
composition targets. To get the U.S. Treasury securities to the 
appropriate entity within an affiliated group, the affiliate often 
enters into repos or reverse repos with a direct participant of a U.S. 
Treasury securities CCA.
---------------------------------------------------------------------------

    \238\ A liquidity buffer generally refers to liquid assets that 
a banking organization manages to enable it to meet expected and 
unexpected cash flows and collateral needs without adversely 
affecting the banking organization's daily operations. See generally 
FRB, FDIC, & OCC, Q&As on Statement Regarding the Use of Capital and 
Liquidity Buffers (Mar. 17, 2020), available at https://www.fdic.gov/news/financial-institution-letters/2020/fil20020a.pdf.
---------------------------------------------------------------------------

    In certain circumstances, the counterparty credit risk posed by 
inter-affiliate transactions may be less than other transactions.\239\ 
However, affiliated entities are separate legal entities and, 
generally, are not legally responsible for each other's contractual 
obligations. In the event that one or more affiliated entities becomes 
insolvent, the affiliates, as separate legal entities, would be managed 
as separate estates in a bankruptcy, with the trustee having a duty to 
the creditors of the affiliate, not the affiliated family. Thus, the 
Commission does not agree that a U.S. Treasury securities CCA is 
exposed to the group-wide financial risks of a direct participant's 
affiliated group.
---------------------------------------------------------------------------

    \239\ See, e.g., Clearing Exemption for Swaps Between Certain 
Affiliated Entities, 77 FR 50425, 50427 (Mar. 2012) (discussing the 
internalization of counterparty risk on inter-affiliate swap 
transactions as wholly owned members of the same corporate group, 
but also discussing that similar benefits may not accrue for other 
inter-affiliate swaps when the counterparties are not members of the 
same group).
---------------------------------------------------------------------------

    In response to the comments received, the Commission is modifying 
the definition of an eligible secondary market transaction in Rule 
17ad-22(a) to conditionally exclude inter-affiliate repurchase and 
reverse repurchase transactions. Specifically, the Commission is 
excluding from that definition any repurchase or reverse repurchase 
agreement collateralized by U.S. Treasury securities entered into 
between a direct participant and an affiliated counterparty, provided 
that the affiliated counterparty submits for clearance and settlement 
all other repurchase or reverse repurchase agreements collateralized by 
U.S. Treasury securities to which the affiliated counterparty is a 
party. By referring to all other repos or reverse repos, the exemption 
clarifies that the requirement does not encompass transactions between 
the direct participant and the affiliate, i.e., the transactions that 
are excluded, and also does not encompass the affiliate's transactions 
that would otherwise be excluded under sections (iii), (iv), or (v) of 
the definition of an eligible secondary market transaction. This 
exclusion is appropriate to ensure that affiliated groups can continue 
to use inter-affiliate repo transactions to transfer liquidity or risk, 
while also conditioning that ability on the affiliated counterparty's 
submission of its eligible secondary market repo transactions for 
clearance and settlement.\240\
---------------------------------------------------------------------------

    \240\ Although the commenter referred generally to inter-
affiliate transactions, without specifying cash versus repo, the 
Commission is limiting the exclusion to repo transactions only for 
two reasons. First, inter-affiliate cash transactions would only be 
included in the definition of an eligible secondary market 
transaction if they met the definition of such transaction, as 
discussed further in part II.A.2.b. Second, as discussed in this 
section and in part IV.B.3.b.v, the Commission understands that the 
inter-affiliate transactions referenced by the commenter typically 
take the form of repo or reverse repo transactions.
---------------------------------------------------------------------------

    Regarding the conditional nature of the exclusion, the Commission 
agreed with the commenter that if the external transaction of a ``back-
to-back'' arrangement in which the related external transaction between 
the affiliated counterparty and a non-affiliated counterparty is 
centrally cleared, the contagion risk would already be addressed and 
requiring the inter-affiliate transaction to be cleared would not 
create additional benefits. To ensure that this is the case, the 
Commission is conditioning the availability of the exclusion for inter-
affiliate transactions on an obligation for the affiliated counterparty 
to submit its repo transactions, other than those with its direct 
participant counterparty, for clearance and settlement. This condition 
should also help ensure that a direct participant cannot rely upon an 
inter-affiliate transaction to avoid the requirement to clear eligible 
secondary market transactions. If there were no such condition, a 
direct participant

[[Page 2738]]

could simply use inter-affiliate transactions to move securities and 
funds to affiliates, and the affiliated counterparty could then enter 
into external transactions with counterparties which, if entered into 
as a direct participant of a U.S. Treasury securities CCA, would be 
eligible secondary market transactions.\241\ The Commission did not 
limit this condition to only the ``back-to-back'' transactions because 
such transactions may not serve as the only potential means by which 
inter-affiliate transactions can be used to evade the requirement to 
clear eligible secondary market transactions, and for that matter, may 
not serve as the only potential means by which such transactions can 
transfer risk.\242\ This condition should lessen the potential for any 
impacts arising from the default of an inter-affiliate transaction to 
spread throughout an affiliated group because it would ensure that the 
external facing transactions of an affiliated counterparty would be 
centrally cleared, if the direct participant wanted to exclude its 
inter-affiliate transactions.\243\
---------------------------------------------------------------------------

    \241\ The Commission acknowledges that the affiliated 
counterparty's transactions may encompass transactions to which the 
requirement to clear eligible secondary market transactions already 
applies, either because the affiliated counterparty is transacting 
with another direct participant of a U.S. Treasury securities CCA or 
because the affiliated counterparty is itself a direct participant 
of a U.S. Treasury securities CCA. The condition for the affiliate 
to clear its repo or reverse repo transactions would also apply, 
however, even if the affiliate is not a direct participant of a U.S. 
Treasury securities CCA.
    \242\ See, e.g., Final Rule, Clearing Exemption for Swaps 
Between Certain Affiliated Entities, 78 FR 21750, 21761-62 (Apr. 11, 
2013).
    \243\ Moreover, the condition is consistent with the commenters' 
views noting that in the event that the external transaction is 
centrally cleared, the benefits of central clearing would be 
realized. See AIMA Letter II, supra note 115, at 3.
---------------------------------------------------------------------------

    This approach to an inter-affiliate exclusion for repos is 
consistent with the CFTC's treatment of this issue in the swaps market, 
as the commenter suggested. As part of its inter-affiliate swap 
exemption, the CFTC also included a requirement that that the swaps 
entered into by the affiliated counterparties with unaffiliated 
counterparties must be cleared.\244\ This approach to an inter-
affiliate exclusion for repos is also similar to the existing rules 
with respect to inter-affiliate transactions in place at FICC, as the 
only U.S. Treasury securities CCA. FICC's rules require that its direct 
participants submit the transactions of particular affiliated 
counterparties (referred to as a Covered Affiliate), i.e., those that 
are not also direct participants, that are not foreign entities, and 
that are either broker-dealers, banks, trust companies, and/or FCMs, if 
that transaction is with another direct participant or another direct 
participant's Covered Affiliate.
---------------------------------------------------------------------------

    \244\ See 17 CFR 50.52(a)(4)(i)(E).
---------------------------------------------------------------------------

    To accommodate this exclusion, the Commission is also adopting in 
Rule 17ad-22(a) a definition of an affiliated counterparty for purposes 
of the definition of an eligible secondary market transaction. 
Specifically, an affiliated counterparty would be defined as any 
counterparty which meets the following criteria: (i) the counterparty 
is either a bank (as defined in 15 U.S.C. 78c(6)), broker (as defined 
in 15 U.S.C. 78c(4)), dealer (as defined in 15 U.S.C. 78c(5)), or 
futures commission merchant (as defined in 7 U.S.C. 1a(28)), or any 
entity regulated as a bank, broker, dealer, or futures commission 
merchant in its home jurisdiction; (ii) the counterparty holds, 
directly or indirectly, a majority ownership interest in the direct 
participant, or the direct participant, directly or indirectly, holds a 
majority ownership interest in the counterparty, or a third party, 
directly or indirectly, holds a majority ownership interest in both the 
direct participant and the counterparty; and (iii) the counterparty, 
direct participant, or third party referenced in (ii) as holding the 
majority ownership interest would be required to report its financial 
statements on a consolidated basis under U.S. Generally Accepted 
Accounting Principles or International Financial Reporting Standards, 
and such consolidated financial statements include the financial 
results of the majority-owned party or of both majority-owned parties. 
With respect to the types of entities that can be considered an 
affiliated counterparty, this definition is consistent with how the 
current U.S. Treasury securities CCA defines the terms for purposes of 
its rule regarding its participants' obligation to clear transactions 
with certain affiliates, and this consistency should be helpful to 
direct participants when considering compliance with this conditional 
exemption. The reference to entities that are regulated as banks, 
brokers, dealers, or futures commission merchants in their home 
jurisdictions encompasses foreign affiliates of direct participants of 
a U.S. Treasury securities CCA. This aspect of the definition of an 
affiliated counterparty is meant to ensure that, to take advantage of 
the conditional inter-affiliate exemption, a direct participant of a 
U.S. Treasury securities CCA would have to ensure that the transactions 
of both domestic and foreign affiliates are submitted for clearing. 
Similarly, with respect to what constitutes affiliated, that is, the 
specific identification of ownership interest to describe the requisite 
custody or control to be considered affiliated, this definition is 
consistent with the definition used by the CFTC for purposes of the 
inter-affiliate swap exemption. This consistency, and additional 
specificity about the requisite custody or control, should be helpful 
to the direct participants of a U.S. Treasury securities CCA when 
determining compliance with this conditional exemption.\245\
---------------------------------------------------------------------------

    \245\ Rule 17ad-22(a) currently contains a definition of a 
``participant family'' for purposes of Rule 17ad-22(b)(3), (d)(14), 
(e)(4), and (e)(7). 17 CFR 240.17ad-22(a)(12). This term is defined 
to mean that if a participant directly, or indirectly through one or 
more intermediaries, controls, is controlled by, or is under common 
control with, another participant then the affiliated participants 
shall be collectively deemed to be a single participant family for 
purposes of the specified portions of Rule 17ad-22. The Commission 
believes that a more specific and granular definition of an 
affiliated counterparty would be helpful for the purposes of the 
inter-affiliate exclusion because it would address any potential 
uncertainty about whether an entity controls, is controlled by, or 
is under common control with, another entity.
---------------------------------------------------------------------------

    This exemption is conditional, and a direct participant of a U.S. 
Treasury securities CCA may choose not to use the exemption, meaning 
that its affiliated counterparty would not be required to submit its 
repo transactions, other than those with its direct participant 
counterparty, for clearance and settlement. If a direct participant 
chooses to use the exemption, its affiliated counterparty could submit 
its transactions in several ways, including through an indirect 
clearing model (e.g., at FICC, the affiliated counterparty could be a 
Sponsored Member or use the Prime Broker or Correspondent Clearing 
models to submit its transactions for clearance and settlement) or by 
becoming a direct participant of the CCA.\246\
---------------------------------------------------------------------------

    \246\ See notes 680 and 681 infra and accompanying text 
regarding these models.
---------------------------------------------------------------------------

vii. Repos by State and Local Governments
    Several commenters argued that regulatory and practical constraints 
on the state and local government level could limit their ability to 
centrally clear their Treasury repo and reverse repo transactions.\247\ 
The commenters stated that authorizing statutes and local ordinances in 
several states only permit repo transactions with a bank or a 
government securities dealer counterparty.\248\ As such, a centrally 
cleared repo, which is novated to a CCA may not comply with these 
statutes or ordinances, because the CCA would be

[[Page 2739]]

the counterparty. One commenter also highlighted specific 
collateralization requirements (e.g., 102%) by several states to their 
repo counterparties and raised concerns that varying levels of 
margining in central clearing of such trades could create a conflict 
with state laws.\249\ The commenters argued that amending state and 
local governments' authorizing statutes through the legislative actions 
of an applicable body would take a substantial amount of time and would 
disrupt investments of public funds in the Treasury repo market with a 
negative effect on market liquidity.\250\ Considering these challenges, 
the commentors suggested exempting state and local governments from the 
scope of the definition of an eligible secondary market transaction.
---------------------------------------------------------------------------

    \247\ SIFMA AMG Letter, supra note 35, at 14; Federated Letter, 
supra note 81, at 7; IDTA Letter, supra note 66, at 10.
    \248\ Id.
    \249\ IDTA Letter, supra note 66, at 10.
    \250\ SIFMA AMG Letter, supra note 35, at 14; Federated Letter, 
supra note 81, at 7; IDTA Letter, supra note 66, at 10; see also 
Letter from James Tabacchi, Chairman, Independent Dealer and Trader 
Association and attached whitepaper at 5 (Sept. 1, 2023) (discussing 
the fact that most states and municipalities use Master Repo 
Agreements based on local law and would by statute be unable to sign 
a New York law-based agreement to clear through a U.S. Treasury 
securities CCA).
---------------------------------------------------------------------------

    The Commission agrees with the commenters that it would be 
appropriate to adopt an exclusion for any repurchase or reverse 
repurchase transaction collateralized by U.S. Treasury securities 
between a direct participant and a state or local government, in light 
of both the potential conflicts with state and local government 
authorities related to their investments and because of the nature and 
size of U.S. Treasury market activity by such entities.
    According to the United States Census Bureau's 2017 Census of 
Governments data, there were over 90,000 local governments in the 
United States, including county, city, municipality, township, and 
special purpose governments as well as nearly 13,000 independent school 
district governments.\251\ Many of these local governments operate only 
small budgets and access the Treasury repo market infrequently and on a 
small scale for secured investment of their surplus cash balances. 
While comprehensive data about investment activity of state and local 
governments are lacking, the costs of building legal and operational 
infrastructure to access central clearing by most of these governments 
may prevent them from accessing the Treasury repo market.
---------------------------------------------------------------------------

    \251\ United States Census Bureau, ``2017 Census of 
Governments--Organization,'' Table 2: Local Governments by Type and 
States and Table 9: Public School System by Types of Organization 
and State, available at https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

    The Commission does not believe that such an exclusion should apply 
to any pension or retirement plan established or maintained by a state, 
any of its political subdivisions, or any agency or instrumentality of 
a state or any of its political subdivisions, for the benefit of its 
employees (or any beneficiaries of its employees). Such state pension 
and retirement plans generally do not face the same statutory 
restrictions as state and local governments regarding their 
investments,\252\ and indeed, several such plans are currently 
Sponsored Members of FICC.\253\
---------------------------------------------------------------------------

    \252\ See, e.g., California Government Code section 20190 
(providing that Board of Advisors of Public Employee Retirement 
System may, in its discretion, invest the assets of the fund through 
the purchase, holding, or sale thereof of any investment, financial 
instrument, or financial transaction when the investment, financial 
instrument, or financial transaction is prudent in the Board's 
informed opinion); N.Y. Retire. & Soc. Sec. Law 177 (identifying 
eligible investments of NY state public pension funds, without 
limiting the counterparties to a repo); Wis. Stat. 325.17 
(identifying eligible investments for Wisconsin state public pension 
funds to various instruments, without limiting the counterparties to 
a repo).
    \253\ DTCC, FICC-GSD Member Directories, Sponsored Member 
Listings, available at https://www.dtcc.com/client-center/ficc-gov-directories (showing five state and local pension plans as Sponsored 
Members).
---------------------------------------------------------------------------

    Moreover, state pension and retirement plans manage a substantial 
amount of assets and are important participants in the Treasury repo 
market. In contrast to surplus cash balances of state and local 
governments that are expected to be managed with the principal 
preservation objective, public pension and retirement plans typically 
have more sizable assets under management and pursue a long-term return 
objective employing a variety of return-enhancing strategies, including 
the use of leverage.\254\ As of March 31, 2023, total funded assets 
under management of these plans were approximately $5.3 trillion.\255\ 
A survey conducted by the National Association of State Retirement 
Administrators found that the average public pension fund allocates 
around 2.5% of its assets to cash investments, which would include 
investments in the Treasury repo market.\256\ Given the total asset 
size of the state pension and retirement plans and the variety of 
investment strategies that they can pursue as well as their ability to 
participate in central clearing under their governing statutes, 
excluding these plans from the scope of the definition of an eligible 
secondary market transaction would be inconsistent with the intent to 
reduce risk and enhance efficiency of the U.S. Treasury market.
---------------------------------------------------------------------------

    \254\ See, e.g., California Public Employees' Retirement System 
Total Fund Investment Policy, available at https://www.calpers.ca.gov/docs/total-fund-investment-policy.pdf; State of 
Wisconsin Investment Board, Investment Strategy, available at 
https://www.swib.state.wi.us/investmentstrategy; Teachers Retirement 
System of Texas, Investment Strategy, available at https://www.trs.texas.gov/Pages/investment_strategy.aspx.
    \255\ Federal Reserve, Financial Accounts of the United States, 
L.120 State and Local Government Employee Retirement Funds (total 
funded assets are considered), available at https://www.federalreserve.gov/releases/z1/20230608/html/l120.htm. This data 
set consists of retirement systems that are administered by a 
recognized unit of a state or local government as defined by the 
Bureau of the Census and whose members are public employees 
compensated with public funds. It includes the defined benefit (DB) 
and defined contribution (DC) retirement funds of both state 
governments and local government entities such as counties, 
municipalities, townships, school districts, and special districts.
    \256\ National Association of State Retirement Administrators, 
Investments, available at https://www.nasra.org/investment.
---------------------------------------------------------------------------

    The Commission is therefore excluding from the definition of an 
eligible secondary market transaction any repurchase or reverse 
repurchase agreement collateralized by U.S. Treasury securities in 
which one counterparty is a state or local government. In addition, the 
Commission would add a definition of state and local government to Rule 
17ad-22(a) to mean a state or any political subdivision thereof, or an 
agency or instrumentality of a State or any political subdivision 
thereof, but not to include any pension or retirement plan established 
or maintained by a state, any of its political subdivisions, or any 
agency or instrumentality of a state or any of its political 
subdivisions, for the benefit of its employees (or any beneficiaries of 
its employees).\257\
---------------------------------------------------------------------------

    \257\ ``State'' is defined in Exchange Act section 3(a)(16) as 
any State of the United States, the District of Columbia, Puerto 
Rico, the Virgin Islands, or any other possession of the United 
States.
---------------------------------------------------------------------------

viii. Other Repo Comments
    One commenter suggested that the Commission should provide further 
specificity around the definition of a repurchase or reverse repurchase 
agreement, suggesting that it may be advisable for the Commission to 
adopt the definition used by the current U.S. Treasury securities 
CCA.\258\ The

[[Page 2740]]

commenter suggested that this definition is indifferent to the method 
of documentation, making it clear that inclusion in the definition does 
not depend on the particular documentation the parties elect to use, 
such as a Master Securities Lending Agreement or Master Securities Loan 
Agreement.\259\ The Commission does not believe that further revision 
of the definition is necessary.
---------------------------------------------------------------------------

    \258\ DTCC/FICC Letter, supra note 33, at 11-12 (citing the FICC 
definition of a Repo Transaction, which covers ``(1) an agreement of 
a party to transfer Eligible Securities to another party in exchange 
for the receipt of cash, and the simultaneous agreement of the 
former party to later take back the same Eligible Securities (or any 
subsequently substituted Eligible Securities) from the latter party 
in exchange for the payment of cash, or (2) an agreement of a party 
to take in Eligible Securities from another party in exchange for 
the payment of cash, and the simultaneous agreement of the former 
party to later transfer back the same Eligible Securities (or any 
subsequently substituted Eligible Securities) to the latter party in 
exchange for the receipt of cash'').
    \259\ DTCC/FICC Letter, supra note 33, at 11-12.
---------------------------------------------------------------------------

    The definition of an eligible secondary market transaction, both as 
proposed and as adopted, applies to all types of transactions that are 
of a type currently accepted for clearing at a U.S. Treasury securities 
CCA. It does not impose a requirement on a U.S. Treasury securities CCA 
to offer additional products for clearing. One commenter specifically 
agreed that the proposal should apply to the types of transactions that 
are eligible for clearing at a U.S. Treasury securities CCA, as those 
eligibility criteria evolve over time. The commenter stated that such 
an approach would ensure that the requirement would not inadvertently 
give rise to risk or undue costs by forcing into central clearing 
transaction types that have not gone through a methodical risk analysis 
or for which the costs may outweigh the benefits, while at the same 
time, it would allow the requirement to evolve as U.S. Treasury 
securities CCAs, their direct participants, and regulators identify 
transaction types that would benefit from central clearing.\260\ The 
Commission agrees that the definition being adopted will allow for this 
type of approach to the clearing requirement.
---------------------------------------------------------------------------

    \260\ DTCC/FICC Letter, supra note 33, at 12-13.
---------------------------------------------------------------------------

    Several commenters discussed whether securities lending should be 
included within the scope of this definition.\261\ Securities lending 
transactions do not fall within the scope of the definition of an 
eligible secondary market transaction and are not currently available 
for central clearing.
---------------------------------------------------------------------------

    \261\ See BNY Mellon Letter, supra note 33, at 2 (suggesting 
additional analysis before requiring the central clearing of 
securities lending transactions, as well as consideration of a non-
cash model for central clearing such transactions); Federated Hermes 
Letter, supra note 85, at 7-8 (stating that securities lending 
transactions should not be included in a clearing mandate because 
they are subject to different market infrastructure than repurchase 
agreements, which has not been adapted to facilitate cleared 
securities lending transactions); Letter from Fran Garritt, 
Director, Securities Lending & Market Risk and Mark Whipple, 
Chairman, Committee on Securities Lending Risk Management 
Association (Dec. 23, 2022) (arguing generally that the scope of an 
eligible secondary market transaction not be expanded to include 
securities lending transactions because of the negative impact on 
beneficial owners, the increased costs, and lack of infrastructure); 
SIFMA/IIB Letter, supra note 37, at 22; ICI Letter, supra note 85, 
at 12 n.35.
---------------------------------------------------------------------------

    One commenter requested clarification that the definition of an 
eligible secondary market transaction does not apply to final 
settlement under physical-delivery futures contracts on U.S. Treasury 
bonds or notes (``Treasury futures''). The commenter noted that such 
Treasury futures are already subject to a central clearing requirement 
and described how the physical delivery process works, that is, if a 
Treasury future goes to delivery, then the commenter, which centrally 
clears Treasury futures, would inform long clearing members of the U.S. 
Treasury securities that will be delivered by the short position 
holders to whom they have been matched and the invoice amounts that the 
short clearing members must receive in payment.\262\ The Commission 
agrees with the commenter that the physical settlement of Treasury 
futures does not fall within the definition of an eligible secondary 
market transaction because it does not fit within the specific 
categories set forth in the rule. In addition, the Treasury futures are 
already subject to central clearing, thereby ensuring that the benefits 
of central clearing are already present in this aspect of the market.
---------------------------------------------------------------------------

    \262\ CME Letter, supra note 81, at 7-8.
---------------------------------------------------------------------------

    Another commenter did not support a requirement to clear repos, but 
stated that if such a requirement were adopted, it should be limited to 
repos by interdealer brokers (``IDBs'') and broker-dealers because (1) 
the counterparties to such transactions are the most active 
participants in the Treasury repo markets, thereby allowing the 
Commission to meaningfully increase central clearing without applying a 
more categorical requirement, and (2) such transactions are more 
interconnected with the rest of the market and have a higher 
possibility to transfer risk to outside parties (including potentially 
a U.S. Treasury securities CCA).\263\ The Commission disagrees that the 
definition of an eligible secondary market transaction should be 
limited in this manner. As discussed in part II.A.2.a supra, there are 
substantive benefits that will arise from the broad scope of the repo 
market, including with respect to balance sheet netting and greater 
capacity of dealers to intermediate repos. Further, the Commission 
disagrees that these transactions are ``more interconnected with the 
rest of the market,'' because it generally is not possible to quantify 
interconnectedness in this manner. Even if a repo is between a dealer 
and its customer neither of which is an IDB or a broker-dealer, the 
failure of that transaction could have an impact on its counterparties 
and transmit that risk to the broader market.
---------------------------------------------------------------------------

    \263\ SIFMA/IIB Letter, supra note 37, at 19-20.
---------------------------------------------------------------------------

    In addition, several commenters requested exemptions for 
transactions entered into outside of the operating hours of a U.S. 
Treasury securities CCA that would settle on or before the next day on 
which the CCA is open for business. For example, one commenter stated 
that firms routinely enter into U.S. Treasury securities transactions 
after the close of business at FICC, for legitimate business or 
operational reasons, including for treasury management purposes, and 
that firms will need the ability to enter into transactions at times 
that a CCA is not open to accept transactions for novation. The 
commenter compared the situation to the derivatives context in which a 
swap subject to mandatory clearing is executed after 4 p.m. or not on a 
business day, it must then be submitted by the next business day when a 
derivatives clearing organization is open.\264\ Another commenter 
stated that market participants may enter into a transaction after the 
close of a CCA's operating/business hours, making it unable to accept 
the transaction for clearing and novation. The commenter stated that 
the Commission should therefore exempt these transactions from a final 
rule, unless and until the existing U.S. Treasury securities CCA can 
change its operating hours to account for such transactions or another 
CCA becomes available with 24/7 clearing capabilities.\265\
---------------------------------------------------------------------------

    \264\ SIFMA/IIB Letter, supra note 37, at 21 (citing CFTC Rules 
50.1 and 50.2).
    \265\ AIMA Letter II, supra note 115, at 2-3.
---------------------------------------------------------------------------

    Such an exemption is not necessary. The existing U.S. Treasury 
securities CCA accepts all bilateral DVP trades for novation from 7 
a.m. until 8 p.m. eastern time.\266\ This window is available for 
submission and novation of bilateral repo transactions, which would be 
novated in real-time upon submission. The Commission understands that 
market participants may enter Treasury repo transactions outside the 
normal U.S. business hours when trades are accepted by U.S. Treasury 
CCA for novation. A review of repo trading data shows that the largest

[[Page 2741]]

share of repo trading activity is conducted during the first 1.5 hours 
of a trading day from 7 a.m. to 8:30 a.m. eastern time.\267\ This early 
morning activity may include repo trades that were arranged prior to 
the U.S. Treasury market opening at 7:00 a.m. The Commission does not 
anticipate the final rule affecting this established market practice. 
With respect to triparty repo, any U.S. Treasury securities CCA must 
interact with the timelines for triparty repo more generally, which 
rely upon the Fedwire Funds Service to transfer funds, and Fedwire has 
a deadline for initiating transfers for the benefit of a third party is 
6 p.m. eastern time.\268\ The existing U.S. Treasury securities CCA 
accepts triparty submissions from 7 a.m. until 5 p.m. and novates the 
activity upon settlement of the start leg of the triparty repos, 
provided that settlement occurs by 5:30 p.m.\269\ The existing timeline 
accommodates completion of the activity at the CCA before the Fedwire 
deadline.
---------------------------------------------------------------------------

    \266\ See FICC Rules, Schedule of Timeframes, supra note 19.
    \267\ Clark et al., Intraday Timing of General Collateral Repo 
Markets, Federal Reserve Bank of New York Liberty Street Economics 
(July 14, 2021), available at https://libertystreeteconomics.newyorkfed.org/2021/07/intraday-timing-of-general-collateral-repo-markets.
    \268\ See Fedwire Funds Services, available at https://
www.federalreserve.gov/paymentsystems/
fedfunds_about.htm#:~:text=The%20Fedwire%20Funds%20Service%20business
,p.m.%20on%20the%20preceding%20Sunday.
    \269\ See FICC Rules, Schedule of Sponsored GC Trade Timeframes, 
supra note 19.
---------------------------------------------------------------------------

    Finally, one commenter requested clarification that the definition 
of an eligible secondary market transactions would not include 
instances in which market participants post U.S. Treasury securities as 
collateral to secure transactions in a wide range of asset classes, 
including cleared and uncleared swaps and listed futures.\270\ This 
type of transaction does not meet the definition of a repurchase or 
reverse repurchase agreement adopted in Rule 17ad-22(a); therefore, it 
would not be within the scope of an eligible secondary market 
transaction.
---------------------------------------------------------------------------

    \270\ See Morgan Stanley Letter, supra note 85, at 2-3.
---------------------------------------------------------------------------

ix. Final Rule
    For the reasons set forth in part II.A.2.a, the Commission is 
adopting the definition of an eligible secondary market transaction in 
Rule 17ad-22(a), specifically as it relates to repurchase and reverse 
repurchase agreements, as proposed, except that it is adopting 
exclusions from the scope of that definition for repos by other 
clearing organizations, repos by state and local governments, and 
inter-affiliate repos.
b. Purchases and Sales of U.S. Treasury Securities
    With respect to cash transactions (i.e., purchases and sales of 
U.S. Treasury securities), the proposal defined an eligible secondary 
market transaction as including:
     Any purchases and sales entered into by a direct 
participant and any counterparty if the direct participant (A) brings 
together multiple buyers and sellers using a trading facility (such as 
a limit order book) and (B) is a counterparty to both the buyer and 
seller in two separate transactions (``IDB transactions''); and
     Any purchases and sales of U.S. Treasury securities 
between a direct participant and a counterparty that is either (i) a 
registered broker-dealer, government securities dealer, or government 
securities broker (``broker-dealer transactions''), (ii) a hedge fund, 
that is any private fund (other than a securitized asset fund): (a) 
with respect to which one or more investment advisers (or related 
persons of investment advisers) may be paid a performance fee or 
allocation calculated by taking into account unrealized gains (other 
than a fee or allocation the calculation of which may take into account 
unrealized gains solely for the purpose of reducing such fee or 
allocation to reflect net unrealized losses); (b) that may borrow an 
amount in excess of one-half of its net asset value (including any 
committed capital) or may have gross notional exposure in excess of 
twice its net asset value (including any committed capital); or (c) 
that may sell securities or other assets short or enter into similar 
transactions (other than for the purpose of hedging currency exposure 
or managing duration) (``hedge fund transactions''), or (iii) an 
account at a registered broker-dealer, government securities dealer, or 
government securities broker where such account may borrow an amount in 
excess of one-half of the value of the account or may have gross 
notional exposure of the transactions in the account that is more than 
twice the value of the account (``leveraged account transactions'').
    When describing the categories included within the definition, the 
Commission stated its belief that including this set of transactions in 
the eligible secondary market definition and therefore subjecting these 
transactions to the proposal represents an incremental first step to 
address potential risks arising to a U.S. Treasury securities CCA.\271\ 
The Commission referenced recent data indicating that an estimated 68 
percent of the overall dollar value of cash market transactions in U.S. 
Treasury securities are not centrally cleared, and an estimated 19 
percent of the overall dollar value of such transactions are subject to 
so-called hybrid clearing (as described above).\272\
---------------------------------------------------------------------------

    \271\ Proposing Release, supra note 14, 87 FR at 64622.
    \272\ Id. (citing 2021 IAWG Report, supra note 4, at 30; TMPG 
White Paper, supra note 13, at 12).
---------------------------------------------------------------------------

    Regarding IDB transactions, in the Proposing Release, the 
Commission stated its belief that including these transactions in the 
definition of an eligible secondary market transaction would 
specifically address the potential for contagion risk associated with 
hybrid clearing that a number of commentators have highlighted. Hybrid 
clearing refers to transactions that are executed on an IDB platform in 
which one counterparty is a member of a CCA and submits its transaction 
with the IDB for central clearing, while the other counterparty is not 
a member of a CCA and bilaterally clears its transaction with the 
IDB.\273\ As the Commission explained in the Proposing Release, the 
configuration of counterparty risk presented by hybrid clearing allows 
the U.S. Treasury securities CCA to manage the risks arising from the 
IDB-CCA direct participant transaction, but the U.S. Treasury 
securities CCA cannot manage the risks arising from the IDB's 
offsetting transaction with its non-member counterparty and the 
potential counterparty credit risk and settlement risk posed to the IDB 
from that trade.\274\ Thus, under the current hybrid clearing model, 
the U.S. Treasury securities CCA is indirectly exposed to the IDB's 
non-centrally cleared transaction, but it lacks the ability to risk 
manage its indirect exposure to this non-centrally cleared leg of the 
transaction. Specifically, it does not know who the ultimate 
counterparty of the transaction is and cannot collect margin on that 
transaction. This, in turn, results in margin collection at the CCP 
which is based upon only one transaction and

[[Page 2742]]

has been calculated to cover this seemingly directional position, as 
well as an inability to net these offsetting transactions and provide 
the benefits of central clearing. In particular, if the IDB's non-CCP 
member counterparty fails to settle a transaction that is subject to 
hybrid clearing, such IDB may not be able to settle the corresponding 
transaction that has been cleared with the U.S. Treasury securities CCA 
due to a lack of financial resources at the IDB, which could lead the 
IDB to default.\275\ As part of its existing default management 
procedures, the U.S. Treasury securities CCA could seek to mutualize 
its losses from the IDB's default, which could in turn transmit stress 
to the market as a whole.
---------------------------------------------------------------------------

    \273\ Proposing Release, supra note 14, 87 FR at 64622 (citing 
TMPG, supra note 13, at 12). These estimates use FR2004 data, which 
are reports provided to the Federal Reserve Bank of New York 
regarding primary dealer market activity in U.S. Government 
securities, covering the first half of 2017 and are based on various 
assumptions specified in the TMPG White Paper. See also FR2004, 
Government Securities Dealer Reports, available at https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZq2f74T6b1cw.
    \274\ See, e.g., Proposing Release, supra note 14, 87 FR at 
64622 (citing TMPG White Paper, supra note 13, at 22 (noting that in 
a hybrid clearing arrangement, an IDB's rights and obligations to 
the CCP are not offset and the IDB is not in a net zero settlement 
position with respect to the CCP at settlement date)).
    \275\ See 2021 IAWG Report, supra note 4, at 31; Depository 
Trust and Clearing Corporation, More Clearing, Less Risk: Increasing 
Centrally Cleared Activity in the U.S. Treasury Cash Market, at 5 
(May 2021), available at https://www.dtcc.com/-/media/Files/PDFs/DTCC-US-Treasury-Whitepaper.pdf (``DTCC May 2021 White Paper'').
---------------------------------------------------------------------------

    In the Proposing Release, the Commission reiterated its belief that 
membership requirements help to guard against defaults of any CCP 
member, as well as to protect the CCP and the financial system as a 
whole from the risk that one member's default could cause others to 
default, potentially including the CCP itself. Further, contagion 
stemming from a CCP member default could undermine confidence in the 
financial system as a whole, even if the health of the CCP is not 
implicated, causing others to back away from participating in the 
market. This risk of decreased participation could be particularly 
problematic if the defaulting participant was an IDB, whose withdrawal 
from the market could impact other market participants' ability to 
access the market for on-the-run U.S. Treasury securities, 
approximately 49.7% of which trade on IDBs.\276\ Including such 
transactions as eligible secondary market transactions would therefore 
help protect against this risk by requiring that a U.S. Treasury 
securities CCA ensure that direct participants who are IDBs centrally 
clear both sides of their transactions, thereby eliminating the various 
aspects of potential contagion risk posed by so-called hybrid clearing.
---------------------------------------------------------------------------

    \276\ TMPG White Paper, supra note 13, at 32; see part 
IV.B.3.a.i infra.
---------------------------------------------------------------------------

    Regarding broker-dealer transactions, in the Proposing Release, the 
Commission explained that the enumerated types of market participants 
(i.e., a registered broker-dealer, government securities broker, or 
government securities dealer) are market intermediaries that are 
engaged in the business of effecting transactions in securities for the 
account of others (in the case of brokers) or for their own accounts 
(in the case of dealers).\277\ The Commission relied upon data 
indicating that a majority of trades in the secondary cash Treasury 
market now clear bilaterally and estimated that the trading volume of 
non-FICC members exceeds that of FICC members.\278\ The Commission 
stated its belief that their collective trading activity likely is 
responsible for a not insignificant portion of the volume of 
transactions involving Treasury securities and could present contagion 
risk to a U.S. Treasury securities CCA.
---------------------------------------------------------------------------

    \277\ Proposing Release, supra note 14, 87 FR at 64623.
    \278\ Id. (citing TMPG White Paper, supra note 13, at 21; 2021 
IAWG Report, supra note 4, at 30).
---------------------------------------------------------------------------

    Regarding hedge fund transactions, the Commission in the Proposing 
Release described its intent in including transactions with hedge funds 
in the definition of an eligible market transaction as two-fold. First, 
hedge funds generally can engage in trading strategies that may pose 
heightened risks of potential financial distress to their 
counterparties, including those who are direct participants of a U.S. 
Treasury securities CCA. There are several characteristics of hedge 
fund strategies that could raise such issues, including using financial 
institutions that may have systemic importance to obtain leverage, 
employing investment strategies that may use leverage, derivatives, 
complex structured products, and short selling in an effort to generate 
returns, and relying upon strategies involving high volumes of trading 
and concentrated investments.\279\ The Commission stated its belief 
that significant hedge fund failures, resulting from their investment 
positions or use of leverage or both, could result in material losses 
at the financial institutions that lend to them if collateral securing 
this lending is inadequate, and that these losses could have systemic 
implications if they require these financial institutions to scale back 
their lending efforts or other financing activities generally. For 
these reasons, the Commission stated its belief that that if any of a 
hedge fund's activities, even those that are not related to the U.S. 
Treasury market, cause financial stress to a counterparty that is a 
direct participant of a U.S. Treasury securities CCA, the inclusion of 
a hedge fund's U.S. Treasury securities cash transactions with a direct 
participant in the definition of an eligible secondary market 
transaction should help ensure that such financial stress would not 
transmit to the U.S. Treasury securities CCA and through to the U.S. 
Treasury market.
---------------------------------------------------------------------------

    \279\ Proposing Release, Reporting by Investment Advisers to 
Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors on Form PF, Release No. IA-3145 (Jan. 26, 2011), 76 
FR 8068, 8073 (Feb. 12, 2011) (``Form PF Proposing Release''). The 
Commission adopted the hedge fund definition with some amendments 
thereafter. Final Rule, Reporting by Investment Advisers to Private 
Funds and Certain Commodity Pool Operators and Commodity Trading 
Advisors on Form PF, Release No. IA-3308 (Oct. 31, 2011), 76 FR 
71127 (Nov. 16, 2011).
---------------------------------------------------------------------------

    Second, the Commission relied upon the role of hedge funds in the 
overall U.S. Treasury market to support its proposal to include hedge 
fund transactions in the definition of an eligible secondary market 
transaction.\280\ The Commission stated its belief that hedge funds 
transacting in the U.S. Treasury market present a potential contagion 
risk to a U.S. Treasury securities CCA because, similar to the risks 
posed to a U.S. Treasury securities CCA by non-centrally cleared trades 
entered into by an IDB, non-centrally cleared transactions entered into 
between hedge funds and direct participants of the CCA could cause 
risks to the CCA in the event that the hedge fund is not able to meet 
its obligations to the direct participant, which could, in turn, create 
stress to the direct participant and through to the CCA. Therefore, the 
Commission stated that including the direct participant's purchase and 
sale transactions with hedge funds within the definition of an eligible 
secondary market transaction should reduce the potential for financial 
distress arising from the transactions that could affect the direct 
participant and the U.S. Treasury securities CCA.
---------------------------------------------------------------------------

    \280\ Proposing Release, supra note 14, 87 FR at 64624 (citing 
Private Funds Statistics for Q4 2021, Table 46 (July 22, 2022), 
available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q4.pdf; Ayelen Banegas, 
Sizing Hedge Funds' Treasury Market Activities and Holdings (Oct. 6, 
2021), available at https://www.federalreserve.gov/econres/notes/feds-notes/sizing-hedge-funds-treasury-market-activities-and-holdings-20211006.htm; see also Daniel Barth & R. Jay Kahn, Hedge 
Funds and the Treasury Cash-Futures Disconnect (Apr. 1, 2021), 
available at https://www.financialresearch.gov/working-papers/2021/04/01/hedge-funds-and-the-treasury-cash-futures-disconnect/; Hedge 
Fund Treasury Trading and Funding Fragility: Evidence from the 
COVID-19 Crisis, available at https://www.federalreserve.gov/econres/feds/files/2021038pap.pdf; 2021 IAWG Report, supra note 4, 
at 34; SEC Staff Report on U.S. Credit Markets Interconnectedness 
and the Effects of the COVID-19 Economic Shock (Oct. 2020), 
available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf).
---------------------------------------------------------------------------

    The proposed definition of a hedge fund was described as consistent 
with the Commission's definition of a hedge fund in Form PF.\281\ The 
Commission

[[Page 2743]]

stated its belief that defining a hedge fund in a manner consistent 
with Form PF is reasonable, because such definition should encompass 
those funds that use strategies that the Commission has determined 
merit additional reporting to allow a better picture of the potential 
systemic risks posed by such activities.\282\ Including transactions 
with such funds within the definition of an eligible secondary market 
transaction should help to limit the potential contagion risk that 
could arise from any financial distress experienced at such a fund that 
could, in turn, be transmitted to a direct participant of a U.S. 
Treasury securities CCA (and to the CCA) via any non-centrally cleared 
transactions. The Commission further states its belief that using a 
definition consistent with that of Form PF to identify transactions 
with a U.S. Treasury securities CCA's direct participant as part of the 
definition of an eligible secondary market transaction should capture 
transactions with entities whose default would be most likely to cause 
potential contagion risk to the Treasury securities CCA. For example, 
hedge funds' use of leverage can make them more vulnerable to liquidity 
shocks, which could, in turn, make them unable to deliver in a 
transaction with a direct participant of a U.S. Treasury securities 
CCA.
---------------------------------------------------------------------------

    \281\ 17 CFR 279.9 (Form PF Glossary of Terms).
    \282\ Final Rule, Reporting by Investment Advisers to Private 
Funds and Certain Commodity Pool Operators and Commodity Trading 
Advisors on Form PF, Release No. IA-3308 (Oct. 31, 2011), 76 FR 
71127 (Nov. 16, 2011). The reporting requirements for Form PF vary 
based on the amount of private fund assets under management for an 
investment adviser registered with the Commission. For example, if 
an investment adviser's private fund assets under management, 
including with respect to hedge funds, are less than $150 million on 
the last day of the most recent fiscal year, then the investment 
adviser is not required to file Form PF. Separately, additional 
reporting requirements apply to large hedge fund advisers with at 
least $1.5 billion in hedge fund assets under management. See Form 
PF, Instructions 1 and 3. However, the Commission believes that 
including all hedge funds within paragraph (ii)(C) of the definition 
of an ``eligible secondary market transaction'' in Proposed Rule 
17ad-22(a) would be consistent with its overall policy goals for 
central clearing in the U.S. Treasury market and ensuring that hedge 
fund transactions with direct participants in a U.S. Treasury 
securities CCA do not adversely impact the direct participant and, 
potentially, the CCA.
---------------------------------------------------------------------------

    Regarding leveraged account transactions, in the Proposing Release, 
the Commission stated its belief that the inclusion of transactions 
with such accounts, i.e., those that can take on significant amounts of 
leverage, within the definition of an eligible secondary market 
transaction should encompass transactions between direct participants 
of a U.S. Treasury securities CCA and a prime brokerage account, which, 
based on the Commission's supervisory knowledge, may hold assets of 
entities, such as, for example, private funds or separately managed 
accounts, and may use leverage that poses a risk to U.S. Treasury 
securities CCA and the broader financial system. The Commission further 
stated that by including the account, and not the entity using the 
account, this aspect of the proposal is targeted to the activity that 
could bring the most potential risk to a U.S. Treasury securities CCA 
and the financial system more generally.
    The Commission addresses each of these particular types of 
transactions in parts II.B.2.b.ii through iv infra, after addressing 
more general comments with respect to cash transactions.
i. Comments Regarding Cash Clearing Generally
    Several commenters supported the Commission's proposal overall, 
including the cash clearing requirement.\283\ By contrast, other 
commenters opposed cash clearing generally. One commenter did not 
support a clearing requirement or otherwise see the current imperative 
for incentivizing the central clearing of cash transactions. The 
commenter stated that any requirement to clear cash transactions will 
serve to increase costs, generate operational complexities, and reduce 
liquidity without producing meaningful benefits to address perceived 
issues with respect to the cash market.\284\ The commenter explained 
that the increased costs would be substantial and would include, among 
other things, increased margin, default fund contributions, and 
clearing fees, as well as the costs incurred to put in place the 
operations, infrastructure, and standard documentation required to 
support central clearing.\285\ The commenter also explained that intra-
day margin calls will ``simply create operational burdens and costs'' 
with no obvious benefit given that many margin calls will be met late 
in the day only to be returned to the posting party the next day. The 
commenter stated that to the extent that dealers are required to post 
collateral to a covered clearing agency without compensation or to 
incur other costs associated with client clearing, those costs will 
have to be absorbed either by clients or dealers, which may reduce 
their capacity and further constrain liquidity.\286\ The commenter also 
stated that additional netting benefits for dealers are unclear as 
accounting rules already allow dealers to net unsettled cash 
transactions across all counterparties on their balance sheets.\287\ 
Another commenter also opposed the requirement to clear cash 
transactions, but supported the exclusion of money market funds from 
the scope of included cash transactions within the definition of an 
eligible secondary market transaction.\288\
---------------------------------------------------------------------------

    \283\ AFREF Letter, supra note 33, at 2; Better Markets Letter, 
supra note 33, at 2, 6-8.
    \284\ SIFMA AMG Letter, supra note 35, at 3.
    \285\ Id. at 3; see also MFA Letter II, supra note 125, at 5 
(regarding increased costs associated with clearing cash 
transactions).
    \286\ SIFMA AMG Letter, supra note 35, at 7.
    \287\ SIFMA AMG Letter, supra note 35, at 3.
    \288\ Federated Letter, supra note 85, at 2.
---------------------------------------------------------------------------

    In response to the commenters opposed to the inclusion of any cash 
transactions in the definition of an eligible secondary market 
transaction, the Commission disagrees. As discussed in the Proposing 
Release, currently, the majority of cash market transactions are not 
centrally cleared, which is in contrast to the market conditions in the 
mid-2000s when most cash transactions were centrally cleared. The fact 
that more than half of market activity occurs outside central clearing 
could represent a contagion risk to any U.S. Treasury securities CCA 
serving the market. Therefore, the Commission identified a set of cash 
transactions to include in the definition of an eligible secondary 
market transaction that would represent an incremental first step in 
the cash market, to address risks to the CCA, and identified a specific 
rationale with respect to each set of categories, as discussed in part 
II.A.2.b supra. Addressing these risks is a meaningful benefit in that 
it would ensure that a U.S. Treasury securities CCA is well positioned 
to understand and manage the risks posed by its participants' 
transactions.
    Further, as discussed in more detail in part IV.C, although, as the 
commenter states, additional clearing likely would result in increased 
margin contributions and clearing fees, simply to account for the 
increased clearing volume, as well as the one-time costs regarding the 
institution of new contractual arrangements to access central 
clearing,\289\ the benefits of central clearing, as discussed in part 
II.A.1 supra, justify these costs.
---------------------------------------------------------------------------

    \289\ The commenter also references increased default fund 
contributions. However, the only U.S. Treasury securities CCA 
serving the U.S. Treasury market does not currently maintain a 
default fund; therefore, the Commission disagrees that some increase 
in such contributions would result from the proposal.
---------------------------------------------------------------------------

    The commenter's discussion regarding the operational issues of 
intraday margin calls does not specify the particular operational 
complexities that would arise, and it does not take into account the 
risk management

[[Page 2744]]

benefit arising from such calls, that is, ensuring that a covered 
clearing agency can address the risks presented by significant intraday 
changes to market volatility or a member's portfolio of net unsettled 
positions. Without such an ability, a covered clearing agency would 
face potential exposure in the event of the default of a clearing 
member; therefore, the additional risk management that a clearing 
agency can accomplish using intraday margin calls must be considered.
    Moreover, the Commission disagrees with the commenter's implication 
that this proposal needs to address the entirety of the ``perceived 
issues'' with respect to the cash market. The Commission stated in the 
Proposing Release that the requirement to clear eligible secondary 
market transactions will not, by itself, necessarily prevent future 
market disruptions, but that it could improve the functioning of the 
U.S. Treasury market.\290\ Although it may have other effects beyond 
the immediate requirement for U.S. Treasury securities CCAs, the 
requirement being adopted in this release is designed to improve the 
resilience of such CCAs by expanding their ability to manage the risks 
arising from direct participants who currently engage in non-centrally 
cleared transactions away from the CCA \291\ and need not solve all the 
issues that commentators have identified regarding the U.S. Treasury 
market.
---------------------------------------------------------------------------

    \290\ Proposing Release, supra note 14, 87 FR at 64614.
    \291\ Id.
---------------------------------------------------------------------------

    By contrast, several commenters suggested that the scope of 
eligible secondary market transactions in the cash market be broadened. 
One commenter stated that the Commission should align the scope of the 
definition with respect to cash transactions with the proposed scope 
for repos, subject to certain limited exceptions for investors that 
trade de minimis volumes. The commenter argued that the Commission's 
approach with respect to cash transactions will increase costs for a 
specific subset of market participants (i.e., hedge funds, leveraged 
accounts, and those using IDBs), thereby putting them at a competitive 
disadvantage, while failing to deliver the envisaged market-wide 
benefits associated with central clearing (i.e., it would materially 
reduce the associated multilateral netting benefits, impair the risk 
management practices of clearing agencies, and hinder the evolution in 
trading protocols that can be expected from a market-wide clearing 
requirement).\292\ For similar reasons, another commenter also stated 
that the benefits of central clearing detailed will only materialize if 
``a market-wide mandate is implemented'' and supported defining the 
scope of eligible secondary market transactions for cash transactions 
as broadly as that proposed for repos.\293\ Another commenter stated 
that limiting the scope of the cash clearing mandate would result in 
unwarranted competitive disadvantages and related market distortions 
for some types of investors, such as hedge funds, or some types of 
trading platforms, such as anonymous trading facilities.\294\ An 
additional commenter stated that the proposed definition leaves out 
other important market participants' cash Treasury transactions that 
also make up a large segment of Treasury market liquidity, and that the 
Commission should require other market participants' cash Treasury 
transactions in which a direct participant is involved to be cleared, 
so that the benefits of central clearing that the Commission cites will 
accrue throughout the broader cash Treasury market.\295\ In addition, 
another commenter acknowledged the benefits of a comprehensive clearing 
requirement, but acknowledged the need for a pragmatic approach and 
supported the Commission's proposed requirements as a reasonable 
foundation to begin mandatory central clearing in this market.\296\
---------------------------------------------------------------------------

    \292\ Citadel Letter, supra note 81, at 5.
    \293\ ARB et al. Letter, supra note 81, at 4 (stating that the 
netting benefits associated with transitioning only proprietary 
trading firm (``PTF'') transactions into central clearing are much 
smaller, given the substantial netting that already occurs directly 
with IDBs; the trading-related benefits of central clearing will 
only accrue to market participants if their transactions are covered 
by the proposed mandate; and that clearing agency resiliency will be 
negatively impacted if only one segment of the market is cleared).
    \294\ MFA Letter, supra note 81, at 2.
    \295\ AIMA Letter, supra note 81, at 7.
    \296\ GTS Letter, supra note 81, at 3-5.
---------------------------------------------------------------------------

    In response to the comments that the scope of the cash transactions 
that are included in the definition of an eligible secondary market 
transaction should be broadened, the scope is not being broadened and, 
in fact, is being further narrowed, as discussed further in part 
II.A.2.b.iii regarding hedge fund and leveraged account cash 
transactions (unless captured by another portion of the rule, e.g., as 
an IDB transaction). As stated in the Proposing Release and discussed 
in part II.2.b supra, the Commission proposed a deliberate and targeted 
approach to clearing in the cash market in the Proposing Release, 
limiting the clearing requirement to specific types of entities 
transacting with members of a U.S. Treasury securities CCA that pose 
heightened risks when clearing cash market treasury transactions 
bilaterally. Specifically, the Commission proposed eligible secondary 
market transaction to be defined as, with reference to cash market 
transactions, a purchase or sale between a direct participant of a 
covered clearing agency and (A) any participant if the direct 
participant is an IDB; (B) a registered broker-dealer, government 
securities broker, or government securities dealer that is not a member 
of a covered clearing agency; (C) a hedge fund; or (D) a leveraged 
account. In each case, the Commission explained the reasoning for why 
such counterparties were to be included in the scope of the 
proposal.\297\
---------------------------------------------------------------------------

    \297\ Proposing Release, supra note 14, 87 FR at 64622-25.
---------------------------------------------------------------------------

    In response to the comments that the benefits of central clearing 
would only materialize with a market-wide mandate and that the targeted 
cash scope would fail to deliver the market-wide benefits associated 
with central clearing, the Commission disagrees because the increased 
clearing of cash transactions, targeted to address the differing risk 
profiles of each market segment, would still bring the benefits of 
central clearing to some portion of the market, even if not as widely 
as the scope for repo transactions, while also addressing the risks 
inherent in these particular market segments. The Commission does not 
believe that the benefits of central clearing exist only if the entire 
market is centrally cleared. The increased costs for certain market 
participants, that is, those whose transactions with direct 
participants of a U.S. Treasury securities CCA are included in the 
definition of an eligible secondary market transaction, are justified 
by the benefit of addressing the risks inherent in those particular 
transactions, and the Commission addresses each of these categories 
separately in parts II.A.2.b.ii through iii infra. Moreover, other 
types of cash transactions do not present the same types of risk to the 
CCA in terms of potential contagion risk.
ii. IDB Transactions
    The proposed definition of an eligible secondary market transaction 
would include, among other things, any purchase or sale between a 
direct participant of a U.S. Treasury securities CCA and any 
counterparty, if the direct participant of the covered clearing agency 
(A) brings together multiple buyers and sellers using a trading 
facility (such as a limit order book) and

[[Page 2745]]

(B) is a counterparty to both the buyer and seller in two separate 
transactions.
    One commenter anticipated that certain other commenters would 
advocate for a definition of eligible secondary market transaction that 
would include IDB transactions and would exclude dealer-to-client over-
the-counter trades, which is not what the Commission proposed.\298\ The 
commenter cautioned against such an ``uneven'' approach because it 
would incentivize market participants to trade bilaterally instead of 
using an IDB to avoid central clearing.\299\
---------------------------------------------------------------------------

    \298\ See CME Letter, supra note 81, at 5.
    \299\ See id.
---------------------------------------------------------------------------

    Thus, the commenter supports the scope of the definition of an 
eligible secondary market transaction as proposed, that is, including 
both IDB transactions and the other categories of transactions set 
forth in the definition.\300\ The Commission agrees with the commenter 
that the definition, as proposed, would not incentivize market 
participants to trade away from IDBs to avoid central clearing because 
the definition of what constitutes an eligible secondary market 
transaction is broader than simply IDB transactions, such that avoiding 
IDBs alone would not be sufficient to avoid the requirement to submit 
eligible secondary market transactions for clearing.
---------------------------------------------------------------------------

    \300\ See CME Letter, supra note 81, at 5-6 (stating the 
commenter's belief that the proposal appears to have been carefully 
drafted to avoid encouraging market participants to trade away from 
IDBs).
---------------------------------------------------------------------------

    In addition, commenters expressed concerns that including IDB 
transactions in the definition of an eligible secondary market 
transaction could draw trading activity away from IDBs, thereby 
reducing market liquidity and market stability.\301\ The commenters 
also noted that IDBs are anonymous platforms that currently support 
all-to-all trading, and that the Commission has recognized that all-to-
all trading would improve market structure and stability.\302\ The 
commenters argued that including IDB transactions in the definition of 
an eligible secondary market transaction could, therefore, hinder all-
to-all trading.\303\ One of these commenters further argued that by 
discouraging market participants from trading on IDBs, the definition 
of an eligible secondary market transaction could limit the choices of 
market participants with respect to trading venues.\304\ The inclusion 
of IDB transactions, along with other types of transactions, would not 
necessarily lead to decreased liquidity and market stability or 
negatively impact all-to-all trading in the U.S. Treasury market. The 
market function provided by IDBs, that is, bringing together buyers and 
sellers anonymously, will continue to be desirable, even if such 
transactions are eligible secondary market transactions, meaning that 
market participants likely still would use IDBs to transact in the U.S. 
Treasury market. Because market participants likely would continue to 
transact on IDBs, the commenters' concerns regarding decreased 
liquidity and market stability would not materialize.
---------------------------------------------------------------------------

    \301\ See ICI Letter, supra note 85, at 3, 11; MFA Letter, supra 
note 81, at 20; Tradeweb Letter, supra note 81, at 3-4.
    \302\ See ICI Letter, supra note 85, at 3, 11; MFA Letter, supra 
note 81, at 20-21; Tradeweb Letter, supra note 81, at 3-4.
    \303\ See id.
    \304\ See MFA Letter, supra note 81, at 20.
---------------------------------------------------------------------------

    Moreover, even if some of these concerns materialize from the 
inclusion of IDB transactions, including them is justified as it would 
allow the U.S. Treasury securities CCA to better risk manage ``hybrid'' 
transactions that are currently not being submitted for central 
clearing.\305\ Specifically, including IDB transactions in the 
definition of an eligible secondary market transaction would address 
the potential for contagion risk associated with hybrid clearing. As 
explained in the Proposing Release, the configuration of counterparty 
risk presented by hybrid clearing allows the U.S. Treasury securities 
CCA to manage the risks arising from the IDB-CCA direct participant 
transaction, on the one hand, but the U.S. Treasury securities CCA 
cannot manage the risks arising from the IDB's offsetting transaction 
with its non-member counterparty and the potential counterparty credit 
risk and settlement risk arising to the IDB from that trade.\306\ Thus, 
under the current hybrid clearing model, the U.S. Treasury securities 
CCA is indirectly exposed to the IDB's non-centrally cleared 
transaction, but it lacks the ability to risk manage its indirect 
exposure to this non-centrally cleared leg of the transaction. 
Specifically, it does not know who the ultimate counterparty of the 
transaction is and cannot collect margin on that transaction. This, in 
turn, results in margin collection at the CCP which is based upon only 
one transaction and has been calculated to cover this seemingly 
directional position, as well as an inability to net these offsetting 
transactions and provide the benefits of central clearing. In 
particular, if the IDB's non-CCP member counterparty fails to settle a 
transaction that is subject to hybrid clearing, such IDB may not be 
able to settle the corresponding transaction that has been cleared with 
the U.S. Treasury securities CCA due to a lack of financial resources 
at the IDB, which could lead the IDB to default.\307\ As part of its 
existing default management procedures, the U.S. Treasury securities 
CCA could seek to mutualize its losses from the IDB's default, which 
could in turn transmit stress to the market as a whole.
---------------------------------------------------------------------------

    \305\ The term ``IDB'' typically refers only to IDBs that are 
also ATSs. See note 643 infra.
    \306\ See, e.g., Proposing Release, supra note 14, 87 FR at 
64622 (citing TMPG White Paper, supra note 13, at 22 (noting that in 
a hybrid clearing arrangement, an IDB's rights and obligations to 
the CCP are not offset and the IDB is not in a net zero settlement 
position with respect to the CCP at settlement date)). Thus, the IDB 
is not able to net all of its positions for clearing at a U.S. 
Treasury securities CCA, and the IDB's positions appear to the CCA 
to be directional, which impacts the amount of margin that the CCA 
collects for the transaction.
    \307\ See 2021 IAWG Report, supra note 4, at 31; Depository 
Trust and Clearing Corporation, More Clearing, Less Risk: Increasing 
Centrally Cleared Activity in the U.S. Treasury Cash Market, at 5 
(May 2021), available at https://www.dtcc.com/-/media/Files/PDFs/DTCC-US-Treasury-Whitepaper.pdf (``DTCC May 2021 White Paper'').
---------------------------------------------------------------------------

    The Commission has previously stated that membership requirements 
help to guard against defaults of any CCP member, as well as to protect 
the CCP and the financial system as a whole from the risk that one 
member's default could cause others to default, potentially including 
the CCP itself.\308\ Further, contagion stemming from a CCP member 
default could undermine confidence in the financial system as a whole, 
even if the health of the CCP is not implicated. This is because the 
default could cause others to back away from participating in the 
market. This risk of decreased participation could be particularly 
problematic if the defaulting participant was an IDB, whose withdrawal 
from the market could impact other market participants' ability to 
access the market for on-the-run U.S. Treasury securities, 
approximately 49.7% of which trade on IDBs.\309\ Including such 
transactions within the definition of an eligible secondary market 
transaction would therefore help protect against this risk by requiring 
that a U.S. Treasury securities CCA ensure that direct participants who 
are IDBs centrally clear both sides of their transactions, thereby 
eliminating the various aspects of potential contagion risk posed by 
so-called hybrid clearing.
---------------------------------------------------------------------------

    \308\ See Proposing Release, supra note 14, 87 FR at 64623.
    \309\ TMPG White Paper, supra note 13, at 32; section IV.B.4 
(Table 1) infra.
---------------------------------------------------------------------------

    One commenter urged the Commission to consider adopting the 
proposal in increments based on further

[[Page 2746]]

study, with IDB transactions as the first market segment to be included 
in the definition due to the distinct settlement risks associated with 
the IDBs' hybrid clearing model.\310\ In contrast, another commenter 
supported adopting the proposal as drafted, arguing that to include 
only IDB transactions would be an uneven approach that would 
incentivize market participants to execute their transactions 
bilaterally, damaging liquidity on IDB platforms.\311\ Commenters 
identified the inclusion of IDB transactions as a targeted option to 
include in the definition of an eligible secondary market transaction 
to address contagion risk.\312\ One commenter stated that, if the 
Commission's concern is the hybrid clearing at IDBs, it would be more 
effective to focus on the regulation of the platforms.\313\
---------------------------------------------------------------------------

    \310\ See SIFMA/IIB Letter, supra note 37, at 2-3, 16-18 
(limiting the proposal to IDB transactions in the cash market would 
address the most salient risks that could be addressed through 
central clearing).
    \311\ See CME Letter, supra note 81, at 5-6.
    \312\ AIMA Letter, supra note 81, at 7; SIFMA/IIB Letter, supra 
note 37, at 16-18.
    \313\ SIFMA AMG Letter, supra note 35, at 11.
---------------------------------------------------------------------------

    The Commission agrees with all of the commenters regarding the 
appropriateness of Commission action to mitigate the risks associated 
with IDBs' hybrid clearing model. The Commission included IDB 
transactions in the definition of an eligible secondary market 
transaction in order to eliminate the potential contagion risk posed by 
hybrid clearing. However, the Commission disagrees with the commenters 
arguing in favor of limiting the scope of the definition to include IDB 
transactions only or taking an entirely different approach that would 
simply regulate IDB platforms. As discussed above, to single out IDBs 
(whether in the definition of eligible secondary market transaction or 
through another regulatory approach), without including the other cash 
transactions included in the definition of an eligible secondary market 
transaction, could incentivize market participants to trade away from 
IDBs, creating the potential for negative effects on market liquidity, 
market stability, all-to-all trading, and participant choice of trading 
venue. Accordingly, the Commission is adopting the definition as 
proposed.
    Two commenters argued that transactions by registered funds that 
take place on an IDB should be excluded from the definition of an 
eligible secondary market transaction. Specifically, one commenter 
urged the Commission to expressly exclude registered funds (e.g., 
mutual funds, exchange-traded funds, closed-end funds, and unit 
investment trusts) from the effects of including IDB transactions in 
the Membership Proposal.\314\ Similarly, another commenter supported an 
exclusion for registered money market funds.\315\
---------------------------------------------------------------------------

    \314\ See ICI Letter, supra note 85, at 11.
    \315\ See Federated Letter, supra note 85, at 2.
---------------------------------------------------------------------------

    The Commission does not agree with these commenters and is not 
including any exclusion for registered funds transacting on an IDB. If 
a fund chooses to transact on an IDB, the same potential hybrid 
contagion risk to the U.S. Treasury securities CCA arises as when other 
market participants transact on an IDB. Therefore, the Commission does 
not believe that such an exclusion is appropriate.
iii. Other Cash Transactions
    The Commission also proposed to include certain additional 
categories of cash transactions of U.S. Treasury securities by the 
direct participants of a U.S. Treasury securities CCA in the definition 
of an eligible secondary market transaction subject to the Membership 
Proposal.
    First, the Commission proposed that the definition of an eligible 
secondary market transaction include those cash purchase and sale 
transactions in which the counterparty of the direct participant is a 
registered broker-dealer, government securities broker, or government 
securities dealer. Each of these entities is a type of market 
intermediary that is engaged in the business of effecting transactions 
in securities for the account of others (in the case of brokers) or for 
their own accounts (in the case of dealers).\316\
---------------------------------------------------------------------------

    \316\ See generally TMPG, Automated Trading in Treasury Markets 
(White Paper, June 2015), available at https://www.newyorkfed.org/TMPG/medialibrary/microsites/tmpg/files/TPMG-June-2015-Automated-Trading-White-Paper.pdf (``TMPG Automated Trading White Paper'').
---------------------------------------------------------------------------

    Commenters did not address this aspect of the definition of an 
eligible secondary market transaction. For the reasons stated in the 
Proposing Release and as discussed in part II.A.2.b supra, the 
Commission continues to believe that these portions of the definition 
are appropriate.\317\ The Commission is therefore adopting this aspect 
of the exclusions as proposed.
---------------------------------------------------------------------------

    \317\ Proposing Release, supra note 14, 87 FR at 64623.
---------------------------------------------------------------------------

    Second, the Commission proposed to include within the definition of 
an eligible secondary market transaction any purchase and sale 
transaction between a direct participant of a U.S. Treasury securities 
CCA and a hedge fund, that is any private fund (other than a 
securitized asset fund): (a) with respect to which one or more 
investment advisers (or related persons of investment advisers) may be 
paid a performance fee or allocation calculated by taking into account 
unrealized gains (other than a fee or allocation the calculation of 
which may take into account unrealized gains solely for the purpose of 
reducing such fee or allocation to reflect net unrealized losses); (b) 
that may borrow an amount in excess of one-half of its net asset value 
(including any committed capital) or may have gross notional exposure 
in excess of twice its net asset value (including any committed 
capital); or (c) that may sell securities or other assets short or 
enter into similar transactions (other than for the purpose of hedging 
currency exposure or managing duration). Third, the Commission proposed 
to include within the definition of an eligible secondary market 
transaction any purchase and sale transaction between a direct 
participant of a U.S. Treasury securities CCA and an account at a 
registered broker-dealer, government securities dealer, or government 
securities broker that either may borrow an amount in excess of one-
half of the net value of the account or may have gross notional 
exposure of the transactions in the account that is more than twice the 
net value of the account. This would apply to accounts that can take on 
significant leverage, that is, by borrowing an amount that is more than 
one half of its net value or take on exposures worth more than twice 
the account's net value (referred to herein as ``leveraged accounts'').
    Some commenters supported the proposed inclusion of transactions 
with hedge funds within the definition of an eligible secondary market 
transaction.\318\ However, other commenters asserted that transactions 
with a hedge fund or a leveraged account \319\ should not be within the 
definition of an eligible secondary market transaction.
---------------------------------------------------------------------------

    \318\ See DTCC/FICC Letter, supra note 33, at 12; Better Markets 
Letter, supra note 33, generally; AFREF Letter, supra note 33, at 2-
3.
    \319\ Commenters generally addressed the inclusion of leveraged 
account transactions in the definition of an eligible secondary 
market transaction as part of a broader discussion including both 
hedge fund transactions and leveraged account transactions. 
Therefore, the Commission is considering both types of transactions 
together for purposes of discussing the comments.
---------------------------------------------------------------------------

    One commenter stated that the inclusion of hedge funds within the 
counterparties to an eligible secondary market transaction would 
arbitrarily single out hedge funds' cash Treasury transactions.\320\ 
Another commenter

[[Page 2747]]

stated that there is no data to support imposing a clearing requirement 
that targets hedge funds and leveraged accounts and expressed concern 
that a partial mandate may result in some dealers choosing to offer 
liquidity only in a cleared environment thereby reducing the liquidity 
available today to accounts in the uncleared cash market.\321\ Another 
commenter stated that the inclusion of hedge funds within the 
counterparties to an eligible secondary market transaction would create 
an uneven playing field that will subject hedge funds to much higher 
costs than other market participants.\322\
---------------------------------------------------------------------------

    \320\ AIMA Letter, supra note 81, at 7.
    \321\ SIFMA AMG Letter, supra note 35, at 11; see also MFA 
Letter II, supra note 125, at 7 (regarding decreased liquidity and 
potentially shifting transactions away from the requirement to clear 
eligible secondary market transactions).
    \322\ MFA Letter II, supra note 125, at 7.
---------------------------------------------------------------------------

    In addition, certain commenters also raised concerns with the 
definition of a hedge fund in the Proposing Release, stating that 
because of the nature of the definition, eligible secondary market 
transactions would include those with firms that may (but in practice 
might not actually) exceed the quantitative thresholds without regard 
to the risks that these firms actually take on, or their investment 
models and strategies.\323\
---------------------------------------------------------------------------

    \323\ MFA Letter, supra note 81, at 18-20; AIMA Letter, supra 
note 81, at 6; SIFMA AMG Letter, supra note 35, at 11.
---------------------------------------------------------------------------

    The Commission is not adopting proposed sections (ii)(C) and (D) of 
the definition of an eligible secondary market transaction with respect 
to hedge funds and leveraged accounts in light of questions raised by 
commenters regarding the inclusion of a hedge fund and a leveraged 
account as proposed that merit further consideration, and the 
Commission will continue to evaluate the issues raised to determine if 
any further action is appropriate with respect to transactions in the 
cash market. This change from the proposal allows for a more 
incremental approach to requiring central clearing of transactions in 
the cash market. However, the requirement to clear eligible secondary 
market transactions that are repos encompasses repos between a direct 
participant of a U.S. Treasury securities CCA and a hedge fund or 
leveraged account, as discussed in part II.A.2.a supra. This 
requirement should ensure that many of the risks posed by hedge funds, 
including the repo portion of a basis trade,\324\ would be addressed by 
the proposal.
---------------------------------------------------------------------------

    \324\ See note 723 infra.
---------------------------------------------------------------------------

    Moreover, repo transactions between a direct participant of a U.S. 
Treasury securities CCA and a hedge fund or leveraged account would be 
within the scope of the definition of an eligible secondary market 
transaction discussed in part II.A.2.a supra. This inclusion is 
important because it addresses the risks posed by hedge fund and 
leveraged account repo activity in the U.S. Treasury market, which is 
often highly leveraged and subject to low or zero haircut.\325\
---------------------------------------------------------------------------

    \325\ See, e.g., Ayelen Banegas and Phillip Monin, Hedge Fund 
Treasury Exposures, Repo, and Margining (Sept. 8, 2023), available 
at https://www.federalreserve.gov/econres/notes/feds-notes/hedge-fund-treasury-exposures-repo-and-margining-20230908.html.
---------------------------------------------------------------------------

iv. Comments Regarding Cash Transactions for Registered Funds
    As discussed in part II.A.2.b supra, the definition of eligible 
secondary market transactions does not include transactions between 
direct participants of a U.S. Treasury securities CCA and registered 
funds. However, if a registered fund were transacting on an IDB, that 
transaction would be an eligible secondary market transaction because 
it otherwise meets the definition of such a transaction (i.e., it is an 
IDB transaction) and not because it is a registered fund.
    Certain commenters addressed cash market transactions specifically 
with respect to registered funds. One commenter supported an exclusion 
from the definition of an eligible secondary market transaction for 
registered funds.\326\ The commenter stated that applying a cash 
Treasury clearing mandate to funds would not promote risk reduction or 
enhancements to market liquidity to a degree that would justify the 
considerable costs and burdens to funds, which would have to build out 
an entire new clearing infrastructure, with such costs borne indirectly 
by fund investors. The commenter stated that the characteristics of 
typical fund cash Treasury transactions are distinguishable from the 
types of transactions that the Commission is seeking to capture under 
the mandate for risk reduction purposes, i.e., those using significant 
leverage and/or giving rise to potential contagion risk. According to 
the commenter, registered funds, by contrast, invest in cash Treasury 
securities for purposes such as obtaining desired exposure, hedging 
risks associated with investments in other markets, diversifying their 
portfolios, and protecting capital, among other reasons. The commenter 
stated that these transactions are generally not linked to other 
leveraged strategies, and observed that funds are limited in their 
ability to incur leverage, both by statute (i.e., Section 18 of the 
1940 Act) and by SEC rules (e.g., Rule 18f-4 under the 1940 Act). The 
commenter further asserted that as a matter of investment strategy as 
well, buy-side market participants such as bond funds generally do not 
acquire significant leverage, including when investing in Treasury 
securities. For these reasons, the commenter asserted that including 
registered fund transactions in the definition of an eligible secondary 
market transaction would not yield additional risk reduction 
benefits.\327\
---------------------------------------------------------------------------

    \326\ ICI Letter, supra note 85, at 10.
    \327\ ICI Letter, supra note 85, at 10.
---------------------------------------------------------------------------

    An additional commenter stated that applying this mandate to money 
market funds would yield minimal benefits while potentially imposing 
significant costs on such funds.\328\ The commenter stated that its 
money market funds do not normally utilize leverage in the cash 
purchase of Treasury securities, but instead are generally investing in 
Treasury securities on a long-term basis or are using them to hedge 
risks, for capital protection or for diversifying the risk in their 
investment portfolios. The commenter stated that these strategies are 
generally not linked to other leveraged strategies and therefore there 
is minimal contagion risk evident in these transactions. The commenter 
further stated that the costs of such a mandate would be significant as 
the commenter currently does not clear cash Treasury transactions and 
therefore would need to establish the technological, operational and 
legal frameworks that are necessary to support such a clearing mandate, 
meaning that any anticipated benefits of money market funds, as well as 
other registered funds, clearing their cash Treasury purchases would be 
vastly outweighed by the costs and burdens associated with such a 
mandate. The commenter also supported a broader exclusion for 
transactions with registered funds from the definition of an eligible 
secondary market transaction.\329\
---------------------------------------------------------------------------

    \328\ Federated Letter, supra note 85, at 5.
    \329\ Id.
---------------------------------------------------------------------------

    As stated in the Proposing Release, the Commission identified 
certain categories of purchases and sales of U.S. Treasury securities 
that should be part of the definition of an eligible secondary market 
transaction, and these categories represented an incremental first step 
to address potential risks arising to a U.S. Treasury securities CCA. 
The Proposing Release did not include transactions with registered 
funds as a counterparty within the definition of an eligible secondary 
market transaction, and the Commission does not believe that a

[[Page 2748]]

specific exclusion for registered funds is necessary. Although a 
transaction with a registered fund may constitute an eligible secondary 
market transaction if the transaction otherwise meets the definition, 
it would not be because of the fact of the registered fund as a 
counterparty, but, rather, because the transaction met some other 
criteria of the definition.
    The Commission understands generally that, consistent with the 
commenters' statements, registered funds, including money market funds, 
typically do not use cash transactions in U.S. Treasury securities to 
take on leverage, both as a matter of strategy and because of 
applicable regulatory requirements, and that they instead use cash 
transactions to obtain desired exposure, hedge risks associated with 
investments in other markets, diversify portfolios, or protect capital.
    However, in response to the commenters that argued that registered 
funds' lack of leverage means that they pose no counterparty risk, the 
Commission believes that, to the extent that a registered fund chooses 
to transact on an inter-dealer broker, such transactions would pose the 
same type of contagion risk as other transactions executed on an inter-
dealer broker. For the reasons discussed in part II.A.2.b.ii supra, in 
such cases, it is appropriate that registered funds' cash transactions, 
if on an IDB, would be encompassed within the definition of an eligible 
secondary market transaction because of the risks such transactions 
present as an IDB transaction and the potential for a default at the 
IDB to have a knock-on effect at the CCA.
v. Final Rule
    For the reasons set forth in part II.A.2.b, the Commission is 
adopting the definition of an eligible secondary market transaction in 
Rule 17ad-22(a), as set forth in sections (ii)(A) and (B) of that 
definition with respect to IDB transactions and transactions with a 
registered broker-dealer, but it is not adopting the definition of an 
eligible secondary market transaction as set forth in sections (ii)(C) 
and (D) of that definition with respect to hedge fund and leveraged 
account transactions.
3. Other Exclusions From the Definition of an Eligible Secondary Market 
Transaction
    Proposed Rule 17ad-22(a) would exclude transactions between direct 
participants of a U.S. Treasury securities CCA and certain 
counterparties from the definition of an eligible secondary market 
transaction in U.S. Treasury securities. These exclusions would apply 
to any purchase or sale transaction in U.S. Treasury securities or 
repurchase or reverse repurchase agreement collateralized by U.S. 
Treasury securities between a direct participant and a central bank, a 
sovereign entity, or an international financial institution. A central 
bank would, in turn, be defined as a reserve bank or monetary authority 
of a central government (including the Board of Governors or any of the 
Federal Reserve Banks) and the Bank of International Settlements. A 
sovereign entity would be defined as a central government (including 
the U.S. Government), or an agency, department, or ministry of a 
central government. An international financial institution would be 
defined by specifying the entities, i.e., (1) African Development Bank; 
(2) African Development Fund; (3) Asian Development Bank; (4) Banco 
Centroamericano de Integraci[oacute]n Econ[oacute]mica; (5) Bank for 
Economic Cooperation and Development in the Middle East and North 
Africa; (6) Caribbean Development Bank; (7) Corporaci[oacute]n Andina 
de Fomento; (8) Council of Europe Development Bank; (9) European Bank 
for Reconstruction and Development; (10) European Investment Bank; (11) 
European Investment Fund; (12) European Stability Mechanism; (13) 
Inter-American Development Bank; (14) Inter-American Investment 
Corporation; (15) International Bank for Reconstruction and 
Development; (16) International Development Association; (17) 
International Finance Corporation; (18) International Monetary Fund; 
(19) Islamic Development Bank; (20) Multilateral Investment Guarantee 
Agency; (21) Nordic Investment Bank; (22) North American Development 
Bank, and providing that the term would also include any other entity 
that provides financing for national or regional development in which 
the United States government is a shareholder or contributing member.
    In addition, Proposed Rule 17ad-22(a) would also exclude 
transactions in U.S. Treasury securities between a direct participant 
of a U.S. Treasury securities CCA and a natural person.
    Commenters expressed support for these exclusions.\330\ For the 
reasons stated in the Proposing Release, the Commission believes that 
these exclusions are appropriate.\331\ The Commission is therefore 
adopting the exclusions as proposed.
---------------------------------------------------------------------------

    \330\ SIFMA/IIB Letter, supra note 37, at 20; CME Letter, supra 
note 81, at 6.
    \331\ Proposing Release, supra note 14, 87 FR at 64625-26.
---------------------------------------------------------------------------

    In addition, several commenters requested an exclusion for market 
participants that engage in cash or repo transactions but are unable to 
access a U.S. Treasury securities CCA. For example, one commenter 
stated that this inability to access a CCA could be because of the 
CCA's existing rules or otherwise.\332\ Another commenter stated that 
this inability could result from being ineligible under the CCA's 
existing rules, regulatory burdens, or other material impediments that 
prevent such access. The commenter further stated that that not all 
market participants will be able to work with a U.S. Treasury 
securities CCA to determine if there are serious obstacles to access 
during the proposal's comment period and that it may take more time for 
any possible issues to surface.\333\ It is difficult to determine what 
entities will be ``unable'' to access central clearing and for what 
reasons, given that, for example, the existing rules of a CCA may 
change during the implementation period, see part III infra, and that 
different market participants may face different regulatory or other 
requirements that could have an effect on its access to central 
clearing. Therefore, such an exclusion would be overly broad and would 
undermine the policy goals of the requirement to clear eligible 
secondary market transactions. The Commission has identified a number 
of exclusions in this release and would consider any additional 
specific requests for exclusions in the future as market participants 
work to finalize arrangements to implement the requirements of this 
release.
---------------------------------------------------------------------------

    \332\ See AIMA Letter II, supra note 115, at 4.
    \333\ SIFMA/IIB Letter, supra note 37, at 21.
---------------------------------------------------------------------------

4. Policies and Procedures Regarding U.S. Treasury Securities CCA's 
Monitoring of Its Direct Participants' Transactions
    The proposed amendments to Rule 17ad-22(e)(18)(iv)(B) would require 
that a U.S. Treasury securities CCA establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable, identify and monitor its direct participants' required 
submission of transactions for clearing, including, at a minimum, 
addressing a direct participant's failure to submit transactions.
    One commenter supported this aspect of the proposal.\334\ The 
commenter

[[Page 2749]]

noted that this aspect of the proposal uses the phrase ``identify and 
monitor,'' which is an understood phrase used elsewhere in the Covered 
Clearing Agency Standards.\335\ Accordingly, the commenter anticipated 
that implementation of this aspect of the proposal would be similar to 
implementation of other Covered Clearing Agency Standards provisions 
that use that phrase.\336\ For example, the commenter stated that it 
expects a U.S. Treasury securities CCA would require its direct 
participants to submit information regarding their U.S. Treasury 
transactions as well as attestations from senior officials that the 
participant is in compliance with its obligations.\337\ The commenter 
stated that it further expects that a U.S. Treasury securities CCA 
would review publicly available information (e.g., information 
collected through FINRA's Trade Reporting and Compliance Engine 
(``TRACE'') reporting) as well as information made available to it by 
regulatory and self-regulatory organizations.\338\ Additionally, the 
commenter stated that it expects a U.S. Treasury securities CCA would 
seek to identify opportunities to coordinate with market participants 
and self-regulatory organizations to examine collected data and 
identify possible instances of non-compliance.\339\ The commenter 
cautioned, however, that the ability of a U.S. Treasury securities CCA 
to effectively identify and monitor its direct participants' required 
submission of transactions for clearing would depend on the quality and 
comprehensiveness of available data, and the commenter asked that the 
Commission continually review and improve the quality of available 
data.\340\ The commenter stated that it expects a U.S. Treasury 
securities CCA would take steps to remediate non-compliance on the part 
of its direct participants in a manner consistent with the Covered 
Clearing Agency Standards and breaches of the CCA's own rules.\341\ The 
commenter cautioned, however, that a U.S. Treasury securities CCA's 
capacity to monitor participant non-compliance is limited because a CCA 
does not have authority over non-participants that may seek to evade 
the requirement to clear eligible secondary market transactions.\342\ 
Therefore, the commenter asked that the Commission utilize its 
supervisory authority to help support any requirement to clear eligible 
secondary market transactions.\343\
---------------------------------------------------------------------------

    \334\ See DTCC/FICC Letter, supra note 33, at 21-22.
    \335\ See DTCC/FICC Letter, supra note 33, at 21.
    \336\ See id.
    \337\ See id.
    \338\ See id.
    \339\ See id.
    \340\ See DTCC/FICC Letter, supra note 33, at 21-22.
    \341\ See DTCC/FICC Letter, supra note 33, at 22.
    \342\ See id.
    \343\ See id.
---------------------------------------------------------------------------

    Consistent with the commenter, the Commission continues to believe 
that such a requirement should ensure that a U.S. Treasury securities 
CCA has a framework in place for oversight of participants' compliance 
with the policies that would be adopted as part of the requirement to 
submit eligible secondary market transactions for clearing. Without 
such policies and procedures, it would be difficult for the CCA to 
assess if the direct participants are complying with the amendments to 
Rule 17ad-22(e)(18)(iv)(A) that would require the submission of 
eligible secondary market transactions for clearing.
    The Commission continues to believe that there are a number of 
possible methods that a U.S. Treasury securities CCA could establish to 
assess its direct participants' compliance with the policies and 
procedures adopted pursuant to the Membership Proposal. For example, 
the Commission agrees with the commenter that a U.S. Treasury 
securities CCA could require direct participants to submit to the CCA 
information regarding their U.S. Treasury securities transactions or to 
require attestations from senior officials of the CCA's direct 
participants as to their submission of the required transactions and 
compliance with their obligations to submit such transactions. The 
Commission further agrees that a U.S. Treasury securities CCA also 
could review publicly available information and information made 
available to it by regulatory and self-regulatory organizations as part 
of its assessment of its direct participants' compliance.
    The Commission continues to believe that requiring a U.S. Treasury 
securities CCA to adopt policies and procedures that address a failure 
of a direct participant to submit transactions that are required to be 
submitted is consistent with section 17A(b)(3)(G) of the Exchange Act. 
That section requires that the rules of a registered clearing agency 
provide that its participants shall be appropriately disciplined for 
violation of any provision of the rules of the clearing agency by 
expulsion, suspension, limitation of activities, functions, and 
operations, fine, censure, or any other fitting sanction. The 
Commission continues to believe that policies and procedures consistent 
with this aspect of the proposal should specify how a U.S. Treasury 
securities CCA would penalize its participants who do not submit the 
required transactions, whether by a particular fine or other action.
    For these reasons, the Commission is adopting the requirement in 
Rule 17ad-22(e)(18)(iv)(B) as proposed.
5. Alternative Approaches Proposed by Commenters
    As discussed in part II.A.1.a supra, commenters identified several 
methods by which the Commission could or should incentivize additional 
central clearing without adopting a requirement to clear eligible 
secondary market transactions. The Commission discusses its views on 
each of these in turn, including whether it has the authority to adopt 
certain initiatives. However, as a general matter, the Commission is 
not persuaded that incentivizing central clearing would be sufficient 
at this point, as those types of changes would not ensure that the 
current risks to U.S. Treasury securities CCAs are addressed. 
Therefore, the requirement to clear eligible secondary market 
transactions is necessary.
    First, commenters identified the proposed amendments to Rule 15c3-3 
discussed in part II.C infra as a method to incentivize additional 
central clearing.\344\ One commenter stated that the practical effect 
of this change would be to allow broker-dealers to use margin collected 
from customers to satisfy margin requirements associated with such 
customers' transactions, rather than using proprietary funds to finance 
customer margin as is the case today, and expressed its support for 
this amendment because it will free up broker-dealer resources by 
reducing the amount of proprietary funds needed to finance customer 
margin and therefore lower the cost of clearing, while continuing to 
protect customer funds.\345\ Another commenter stated that the proposed 
change to allow a debit under the Rule 15c3-3a customer reserve formula 
should incentivize central clearing of U.S. Treasury securities 
transactions by reducing costs.\346\ One commenter stated that this 
change would reduce the costs of centrally clearing U.S. Treasury 
securities transactions and thus incentivize more central clearing of 
such transactions.\347\
---------------------------------------------------------------------------

    \344\ SIFMA AMG Letter, supra note 35, at 8; SIFMA/IIB Letter, 
supra note 37, at 12; MFA Letter, supra note 81, at 3, 10.
    \345\ MFA Letter, supra note 81, at 10.
    \346\ SIFMA AMG Letter, supra note 35, at 8.
    \347\ SIFMA/IIB Letter, supra note 37, at 12.
---------------------------------------------------------------------------

    Second, commenters identified the proposed amendments to require 
U.S. Treasury securities CCAs to segregate customer positions and 
margin

[[Page 2750]]

discussed in part II.C.1 infra as a method to incentivize additional 
central clearing.\348\ One commenter stated that this change would 
ensure that a direct participant's proprietary positions would be 
available to net against other proprietary positions, which would 
incentivize additional central clearing.\349\ An additional commenter 
stated that the segregation of customer positions should allow for a 
dealer's proprietary positions to be netted against that dealer's 
proprietary positions vis-[agrave]-vis other dealers, allowing more 
central clearing of U.S. Treasury securities transactions.\350\
---------------------------------------------------------------------------

    \348\ SIFMA AMG Letter, supra note 35, at 8; SIFMA/IIB Letter, 
supra note 37, at 12; MFA Letter, supra note 81, at 3.
    \349\ SIFMA/IIB Letter, supra note 37, at 12, 25.
    \350\ SIFMA AMG Letter, supra note 35, at 8.
---------------------------------------------------------------------------

    Third, commenters identified requiring CCAs to review their access 
models and/or adopt particular access models or features thereof as a 
method to incentivize clearing, as discussed in part II.B.2 infra.\351\
---------------------------------------------------------------------------

    \351\ SIFMA/IIB Letter, supra note 37, at 13; SIFMA AMG Letter, 
supra note 35, at 8; MFA Letter, supra note 81, at 3, 6-10.
---------------------------------------------------------------------------

    The Commission agrees that the methods identified by the commenters 
could incentivize and facilitate additional central clearing. The 
Commission therefore is adopting the amendments to Rule 15c3-3, the 
requirement to segregate house and customer margin, and the requirement 
to ensure access to central clearing, as discussed in parts II.C, 
II.B.1, and II.B.2 infra respectively. However, the Commission 
disagrees with these commenters that these changes alone, without also 
requiring that U.S. Treasury securities CCAs obligate their direct 
participants to submit eligible secondary market transactions for 
clearing, are enough. Merely incentivizing and facilitating greater 
central clearing is not sufficient, as those types of changes would not 
ensure that the current risks to U.S. Treasury securities CCAs are 
addressed. Therefore, for the reasons discussed in part II.2.a and b, 
the requirement to clear is also necessary.
    Fourth, one commenter argued that another way the Commission could 
incentivize greater central clearing without requiring it was to 
require FICC to consider amending its clearing fund structure to 
separate initial margin from default fund requirements that can be 
subject to loss mutualization, which would result in capital 
efficiencies for bank or bank-affiliated dealers and also may allow for 
increased participation from counterparty types that are restricted 
from participating in loss mutualization arrangements (e.g., money 
market funds).\352\ Another commenter also stated that changing the 
sponsored member clearing fund contribution to a pool of margin that is 
used in the event of a default of the underlying sponsored member would 
more closely align a sponsored member's exposure to potential losses in 
a default scenario with its own creditworthiness (i.e., the defaulter 
pays first) and be more cost effective for sponsoring members.\353\ 
Another commenter stated that FICC must be required to separate initial 
margin from default fund requirements that can be subject to loss 
mutualization, prior to the imposition of a clearing requirement.\354\
---------------------------------------------------------------------------

    \352\ SIFMA/IIB Letter, supra note 37, at 3.
    \353\ ICI Letter, supra note 85, at 14.
    \354\ MFA Letter II, supra note 125, at 4.
---------------------------------------------------------------------------

    The Commission recognizes that the particular clearing fund 
structure used by FICC may bring some level of capital inefficiency to 
banks who choose to join a CCA.\355\ However, the Commission previously 
has declined a commenter's suggestion to impose such a 
requirement.\356\ As it stated when considering a similar comment when 
adopting the Covered Clearing Agency Standards, the Commission 
acknowledges that loss mutualization and other pooling-of-resources 
arrangements involve tradeoffs that a CCA generally should carefully 
assess and balance. A CCA may be better able to manage multiple 
defaults in extreme conditions more efficiently using pooled resources 
because the pooled resources would be greater than the resources of any 
single defaulting participant. Further, because the arrangements are 
prefunded, participants can model and manage the risks they face from 
the clearing agency while being able to take into account the amount of 
resources that they have provided to the clearing agency. The pooling 
of resources, however, can increase interdependencies among, and 
therefore the potential risks to, participants of the CCA. The use of 
loss mutualization and other pooling-of-resources arrangements 
generally should, to minimize systemic risk, balance the safety and 
soundness of the CCA against the potential for increased exposures 
among participants that may arise from the manner the CCA holds 
financial resources. For all these reasons, the Commission continues to 
believe that it should not impose such a requirement on CCAs, 
notwithstanding the potential capital efficiencies arising from a 
different clearing fund structure at a CCA.
---------------------------------------------------------------------------

    \355\ Banking regulations may result in different treatment for 
collateral posted as margin to a CCP if that collateral is 
potentially subject to loss mutualization versus collateral that is 
not subject to loss mutualization. Specifically, a bank has to treat 
potentially mutualized collateral, like clearing fund posted to FICC 
or, more generally, the guaranty fund posted to derivatives CCPs, 
differently from collateral that would be used only in the event of 
the specific bank member's default to the CCP. Such banking 
regulations are outside the scope of this rulemaking or the 
Commission's authority in general.
    \356\ CCA Standards Adopting Release, supra note 10, 81 FR at 
70813.
---------------------------------------------------------------------------

    Pursuant to Rule 17ad-22(e)(23), a covered clearing agency must 
establish, implement, maintain and enforce written policies reasonably 
designed to disclose, among other things, key aspects of its default 
rules and procedures and the risks, fees, and other material costs 
participants incur by participating in the covered clearing agency. The 
availability of these policies and procedures should allow participants 
to understand in advance a covered clearing agency's reliance on such 
resources and to consider their own ability to meet the CCA's 
membership obligations, including with respect to financial resources, 
prior to becoming members of the covered clearing agency.
    Fifth, several commenters discussed facilitating cross-margining of 
indirect participants' transactions in U.S. Treasury securities with 
those in U.S. Treasury futures as a method to incentivize additional 
clearing.\357\ One commenter stated that the Commission should take 
steps to allow cross-margining of customer transactions between 
Treasury securities and U.S. Treasury futures, because the reduced 
margin requirements obtained through cross-margining serves an 
important function in increasing market liquidity through balance sheet 
savings and incentivizing risk reduction through hedging. The commenter 
also referred to the work of the G-30, which observed that wider use of 
cross-margining would reduce the risk that increases in initial margin 
requirements on the futures leg of cash-futures basis trades result in 
forced sales of Treasury securities, which may have contributed to 
selling pressures in the market in March 2020.\358\ Another commenter 
stated that cross-margining would lower costs for market participants 
by allowing them to apply margin across positions submitted for 
clearing through various clearinghouses. The commenter stated that this 
would ensure that a market participant can post margin adequate to 
support its positions without having to

[[Page 2751]]

post margin in excess of regulatory requirements due to an inability to 
apply margin across platforms.\359\ Another commenter stated that the 
Commission should explore developing a framework that would allow cross 
margining of futures and securities transactions, and an additional 
commenter added that this type of framework would ensure a level 
playing field between direct and indirect members and noting that, 
unlike direct participants, clients are not permitted to cross-margin 
positions cleared at FICC with futures positions cleared at CME Group 
under FICC's current cross-margining framework, which significantly 
increases clearing costs for clients (depending on the trading 
strategies involved), discouraging clearing and creating an unlevel 
playing field between direct members and clients at FICC.\360\
---------------------------------------------------------------------------

    \357\ MFA Letter, supra note 81, at 11; SIFMA/IIB Letter, supra 
note 37, at 13; SIFMA AMG Letter, supra note 35, at 8.
    \358\ SIFMA/IIB Letter, supra note 37, at 13.
    \359\ MFA Letter, supra note 81, at 11. The commenter further 
stated that the Commission should ensure indirect participants also 
can take into account offsetting positions when calculating margin 
requirements. MFA Letter II, supra note 125, at 4.
    \360\ SIFMA/AMG Letter, supra note 35, at 8; ARB et al. Letter, 
supra note 81, at 9.
---------------------------------------------------------------------------

    The current cross-margining agreement between FICC and CME is part 
of FICC's rulebook, any changes to which have to be filed with the 
Commission pursuant to Section 19(b) of the Exchange Act. The 
Commission historically has supported and approved cross-margining at 
clearing agencies and 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.\361\ The Commission 
has stated that cross-margining arrangements may be consistent with 
Section 17A(b)(3)(F) of the Exchange Act 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.\362\ For 
these reasons, the Commission continues to believe that market 
participants can benefit from cross-margining arrangements and 
encourages U.S. Treasury securities CCAs to consider the potential of 
such benefits.
---------------------------------------------------------------------------

    \361\ 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, Exchange Act Release No. 98327 (Sept. 8, 2023), 88 FR 63185, 
63187 (Sept. 14, 2023); see also Exchange Act Release No. 90464 
(Nov. 19, 2020), 85 FR 75384, 75386 (Nov. 25, 2020) (approving a 
second amended and restated cross-margining agreement between the 
Options Clearing Corp. and CME); Exchange Act Release No. 38584 (May 
8, 1997), 62 FR 26602, 26604-05 (May 14, 1997) (establishing a 
cross-margining agreement with the Options Clearing Corp., CME, and 
the Commodity Clearing Corporation).
    \362\ Id.
---------------------------------------------------------------------------

    Sixth, commenters identified a number of regulations that 
purportedly could be changed to further incentivize central clearing 
that are outside the Commission's jurisdiction. For example, one 
commenter stated that requiring counterparties to post margin for non-
centrally cleared bilateral repos through internationally agreed upon 
standards could level the playing field for margin requirements in 
Treasury repos, whether or not centrally cleared, and therefore 
incentivize market participants to centrally clear repos.\363\ The 
Commission alone cannot prescribe standards applicable to all market 
participants with respect to uncleared repo, and imposing requirements 
solely upon entities regulated by the Commission could lead to 
potential regulatory arbitrage. In addition, the commenter stated that 
FICC should have the ability to access a Federal Reserve standing 
repurchase facility for FICC as a systemically important financial 
market utility, which would (i) reduce the need for a participant-
funded liquidity resources at a CCA, thereby reducing costs and 
incentivizing further central clearing, and (ii) mitigate the increased 
concentration risk of substantially increasing the Treasury 
transactions cleared at FICC.\364\ However, the Commission does not 
have the authority to provide that access.
---------------------------------------------------------------------------

    \363\ SIFMA/IIB Letter, supra note 37, at 13.
    \364\ SIFMA/IIB Letter. supra note 37, at 13-14.
---------------------------------------------------------------------------

    In addition, the commenter stated that exempting a clearing 
member's exposure to FICC's CCLF from the Single Counterparty Credit 
Limits (``SCCL'') or increasing the SCCL with respect to exposures to 
FICC, due to the larger possible CCLF exposure that bank holding 
companies may end up incurring, would allow market participants to 
clear additional transactions at FICC without risking exceeding SCCL 
limits.\365\ Another commenter suggested that the Commission work with 
other regulators to advocate for improvements to prudential rules which 
would have the effect of enhancing liquidity in the U.S. Treasury 
market (i.e., the Supplementary Leverage Ratio and other capital 
requirements).\366\ The SCCL and the Supplementary Leverage Ratio, as 
well as other bank capital requirements, arise from regulations of the 
Board of Governors.\367\ Therefore, any changes to the SCCL and banking 
capital regulations are outside the Commission's jurisdiction.
---------------------------------------------------------------------------

    \365\ SIFMA/IIB Letter, supra note 37, at 14.
    \366\ SIFMA AMG Letter, supra note 35, at 8.
    \367\ See 12 CFR part 252 subpart H (regulations regarding 
SCCL); 12 CFR 217.10(c) (SLR regulation) and part 217 generally 
regarding bank capital requirements); see also Final Rule, Single-
Counterparty Credit Limits for Bank Holding Companies and Foreign 
Banking Organizations, 83 FR 38460 (Aug. 6, 2018).
---------------------------------------------------------------------------

    One commenter suggested promoting alternatives to central clearing 
that could improve liquidity and strengthen the U.S. Treasury market. 
The commenter stated that CUSIP aggregation has been applied 
successfully in the past to agency mortgage-backed securities and may 
improve liquidity by increasing the size of certain off-the-run U.S. 
Treasury issuances. The commenter further stated that the U.S. Treasury 
could also continue to consider engaging in buybacks of existing U.S. 
Treasury securities as a way of improving liquidity. The commenter also 
stated that the Commission could further engage with the industry in 
discussions on how to expand all-to-all trading in secondary market 
cash transactions as a way to promote liquidity. Finally, the commenter 
stated that other recent rule proposals and enhancements to the TRACE 
reporting obligations for U.S. Treasury securities will in time give 
the Commission greater visibility into this market.\368\
---------------------------------------------------------------------------

    \368\ SIFMA AMG Letter, supra note 35, at 8.
---------------------------------------------------------------------------

    In response to the comments regarding CUSIP aggregation and buyback 
of U.S. Treasury securities, those actions would be undertaken by 
either the Federal Reserve Bank of New York (or other market 
participants) or the U.S. Department of the Treasury, 
respectively.\369\ The Commission does not have the authority to 
conduct such actions, and these actions would not impact the overall 
level of central clearing in the market. In response to the comments 
regarding all-to-all liquidity, the Commission agrees that increased 
all-to-all trading could improve liquidity in the U.S. Treasury market 
and, as stated in the Proposing

[[Page 2752]]

Release, believes that increased central clearing could, in fact, 
increase all-to-all trading.\370\ However, all-to-all trading does not, 
on its own, address the risks to CCAs that the proposal was designed to 
address. The Commission therefore believes that imposing requirements 
on CCAs to have their members centrally clear eligible secondary market 
transactions should proceed, regardless of the current status of all-
to-all trading, to address these issues. Similarly, in response to the 
comments regarding TRACE reporting, the Commission does not believe 
that the increased reporting would address the risks to CCAs arising 
from current clearing practices in the U.S. Treasury market. Therefore, 
relying on reporting alone would not be sufficient.
---------------------------------------------------------------------------

    \369\ See FRBNY, Statement Regarding Aggregation of Agency 
Mortgage-Backed Securities Holdings (Oct. 6, 2022), available at 
https://www.newyorkfed.org/markets/opolicy/operating_policy_221006; 
31 CFR part 375, Marketable Treasury Securities Redemption 
Operations (establishing the terms and conditions by which the U.S. 
Department of the Treasury may redeem outstanding, unmatured 
marketable Treasury securities).
    \370\ Proposing Release, supra note 14, 87 FR at 64628; see also 
FRBNY Staff Report No. 1036, All-to-All Trading in the U.S. Treasury 
Market at 12-13 (Oct. 2022), available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1036.pdf?sc_lang=en (discussing how central clearing could make 
all-to-all trading more likely to expand in the Treasury market, 
while also potentially increasing the costs).
---------------------------------------------------------------------------

    Eighth, one commenter stated that the Commission should require 
enhanced transparency regarding FICC's margining calculations and 
default management procedures. The commenter states that the proposal 
does not set default management standards or require disclosure of such 
standards. The commenter asserts that while FICC has disclosed ``key 
aspects'' of its default rules and procedures, greater transparency 
into these procedures, including, in particular, with respect to how 
FICC manages the default risk of indirect participants, would be 
beneficial. The commenter also stated that the proposal does not set 
margin requirements or require transparency into how margin 
requirements are set. The commenter states that with respect to both 
default management and margin calculations, enhanced transparency would 
enhance confidence in, and the resilience of, FICC, which will, in turn 
increase market participants' confidence in submitting additional 
transactions for clearing.\371\ Another commenter also referenced the 
``broad opacity'' of FICC margin models and the challenges that posed 
for participants, stating that the participants' inability to replicate 
FICC's margin models left the direct and indirect participants as not 
being able to accurately predict the daily (or more) margin calls to a 
reasonable degree.\372\
---------------------------------------------------------------------------

    \371\ MFA Letter, supra note 81, at 11-12; see also MFA Letter 
II, supra note 125, at 5.
    \372\ SIA Partners Comment, supra note 52, at 18; see also id. 
at 74-75.
---------------------------------------------------------------------------

    The Commission's existing rules address these issues and require 
transparency into default management, and margin methodology. On 
default management, Rule 17ad-22(e)(13) requires that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures 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 by, at a minimum, requiring the covered clearing 
agency's participants and, when practicable, other stakeholders to 
participate in the testing and review of its default procedures, 
including any close-out procedures, at least annually and following 
material changes thereto.\373\ When adopting the Covered Clearing 
Agency Standards, the Commission declined to prohibit or adopt specific 
loss allocation or default management tools suggested by commenters, 
relying upon the Commission's belief that, when determining the content 
of its policies and procedures with respect to default management, each 
CCA must have the ability to enhance its policies and procedures to 
meet the evolving challenges and risks in the securities market that 
the CCA serves.\374\ For these reasons, the Commission continues to 
believe that it should not set particular default management procedures 
for CCAs.
---------------------------------------------------------------------------

    \373\ 17 CFR 240.17ad-22(e)(13).
    \374\ CCA Standards Adopting Release, supra note 10, 81 FR at 
70829.
---------------------------------------------------------------------------

    In addition, Rule 17ad-22(e)(6) requires that a CCA 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.\375\ Thus, CCAs are 
required to develop policies governing how they calculate margin. In 
addition, under the amendments to Rule 17ad-22(e)(6) being adopted in 
this release, CCAs will be obligated to have policies and procedures to 
calculate house margin separately from customer margin.
---------------------------------------------------------------------------

    \375\ 17 CFR 240.17ad-22(e)(6).
---------------------------------------------------------------------------

    Further, both default management and margin calculation generally 
constitute material aspects of the operations of a CCA, meaning that 
they should be considered stated policies, practices, or 
interpretations under Exchange Act Rule 19b-4.\376\ As such, they are 
subject to the filing obligations applicable to SROs under Section 
19(b) of the Exchange Act. This means that the default management 
processes and margin methodologies are described in SRO rule filings 
upon which market participants may comment and that the Commission must 
review and approve. CCAs have adopted rules on these topics pursuant to 
the SRO rule filing process.\377\ The filing obligations under Section 
19(b) of the Exchange Act provide transparency into the covered 
clearing agencies' default management processes and margin 
methodologies.
---------------------------------------------------------------------------

    \376\ 17 CFR 240.19b-4(a)(6)(i).
    \377\ Regarding default management, see, e.g., FICC Rule 4, 
sections 6, 7, 7a, and 7b (addressing application of clearing fund 
deposits and other Amounts to defaulting members' obligations, loss 
allocation waterfall, corporate contribution, and withdrawal from 
membership in the event of a loss allocation); FICC Rule 3A, 
sections 12, 15, and 16 (addressing loss allocation in the Sponsored 
Service and the insolvency of either a sponsoring or sponsored 
member), supra note 19; Self-Regulatory Organizations; Fixed Income 
Clearing Corporation; Order Approving a Proposed Rule Change, as 
Modified by Amendment No. 1, to Amend the Loss Allocation Rules and 
Make Other Changes, Exchange Act Release No. 83970 (Aug. 28, 2018). 
Regarding margin methodologies, see e.g., FICC Rule 4, section 1b 
(setting forth the GSD unadjusted margin portfolio amount) and 
section 2a (describing the intraday supplemental required fund 
deposit), in conjunction with Rule 1 (defining the various 
components of the margin methodology, including, among other things, 
the VaR Charge, the Backtesting Charge, and the Margin Liquidation 
Adjustment Charge), supra note 19; see also Self-Regulatory 
Organizations; Fixed Income Clearing Corporation; Notice of Filing 
of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Implement 
Changes to the Required Fund Deposit Calculation in the Government 
Securities Division Rulebook, Exchange Act Release No. 83362 (June 
1, 2018), 83 FR 26514 (June 7, 2018).
---------------------------------------------------------------------------

    Second, in addition to the aforementioned obligations under the 
Covered Clearing Agency Standards specific to default management and 
margin, Rule 17ad-22(e)(23) also imposes a set of requirements related 
to transparency and disclosure. Specifically, a CCA is obligated to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for publicly disclosing all 
relevant rules and material procedures, including key aspects of its 
default rules and procedures, and providing sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in the CCA.\378\ In 
addition, a CCA must produce a comprehensive public disclosure that 
describes its material rules, policies, and procedures regarding its 
legal, governance, risk management, and operating framework, accurate 
in all material respects at the time of publication, that includes, 
among other things, a standard-by-standard summary narrative for each 
applicable standard set forth in

[[Page 2753]]

paragraph (e)(1) through (23) of the Covered Clearing Agency Standards 
section with sufficient detail and context to enable a reader to 
understand the CCA's approach to controlling the risks and addressing 
the requirements in each standard.\379\ Thus, each CCA issues a public 
document designed to address each standard, including those with 
respect to fees, default management, and margin.\380\ In addition, CCAs 
provide a variety of additional tools to assist their participants in 
understanding their margin obligations, such as descriptions of the 
components, including their calculations, and margin calculators that 
can be used to estimate margin requirements based on potential changes 
to a participant's portfolio.\381\
---------------------------------------------------------------------------

    \378\ 17 CFR 240.17ad-22(e)(23)(i) and (ii).
    \379\ 17 CFR 240.17ad-22(e)(23)(iii).
    \380\ See, e.g., FICC Disclosure Framework, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf.
    \381\ See, e.g., FICC Government Securities Division, Overview 
of the Clearing Fund Methodology (Oct. 2023), available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/GSD-Clearing-Fund-Methodology-Overview-October-2023.pdf; Comment 
Letter from FICC re: SR-FICC-2020-017 and SR-FICC-2020-804, 
available at https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017-8451684-229787.pdf (describing the different 
capabilities provided at FICC to enable direct participants to 
determine their margin requirements, including, but not limited to a 
calculator that provides functionality to direct participants to 
enter ``what if'' position data and recalculate their VaR Charge to 
determine margin impact pre-trade execution and to see the impact to 
VaR if specific transactions are executed or to anticipate the 
impact of an increase or decrease to a current clearing position).
---------------------------------------------------------------------------

    Accordingly, because of the existing framework applicable to 
transparency, the Commission disagrees that enhanced transparency into 
margining calculations and default management procedures is necessary 
or that it would meaningfully incentivize greater clearing. However, 
the Commission encourages market participants and CCAs to engage 
regarding the existing tools and potential additional resources that 
could be provided to better assist market participants at understanding 
potential margin obligations.
    Finally, one commenter encouraged the Commission to consider 
whether proposal should specifically require FICC to establish rules 
ensuring that fees charged by direct participants are transparent and 
reasonable.\382\ Section 17A(b)(3)(E) of the Exchange Act requires that 
the rules of a clearing agency do not impose any schedule of prices, or 
fix rates or other fees, for services rendered by its participants. In 
light of this statutory provision, a rule such as that suggested by the 
commenter would not be appropriate.
---------------------------------------------------------------------------

    \382\ MFA Letter, supra note 81, at 11.
---------------------------------------------------------------------------

    For all these reasons, the Commission disagrees with commenters 
that would support not requiring the clearance of eligible secondary 
market transactions. The Commission believes that requiring direct 
participants of U.S. Treasury securities CCAs to clear their eligible 
secondary market transactions is essential to improving risk management 
at U.S. Treasury securities CCAs (including contagion risk) and to 
obtaining the benefits of central clearing in the U.S. Treasury market, 
as discussed in part II.A.1.a supra. As discussed in more detail in 
parts III and IV infra, the Commission does not believe that further 
study is necessary, but believes that, as discussed in more detail in 
part III, a phased implementation schedule for the requirements 
discussed in part II, beginning with some of the items identified as 
incentives to central clearing, should address commenters' concerns 
that the necessary market infrastructure is not in place to support the 
requirement to clear eligible secondary market transactions.

B. Additional Changes to Covered Clearing Agency Standards

    The Commission also proposed additional changes to the Covered 
Clearing Agency Standards, designed to address the likely increase in 
the volume of U.S. Treasury securities transactions submitted for 
central clearing resulting from the proposed requirement that direct 
participants of a U.S. Treasury securities CCA submit eligible 
secondary market transactions for clearance and settlement. The 
Commission is adopting these additional changes, for the reasons 
discussed in more detail below.
1. Netting and Margin Practices for House and Customer Accounts
    The proposed amendments to Rule 17ad-22(e)(6)(i) would require a 
U.S. Treasury securities CCA to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable, calculate, collect, and hold margin amounts from a direct 
participant for its proprietary U.S. Treasury securities positions 
separately and independently from margin calculated and collected from 
that direct participant in connection with U.S. Treasury securities 
transactions by an indirect participant that relies on the services 
provided by the direct participant to access the covered clearing 
agency's payment, clearing, or settlement facilities. This rule would 
prohibit a U.S. Treasury securities CCA from netting customer and 
proprietary positions.
    In the Proposing Release, the Commission stated it believed that 
the separation of house and customer positions could reduce the 
potential risk to the U.S. Treasury securities CCA arising from such 
transactions. Such changes should allow a U.S. Treasury securities CCA 
to better understand the source of potential risk arising from the U.S. 
Treasury securities transactions it clears and potentially further 
incentivize central clearing.\383\
---------------------------------------------------------------------------

    \383\ Proposing Release, supra note 14, 87 FR at 64633.
---------------------------------------------------------------------------

    Importantly, the amendment to Rule 17ad-22(e)(6)(i) would not 
require that a CCA's direct participant collect a specified amount of 
margin from its customers or determine customer margin in a particular 
manner, such as on a gross basis; the calculation and collection of 
margin between a CCA direct participant and its customers would be left 
to other applicable regulations and, to the extent applicable, 
bilateral negotiation between the member and its customer. As the 
Commission stated in the Proposing Release,\384\ the amendments to Rule 
17ad-22(e)(6)(i) would, in this way, require policies and procedures 
that closely resemble the calculation, collection, and holding of 
margin for listed options.\385\ When considering and adopting the 
Covered Clearing Agency Standards, the Commission noted that customer 
segregation can be achieved through such an omnibus account structure, 
where all collateral belonging to all customers of a particular member 
is commingled and held in a single account segregated from that of the 
member,\386\ which is consistent with the practice at the clearing 
agency for listed options and this amendment to Rule 17ad-22(e)(6)(i).
---------------------------------------------------------------------------

    \384\ Proposing Release, supra note 14, 87 FR at 64634.
    \385\ Currently, the covered clearing agency that clears and 
settles listed options transactions holds margin for customer trades 
separately from the proprietary trades of the submitting participant 
in an omnibus account. See Options Clearing Corp. Rules 601(c) and 
(d), available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf (``OCC Rules''). This approach 
is also similar to the approach used for futures customers. See 17 
CFR 1.22 and Advanced Notice of Proposed Rulemaking, Protection of 
Cleared Swaps Customers Before and After Commodity Broker 
Bankruptcies, 75 FR 75162, 75163 (Dec. 2, 2010) (describing the 
futures model).
    \386\ See Proposing Release, supra note 14, 87 FR at 64634 
(discussing CCA Standards Proposing Release, supra note 8, 79 FR at 
29547; CCA Standards Adopting Release, supra note 10, 81 FR at 
70832-33).

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

[[Page 2754]]

    Commenters generally supported the proposed amendment to Rule 17ad-
22(e)(6)(i).\387\ One commenter agreed that this amendment would 
further the risk management benefits associated with central clearing 
and help avoid a direct participant's disorderly default because FICC 
would have a more holistic view of the market than currently available, 
and that because a direct participant's margin would be calculated, 
collected and held separately and independently than that of its 
customers, the direct participant's trades with its customers can be 
netted against the direct participant's trades with other direct 
participants.\388\ One commenter stated that the proposed changes with 
respect to risk management requirements would facilitate the proposal's 
goals of increased central clearing, and that it would also 
appropriately assign the risk of centrally cleared customer U.S. 
Treasury securities transactions to the customer.\389\
---------------------------------------------------------------------------

    \387\ ICE Letter, supra note 33, at 3; DTCC/FICC Letter, supra 
note 33, at 25; ICI Letter, supra note 85, at 25-26; SIFMA/IIB 
Letter, supra note 37, at 25-26; Tradeweb Letter, supra note 81, at 
3; AIMA Letter, supra note 81, at 8; AFREF Letter, supra note 33, at 
5; SIFMA AMG Letter, supra note 35, at 8.
    \388\ AIMA Letter, supra note 81, at 8.
    \389\ SIFMA/IIB Letter, supra note 37, at 25.
---------------------------------------------------------------------------

    However, commenters also raised several additional issues with 
respect to the separation of house and customer margin that the 
Commission will address below.
    First, several commenters argued that this rule should also 
prohibit the use of separate customer margin for any other purpose, 
including loss mutualization (i.e., when a clearing agency uses non-
defaulting customers' funds in the event of a default, thereby 
``mutualizing'' the loss).\390\ Another commenter stated that 
prohibiting the use of customer margin for loss mutualization would 
mitigate higher risk-weighted assets under certain bank capital rules 
and may also facilitate clearing for market participants that are 
subject to restrictions regarding exposure to loss mutualization.\391\
---------------------------------------------------------------------------

    \390\ SIFMA/IIB Letter, supra note 37, at 26-27; ICI Letter, 
supra note 85, at 19 (supporting strong protections for funds in 
whatever models FICC chooses to adopt, including LSOC protections, 
and stating that customer funds must be identified as fund assets 
and have the benefit of customer treatment); AIMA Letter, supra note 
81, at 8 (stating that the Commission should specify that client 
initial margin should not be included as part of a clearing agency's 
default waterfall and subject to loss mutualization); ARB et al. 
Letter, supra note 81, at 8 (``in no event should margin posted for 
client positions be available for use as part of a clearing agency's 
default waterfall''); MFA Letter, supra note 81, at 7 (``it is 
crucial that indirect participants are able to post margin on a 
segregated basis such that their clients are not subject to the 
credit risk of others (and, likewise, that their funds are not 
subject to loss mutualization''); see also SIFMA AMG Letter, supra 
note 35, at 12-13 (``it will be difficult to support expanding 
cleared trading in U.S. Treasury securities until we have a 
framework which ensures customers can access clearing solutions 
where their margin and collateral will be adequately protected, 
including from loss mutualization by the clearing agency'').
    \391\ Letter from Ann Battle, Senior Counsel, Market 
Transitions, International Swaps and Derivatives Association, Inc., 
at 2 (Dec. 27, 2022) (``ISDA Letter'').
---------------------------------------------------------------------------

    What the commenters seek is akin to the requirements applicable to 
derivatives clearing organizations clearing swaps, that is, the 
``legally segregated, operationally commingled'' (``LSOC'') model, 
which, as the Commission stated in the Proposing Release, differs from 
the requirements proposed in Rule 17ad-22(e)(6)(i).\392\ Under such an 
approach, customer collateral may be held in one combined account and 
commingled, but in the event of a customer default, the collateral of 
non-defaulting customers would not be available to cover any losses 
attributable to the defaulting customer (i.e., they would be legally 
separated from the collateral of the defaulting customer and not 
available for loss mutualization).\393\ As discussed in the Proposing 
Release, the Commission previously has declined to require such an 
approach for covered clearing agencies, preferring to allow each 
covered clearing agency to determine the method that works best for the 
products it clears and markets it serves.\394\ When discussing that 
conclusion, the Commission also noted that this type of segregation 
does not occur at the CCP level under the current market structure for 
cash securities and listed options, and that customer positions and 
funds in the cash securities and listed options markets are eligible 
for protection under SIPA, which is not the case for futures and 
cleared swaps.\395\
---------------------------------------------------------------------------

    \392\ Proposing Release, supra note 14, 87 FR at 64634 
(discussing 17 CFR 22.15).
    \393\ See, e.g., Protection of Cleared Swaps Customer Contracts 
and Collateral; Conforming Amendments to the Commodity Broker 
Bankruptcy Provisions, 77 FR 6336, 6339 (Feb. 7, 2012) (describing 
the LSOC approach and adopting final rules for this approach).
    \394\ See Proposing Release, supra note 14, 87 FR at 64634 
(discussing CCA Standards Adopting Release, supra note 10, 81 FR at 
70832).
    \395\ Id.
---------------------------------------------------------------------------

    The Commission continues to believe that it would not be 
appropriate to require an LSOC model for U.S. Treasury security CCAs, 
because customer positions and funds in the market for cash securities 
and listed options would be eligible for protection under SIPA, unlike 
in other markets which use an LSOC model. However, a U.S. Treasury 
securities CCA may choose to offer such a model, based upon what works 
best for both direct and indirect participants or to satisfy other 
regulatory obligations. In practice, U.S. Treasury securities CCAs 
seeking to provide services that would allow broker-dealers to 
rehypothecate customer margin to the CCA, as discussed further in part 
II.C.2 infra, would, consistent with that flexibility, choose to adopt 
practices that would ensure that customer funds can be used only for a 
loss arising from customer activity and could not be used for loss 
mutualization. Thus, adopting the changes described in section II.C.2 
below should also result in U.S. Treasury securities CCAs incorporating 
access models that provide for the type of segregation requested by the 
commenters.
    Another commenter argued that the Commission should consider 
additional changes that would compel FICC to require that all margin 
requirements related to customer positions be satisfied by those 
customers, to appropriately allocate risk to those customers and lower 
barriers to participation in central clearing for customers by direct 
participants who otherwise may not be able to submit margin on behalf 
of their customers.\396\ The requirement to collect, calculate, and 
hold customer margin separate from proprietary margin should ensure 
that, at the CCA level, the risks arising from customer clearing are 
sufficiently margined to protect the CCA from the exposure arising from 
customer clearing. In the event that a direct participant of the CCA is 
not able to submit margin on behalf of its customers, such participants 
could elect to take advantage of the amendments to Rule 15c3-3, as 
discussed in part II.C.2 infra, regarding Rule 15c3-3, which would 
require the participant to collect 100% customer margin in order to be 
able to onward post the margin.
---------------------------------------------------------------------------

    \396\ SIFMA/IIB Letter, supra note 37, at 26 (analogizing to the 
CFTC requirement that DCOs collect at least 100% of margin to cover 
customer positions, see 17 CFR 39.13(g)(8)).
---------------------------------------------------------------------------

    An additional commenter described the proposed rule as requiring 
customers to be margined individually and requiring FICC to collect 
margin even where a member's overall customer position is netted, which 
would ``exponentially'' increase the margin requirement on all those 
involved in the U.S. Treasury market.\397\ The Commission disagrees 
that the proposed amendments to Rule 17ad-22(e)(6)(i) would require 
customers to

[[Page 2755]]

be margined individually or that FICC would be required to collect 
margin even where a participant's overall position is netted. As 
discussed in the Proposing Release, the proposed changes would require 
that a U.S. Treasury securities CCA calculate, collect, and hold margin 
for positions in U.S. Treasury securities transactions of a direct 
participant in a U.S. Treasury securities CCA separately from those of 
customers or other indirect participants that rely on the direct 
participant to access the covered clearing agency's payment, clearing, 
or settlement facilities, but this does not mandate the calculation of 
margin for individual customers, that is, on a gross basis for each 
customer.\398\ A U.S. Treasury securities CCA would have the discretion 
to collect a single netted amount for each clearing member's customer 
account as a whole, that is, netting each customer's margin against 
that of other customers within the overall customer account.\399\
---------------------------------------------------------------------------

    \397\ IDTA Letter, supra note 66, at 4.
    \398\ Proposing Release, supra note 14, 87 FR at 64634.
    \399\ Id.
---------------------------------------------------------------------------

    The commenter also discusses the impact of this purported gross 
margining on small and mid-size broker-dealers who are 
disproportionately affected by FICC's Excess Capital Premium (``ECP'') 
charge, which is a margin add-on that collects a premium when a 
member's VaR charge exceeds the member's Net Capital, net assets or 
equity capital (as applicable to that member based on its type of 
regulation).\400\ The commenter explained the potential impact of the 
ECP charge in conjunction with FICC's Sponsored Service, stating that 
``the combination of gross margining and ECP currently in use under the 
Sponsored Model, and what is prescribed in the Proposed Rule, 
effectively prevents smaller and middle market broker dealers from 
materially participating in the Treasury market.'' \401\ The commenter 
states that the potential effect of the ECP charge would be exacerbated 
when customer/institutional counterparty margin is included in the 
calculation, and the surcharge prevents smaller independent broker-
dealers from sponsoring institutional counterparties/customers.\402\ 
The commenter states that the proposal must be changed to ensure that 
the combined effect of gross margining and the ECP does not excessively 
burden smaller, middle-market broker dealers and their institutional 
investor customers.\403\ The commenter's concerns regarding the 
interplay between purported required gross margining and the ECP charge 
rests on the assumption that gross margin is required under the 
proposal, which, as discussed in the prior paragraph, is not the case. 
In addition, FICC recently has indicated that it intends to make 
available client clearing models that do not require gross margin, 
consistent with its current offerings.\404\ Therefore, the Commission 
does not believe that the proposal needs to be changed to address this 
issue. With respect to the ECP charge on its own, the Commission is not 
taking any action with respect to the ECP charge as part of adopting 
these new requirements. The ECP charge is part of FICC's existing 
rulebook, and any change to that rulebook would be made pursuant to the 
proposed SRO rule change process under Section 19(b).\405\
---------------------------------------------------------------------------

    \400\ IDTA Letter, supra note 66, at 4; see also FICC Rule 4, 
section 14, supra note 19.
    \401\ IDTA Letter, supra note 66, at 5.
    \402\ IDTA Letter, supra note 66, at 5.
    \403\ IDTA Letter, supra note 66, at 6.
    \404\ See DTCC 2023 White Paper, supra note 107, at 6 
(discussing that the proposal would allow the option to calculate 
and collect margin associated with customer activity on a gross or 
net basis depending on the client clearing model selected by the 
member and stating that FICC would offer options via different 
access models that would allow those parties to balance the benefits 
of netting and segregation in different ways).
    \405\ 15 U.S.C. 78s(b); see also 15 U.S.C. 78s(c).
---------------------------------------------------------------------------

    Another commenter stated that the Commission should encourage FICC 
to hear and consider input from indirect participants regarding 
potential changes to fee and governance models.\406\ The Commission has 
adopted a requirement that registered clearing agencies must establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to solicit, consider, and document its 
consideration of the views of participants and other relevant 
stakeholders of the registered clearing agency regarding material 
developments in its governance and operations on a recurring 
basis.\407\ Requiring these policies and procedures should ensure that 
FICC considers input from indirect participants regarding potential 
changes to fee and governance models.
---------------------------------------------------------------------------

    \406\ AIMA Letter, supra note 81, at 8.
    \407\ Adopting Release, Clearing Agency Governance and Conflicts 
of Interest, Exchange Act Release No. 98959 (Nov. 16, 2023), 88 FR 
84454 (Dec. 5, 2023) (adopting Rule 17ad-25(j)).
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission is therefore 
adopting the amendments to Rule 17ad-22(e)(6)(i) as proposed.
2. Facilitating Access to U.S. Treasury Securities CCAs
    Proposed Rule 17ad-22(e)(18)(iv)(C) would require that a U.S. 
Treasury securities CCA establish, implement, maintain and enforce 
written policies and procedures reasonably designed to, as applicable, 
ensure that it has appropriate means to facilitate access to clearance 
and settlement services of all eligible secondary market transactions 
in U.S. Treasury securities, including those of indirect participants, 
which policies and procedures the U.S. Treasury securities CCA's board 
of directors reviews annually. In the Proposing Release, the Commission 
explained that this provision does not prescribe specific methods for 
market participants to obtain indirect access to a U.S. Treasury 
securities CCA.\408\
---------------------------------------------------------------------------

    \408\ Proposing Release, supra note 14, 87 FR at 64635.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated its understanding 
that indirect participants may have significantly different preferences 
with respect to how they access and obtain clearing services from 
direct participants of U.S. Treasury securities CCAs. The Commission 
explained that this proposed requirement is intended to help ensure 
that all U.S. Treasury security CCAs review their indirect access 
models and ensure that they facilitate access to clearance and 
settlement services in a manner suited to the needs and regulatory 
requirements of market participants throughout the U.S. Treasury 
securities market, including indirect participants.\409\
---------------------------------------------------------------------------

    \409\ Id.
---------------------------------------------------------------------------

a. Comments Supporting the Commission's Proposed Rule
    Commenters generally supported the Commission's attention to the 
need for appropriate access to the U.S. Treasury securities CCA,\410\ 
and several commenters specifically agreed that the Commission should 
not prescribe any particular model. One commenter cautioned that 
dictating a single model of clearing would close off clearing to many 
market participants, force indirect participants to bear additional 
clearing costs, increase concentration, reduce competition, and 
negatively impact market liquidity.\411\ In addition, another commenter 
stated that clearing agencies should have flexibility to innovate in 
this area.\412\ Another commenter stated that it supported the 
proposal's approach of allowing clearing agencies to engage on 
potential reforms directly with affected market participants via the 
clearing agencies' existing rulemaking processes, particularly given 
the many

[[Page 2756]]

risks involved and given that various models may be appropriate for 
different firms and different situations.\413\
---------------------------------------------------------------------------

    \410\ MFA Letter, supra note 81, at 5.
    \411\ DTCC/FICC Letter, supra note 33, at 14, 18.
    \412\ ICE Letter, supra note 33, at 3.
    \413\ ISDA Letter, supra note 391, at 3.
---------------------------------------------------------------------------

    Another commenter asked the Commission to retain optionality in 
access models for U.S. Treasury securities CCAs, because all access 
models have costs and benefits and different access models may be 
appropriate for different market participants or commercial 
arrangements. The commenter agreed with the Commission that neither the 
Commission nor the rulebook of a U.S. Treasury securities CCA should 
mandate a single approach to access or require that direct participants 
that clear for indirect participants offer all possible access models. 
The commenter stated that a U.S. Treasury securities CCA should provide 
the flexibility necessary to allow market participants to match access 
models with optimal use cases, which would encourage maximum market 
participation from a diverse group.\414\
---------------------------------------------------------------------------

    \414\ SIFMA/IIB Letter, supra note 37, at 23.
---------------------------------------------------------------------------

    The Commission agrees with these commenters regarding the need for 
flexibility in a U.S. Treasury securities CCA's access models. These 
CCAs should be able to develop models that meet the needs of different 
market participants, and they should not mandate a single approach to 
access or require that direct participants that clear for indirect 
participants offer all possible access models. When considering whether 
its models meet the needs of different market participants, a U.S. 
Treasury securities CCA generally should consider certain topics 
related to its access models, such as their sustainability, the need 
for additional models or revisions, and potential applicability of 
models used in other markets, as part of the CCA's consideration of its 
compliance with this proposed rule. Many commenters also expressed that 
the Commission should impose additional requirements regarding access 
to a U.S. Treasury securities CCA. These comments are discussed in the 
following parts II.B.2.b and c.
b. Comments Regarding the Commission's Authority To Require a CCA To 
Accept Done Away Transactions
    Several commenters stated that the Commission should require that a 
U.S. Treasury securities CCA obligate its members to accept done-away 
transactions and/or that the Commission should prohibit anticompetitive 
practices at CCPs, including prohibiting clearing members from 
requiring clients to bundle execution and clearing.\415\ The commenters 
argued that the Commission had the statutory authority to implement 
such a requirement. First, the commenters stated that ``since a 
clearing requirement cannot be implemented in the Treasury market 
unless the Commission ensures that both direct and indirect participant 
have a way to access a clearing agency, the two topics are inseparable 
and the Commission can rely on the statutory authority underlying the 
clearing requirement in order to address related access issues, 
including promoting the prompt and accurate clearance and settlement of 
Treasury securities.'' \416\ Second, the commenters stated that Section 
17A of the Exchange Act grants the Commission broad authority to 
improve access and competitive practices at a clearing agency. The 
commenters identified the Commission's authority to adopt rules for 
clearing agencies that are necessary or appropriate in the public 
interest or otherwise in furtherance of the purposes of this chapter, 
noting that the purposes of Section 17A include maintaining fair 
competition among brokers and dealers and scrutinizing clearing agency 
rules to ensure they do not permit unfair discrimination among 
participants in the use of the clearing agency and do not impose any 
burden on competition not necessary or appropriate.\417\ Another 
commenter stated that the Commission has the authority in Section 17A 
to prohibit anticompetitive practices at all CCAs.\418\
---------------------------------------------------------------------------

    \415\ See, e.g., ARB et al. Letter, supra note 81, at 7; MFA 
Letter II, supra note 125, at 3-4; see also Citadel Letter, supra 
note 81, at 7.
    \416\ ARB et al. Letter, supra note 81, at 7; see also Citadel 
Letter, supra note 81, at 7.
    \417\ See Citadel Letter, supra note 81, at 7; ARB et al. 
Letter, supra note 81, at 6.
    \418\ AIMA Letter, supra note 81, at 6.
---------------------------------------------------------------------------

    Similarly, one commenter asserted that requiring a direct 
participant that offers clearing services to indirect participants to 
accept those indirect participants' done away transactions would be 
consistent with Exchange Act Section 17A, including, in particular, 
requirements relating to addressing unnecessary costs, maintaining fair 
competition, removing impediments to a national market system, and 
promoting the public interest and protection of investors. The 
commenter also suggested, at a minimum, that the Commission should 
require that if a clearing agency permits its direct participants to 
condition an indirect participant's access to clearing on the indirect 
participant also executing transactions with the direct participant or 
its affiliate, the clearing agency must specify in its rules when such 
conditional access is permitted, which should be limited to 
circumstances where the clearing agency can show such conditional 
access is consistent with the Exchange Act.
    The commenters cited several provisions of Section 17A in support 
of their views. First, several commenters referenced language in 
Section 17A(a)(1), which sets forth the Congressional findings 
underpinning Section 17A. Specifically, Congress found that, 
inefficient procedures for clearance and settlement impose unnecessary 
costs on investors and persons facilitating transactions by and acting 
on behalf of investors, and that the linking of all clearance and 
settlement facilities and the development of uniform standards and 
procedures for clearance and settlement will reduce unnecessary costs 
and increase the protection of investors and persons facilitating 
transactions by and acting on behalf of investors. These findings, 
including the reference to ``unnecessary costs,'' do not provide the 
Commission with authority to adopt rules requiring CCAs to impose 
particular requirements on their direct participants regarding the 
direct participants' business models. Instead, they represent Congress' 
findings about the consequences of the situation at the time Section 
17A was adopted in 1975.
    Second, the commenters relied upon language in Section 17A(a)(2) 
setting forth the Congressional direction to the Commission regarding a 
national system for clearance and settlement. This direction instructs 
the Commission to take into account, among other things, the 
maintenance of fair competition among brokers and dealers when 
facilitating the establishing of a national system for the prompt and 
accurate clearance and settlement of securities transactions.
    Third, commenters relied upon language in Section 17A(b)(3)(F) and 
(I). These provisions set forth certain requirements for a clearing 
agency's rules that must be met in order for the Commission to register 
the clearing agency. In the portions cited by commenters, Section 
17A(b)(3)(F) states that the clearing agency's rules should be, among 
other things, designed 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, and that they should not be designed 
to permit unfair discrimination among participants in the use of the 
clearing agency. Section

[[Page 2757]]

17A(b)(3)(I) states that the clearing agency's rules should not impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of this chapter.
    The type of requirement sought by commenters differs from the 
requirement to clear eligible secondary market transactions, in that 
the requirement to clear eligible secondary market transactions relates 
to transactions that the direct participant already has determined to 
enter into, based on its own business model.\419\ It is not requiring 
the direct participant to engage in particular transactions or to offer 
particular business models. By contrast, the commenters' support for a 
prohibition on anti-competitive practices or a requirement to accept 
done-away transactions would require clearing agencies to, in turn, 
require their direct participants to transact with their customers in 
specific ways and limit their ability to offer certain types of pricing 
services. As discussed in the Proposing Release, the current client 
clearing models in place at FICC allow for the submission of done-away 
transactions and allows non-FICC entities to access the CCA through 
multiple direct participants, but do not require any direct participant 
to submit done-away transactions on behalf of other market 
participants.\420\ Therefore, the Commission disagrees that the failure 
to require the submission of done-away transactions necessarily 
constitutes ``unfair discrimination,'' as discussed in Section 
17A(b)(3)(F). Moreover, in order to encourage market participants to 
provide services to enable indirect access to central clearing, the 
Commission believes it is best not to remove the ability of a direct 
participant of a U.S. Treasury securities CCA to determine what risk it 
will take with respect to guaranteeing transactions to the CCA. In 
addition, the Commission would not agree with the commenter that, at 
this time, the current access models offered by the existing U.S. 
Treasury securities CCA constitute a burden on competition that is not 
necessary or appropriate, as discussed in Section 17A(b)(3)(I).
---------------------------------------------------------------------------

    \419\ Specifically, the definition of an eligible secondary 
market transaction would simply identify various types of 
transactions but would not favor or require one over another.
    \420\ Proposing Release, supra note 14, 88 FR at 64635.
---------------------------------------------------------------------------

    More generally, the Commission disagrees that it should impose a 
particular access model at this time. The Commission is adopting a 
number of changes with regard to the method by which CCAs will provide 
services to the U.S. Treasury market, including the segregation of 
house and customer margin and the potential ability to use Rule 15c3-3 
to rehypothecate customer margin to the CCA to meet margin 
requirements, and regarding the CCA's obligations with respect to 
ensuring access. These changes will present both new obligations, but 
also potentially new business opportunities, for existing direct 
participants of the U.S. Treasury securities CCA. It is appropriate to 
allow the U.S. Treasury market to take these new requirements into 
account, before determining that additional access models are needed. 
Currently, FICC's models do allow for done-away transactions, and the 
Commission therefore disagrees that an additional model is a 
prerequisite to the requirement to clear eligible secondary market 
transactions.\421\
---------------------------------------------------------------------------

    \421\ In addition, the Commission notes that any additional 
model would have to be consistent with Section 17A(b)(3)(E), which 
requires that the rules of a registered clearing agency not impose 
any schedule of prices, or fix rates or other fees, for services 
rendered by its participants.
---------------------------------------------------------------------------

    Finally, a commenter also stated that in order to satisfy the 
proposal's principles-based access requirement, a clearing agency 
should have to demonstrate that, for each clearing model it considers 
necessary to offer to satisfy that access standard, the clearing agency 
is clearing a material volume of transactions through that model (i.e., 
if permitting done away clearing is necessary for the clearing agency 
to satisfy the proposal, then the clearing agency must demonstrate that 
material volume of done away clearing is actually taking place).\422\ 
The Commission agrees with the commenter that the CCA generally should 
consider the volumes and proportion of the market that are being 
centrally cleared through different access models as part of the CCA's 
consideration of whether its access models are meeting the needs of the 
market.
---------------------------------------------------------------------------

    \422\ MFA Letter, supra note 81, at 9.
---------------------------------------------------------------------------

c. Other Comments Regarding Access
    Other commenters supported additional Commission requirements 
regarding customer clearing models, particularly with respect to done-
away transactions. One commenter stated that the Commission needs to be 
more prescriptive in directing covered clearing agencies on how they 
design their access models, disagreeing with the amount of discretion 
left to the clearing agency and its board. The commenter stated that a 
successful clearing model must also facilitate and incentivize the 
clearing of ``done away'' transactions, which will require changes to 
incentives so that clearing brokers are compensated for facilitating 
this activity. The commenter identified ``the only viable path'' to a 
clearing requirement as the Commission's issuing a detailed rulemaking 
establishing a common clearing model and standards which must be met by 
any U.S. Treasury securities CCA, including FICC.\423\
---------------------------------------------------------------------------

    \423\ SIFMA AMG Letter, supra note 35, at 9-10.
---------------------------------------------------------------------------

    The Commission addressed similar comments in the discussion in part 
II.B.2.b supra. As discussed there, the Commission is not prescribing 
particular access models. The Commission agrees with commenters that a 
workable done-away model will be critical to this market, to 
accommodate the increased central clearing that would result from 
implementation of this rule, and encourages FICC and other market 
participants to consider how to offer and price the currently available 
models to ensure that indirect participants can access central 
clearing.
    One commenter stated that the Commission should adopt more robust 
and direct measures to ensure fair and open access, specifically to 
make sure that market participants have sufficient access to 
clearing.\424\ This commenter identified three overarching principles 
or concerns with respect to FICC's current clearing access models 
``that must be addressed in any final rule.'' First, the commenter 
stated that FICC's rules must ensure that an indirect participant can 
consolidate the clearing of its portfolio in one or a small number of 
direct participants by requiring a direct participant offering customer 
clearing to accept transactions executed by the customer with third-
party executing firms (that is, to accept ``done-away'' transactions). 
The commenter stated that under the current FICC rules, indirect 
participants may be prevented by their clearing firms from clearing 
these ``done-away'' transactions, which means that the indirect 
participant often needs to establish a clearing relationship with each 
executing counterparty, which divides portfolios, increases margin 
costs and operational complexity, and potentially reduces netting 
efficiencies.\425\ In response to this comment, for the reasons 
explained above, the Commission is not prescribing particular access 
models.
---------------------------------------------------------------------------

    \424\ MFA Letter, supra note 81, at 5; MFA Letter II, supra note 
125, at 3-4.
    \425\ MFA Letter, supra note 81, at 7; MFA Letter II, supra note 
125, at 3-4.
---------------------------------------------------------------------------

    Second, the commenter stated that indirect participants should be 
able to access central clearing models providing for FICC to guarantee 
settlement of their

[[Page 2758]]

transactions, which the commenter asserts is not the case with certain 
models today including FICC's correspondent and prime broker models. 
The commenter states that these models do not afford indirect 
participants the benefits of central clearing because settlement of the 
transactions they clear through those models remains dependent upon the 
direct participant because the indirect participant does not face FICC 
directly. The commenter states that because a clearing mandate would, 
in practice, force many market participants to contract with FICC 
direct participants to access clearing (and would disallow various 
bilateral settlement models), it is critical that the Commission ensure 
that settlement of such market participants' transactions is not 
contingent upon circumstances outside the indirect participants' 
control, including, for example, the solvency of a direct 
participant.\426\
---------------------------------------------------------------------------

    \426\ MFA Letter, supra note 81, at 7; see also MFA Letter II, 
supra note 125, at 4.
---------------------------------------------------------------------------

    The Commission recognizes that certain access models offered by 
FICC may not result in a contractual relationship or direct obligation 
between FICC and the indirect participant, meaning that FICC itself 
cannot guarantee settlement of such transactions. The Commission 
observes that this generally would be the case in any agent clearing 
relationship in which an indirect participant relies upon a direct 
participant to submit transactions for clearing on its behalf. For 
example, customers who access DCOs through an FCM that is a direct 
participant in the DCO may face exposure if the FCM fails. DCO rules 
generally require that it take steps to port the customer transactions 
(i.e., to transfer the customer positions to a new direct participant 
if the customer's original direct participant defaults), but ultimately 
retain the ability to close out the transactions if needed, leaving the 
customer to seek redress from its direct participant.\427\ However, 
this structure still provides the benefits of central clearing to the 
market as a whole, as described in part II.A.1 supra, despite the fact 
that an indirect participant may face continued exposure to its agent 
direct participant.
---------------------------------------------------------------------------

    \427\ See, e.g., ICE Clear Credit Rule 20A-02(a) (describing 
what happens in the event that FICC determines to effect the 
closing-out Process for client-related positions of a defaulting 
participant); CME Group Exchange Rule 802.G(1) (describing the DCO's 
ability to terminate transactions in a customer futures account).
---------------------------------------------------------------------------

    Third, the commenter states that an indirect participant should 
have the ability (although not the obligation) to fund the margin 
obligations of the direct participant clearing on its behalf which are 
attributable to the indirect participant. The commenter states that 
given that many indirect participants have fiduciary obligations to 
their own clients, it is crucial that indirect participants are able to 
post margin on a segregated basis such that their clients are not 
subject to the credit risk of others (and, likewise, that their funds 
are not subject to loss mutualization), which would promote systemic 
risk mitigation by facilitating a defaulter-pays model for clearing by 
indirect participants.\428\ The Commission addressed this issue in its 
discussion of a similar comment in part II.A.2.a.ii supra.
---------------------------------------------------------------------------

    \428\ MFA Letter, supra note 81, at 7.
---------------------------------------------------------------------------

    One commenter stated that the Commission should undertake a study 
of possible models to access U.S. Treasury securities CCAs, including 
models used in other markets. The commenter stated that current access 
models may not be suited for all participants or commercial 
arrangements, for various reasons including FICC membership 
requirements, operational constraints, and resource costs associated 
with legal documentation. The commenter stated that implementing a 
central clearing requirement without a comprehensive analysis regarding 
the suitability of current models to access U.S. Treasury securities 
CCAs and whether there is a need for additional models or revisions to 
current models could drive market participants away from transacting 
with direct participants or from the Treasury market entirely, if such 
participants do not believe there is a reasonable means of accessing a 
CCA. The commenter stated that such study should take place prior to 
the adoption of any rule requiring additional central clearing.\429\ 
Another commenter suggested that the Commission conduct a holistic 
review of FICC rules to ensure fair access for all market participants 
(both direct participants and indirect participants), prior to imposing 
any requirements.\430\
---------------------------------------------------------------------------

    \429\ SIFMA/IIB Letter, supra note 37, at 24.
    \430\ MFA Letter II, supra note 125, at 5.
---------------------------------------------------------------------------

    The Commission does not agree that a formal study or holistic 
review of access models must occur before adoption of the proposal. As 
discussed in part II.C.2 supra, a U.S. Treasury securities CCA 
generally should consider these topics, such as the sustainability of 
current models and the need for additional models or revisions, as well 
as the potential applicability of models used in other markets, as part 
of the CCA's consideration of its compliance with this proposed rule. 
The Commission will have the opportunity to consider these issues as 
well, in its review of any changes to access models filed pursuant to 
Section 19(b) of the Exchange Act.
    Finally, one commenter stated that the Commission's goal of 
ensuring access for indirect participants to U.S. Treasury securities 
CCAs should be balanced against sufficiently robust membership criteria 
to ensure risk is appropriately managed.\431\ The commenter cautioned 
that any expansion of access to U.S. Treasury securities CCA services 
should not relax membership requirements essential for appropriate risk 
management.\432\ The commenter stated that less stringent membership 
requirements in the name of increasing access to central clearing would 
increase the risk of a participant default, increasing risk to 
FICC.\433\ The Commission agrees with the commenter that membership 
requirements are essential to a covered clearing agency's risk 
management. As the Commission stated in the Proposing Release, 
membership requirements help to guard against defaults of any CCP 
member, as well as to protect the CCP and the financial system as a 
whole from the risk that one member's default could cause others.\434\ 
Membership requirements will remain essential even with the requirement 
to clear eligible secondary market transactions, and U.S. Treasury 
securities CCAs generally should not relax membership requirements to 
accommodate such a requirement. A U.S. Treasury securities CCA is 
subject to Rule 17ad-22(e)(18)(i), (ii), and (iii), which requires that 
a CCA establish, implement, maintain and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities, require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency, and 
monitor compliance with such participation requirements on an ongoing 
basis. These requirements should help ensure that CCAs are not able to 
use less stringent membership requirements to comply with the 
requirement to clear eligible secondary market transactions. Moreover, 
any changes to FICC's membership

[[Page 2759]]

requirements would necessarily encompass a change to FICC's Rules, 
which would be subject to Commission review and consideration pursuant 
to Section 19(b) of the Exchange Act.
---------------------------------------------------------------------------

    \431\ SIFMA/IIB Letter, supra note 37, at 23.
    \432\ SIFMA/IIB Letter, supra note 37, at 24.
    \433\ Id. at 25.
    \434\ Proposing Release, supra note 14, 87 FR at 64623.
---------------------------------------------------------------------------

    One commenter stated that the Commission must address other aspects 
of the Sponsored Service to better promote the objectives of central 
clearing, with such issues including the treatment of the start leg of 
the transaction, FICC's obligations to complete settlement of a 
Sponsored Member's positions in the event of a Sponsoring Member's 
default, and a Sponsored Member's ability to engage with FICC to 
address issues arising from repo transactions that have been submitted 
through sponsored clearing.\435\
---------------------------------------------------------------------------

    \435\ ICI Letter, supra note 85, at 26-28.
---------------------------------------------------------------------------

    With respect to the start leg of the transaction, the commenter 
stated that, within the Sponsored Service, FICC does not novate the 
settlement of the start leg of a repo transaction that is submitted for 
clearing between a Sponsoring Member and a Sponsored Member, although 
it does novate the end leg of the transaction, meaning that the 
counterparties continue to be responsible for settlement outside of 
FICC and bear the risk of a settlement fail vis [agrave] vis one 
another. The commenter also states that the lack of central clearing 
for the start leg of repo transactions in the Sponsored Service means 
that a requirement to clear eligible secondary market transactions may 
not eliminate counterparty credit risk issues to the extent the 
Commission anticipates, which, in turn, means that the proposal may not 
increase competition or reduce spreads as the Commission predicted in 
the Proposing Release.
    A U.S. Treasury repo transaction generally encompasses both the 
start leg and the end leg of a U.S. Treasury repo. The Commission 
understands that, currently, the only U.S. Treasury securities CCA 
novates the start legs of many types of repo transactions cleared by 
the CCA, but does not provide central clearing for the start legs of 
repo transactions cleared through a particular client clearing access 
model.
    The Commission understands that, contrary to transactions cleared 
at FICC outside the Sponsored Service, FICC currently does not novate 
the start legs of same-day settling Sponsored DVP Repos where the 
Sponsored Member's pre-novation counterparty is its Sponsoring Member 
(i.e., ``done-with'' Sponsored DVP Repo) or of Repos. The Commission 
acknowledges that this transaction occurring outside central clearing 
could somewhat reduce the benefits of central clearing in this limited 
instance, but the counterparty credit risk arising from the start legs 
of such transactions are largely addressed by the fact that they 
usually settle on a delivery-versus-payment basis between the 
counterparties, meaning that the securities and funds are exchanged 
simultaneously and resulting in less counterparty credit risk to 
address. The Commission does not believe that the lack of clearing for 
the start leg undermines the overall benefits of the requirement to 
clear eligible secondary market transactions. However, the Commission 
further understands that FICC has stated that it is able to clear the 
start leg of any repo transaction and currently does clear the start 
leg of all repos between two direct participants, the start leg of any 
Sponsored DVP repo where the Sponsored Member's pre-novation 
counterparty is a third-party member of FICC (i.e., ``done-away'' from 
the Sponsoring Member), and any Sponsored DVP Repo where the start leg 
of such repo is scheduled to settle on some business day in the future 
(i.e., forward-settling repos).\436\ The Commission would consider any 
proposal to provide additional clearing of repo start legs in 
particular access models in due course, consistent with its obligations 
under Section 19(b) of the Exchange Act.
---------------------------------------------------------------------------

    \436\ See FICC Rule 11, section 2, supra note 19; FICC Buyside 
FAQ, supra note 169, at 2-3.
---------------------------------------------------------------------------

    With respect to the completion of settlement of a Sponsored 
Member's transactions if the Sponsoring Member defaults, the commenter 
states that neither the Sponsored Bilateral DVP Service nor the 
Sponsored GC Repo Service compel FICC to complete the settlement of a 
sponsored member's transactions in the event of a sponsoring member's 
default, and that this approach is not consistent with the Commission's 
assumption that central clearing increases the likelihood of 
settlement.\437\ The Commission agrees that in most cases of a 
Sponsoring Member's default, the ability for the CCA to settle its 
sponsored transactions likely would tend to minimize market disruption. 
However, the Commission understands that the current structure of the 
Sponsored Service, as set forth in FICC's rules, would allow FICC the 
ability to, potentially, terminate the Sponsored Member's transaction 
in such circumstances, and that this structure arises from the fact 
that, by design, the Sponsoring Member serves as the processing agent 
for all movement of funds and securities for its Sponsored Members. 
FICC is not able to guarantee that an insolvent Sponsoring Member, 
which may be subject to the control of another legal entity, such as a 
bankruptcy trustee, would be able to continue processing such 
transactions, thereby allowing settlement to occur. This aspect of 
FICC's rules is consistent with how other central counterparties have 
addressed the potential termination of customer transactions in the 
event of their agent's default.\438\ The Commission does not believe 
that the potential for FICC to terminate these transactions, in the 
unlikely event of a Sponsoring Member default in which it is unable to 
work with the controlling legal entity, means that the benefits in the 
Proposing Release would not be, to a great extent, realized. Based on 
its supervisory knowledge, the Commission is not aware of any instance 
in which FICC was unable to work with the controlling legal entity for 
a defaulting member (i.e., a member for which FICC has ceased to act). 
Therefore, this is an extremely infrequent event and would depend on 
the facts and circumstances of a particular insolvency.
---------------------------------------------------------------------------

    \437\ ICI Letter, supra note 85, at 27.
    \438\ See note 427 supra.
---------------------------------------------------------------------------

    With respect to the overall structure of the Sponsored Service, one 
commenter stated that market participants have raised concerns about 
the ability, as sponsored members, to engage with FICC to address 
issues arising from repo transactions that have been submitted through 
sponsored clearing, which, if not addressed, may prove to be a further 
impediment to the expansion of sponsored repo clearing. The commenter 
also states that market participants have cited challenges with seeking 
recourse from FICC in cases where the sponsoring member is in 
default.\439\ As discussed in the prior paragraph, the Commission 
understands that this is inherent to the design of the Sponsored 
Service, in that the Sponsoring Member serves as a processing agent for 
all the Sponsored Member's cleared transactions. FICC's rules address 
how it would proceed in the event of a Sponsoring Member default, 
including in the event that it closes out a Sponsored Member's 
transactions.\440\ In the event that FICC chooses to revisit this 
structure to provide some additional ability for the Sponsored Member 
to directly access FICC, without relying on its Sponsoring Member, the 
Commission would consider such a proposal in due course,

[[Page 2760]]

consistent with its obligations under Section 19(b) of the Exchange 
Act.
---------------------------------------------------------------------------

    \439\ ICI Letter, supra note 85, at 27-28.
    \440\ See FICC Rule 3A, section 14(c) (stating that FICC would 
rely upon Rule 22, section 3 to close out Sponsored Member 
transactions and to determine the amount owed to or due from a 
Sponsoring Member), supra note 19.
---------------------------------------------------------------------------

d. Final Rule
    For the reasons discussed in parts II.B.2.a through c, the 
Commission is adopting Rule 17ad-22(e)(18)(iv)(C) as proposed. To 
facilitate compliance with this requirement, a U.S. Treasury securities 
CCA generally should conduct and document an initial review of its 
access models and related policies and procedures. As it conducts this 
review, in view of the critical services it provides, the U.S. Treasury 
securities CCA generally should seek to provide access in as flexible a 
means as possible, consistent with its responsibility to provide sound 
risk management and comply with other provisions of the Exchange Act, 
the Covered Clearing Agency Standards, and other applicable regulatory 
requirements. A U.S. Treasury securities CCA generally should consider 
a wide variety of appropriate means to facilitate access to clearance 
and settlement services of all eligible secondary market transactions 
in U.S. Treasury securities, including those of indirect participants. 
To ensure that it considers a sufficiently broad set of perspectives, 
the U.S. Treasury securities CCA generally should consult with a wide-
range of stakeholders, including indirect participants, as it seeks to 
comply with proposed rule 17ad-22(e)(18)(iv)(C).
    A U.S. Treasury securities CCA generally should review and document 
any instance in which its policies and procedures treat transactions 
differently based on the identity of the participant submitting the 
transaction, the fact that an indirect participant is a party to the 
transaction, or the method of execution, or in any other way, and 
confirm that any variation in the treatment of such transactions is 
necessary and appropriate to meet the minimum standards regarding, 
among other things, operations, governance, and risk management 
identified in the Covered Clearing Agency Standards. The review by a 
U.S. Treasury securities CCA's board of directors under proposed Rule 
17ad-22(e)(18)(iv)(C) generally should include consideration of whether 
to establish policies and procedures that enable direct members to 
submit to the U.S. Treasury securities CCA eligible transactions for 
clearance and settlement that have been executed by two indirect 
participants of the U.S. Treasury securities CCA, which could 
potentially help address some of the concerns potential participants 
raised about the inability to present ``done away'' trades for 
clearance and settlement described above. Finally, as part of its 
consideration, a U.S. Treasury securities CCA generally should consider 
the volumes and proportion of the market that are being centrally 
cleared through different access models as part of the CCA's 
consideration of whether its access models are meeting the needs of the 
market. To the extent that a U.S. Treasury securities CCA's initial (or 
any subsequent) review occasions a change to its rules, such U.S. 
Treasury securities CCA would need to file such changes for Commission 
review and approval, as appropriate, under section 19(b) of the 
Exchange Act and Title VIII of the Dodd-Frank Act.\441\ The review by a 
U.S. Treasury securities CCA's board of directors under proposed Rule 
17ad-22(e)(18)(iv)(C) generally should include consideration whether 
the U.S. Treasury securities CCA's written policies and procedures are 
reasonably designed to ensure appropriate means to facilitate access to 
clearance and settlement services of all eligible secondary market 
transactions in U.S. Treasury securities, including those of indirect 
participants.
---------------------------------------------------------------------------

    \441\ See 15 U.S.C. 78s(b); 17 CFR 240.19b-4; 12 U.S.C. 5465(e).
---------------------------------------------------------------------------

C. Amendments to Rule 15c3-3a

1. Introduction
    The rules adopted above could cause a substantial increase in the 
margin broker-dealers must post to a U.S. Treasury securities CCA 
resulting from their customers' cleared U.S. Treasury positions.\442\ 
Currently, Rules 15c3-3 and 15c3-3a do not permit broker-dealers to 
include a debit in the customer reserve formula equal to the amount of 
margin required and on deposit at a U.S. Treasury securities CCA. This 
is because no U.S. Treasury securities CCA has implemented rules and 
practices designed to segregate the margin and limit it to being used 
solely to cover obligations of the broker-dealer's customers. 
Therefore, increases in the amount of margin required to be deposited 
at a U.S. Treasury securities CCA as a result of the adoption of the 
Membership Proposal would result in corresponding increases in the need 
to use broker-dealers' cash and securities to meet these new 
requirements.\443\
---------------------------------------------------------------------------

    \442\ See Proposing Release, supra note 14, 87 FR at 63637.
    \443\ Proposing Release, supra note 14, 87 FR at 64637.
---------------------------------------------------------------------------

    To facilitate implementation of the Membership Proposal, the 
Commission proposed to amend Rule 15c3-3a to permit margin required and 
on deposit at a U.S. Treasury securities CCA to be included as a debit 
item in the customer reserve formula, subject to the conditions 
discussed below. This new debit item would offset credit items in the 
Rule 15c3-3a formula and, thereby, free up resources that could be used 
to meet the margin requirements of a U.S. Treasury securities CCA. The 
debit item would be reported on a newly created Item 15 of the Rule 
15c3-3a reserve formula. The proposed amendments also set forth a 
number of conditions that would need to be met to include the debit in 
the reserve formula. As discussed below, these proposed conditions were 
designed to permit the inclusion of the debit under conditions that 
would provide maximum protection to the broker-dealer's customers. The 
goal of the proposed amendments was to facilitate implementation of the 
Membership Proposal in a way that does not diminish the customer-
protection objective of Rules 15c3-3 and 15c3-3a.\444\
---------------------------------------------------------------------------

    \444\ Proposing Release, supra note 14, 87 FR at 64637.
---------------------------------------------------------------------------

    The proposed conditions would be set forth in a new Note H to the 
reserve formula similar to how the conditions for including a debit in 
the reserve formula with respect to margin required and on deposit at a 
securities futures clearing agency or DCO are set forth in Note G. The 
proposed amendments were based, in part, on the conditions in Note G 
and the requirements in Rules 15c3-3 and 15c3-3b for including a debit 
with respect to margin required and on deposit at security-based swap 
clearing agency. The Note G conditions and requirements of Rules 15c3-3 
and 15c3-3b similarly were designed to permit the debit under 
circumstances that provide protection to customers.\445\
---------------------------------------------------------------------------

    \445\ Proposing Release, supra note 14, 87 FR at 64637.
---------------------------------------------------------------------------

    Overall, commenters supported the proposal to permit this debit 
item.\446\ Commenters stated that the proposed amendments would make 
clearing more efficient and free up resources that could be used to 
meet the CCA's margin requirements, while continuing to protect 
customer funds.\447\ Commenters also stated that the proposal would 
incentivize central clearing.\448\ A commenter stated that the proposal 
would extend to margin held at a U.S. Treasury securities CCA the same

[[Page 2761]]

treatment as margin posted to other clearing organizations.\449\ As a 
result, this commenter stated that the proposal would facilitate 
greater access to clearing and eliminate an undue burden on 
competition. Another commenter--in supporting this aspect of the 
proposal--stated that it does not make sense that margin cannot be 
freely rehypothecated from a customer through a broker-dealer to a U.S. 
Treasury securities CCA without the broker-dealer receiving a 
beneficial adjustment as part of its customer reserve formula 
calculation.\450\ For greater and more efficient client clearing, 
another commenter encouraged the Commission to adopt this proposal 
irrespective of whether the Membership Proposal is adopted.\451\
---------------------------------------------------------------------------

    \446\ See AIMA Letter, supra note 81, at 8; CME Letter, supra 
note 81, at 4; DTCC/FICC Letter, supra note 33, at 28-29; ICE 
Letter, supra note 33, at 3; MFA Letter, supra note 81, at 10; ISDA 
Letter, supra note 391, at 2; SIFMA AMG Letter, supra note 35, at 8.
    \447\ See AIMA Letter, supra note 81, at 8; MFA Letter, supra 
note 81, at 10; SIFMA/IIB Letter, supra note 37, at 27-28.
    \448\ See CME Letter, supra note 81, at 4; SIFMA AMG Letter, 
supra note 35, at 8.
    \449\ See DTCC/FICC Letter, supra note 33, at 28.
    \450\ See SIFMA AMG Letter, supra note 35, at 8.
    \451\ See ISDA Letter, supra note 391, at 2.
---------------------------------------------------------------------------

    Commenters did suggest certain modifications to the proposal. The 
Commission's responses to comments, modifications to the proposed rule 
text made in response to comments, and the final amendments are 
discussed below.
2. Credit Items
    Cash delivered by a customer to the broker-dealer to be posted by 
the broker-dealer to a U.S. Treasury securities CCA would be a free 
credit balance or other credit balance in the customer's securities 
account. Thus, this cash will need to be included in Item 1 to the Rule 
15c3-3a formula. Further, when a broker-dealer uses customer margin 
securities to borrow funds or execute a securities loan transaction, 
the firm must put a credit in the formula.\452\ The credit items are 
designed to require the broker-dealer to reserve sufficient funds to be 
able to retrieve securities that collateralize the borrowed funds or 
have been loaned. There is not a specific Item in the Rule 15c3-3a 
formula to include the credit arising from the broker-dealer's use of 
customers' securities to meet a margin requirement imposed on the 
broker-dealer by a U.S. Treasury securities CCA. Consequently, the 
Commission proposed to amend Note B to Item 2 of the Rule 15c3-3a 
formula to instruct broker-dealers to include as a credit in Item 2 the 
market value of customers' U.S. Treasury securities on deposit at a 
U.S. Treasury securities CCA that meets the definition of a ``qualified 
clearing agency'' in Note H.\453\ The Commission did not receive any 
comments on this aspect of the proposal and is adopting it 
substantially as proposed.\454\
---------------------------------------------------------------------------

    \452\ See Items 2 and 3 to Rule 15c3-3a.
    \453\ See Proposing Release, supra note 14, 87 FR at 64638, n. 
232.
    \454\ See Note B to Item 2 of Rule 15c3-3a, as adopted. The 
phrase ``customers' U.S. Treasury securities'' in the note--as 
proposed--has been replaced with the more generic phrase 
``customers' securities'' in the note, as adopted. Id. This 
modification conforms the note to modifications discussed below that 
expand the type of customer collateral that can be posted to the 
U.S. Treasury securities CCA. As proposed, the broker-dealer was 
limited to posting customer cash or U.S. Treasury securities. See 
Proposing Release, supra note 14, 87 FR at 64638. This provision is 
being modified to include any securities accepted as margin by the 
U.S. Treasury securities CCA, subject to certain conditions. See 
Note H(a)(1) to Item 15, as adopted.
---------------------------------------------------------------------------

3. New Debit Item
    On the debit side of the formula, the Commission proposed 
renumbering current Item 15 of the Rule 15c3-3a formula as Item 
16.\455\ As proposed, new Item 15 would identify as a debit in the Rule 
15c3-3a formula margin required and on deposit with a clearing agency 
registered with the Commission under section 17A of the Exchange Act 
resulting from the following types of transactions in U.S. Treasury 
securities in customer accounts that have been cleared, settled, and 
novated by the clearing agency: (1) purchases and sales of U.S. 
Treasury securities; and (2) U.S. Treasury securities repurchase and 
reverse repurchase agreements (together ``customer position 
margin'').\456\ As proposed, this debit item was limited to customer 
position margin required and on deposit at a clearing agency that 
clears, settles, and novates transactions in U.S. Treasury securities. 
Except for the debits identified in current Items 13 and 14 of the Rule 
15c3-3a formula, margin required and on deposit at other types of 
clearing agencies or for other types of securities transactions would 
not qualify as a debit item under the proposal. Further, this debit 
item would be limited to customer position margin required and on 
deposit at the U.S. Treasury securities CCA resulting from U.S. 
Treasury positions in customer accounts. Margin required and on deposit 
at the U.S. Treasury securities CCA as result of the broker-dealer's 
proprietary U.S. Treasury positions could not be included in this debit 
item. This proposed limitation would effectuate a fundamental aspect of 
Rule 15c3-3: that customer cash and securities not be used by the 
broker-dealer to finance its proprietary business activities.
---------------------------------------------------------------------------

    \455\ Current Item 15 is where the broker-dealer reflects the 
amount, if any, that total credits exceed total debits.
    \456\ See Proposing Release, supra note 14, 87 FR at 64637.
---------------------------------------------------------------------------

    Finally, the debit would be limited to customer position margin 
required and on deposit at the U.S. Treasury securities CCA. This would 
mean that the broker-dealer could not include in this debit item 
amounts on deposit at the U.S. Treasury securities CCA that exceed the 
broker-dealer's margin requirement resulting from its customers' 
cleared U.S. Treasury securities positions. This limitation is designed 
to prevent the broker-dealer from artificially increasing the amount of 
the debit item by depositing cash and securities at the U.S. Treasury 
securities CCA that are not needed to meet a margin requirement 
resulting from its customers' U.S. Treasury securities positions. The 
Commission did not receive any comments on these aspects of the 
proposal and is adopting them as proposed.\457\
---------------------------------------------------------------------------

    \457\ See Item 15 of the Rule 15c3-3a formula, as adopted.
---------------------------------------------------------------------------

4. Note to New Debit Item
    As proposed, Item 15 of the Rule 15c3-3a formula would have a Note 
H (``Note H'') that sets forth conditions that would need to be met to 
include the amount of customer position margin required and on deposit 
at the U.S. Treasury securities CCA as a debit.\458\ Each of the 
conditions in Note H to Item 15 would need to be met for a broker-
dealer to include a debit equal to the amount of customer position 
margin required and on deposit at the U.S. Treasury securities CCA. As 
discussed below, the Commission is adopting the conditions largely as 
proposed, with some modifications in response to comments.\459\
---------------------------------------------------------------------------

    \458\ Proposing Release, supra note 14, 87 FR at 64638-40.
    \459\ See Note H to Rule 15c3-3a, as adopted.
---------------------------------------------------------------------------

a. First Condition--Permitted Collateral
    The first condition--set forth in paragraph (a) of Note H--provided 
that the debit item could be included in the Rule 15c3-3a formula to 
the extent that the customer position margin is in the form of cash or 
U.S. Treasury securities and is being used to margin U.S. Treasury 
securities positions of the customers of the broker-dealer that are 
cleared, settled, and novated at the U.S. Treasury securities CCA.\460\ 
The objective was to limit the assets underlying the debit item to the 
safest and most liquid instruments, given that the debit item would 
offset credit items (cash owed to customers).\461\ As

[[Page 2762]]

discussed above, the liquidity of the debit items protects the 
customers whose cash or securities are used to finance or facilitate 
customer transactions.
---------------------------------------------------------------------------

    \460\ Proposing Release, supra note 14, 87 FR at 64638.
    \461\ See, e.g., 17 CFR 240.15c3-3(e) (limiting the assets that 
can be deposited into the customer reserve account to cash and 
qualified securities); 17 CFR 240.15c3-3(a)(6) (defining the term 
``qualified security'' to mean a security issued by the United 
States or a security in respect of which the principal and interest 
are guaranteed by the United States).
---------------------------------------------------------------------------

    In response to the proposed first condition, commenters stated that 
the Commission should expand the types of securities that could be used 
to meet the customer position margin requirement.\462\ Specifically, 
one commenter stated that the use of the debit should not be limited to 
margin in the form of cash or Treasury securities.\463\ This commenter 
stated that FICC accepts additional securities for clearing fund 
deposits, including eligible obligations of U.S. agencies or government 
sponsored entities and eligible mortgage-backed securities.\464\ The 
commenter also stated that the Commission found--in the context of 
approving a FICC rule change--that the expanded scope of acceptable 
forms of clearing fund collateral deposits would ``better enable FICC 
to assure the safeguarding of securities and funds in its custody or 
control or for which it is responsible,'' and therefore was consistent 
with the requirements of the Exchange Act and other governing 
regulations.\465\
---------------------------------------------------------------------------

    \462\ See ISDA Letter, supra note 391; SIFMA/IIB Letter, supra 
note 37, at 29.
    \463\ See SIFMA/IIB Letter, supra note 37, at 29.
    \464\ See SIFMA/IIB Letter, supra note 37, at 29.
    \465\ See SIFMA/IIB Letter, supra note 37, at 29 (citing Self-
Regulatory Organizations; Fixed Income Clearing Corporation; Order 
Approving Proposed Rule Change to Modify its Rules to Diversify and 
Standardize Clearing Fund Collateral Requirements Across the 
Divisions to Improve Liquidity and Minimize Risk for its Members, 
Exchange Act Release No. 54969 (Dec. 26, 2006), 71 FR 77837, 77838 
(Dec. 27, 2006)).
---------------------------------------------------------------------------

    In response to comments, the Commission is modifying paragraph (a) 
of Note H to permit ``qualified customer securities'' to be used to 
meet the customer position margin requirement in addition to cash and 
U.S. Treasury securities.\466\ The term ``qualified customer 
securities'' is defined to mean securities of a customer of the broker-
dealer (other than U.S. Treasury securities) that are held in custody 
by the broker-dealer for the customer and that under the rules of the 
U.S. Treasury securities CCA are eligible to be used to margin U.S. 
Treasury securities positions of the customer that are cleared, 
settled, and novated by the CCA.\467\ Therefore, a broker-dealer may 
post cash, U.S. Treasury securities, and qualified customer securities 
(i.e., securities other than U.S. Treasury securities that are accepted 
by the U.S. Treasury securities CCA) to meet a customer position margin 
requirement.
---------------------------------------------------------------------------

    \466\ See Rule 15c3-3a, Note H(a)(1), as adopted. To implement 
this modification, paragraph (a) of Note H is being divided into 
subparagraphs (a)(1) and (2). Subparagraph (a)(1) identifies the 
types of collateral that can be used to meet the customer position 
margin requirement (i.e., cash, U.S. Treasury securities, and 
qualified customer securities), and subparagraph (a)(2) contains the 
text that provides that the collateral must be used to margin U.S. 
Treasury securities positions of the customers of the broker-dealer 
that are cleared, settled, and novated by the qualified clearing 
agency, as was proposed. See Rule 15c3-3a, Note H(a)(1) and (2), as 
adopted.
    \467\ See Rule 15c3-3a, Note H(c), as adopted.
---------------------------------------------------------------------------

    As proposed, paragraph (b) of Note H set forth the second, third, 
and fourth conditions that would need to be met to include the amount 
of customer position margin required and on deposit at the U.S. 
Treasury securities CCA as a debit item.\468\
---------------------------------------------------------------------------

    \468\ See Note H(b)(1) through (3) of Rule 15c3-3a, as proposed.
---------------------------------------------------------------------------

b. Second Condition--Customer Position Margin
    The second condition--set forth in paragraph (b)(1) of Note H--
provided that the customer position margin must consist of cash owed to 
the customer of the broker-dealer or U.S. Treasury securities held in 
custody by the broker-dealer for the customer that was delivered by the 
broker-dealer to meet to meet a margin requirement resulting from that 
customer's U.S. Treasury securities positions cleared, settled, and 
novated at the U.S. Treasury securities CCA and not for any other 
customer's or the broker-dealer's U.S. Treasury securities positions 
cleared, settled, and novated at the U.S. Treasury securities CCA.\469\ 
In sum, to meet this condition, the broker-dealer would need to: (1) 
use customer assets exclusively to meet the customer position margin 
requirement; (2) use a particular customer's assets exclusively to meet 
the amount of the customer position margin requirement resulting from 
that customer's cleared U.S. Treasury securities positions; and (3) 
have delivered the customer's assets to the U.S. Treasury securities 
CCA.
---------------------------------------------------------------------------

    \469\ Proposing Release, supra note 14, 87 FR at 64638.
---------------------------------------------------------------------------

    The objective of the first component of the second condition--the 
need to use customer assets exclusively--was to segregate the customer 
assets being used to meet the customer position margin requirement from 
the broker-dealer's proprietary assets.\470\ Additional conditions--
under the proposal--provided that the U.S. Treasury securities CCA must 
hold the assets being used to meet the customer position margin 
requirement in an account of the broker-dealer that is segregated from 
any other account of the broker-dealer and is identified as being held 
for the exclusive benefit of the broker-dealer's customers.\471\ The 
first prong of the condition was designed to ensure that only customer 
assets are held in the account.
---------------------------------------------------------------------------

    \470\ Proposing Release, supra note 14, 87 FR at 64638.
    \471\ See Proposing Release, supra note 14, 87 FR at 64639-40 
(discussing these additional conditions). As discussed below, the 
Commission is adopting these additional conditions, substantially as 
proposed.
---------------------------------------------------------------------------

    The objective of the second component of the second condition--the 
need to use a particular customer's assets exclusively to meet the 
amount of the customer position margin requirement resulting from that 
customer's cleared U.S. Treasury securities positions--was to avoid the 
use of one customer's assets to meet another customer's margin 
requirement.\472\ For example, FICC's Sponsored Member program allows 
its members to sponsor a person's (i.e., a Sponsored Member's) U.S. 
Treasury securities transactions for clearance and settlement. FICC 
interacts solely with the sponsoring member as processing agent for 
purposes of the day-to-day satisfaction of the Sponsored Member's 
obligation to or from FICC, including the Sponsored Member's cash and 
securities settlement obligations. However, FICC calculates a separate 
margin requirement for each Sponsored Member's trading activity and the 
sum of each sponsored member's margin calculation is the aggregate 
margin requirement that must be met by the sponsoring member. Further, 
this margin is held in an omnibus account that is separate from the 
account that holds the Sponsoring Member's net margin obligation for 
non-sponsored securities transactions. In this scenario, the U.S. 
Treasury securities CCA's margin calculations and resulting 
requirements can be traced to a specific customer's cleared U.S. 
Treasury securities positions. Consequently, the broker-dealer would be 
able to allocate the amount of the U.S. Treasury securities CCA's daily 
customer position margin requirement attributable to a specific 
customer. Under this component of the second condition, the broker-
dealer would need to deliver cash or U.S. Treasury securities belonging 
to that specific customer to meet the amount of the U.S. Treasury 
securities CCA's customer position margin requirement resulting from 
that customer's cleared U.S. Treasury securities positions. This would 
mitigate the risk to all the broker-dealer's customers by limiting when 
their assets can be used to meet the U.S.

[[Page 2763]]

Treasury securities CCA's customer position margin requirement.
---------------------------------------------------------------------------

    \472\ Proposing Release, supra note 14, 87 FR at 64638.
---------------------------------------------------------------------------

    The objective of the third component of the second condition--that 
the broker-dealer had delivered the customer's assets to the U.S. 
Treasury securities CCA--was to address the potential that a customer 
may use more than one broker-dealer to engage in U.S. Treasury 
securities transactions.\473\ In this case, two or more broker-dealers 
may be subject to customer position margin requirements of the U.S. 
Treasury securities CCA resulting from the customer's cleared U.S. 
Treasury securities positions. The intent was to prevent a broker-
dealer from including as a debit the amount of customer position margin 
that another broker-dealer delivered to the U.S. Treasury securities 
CCA with respect to U.S. Treasury securities positions of a customer of 
both the broker-dealers. The amount that a given broker-dealer's debit 
items can offset its credit items should be limited to the amount of 
customer position margin it delivered to the U.S. Treasury securities 
CCA. Otherwise, the customers of the broker-dealer would be put at risk 
for transactions effected by another broker-dealer.
---------------------------------------------------------------------------

    \473\ Proposing Release, supra note 14, 87 FR at 64638-39.
---------------------------------------------------------------------------

    Two commenters stated that broker-dealers should not be limited to 
posting the same assets received from its customer to a U.S. Treasury 
securities CCA.\474\ One stated that in many instances, broker-dealers 
post proprietary assets to a clearing agency on behalf of a customer 
given timing and operational constraints.\475\ The other commenter 
stated that FICC collects clearing fund margin on a faster timeline 
than broker-dealers are able to collect margin from their 
customers.\476\ More specifically, this commenter stated that FICC 
collects margin from direct participants on an overnight and intraday 
basis, while most broker-dealers generally provide their customers with 
a full business day to post margin. As a result, this commenter stated 
that most broker-dealers generally post clearing fund margin to FICC 
and then subsequently collect that clearing fund margin from their 
customers. One of these commenters stated that posting proprietary 
collateral is permissible in the context of margin posted to the other 
clearing agencies and should also be permissible with respect to margin 
posted to a U.S. Treasury Securities CCA.\477\ Finally, one of these 
commenters stated that not allowing the use of proprietary assets would 
significantly undercut the benefits to the Rule 15c3-3a proposal.\478\
---------------------------------------------------------------------------

    \474\ See DTCC/FICC Letter, supra note 33, at 32; SIFMA/IIB 
Letter, supra note 37, at 30.
    \475\ See SIFMA/IIB Letter, supra note 37, at 30.
    \476\ See DTCC/FICC Letter, supra note 33, at 32.
    \477\ See SIFMA/IIB Letter, supra note 37, at 30.
    \478\ See DTCC/FICC Letter, supra note 33, at 32.
---------------------------------------------------------------------------

    In response to comments, the Commission is modifying Note H under 
the final rule to permit broker-dealers to elect to deliver proprietary 
U.S. Treasury securities to meet a margin requirement of a customer 
resulting from that customer's U.S. Treasury securities positions 
cleared, settled, and novated at the qualified clearing agency.\479\ 
This will address the concern raised by commenters that the U.S. 
Treasury securities CCA may call for margin from a broker-dealer 
arising from a customer's cleared U.S. Treasury security transaction 
before the customer is able to deliver the requisite margin to the 
broker-dealer. However, the final rule places strict limits on this 
requirement. First, the broker-dealer must use proprietary U.S. 
Treasury securities for this purpose and, therefore, it cannot use 
other types of securities collateral acceptable to the U.S. Treasury 
securities CCA.\480\ For example, as discussed above, a broker-dealer 
can post qualified customer securities (which are securities other than 
U.S. Treasury securities acceptable to the U.S. Treasury securities 
CCA), provided the customer has delivered them to the broker-dealer. 
However, the broker-dealer could not post these types of securities if 
they belong to the broker-dealer. This is designed to ensure that the 
safest most liquid securities of the broker-dealer are commingled with 
the customer cash and securities in the account.\481\ It also will 
prevent the broker-dealer from using customer cash deposited with the 
broker-dealer to purchase less liquid securities and post them to the 
U.S. Treasury securities CCA to meet a customer position margin 
requirement.
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    \479\ See Note H(b)(1)(iii) of Rule 15c3-3a, as adopted. To 
implement this modification, paragraph (b)(1) is being divided into 
subparagraphs (b)(1)(i) through (iii). Subparagraphs (b)(1)(i) and 
(ii) contain the proposed components of the second condition that 
the broker-dealer can use cash owed to a customer or U.S. Treasury 
securities held in custody by the broker-dealer for the customer to 
meet a margin requirement of the U.S. Treasury securities CCA 
resulting from that customer's U.S. Treasury securities transactions 
cleared at the CCA, with the modifications that cash and securities 
are now addressed in a separate subparagraphs (subparagraphs 
(b)(1)(i) and (ii), respectively) and qualified customer securities 
held in custody by the broker-dealer for the customer also can be 
used for this purpose. See Note H(b)(1)(i) and (ii) of Rule 15c3-3a, 
as adopted. Subparagraph (b)(1)(iii) contains the new provision--
discussed below--permitting the use of the broker-dealer's 
proprietary securities, subject to certain conditions. See Note 
H(b)(1)(iii) of Rule 15c3-3a, as adopted.
    \480\ See prefatory text of Note H(b)(1)(iii) of Rule 15c3-3a, 
as adopted.
    \481\ See supra note 461; see also Section I. Introduction 
(describing the critical and unique role that U.S. Treasury 
securities play a critical in the U.S. and global economy) and 
Section IV.B. Economic Analysis--Baseline (describing U.S. Treasury 
securities and repos, and clearance and settlement of these 
positions); see also 17 CFR 240.15c3-1(c)(2)(vi)(A)(1) (prescribing 
haircuts under the broker-dealer net capital rule for a security 
issued or guaranteed as to principal or interest by the United 
States or any agency thereof ranging from 0 to 6%).
---------------------------------------------------------------------------

    Second, the broker-dealer's ability to post proprietary U.S. 
Treasury securities is limited to circumstances where the broker-dealer 
did not owe the customer or hold in custody for the customer sufficient 
cash, U.S. Treasury securities, and/or qualified customer securities to 
meet a margin requirement resulting from that customer's U.S. Treasury 
securities positions cleared, settled, and novated at the qualified 
clearing agency at the time the margin requirement arose.\482\ Thus, 
the broker-dealer is limited to using proprietary U.S. Treasury 
securities to address the specific concern raised by commenters: a 
timing mismatch between when margin must be delivered to the U.S. 
Treasury securities CCA and when the broker-dealer receives the margin 
from the customer.
---------------------------------------------------------------------------

    \482\ See Note H(b)(1)(iii)(A) of Rule 15c3-3a, as adopted.
---------------------------------------------------------------------------

    Third, the broker-dealer must call for the customer to deliver a 
sufficient amount of cash, U.S. Treasury securities, and/or qualified 
customer securities to meet the margin requirement on the day the 
margin requirement arose and must receive a sufficient amount of cash, 
U.S. Treasury securities, and/or qualified customer securities to meet 
the margin requirement by the close of the next business day after the 
margin requirement arose.\483\ Thus, the broker-dealer can deliver 
proprietary U.S. Treasury securities to meet a margin call related to 
its customers' transactions as an interim step before receiving the 
associated margin from its customer no later than the close of the next 
business day. The objective is to narrowly confine the ability to use 
proprietary U.S. Treasury securities and thereby promote the final 
rule's objective of using a specific customer's collateral to meet a 
customer position margin requirement generated by that customer's 
cleared U.S. Treasury securities transactions.
---------------------------------------------------------------------------

    \483\ See Note H(b)(1)(iii)(B) and (C) of Rule 15c3-3a, as 
adopted.

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[[Page 2764]]

c. Third Condition--Rules of U.S. Treasury Securities CCA
    The third condition for including customer position margin as a 
debit in the Rule 15c3-3a formula was set forth in proposed paragraph 
(b)(2) of Note H.\484\ Under this condition, the customer position 
margin needed to be treated in accordance with rules of the U.S. 
Treasury securities CCA designed to protect and segregate the customer 
position margin, and the U.S. Treasury securities CCA and broker-dealer 
would need to be in compliance with those rules (as applicable). As 
proposed, paragraph (b)(2) of Note H identified five sets of rules that 
would need to be implemented by the U.S. Treasury securities CCA.\485\
---------------------------------------------------------------------------

    \484\ Proposing Release, supra note 14, 87 FR at 64639.
    \485\ Proposing Release, supra note 14, 87 FR at 64639-40.
---------------------------------------------------------------------------

    The first rule set--identified in paragraph (b)(2)(i) of Note H--
provided that the customer position margin must be treated in 
accordance with rules requiring the qualified U.S. Treasury securities 
CCA to calculate a separate margin amount for each customer of the 
broker-dealer and the broker-dealer to deliver that amount of margin 
for each customer on a gross basis.\486\ As discussed above, a 
component of the second condition--set forth in paragraph (b)(1) of 
Note H, as proposed--was that the broker-dealer use a particular 
customer's assets exclusively to meet the amount of the customer 
position margin requirement resulting from that customer's cleared U.S. 
Treasury securities positions.\487\ The proposal that the U.S. Treasury 
securities CCA implement these margin calculation rules was designed to 
facilitate that condition. This would allow the broker-dealer to 
allocate the amount of the customer position margin requirement 
attributable to each of its customers. In addition, the rules needed to 
require the broker-dealer to deliver the margin amount calculated for 
each customer on a gross basis. This would mean that the risk of one 
customer's positions could not be offset by the risk of another 
customer's positions in determining the amount of customer position 
margin the broker-dealer would need to have on deposit at the U.S. 
Treasury securities CCA. As a result, the broker-dealer would not be 
able to deliver assets belonging to one customer to meet the margin 
requirement of another customer.
---------------------------------------------------------------------------

    \486\ Proposing Release, supra note 14, 87 FR at 64639.
    \487\ Proposing Release, supra note 14, 87 FR at 64638-39.
---------------------------------------------------------------------------

    In response to this aspect of the proposal, a commenter suggested 
that the Commission modify the requirement to be consistent with the 
requirements of Item 13 and Note F to the reserve formula which covers 
margin required and on deposit with the Options Clearing Corporation 
(``OCC'') for all option contracts written or purchased in customer 
accounts.\488\ In particular, the permitted debit under Item 13 and 
Note F is based on a margin amount posted to OCC that is calculated on 
a net basis across all the broker-dealer's customers with listed 
options positions. This is different than the proposal to permit a 
debit with respect to margin posted to a U.S. Treasury securities CCA 
in that the margin amount needed to be calculated for each customer on 
a gross basis and that gross amount to be delivered to the CCA. For the 
reasons discussed below, the Commission is retaining the requirement 
that the U.S. Treasury securities CCA implement rules requiring that 
the margin be calculated and delivered on a gross basis for each 
customer.\489\
---------------------------------------------------------------------------

    \488\ See DTCC/FICC Letter, supra note 33, at 31.
    \489\ See Note H(b)(2)(i) of Rule 15c3-3a, as adopted.
---------------------------------------------------------------------------

    Listed options cleared at the OCC are subject to customer margin 
requirements of the broker-dealer SROs.\490\ Under Rule 15c3-3, a 
broker-dealer can use customer cash or securities that are serving as 
margin for listed options positions under SRO margin rules, subject to 
certain limitations.\491\ If the margin is in the form of cash, the 
broker-dealer needs to treat it as an ``other credit balance'' in the 
customer's securities account and include it in Item 1 in the Rule 
15c3-3a reserve formula.\492\ The broker-dealer can use this cash to 
finance a margin loan to another customer, to borrow securities to 
effect a short sale of another customer, or to deliver it to the OCC to 
meet a margin requirement for other customers' listed options positions 
cleared at the OCC.\493\ In each case, the ``other credit balance'' on 
the credit side of the Rule 15c3-3a reserve formula is offset by a 
corresponding debit balance on the debit side of the formula. If the 
margin is in the form of securities, the broker-dealer can 
rehypothecate them to obtain a bank loan, to deliver on a securities 
loan, or to meet a margin requirement of the OCC.\494\ The broker-
dealer's use of the customer's margin securities generates a credit in 
the Rule 15c3-3a reserve formula that generally is offset by debits in 
the formula stemming from the broker-dealer's financing of the 
customer's margin loan, facilitating the customer's short sale, or 
delivering margin to the OCC to meet margin requirements arising from 
customer options positions.\495\
---------------------------------------------------------------------------

    \490\ See, e.g., FINRA Rule 4210(f)(2); Cboe Rules 10.1 et seq.; 
see also 12 CFR 220.12(f). Generally, buyers of options (i.e., long 
options) that expire in nine months or less must pay for these 
positions in full. Margin requirements for option writers (i.e., 
short options) are complex and are not the same for every type of 
underlying security or component value. SRO rules generally require 
an option writer to post 100% of the options proceeds to the margin 
account, plus a specific percentage of the market value of the 
underlying securities or component value as options margin (e.g., 
20% for an option on a single equity security). SRO rules also 
recognize certain spread positions. Finally, equity-based options 
also are eligible positions under SRO securities portfolio margin 
rules. See, e.g., FINRA Rule 4210(f)(2) and (g); Cboe Rules 10.3 and 
10.4.
    \491\ See 17 CFR 240.15c3-3.
    \492\ See 17 CFR 240.15c3-3a, Item 1.
    \493\ See 17 CFR 240.15c3-3(e)(2) (providing, in pertinent part, 
that a broker-dealer must not accept or use any of the amounts under 
items comprising Total Credits under the Rule 15c3-3a reserve 
formula except for the specified purposes indicated under items 
comprising Total Debits under the formula); 17 CFR 240.15c3-3a, 
Items 10, 11, and 13.
    \494\ See 17 CFR 240.15c3-3(a)(3), (4), and (5) (defining, 
respectively, the terms ``fully paid securities,'' ``margin 
securities,'' and ``excess margin securities''); 17 CFR 240.15c3-
3(b)(1) (providing, in pertinent part, that a broker-dealer shall 
promptly obtain and shall thereafter maintain the physical 
possession or control of all fully-paid securities and excess margin 
securities carried by a broker-dealer for the account of customers 
but not applying this requirement to margin securities).
    \495\ See 17 CFR 240.15c3-3a, Items 2 and 3 (requiring, 
respectively, credits to be added to the Rule 15c3-3a reserve 
formula for: (1) monies borrowed collateralized by securities 
carried for the accounts of customers; and (2) monies payable 
against customers' securities loaned); 17 CFR 240.15c3-3a, Items 10, 
11, and 13 (requiring, respectively, debits to be added to the 
reserve formula for: (1) debit balances in customers' cash and 
margin accounts; (2) securities borrowed to effectuate short sales 
by customers; and (3) margin required and on deposit with the 
Options Clearing Corporation for all option contracts written or 
purchased in customer account).
---------------------------------------------------------------------------

    SRO options margin requirements help to protect the broker-dealer 
from the consequences of a customer default, because the required 
equity in a customer's account (because of the SRO option margin 
requirements) serves to over-collateralize an option customer's 
obligations to the broker-dealer. This buffer also protects the 
customers whose cash was used to facilitate the broker-dealer's 
financing of securities transactions of other customers (i.e., margin 
loans, short sales, or to meet a margin requirement for other 
customers' listed options positions cleared at the OCC). For example, 
if the broker-dealer fails, the customer debits, because they generally 
are over-collateralized, should be attractive assets for another 
broker-dealer to purchase or, if not purchased by another broker-
dealer, they should be able to be liquidated to a net positive

[[Page 2765]]

equity.\496\ The proceeds of the debits sale or liquidation can be used 
to repay the customer cash used to finance the customer obligations. 
This cash plus the funds and/or U.S. government securities held in the 
customer reserve account should equal or exceed the total amount of 
customer credit items (i.e., the total amount owed by the broker-dealer 
to its customers).\497\
---------------------------------------------------------------------------

    \496\ The attractiveness of the over-collateralized debits 
facilitates the bulk transfer of customer accounts from a failing or 
failed broker-dealer to another broker-dealer.
    \497\ See Net Capital Requirements for Broker-Dealers; Amended 
Rules, Exchange Act Release No. 18417 (Jan. 13, 1982), 47 FR 3512, 
3513 (Jan. 25, 1982) (``The alternative approach is founded on the 
concept that, if the debit items in the Reserve Formula can be 
liquidated at or near their contract value, these assets along with 
any cash required to be on deposit under the [customer protection] 
rule, will be sufficient to satisfy all liabilities to customers 
(which are represented as credit items in the Reserve Formula).'').
---------------------------------------------------------------------------

    In contrast, although SRO margin rules require the collection of 
margin for certain transactions in U.S. Treasury securities, 
transactions between dealers and institutional customers generally are 
subject to a variable ``good-faith'' margin standard, which the 
Commission understands--based on its supervisory experience--can often 
result in a broker-dealer collecting less (or no) margin collateral 
from a customer with respect to transactions in U.S. Treasury 
securities.\498\ Consequently, the SRO margin requirements for U.S. 
Treasury securities transactions do not result in the same levels of 
over-collateralization that the SRO margin requirements for listed 
options impose and, therefore, would not provide the same level 
protection to the broker-dealer's customers. Accordingly, modifying the 
proposal to align it with how margin posted to the OCC is treated would 
diminish an important protection that the proposal is designed to 
achieve in terms of protecting the broker-dealer's customers: 
preventing one customer's cash or securities to be used to meet a 
margin requirement of the U.S. Treasury securities CCA resulting from 
another customer's cleared U.S. Treasury securities transactions. This 
protection is achieved through the proposed requirements that the U.S. 
Treasury securities CCA calculate a gross margin amount for each of the 
broker-dealer's customers and that the broker-dealer must meet that 
gross margin amount with cash or securities owned by the customer whose 
U.S. Treasury securities transactions generated the margin 
requirement.\499\
---------------------------------------------------------------------------

    \498\ SRO rules provide for the collection of margin for cash 
U.S. Treasury transactions. See, e.g., FINRA Rule 4210(e)(2)(A) 
(setting forth margin requirements for U.S. Treasury securities and 
certain other bonds). However, these rules do not necessarily apply 
to exempt accounts. See FINRA Rule 4210(e)(2)(F) (permitting FINRA-
member broker-dealers to not collect margin for certain good faith 
securities held in exempt accounts and providing for a capital 
charge for any uncollected mark-to-market loss); FINRA Rule 
4210(a)(13) (defining exempt account). Although SRO rules also 
require a broker-dealer to establish procedures to review limits and 
types of credit extended to all customers, formulate their own 
``house''' margin requirements, and review the need for instituting 
higher margin requirements than are required for individual 
securities or customer accounts, based on the Commission's 
supervisory experience, the resulting customer margin collection is 
often less than that required pursuant to FICC's margin model. See 
Proposing Release, supra note 14, 87 FR at 64627 n.171.
    \499\ As discussed above, under the final rule, the broker-
dealer can use proprietary U.S. Treasury securities in limited 
circumstances and under strict conditions to meet a margin 
requirement of the U.S. Treasury securities CCA resulting from a 
particular customer's cleared U.S. Treasury securities transactions. 
See Note H(b)(1)(iii) of Rule 15c3-3a.
---------------------------------------------------------------------------

    Moreover, cash delivered by a customer to the broker-dealer to be 
posted by the broker-dealer to a U.S. Treasury securities CCA generally 
would be a free credit balance, given the minimal margin requirements 
of the SROs with respect to the types of U.S. Treasury securities 
transactions that would be cleared (i.e., the cash would not have the 
same status as cash serving as margin for a listed options position 
under the SRO margin rules). For the same reason, securities delivered 
by a customer to the broker-dealer to be posted by the broker-dealer to 
a U.S. Treasury securities CCA generally would be fully paid securities 
(i.e., they would not have the same status as margin securities serving 
as margin for listed options under the SRO margin rules). The 
proposal--consequently--set forth strict limitations on the broker-
dealer's ability to use the cash or securities to meet a margin 
requirement the U.S. Treasury securities CCA imposed on the broker-
dealer. These limitations were designed to restrict the broker-dealer's 
ability to use the customer cash and securities--and thereby protect 
them--given that these customer assets generally otherwise would need 
to be treated as a free credit balance or fully paid securities in the 
customer's securities account.
    For these reasons, the Commission is retaining the requirement that 
the U.S. Treasury securities CCA implement rules requiring that the 
margin be calculated and delivered on a gross basis for each 
customer.\500\ Therefore, the Commission is adopting the gross 
margining requirement, as proposed.
---------------------------------------------------------------------------

    \500\ See Note H(b)(2)(i) of Rule 15c3-3a, as adopted.
---------------------------------------------------------------------------

    The second rule set--identified in paragraph (b)(2)(ii) of Note H--
provided that the customer position margin be treated in accordance 
with rules requiring that the U.S. Treasury securities CCA be limited 
to investing it in U.S. Treasury securities with a maturity of one year 
or less.\501\ The objective was to limit the assets underlying the 
debit item to the safest and most liquid instruments. The Commission 
did not receive comments on this aspect of the proposal and is adopting 
it as proposed.\502\
---------------------------------------------------------------------------

    \501\ See Proposing Release, supra note 14, 87 FR at 64639.
    \502\ See Note H(b)(2)(ii) of Rule 15c3-3a, as adopted.
---------------------------------------------------------------------------

    However, one commenter sought clarification that the conditions of 
Rule 15c3-3 would not preclude a U.S. Treasury securities CCA from 
entering into a repurchase transaction using customer cash margin, so 
long as the purchased securities under such repurchase transaction 
consist of U.S. Treasury securities held in a segregated account for 
the benefit of customers and satisfy certain other requirements.\503\ 
The commenter stated that the proposal was not clear whether the 
conditions related to Rule 15c3-3 would preclude a U.S. Treasury 
securities CCA from using customer margin for liquidity purposes, and 
that there are ways to use customer margin for liquidity purposes that 
ensure that cash or Treasury securities having a value equal to or 
exceeding the posted customer margin remain in a segregated account for 
the benefit of customers.\504\ The commenter further explained that if 
a U.S. Treasury securities CCA could not use customer margin as a 
qualifying liquid resource, for purposes of its obligations under Rule 
17ad-22(e)(7), it might need to obtain liquidity resources from other 
sources, which could mean increasing certain requirements applicable to 
direct participants or increasing the cash margin requirements 
applicable to direct participants and/or other indirect 
participants.\505\ Finally, the commenter suggested adding language to 
Note H that a CCA's use of cash margin for liquidity purposes would not 
cause item 15 to cease to apply, so long as (i) the CCA only uses the 
cash margin after it determines that it does not have the

[[Page 2766]]

ability to obtain liquidity from other resources in order to satisfy 
the cash payment obligations that were originally due to be paid by a 
defaulting member, (ii) in connection with such usage, the CCA deposits 
into and maintains an account of the broker-dealer that generally 
satisfies the requirements for a special reserve account U.S. Treasury 
securities or cash that at all relevant times have a value of no less 
than the value amount of used cash, and (iii) the CCA replenishes the 
cash margin promptly after the liquidity need is satisfied.\506\
---------------------------------------------------------------------------

    \503\ Letter from Brian Steele, Managing Director, President of 
DTCC Clearing Agency Services, Head of Global Business Operations, 
and Laura Klimpel, General Manager of FICC, Head of SIFMU Business 
Development, at 1-2 (Nov. 10, 2023) (``DTCC/FICC Letter II'').
    \504\ Id. at 2. The commenter stated that a U.S. Treasury 
securities CCA could enter into a repurchase transaction with a 
broker-dealer, as agent for its customers, pursuant to which the 
broker-dealer purchases U.S. Treasury securities using customer cash 
margin and holds such securities in a segregated account of the 
broker-dealer. Id.
    \505\ Id. at 5.
    \506\ Id. at 7-8.
---------------------------------------------------------------------------

    The objective of the conditions for including the debit in the 
customer reserve formula is to provide maximum protection to the cash 
or securities delivered to the U.S. Treasury securities CCA. The 
commenter provides a summary of potential protections that could be put 
in place to ensure that--if a U.S. Treasury securities CCA uses cash in 
the broker-dealer's segregated account for liquidity purposes--the cash 
will be protected through collateral comprising U.S. Treasury 
securities deposited into the account and other measures. The 
Commission would need to review a more detailed plan for how the cash 
will be used and customers protected before taking any action on any 
formal request. In this regard, were FICC to file proposed rule changes 
that provide specific details regarding the protections and how cash 
will be used, the Commission will consider those proposed rule changes 
at that time consistent with the statutory standard for approval under 
Section 19(b).
    The third rule set--identified in paragraph (b)(2)(iii) of Note H--
provided that the customer position margin be treated in accordance 
with rules designed to address the segregation of the broker-dealer's 
account at the U.S. Treasury securities CCA that holds the customer 
position margin and set strict limitations on the U.S. Treasury 
securities CCA's ability to use the margin.\507\ The required rules 
were modeled on the requirements for a broker-dealer to include a debit 
with respect to margin delivered to a security-based swap clearing 
agency.\508\ In particular, the note provided that the customer 
position margin needed to be treated in accordance with rules requiring 
that it must be held in an account of the broker-dealer at the U.S. 
Treasury securities CCA that is segregated from any other account of 
the broker-dealer at the U.S. Treasury securities CCA and that is:
---------------------------------------------------------------------------

    \507\ Proposing Release, supra note 14, 87 FR at 64639.
    \508\ See 17 CFR 240.15c3-3(p)(1)(iii) (defining the term 
``qualified clearing agency account''); 17 CFR 240.15c3-3b, Item 15 
(permitting a broker-dealer to include a debit in the security-based 
swap reserve formula equal to the margin required and on deposit in 
a qualified clearing agency account at a clearing agency).
---------------------------------------------------------------------------

     Used exclusively to clear, settle, novate, and margin U.S. 
Treasury securities transactions of the customers of the broker-dealer;
     Designated ``Special Clearing Account for the Exclusive 
Benefit of the Customers of [name of broker-dealer]'';
     Subject to a written notice of the U.S. Treasury 
securities CCA provided to and retained by the broker-dealer that the 
cash and U.S. Treasury securities in the account are being held by the 
U.S. Treasury securities CCA for the exclusive benefit of the customers 
of the broker-dealer in accordance with the regulations of the 
Commission and are being kept separate from any other accounts 
maintained by the broker-dealer or any other clearing member at the 
U.S. Treasury securities CCA; and
     Subject to a written contract between the broker-dealer 
and the U.S. Treasury securities CCA which provides that the cash and 
U.S. Treasury securities in the account are not available to cover 
claims arising from the broker-dealer or any other clearing member 
defaulting on an obligation to the U.S. Treasury securities CCA or 
subject to any other right, charge, security interest, lien, or claim 
of any kind in favor of the U.S. Treasury securities CCA or any person 
claiming through the U.S. Treasury securities CCA, except a right, 
charge, security interest, lien, or claim resulting from a cleared U.S. 
Treasury transaction of a customer of the broker-dealer effected in the 
account.
    The objective was to protect the customer position margin that the 
broker-dealer deposits with the U.S. Treasury securities CCA to margin 
its customers' U.S. Treasury security positions by isolating it from 
any other assets of the broker-dealer at the U.S. Treasury securities 
CCA and to prevent it from being used to cover any obligation other 
than an obligation of the broker-dealer's customer resulting from a 
U.S. Treasury transaction cleared, settled, and novated in the 
account.\509\ Further, the account designation and written notice 
requirements were designed to alert creditors of the broker-dealer and 
U.S. Treasury securities CCA that the assets in this account are not 
available to satisfy any claims they may have against the broker-dealer 
or the U.S. Treasury securities CCA. The written contract requirement 
was designed to limit the U.S. Treasury securities CCA's rights to use 
the customer position margin for any purpose other than an obligation 
of the broker-dealer's customers. For example, the assets in the 
account could not be used to cover an obligation of the broker-dealer 
to the U.S. Treasury securities CCA if the broker-dealer defaults on 
the obligation. Similarly, the assets in the account could not be used 
to mutualize the loss across the U.S. Treasury securities CCA's members 
if a member defaulted and its clearing funds were insufficient to cover 
the loss. The Commission did not receive comments on this aspect of the 
proposal and is adopting it substantially as proposed.\510\
---------------------------------------------------------------------------

    \509\ Proposing Release, supra note 14, 87 FR at 64639.
    \510\ See Note H(b)(2)(iii) of Rule 15c3-3a, as adopted. The 
rule text of this paragraph has been modified to add the phrase 
``and qualified customer securities'' after the phrase ``U.S. 
Treasury securities'' wherever the latter appears in the paragraph 
to conform the rule text to the modification discussed above 
relating to the broker-dealer's ability to post qualified customer 
securities.
---------------------------------------------------------------------------

    The fourth rule set--identified in paragraph (b)(2)(iv) of Note H--
provided that the customer position margin be treated in accordance 
with rules designed to address how the U.S. Treasury securities CCA 
holds the customer position margin.\511\ The objective was to isolate 
the customer position margin and prevent it from being used to satisfy 
the claims any creditors may have against the U.S. Treasury securities 
CCA. In particular, the note provided that the customer position margin 
needed to be treated in accordance with rules of the U.S. Treasury 
securities CCA requiring that the U.S. Treasury securities CCA hold the 
customer position margin itself or at either a U.S. Federal Reserve 
Bank or a ``bank'' (as defined in section 3(a)(6) of the Exchange Act 
(15 U.S.C. 78c(a)(6)) that is insured by the Federal Deposit Insurance 
Corporation. The objective was to have the U.S. Treasury securities CCA 
hold the customer position margin at a safe financial institution. In 
addition, the rules would need to provide that the U.S. Treasury 
securities CCA's account at the U.S. Federal Reserve Bank or bank be:
---------------------------------------------------------------------------

    \511\ Proposing Release, supra note 14, 87 FR at 64640.
---------------------------------------------------------------------------

     Segregated from any other account of the U.S. Treasury 
securities CCA or any other person at the U.S. Federal Reserve Bank or 
bank and used exclusively to hold cash and U.S. Treasury securities to 
meet current margin requirements of the U.S. Treasury securities CCA 
resulting from positions in U.S. Treasury securities of the customers 
of the broker-dealer

[[Page 2767]]

members of the qualified U.S. Treasury securities CCA;
     Subject to a written notice of the U.S. Federal Reserve 
Bank or bank provided to and retained by the U.S. Treasury securities 
CCA that the cash and U.S. Treasury securities in the account are being 
held by the U.S. Federal Reserve Bank or bank pursuant to Rule 15c3-3 
and are being kept separate from any other accounts maintained by the 
U.S. Treasury securities CCA or any other person at the U.S. Federal 
Reserve Bank or bank; and
     Subject to a written contract between the U.S. Treasury 
securities CCA and the U.S. Federal Reserve Bank or bank which provides 
that the cash and U.S. Treasury securities in the account are subject 
to no right, charge, security interest, lien, or claim of any kind in 
favor of the U.S. Federal Reserve Bank or bank or any person claiming 
through the U.S. Federal Reserve Bank or bank.
    These conditions with respect to the account designation, written 
notice, and written contract would be designed to achieve the same 
objectives as the analogous conditions discussed above with respect to 
the broker-dealer's account at the U.S. Treasury securities CCA. The 
Commission did not receive comments on this aspect of the proposal and 
is adopting it substantially as proposed.\512\
---------------------------------------------------------------------------

    \512\ See Note H(b)(2)(iv) of Rule 15c3-3a, as adopted. The rule 
text of this paragraph has been modified to add the phrase ``and 
qualified customer securities'' after the phrase ``U.S. Treasury 
securities'' wherever the latter appears in the paragraph to conform 
the rule text to the modification discussed above relating to the 
broker-dealer's ability to post qualified customer securities.
---------------------------------------------------------------------------

    The fifth rule set--identified in paragraph (b)(2)(v) of Note H--
provided that the customer position margin be treated in accordance 
with rules of the clearing agency requiring systems, controls, 
policies, and procedures to return customer position margin to the 
broker-dealer that is no longer needed to meet a current margin 
requirement resulting from positions in U.S. Treasury securities of the 
customers of the broker-dealer no later than the close of the next 
business day after the day the customer position margin is no longer 
needed for this purpose.\513\ As discussed above, the debit would be 
limited to customer position margin required and on deposit at the U.S. 
Treasury securities CCA. This would mean that the broker-dealer could 
not include in this debit item the amount of customer position margin 
on deposit at the U.S. Treasury securities CCA that exceeds the broker-
dealer's margin requirement resulting from its customers' cleared U.S. 
Treasury securities positions. The objective of this condition was to 
effectuate the prompt return of customer position margin to the broker-
dealer.
---------------------------------------------------------------------------

    \513\ Proposing Release, supra note 14, 87 FR at 64640.
---------------------------------------------------------------------------

    Several commenters opposed the proposed requirement to return 
excess collateral within one business day.\514\ A commenter stated that 
this requirement does not apply to margin posted to other clearing 
agencies or DCOs and does not seem to serve any customer protection 
benefit.\515\ The commenter stated further that FICC does not have a 
mechanism to push excess margin to direct participants and direct 
participants do not have the capability of accepting unsolicited excess 
margin. Rather, similar to other clearing organizations, this commenter 
stated that FICC regularly notifies direct participants of excess 
margin every time margin is calculated and then allows such direct 
participants to demand a return of such margin. Furthermore, this 
commenter stated that some direct participants prefer to leave excess 
margin with FICC to serve as a buffer for future margin calls. Another 
commenter stated that the proposed requirement was inconsistent with 
other cleared products and unnecessary for customer protection.\516\ 
Finally, a commenter stated that a required automatic return would add 
significant operational burdens, as broker-dealer participants would 
need to update their systems to accept an automatic return of excess 
margin without a request and ensure that any such amounts are 
appropriately treated as customer assets.\517\
---------------------------------------------------------------------------

    \514\ See, e.g., DTCC/FICC Letter, supra note 33, at 31-32; ICE 
Letter, supra note 33, at 3; SIFMA/IIB Letter, supra note 37, at 30.
    \515\ See DTCC/FICC Letter, supra note 33, at 31.
    \516\ See ICE Letter, supra note 33, at 3-4.
    \517\ See SIFMA/IIB Letter, supra note 37, at 30.
---------------------------------------------------------------------------

    The Commission agrees with commenters that the proposed requirement 
may add significant operational burdens to broker-dealers if a U.S. 
Treasury securities CCA is required to return excess collateral to a 
broker-dealer no later than the close of the next business day after 
the day the collateral is no longer needed to meet a current margin 
requirement resulting from positions in U.S. Treasury securities of the 
customers of the broker-dealer. Moreover, because the debit is limited 
to margin required and on deposit at the U.S. Treasury securities CCA, 
the broker-dealer has an incentive to obtain the prompt return of 
excess margin collateral held by the CCA that is in the form of 
securities. Specifically, the amount of the excess margin would remain 
a credit in the Rule 15c3-3a formula with no offsetting debit because 
the excess margin amount is no longer required by the U.S. Treasury 
securities CCA. Consequently, maintaining the excess margin collateral 
at the U.S. Treasury CCA could increase the amount that the broker-
dealer must deposit into the customer reserve account.\518\
---------------------------------------------------------------------------

    \518\ See Item 15 of the Rule 15c3-3a formula, as adopted 
(requiring that the debit in Item 15 of the Rule 15c3-3a formula 
equal the margin required and on deposit with a clearing agency 
registered with the Commission under section 17A of the Exchange Act 
resulting from the following types of transactions in U.S. Treasury 
securities in customer accounts that have been cleared, settled, and 
novated by the clearing agency: (1) purchases and sales of U.S. 
Treasury securities; and (2) U.S. Treasury securities repurchase and 
reverse repurchase agreements); see also Item 13 of the Rule 15c3-3a 
formula (requiring that the debit in Item 13 of the 15c3-3a reserve 
formula equal the margin required and on deposit with the OCC for 
all option contracts written or purchased in customer accounts).
---------------------------------------------------------------------------

    For these reasons, the Commission is removing this aspect of the 
requirement from the final rule. However, the final rule retains the 
provision that the customer position margin is treated in accordance 
with rules of the clearing agency requiring systems, controls, 
policies, and procedures to return customer position margin to the 
broker-dealer that is no longer needed to meet a current margin 
requirement resulting from positions in U.S. Treasury securities of the 
customers of the broker-dealer.\519\ Thus, it retains the overall 
objective of the proposal to effectuate the prompt return of customer 
position margin to the broker-dealer that is no longer needed to meet a 
margin requirement but leaves it to the broker-dealer and the U.S. 
Treasury securities CCA arrange when that amount will be returned.
---------------------------------------------------------------------------

    \519\ See Note H(b)(2)(v) to Rule 15c3-3a, as adopted. To 
implement the modification discussed above, the phrase ``no later 
than the close of the next business day after the day the cash and 
U.S. Treasury securities are no longer needed for this purpose'' was 
deleted from the rule text. In addition, the rule text of this 
paragraph has been modified to add the phrase ``and qualified 
customer securities'' after the phrase ``U.S. Treasury securities'' 
to conform the rule text to the modification discussed above 
relating to the broker-dealer's ability to post qualified customer 
securities.
---------------------------------------------------------------------------

d. Fourth Condition--Commission Approval of Rules of U.S. Treasury 
Securities CCA
    The fourth condition for including customer position margin as a 
debit in the Rule 15c3-3a formula was set forth in paragraph (b)(3) of 
Note H.\520\ Under

[[Page 2768]]

this condition, the Commission would need to have approved rules of the 
U.S. Treasury securities CCA that meet the conditions of proposed Note 
H and the Commission would had to have published (and not subsequently 
withdrawn) a notice that brokers-dealers may include a debit in the 
customer reserve formula when depositing customer position margin to 
meet a margin requirement of the U.S. Treasury securities CCA resulting 
from positions in U.S. Treasury securities of the customers of the 
broker-dealer. The Commission staff would analyze the U.S. Treasury 
securities CCA's approved rules and practices regarding the treatment 
of customer position margin and make a recommendation as to whether 
they adequately implement the customer protection objectives of the 
conditions set forth in proposed Note H. If satisfied with the staff's 
recommendation, the Commission would publish a positive notice. The 
objective was to permit the debit only after the Commission has 
approved the U.S. Treasury securities CCA's rules pursuant to section 
19(b) of the Exchange and published the notice.\521\ Any changes to 
those rules and practices that would undermine these customer 
protection objectives could result in the Commission withdrawing the 
notice, at which point the Commission would no longer permit the debit. 
The Commission did not receive comments on this aspect of the proposal 
and is adopting it substantially as proposed.\522\
---------------------------------------------------------------------------

    \520\ Proposing Release, supra note 14, 87 FR at 64640.
    \521\ See 15 U.S.C. 78s.
    \522\ See Note H(b)(3) to Rule 15c3-3a, as adopted. The rule 
text of this paragraph has been modified to add the phrase ``and 
qualified customer securities'' after the phrase ``U.S. Treasury 
securities'' to conform the rule text to the modification discussed 
above relating to the broker-dealer's ability to post qualified 
customer securities.
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5. PAB Reserve Computation
    Finally, broker-dealers are required to perform a separate reserve 
computation for PAB accounts and maintain a separate reserve account 
with respect to that computation.\523\ The Rule 15c3-3a computation 
provides that this separate PAB reserve computation must be performed 
in accordance with the Rule 15c3-3a computation for the broker-dealer's 
non-PAB customers, except as provided in Notes to the PAB 
Computation.\524\ Therefore, the amendments discussed above adding a 
new debit in Item 15 would apply to the PAB reserve computation. 
Further, the Commission proposed to amend Note 9 Regarding the PAB 
Reserve Bank Account Computation--which permits a debit in the PAB 
reserve computation for clearing deposits required to be maintained at 
registered clearing agencies--to clarify that the conditions set forth 
in new Note H with respect to including a debit in the non-PAB customer 
reserve computation would apply to the PAB reserve computation as 
well.\525\ The Commission did not receive comments on this aspect of 
the proposal and is adopting it as proposed.\526\
---------------------------------------------------------------------------

    \523\ See 17 CFR 240.15c3-3(a)(16) (defining the term ``PAB 
account'' to mean a proprietary securities account of a broker-
dealer (which includes a foreign broker-dealer, or a foreign bank 
acting as a broker-dealer) other than a delivery-versus-payment 
account or a receipt-versus-payment account); 17 CFR 240.15c3-3(e) 
(requiring separate reserve accounts and reserve account 
computations for PAB accounts).
    \524\ See 17 CFR 240.15c3-3a, Notes 1 through 10 Regarding the 
PAB Reserve Bank Account Computation.
    \525\ Proposing Release, supra note 14, 87 FR at 64640.
    \526\ See Rule 15c3-3a, Note 9 Regarding the PAB Reserve Bank 
Account Computation.
---------------------------------------------------------------------------

III. Compliance Dates

    In the Proposing Release, the Commission sought input from 
commenters on the appropriate compliance date or implementation 
schedule for the proposed amendments.\527\
---------------------------------------------------------------------------

    \527\ Proposing Release, supra note 14, 87 FR at 64641.
---------------------------------------------------------------------------

    Commenters generally supported a staged approach to implementation 
and compliance. Specifically, commenters stated that as a first step, 
the proposed requirements related to the segregation of house and 
customer margin (discussed in part II.B.1), access to central clearing 
(discussed in part II.B.2), and Rule 15c3-3 (discussed in part II.C) 
should become effective, and that as a second step, the proposed 
requirements related to clearing eligible secondary market transactions 
(discussed in part II.A) should become effective thereafter. Commenters 
also generally supported a lengthy or substantial timeframe for 
implementation. These comments are discussed in detail in this part.
    For example, one commenter which currently is a U.S. Treasury 
securities CCA stated that it would take the commenter and the U.S. 
securities industry as a whole substantial time to make the 
documentation, operational, organizational, and systems changes needed 
to comply with the proposal, and that the commenter would need to amend 
its rules, which amendments the Commission would need to approve.\528\ 
The commenter stated that it would be advisable to adopt a phased 
implementation schedule, under which different requirements of the 
proposal become effective, beginning with the customer segregation 
requirement. The commenter stated that, depending on when any final 
rule is adopted, FICC and market participants may be able to implement 
the segregation requirement by 2025, giving market participants a full 
year after the expected implementation of T+1 to focus on these 
changes.\529\
---------------------------------------------------------------------------

    \528\ FICC/DTCC Letter, supra note 33, at v. The commenter 
elaborated that it will take market participants substantial time to 
scope the transactions subject to the requirement, execute the 
documentation necessary to submit such transactions for central 
clearing, implement internal procedures and systems to monitor and 
ensure compliance, and establish the relevant accounts and 
operational integrations with a Treasury CCA. It also stated that, 
concurrently, the commenter will need to develop and test the 
systems, operations, and documentation needed to accommodate a far 
greater volume of transactions, create a strategy and framework to 
identify and monitor compliance, and establish margin segregation 
arrangements. Id. at 27-28.
    \529\ FICC/DTCC Letter, supra note 33, at v, 28.
---------------------------------------------------------------------------

    Another commenter stated that a phased approach to implementation 
is necessary to ensure that the market can support a clearing mandate 
without undue costs to market participants and market liquidity or 
stability.\530\ The commenter stated that the Commission should first 
adopt rules to ensure that market participants have sufficient access 
to clearing, including changes to the access models, the segregation of 
house and customer margin, and changes to Rule 15c3-3. The commenter 
then recommended that subsequent to the Commission's adoption of such 
rules and FICC's implementation of the necessary corresponding changes 
to its access models, which would require at a minimum two years, the 
Commission should provide 18 months for the implementation of a 
tailored clearing mandate that applies to bilateral repo 
transactions.\531\ The commenter stated that the Commission and market 
participants could then observe the effects of the clearing mandate in 
the bilateral repo market and consider whether and how to apply the 
mandate to triparty repo transactions.\532\
---------------------------------------------------------------------------

    \530\ MFA Letter, supra note 81, at 21.
    \531\ Id. at 21; MFA Letter II, supra note 125, at 8.
    \532\ MFA Letter, supra note 81, at 21; see also MFA Letter II, 
supra note 125, at 5.
---------------------------------------------------------------------------

    Another commenter stated, in considering an appropriate compliance 
timeframe, the Commission must build in the time necessary for: (i) 
FICC to work with the Commission to identify changes to its rules 
necessary to address the issues we have identified above with respect 
to the Sponsored Program; (ii) FICC to propose and adopt additional 
rules or amendments, subject to public notice and comment, that may be

[[Page 2769]]

needed to address these issues; (iii) the Commission to propose and 
adopt amendments to its rules, subject to public notice and comment, 
and provide regulatory relief as needed to address the issues for funds 
that we have highlighted above; and (iv) FICC and industry participants 
to implement the extensive changes to policies and procedures, 
documentation, and operations (as detailed above for funds) that will 
be needed to comply with final rules.\533\ The commenter stated that 
these steps will require a significant amount of time and recommended 
that the Commission propose a multi-year, staged, compliance schedule, 
including, at a minimum, that a requirement to comply with a clearing 
requirement should go into effect no earlier than three years after the 
Commission and FICC have adopted final rules and amendments, as 
described in (ii) and (iii).\534\
---------------------------------------------------------------------------

    \533\ ICI Letter, supra note 85, at 31.
    \534\ ICI Letter, supra note 85, at 31.
---------------------------------------------------------------------------

    Another commenter stated that the Commission should implement any 
central clearing requirement in stages and at a measured pace 
commensurate with the size, scope and scale of the implementation 
program required.\535\ The commenter stated that the Commission should 
work to determine an implementation that will be the least disruptive 
to the market and that accounts for the practical challenges that 
different industry participants may face as they prepare for a central 
clearing requirement, which may not be clear until participants are 
able to review any proposals from FICC regarding implementation. The 
commenter stated that staging implementation would allow the Commission 
to appropriately calibrate the costs and benefits of any requirement to 
clear eligible secondary market transactions and referenced that 
similarly significant changes to market structure (i.e., triparty 
market reform and swaps clearing) were successfully phased-in over five 
or more years to allow adequate time for market readiness while 
mitigating the potential for disruption.\536\
---------------------------------------------------------------------------

    \535\ SIFMA/IIB Letter, supra note 37, at 33.
    \536\ ICI Letter, supra note 85, at 33.
---------------------------------------------------------------------------

    Another commenter stated that, if adopting a clearing requirement, 
a measured approach to implementation is required. The commenter 
specified that any new requirement to clear should be introduced only 
after enhancements to the clearing infrastructure are achieved, FICC's 
readiness is assured, and at least one other covered clearing agency 
registered with the Commission is ready to support the market in 
clearing eligible secondary market transactions.\537\ The commenter 
further stated that industry participants should have at least 18 
months to engage with each CCA on the design of an appropriate clearing 
model thar provides the minimum level of protection it described in its 
comment letter. The commenter also stated a timetable for clearing 
requirements should only be set only once sufficient consensus has 
emerged around the appropriate clearing model and appropriate 
regulatory requirements are developed. The commenter recommended that 
the clearing requirement should be phased in over several years based 
on the volume of U.S. Treasury securities transaction activity in which 
a market participant engages (like the phase-in approach which was 
followed for regulatory initial margin requirements for uncleared OTC 
derivatives which took more than five years following the publication 
of final rules to be fully implemented). The commenter stressed the 
importance of phasing in the new requirements in a manner that avoids 
too many market participants looking to finalize documentation and go-
live with clearing all on the same day.\538\
---------------------------------------------------------------------------

    \537\ SIFMA AMG Letter, supra note 35, at 15.
    \538\ SIFMA AMG Letter, supra note 35, at 15.
---------------------------------------------------------------------------

    The commenter also stated that a long phase-in period is essential, 
as there will be a significant implementation effort needed to comply 
with any new requirements.\539\ The commenter stated that it is 
difficult to estimate the potential scope of this work and the effort 
involved until the access models are more developed. The commenter 
stated that given the breadth of participation in the U.S. Treasury 
markets, the potential scale of the effort and time required to 
complete this work, implementation will take many years to complete 
after a final rule.\540\
---------------------------------------------------------------------------

    \539\ SIFMA AMG Letter, supra note 35, at 15. For direct 
participants, these efforts would include obtaining information to 
classify their counterparties to determine who qualifies as an IDM, 
a hedge fund, or a leveraged account and negotiating clearing 
agreements with each hedge fund and leveraged account. For asset 
managers, these efforts would include implementation of 
documentation such as clearing agreements, give-up agreements, and 
related infrastructure. For managed funds, these efforts would 
include revisiting existing formation and distribution 
documentation, such as investment management agreements and 
investment guidelines, as they do not permit clearing activity or 
contemplate the clearing of U.S. Treasury securities. Buy-side firms 
will have to undertake a significant operational build to be able to 
settle and margin cleared transactions. The commenter, a trade 
association, stated that many of its members trade in blocks on 
behalf of multiple underlying accounts, and that the industry will 
have to consider and address how a mandatory requirement to clear 
would impact an asset manager's transaction allocation process where 
some accounts are required to clear and others are not. Id. at 15-
16.
    \540\ SIFMA AMG Letter, supra note 35, at 16.
---------------------------------------------------------------------------

    An additional trade association commenter stated that its members 
would incur incredible costs as they establish numerous costly clearing 
relationships to ensure that all its transactions can be cleared as 
required, which will take a significant amount of time.\541\ The 
commenter therefore recommended a compliance date of at least 30 months 
after the publication of any final rule in the Federal Register.\542\ 
An additional commenter recognized that clearing requirements can have 
unintended and disruptive consequences and therefore recommended that 
the Commission implement the changes with respect to the segregation of 
house and customer margin, access models, and Rule 15c3-3 before moving 
forward with any expanded clearing requirements.\543\
---------------------------------------------------------------------------

    \541\ AIMA Letter, supra note 81, at 9.
    \542\ AIMA Letter, supra note 81, at 9.
    \543\ CME Letter, supra note 81, at 8.
---------------------------------------------------------------------------

    Finally, an additional commenter supported an extensive 
implementation timeframe that is appropriately prioritized and 
sequenced due to the breadth of the proposal, the time and resources 
necessary for a covered clearing agency to revise its policies and 
procedures, and the changes necessary for market participants' 
compliance. The commenter referred to tri-party market reform as a 
successful example of the time and sequencing involved in such a 
significant change.\544\
---------------------------------------------------------------------------

    \544\ BNY Mellon Letter, supra note 33, at 3.
---------------------------------------------------------------------------

    The Commission agrees with commenters that a phased approach to 
implementation and compliance would be appropriate for these 
amendments. As discussed in the Proposing Release, the Commission 
understands that the amendments to Rule 17ad-22(e)(18)(iv)(A) will 
likely result in a significant increase in the volume of U.S. Treasury 
securities transactions submitted for central clearing, including 
transactions of market participants that currently may not submit such 
transactions for central clearing.\545\ The Commission therefore stated 
its belief that additional changes with respect to the segregation of 
house and customer margin and access, as proposed in Rule 17ad-
22(e)(6)(i) and (e)(18)(iv)(C), respectively, may be warranted. These 
changes were designed to improve risk management by and access to the 
U.S. Treasury securities CCA and would also serve to help manage the 
risks and

[[Page 2770]]

facilitate access that would likely result from the requirement to 
clear eligible secondary market transactions.\546\ In addition, the 
Commission proposed changes to Rule 15c3-3 to facilitate implementation 
of the requirement to clear eligible secondary market transactions, by 
reducing the amount of broker-dealers cash and securities that would be 
needed to meet the requirements of Rule 15c3-3.\547\
---------------------------------------------------------------------------

    \545\ Proposing Release, supra note 14, 87 FR at 64632, 64637.
    \546\ Id. at 64632-33.
    \547\ Id. at 64637.
---------------------------------------------------------------------------

    The Commission continues to believe that the changes with respect 
to the segregation of house and customer margin, ensuring access to 
central clearing, and Rule 15c3-3 would help facilitate the central 
clearing of additional U.S. Treasury securities transactions, as will 
likely result when a requirement to clear eligible secondary market 
transactions goes into place. The Commission also agrees with the 
commenters, that it would be appropriate to implement those changes 
prior to the imposition of any clearing requirement. This would allow 
for the development of additional infrastructure that would support the 
eventual increased amount of central clearing that would occur upon the 
applicability of a requirement to clear eligible secondary market 
transactions.
    To do so, the Commission is adopting a different compliance date 
for the amendments to Rule 17ad-22(e)(6)(i) (regarding separation of 
house and customer margin), 17ad-22(e)(18)(iv)(C) (regarding access), 
and 15c3-3 (regarding the broker-dealer customer protection rule), from 
the compliance date for the amendments to Rule 17ad-22(e)(18)(iv)(A) 
and (B) (regarding the requirements to clear eligible secondary market 
transactions and monitoring of the submission of such transactions). 
This staging would allow market participants, including U.S. Treasury 
securities CCAs, the opportunity to incorporate changes to their rules, 
systems, practices, contractual arrangements, and other documentation, 
prior to the applicability of a clearing requirement. It also would 
provide time between the implementation of structural changes to 
accommodate the separation of house and customer margin, the potential 
ability to rehypothecate margin pursuant to Rule 15c3-3, as amended, 
and additional access by new types of market participants, on the one 
hand, and the requirement for a U.S. Treasury securities CCA to require 
its direct participants to clear eligible secondary market 
transactions, on the other hand.
    On the latter point, the Commission is incorporating two stages of 
compliance for the requirement to clear eligible secondary market 
transactions: the first would apply to the cash market transactions 
described in section (i) of the definition of an eligible secondary 
market transaction, and the second would apply to the repo market 
transactions described in section (ii) of the definition of an eligible 
secondary market transaction. Providing additional time for repo 
transactions to be centrally cleared should allow time for many market 
participants who are active in the repo market but do not centrally 
clear this volume of their transactions to plan for and implement 
necessary contractual arrangements and processes to manage the increase 
in volume of central clearing.
    With respect to the changes to Rule 17ad-22(e)(6)(i) (regarding 
separation of house and customer margin), 17ad-22(e)(18)(iv)(C) 
(regarding access), and 15c3-3 (regarding the broker-dealer customer 
protection rule), (1) each covered clearing agency will be required to 
file with the Commission any proposed rule changes regarding those 
amendments required under Section 19(b) and/or advance notices required 
under Title VIII of the Dodd-Frank Act no later than 60 days following 
January 16, 2024, and (2) the proposed rule changes must be effective 
by March 31, 2025. With respect to the proposed changes to Rule 17ad-
22(e)(18)(iv)(A) and (B) (regarding the requirements to clear eligible 
secondary market transactions and monitoring of the submission of such 
transactions), (1) each covered clearing agency will be required to 
file with the Commission any proposed rule changes regarding those 
amendments required under Section 19(b) and/or advance notices required 
under Title VIII of the Dodd-Frank Act no later than 150 days following 
January 16, 2024, and (2) the proposed rule changes must be effective 
by December 31, 2025, for cash market transactions encompassed by 
section (ii) of the definition of an eligible secondary market 
transaction, and by June 30, 2026, for repo transactions encompassed by 
section (i) of the definition of an eligible secondary market 
transactions. Compliance by the direct participants of a U.S. Treasury 
securities CCA with the requirement to clear eligible secondary market 
transactions would not be required until December 31, 2025, and June 
30, 2026, respectively, for cash and repo transactions.
    This staged implementation timeframe will encompass two and a half 
years from the time of the action set forth in this release. This 
amount of time is consistent with commenters who sought a staged, 
multi-year approach to implementation for this proposal, which, as 
adopted, is less extensive than what was proposed.\548\ It is also 
consistent with the comment of the existing U.S. Treasury securities 
CCA that stated that it and market participants would need until at 
least 2025 to implement any final rule, as it allows for that 
timeframe. Although some commenters referred to potentially longer 
timeframes for implementation, whether expressly (e.g., by referring to 
some particular length of time, such as 18 months or three years after 
the U.S. Treasury securities CCA has updated its rules \549\) or more 
generally (e.g., by referring to the need for a lengthy timeline or 
several years to impose clearing requirements \550\), the Commission 
believes that this timeframe would allow the benefits of greater 
central clearing to be achieved sooner and therefore is adopting the 
staged implementation timeframe discussed in this part.\551\
---------------------------------------------------------------------------

    \548\ See AIMA Letter, supra note 81, at 9 (seeking 30 months 
after publication of any final rule in the Federal Register).
    \549\ See MFA Letter, supra note 81, at 21; ICI Letter, supra 
note 85, at 33.
    \550\ See SIFMA/IIB Letter, supra note 37, at 33; BNY Mellon 
Letter, supra note 33, at 3; SIFMA AMG Letter, supra note 35, at 16.
    \551\ In addition, with respect to the compliance date, several 
commenters requested the Commission to consider interactions between 
the proposed rule and other recent Commission rules. In determining 
compliance dates, the Commission considers the benefits of the rules 
as well as the costs of delayed compliance dates and potential 
overlapping compliance dates. For the reasons discussed throughout 
the release, to the extent that there are costs from overlapping 
compliance dates, the benefits of the rule justify such costs. See 
infra parts IV.A and IV.C.2.e for a discussion of the interactions 
of the final rule with certain other Commission rules.
---------------------------------------------------------------------------

    In addition, one commenter also stated its belief that, given the 
complexity and extent of changes that will be necessary to implement 
the proposal, it would be advisable to engage in a consultative process 
regarding the implementation timeline, with that process occurring 
after any adoption of the proposal because it is difficult for market 
participants to assess how long it will take to implement a requirement 
when they do not yet know with clarity the scope of the final 
requirement.\552\ The commenter specifically stated that, after any 
adoption of the proposal, the Commission should require U.S. Treasury 
CCAs to submit to the Commission a proposed rule change, pursuant to 
Section 19 of the Exchange Act, containing an implementation schedule 
by no later than 180 days after

[[Page 2771]]

the publication of the final rule in the Federal Register. The 
commenter stated that this would provide market participants with the 
ability to comment on the timing and requirements set forth in the 
proposed rule change with the benefit of knowing the requirements' 
scope, and that the Commission and the commenter could then consider 
those comments in adopting a final implementation schedule. The 
commenter stated that this kind of deliberative and consultative 
approach would facilitate the adoption of a realistic timeline and 
thereby avoid the need for successive extensions and the attendant 
uncertainty and disruption such shifting timelines present.\553\ 
However, the Commission's phased compliance timeline allows for the 
type of deliberation and consultation that the commenter recommends. A 
U.S. Treasury securities CCA will be required to submit proposed rule 
changes to comply with the requirements being adopted in this release, 
and there will be opportunity for comment on those proposals by market 
participants, thereby allowing for consultation about the potential 
impact of any such proposed rule changes.
---------------------------------------------------------------------------

    \552\ FICC/DTCC Letter, supra note 33, at v.
    \553\ FICC/DTCC Letter, supra note 33, at v.
---------------------------------------------------------------------------

IV. Economic Analysis

    The Commission is mindful of the economic effects that may result 
from these amendments, including the benefits, costs, and the effects 
on efficiency, competition, and capital formation. Exchange Act section 
3(f) requires the Commission, when it is engaged in rulemaking pursuant 
to the Exchange Act and is required to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider, 
in addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation.\554\ In 
addition, Exchange Act section 23(a)(2) requires the Commission, when 
making rules pursuant to the Exchange Act, to consider among other 
matters the impact that any such rule would have on competition and not 
to adopt any rule that would impose a burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.\555\
---------------------------------------------------------------------------

    \554\ See 15 U.S.C. 78c(f).
    \555\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission is adopting amendments to its rules that impose 
additional requirements for any U.S. Treasury securities CCA.\556\ 
First, the amendments require that U.S. Treasury securities CCAs 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, establish objective, 
risk-based, and publicly disclosed criteria for participation, which 
require that the direct participants of such covered clearing agency 
submit for clearance and settlement all of the eligible secondary 
market transactions to which they are a counterparty.\557\ In addition, 
the amendments require that such CCAs establish, implement, maintain 
and enforce written policies and procedures reasonably designed to, as 
applicable, identify and monitor its direct participants' required 
submission of transactions for clearing, including, at a minimum, 
policies and procedures that address any failures to submit 
transactions.\558\ Strengthening the membership standards will help 
reduce contagion risk to U.S. Treasury securities CCAs and bring the 
benefits of central clearing to more transactions involving U.S. 
Treasury securities, thereby lowering the risk of disruptions to the 
U.S. Treasury securities market.\559\
---------------------------------------------------------------------------

    \556\ See part II supra.
    \557\ See part II.A.1 and part II.A.2 supra for a description of 
the requirement to clear eligible secondary market transactions 
including the definition of ``eligible secondary market 
transaction.''
    \558\ See part II.A.4 supra.
    \559\ See part IV.A infra.
---------------------------------------------------------------------------

    Second, the Commission is adopting additional requirements on how 
U.S. Treasury securities CCAs calculate, collect, and hold margin 
posted on behalf of indirect participants (i.e., customers) who rely on 
the services of a direct participant (i.e., the member of the U.S. 
Treasury securities CCA) to access the CCA's services.\560\ As 
discussed in more detail below, such requirements also will improve the 
risk management practices at U.S. Treasury securities CCAs and 
incentivize and facilitate additional central clearing in the U.S. 
Treasury securities market.
---------------------------------------------------------------------------

    \560\ See part II.C supra.
---------------------------------------------------------------------------

    Third, the Commission is adopting amendments that will require that 
a U.S. Treasury securities CCA establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable, ensure that it has appropriate means to facilitate access 
to clearance and settlement services of all eligible secondary market 
transactions in U.S. Treasury securities, including those of indirect 
participants, and that its board of directors reviews these policies 
and procedures annually.\561\ Although these requirements do not 
prescribe specific methods for market participants to obtain indirect 
access to a U.S. Treasury securities CCA, they are intended to help 
ensure that all U.S. Treasury security CCAs review their indirect 
access models and ensure that they facilitate access to clearance and 
settlement services in a manner suited to the needs and regulatory 
requirements of market participants throughout the U.S. Treasury 
securities market, including indirect participants.
---------------------------------------------------------------------------

    \561\ See part II.B.2 supra.
---------------------------------------------------------------------------

    Lastly, the Commission is amending its rules to permit margin 
required and on deposit at a U.S. Treasury securities CCA to be 
included as a debit item in the customer reserve formula, subject to 
certain conditions.\562\ As discussed further below, these amendments 
to its rules, in conjunction with the amendments requiring the 
separation of house and customer margin, should incentivize and 
facilitate additional central clearing in the U.S. Treasury securities 
market.
---------------------------------------------------------------------------

    \562\ See part II.C supra.
---------------------------------------------------------------------------

    The discussion of the economic effects of the rule amendments 
begins with a discussion of the risks inherent in the clearance and 
settlement process and how the use of a CCP can mitigate those risks. 
This is followed by a baseline of current U.S. Treasury securities 
market practices. The economic analysis then discusses the likely 
economic effects of the rule amendments, as well as their effects on 
efficiency, competition, and capital formation. The Commission has, 
where practicable, attempted to quantify the economic effects expected 
to result from these rule amendments. In some cases, however, data 
needed to quantify these economic effects is not currently available. 
For example, prior to the proposal the reporting of data for 
bilaterally cleared repo transactions was not a regulatory requirement, 
so counterparty-specific statistics were not available and any 
aggregate statistics on this market segment may not have been 
comprehensive.\563\ In the intervening period, and as discussed further 
below, the Department of the Treasury's Office of Financial Research 
(OFR) has reported the results of a pilot data collection of non-
centrally cleared bilateral repo.\564\ Likewise, the reporting

[[Page 2772]]

of U.S. Treasury securities transactions to TRACE has been until 
recently \565\ limited to cash transactions in which at least one of 
the counterparties is a FINRA member, so analyses based on that data 
will necessarily be incomplete.
---------------------------------------------------------------------------

    \563\ Samuel J. Hempel, R. Jay Kahn, Vy Nguyen, and Sharon Y. 
Ross, Non-Centrally Cleared Bilateral Repo, The OFR Blog (Aug. 24, 
2022) (``Hempel et al. (2022)''), available at https://www.financialresearch.gov/the-ofr-blog/2022/08/24/non-centrally-cleared-bilateral-repo/.
    \564\ See part IV.B.3.b.ii infra. See also Samuel J. Hempel, R. 
Jay Kahn, Robert Mann, and Mark Paddrik, Why Is So Much Repo Not 
Centrally Cleared?, OFR Brief (May 12, 2023) (``Hempel et al. 
(2023)''), available at https://www.financialresearch.gov/briefs/2023/05/12/why-is-so-much-repo-not-centrally-cleared/. The OFR has 
also proposed rulemaking mandating the collection of daily 
transaction level data from certain financial companies on their 
non-centrally cleared bilateral repurchase agreement trades. See 
Office of Financial Research, Office of Financial Research Releases 
Proposal to Collect Data on Certain Repo Transactions (Jan. 5, 
2023), available at https://www.financialresearch.gov/press-releases/2023/01/05/office-of-financial-research-releases-proposal-to-collect-data-on-certain-repo-transactions/.
    \565\ Reporting of additional cash transactions to TRACE, by 
certain U.S. and foreign banks, began on Sept. 1, 2022, but the 
recent nature of that change makes it difficult to draw conclusions 
from the limited data available. See generally Federal Reserve 
System, Agency Information Collection Activities: Announcement of 
Board Approval Under Delegated Authority and Submission to OMB, 86 
FR 59716 (Oct. 28, 2021); see also Bd. Governors Fed. Rsrv. Sys., 
Supporting Statement for the Treasury Securities and Agency Debt and 
Mortgage-Backed Securities Reporting Requirements, 
Federalreserve.gov, available at https://www.federalreserve.gov/reportforms/formsreview/FR%202956%20OMB%20SS.pdf (last visited Dec. 
11, 2023).
---------------------------------------------------------------------------

    In many cases, and as noted below, the Commission is unable to 
quantify the economic effects of the rule amendments and in the 
proposal solicited comment, including estimates and data from 
interested parties, to help inform the estimates of the economic 
effects of the proposal. As discussed further below, several commenters 
stated the importance of further research and to better understand the 
potential intended and unintended impacts of the rule. Although many of 
the commenters calling for additional research did not provide 
additional data or propose how any remaining uncertainty might be 
resolved, as discussed below, some commenters did provide limited data 
on quantifiable costs.\566\
---------------------------------------------------------------------------

    \566\ See part IV.C.2 infra.
---------------------------------------------------------------------------

    Costs and benefits will depend in part on how market participants 
access central clearing in order to clear eligible secondary market 
transactions. As some commenters have highlighted, the current clearing 
framework may need to be changed and extended to support the 
requirement to clear eligible secondary market transactions. The 
Commission agrees that changes to the current clearing framework are 
necessary and therefore is adopting as proposed Rule 17ad-
22(e)(18)(iv)(C) that requires that a U.S. Treasury securities CCA 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, ensure that it has 
appropriate means to facilitate access to clearance and settlement 
services of all eligible secondary market transactions in U.S. Treasury 
securities, including those of indirect participants, which policies 
and procedures the U.S. Treasury securities CCA's board of directors 
reviews annually.

A. Broad Economic Considerations

    Clearance and settlement risk is the risk that a counterparty fails 
to deliver a security or cash as agreed upon at the time when the 
security was traded. One method of reducing such risk is to require one 
or both counterparties to the trade to post collateral.\567\ The 
purpose of posting collateral in financial transactions is to alleviate 
frictions caused by adverse selection and moral hazard.\568\ The amount 
of collateral needed to support a set of unsettled trades, however, can 
depend on whether trades are cleared bilaterally or through a CCP. In 
cases where market participants have several outstanding buy and sell 
orders, central clearing reduces the total collateral required to 
support a given set of trades due to multilateral netting.\569\ A 
simple example illustrates the effect. Suppose there are 3 firms trying 
to complete three bilateral trades among themselves. Firm A is buying 
$90 million in U.S. Treasury securities from Firm B, Firm B is buying 
$80 million in the same U.S. Treasury securities from Firm C, and Firm 
C is buying $100 million in the same U.S. Treasury securities from Firm 
A. This means that over the settlement cycle, the firms in this example 
would need to post collateral to cover a total of $270 million in gross 
obligations to complete these three trades. If these trades were 
centrally cleared, however, then the net obligations would be 
substantially smaller. In this example, the collateral required would 
no longer be that required to support $270 million in outstanding 
obligations, but instead would reduce to $40 million: $20 million for 
Firm C, and $10 million each for Firms A and B.\570\ Central clearing 
can, in part, replace a trading network made up of a web of bilateral 
relationships with a simpler hub and spoke model. As each connection is 
a potential source of failure, a simpler system can imply less risk.
---------------------------------------------------------------------------

    \567\ An alternative method of reducing counterparty credit risk 
is delivery versus payment (``DVP''). Under DVP, counterparties aim 
to deliver securities and payment simultaneously, so that the 
transfer of securities happens if and only if payment has also been 
made.
    \568\ For example, if the fulfillment of a contract depends on a 
counterparty exerting unobservable and costly effort, collateral can 
be used as a commitment device by putting more of the counterparty's 
resources at stake in the case of nonfulfillment. See Bengt 
Holmstrom & Jean Tirole, Financial Intermediation, Loanable Funds, 
and the Real Sector, 112 Q. J. Econ. 663 (Aug. 1997); Albert J. 
Menkveld & Guillaume Vuillemey, The Economics of Central Clearing, 
13 Ann. Rev. Fin. Econ. 153, 158 (2021).
    \569\ Darrell Duffie & Haoxiang Zhu, Does a Central Clearing 
Counterparty Reduce Counterparty Risk? 1 Rev. Asset Pricing Stud. 74 
(2011), available at https://academic.oup.com/raps/article-abstract/1/1/74/1528254. The authors note that this benefit scales with the 
square root of the number of participants when the trading positions 
are statistically independent and identically distributed. The 
authors also note certain conditions that can impact netting 
efficiencies, e.g., when cross asset netting is allowed in non-
centrally cleared markets, asset specific CCPs can negatively impact 
netting efficiency. We also note, as discussed below, that certain 
aspects of client clearing models can impact netting efficiency.
    \570\ This example is from Duffie, supra note 27.
---------------------------------------------------------------------------

    Clearance and settlement through a CCP can also make trades less 
``informationally sensitive'' in the sense that the value of the trade 
does not depend on information about the creditworthiness of the 
counterparties, thereby reducing adverse selection.\571\ This occurs 
when the trade is novated to the CCP, and the CCP becomes the buyer to 
every seller and the seller to every buyer. This reduces the need for 
investors to acquire private information about the credit risk of their 
counterparty. By mitigating adverse selection through the substitution 
of the CCP's counterparty credit risk evaluation for a market 
participant's own, central clearing through a CCP lowers the cost of 
trading by market participants and should increase their willingness to 
trade, thereby improving market liquidity. Reducing the information 
sensitivity of trades also increases the uniformity of the asset that 
is traded. In the absence of novation, the U.S. Treasury security is 
essentially bundled together with counterparty risk. That is, when 
buying or selling a security, if there is counterparty risk, the 
pricing depends not only on the security itself but also on the 
reliability of the counterparty to the trade. It is as if, from an 
economic perspective, one is ``buying'' both the security and the 
characteristics of the counterparty. Besides the reduction in adverse 
selection, reducing counterparty credit risk makes the security a more 
standard product. Standardization itself increases liquidity.\572\
---------------------------------------------------------------------------

    \571\ See Gary Gorton & George Pennacchi, Financial 
Intermediaries and Liquidity Creation, 45 J. Fin. 49 (1990); see 
also Francesca Carapella & David Mills, Information Insensitive 
Securities: the Benefits of Central Counterparties (N.Y. Fed, 
working paper Oct. 17, 2012), available at https://www.newyorkfed.org/medialibrary/media/research/conference/2012/MP_Workshop/Carapella_Mills_information_insensitive_securities.pdf.
    \572\ See Ben Bernanke, Clearing and Settlement During the 
Crash, 3 Rev. Fin. Stud. 133 (1990).
---------------------------------------------------------------------------

    Financial networks that incorporate a CCP can further improve the 
resilience

[[Page 2773]]

of financial markets. The Bank for International Settlements stated in 
2015 that the shift to central clearing had helped to mitigate the 
risks that emerged in non-centrally cleared markets before and during 
the 2007-2009 financial crisis. Further, it had reduced financial 
institutions' exposure to counterparty credit risk shocks through 
netting, margining and collateralization.\573\
---------------------------------------------------------------------------

    \573\ Dietrich Domanski, Leonardo Gambacorta, and Cristina 
Picillo, Central clearing: trends and current issues, BIS Q. Rev. 
(Dec. 2015), available at https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf.
---------------------------------------------------------------------------

    Another potential benefit of central clearing is it should reduce 
the magnitude of, or even prevent, fire sales of assets. This 
mitigation of fire sale risk is achieved when a member defaults and the 
CCP manages the liquidation of assets. Central management of asset 
liquidation may mitigate suboptimal outcomes in the face of capital or 
margin constraints. For example, if investors believe the counterparty 
will sell in the case of a missed margin call, other investors may join 
the selloff, leading to further declines in asset prices. If market 
participants can pledge to not sell, then a more efficient equilibrium 
in which there is no fire sale could be achieved. In this way, the CCP 
acts as a way to select into the more efficient equilibrium by allowing 
members to credibly pre-commit to the coordinated liquidation of assets 
in the case of a missed margin call.\574\
---------------------------------------------------------------------------

    \574\ John Chi-Fong Kuong, Self-Fulfilling Fire Sales: Fragility 
of Collateralized Short-Term Debt Markets, 34 Rev. Fin. Stud. 2910 
(2021), available at https://academic.oup.com/rfs/article/34/6/2910/5918033?login=true.
---------------------------------------------------------------------------

    Finally, broadening central clearing could lead to a wider group of 
liquidity providers, which likely would increase the reliability of 
access to funding during periods of market stress.\575\ The reason is 
that novation of the trade to a central counterparty reduces one of the 
major reasons for not doing business with a particular counterparty: 
the risk that that counterparty may fail to deliver on its obligations. 
It also reduces one of the reasons for failing to provide liquidity, 
namely concerns over the credit risk of counterparties. Therefore, as a 
result of increased levels of central clearing and the resulting 
increased centralization of counterparty credit risk evaluation by a 
CCP and the CCP's application of consistent and transparent risk 
management,\576\ more counterparties--who would also be potential 
liquidity providers--would be willing to compete to provide liquidity 
to buy-side investors and to each other. In addition, several academic 
studies following the 2008 financial crisis emphasize the role of 
intermediary balance sheet constraints as a cause of financial 
crises.\577\ Moreover, losses experienced by market participants can 
lead to an increase in risk aversion leading those market participants 
to exit, creating a need for new market participants to replace them in 
order to provide liquidity.\578\ Therefore, either because of increased 
risk aversion or because some friction implies that the liquidity 
providers who find themselves warehousing the asset can no longer do so 
due to trading losses, outside liquidity providers may play an 
important role in stabilizing the market. In addition, central clearing 
facilitates anonymized all-to-all trading that would enable the 
provision of market liquidity by investors.579 580
---------------------------------------------------------------------------

    \575\ G-30 Report, supra note 5, at 13.
    \576\ See TMPG White Paper, supra note 13 (``[b]ilateral 
clearing involves varying risk management practices that are less 
uniform and less transparent to the broader market . . .''). In 
addition, FICC has been designated by FSOC as a systemically 
important financial market utility, which brings heightened risk 
management requirements and additional regulatory supervision by 
both its primary regulator and the Board of Governors. See also U.S. 
Dept. of the Treasury, Fin. Stability Oversight Council, 2012 Annual 
Report, App. A, available at https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf (``FSOC 2012 Annual Report'').
    \577\ See e.g., Markus K. Brunnermeier & Yuliy Sannikov, A 
Macroeconomic Model with a Financial Sector, 104 a.m. Econ. Rev. 379 
(Feb. 2014); see also Zhiguo He & Arvind Krishnamurthy, Intermediary 
Asset Pricing, 103 a.m. Eco. Rev. 732 (Apr. 2013). Balance sheet 
constraints and the impact of losses on risk aversion both affect 
the ability and willingness of market participants to provide 
liquidity. A CCP is not similarly affected as it does not supply 
liquidity.
    \578\ See, e.g., John Y. Campbell & John H. Cochrane, By Force 
of Habit: A Consumption-Based Explanation of Aggregate Stock Market 
Behavior, 107 J. Pol. Econ. 205 (Apr. 1999).
    \579\ G-30 Report, supra note 5, at 13. See also Duffie, supra 
note 27, at 4 (``Further, given broad access to a CCP, some Treasury 
transactions could flow directly from ultimate sellers to ultimate 
buyers without necessarily impinging on dealer balance sheet 
space.'').
    \580\ The market responded to the stress of 2020 through some 
increase in all-to-all trading. See MarketAxess, FIMSAC Slides, at 6 
(Oct. 5, 2020), available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/mcvey-fimsac-slides-100120.pdf Additional 
central clearing may have enabled a greater increase.
---------------------------------------------------------------------------

    Several commenters were generally supportive of benefits of central 
clearing. One commenter stated that it, `` . . . supports central 
clearing because, when calibrated appropriately, it has increased 
resiliency, liquidity and transparency in financial markets.'' \581\ 
Another commenter stated that ``[i]f implemented thoughtfully, 
increased central clearing of Treasury cash and repurchase (``repo'') 
transactions will reduce systemic risk and meaningfully improve 
counterparty risk management, market liquidity, and resiliency.'' \582\ 
Several additional commenters made similar statements.\583\
---------------------------------------------------------------------------

    \581\ AIMA Letter, supra note 81, at 2.
    \582\ Citadel Letter, supra note 81, at 1.
    \583\ See AIMA Letter, supra note 81, at 2; CME Group, supra 
note 81, at 2; DTCC/FICC Letter, supra note 33, at 1; GTS Letter, 
supra note 81, at 3; ISDA Letter, supra note 391, at 2; LSEG Letter, 
supra note 33, at 2; MFA Letter, supra note 81, at 2; ARB Trading et 
al. Letter, supra note 81, at 1; SIFMA/IIB Letter, supra note 37, at 
1; Sunthay Letter, supra note 33, at 4; Tradeweb Letter, supra note 
81, at 2; Better Markets Letter, supra note 33, at 8; ICE Letter, 
supra note 33, at 1.
---------------------------------------------------------------------------

    Several commenters, including some who were generally supportive of 
the benefits of central clearing, referenced the need to do additional 
study before imposing any requirement on U.S. Treasury securities CCAs 
for their participants to clear and settle eligible secondary market 
transactions. One commenter stated that the Commission should conduct 
detailed analysis on the costs and benefits of central clearing across 
market segments and participant types, as well as analyze the overall 
impact on Treasury market liquidity. The commenter stated that it is 
widely recognized within existing literature on Treasury market 
structure reform that further detailed study is needed in this area. 
The commenter also stated that increased central clearing resulting 
from incentives to centrally clear U.S. Treasury securities 
transactions would provide additional data for this analysis.\584\
---------------------------------------------------------------------------

    \584\ SIFMA/IIB Letter, supra note 37, at 2.
---------------------------------------------------------------------------

    In support of its claim that it is widely recognized within 
existing literature on Treasury market structure reform that further 
study is needed, the commenter cites two working papers.\585\ The first 
citation includes a quote stating that it would be difficult to 
estimate the amount of liquidity savings associated with central 
clearing without further study.\586\ However, the cited work is 
generally supportive of central clearing, stating that ``Without a 
broad central clearing mandate, the size of the Treasury market will 
outstrip the capacity of dealers to safely intermediate the market on 
their own balance sheets, raising doubts over the safe-haven status of 
U.S. Treasuries and concerns over the cost to taxpayers of financing 
growing federal deficits.'' \587\
---------------------------------------------------------------------------

    \585\ SIFMA/IIB Letter, supra note 37, at 2 (citing working 
papers by Duffie, supra note 27, and Liang and Parkinson, supra note 
28).
    \586\ Id. at 2.
    \587\ Duffie, supra note 27, at 1.
---------------------------------------------------------------------------

    The second citation provided by the commenter also focuses on the 
potential benefit of improved liquidity.\588\ The working paper states 
that a potential mandate for wider use of central

[[Page 2774]]

clearing for Treasury securities is the second of four complementary 
measures for enhancing the liquidity of U.S. Treasury markets when 
under stress.\589\ The cited work also does not address the potential 
benefits of increased central clearing other than the potential for 
improved liquidity. Immediately following the authors' statement in 
favor of further study, they state that ``If such a study were to 
conclude that expanded clearing is not appropriate for Treasury 
securities, it should explain what distinguishes Treasury markets from 
the many other markets, such as equities and Treasury futures, for 
which there is a clearing mandate.'' \590\
---------------------------------------------------------------------------

    \588\ Liang and Parkinson, supra note 28.
    \589\ Id.
    \590\ Id. at 3.
---------------------------------------------------------------------------

    Another commenter stated that the Commission should substantiate 
the benefits and potential costs of clearing through additional studies 
and data. The commenter stated that the Commission's proposal should be 
considered after the Commission has had an opportunity to gather 
additional data and further assess whether increased clearing is the 
best way to mitigate the risks confronting the U.S. Treasury market, 
including a more in-depth understanding of how these changes will 
affect the costs of transactions for institutional investors who depend 
on access to these markets for active portfolio management and, as a 
result, represent a significant source of market liquidity.\591\ In 
addition, one commenter, which surveyed market participants as the 
basis of its comment, conveyed a ``strong belief that insufficient 
review and examination has been given to the proposal by the official 
sector and that such work needs to be detailed and focused to properly 
vet a mixture of economic, operational, legal and market challenges 
before the proposal is enacted.'' \592\
---------------------------------------------------------------------------

    \591\ SIFMA AMG Letter, supra note 37, at 2-3.
    \592\ SIA Partners Comment, supra note 52, at 8.
---------------------------------------------------------------------------

    The Commission has reviewed the academic literature on central 
clearing as well as the reports published by the G-30, the TMPG, the 
OFR, and others \593\ and does not agree with commenters that suggest 
that additional study should precede adoption of a requirement for U.S. 
Treasury securities CCAs to obligate direct participants to clear 
eligible secondary market transactions. Although the Commission 
recognizes that some of the benefits of additional central clearing of 
eligible secondary market transactions may be mitigated for certain 
transactions,\594\ the Commission has consulted with other regulators 
regarding this proposal and believes it has performed sufficient 
analysis in both the Proposing Release and in this release to consider 
the costs and benefits arising from its proposal.
---------------------------------------------------------------------------

    \593\ See, e.g., Duffie, supra note 27; Duffie and Zhu, supra 
note 569; Duffie, infra note 718; Duffie et al., infra note 718; G-
30 Report, supra note 5; TMPG White Paper, supra note 13; TMPG Repo 
White Paper, supra note 75; Hempel et al. (2022), supra note 563; 
Hempel et al. (2023), supra note 564; Kahn & Olson, supra note 628; 
2017 OFR Report, infra note 797; 2021 IAWG Report, supra note 4; 
Staffs of the U.S. Department of the Treasury, Board of Governors of 
the Federal Reserve System, Federal Reserve Bank of New York, U.S. 
Securities and Exchange Commission, and U.S. Commodity Futures 
Trading Commission, Enhancing the Resilience of the U.S. Treasury 
Market: 2022 Staff Progress Report (Nov. (2023), supra note 564; 
Kahn & Olson, supra note 628; 2017 OFR Report, infra note 797; 2021 
IAWG Report, supra note 4; Staffs of the U.S. Department of the 
Treasury, Board of Governors of the Federal Reserve System, Federal 
Reserve Bank of New York, U.S. Securities and Exchange Commission, 
and U.S. Commodity Futures Trading Commission, Enhancing the 
Resilience of the U.S. Treasury Market: 2022 Staff Progress Report 
(Nov. 2022), available at https://home.treasury.gov/system/files/136/2022-IAWG-Treasury-Report.pdf (``2022 IAWG Report''); Staffs of 
the U.S. Department of the Treasury, Board of Governors of the 
Federal Reserve System, Federal Reserve Bank of New York, U.S. 
Securities and Exchange Commission, and U.S. Commodity Futures 
Trading Commission, Enhancing the Resilience of the U.S. Treasury 
Market: 2023 Staff Progress Report (Nov. 2023), available at https://home.treasury.gov/system/files/136/20231106_IAWG_report.pdf (``2023 
IAWG Report''); 2017 Treasury Report, infra note 736; Joint Staff 
Report, supra note 4.
    \594\ See, e.g., part IV.B.5 infra.
---------------------------------------------------------------------------

    As discussed in more detail throughout this release, and especially 
in part IV.C infra, the Commission understands that the costs 
associated with the requirement to clear eligible secondary market 
transactions will vary depending on how a market participant is able to 
and/or chooses to access central clearing. The degree to which market 
participants have increased costs will depend largely on whether and 
how they currently access central clearing, and therefore, costs likely 
will vary greatly across different types of market participants. For 
example, for certain indirect participants whose transactions with 
direct participants of a U.S. Treasury securities CCA are not submitted 
for central clearing currently, the costs of establishing some indirect 
participant relationship, whether through FICC's Sponsored Service or 
some other client clearing model, may be high. In addition, following 
the initial costs, the ongoing costs of submitting transactions for 
central clearing, such as posting margin and paying fees to a direct 
participant which facilitates access, may also be high.\595\
---------------------------------------------------------------------------

    \595\ See part IV.C.2.a.ii infra.
---------------------------------------------------------------------------

    However, benefits will accrue from the requirement to submit for 
clearing and settlement eligible secondary market transactions. As 
discussed earlier in this section and in part IV.C.1 supra, one of the 
several cited benefits of additional central clearing is the increased 
resiliency of centrally cleared markets. The economic costs of market 
disruptions can be high so market changes that decrease the probability 
of such events by even a small amount can result in a large expected 
economic benefit. Discussion of disruptions in the U.S. Treasury 
Securities Market over the last decade typically discuss the size of 
the market and interconnectedness of the U.S. Treasuries markets with 
other financial markets as evidence of their importance; estimates of 
the cost to the U.S. economy as a result of these disruptions are less 
common.\596\ However, there is evidence that the costs of extreme 
financial crises can be high.\597\
---------------------------------------------------------------------------

    \596\ See part IV.B.6 infra, for a discussion of the Mar. 2020, 
Sept. 2019, and Oct. 2014 market disruptions. See SEC Staff Report 
on U.S. Credit Markets Interconnectedness and the Effects of the 
COVID-19 Economic Shock (Oct. 2020), supra note 280, for discussion 
of the interconnectedness of financial crisis and market 
disruptions.
    \597\ Barnichon et al., estimate that ``the 2007-08 financial 
crisis persistently lowered output by roughly 7 percentage points. 
This is a large number: In dollar terms, it represents a lifetime 
income loss in present-discounted value terms of about $70,000 for 
every American.'' Regis Barnichon, Christian Matthes, and Alexander 
Ziegenbein, The Financial Crisis at 10: Will We Ever Recover?, FRBSF 
Econ. Letter 2018-19 (Aug. 13, 2018), available at https://www.frbsf.org/economic-research/publications/economic-letter/2018/august/financial-crisis-at-10-years-will-we-ever-recover/?utm_source=frbsf-home-economic-letter-title&utm_medium=frbsf&utm_campaign=economic-letter. Romer and Romer 
(2017) study a panel of countries in the Organization for Economic 
Co-operation and Development and find that gross domestic product is 
typically about 9 percentage points lower five years after an 
extreme financial crisis. Christina Romer and David Romer, New 
Evidence on the Aftermath of Financial Crises in Advanced Countries, 
107 a.m. Econ. Rev. 3,072 (Oct. 2017).
---------------------------------------------------------------------------

    In addition, the requirement for direct participants to clear such 
transactions will reduce risk to the U.S. Treasury securities CCA, by 
reducing counterparty risk and enabling additional multilateral netting 
and centralized default management, as discussed in part II.A.1 supra. 
Further, to the extent that implementation costs arise from changes to 
the CCA's rules, the CCA's implementation of the requirement will 
provide further opportunity to consider the costs and benefits of 
particular methods of implementation. Because CCAs are self-regulatory 
organizations, any rule changes to implement the requirement will need 
to be reviewed by the Commission,\598\ and commenters will be able to 
comment on the particular

[[Page 2775]]

changes and issues raised by such changes, including costs and 
benefits.
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    \598\ See Exchange Act section 19(b) and Rule 19b-4.
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B. Baseline

    The baseline against which the costs, benefits, and the effects on 
efficiency, competition, and capital formation of the final rule are 
measured consists of the current state of the market for U.S. Treasury 
securities, including the repo market, current practice as it relates 
to the purchase and sale of U.S. Treasury securities, and the current 
regulatory framework. The economic analysis considers existing 
regulatory requirements, including recently adopted rules, as part of 
its economic baseline against which the costs and benefits of the final 
rule are measured.\599\
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    \599\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C. 
Cir. 2022). This approach also follows SEC staff guidance on 
economic analysis for rulemaking. See SEC Staff, Current Guidance on 
Economic Analysis in SEC Rulemaking (Mar. 16, 2012), available at 
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic 
consequences of proposed rules (potential costs and benefits 
including effects on efficiency, competition, and capital formation) 
should be measured against a baseline, which is the best assessment 
of how the world would look in the absence of the proposed 
action.''); id. at 7 (``The baseline includes both the economic 
attributes of the relevant market and the existing regulatory 
structure.''). The best assessment of how the world would look in 
the absence of the proposed or final action typically does not 
include recently proposed actions, because that would improperly 
assume the adoption of those proposed actions.
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    Certain commenters requested the Commission to consider 
interactions between the economic effects of the proposed rule and 
other recent Commission proposals.\600\ The Commission recently adopted 
six of the proposed rules mentioned by commenters as potentially 
impacting the economic effects of the final rule,\601\ namely the May 
2023 SEC Form PF Amending Release,\602\ Private Fund Advisers Adopting 
Release,\603\ Beneficial Ownership Amending Release,\604\ the Rule 10c-
1a Adopting Release,\605\ the Short Position Reporting Adopting 
Release,\606\ and the Securitizations Conflicts Adopting Release.\607\ 
These rules were not included as part of the baseline in the Proposing 
Release because they had not been adopted at that time. In response to 
commenters, this economic analysis considers potential economic effects 
arising from any overlap between the compliance period for the final 
amendments and these recently adopted rules.\608\
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    \600\ Letter from Eric Pan, Pres. & CEO, and Susan Olsen, 
General Counsel, Investment Company Institute at 1 (Aug. 17, 2023) 
(``ICI Letter 2'') (``The Commission has issued a wide range of 
interconnected rule proposals . . . [that] in the aggregate warrant 
further analysis by the Commission.''); Letter from Jennifer W. Han, 
Executive Vice President, Chief Counsel & Head of Global Regulatory 
Affairs, Managed Funds Association at 6 (July 21, 2023) (``MFA 
Letter 2'') (``the Commission should holistically examine all of the 
pending Proposals, consider the potential overlap between them, and 
. . . evaluat[e] the costs and benefits of the Proposals in light of 
one another.''); see also ARB et al. Letter, supra note 81, at 9 
(``the Commission has simultaneously put forward multiple proposals 
designed to achieve [ ] objectives without considering how these 
various proposals interact with each other.''); cf. AIMA Letter II, 
supra note 115, at 4 (``Together, the Treasury Clearing Proposal and 
ATS Proposal render the [then-proposed amendments to the definition 
of dealer] unnecessary.'').
    \601\ Those six proposals are: Amendments to Form PF to Require 
Current Reporting and Amend Reporting Requirements for Large Private 
Equity Advisers and large Liquidity Fund Advisers, Release No. IA-
5950 (Jan. 26, 2022) 87 FR 9106 (Feb 17, 2022) (see MFA Letter 2, 
supra note 600, at 10-12); Modernization of Beneficial Ownership 
Reporting, Release Nos. 33-11030, 34-94211 (Feb. 10, 2022), 87 FR 
13846 (Mar. 10, 2022) (see MFA Letter 2, supra note 600, at 14-15); 
Short Position and Short Activity Reporting by Institutional 
Investment Managers, Release No. 34-94313 (Feb. 25, 2022), 87 FR 
14950 (Mar. 16, 2022) (see MFA Letter 2, supra note 600, at 15-16); 
Private Fund Advisers; Documentation of Registered Investment 
Adviser Compliance Reviews, Release No. IA-5955 (Feb. 9, 2022), 87 
FR 16886 (Mar. 24, 2022) (see MFA Letter 2, supra note 600, passim); 
Prohibition Against Conflicts of Interest in Certain 
Securitizations, Release No. 33-11151 (Jan. 25, 2023), 88 FR 9678 
(Feb. 14, 2023) (see MFA Letter 2, supra note 600, at 21-22); 
Outsourcing by Investment Advisers, Release No. IA-6176 (Oct. 26, 
2022), 87 FR 68816 (Nov. 16, 2022) (see MFA Letter 2, supra note 
600, at 17-18).
    \602\ Form PF; Event Reporting for Large Hedge Fund Advisers and 
Private Equity Fund Advisers; Requirements for Large Private Equity 
Fund Adviser Reporting, Release No. IA-6297 (May 3, 2023) 88 FR 
38146 (June 12, 2023) (``May 2023 SEC Form PF Amending Release''). 
The Form PF amendments require large hedge fund advisers and all 
private equity fund advisers to file reports upon the occurrence of 
certain reporting events. The compliance dates are Dec. 11, 2023, 
for the event reports in Form PF sections 5 and 6, and June 11, 
2024, for the remainder of the Form PF amendments.
    \603\ Private Fund Advisers; Documentation of Registered 
Investment Adviser Compliance Reviews, Release No. IA-6383 (Aug. 23, 
2023), 88 FR 63206 (Sept. 14, 2023) (``Private Fund Advisers 
Adopting Release''). The Private Fund Advisers Adopting Release 
includes new rules designed to protect investors who directly or 
indirectly invest in private funds by increasing visibility into 
certain practices and restricting other practices, along with 
amendments to the Advisers Act books and records rule and compliance 
rule. The amended Advisers Act compliance provision for registered 
investment advisers has a Nov. 13, 2023, compliance date. The 
compliance date is Mar. 14, 2025, for the rule's quarterly statement 
and audit requirements for registered investment advisers with 
private fund clients. For the rule's adviser-led secondaries, 
restricted activity, and preferential treatment requirements, the 
compliance date is Sept. 14, 2024, for larger advisers and Mar. 14, 
2025, for smaller advisers. See Private Fund Advisers Adopting 
Release, sections IV, VI.C.1.
    \604\ Modernization of Beneficial Ownership Reporting, Release 
No. 33-11253 (Oct. 10, 2023), 88 FR 76896 (Nov. 7, 2023) 
(``Beneficial Ownership Amending Release''). Among other things, the 
amendments shorten the filing deadlines for beneficial ownership 
reports filed on Schedule 13D and Schedule 13G. The compliance dates 
are 90 days after publication in the Federal Register, for Schedule 
13D amended filing deadlines; Sept. 30, 2024, for the Schedule 13G 
amended filing deadlines; and Dec. 18, 2024, for the structured data 
requirement.
    \605\ Reporting of Securities Loans, Release No. 34-98737 (Oct. 
13, 2023), 88 FR 75644 (Nov. 3, 2023) (``Rule 10c-1a Adopting 
Release''). The securities loan reporting rule requires any person 
who loans a security on behalf of itself or another person to report 
information about securities loans to a registered national 
securities association (namely, FINRA) and requires FINRA to make 
certain information it receives available to the public. The covered 
persons will include market intermediaries, securities lenders, 
broker-dealers, and reporting agents. The final rule's compliance 
dates require that FINRA propose its rules within four months of the 
effective date of final Rule 10c-1a, or approximately May 2024, and 
finalize them no later than 12 months after the effective date of 
final Rule 10c-1a, or approximately Jan. 2025; that FINRA implement 
data retention and availability requirements for reporting 24 months 
after the effective date of final Rule 10c-1a, or approximately Jan. 
2026; that covered persons report Rule 10c-1a information to FINRA 
starting on the first business day thereafter; and that FINRA 
publicly report Rule 10c-1a information within 90 calendar days 
thereafter, or approximately Apr. 2026. See Rule 10c-1a Adopting 
Release, section VIII, at 75691.
    \606\ Short Position and Short Activity Reporting by 
Institutional Investment Managers, Release No. 34-98738 (Oct. 13, 
2023), 88 FR 75100 (Nov. 1, 2023) (``Short Position Reporting 
Adopting Release''). The new rule and related form are designed to 
provide greater transparency through the publication of short sale-
related data to investors and other market participants. Under the 
new rule, institutional investment managers that meet or exceed 
certain specified reporting thresholds are required to report, on a 
monthly basis using the related form, specified short position data 
and short activity data for equity securities. The compliance date 
for the rule is 12 months after the effective date of the release, 
which will be approximately Jan. 2025. In addition, the Short 
Position Reporting Adopting Release amends the national market 
system plan governing CAT to require the reporting of reliance on 
the bona fide market making exception in the Commission's short sale 
rules. The compliance date for the CAT amendments is 18 months after 
the effective date, or approximately July 2025.
    \607\ Prohibition Against Conflicts of Interest in Certain 
Securitizations, Release No. 33-11254 (Nov. 27, 2023), 88 FR 85396 
(Dec. 7, 2023) (``Securitizations Conflicts Adopting Release''). The 
new rule prohibits an underwriter, placement agent, initial 
purchaser, or sponsor of an asset-backed security (ABS) (including a 
synthetic ABS), or certain affiliates or subsidiaries of any such 
entity, from engaging in any transaction that would involve or 
result in certain material conflicts of interest. The compliance 
date is 18 months after publication in the Federal Register, or June 
9, 2025.
    \608\ In addition, commenters indicated there could also be 
overlapping compliance costs between the final amendments and 
proposals that have not been adopted. See, e.g., ICI Letter 2, supra 
note 600, at 8 n.13. To the extent those proposals are adopted, the 
baseline in those subsequent rulemakings will reflect the existing 
regulatory requirements at that time.
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1. U.S. Treasury Securities
    U.S. Treasury securities are direct obligations of the U.S. 
Government issued by the U.S. Department of the Treasury. After 
issuance in the primary market U.S. Treasury securities trade in

[[Page 2776]]

an active secondary market.\609\ A number of types of market 
participants intermediate between investors in U.S. Treasury 
securities. These investors hold U.S. Treasury securities as a 
relatively riskless way of saving, as a way of placing a directional 
bet on interest rates, or as a means of hedging against deflation. U.S. 
Treasury securities can also function directly as a medium of exchange 
in some instances, and, as described in more detail below, as 
collateral for loans.
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    \609\ There is also an active market for U.S. Treasury 
securities that trade on a ``when-issued'' (WI) basis. ``Based on 
Treasury TRACE transactions data, WI trading volume averaged $80 
billion per day between July 1, 2019, and June 30, 2020, accounting 
for 12% of the $651 billion traded daily across all Treasury 
securities.'' See Michael Fleming, Or Shachar, and Peter Van Tassel, 
Treasury Market When-Issued Trading Activity, Liberty Street 
Economics Blog (Nov. 30, 2020), available at https://libertystreeteconomics.newyorkfed.org/2020/11/treasury-market-when-issued-trading-activity/. As discussed in the Proposing Release, 
supra note 14, 87 FR at 64615, for purposes of this rulemaking only 
the WI market after the auction but before issuance (WI on-the-run 
issues) is considered part of the secondary market for U.S. Treasury 
securities. Most of the WI trading in the Fleming, Shachar, and Van 
Tassel analysis occurred in on-the-run issues. (``WI trading that 
occurs up to and including the auction day (account[s] for about 
one-third of WI trading) and WI trading that occurs after the 
auction day (account[s] for about two-thirds of WI trading'').) For 
a discussion of how WI trading functions in the context of central 
clearing, see Kenneth D. Garbade & Jeffrey F. Ingber, The Treasury 
Auction Process: Objectives, Structure, and Recent Adaptations, 11 
Current Issues Econ. & Fin. 1 (2005), available at https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.html.
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    Market participants refer to the most recently issued U.S. Treasury 
securities as ``on-the-run,'' with earlier issues referred to as ``off-
the-run''.\610\ Figure 1 shows the outstanding value of on-the-run 
(Panel A) and off-the-run (Panel B) U.S. Treasury securities. On-the-
run U.S. Treasury securities have consistently made up approximately 3% 
of the total value of all marketable U.S. Treasury securities during 
the 2012-2022 period, but, as Figure 3 shows, account for a 
disproportionate share of trading volume. Thus, an on-the-run security 
is generally far more liquid than a similar off-the-run security.
---------------------------------------------------------------------------

    \610\ On-the-run U.S. Treasury securities are the most recently 
auctioned nominal coupon securities. These securities are referred 
to as ``on-the-run'' starting the day after they are auctioned. 
Nominal coupon securities pay a fixed semi-annual coupon and are 
currently issued at original maturities of 2, 3, 5, 7, 10, 20, and 
30 years. These standard maturities are commonly referred to as 
``benchmark'' securities because the yields for these securities are 
used as references to price a number of private market transactions.
[GRAPHIC] [TIFF OMITTED] TR16JA24.000

    As of November 2023, the total market value outstanding of 
marketable U.S. Treasury securities held by the public was $26.3 
trillion.\611\ As shown in Figure 2, the value of marketable U.S. 
Treasury securities outstanding has increased by approximately $19 
trillion since 2000. The total amount of marketable U.S. Treasury 
securities issued during 2022 was $17.4 trillion.\612\
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    \611\ See SIFMA US Treasury Securities Statistics, available at 
https://www.sifma.org/resources/research/us-treasury-securities-statistics/.
    \612\ U.S. Treasury, Debt Position and Activity Report (July 31, 
2023), available at https://www.treasurydirect.gov/government/public-debt-reports/debt-position-and-activity-report/.

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[[Page 2777]]

[GRAPHIC] [TIFF OMITTED] TR16JA24.001

    In the primary market, the Treasury Department auctions securities 
(i.e., debt) to the public through a competitive bidding process and 
subsequently issues awarded securities to finance the Federal 
Government.\613\ Financial institutions designated by the Federal 
Reserve Bank of New York as ``primary dealers'' are expected to submit 
competitive bids on a pro-rata basis and participate meaningfully in 
all U.S. Treasury auctions at reasonably competitive rates or 
yields.\614\ The Treasury Department typically issues U.S. Treasury 
securities a few days after the auction and trade on the secondary 
market.\615\ The subsequent trading of U.S. Treasury securities is 
defined as the secondary market. Figure 3 reports weekly trading values 
in the secondary market for U.S. Treasury securities. According to 
industry reports, 67% of the $913.2 billion in average daily trading 
volume of U.S. fixed income securities in 2022 was in U.S. Treasury 
securities.\616\ As shown in Figure 3, average weekly trading volume 
was approximately $3 trillion in 2022, with notable peaks in March 2020 
and early 2021.\617\
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    \613\ TMPG White Paper, supra note 13, at 6. The Federal Reserve 
Bank of New York serves as fiscal agent for the U.S. Treasury in 
conducting auctions of marketable U.S. Treasury debt. See 12 U.S.C. 
391.
    \614\ See Federal Reserve Bank of New York, Administration of 
Relationships with Primary Dealers, available at https://www.newyorkfed.org/markets/primarydealers.html. Specifically, 
primary dealers are required to be either (1) a registered broker-
dealer or government securities broker-dealer, which is approved as 
a member of the Financial Industry Regulatory Authority, Inc. and 
has net regulatory capital of at least $50 million, or (2) a state 
or federally chartered bank or savings association (or a state or 
federally licensed branch or agency of a foreign bank) that is 
subject to bank supervision and maintains at least $1 billion in 
Tier 1 capital. Id. Thus, for those primary dealers that fall into 
the former category, they are a subset of the broader set of 
registered broker-dealers or government securities broker-dealers.
    \615\ The Treasury Department typically announces a new security 
that it intends to sell several days before the auction at which it 
is first sold to the public. These securities begin trading after 
announcement before the auction and through issuance, which occurs a 
few days after the auction. Such trading is known generally as 
``when-issued'' trading; however, in the timeframe between the 
announcement and the auction, such trading is known as when-issued 
and referred to as such by market participants, but after the 
auction and before issuance, the securities are typically referred 
to simply as on-the-run, consistent with market practice. See 
Fleming et. al. supra note 609.
    \616\ Another 26% was Agency MBS, 4% corporate debt, with the 
remainder in municipal, non-agency mortgage-backed, Federal agency 
debt and asset-backed securities. SIFMA, US Fixed Income Securities 
Statistics (last updated Aug. 7, 2023), available at https://www.sifma.org/resources/research/us-fixed-income-securities-statistics/.
    \617\ Id.

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[[Page 2778]]

[GRAPHIC] [TIFF OMITTED] TR16JA24.002

2. U.S. Treasury Repurchase Transactions
    A U.S. Treasury repurchase transaction generally refers to a 
transaction in which one market participant sells a U.S. Treasury 
security to another market participant and commits to repurchase the 
security at a specified price on a specified later date.\618\ Because 
one side of the transaction receives cash, and the other side receives 
securities, to be returned at a later date, the transaction is a sale 
and purchase of securities that is economically similar to borrowing 
cash against securities as collateral. The amount the lender pays for 
the security in the initial leg may be less than the market price. The 
difference between the market price and the price paid divided by the 
market price of the collateral is known as the ``haircut.'' A positive 
haircut implies that the loan is over-collateralized: the collateral is 
worth more than the cash that is loaned. A related term is ``initial 
margin''--the ratio of the purchase price to the market value of the 
collateral.
---------------------------------------------------------------------------

    \618\ See supra note 74.
---------------------------------------------------------------------------

    General collateral repurchases are an important variation on the 
above type of transaction, where one participant purchases from a 
class, not a specific issue, of U.S. Treasury securities.\619\ U.S. 
Treasury repo for a specific asset is generally a bilaterally settled 
arrangement, whereas general collateral repurchases are usually settled 
with a third agent, known as a triparty agent. In bilaterally settled 
repo arrangements (bilateral repo), the repo buyer has the title to the 
specific asset in question and can sell or re-hypothecate it. In repo 
that is settled through a triparty agent (triparty repo), which is 
discussed below, the repo buyer has more limited use of the collateral. 
However, this collateral is often re-hypothecated within the same 
triparty system; namely, a buyer may use the securities purchased from 
the seller for its own reverse repo transaction.
---------------------------------------------------------------------------

    \619\ More specifically, general collateral is a set of security 
issues which trade in the repo market at the same or a very similar 
repo rate. These security issues can therefore be substituted for 
one another without changing the repo rate. In other words, the 
buyer in a general collateral repo is indifferent to which of the 
general collateral securities she will receive. The basket of 
security issues that form a particular general collateral repo 
market belong to the same class (e.g., government bonds) or sub-
class (e.g., government bonds with no more than five years remaining 
to maturity). See International Capital Market Association, [FAQ] 8. 
What is General Collateral (GC)?, ICMA ERCC Publications (Jan. 
2019), available at https://www.icmagroup.org/market-practice-and-regulatory-policy/repo-and-collateral-markets/icma-ercc-publications/frequently-asked-questions-on-repo/8-what-is-general-collateral-gc.
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    As described in the Proposing Release, repurchase agreements are 
generally classified by the term over which they take place, either 
``overnight'' or ``term.'' \620\ In overnight repurchase agreements, 
the repurchase of the security takes place the day after the initial 
purchase, meaning that these agreements serve, essentially, as 
overnight loans collateralized by U.S. Treasury securities. Term 
repurchase agreements, conversely, take place over a longer 
horizon.\621\
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    \620\ See Proposing Release, supra note 14, 87 FR at 64616.
    \621\ Overnight repurchase agreements account for 87.5% of daily 
transaction volume. See Figure 5 and the associated discussion for 
more details. In addition to term repo agreements with fixed 
maturity dates, there exist term repurchase agreements with embedded 
options that lead to an uncertain maturity date. For example, 
``callable'' repos include an option for the lender to call back 
debt (i.e., resell securities) at its discretion. ``Open'' repos 
have no defined term but rather allow either party to close out at 
the contract at any date after initiation of the agreement.
---------------------------------------------------------------------------

    U.S. Treasury repo has various economic uses. First, it is 
analogous to secured borrowing and lending, allowing some market 
participants to, in effect, turn their U.S. Treasury securities

[[Page 2779]]

into cash positions, and others to temporarily invest cash that is not 
in use in a way that mitigates exposure to, for example, the 
counterparty risk of a depository institution. Bilateral repo can allow 
market participants to effectively price interest rate expectations 
into bonds, and to arbitrage differences in the market prices of 
closely related U.S. Treasury securities, because it provides financing 
for U.S. Treasury security purchases and facilitates short sales.
    Repos also play a role in monetary policy. The Federal Reserve 
operates a reverse repurchase facility in which it receives cash from 
eligible market participants in exchange for collateral consisting of 
U.S. Treasury securities. The interest rate on these repurchase 
agreements is the overnight reverse repurchase offer rate set by the 
Federal Reserve to aid implementation of monetary policy by firming up 
the floor for the effective Federal funds rate.\622\
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    \622\ See Federal Reserve Bank of New York, Monetary Policy 
Implementation, available at https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation.
---------------------------------------------------------------------------

    There is some evidence of dealer concentration in repo markets. In 
a December 2019 report, the BIS reported that as repo rates rose above 
the interest rate on excess reserves in mid-2018, the four largest U.S. 
banks appeared to have turned into the marginal lender in repo 
markets.\623\ However, in 2021 the Federal Reserve Bank of New York 
economists reported that the secured funding portion of the repo market 
is competitive.\624\ Using data on centrally cleared U.S Treasury repo 
transactions and all triparty settled transactions, the New York Fed 
economists filtered the data using the same filters used in the 
construction of SOFR in order to eliminate transactions likely driven 
by considerations other than secured funding and then reported measures 
of dealer concentration.\625\ The authors report that the top 5 (10) 
dealers comprise 44.2 (63.6) percent of repo selling (cash-lending) 
activity and 40.2 (56.7) percent of repo purchasing (cash-borrowing) 
activity and conclude that the centrally cleared and triparty portion 
of the repo market is less concentrated than might appear from the BIS 
study.\626\
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    \623\ See Fernando Avalos, Torsten Ehlers and Egemen Eren, 
September stress in dollar repo markets: passing or structural?, BIS 
Q. Rev. (Dec. 2019), available at https://www.bis.org/publ/qtrpdf/r_qt1912v.htm. Up to July 28, 2021, interest was paid at an IORR 
(interest on required reserves) rate and at an IOER (interest on 
excess reserves) rate. The IORR rate was paid on balances maintained 
to satisfy reserve balance requirements, and the IOER rate was paid 
on excess balances. Effective Mar. 24, 2020, the Board amended 
Regulation D to set all reserve requirement ratios for transaction 
accounts to 0%, eliminating all reserve requirements. To account for 
those changes, the Board approved a final rule amending Regulation D 
to replace references to an IORR rate and to an IOER rate with 
references to a single IORB (interest rate on required balance) 
rate. See Board of Governors of the Federal Reserve, Interest on 
Reserve Balances (IORB) Frequently Asked Questions (July 29, 2021), 
available at https://www.federalreserve.gov/monetarypolicy/iorb-faqs.htm.
    \624\ Adam Copeland, R. Jay Kahn, Antoine Martin, Matthew 
McCormick, William Riordan, Kevin Clark, and Tim Wessel, How 
Competitive are U.S. Treasury Repo Markets?, Federal Reserve Bank of 
New York Liberty Street Economics (Feb. 18, 2021), available at 
https://libertystreeteconomics.newyorkfed.org/2021/02/how-
competitive-are-us-treasury-repo-markets/
#:~:text=In%20contrast%2C%20the%20GCF%20Repo,both%20sides%20of%20the%
20market.
    \625\ Among other filters, transactions to which the Federal 
Reserve is a counterparty are excluded. See Additional Information 
about Reference Rates Administered by the New York Fed, Federal 
Reserve Bank of New York (Jan. 24, 2022), available at https://www.newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates#treasury_repo_data_exclusions.
    \626\ See supra note 623. The New York Fed makes available data 
on top 3 dealer concentration (see Tri-Party/GCF Repo, Federal 
Reserve Bank of New York, available at https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo#interactive/concentration (last visited Dec. 12, 2023)) in the tri-party/GCF 
repo segment; however, the New York Fed's statistics treat its own 
Overnight Reverse Repo Facility as a dealer. Since the use of this 
facility has grown from zero to $2.2 trillion since 2021 Q1, the New 
York Fed's data on the concentration of the top 3 ``dealers'' is 
difficult to interpret and is not included here.
---------------------------------------------------------------------------

    The market for repos is dominated by large, sophisticated 
institutions, at least as compared to the cash market. The institutions 
that participate in the market for repos are also those for whom access 
to central clearing may be the least costly economically. Relatedly, 
although difficult to quantify precisely, the number of participants is 
one or more orders of magnitude greater in the cash market as compared 
with the repo market: e.g., tens of thousands as opposed to thousands. 
As Figure 4 shows, the U.S. Treasury securities repurchase market is 
large; throughout 2020 and through May of 2021, daily transaction 
volume of repo that was either centrally cleared or settled on the 
triparty platform ranged between $1.4 and $2.1 trillion per day. Since 
May 2021, the daily volume has increased considerably--as high as $4.6 
trillion per day--coinciding with the growth in the Federal Reserve's 
overnight reverse repurchase operations. Figure 4 further splits these 
totals into three categories based on 3 of the 4 repo market components 
discussed in part IV.B.3.b supra: non-centrally cleared triparty, FICC 
DVP Service, and FICC GCF Repo Service.\627\ Despite steadily 
increasing volumes of centrally cleared repurchase transactions, due in 
part to the development of services to enable acceptance of more types 
of repurchase transactions at the covered clearing agency, the 
Commission understands that the volume of bilateral repurchase 
transactions that are cleared and settled directly between the two 
counterparties remains substantial, representing approximately half of 
all bilateral repurchase transactions in 2021.\628\
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    \627\ Figure 4 does not include bilateral repo transactions--
including most inter-affiliate transactions--that are not settled on 
the tri-party platform or centrally cleared through FICC for which 
comprehensive data is not currently available. Trades resulting from 
the Federal Reserve Bank of New York's standing repo facility and 
reverse repo facility are cleared and settled on the tri-party 
platform and are included in Figure 4. See Federal Reserve Bank of 
New York, FAQs: Standing Repo Facility (July 26, 2023), available at 
https://www.newyorkfed.org/markets/repo-agreement-ops-faq and 
Federal Reserve Bank of New York, FAQs: Reverse Repurchase Agreement 
Operations (July 26, 2023), available at https://www.newyorkfed.org/markets/rrp_faq.
    \628\ See R. Jay Kahn & Luke M. Olson, Who Participates in 
Cleared Repo?, OFR Brief Series (July 8, 2021), available at https://www.financialresearch.gov/briefs/files/OFRBr_21-01_Repo.pdf.

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[[Page 2780]]

[GRAPHIC] [TIFF OMITTED] TR16JA24.003

    The triparty segment of the U.S. Treasury securities repurchase 
agreement market is large, with an average of approximately $575 
billion of daily trading volume in 2020, and has taken on a 
substantially larger role since the beginning of 2021, peaking at 
approximately $3.1 trillion in transaction volume in the March of 
2023.\629\ Of this, overnight repos is the largest segment, making up 
92% on average of daily transaction volume since 2020, as shown in 
Figure 5. Although different types of securities are used as collateral 
in triparty repos, over 70% of daily volume of triparty repo since 2020 
are transactions with U.S. Treasury securities as collateral.\630\ The 
remainder are agency securities, referring to mortgage-backed 
securities issued by U.S government agencies and government sponsored 
enterprises, and various other securities including corporate bonds, 
non-U.S. sovereign debt, equity, municipal debt, and commercial 
paper.\631\
---------------------------------------------------------------------------

    \629\ See Figure 4.
    \630\ See Figure 5.
    \631\ See Mark E. Paddrik, Carlos A. Ram[inodot]rez, & Matthew 
J. McCormick, The Dynamics of the U.S. Overnight Triparty Repo 
Market (FEDS Notes, Aug. 2, 2021), available at https://www.federalreserve.gov/econres/notes/feds-notes/the-dynamics-of-the-us-overnight-triparty-repomarket-20210802.htm.

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[[Page 2781]]

[GRAPHIC] [TIFF OMITTED] TR16JA24.004

3. Clearance and Settlement of U.S. Treasury Security Transactions
    The secondary market includes the ``cash market,'' for outright 
purchases and sales of securities, and the repo market, where one 
participant sells a U.S. Treasury security to another participant and 
commits to repurchase the security at a specified price on a specified 
later date.\632\ These rule amendments and new rules apply to the 
secondary market for U.S. Treasury securities.
---------------------------------------------------------------------------

    \632\ See 2021 IAWG Report, supra note 4, at 3. The secondary 
market also includes the market for U.S. Treasury futures, which 
trade electronically on the Chicago Board of Trade, a designated 
contract market operated by the Chicago Mercantile Exchange 
(``CME'') Group, and centrally cleared by CME Clearing. U.S. 
Treasury futures are generally regulated by the U.S. Commodity 
Futures Trading Commission.
---------------------------------------------------------------------------

a. Cash Market
    The cash market has two main components: the interdealer market and 
the dealer-to-customer market. In the interdealer market, dealers 
primarily trade with each other and with principal trading firms 
(``PTFs''), which trade as principals for their own accounts. In the 
dealer-to-customer market, dealers trade with their customers.
i. Interdealer
    The majority of trading in the interdealer market in on-the-run 
U.S. Treasury securities occurs on trading platforms operated by IDBs, 
as described in part II.A.2.b.ii, supra.\633\ These IDBs are generally 
direct participants of a U.S. Treasury securities CCA and stand as 
counterparties to both sides of each trade on their platforms.\634\
---------------------------------------------------------------------------

    \633\ Joint Staff Report, supra note 4, at 11, 35-36.
    \634\ 2021 IAWG Report, supra note 4, at 21.
---------------------------------------------------------------------------

    The majority of trades in the interdealer markets are trades in 
``on-the-run'' issues. The majority of interdealer trading for off-the-
run U.S. Treasury securities occurs via bilateral transactions through 
traditional voice-assisted brokers and electronic trading platforms 
offering various protocols to bring together buyers and sellers, 
although some interdealer trading in off-the-run U.S. Treasury 
securities does occur on IDBs that anonymously bring together buyers 
and sellers.\635\
---------------------------------------------------------------------------

    \635\ Joint Staff Report, supra note 4, at 35.
---------------------------------------------------------------------------

    Most IDBs are FICC direct participants, and the trades between an 
IDB, which is a FICC direct participant, and another FICC direct 
participant are submitted for central clearing to FICC, which, as 
discussed below, is currently the only U.S. Treasury securities CCA. 
Direct participants of FICC are generally either dealers (both bank-
affiliated and independent) or banks. FICC's current rules generally 
require that FICC direct participants submit for clearing all trades 
with other FICC direct participants.\636\ However, FICC's rules do not 
require that a trade between a FICC direct participant and a party that 
is not a FICC direct participant be submitted for clearing. Therefore, 
for trades on IDBs between a party that is not a FICC direct 
participant (which, on an IDB, is generally a PTF) and a dealer that is 
a FICC direct participant--which results in two separate transactions, 
between the IDB and the dealer, on the one hand, and between the IDB 
and the PTF, on the other hand--the transaction between the dealer and 
the IDB would be centrally cleared. But the transaction between a PTF 
which is not a FICC member and the IDB, on the other side, would not be 
centrally cleared and instead would be settled bilaterally with the 
IDB, often through a clearing agent acting on behalf of the non-FICC 
direct participant.\637\
---------------------------------------------------------------------------

    \636\ FICC Rule 2A section 7(e) (requirement that FICC Netting 
Members submit to FICC all of its eligible trades with other Netting 
Members); FICC Rule 18 section 2 (similar requirement with regard to 
Repo transactions), supra note 19.
    \637\ See TMPG White Paper, supra note 13, at Figures 5A and 5B 
(providing graphical description of this type of clearing).

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

[[Page 2782]]

    Estimates from the first half of 2017 further suggest that only 13 
percent of the cash transactions in the U.S. Treasury securities market 
are centrally cleared. These estimates suggest that another 19 percent 
of transactions in this market are subject to so-called hybrid clearing 
in which one leg of a transaction facilitated by an IDB platform is 
centrally cleared and the other leg of the transaction is cleared 
bilaterally.\638\
---------------------------------------------------------------------------

    \638\ See 2021 IAWG Report, supra note 4, at 30; see also TMPG 
White Paper, supra note 13, at 12. The figures are estimated using 
FR 2004 data covering the first half of 2017 and are based on 
various assumptions: (a) primary dealers account for all dealer 
activity, (b) 5% of dealers' trading not through an IDB is with 
another dealer, (c) the shares of dealer and non-dealer activity in 
the IDB market for coupon securities equal the weighted averages of 
the shares reported in the Oct. 15 report (that is, 41.5% and 58.5%, 
respectively), (d) only dealers trade bills, FRNs, and TIPS in the 
IDB market, and (e) the likelihood of dealer and non-dealers trading 
with one another in the IDB market solely reflects their shares of 
overall volume. Commission staff understands that these assumptions 
may be less appropriate for more recent time periods (e.g., PTFs are 
responsible for a growing share of IDB activity).
---------------------------------------------------------------------------

    Until the mid-2000s, most inter-dealer trading occurred between 
primary dealers who were FICC members and thus was centrally 
cleared.\639\ Today, PTFs actively buy and sell large volumes of U.S. 
Treasury securities on an intraday basis using high-speed and other 
algorithmic trading strategies.\640\ PTFs are not generally FICC 
members and, as such, their trades are often not centrally cleared. 
Moreover, PTFs compose a substantial portion of trading volume, 
averaging about 20% of overall U.S. Treasury cash market volume and 
accounting for around 50-60% of IDB volume in outright purchases and 
sales of U.S. Treasury securities.\641\ Primary dealers, who are FICC 
members and who transact the 40-50% of IDB volume not accounted for by 
PTFs, are required by Federal Reserve Bank of New York policy to 
centrally clear their U.S. Treasury securities primary market cash 
activity.\642\
---------------------------------------------------------------------------

    \639\ See G-30 Report, supra note 5; 2021 IAWG Report, supra 
note 4, at 5-6; TMPG White Paper, supra note 13, at 6.
    \640\ See Joint Staff Report, supra note 4, at 1, 8, 32, 35-36, 
39.
    \641\ See James Collin Harkrader & Michael Puglia, Principal 
Trading Firm Activity in Treasury Cash Markets (FEDS Notes, Aug. 
2020) (``Harkrader and Puglia FEDS Notes''), available at https://www.federalreserve.gov/econres/notes/feds-notes/principal-trading-firm-activity-in-treasury-cash-markets-20200804.htm.
    \642\ See Federal Reserve Bank of New York, Administration of 
Relationships with Primary Dealers, available at https://www.newyorkfed.org/markets/primarydealers.html.
---------------------------------------------------------------------------

    As Tables 1 and 2 below show, during the 6-month period ending in 
June 2023 trading volume of on-the-run U.S. Treasury securities was 
approximately two and half times that of off-the-run U.S. Treasury 
securities. Over half (57.9%) of on-the-run U.S. Treasury security 
trading volume and approximately one quarter (22.9%) of off-the-run 
U.S. Treasury security trading volume occurred on ATSs (which are also 
IDBs) and non-ATS IDBs.\643\ Of the on-the-run U.S. Treasury security 
trading volume that occurred on ATS IDBs and non-ATS IDBs, 34.0% were 
dealer trades, 18.4% were PTF trades, and the remainder were customer 
trades. For off-the-run trading in U.S. Treasury securities, the 
comparable figures are 19.0% dealer trades, 1.2% PTF trades, and the 
remainder are customer trades. In contrast to trades that take place on 
an ATS or a non-ATS IDB, 42.0% of on-the-run U.S. Treasury security 
transactions and 77.1% of off-the-run U.S. Treasury security 
transactions are traded bilaterally. The majority of these (78.5% of 
on-the-run and 84.3% of off-the-run) are dealer-to-customer trades.
---------------------------------------------------------------------------

    \643\ The term ``IDB'' typically refers only to IDBs that are 
also ATSs. The entities referred to as IDBs here are encompassed in 
the ATSs category in the tables set forth in this section because of 
the way that such IDBs are categorized in TRACE. Specifically, the 
``ATS'' category in TRACE encompasses these IDBs. By contrast, the 
non-ATS IDBs category in TRACE encompasses the voice-based or other 
non-anonymous methods of bringing together buyers and sellers, which 
are also sometimes referred to as interdealer brokers by market 
participants.
---------------------------------------------------------------------------

    Bilaterally cleared trades make up 87% of total trading in the 
secondary U.S. Treasury securities market, making them the most 
prevalent trade type in the market.\644\ These trades include at least 
one party that is not a netting member of the single U.S. Treasury 
securities CCA. The bilateral clearing process comes with risks. After 
the trade is executed, the principals to the trade face counterparty 
credit risk, in the event that either party fails to deliver on its 
obligations.\645\
---------------------------------------------------------------------------

    \644\ TMPG White Paper, supra note 13, at 12. This figure is 
estimated from 2017H1 data and includes approximately 19% hybrid 
clearing. As reported by TMPG, the estimates are based on various 
assumptions: (a) primary dealers account for all dealer activity, 
(b) 5% of dealers' trading not through an IDB is with another 
dealer, (c) the shares of dealer and non-dealer activity in the IDB 
market for coupon securities equal the weighted averages of the 
shares reported in the Oct. 15 report (that is, 41.5% and 58.5%, 
respectively), (d) only dealers trade bills, FRNs, and TIPS in the 
IDB market, and (e) the likelihood of dealer and non-dealers trading 
with one another in the IDB market solely reflects their shares of 
overall volume. Commission staff understands that these assumptions 
may be less appropriate for more recent time periods (e.g., PTFs are 
responsible for a growing share of IDB activity).
    \645\ TMPG White Paper, supra note 13, at 13.

                           Table 1--On-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                                                                   Number of     Average weekly    Volume share
                                                                    venues         volume ($M)          (%)
----------------------------------------------------------------------------------------------------------------
ATSs..........................................................              16           874,284            49.4
    Customer trades...........................................              12            38,338             2.2
    Dealer trades.............................................              16           510,296            28.8
    PTF trades................................................               7           325,649            18.4
Non-ATS Interdealer Brokers...................................              24           151,353             8.5
    Customer trades...........................................              22            59,639             3.4
    Dealer trades.............................................              23            91,714             5.2
Bilateral dealer-to-dealer trades.............................             283           159,760             9.0
Bilateral dealer-to-customer trades...........................             521           584,832            33.0
                                                               -------------------------------------------------

[[Page 2783]]

 
        Total.................................................  ..............         1,770,229           100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\a\ Non-ATS interdealer brokers, bilateral dealer-to-
  dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for on-the-run
  U.S. Treasury Securities. On-the-run U.S. Treasury Securities are the most recently issued nominal coupon
  securities and Treasury Inflation Protected Securities (TIPS). Nominal coupon securities pay a fixed semi-
  annual coupon and are currently issued at original maturities of 2, 3, 5, 7, 10, 20, and 30 years. Treasury
  Bills and Floating Rate Notes are excluded. Volume is the average weekly dollar volume in par value (in
  millions of dollars) over the six-month period, from Jan. 1, 2023, to June 30, 2023.\b\ Number of Venues is
  the number of different trading venues in each category and the number of distinct MPIDs for bilateral
  transactions.\c\ Volume Share (%) is the measure of the dollar volume as a percent of total dollar volume.\d\
  The volumes of ATSs and non-ATS interdealer brokers are broken out by Customer trades, Dealer trades, and PTF
  trades within each group.\e\ Data is based on the regulatory version of TRACE for U.S. Treasury Securities
  from Jan. 1, 2023, to June 30, 2023. Bilateral trades are a catchall classification that may include trades
  conducted via bilateral negotiation, as well as trades conducted electronically via platforms not registered
  with FINRA as an ATS.
\a\ This analysis is necessarily limited to transactions reported to TRACE, which may not be all transactions in
  U.S. Treasury securities. Transactions that take place on non-FINRA member ATSs or between two non-FINRA
  members are not reported to TRACE. Entities in the ATS TRACE category encompass the IDBs described in the
  preamble of this release. By contrast, the non-ATS IDB category in TRACE encompasses the voice-based or other
  non-anonymous methods of bringing together buyers and sellers. PTFs that are FINRA members are included as
  dealers while PTFs refer to PTFs that are not FINRA members. See Proposing Release note 43 and referencing
  text.
\b\ FINRA reports volume as par volume, where par volume is the volume measured by the face value of the bond,
  in dollars. See relevant weekly volume files, available at https://www.finra.org/filing-reporting/trace/data/trace-treasury-aggregates.
\c\ Dealers are counted using the number of distinct MPIDs.
\d\ Total dollar volume (in par value) is calculated as the sum of dollar volume for ATSs, non-ATS interdealer
  brokers, bilateral dealer-to-dealer transactions, and bilateral dealer-to-customer transactions.
\e\ We identify ATS trades and non-ATS interdealer broker trades using MPID. The regulatory version of TRACE for
  U.S. Treasury securities includes an identifier for customer and interdealer trades. Furthermore, we use MPID
  for non-FINRA member subscriber counterparties in the regulatory version of TRACE for U.S. Treasury securities
  to identify PTF trades on ATSs.


                          Table 2--Off-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                                                                   Number of     Average weekly    Volume share
                                                                    venues         volume ($M)          (%)
----------------------------------------------------------------------------------------------------------------
ATSs..........................................................              13           126,489            18.0
    Customer trades...........................................               9            10,713             1.5
    Dealer trades.............................................              13           107,304            15.2
    PTF trades................................................               5             8,472             1.2
Non-ATS Interdealer Brokers...................................              24            34,796             4.9
    Customer trades...........................................              19             7,967             1.1
    Dealer trades.............................................              22            26,829             3.8
Bilateral dealer-to-dealer trades.............................             568            85,178            12.1
Bilateral dealer-to-customer trades...........................             732           458,070            65.0
                                                               -------------------------------------------------
        Total.................................................  ..............           704,533           100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\a\ non-ATS interdealer brokers, bilateral dealer-to-
  dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for off-the-run
  U.S. Treasury Securities. Off-the-run or ``seasoned'' U.S. Treasury Securities include TIPS, STRIPS, and
  nominal coupon securities issues that preceded the current on-the-run nominal coupon securities. Number of
  Venues is the number of different trading venues in each category and the number of distinct MPIDs for
  bilateral transactions. Volume is the average weekly dollar volume in par value (in millions of dollars) over
  the six-month period, from Jan. 1, 2023, to June 30, 2023. Volume Share (%) is the measure of the dollar
  volume as a percent of the total dollar volume. The volumes of ATSs and non-ATS interdealer brokers are broken
  out by Customer trades, Dealer trades, and PTF trades within each group.\b\ Data is based on the regulatory
  version of TRACE for U.S. Treasury Securities from Jan. 1, 2023, to June 30, 2023. Bilateral trades are a
  catchall classification that may include trades conducted via bilateral negotiation, as well as trades
  conducted electronically via platforms not registered with FINRA as an ATS.
\a\ The analysis based on TRACE is necessarily limited to transactions reported to TRACE, which may not be all
  transactions in government securities. Transactions that take place on non-FINRA member ATSs or between two
  non-FINRA members are not reported to TRACE. The analysis based on TRACE is necessarily limited to
  transactions reported to TRACE, which may not be all transactions in government securities. Transactions that
  take place on non-FINRA member ATSs or between two non-FINRA members are not reported to TRACE. Entities in
  the ATS TRACE category encompass the IDBs described in the preamble of this release. By contrast, the non-ATS
  IDB category in TRACE encompasses the voice-based or other non-anonymous methods of bringing together buyers
  and sellers. PTFs that are FINRA members are included as dealers while PTFs refer to PTFs that are not FINRA
  members. See Proposing Release note 43 and referencing text.
\b\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
  for U.S. Treasury securities. The regulatory version of TRACE for U.S. Treasury securities includes an
  identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber
  counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on ATSs.

ii. Dealer-to-Customer
    Dealer-to-customer trading generally involves ``off-the-run'' 
issues more often than the interdealer market and typically is 
conducted via voice or electronically (i.e., electronic ``request for 
quote'' systems referred to in Tables 1 and 2, supra as non-ATS 
IDBs).\646\ Trading in the dealer-to-customer cash market is 
generally--and has historically been--conducted through bilateral 
transactions. Customers have not traditionally traded directly with 
other end users.\647\ Rather, non-dealers primarily trade with dealers, 
and dealers use the interdealer market as a source of orders and 
trading interest to

[[Page 2784]]

help facilitate their trading with customers in the dealer-to-customer 
market. Generally, trades in the dealer-to-customer market are not 
centrally cleared.\648\
---------------------------------------------------------------------------

    \646\ G-30 Report, supra note 5, at 1; TMPG White Paper, supra 
note 13, at 1-2.
    \647\ See Exchange Act Release No. 90019 (Sept. 28, 2020), 85 FR 
87106, 87108 (Dec. 30, 2020).
    \648\ G-30 Report, supra note 5, at 1; 2021 IAWG Report, supra 
note 4, at 3; TMPG White Paper, supra note 13, at 6.
---------------------------------------------------------------------------

    In cash U.S. Treasury security transactions that are bilaterally 
cleared, the process generally begins with participants initiating the 
trade by an electronic or voice trading platform, and both parties 
booking the details of the trade in their internal systems and 
confirming the details of the trade with one another. Once the details 
are confirmed, each party then sends messages to its clearing or 
settlement agents to initiate the clearing process. Different types of 
institutions use different clearing and settlement agents, with buy-
side firms typically using custodial banks, dealers using clearing 
banks, and hedge funds and PTFs using prime brokers.
b. U.S. Treasury Repo Market
    Depending on clearing and settlement practices, the U.S. Treasury 
repo market consists of four main components: (1) non-centrally 
cleared, settled bilaterally, (2) centrally cleared, settled 
bilaterally, (3) non-centrally cleared, settled on a triparty platform, 
and (4) centrally cleared, settled on a triparty platform. The Office 
of Financial Research has collected transaction level data for 
centrally cleared repo transactions since October 2019, and the New 
York Fed collects data on triparty repo transactions through its 
supervisory role. However, as discussed in part II.A.2.a supra, the 
lack of reporting of non-centrally cleared bilateral repo makes 
estimating the size of this segment of the repo market difficult.
i. Non-Centrally Cleared Bilateral Repo
    For non-centrally cleared bilateral U.S. Treasury repos, the 
parties agree to the terms and settle the trades between themselves, 
without involving a CCP or other third-party. As mentioned above, 
FICC's rules require its direct participants to submit for central 
clearing all eligible trades with other direct participants. Therefore, 
non-centrally cleared bilateral U.S. Treasury repos may involve at 
least one party that is not a FICC direct participant (e.g., a hedge 
fund or PTF); alternatively, or additionally, such repos may also 
involve a transaction type that FICC does not accept for clearing.
    In January of 2022, the Federal Reserve Bank of New York updated 
its primary dealer statistics to capture the segments of the repo 
market used by primary dealers. On average during the first three 
quarters of 2022, the non-centrally cleared bilateral market made up 
$1.19 trillion of primary dealer reverse repo (60% of the total) and 
$0.94 trillion of primary dealer repo (37% of the total).\649\ At more 
than $2 trillion in total exposure, this would make non-centrally 
cleared bilateral repo the largest segment of the repo market in gross 
exposure by primary dealers.
---------------------------------------------------------------------------

    \649\ See Hempel et al. (2022), supra note 563.
---------------------------------------------------------------------------

    The Office of Financial Research (OFR) conducted a pilot collection 
of data on non-centrally cleared bilateral repurchase agreement trades 
spanning nine dealers over three reporting dates in June 2022.\650\ 
Using that pilot data collection, the OFR finds that with regard to 
rates, counterparty types, and collateral, pilot participants' activity 
in the non-centrally cleared bilateral repo segment roughly mirrors 
their activity in the centrally cleared bilateral segment.\651\ 
However, as discussed in part IV.B.5 infra, haircuts in this segment 
differ from those in the centrally cleared segments.\652\
---------------------------------------------------------------------------

    \650\ The OFR has a proposed rulemaking that mandates the 
collection of daily transaction level data from certain financial 
companies on their non-centrally cleared bilateral repurchase 
agreement trades. See supra note 564.
    \651\ See Hempel et al. (2023), supra note 564, at 1.
    \652\ Id. at 3.
---------------------------------------------------------------------------

ii. Centrally Cleared Bilateral Repo
    For centrally cleared bilateral U.S. Treasury repos, for parties 
that are FICC direct participants, each party submits agreed-upon trade 
details to FICC for central clearing, and those trades are settled 
delivery versus payment using the members' clearing banks and/or 
Fedwire Securities Service. Market participants that are not direct 
participants of FICC may access central clearing through a customer 
model, such as the Sponsored Service or the Prime Broker/Correspondent 
clearing models.\653\ Although a U.S. Treasury repo transaction 
generally encompasses both the start leg and the end leg of a U.S. 
Treasury repo, currently the only U.S. Treasury securities CCA does not 
provide central clearing for the start leg of certain 
transactions.\654\ Central clearing of U.S. Treasury repo is further 
discussed below.
---------------------------------------------------------------------------

    \653\ See Proposing Release, supra note 14, 87 FR at 64616.
    \654\ FICC Rule 11, section 2, supra note 19.
---------------------------------------------------------------------------

    Data on the extent of central clearing in the U.S. Treasury 
securities market is limited. As discussed previously, the Commission 
believes that approximately half of bilateral repo trades are centrally 
cleared.\655\
---------------------------------------------------------------------------

    \655\ See part IV.B.3.b.i, supra. See also note 75, supra.
---------------------------------------------------------------------------

iii. Non-Centrally Cleared Repo Settled on a Triparty Platform
    For non-centrally cleared triparty U.S. Treasury repos, repo buyers 
(cash lenders (e.g., money market funds)) provide financing to repo 
sellers (cash borrowers (e.g., dealers)). The parties agree to the 
terms of a trade and arrange for a clearing bank to facilitate 
settlement. Like non-centrally cleared bilateral repos, at least one 
party to the transaction is not a FICC member. While the clearing bank 
provides a triparty platform to help facilitate the movement of cash 
and securities among accounts of counterparties to the transaction, it 
does not itself become a counterparty to the transactions and does not 
guarantee either counterparty's performance of its obligations. 
Collateral posted to the triparty platform generally cannot be 
repledged outside the platform, thereby protecting against settlement 
fails.\656\
---------------------------------------------------------------------------

    \656\ See generally Reference Guide to U.S. Repo and Securities 
Lending Markets (Nov. 9, 2015), available at https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf.
---------------------------------------------------------------------------

iv. Centrally Cleared Repo Settled on a Triparty Platform
    For centrally cleared U.S. Treasury triparty repos, the parties are 
FICC members that submit agreed-upon trade details to FICC for central 
clearing through FICC's General Collateral Finance (``GCF'') Repo 
Service. Unlike centrally cleared bilateral repos, these triparty repos 
are settled on the clearing bank's triparty platform. Like centrally 
cleared bilateral repos, centrally cleared triparty repos are novated 
to FICC, and FICC acts as a CCP for these transactions, including by 
collecting margin pursuant to its margin methodology for such 
transactions. Until recently, centrally cleared triparty repos were 
only conducted through the GCF Repo Service between two direct members 
of FICC. However, in September 2021, FICC introduced its Sponsored 
General Collateral Service (``Sponsored GC Service''), which enables 
centrally cleared triparty repos between a sponsored member and its 
sponsoring member.\657\ The Sponsored GC Service accepts general 
collateral in a number of generic CUSIPs, and though U.S. Treasury 
securities are among the

[[Page 2785]]

general collateral types acceptable in the Sponsored GC Service, other 
types of collateral including agency and mortgage backed securities are 
acceptable for use as collateral as well.\658\ Each type of eligible 
collateral for the Sponsored GC Service is assigned its own generic 
CUSIP number, and security types are not mixed.\659\
---------------------------------------------------------------------------

    \657\ Exchange Act Release No. 92808 (Aug. 30, 2021), 86 FR 
49580 (Sept. 3, 2021). Currently, the Bank of New York Mellon 
operates the triparty platform that facilitates trades conducted via 
the GCF Repo Service and Sponsored GC Service.
    \658\ See generally DTCC Sponsored General Collateral Service 
(``DTCC SGCS''), available at https://www.dtcc.com/-/media/Files/Downloads/Clearing-Services/FICC/GOV/SponsoredGC-FS-INTL.pdf (last 
visited Dec. 11, 2023).
    \659\ Id.
---------------------------------------------------------------------------

v. Inter-Affiliate Repo
    Current FICC rules require the submission of transactions of a 
netting member's ``Covered Affiliate'' with another FICC netting member 
where a Covered Affiliate is defined as an affiliate of a netting 
member that: (1) is not itself a netting member; (2) is not a foreign 
person; and (3) is a broker-dealer, bank, trust company, and/or FCM, if 
that transaction is with another netting member or a Covered Affiliate 
of another netting member.\660\ FICC rules do not require the 
submission of transactions between (1) a netting member and an 
affiliate or (2) between a netting member's affiliates.
---------------------------------------------------------------------------

    \660\ GSD Rule 11, Section 3 (along with Rule 1 for the 
definition of a Covered Affiliate), supra note 19.
---------------------------------------------------------------------------

    The Commission understands that inter-affiliate repo transactions 
represent an important tool to transfer liquidity and risk within an 
affiliated group. These transactions may serve different purposes, 
including, but not limited to, providing U.S. Treasury securities for 
delivery when an affiliate has taken a long or short position in U.S. 
Treasury securities as a hedge against other exposures, allowing the 
movement of U.S. Treasury securities to allow them to be posted as 
margin on an affiliate's transaction, ensuring that U.S. Treasury 
securities can serve as a liquidity buffer for an affiliated bank,\661\ 
or to meet liquidity composition targets. To get the U.S. Treasury 
securities to the appropriate entity with an affiliated group, the 
affiliate often enters into repos or reverse repos with a direct 
participant of a U.S. Treasury securities CCA.
---------------------------------------------------------------------------

    \661\ A liquidity buffer generally refers to liquid assets that 
a banking organization manages to enable it to meet expected and 
unexpected cash flows and collateral needs without adversely 
affecting the banking organization's daily operations. See generally 
FRB, FDIC, & OCC, Q&As on Statement Regarding the Use of Capital and 
Liquidity Buffers (Mar. 17, 2020), available at https://www.fdic.gov/news/financial-institution-letters/2020/fil20020a.pdf.
---------------------------------------------------------------------------

    Using assets and liabilities data reported by the five largest U.S. 
broker-dealers in their 2022 annual audited financial statements, the 
Commission observed that the value of repo and reverse repo from inter-
affiliate transactions ranges from 25-75% of total repo and reverse 
repo reported at the end of year.
4. Central Clearing in the U.S. Treasury Securities Market
    Currently, FICC is the sole provider of clearance and settlement 
services for U.S. Treasury securities.\662\ On July 18, 2012, FSOC 
designated the FICC as a systemically important financial market 
utility under Title VIII of the U.S. Dodd-Frank Act. FSOC assigned this 
designation on the basis that a failure or a disruption to FICC could 
increase the risk of significant liquidity problems spreading among 
financial institutions or markets and thereby threaten the stability of 
the financial system in the United States.
---------------------------------------------------------------------------

    \662\ See part I, supra.
---------------------------------------------------------------------------

    Should a trade be centrally cleared, the CCP receives a notice of 
the executed trade from both parties, and after comparison (i.e., 
matching of the trade details), the CCP guarantees and novates the 
contract, where novation refers to the process by which the CCP becomes 
the counterparty to both the buyer and seller in the original trade. 
Once the trading day ends and all trades have been reported to the CCP 
(i.e., end of T+0), the CCP determines its net obligations to each CCP 
participant for each security and communicates the resulting settlement 
obligations to the counterparties. The participants then have the 
obligation to settle their portion of the trade on T+1. Once this 
information is communicated, the participants send instructions to 
their settlement agents. In contrast to the bilateral case, central 
clearing reduces the credit risk that both parties are exposed to 
throughout the trade. While at execution both CCP members hold the 
usual counterparty credit risk to one another, this risk is 
transformed, generally within minutes of trade execution, when the 
trade details are sent to the CCP and the CCP guarantees and novates 
the trade. Consequently, both parties to the trade now hold centrally 
cleared credit risk, and the CCP has counterparty risk to both members.
    Direct membership in FICC typically consists of banks and 
registered dealers, who must meet specified membership criteria.\663\ 
In other markets such as U.S. equity markets, not all active 
participants are direct members of the clearing agency. For this 
reason, it is likely that under the requirement to clear eligible 
secondary market transactions, some market participants will access 
clearing indirectly. At FICC, the indirect clearing models are its 
Sponsored Program and a prime broker/correspondent clearing 
program.\664\ As of August 14, 2023, FICC has 208 direct members.\665\
---------------------------------------------------------------------------

    \663\ The Commission believes that not all market participants 
likely would satisfy a covered clearing agency's stringent 
membership criteria. See 17 CFR 17ad-22(e)(18); FICC Rule 2A, supra 
note 19. Even among those that do, legal operational or other 
considerations may preclude many market participants from becoming 
direct members of a CCP that clears and settles government 
securities transactions.
    \664\ See, e.g., FICC Rules, 8, 18, 3A (providing for prime 
brokerage and correspondent clearing, as well as sponsored 
membership), supra note 19.
    \665\ See FICC Member Directories, available at https://www.dtcc.com/client-center/ficc-gov-directories (last visited Dec. 
12, 2023) (This includes all members who make use of Netting, 
Repurchase Netting, and/or GCF services.).
---------------------------------------------------------------------------

    Centrally cleared institutional triparty (``CCIT'') membership is a 
limited direct membership for entities who buy repo using FICC's GCF 
Repo Service that settles using triparty settlement.\666\ In 2017, FICC 
developed the CCIT Service to allow repo cash providers to access 
central clearing as limited-purpose members without the sponsorship or 
intermediation of a direct participant.\667\ These entities pledge to 
FICC the purchased securities under their repos in order to secure 
their obligation to perform under the transaction. As of July 27, 2023, 
there were 7 CCIT members, all of which were affiliated with a single 
investment firm.\668\
---------------------------------------------------------------------------

    \666\ DTCC, CCIT Service, available at https://www.dtcc.com/clearing-services/ficc-gov/centrally-cleared-institutional-triparty.
    \667\ The Commission has not yet approved registered investment 
companies to participate in CCIT. See Order Granting Approval of 
Proposed Rule Change to Establish the Centrally Cleared 
Institutional Triparty Service and Make Other Changes, Exchange Act 
Release No. 80574, File No. SR-FICC-2017-005, 82 FR 21439, 21440 
n.11 (May 2, 2017).
    \668\ DTCC, FICC-Gov Member Directory (July 27, 2023), available 
at https://www.dtcc.com/client-center/-/media/Files/Downloads/client-center/FICC/FICC-GSD-Member-Directory-CCIT.xlsx.
---------------------------------------------------------------------------

    FICC interacts solely with the Sponsoring Member/direct participant 
as agent for purposes of the Sponsoring Member's clients/Sponsored 
Members' obligations to and from FICC. Sponsoring Members also 
guarantee to FICC the payment and performance obligations of their 
Sponsored Members.\669\ Sponsoring Members can

[[Page 2786]]

be either bank direct participants of FICC that meet certain capital 
and other requirements or any other FICC direct participant that meets 
what FICC determines to be the appropriate financial resource 
requirements; in practice, Sponsoring Members include both banks and 
broker-dealers.\670\ Sponsored Members have to be ``qualified 
institutional buyers'' as defined by Rule 144A under the Securities Act 
of 1933, as amended, or otherwise meet the financial standards 
necessary to be a ``qualified institutional buyer,'' and currently, 
Sponsored Members generally consist of hedge funds, money market funds, 
other asset managers, and smaller banks.\671\
---------------------------------------------------------------------------

    \669\ See Exchange Act Release No. 51896 (June 21, 2005), 70 FR 
36981 (June 27, 2005); see also FICC Rule 3A, supra note 19. For 
general information and statistics regarding the Sponsored Service, 
see DTCC, Sponsored Service, available at https://www.dtcc.com/clearing-services/ficc-gov/sponsored-membership, as well as part 
IV.B.7.d.i infra. The Sponsored Service also allows the submission 
of cash transactions; however, at this time, the service is 
generally used only for U.S. Treasury repo transactions.
    \670\ See FICC Rule 3A, section 2(a) and (b), supra note 19; 
DTCC, FICC GSD Member Directory (Oct. 31, 2023), available at 
https://www.dtcc.com/-/media/Files/Downloads/client-center/FICC/Mem-GOV-by-name.xlsx (identifying Sponsoring Members as those with 
Omnibus accounts).
    \671\ See FICC Rule 3A, section 3(a), supra note 19; FICC 
Sponsored Membership Listing, available at https://www.dtcc.com/client-center/ficc-gov-directories.
---------------------------------------------------------------------------

    The Sponsored Service allows eligible direct participants 
(Sponsoring Members) to (i) sponsor their clients into a limited form 
of FICC membership (Sponsored Members) and then (ii) submit certain 
eligible client securities transactions for central clearing. The 
requirement to clear eligible secondary market transactions could 
affect Sponsored Members. FICC interacts solely with the Sponsoring 
Member/direct participant as agent. Sponsoring Members guarantee to 
FICC the payment and performance obligations of its Sponsored 
Members.\672\ Following FICC's expansion in 2021 of its Sponsored 
Service to allow Sponsored Members to clear triparty repos through the 
program,\673\ there are now approximately 350 Sponsoring Members and 
approximately 2,200 Sponsored Members \674\ with access to central 
clearing. During the 12-month period ending on August 15, 2023, the 
total dollar value of Sponsored Members' daily repo and reverse repo 
activity ranged from a high of $771.7 billion on June 30, 2023, to a 
low of $265.8 billion on September 14, 2022.\675\
---------------------------------------------------------------------------

    \672\ See FICC's GSD Rule 3A, supra note 663. Sponsored Members 
have to be Securities Act Rule 144A ``qualified institutional 
buyers,'' or otherwise meet the financial standards necessary to be 
a ``qualified institutional buyer.'' See id., Rule 3A, section 3(a).
    \673\ See Self-Regulatory Organizations; Fixed Income Clearing 
Corporation; Order Approving a Proposed Rule Change to Expand 
Sponsoring Member Eligibility in the Government Securities Division 
Rulebook and Make Other Changes, Exchange Act Release No. 85470 
(Mar. 29, 2019).
    \674\ In its 2022 annual report, DTCC reported that FICC's 
sponsored service expanded during the year to more than 35 
sponsoring members. DTCC 2022 Annual Report, supra note 737, at 29. 
See also supra note 668.
    \675\ This information was available from DTCC on the 1 year 
version of the FICC Sponsored Activity chart as of Aug. 15, 2023. 
DTCC, Sponsored Membership (last updated Dec. 1, 2023), available at 
https://www.dtcc.com/charts/membership.
---------------------------------------------------------------------------

    Among the various types of financial firms that are Sponsored 
Members are (i) over 1,400 funds, including a number of hedge funds, 
many money market funds, other mutual funds, and a smaller number of 
exchange-traded funds (``ETFs''); \676\ (ii) banks, including a small 
number of national, regional Federal Home Loan Banks, and international 
banks; and (iii) other asset managers including a few insurance 
companies.\677\
---------------------------------------------------------------------------

    \676\ For various persons, direct participation in FICC may not 
be an alternative to the Sponsored Membership program. For example, 
``[a] subset of market participants, such as certain money market 
funds, face legal obstacles to joining FICC because they are 
prohibited from mutualizing losses from other clearing members in 
the way that FICC rules currently require.'' Marta Chaffee and Sam-
Schulhofer-Wohl, infra note 678, at 2.
    \677\ FICC Membership Listing, supra note 670.
---------------------------------------------------------------------------

    From a direct participant's perspective, clearing a U.S. Treasury 
securities transaction at FICC between that participant and its non-
participant counterparty (i.e., a dealer-to-client trade) need not 
result in a separate collection of margin for each transaction. 
Transactions between direct participants are novated by FICC, and, by 
virtue of multilateral netting, all of a member's positions are netted 
into a single payment obligation--either to or from the CCP. In 
contrast, in a dealer-to-client trade, there is no transaction between 
two direct participants that FICC membership rules would require to be 
novated to the CCP, and as a result, FICC does not provide any guaranty 
of settlement or otherwise risk manage this trade.\678\ In other words, 
as one recent publication explained, ``if a dealer were to buy a 
security from its own customer and submit this transaction to FICC, 
there would be no effect on the dealer's net position at, obligations 
to, or guarantees from FICC.'' \679\ Indeed, except for its sponsored 
program, because FICC nets all trades at a dealer before calculating 
margin, as at present, customer trades with their own dealers generate 
no margin requirement and are not collateralized at the CCP.
---------------------------------------------------------------------------

    \678\ See Marta Chaffee and Sam-Schulhofer-Wohl, Is a Treasury 
Clearing Mandate the Path to Increased Central Clearing?, Chicago 
Fed Insights, https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/treasury-clearing-mandate (June 23, 2021) 
(explaining that this conclusion follows from that fact that ``FICC 
nets members' trades for their own accounts against trades by the 
members' customers, so the dealer's and customer's sides of the 
trade would cancel out in the netting process.'').
    \679\ Id.
---------------------------------------------------------------------------

    Sponsored Members participating in FICC's Sponsored Service are 
indirect members of FICC, and upon novation of their U.S. Treasury 
transactions, FICC becomes obligated to such Sponsored Members.\680\ 
FICC requires that its Sponsoring Members provide margin on a gross 
basis for its Sponsored Member positions.\681\ In FICC's correspondent 
clearing and prime brokerage clearing models, the client of the netting 
member does not have a legal relationship with FICC.\682\ FICC only has 
CCP obligation to the correspondent clearer or prime broker itself, as 
applicable, who is a FICC member.
---------------------------------------------------------------------------

    \680\ FICC-GSD Rule 3A sections 3 (membership) and 7 (novation), 
supra note 19.
    \681\ FICC Rule 3A, section 10(c), supra note 19. See also The 
Depository Trust and Clearing Corporation (DTCC), Making the U.S. 
Treasury Market Safer for All Participants: How FICC's Open Access 
Model Promotes Central Clearing (white paper, Oct. 2021), available 
at https://www.dtcc.com/-/media/Files/Downloads/WhitePapers/Making-the-Treasury-Market-Safer-for-all-Participants.pdf (``DTCC October 
2021 White Paper'') at 5-6.
    \682\ FICC Rule 8, supra note 19. See DTCC October 2021 White 
Paper, supra note 681, at 5, which reports that $80 billion plus of 
activity are observed clearing and settling daily through FICC's 
correspondent clearing and prime broker clearing models.
---------------------------------------------------------------------------

    Certain aspects of FICC's Sponsored Service are worth noting, as 
they may have an effect on some market participants' willingness to 
participate in the service. For example, once a trade is novated, FICC 
makes delivery of cash or securities to the Sponsoring Member as agent 
for the Sponsored Member.\683\ Therefore, market participants may 
consider the ability of their Sponsoring Member to make delivery to 
them in situations in which the Sponsoring Member is in default, when 
determining whether to use the Sponsored Service. In addition, if a 
Sponsoring Member defaults, FICC continues to guarantee any novated 
sponsored trades and may determine whether to close out a sponsored 
trade and/or to permit the Sponsored Member to settle the trade.\684\ 
This may lead a potential sponsored member to decline to enter a 
sponsoring relationship unless it was willing to trade bilaterally with 
those sponsoring firms. The Commission understands that some Sponsoring 
Members also may limit which market participant's trades they are 
willing to sponsor based on firm type. Sponsored triparty repo is a 
relatively recent addition.\685\ Volumes of sponsored repo

[[Page 2787]]

fluctuate, but they appear to be substantial as Figure 6 shows.
---------------------------------------------------------------------------

    \683\ FICC Rule 3A, sections 8 and 9, supra note 19.
    \684\ FICC Rule 3, section 14(c), supra note 19.
    \685\ See generally DTCC SGCS, supra note 658.
---------------------------------------------------------------------------

    In addition, the Commission understands that it is common practice 
for sponsoring members to only offer clearing services for transactions 
in which the sponsor is the counterparty to the sponsored member. This 
bundling of execution and central clearing sponsor services means that 
should a non-FICC member wish to centrally clear a U.S. Treasury 
transaction, it is limited in the counterparties with which it can 
trade to those FICC direct members with which it has an existing 
sponsoring member relationship.
[GRAPHIC] [TIFF OMITTED] TR16JA24.005

    In order for a CCP to perform as the guarantor of trades that have 
been novated to it, the CCP must have resources available to absorb the 
costs of clearing member non-performance. FICC is required by 
Commission rule to have policies and procedures reasonably designed to 
maintain financial resources at the minimum to enable it to cover a 
wide range of foreseeable stress scenarios that include, but are not 
limited to, the default of the participant family that would 
potentially cause the largest aggregate credit exposure in extreme but 
plausible market conditions.\686\ A CCP's plan to deal with a clearing 
member default is referred to as its default waterfall. The default 
waterfall provides an identification of resources that the CCP will use 
in attempting to recoup losses from clearing member defaults. The FICC 
waterfall comprises the defaulting clearing member's contribution 
(i.e., margin, as well as any other resources the member has on deposit 
such as excess margin, the proceeds from liquidating the member's 
portfolio, and any amounts available from cross-guaranty agreements), 
the corporate contribution to the clearing fund, followed by non-
defaulting clearing members' margin.\687\
---------------------------------------------------------------------------

    \686\ 17 CFR 240.17ad-22(e)(4)(iii).
    \687\ FICC Rule 4, sections 6 and 7, supra note 19.
---------------------------------------------------------------------------

    In addition, with respect to liquidity risk, the Commission's rules 
require FICC to have policies and procedures reasonably designed to 
meet a ``cover-1'' standard and hold qualifying liquid resources 
sufficient to complete its settlement obligations in the event of the 
default of the largest member and its affiliates.\688\ For example, if 
a clearing member has a net long position in a security that has not 
yet settled, the CCP must have the cash available to complete the 
purchase. The securities can be subsequently liquidated and any losses 
that may result would be covered by the resources in the default 
waterfall. The first liquidity source that FICC would use in the event 
of a member default is the cash portion of the clearing fund.\689\ 
Second, FICC can pledge securities in the clearing fund as a source of 
cash, including securities that would have otherwise been delivered to 
the defaulting member.\690\ Should additional liquid resources be 
required FICC could make use of the CCLF.\691\
---------------------------------------------------------------------------

    \688\ Specifically, the Commission's rules require FICC to have 
policies and procedures reasonably designed to maintain sufficient 
liquid resources at the minimum in all relevant currencies to effect 
same-day and, where appropriate, intraday and multiday settlement of 
payment obligations with a high degree of confidence under a wide 
range of foreseeable stress scenarios that includes, but is not 
limited to, the default of the participant family that would 
generate the largest aggregate payment obligation for the covered 
clearing agency in extreme but plausible market conditions, and to 
hold qualifying liquid resources sufficient to meet that 
requirement. See 17 CFR 240.17ad-22(e)(7)(i) and (ii).
    \689\ FICC Rule 4, sections 5 and 6, supra note 19.
    \690\ Id.
    \691\ FICC Rule 22A, section 2a, supra note 19.
---------------------------------------------------------------------------

    The CCLF is a rules-based arrangement in which FICC members are 
obligated to participate as a condition of their membership. Should 
FICC declare a CCLF event, each member would be obligated to enter into 
repurchase agreements with FICC up to

[[Page 2788]]

a member-specific limit.\692\ The CCLF is not prefunded, and it is 
separate from FICC's margin requirements. Each FICC member is required, 
by FICC's rules, to attest that its CCLF requirement has been 
incorporated into its liquidity planning and related operational plans 
at least annually and in the event of any changes to such Member's CCLF 
requirement.\693\ Thus, the members are obligated to have such 
resources lined up, which can be costly.\694\
---------------------------------------------------------------------------

    \692\ These repurchase agreements may continue for up to 30 
days. See FICC Rule 22A, section 2a(a)(L), supra note 19.
    \693\ FICC Rule 22A, section 2a(d), supra note 19.
    \694\ See Independent Dealer & Trader Association, White Paper 
on the Repo Market Affecting U.S. Treasury and Agency MBS 8 (Dec. 6, 
2019), available at https://static1.squarespace.com/static/5ad0d0abda02bc52f0ad4922/t/5dea7fb6af08dd44e68f48cc/1575649207172/IDTA+-+White+Paper+%2812.6.19%29-c2.pdf (``In light of the fact that 
a significant component of a firm's CCLF obligation is based on its 
overnight liquidity exposures at FICC, middle-market dealers 
immediately took to reducing their reliance on overnight liquidity. 
Some middle-market dealers reduced the size of their portfolio and 
extended liquidity terms in place of overnight funding, adding to 
both financing and opportunity costs. Others have incorporated 
liquidity plans for which commitment and administration fees 
materially added to the cost of doing business.'').
---------------------------------------------------------------------------

    The CCLF provides a mechanism for FICC to enter into repurchase 
transactions based on the clearing activity of the defaulted 
participant. Specifically, in the event that FICC declares a CCLF 
event, FICC's members would be required to hold and fund their 
deliveries to the defaulting member, up to a predetermined capped 
dollar amount, by entering into repurchase transactions with FICC until 
FICC completes the associated closeout.\695\ The aggregate size of the 
CCLF is the historical cover-1 liquidity requirement (i.e., the largest 
liquidity need generated by an Affiliated Family during the preceding 
six-month period) plus a liquidity buffer (i.e., the greater of 20 
percent of the historical cover-1 liquidity requirement or $15 
billion).\696\
---------------------------------------------------------------------------

    \695\ See generally FICC Rule 22A, section 2a(b), supra note 19. 
For details on the process, see Order Approving a Proposed Rule 
Change to Implement the Capped Contingency Liquidity Facility in the 
Government Securities Division Rulebook, Exchange Act Release No. 
82090 (Nov. 15, 2017), 82 FR 52457 (Nov. 21, 2017).
    \696\ FICC Rule 1 (definitions of Aggregate Total Amount and 
Liquidity Buffer) and 22A, section 2, supra note 19.
---------------------------------------------------------------------------

    The first $15 billion of the total amount of the CCLF is shared, on 
a scaled basis, across all members. Any remaining amount is allocated 
to members who present liquidity needs greater than $15 billion, using 
a liquidity tier structure based on frequency of liquidity created 
across liquidity tiers in $5 billion increments.\697\ The size of the 
CCLF and each member's share is reset every 6 months or as 
appropriate.\698\ Figure 7 provides data on the aggregate amount of the 
CCLF from 2018 quarter 4 through 2023 quarter 1. The aggregate size of 
the CCLF was over $76 billion in 2023 quarter 1.
---------------------------------------------------------------------------

    \697\ FICC Rule 22A, section 2a(b)(iii), (iv), and (v), supra 
note 663. See also Exchange Act Release No. 82090, supra note 695, 
82 FR at 55429-30.
    \698\ FICC Rule 22A, section 2a(b)(ii), (iii), (iv), and (v), 
supra note 19.
[GRAPHIC] [TIFF OMITTED] TR16JA24.006


[[Page 2789]]


5. Margin Practices in U.S. Treasury Secondary Markets
    As described above, posting of margin is one way to manage the risk 
of settlement in cash trades. Indeed, for trades that are centrally 
cleared, the CCP collects margin on an intraday basis, typically twice 
per day.\699\ Varying bespoke arrangements appear to characterize 
current margining practices in the bilateral, non-centrally cleared 
cash market.\700\ A recent publication stated that competitive 
pressures in the bilaterally settled market for repo transactions has 
exerted downward pressure on haircuts, sometimes to zero.\701\ The 
Commission understands that most non-centrally cleared bilateral repo 
trades go unmargined.\702\ For non-centrally cleared repo including 
that which is settled using the triparty platform, haircuts serve as a 
counterparty credit risk mitigant. The median haircut on U.S. Treasury 
collateral for non-centrally cleared bilateral repo that is settled on 
the triparty platform has been 2% since at least 2010.\703\
---------------------------------------------------------------------------

    \699\ TMPG White Paper, supra note 13, at 3.
    \700\ Id. at 3. Non-centrally cleared cash trades are negotiated 
and settled bilaterally, and the Commission has little direct 
insight into the arrangements market participants use to manage 
their counterparty exposure. The TMPG observes in the White Paper 
that non-centrally cleared trades are ``. . . not margined in a 
uniform or transparent manner, thereby creating uncertainty about 
counterparties' exposure to credit and market risk.'' Id.
    \701\ G-30 Report, supra note 5, at 13.
    \702\ TMPG White Paper, supra note 13, at 3 (``Margining has not 
been a common practice for regularly settling bilaterally cleared 
transactions. . .'').
    \703\ See Tri-Party/GCF Repo, Federal Reserve Bank of New York, 
available at https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo/index.html#interactive/margins.
---------------------------------------------------------------------------

    In a study of non-centrally cleared bilateral repo trade data 
collected in its June 2022 pilot study, the OFR reports that 74% of all 
volume is transacted at zero haircut.\704\ The report also suggests 
that this finding is in part due to the use of netted packages, in 
which a dealer will conduct both a repo and a reverse repo with the 
same counterparty and the same tenor but over different pieces of 
Treasury collateral.\705\ The report also provides evidence that 
haircuts reflect not only the riskiness of the collateral but also the 
relative credit risk of the counterparties. For example, haircuts on 
Treasury repo where dealers are selling repo to hedge fund customers 
are usually zero or negative, while haircuts where dealers buying repo 
from hedge funds are usually zero or positive.\706\
---------------------------------------------------------------------------

    \704\ See Hempel et al. (2023), supra note 564, at 3 and 7-9.
    \705\ Id.
    \706\ Id. at 7.
---------------------------------------------------------------------------

    The reduction of haircuts, which serve as the primary counterparty 
credit risk mitigant in non-centrally cleared and bilaterally settled 
repos, could result in greater exposure to potential counterparty 
default risk in non-centrally cleared repos. Such arrangements (in both 
cash and repo) may not take into account the value of margin in 
protecting against systemic events, because they are designed to be 
optimal for the counterparties rather than the larger financial market.
    For centrally cleared cash U.S. Treasury transactions, however, 
FICC rules dictate that margin must be posted based on the net 
positions of all members with the clearing agency.\707\ Positions in 
securities with longer maturities--for example, 20+ year U.S. Treasury 
bonds--require more margin to be posted because they are more sensitive 
to interest rate changes. Required margin is also larger for short 
positions, and it rises with volatility in the U.S. Treasury securities 
market.\708\ For example, during the first quarter of 2020, a period 
which includes the U.S. Treasury securities market disruption of March 
2020, total initial margin required was 9.4% higher than the previous 
quarter and the average total variation margin paid was 72% 
higher.\709\
---------------------------------------------------------------------------

    \707\ See Part IV.B.3.4, supra for a discussion of how FICC 
requires for margining of sponsored positions.
    \708\ See FICC Rule 4, section 1b, supra note 19. FICC's margin 
requirements are discussed in more detail below. A key component of 
the margin requirement is a Value-at-Risk charge, where the 
calculated margin requirement is based in part on the historical 
volatility of the traded security. Securities that are more 
sensitive to interest rates should have higher VaR, all else equal.
    \709\ See CPMI IOSCO Quantitative Disclosure Results for 2020Q1 
and 2019Q4, items 6.1.1 and 6.6.1, available at https://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    FICC Rules set forth the various components of a member's margin 
requirements.\710\ The largest component is a Value-at-Risk (VaR) 
charge, which is calculated both intraday and end-of-day and reflects 
potential price volatility of unsettled positions. FICC typically 
calculates VaR using ten years of historical data; for securities 
without the requisite amount of data, FICC instead employs a haircut 
approach, where the required margin is some percentage of the traded 
security's value. Other components of FICC's margin requirements 
include a liquidity adjustment charge, which is levied against members 
who have large, concentrated positions in particular securities that 
FICC determines to be difficult to liquidate, and special charges that 
can be levied in response to changes in aggregate market conditions 
(such as increases in market-wide volatility).
---------------------------------------------------------------------------

    \710\ FICC Rule 4, section 1b, supra note 19.
---------------------------------------------------------------------------

    In the market for bilaterally cleared repo, margin typically comes 
in the form of haircuts. For example, if a repo buyer is providing $100 
of cash in return for $102 of securities from the repo seller, then the 
haircut would be $2. The difference between the value of the securities 
sold and the initial price paid, which is essentially a form of initial 
margin, protects the buyer by making it more costly for the seller to 
fail to repurchase the securities as agreed at the end of the repo, 
while also protecting the buyer against the risk that short-term 
volatility erodes the value of the purchased securities.\711\ The 
difference between the cash provided and the value of the securities is 
known colloquially as a ``haircut.'' Triparty repo also features 
overcollateralization, where the haircut is again negotiated 
bilaterally between the two counterparties.\712\ Data from the Federal 
Reserve Bank of New York show that a 2% haircut is the norm in the 
Triparty/GCF repo market, though there are occasionally some deviations 
from the norm.\713\ Money market funds also generally require margin of 
2%, which is generally the case for other investment companies as 
well.\714\ Outside of money market funds and

[[Page 2790]]

other investment companies, due to the lack of reporting requirements 
for bilateral repo, the Commission lacks good insight into margin 
practices of participants in the market for bilaterally cleared repo. 
Anecdotally, the Commission understands that--as with the cash market--
some participants may not be required to post any margin.\715\
---------------------------------------------------------------------------

    \711\ With respect to registered investment company lenders 
seeking to rely on Rule 5b-3 under the 1940 Act, the value of the 
collateral received under a repo must be at least equal to the 
resale price, reduced by the transaction costs (including loss of 
interest) that the investment company reasonably could expect to 
incur if the cash borrower defaults. See Rule 5b-3(a); (c)(1).
    \712\ Although triparty repo transactions are settled through a 
clearing bank, the terms of the transactions are bilaterally 
negotiated. Although haircuts vary by collateral type, the variance 
of haircuts is small for U.S. Treasury repo compared to other 
collateral types. See Paddrik et al., supra note 631.
    \713\ For data on the median, 10th, and 90th percentiles of 
overcollateralization in Triparty repo, see Tri-Party/GCF Repo, 
Federal Reserve Bank of New York, available at https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo. The median level of overcollateralization has been 2% for the 
entire period from May 2010 through July 2023. The 10th and 90th 
percentiles are also typically 2%, although the 10th percentile has 
occasionally fallen to as low as zero--notably, in the summer of 
2011, briefly in Sept. 2012, and in the period from Sept. of 2022 
through early Jan. of 2023--while the 90th percentile has 
occasionally spiked to as high as 5%--specifically in Jan. 2017 and 
again in Apr. of the same year.
    \714\ See Viktoria Baklanova, Isaac Kuznits, Trevor Tatum, 
Primer: Money Market Funds and the Repo Market (Feb. 18, 2021), 
available at https://www.sec.gov/files/mmfs-and-the-repo-market-021721.pdf (``MMF Primer'').
    \715\ See G-30 Report, supra note 5, at 13 (noting that minimum 
margin requirements ``. . . would stop competitive pressures from 
driving haircuts down (sometimes to zero), which reportedly has been 
the case in recent years.'').
---------------------------------------------------------------------------

    While positive haircuts protect the repo buyer, the bilaterally 
cleared repo market generally does not feature the same level of 
protection for the repo seller. Indeed, one of the main benefits of the 
bilateral market to repo buyers is that it allows them to resell the 
securities purchased in the start leg of the repo. As a result, repo 
sellers are exposed to settlement risk and must manage that risk as 
they see fit. In the triparty repo market, securities purchased as part 
of a repo transaction remain in the custody of the clearing bank and 
cannot be reused by the repo buyer except as collateral in another 
triparty repurchase agreement, reducing settlement risk for the repo 
seller.
    Unlike bilaterally cleared and triparty repo the counterparties to 
a centrally cleared repo transaction must post cash margin to the CCP 
twice per day, as they do with trades in the cash market. Repo sellers 
may be required to post more margin than repo buyers, similar to how in 
the bilaterally cleared market repo sellers post margin through 
haircuts while repo buyers do not.
6. Disruptions in the U.S. Treasury Securities Market
    There have been significant disruptions in the U.S. Treasury 
securities market in recent years. Although different in their scope 
and magnitude, these events all generally involved dramatic increases 
in market price volatility and/or sharp decreases in available 
liquidity.\716\ U.S. Treasury securities are generally not information 
sensitive in that their payoff is fixed in nominal terms. Moreover, 
there is little evidence that information on inflation risk or 
expectations could have driven the volatility observed in these 
episodes, raising the possibility that the volatility originated in a 
buy-sell imbalance, as opposed to fundamental factors. While a market 
failure could be the origin of price volatility, the forward-looking 
nature of markets can compound liquidity-driven price movements. The 
fear of being unable to exit a position can lead to a ``rush to the 
exits,'' leading to yet greater price swings. Because U.S. Treasury 
securities are standardized, they generally benefit from a deep, ready 
market for transactions. Investors count on the ability to move between 
cash and U.S. Treasury securities seamlessly.\717\ This makes events 
that reduce liquidity in these markets especially striking and 
destabilizing to the overall market. Moreover, since the Proposal, 
regulators and others have noted the persistence of illiquidity and the 
mitigating effect of greater central clearing.\718\
---------------------------------------------------------------------------

    \716\ See 2021 IAWG Report, supra note 4, for further discussion 
of these and other disruptions. See also Remarks by Under Secretary 
for Domestic finance Nellie Liang at the 2022 Treasury Market 
Conference, available at https://home.treasury.gov/news/press-releases/jy1110. Under Secretary Liang points out that continued 
liquidity concerns are linked to higher volatility since the COVID-
19 shock of Mar. 2020.
    \717\ U.S. Treasury securities are often used as substitutes for 
cash. There is anecdotal evidence that during Mar. 2020, some market 
participants refused U.S. Treasury securities collateral in favor of 
cash.
    \718\ See Remarks by Under Secretary for Domestic Finance Nellie 
Liang at the 2022 Treasury Market Conference available at https://home.treasury.gov/news/press-releases/jy1110, Enhancing The 
Resilience of the U.S. Treasury Market: 2022 Staff Progress Report 
(Nov 10, 2022), available at https://home.treasury.gov/system/files/136/2022-IAWG-Treasury-Report.pdf), and Darrel Duffie, Resilience 
redux in the US Treasury market, Jackson Hole Symposium (Sept. 2, 
2023), available at https://www.kansascityfed.org/Jackson%20Hole/documents/9780/JH-2023BW.pdf. See also Darrell Duffie, Michael 
Fleming, Frank Keane, Claire Nelson, Or Shachar, and Peter Van 
Tassel, B.6.aa, Internal SEC seminar (July 2023), available at 
https://www.sec.gov/comments/s7-23-22/s72322-260739-614102.pdf.
---------------------------------------------------------------------------

a. COVID-19 Shock of March 2020
    The market for U.S. Treasury securities experienced significant 
disruptions in March 2020, characterized by a spike in volume, whose 
origins may have been multiple but included high levels of selling by 
foreign banks and by hedge funds.\719\ For example, hedge funds, one of 
the principal sellers of U.S Treasury futures, hedge their short 
futures position by establishing a long position in the cash market, 
creating a ``cash-futures basis trade.'' \720\ The cash position of 
this trade is often highly levered, using the repo market for 
financing. In March, as the U.S. Treasury securities market came under 
stress and as repo rates increased in some segments of the repo market, 
the economics of the cash-futures basis trade worsened and various 
funds found it necessary to unwind at least a portion of their 
positions. This unwinding of positions resulted in more outright sales 
of U.S. Treasury securities in the cash market, adding further stress 
through a feedback loop.\721\
---------------------------------------------------------------------------

    \719\ See SEC Staff Report on U.S. Credit Markets 
Interconnectedness and the Effects of the COVID-19 Economic Shock 
(Oct. 2020), available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
    \720\ See Ayelen Banegas, Phillip J. Monin, and Lubomir 
Petrasek, Sizing hedge funds' Treasury market activities and 
holdings (FEDS Notes Oct. 6, 2021), available at https://www.federalreserve.gov/econres/notes/feds-notes/sizing-hedge-funds-treasury-market-activities-and-holdings-20211006.html.
    \721\ See supra note 719, at 4. In addition, a similar dynamic 
was observed in the risk parity trades, where hedge funds lever up 
(through the repo markets) lower volatility fixed-income positions 
(e.g., government bonds) to create a risk-equalized portfolio across 
asset classes. See also id.
---------------------------------------------------------------------------

    During this period, bid-ask spreads increased by a factor of 5, and 
market depth on inter-dealer brokers decreased by a factor of 10. The 
price of 30-year U.S. Treasury securities fell by 10% in one two-day 
period. Arbitrage relations appeared to break down throughout the 
market.\722\ This may, as discussed above, have led to the winding down 
of the cash-futures basis trade, for example, adding to further 
stress.\723\ There also appeared to be large-scale selling from foreign 
investors, including official institutions, to address their domestic 
currency and liquidity needs.\724\
---------------------------------------------------------------------------

    \722\ Duffie, supra note 27.
    \723\ See generally Ayelen Banegas et al., supra note 720; see 
also Daniel Barth & R. Jay Kahn, Hedge Funds and the Treasury Cash-
Futures Disconnect (Apr. 1, 2021), available at https://www.financialresearch.gov/working-papers/2021/04/01/hedge-funds-and-the-treasury-cash-futures-disconnect/; Mathias S. Kruttli, Phillip 
J. Monin, Lubomir Petrasek, & Sumudu W. Watugala, Hedge Fund 
Treasury Trading and Funding Fragility: Evidence from the COVID-19 
Crisis (working paper Fin. and Econ. Disc. Series 2021-038), Fed. 
Res. Bd (Apr. 2021), available at https://www.federalreserve.gov/econres/feds/files/2021038pap.pdf.
    \724\ See Colin R. Weiss, Foreign Demand for U.S. Treasury 
Securities during the Pandemic (FEDS Notes, Jan. 28, 2022), 
available at https://www.federalreserve.gov/econres/notes/feds-notes/foreign-demand-for-us-treasury-securities-during-the-pandemic-20220128.htm.
---------------------------------------------------------------------------

    Duffie and Liang and Parkinson, among others, have tied these 
patterns to underlying U.S. Treasury securities market structure, in 
which intermediation capacity may be reduced relative to the size of 
the market and ultimate buyers and sellers may have difficulty locating 
each other. These authors discuss ways in which central clearing could 
have reduced these problems, mitigating the large price swings due to 
illiquidity in the market just when it was most needed.\725\ One view 
of central clearing is that it may facilitate all-to-all trading, thus 
helping

[[Page 2791]]

ultimate buyers and sellers find each other.\726\ More buyers and 
sellers of U.S. Treasury securities could potentially act as additional 
sources of liquidity in a market with central clearing.
---------------------------------------------------------------------------

    \725\ Duffie, supra note 27; Nellie Liang & Pat Parkinson, 
Enhancing Liquidity of the U.S. Treasury Market Under Stress 
(Hutchins Ctr. Working Paper No. 72, 2020), available at https://www.brookings.edu/wp-content/uploads/2020/12/WP72_Liang-Parkinson.pdf (``Liang & Parkinson'').
    \726\ See Duffie, supra note 27.
---------------------------------------------------------------------------

b. September 2019 Repo Market Disruptions
    The repo market experienced a substantial disruption starting 
September 16, 2019, when overnight repo rates began to rise, and on 
September 17, 2019, when the rise in repo rates accelerated 
dramatically. During the episode, the Secured Overnight Financing Rate 
(SOFR)--a measure of the average cost of overnight repo borrowing 
(e.g., the implied cost of borrowing by selling overnight repo)--spiked 
by 300 basis points to over 5% in the course of 2 days. There was also 
a wide dispersion around this average; some trades occurred at rates as 
high as 9%. On top of this, the spread between the 1st and 99th 
percentile rates increased substantially from its average earlier in 
2019 of approximately 25 basis points to approximately 675 basis points 
during the disruption. The disruption spilled over into the other 
markets, with the Effective Federal Funds Rate (EFFR) rising above the 
Federal Reserve target by 5 basis points.
    The disruption occurred amidst two events: first, a large 
withdrawal of reserves from the banking system to service corporate tax 
payments due September 16; and second, the settlement of U.S. Treasury 
securities auctions. Altogether, the tax payments led approximately 
$120 billion to flow away from bank reserves, bringing them down to 
their lowest level in 5 years.\727\ Moreover, the auction settlement 
raised the supply of U.S. Treasury securities outstanding, which was 
accompanied by an increased demand for cash to fund purchases of these 
securities. The need for cash reserves played a role in what appears to 
be an unwillingness of banks to lend to one another at very high rates. 
Less tangibly, market expectations could have played a role; it is 
possible that the spike in rates could have been interpreted as a 
signal for a future need of cash reserves, leading banks to conserve 
cash regardless of what appeared to be strong economic incentives to do 
otherwise.
---------------------------------------------------------------------------

    \727\ See Sriya Anbil, Alyssa Anderson, and Zeynep Senyuz, What 
Happened in Money Markets in September 2019? (FEDS Notes, Feb. 27, 
2020), available at https://www.federalreserve.gov/econres/notes/feds-notes/what-happened-in-money-markets-in-september-2019-20200227.htm.
---------------------------------------------------------------------------

    While the need for the banking system to replace reserves with cash 
may be part of the explanation, in a well-operating market high rates 
for overnight borrowing collateralized by U.S. Treasury securities 
(i.e., the implied cost of borrowing by selling overnight repo) would 
have attracted other market participants. Ultimately, as it did in 
March 2020, the Federal Reserve injected reserves into the system--the 
economic equivalent of lending to banks. The overnight repo operations 
totaled $75 billion on September 17, 2019. Besides directly providing 
cash, this perhaps signaled the Fed's willingness and ability to lend 
as needed to restore rates to levels that would occur in the absence of 
market frictions. In such a setting, a potential benefit of enhanced 
clearing for U.S. Treasury repo and cash is its ability to reduce those 
market frictions directly, without official sector intervention.
c. October 2014 Flash Rally
    In March 2020 U.S. Treasury securities' prices fell, whereas in 
September 2019 the rate for lending increased. Both events were 
associated with an increase in the cost of borrowing (i.e., the implied 
cost of borrowing by selling overnight repo). The events of October 15, 
2014, were different in form: in this instance, yields on U.S. Treasury 
bonds fell quickly and dramatically, leading to large increases in 
prices, without any clear explanation. The intraday range for the 10-
year bond was 37 basis points, one of the largest on record, and far 
outside the typical historical distribution.\728\ October 15, 2014, 
featured the release of somewhat weaker-than-expected U.S. retail sales 
data at 8:30 a.m. ET. While the data appeared to prompt the initial 
decline in interest rates, the reaction was far larger than would have 
been expected given the modest surprise in the data. Suggestive of some 
connection is that the dollar amount of standing quotes in the central 
limit order books on cash and futures trading platforms--a measure of 
the quantity of liquidity that is commonly referred to as ``market 
depth''--fell dramatically in the hour before the event window.
---------------------------------------------------------------------------

    \728\ See generally Joint Staff Report, supra note 4.
---------------------------------------------------------------------------

    A sudden rise in price does not at first appear as potentially 
disruptive as a decline. However, it appears that levered market 
participants had taken short positions in anticipation of an increase 
in yields. Any further increase in price would have forced these 
participants to cover their positions. Indeed, hedge funds became net 
buyers of U.S. Treasury securities on the morning of October 15, 2014. 
The decline in liquidity may have led to a further concern of an 
inability to exit positions. In particular, although the share of 
trading volume attributed to PTFs on October 15 does not stand out as 
unusual relative to the prior period,\729\ PTFs significantly reduced 
the dollar amounts of standing quotes in central limit order 
books,\730\ leading to greater pressure on the system. This withdrawal 
of liquidity appears to have been motivated by an attempt to manage 
risk. Lastly, though broker-dealers increased their trading volume, 
they provided less liquidity to the order books by widening their 
spreads and in some cases withdrawing for brief periods from the offer 
side of the book.\731\
---------------------------------------------------------------------------

    \729\ See Joint Staff Report, supra note 4, at 21.
    \730\ See 2021 IAWG Report, supra note 4, at 18.
    \731\ See id.
---------------------------------------------------------------------------

    This disruption showed that market liquidity provision had become 
more short-term in nature, some liquidity providers were backed by less 
capital, and liquidity was more vulnerable to shocks as a result of the 
change in the composition of liquidity providers. In addition, 
electronic trading permitted rapid increases in orders that removed 
liquidity. These vulnerabilities are similar to ones observed during 
the March 2020 events.\732\ As in the previously described episodes, 
the price swings illustrate the apparent difficulty for outside capital 
at accessing the market. Improved market functioning could have allowed 
economic incentives to help stabilize the system: end-users of U.S. 
Treasury securities could have reacted to the unusually high prices by 
selling. However, such participants would have needed access to pricing 
and to the ability to trade.
---------------------------------------------------------------------------

    \732\ See id.
---------------------------------------------------------------------------

7. Affected Parties
a. Covered Clearing Agencies for U.S. Treasury Securities: FICC
    Although the requirement to clear eligible secondary market 
transactions would apply to all U.S. Treasury securities CCAs, FICC's 
Government Securities Division, as noted previously, is the sole 
provider of clearance and settlement services for U.S. Treasury 
securities. FICC is a wholly owned subsidiary of The Depository Trust & 
Clearing Corporation (DTCC); DTCC is a private corporation whose common 
shares are owned by fee-paying participants in DTCC's clearing agency

[[Page 2792]]

subsidiaries, including FICC.\733\ In 2022 and 2021, FICC's total 
clearing revenue was approximately $312.8 million and $310.0 million, 
respectively, and its net income was approximately $4.6 million and 
$13.4 million, respectively.\734\
---------------------------------------------------------------------------

    \733\ See generally Notice of No Objection to Advance Notices, 
Exchange Act Rel. No. 74142 (Jan. 27, 2015), 80 FR 5188 (Jan. 30, 
2015) (not objecting to a proposal that DTCC's new common share 
ownership formula will be based solely on fees paid to its 
subsidiary clearing agencies).
    \734\ FICC, Consolidated Financial Statements as of and for the 
Years Ended Dec. 31, 2022 and 2021, available at https://www.dtcc.com/-/media/Files/Downloads/legal/financials/2023/DTCC-Annual-Financial-Statements-2022-and-2021.pdf.
---------------------------------------------------------------------------

    The G-30 Report estimated that ``roughly 20 percent of commitments 
to settle U.S. Treasury security trades are cleared through FICC.'' 
\735\ Although various analyses have noted the increased volume of 
secondary market U.S. Treasury transactions that are not centrally 
cleared,\736\ the dollar value of transactions FICC clears remains 
substantial. In 2022, FICC's GSD processed $1.512 quadrillion in DVP 
transactions of U.S. Government securities.\737\ In March 2020, 
clearing dollar volume in U.S. Treasury securities at FICC rose ``to 
over $6 trillion daily, an almost 43 percent increase over the usual 
daily average of $4.2 trillion cleared [at that time].'' \738\
---------------------------------------------------------------------------

    \735\ G-30 Report, supra note 5, at 11.
    \736\ See, e.g., 2021 IAWG Report, supra note 4, at 5-6 (citing 
TMPG White Paper); U.S. Department of the Treasury, A Financial 
System That Creates Economic Opportunities Capital Markets (Oct. 
2017), available at https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``2017 Treasury 
Report''), at 81; Joint Staff Report, supra note 4, at 36-37.
    \737\ Performance Dashboard, DTCC 2022 Annual Report, at 44, 
available at https://www.dtcc.com/about/-/media/Files/Downloads/Annual-Report-2022/DTCC2022AR-PRINT.pdf. FICC's GSD also process 
U.S. Government securities that are not U.S. Treasury securities but 
the dollar amount processed of such securities is believed to be 
nominal by comparison to that of U.S. Treasury securities.
    \738\ DTCC May 2021 White Paper, supra note 307, at 3.
---------------------------------------------------------------------------

    There are differences between the degree of central clearing in the 
cash and the repo markets. Based on 2017 data, the TMPG estimated that 
13 percent of cash U.S. Treasury securities transactions are centrally 
cleared; 68 percent are bilaterally cleared; and 19 percent involve 
hybrid clearing, in which only one leg of a transaction on an IDB 
platform is centrally cleared.\739\ A Federal Reserve staff analysis of 
primary dealer repo and reverse repo transactions during the first half 
of 2022 found ``that approximately 20 percent of all repo and 30 
percent of reverse repo is centrally cleared via FICC.'' \740\ Measured 
by dollar volume, repos, according to DTCC, are the largest component 
of the government fixed-income market.\741\ In mid-July 2021, according 
to Finadium and based on DTCC data, FICC processed $1.15 trillion in 
repo, or roughly 25 percent of the $4.4 trillion U.S. repo market at 
that time.\742\ For all of 2022, DTCC reported that FICC processed $235 
trillion through its GCF Repo Service.\743\
---------------------------------------------------------------------------

    \739\ See 2021 IAWG Report, supra note 4, at 30; see also TMPG 
White Paper, supra note 13, at 12.
    \740\ See Sebastian Infante et al., supra note 75 (``Form FR2004 
data only cover activities of primary dealers. Therefore, any 
estimate based on that data is likely to underestimate the total 
size of the repo market. Discussions with market participants 
suggest that the nonprimary dealer's market share is smaller than 
that attributed to the primary dealers, but growing.''). The authors 
also show that all cleared bilateral repo and reverse repo have U.S. 
Treasury securities and TIPS as collateral (the authors' Figure 4); 
Viktoria Baklanova, Adam Copeland, and Rebecca McCaughrin, Reference 
Guide to U.S. Repo and Securities Lending Markets, N.Y. Fed. Staff 
Report No. 740, at 11 (rev. Dec. 2015), available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf.
    \741\ DTCC, A Guide to Clearance and Settlement, Chapter 8: 
Settling Debt Instruments, available at https://www.dtcc.com/clearance-settlement-guide/#/chapterEight (last visited Dec. 12, 
2023).
    \742\ Finadium, Building Out Industry Data for New Industry 
Needs 9 (2021), available at https://finadium.com/wp-content/pdfs/finadium-dtcc-building-out-repo-data.pdf.
    \743\ DTCC 2022 Annual Report, supra note 737, at 44.
---------------------------------------------------------------------------

b. Direct Participants at U.S. Treasury Securities CCAs: FICC Netting 
Members
    The requirement to clear eligible secondary market transactions 
would directly affect market participants that are direct participants 
in a U.S. Treasury securities CCA, which currently means only direct 
participants at FICC's GSD. FICC direct participants are also referred 
to as FICC Netting Members. As previously discussed, FICC Netting 
Members are the only FICC members eligible to become a counterparty to 
FICC to a U.S. Treasury securities transaction, including repo and 
reverse repo trades. As of August 14, 2023, FICC's GSD had 208 Netting 
Members of which 192 were participants in FICC's repo netting 
service.\744\ FICC Netting Members generally consist of bank-affiliated 
dealers and registered broker-dealers. These dealers include all 24 
financial institutions currently designated by the Federal Reserve Bank 
of New York (N.Y. Fed) as ``primary dealers.'' \745\ In 2022, the 
average daily trading dollar value in U.S. Treasury securities by 
primary dealers was $614.3 billion.\746\ The relative significance of 
dealer trading in the cash market for U.S. Treasury securities is shown 
in Figure 8.
---------------------------------------------------------------------------

    \744\ DTCC, FICC GSD Member Directory (Oct. 31, 2023), available 
at https://www.dtcc.com/-/media/Files/Downloads/client-center/FICC/Mem-GOV-by-name.xlsx (107 Netting Members participated in FICC's GCF 
service).
    \745\ Primary dealers are counterparties to the N.Y. Fed in its 
implementation of monetary policy and expected to participate 
meaningfully in all U.S. Treasury securities auctions for new 
issuances of U.S. Treasury securities. US Dept of the Treasury, 
Primary Dealers, available at https://home.treasury.gov/policy-issues/financing-the-government/quarterly-refunding/primary-dealers. 
For a current list of primary dealers see List of Primary Dealers, 
Federal Reserve Bank of New York, available at https://www.newyorkfed.org/markets/primarydealers.
    \746\ SIFMA, 2023 Capital Markets Fact Book, at 56 (July 2023) 
available at https://www.sifma.org/wp-content/uploads/2022/07/2023-SIFMA-Capital-Markets-Factbook.pdf (SIMFA's term primary dealers 
refers to N.Y. Fed prime brokers). Id. The dollar value of trading 
in U.S. Treasury securities by primary dealers has a combined 
average annual growth rate of 1.7% for the 10-year period ending in 
2022.

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

[[Page 2793]]

[GRAPHIC] [TIFF OMITTED] TR16JA24.007

    As previously discussed, the total notional transactions amount in 
the repo market is larger than that of the cash U.S. Treasury 
securities market. In 2021, average aggregate daily primary dealer 
outstanding total repo positions were $4.3 trillion consisting of $2.5 
trillion in repo (75% of which is collateralized by U.S. Treasury 
securities) and $1.8 trillion in reverse repo (89% of which is 
collateralized by U.S. Treasury securities).\747\ As of December 31, 
2021, the repo market as a whole was valued at approximately $5.8 
trillion.\748\ Although a large portion of this activity is cleared by 
FICC, a large portion is also not centrally cleared. For 2021, DTCC 
reported that ``FICC matches, nets, settles and risk manages repo 
transactions valued at more than $3T daily.'' \749\ During the first 
half of 2022, Federal Reserve staff estimated that a ``large fraction 
of primary dealers' repo (38 percent) and reverse repo (60 percent) 
activity is in the uncleared bilateral segment.'' \750\ See Figure 9. 
Although these statistics include all collateral types, for the subset 
of the repo market that includes a primary dealer on one side, the 
Commission has more detailed data. As Figures 10 and 11 show, the vast 
majority of uncleared bilateral and triparty primary dealer repo and 
reverse repo collateral consists of U.S. Treasury securities (including 
TIPS). The largest remaining components of repo (approximately 40 
percent) and reverse repo activity (approximately 8 percent) are not 
centrally cleared but settle on the triparty platform.\751\ This is 
labeled ``Tri-Party (excluding GCF)'' in Figure 9, and the degree to 
which Treasury collateral is used in these transactions is displayed in 
Figure 11. The final and by far the smallest component of repo and 
reverse repo activity (amounting to about 2% of activity) is triparty 
repo using FICC's Sponsored GC service.\752\
---------------------------------------------------------------------------

    \747\ SIFMA Research, US Repo Markets: A Chart Book, at 6, 7, 
and 8 (Feb. 2022), available at https://www.sifma.org/wp-content/uploads/2022/02/SIFMA-Research-US-Repo-Markets-Chart-Book-2022.pdf. 
Because these are figures for primary dealer repo and reverse repo, 
they need not be equal. In the aggregate, however, repo must equal 
reverse repo.
    \748\ The Financial Accounts of the United States, L.207, line 1 
(Federal Funds and Security Repurchase Agreements) available at 
https://www.federalreserve.gov/releases/z1/20220310/html/l207.htm. 
This number includes federal funds and security repurchase 
agreements (for all collateral types). Federal funds outstanding on 
Dec. 31, 2021, was $49B. Effective Federal Funds Rate, Federal 
Reserve Bank of New York, available at https://www.newyorkfed.org/markets/reference-rates/effr. The comparable figures for Dec. 31, 
2022, were $6.6T and $67B. The Financial Accounts of the United 
States, L.207, line 1 (Federal Funds and Security Repurchase 
Agreements), available at https://www.federalreserve.gov/releases/z1/20230608/html/l207.htm and Effective Federal Funds Rate, Federal 
Reserve Bank of New York, available at https://www.newyorkfed.org/markets/reference-rates/effr.
    \749\ DTCC 2021 Annual Report, supra note 737, at 32.
    \750\ Sebastian Infante et al., supra note 75.
    \751\ While the concentration among the top three dealers in the 
U.S. Treasury securities (excluding Strips) tri-party repo market 
ranged between 22% and 50% between 2011 and 2020, between Jan. 2021 
and Nov. 2022, the percentage of the volume in this market 
attributable to the top three dealers grew from 33.8 percent to 
77.6% before falling to 67.7% by July 2023. NY Fed, Data & 
Statistics, Visualization Tri-Party/GCF Repo, available at https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo/index.html-interactive/concentration.
    \752\ Id.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 2794]]

[GRAPHIC] [TIFF OMITTED] TR16JA24.008

[GRAPHIC] [TIFF OMITTED] TR16JA24.009

[GRAPHIC] [TIFF OMITTED] TR16JA24.010


[[Page 2795]]


BILLING CODE 8011-01-C
c. Interdealer Brokers
    Interdealer brokers \753\ and the trading platforms they operate 
play a significant role in the markets for U.S. Treasury securities. As 
previously discussed, an IDB will generally provide a trading facility 
for multiple buyers and sellers for U.S. Treasury securities to enter 
orders at specified prices and sizes and have these orders displayed 
anonymously to all users. When a trade is executed, the IDB then books 
two trades, with the IDB functioning as the principal to each 
respective counterparty, thereby protecting the anonymity of each 
party, but taking on credit risk from each of them. Although there is 
no legal requirement for an IDB to be a FICC direct participant/Netting 
Member, most IDBs are FICC Netting Members.\754\ Under FICC's existing 
rules, if an IDB's customer in a U.S. Treasury security transaction is 
not a FICC member, the IDB's transaction with that customer need not be 
centrally cleared and may be bilaterally cleared. As discussed in the 
Proposing Release and in parts II.A.1 and II.A.2.b.ii infra, each 
transaction at an IDB is split into two pieces: a leg between the buyer 
and the IDB and a leg between the IDB and the seller.\755\ If the buyer 
or seller is a dealer, the respective leg is centrally cleared. 
Transaction legs involving PTFs are generally not cleared and settled 
bilaterally.
---------------------------------------------------------------------------

    \753\ As noted previously, IDB is not used to encompass 
platforms that provide voice-based or other non-anonymous methods of 
bringing together buyers and sellers of U.S. Treasury securities. 
IDB instead refers to electronic platforms providing anonymous 
methods of bringing together buyers and sellers.
    \754\ See generally TMPG White Paper, supra note 13. The TMPG 
White Paper assumes throughout that IDBs are CCP direct members 
(e.g., ``More specifically, the IDB platforms themselves and a 
number of platform participants continue to clear and settle through 
the CCP.'' Id. at 2).
    \755\ See supra note 14, 87 FR at 64615.
---------------------------------------------------------------------------

    TMPG estimates that ``roughly three-quarters of IDB trades clear 
bilaterally.'' \756\ To help visualize the significance of the role 
played by IDBs in the centrally cleared market, and given existing data 
limitations, Table 3, adapted from a table prepared by the TMPG in 
2019, presents five clearing and settlement case types that cover the 
vast majority of secondary market cash trades. The table uses Federal 
Reserve data collected from primary dealers in the first half of 2017 
to estimate the daily volume (dollar and share percentage) attributable 
to each clearing and settlement case type.
---------------------------------------------------------------------------

    \756\ TMPG White Paper, supra note 13, at 2.

Table 3--Estimated Secondary Cash Market Primary Dealer Daily Trading Dollar (Billions) and Percentage Volume by
                                          Clearing and Settlement Type
----------------------------------------------------------------------------------------------------------------
                                                     $ Volume                                         Overall
          Clearing and settlement type               billions      Non-IDB share     IDB share      percentage
----------------------------------------------------------------------------------------------------------------
Bilateral clearing, no IDB......................            $289             95%  ..............            54.3
Central clearing, no IDB........................              15              5%  ..............             2.9
Central clearing, with IDB......................              52  ..............           22.9%             9.8
Bilateral clearing, with IDB....................              73  ..............           31.9%            13.6
Bilateral/central clearing, with IDB............             103  ..............           45.3%            19.4
                                                 ---------------------------------------------------------------
    Totals:.....................................             531    $304 (57.2%)    $228 (42.8%)             100
----------------------------------------------------------------------------------------------------------------
Source: TMPG White Paper, supra note 13, adapted from a table at p. 12.
Table 3 Notes: Figures are estimated using the Federal Reserves' Form FR2004 data for the first half of 2017 and
  are based on the following assumptions: a) primary dealers account for all dealer activity, b) 5% of dealers'
  trading not through an IDB is with another dealer, c) the shares of dealer and non-dealer activity in the IDB
  market for coupon securities equal the weighted averages of the shares reported in the Oct. 15 report (that
  is, 41.5% and 58.5%, respectively), d) only dealers trade bills, FRNs, and TIPS in the IDB market, and e) the
  likelihood of dealer and non-dealers trading with one another in the IDB market solely reflects their shares
  of overall volume. The table presents estimates because precise information is not available on the size of
  the market or on how activity breaks down by the method of clearing and settlement.

d. Other Market Participants
    As discussed previously, FICC netting members are generally 
registered broker-dealers or banks. Some institutional participants 
that are not FICC Netting Members/FICC direct participants are able to 
centrally clear repos through FICC's Sponsored Service.\757\
---------------------------------------------------------------------------

    \757\ FICC's Sponsored Member program also allows the submission 
of cash transactions; however, as previously noted, the service is 
generally used only for U.S. Treasury repo transactions at this 
time.
---------------------------------------------------------------------------

    In addition to Sponsored Members, various types of direct and 
indirect market participants hold significant amounts of U.S. Treasury 
securities and repo, and potentially purchase and sell U.S. Treasury 
securities in the secondary cash and repo markets. To the extent that 
these persons engage in secondary market transactions, we expect their 
trading may be affected by increased central clearing resulting from 
the adoption of the requirement to clear eligible secondary market 
transactions.
    Other key market participants, some of which are direct 
participants and some of which are sponsored members that may be 
affected by the rule include:
i. Broker-Dealers That Are Not Direct Participants/FICC Netting Members
    Broker-dealers perform a number of functions in the U.S. securities 
markets including making markets in securities, brokering securities 
transactions, dealing securities, executing securities transactions, 
clearing and settling securities transactions, and maintaining custody 
of securities for investors. Some broker-dealers may perform multiple 
functions whereas others may perform a single function.\758\
---------------------------------------------------------------------------

    \758\ Using Form BD data from Sept. 2022, the Commission has 
previously stated that 27% of Form BD filers are U.S. Government 
Securities Brokers and 10% are U.S. Government Securities Dealers. 
See Cybersecurity Risk Management Rule for Broker-Dealers, Clearing 
Agencies, Major Security-Based Swap Participants, the Municipal 
Securities Rulemaking Board, National Securities Associations, 
National Securities Exchanges, Security-Based Swap Data 
Repositories, Security-Based Swap Dealers, and Transfer Agents, 
Exchange Act Release No. 97142 (Oct. 25, 2022) 87 FR 64610, at 
64650-1.
---------------------------------------------------------------------------

    Based on 2022 annual FOCUS filings, third quarter 2023 FOCUS 
filings, and FICC list of netting members,\759\ there are 3,215 broker-
dealers that are not also FICC netting members. Broker-dealers that are 
not FICC netting members are typically much smaller than those that 
are. Average assets of all broker-dealers is approximately $2.4 billion 
while the average of non-FICC netting member broker-dealers is 
approximately $276 million.
---------------------------------------------------------------------------

    \759\ See supra note 744.
---------------------------------------------------------------------------

ii. Hedge Funds, Family Offices, and Separately Managed Accounts
    Hedge funds are active participants in the secondary market for 
U.S. Treasury

[[Page 2796]]

securities and their trading activities may be a cause of price 
movements in the U.S. Treasury securities market.\760\ Hedge funds can 
use U.S. Treasury securities, for example, in order to borrow cash 
(i.e., sell repo) to take leveraged positions in other markets, or to 
execute trading strategies. As of December 31, 2022, approximately 21 
percent of Form PF filers \761\ that are qualifying hedge funds 
reported U.S. Treasury securities holdings totaling $1.70 trillion in 
notional exposure in the cash market and $2.13 trillion in notional 
exposure to repos.\762\
---------------------------------------------------------------------------

    \760\ Ron Alquist & Ram Yamarthy, Hedge Funds and Treasury 
Market Price Impact: Evidence from Direct Exposures (OFR working 
paper 22-05, Aug. 23, 2022) (``find[ing] economically significant 
and consistent evidence that changes in aggregate hedge fund 
[Treasury] exposures are related to Treasury yield changes [and] . . 
. that particular strategy groups and lower-levered hedge funds 
display a larger estimated price impact on Treasuries.''), available 
at https://www.financialresearch.gov/working-papers/files/OFRwp-22-05-hedge-funds-and-treasury-market-price-impact.pdf. See also note 
720, supra.
    \761\ Qualifying hedge funds refers to those hedge funds that 
have a net asset value (individually or in combination with any 
feeder funds, parallel funds and/or dependent parallel managed 
accounts) of at least $500 million as of the last day of any month 
in the fiscal quarter immediately preceding its most recently 
completed fiscal quarter. See Form PF (Glossary of Terms). Although 
the Proposal would cover any hedge fund, smaller funds' holdings are 
not reflected in these statistics because of Form PF's minimum $150 
million reporting threshold. An adviser must file Form PF if (1) it 
is registered (or required to register) with the Commission as an 
investment adviser, including if it also is registered (or required 
to register) with CFTC as a commodity pool operator or commodity 
trading adviser, (2) it manages one or more private funds, and (3) 
the adviser and its related persons, collectively had at least $150 
million in private fund assets under management as of the last day 
of its most recently completed fiscal year. See Form PF General 
Instruction No. 1, available at https://www.sec.gov/files/formpf.pdf.
    \762\ Division of Investment Management Analytics Office, 
Private Funds Statistics Fourth Calendar Quarter 2022, Table 46 at 
39 (July 22, 2022), available at https://www.sec.gov/files/investment/private-funds-statistics-2022-q4-accessible.pdf.
---------------------------------------------------------------------------

    Family offices are entities established by families to manage 
family wealth.\763\ A recent survey of family offices \764\ found that 
of 385 participating family offices around the world, almost half (46%) 
are based in North America. Average family office AUM for North 
American families was $1 billion.
---------------------------------------------------------------------------

    \763\ ``Historically, most family offices have not been 
registered as investment advisers under the Advisers Act because of 
the `private adviser exemption' provided under the Advisers Act to 
firms that advice fewer than fifteen clients and meet certain other 
conditions.'' SEC Staff, Family Office: A Small Entity Compliance 
Guide (Nov. 21, 2011), available at https://www.sec.gov/rules/final/2011/ia-3220-secg.htm.
    \764\ Campden Wealth & The Royal Bank of Canada, The North 
America Family Office Report 2021, available at https://www.rbcwealthmanagement.com/_assets/documents/cmp/the-north-america-family-office-report-2021-final-ua.pdf.
---------------------------------------------------------------------------

    Similarly, Separately Managed Accounts (SMAs) are also portfolios 
of assets managed by an investment adviser, usually targeted towards 
institutional investors and wealthy individual investors. Because of 
the end investor's risk tolerance, SMAs can also pursue high-risk, 
leveraged strategies.
iii. Registered Investment Companies (RICs) Including Money Market 
Funds, Other Mutual Funds, and ETFs
    RICs, mainly money market funds, mutual funds, and ETFs, are large 
holders of U.S. Treasury securities.\765\ At the end of the first 
quarter of 2023, money market funds held $1.0 trillion of U.S. Treasury 
securities ($185 billion in T-Bills and $856 billion in other U.S. 
Treasury securities).\766\ Mutual funds held an additional $1.4 
trillion of other U.S. Treasury securities ($14 billion of T-Bills and 
$1.4 trillion of other U.S. Treasury securities) while exchange-traded 
funds held an additional $452.4 billion in U.S. Treasury 
securities.\767\ The degree to which these entities would be affected 
depends on the extent to which their trading is likely to take place in 
the secondary market.\768\
---------------------------------------------------------------------------

    \765\ As of Mar. 2022, investment companies were the third 
largest holder of U.S. Treasury securities holding just under $3.6 
trillion. Viktoria Baklanova, Isaac Kuznits, Trevor Tatum, Money 
Market Funds in the Treasury Market (Sept. 1, 2022), available at 
https://www.sec.gov/files/mmfs-treasury-market-090122.pdf (``MMFs in 
the Treasury Market''), at 3 (citing to Financial Accounts of the 
United States as of Mar. 2022). The other large (over 5%) holders 
are: ``other'' holders (including hedge funds) 30%, the Federal 
Reserve (23 percent), pension funds (14%), and U.S. banks and state 
and local governments (each holding 6%). See id. at 2 (figure 5).
    \766\ Federal Reserve Statistical Release, Z.1 Financial 
Accounts of the U.S, Flow of Funds, Balance Sheets, and Integrated 
Macroeconomic Accounts, at 119 (L210 Treasury Securities--lines 42-
49) (``Financial Accounts of the U.S.''), available at https://www.federalreserve.gov/releases/z1/20220609/z1.pdf.
    \767\ Id. at 119 (L210 Treasury Securities--lines 45-47 and 49). 
Filings of Form N-MFP by money market funds show that, as of May 31, 
2023, these funds invested approximately $2.8 trillion in Treasury 
repos. In addition, mutual funds invested $27 billion in repurchase 
agreements, including those backed by Treasury securities. See supra 
note 118 and referencing text.
    \768\ For example, an analysis of money market fund portfolios' 
turnover of U.S. Treasury securities by the Commission staff 
indicates only limited secondary market trading activity. Estimates 
based on monthly filings of Form N-MFP suggest that, on average, 
money market funds hold around 70% of U.S. Treasury securities to 
the next month with around 6% of U.S. Treasury securities holdings 
disposed of before maturity. The remaining approximately 23% of 
holdings mature during the month. MMFs in the Treasury Market, supra 
note 765, at 3. These estimates suggest that the final rule's effect 
on money market fund cash market transactions in U.S. Treasury 
securities will be very limited relative the final rule's effects on 
money market funds' repo activities which could be more significant.
---------------------------------------------------------------------------

    RICs are also active participants in the repo market with money 
market funds being active cash investors in U.S. Treasury repo. 
According to data filed with the Commission, money market funds' 
investments in U.S. Treasury repo, both bilateral and triparty, 
amounted to approximately $2.46 trillion in June 2023. Moreover, as 
shown in Figure 12, money market fund U.S. Treasury repo volume has 
grown from approximately $200 billion monthly in 2011 with the vast 
majority of the most recent year's growth attributed to investments in 
the Federal Reserve's repo facility.\769\
---------------------------------------------------------------------------

    \769\ Id. at 4. The Commission understands the credit rating 
agencies consider concentration of counterparty credit risk as one 
factor in determining their rating of money market funds which may 
drive money market funds to seek diversification of counterparties 
for the repo transactions.

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

[[Page 2797]]

[GRAPHIC] [TIFF OMITTED] TR16JA24.011

    For RICs, holdings of U.S. Treasury securities play an important 
role in managing liquidity risk stemming from potential redemptions. 
Given their highly liquid nature, U.S. Treasury securities can be used 
to raise cash to meet redemptions. For example, a survey conducted by 
an industry group showed that in the first quarter of 2020 mutual funds 
had net sales of $128 billion in Treasury and agency bonds, mainly to 
meet redemption requests at the onset of the Covid-19 pandemic.\770\
---------------------------------------------------------------------------

    \770\ See Shelly Antoniewicz & Sean Collins, Setting the Record 
Straight on Bond Mutual Funds' Sales of Treasuries, ICI Viewpoints 
(Feb. 24, 2022), available at https://www.ici.org/viewpoints/22-view-bondfund-survey-2.
---------------------------------------------------------------------------

    In addition to reliance on Treasury securities as sources of 
liquidity, RICs use Treasury securities as another source of liquidity 
by selling repo. Also, RICs accept Treasury securities as collateral in 
their securities lending programs established as an additional source 
of income for the fund shareholders. In July of 2023, the Commission 
adopted amendments to certain rules that govern money market funds, 
that among other things, increased daily and weekly liquid asset 
minimums.\771\ As direct obligations of the U.S. Government, including 
U.S. Treasury securities, are included in the definition of both daily 
and weekly liquid assets,\772\ to the extent that money market funds 
currently fall below the minimums, their holdings of U.S. Treasuries 
may increase.
---------------------------------------------------------------------------

    \771\ See Money Market Fund Reforms; Form PF Reporting 
Requirements for Large Liquidity Fund Advisers; Technical Amendments 
to Form N-CSR and Form N-1A, Investment Advisors Act Release No. 
6344 (Aug. 3, 2023), 88 FR 51404 (``Money Market Reforms Adopting 
Release'').
    \772\ See supra note 771, at 51431.
---------------------------------------------------------------------------

iv. Principal Trading Firms (PTFs)
    The role and importance of PTFs providing liquidity in the U.S. 
Treasury securities market have been the subject of a number of 
analyses and reports in recent years.\773\ For example, using FINRA's 
Regulatory TRACE data in connection with a recent rulemaking proposal, 
we identified 174 market participants who were active in the U.S. 
Treasury securities market in July 2021 and were not members of 
FINRA.774 775 We ``found that these participants accounted 
for approximately 19 percent

[[Page 2798]]

of the aggregate U.S. Treasury security trading volume, with PTFs 
representing the highest volumes of trading among these participants.'' 
\776\ We explained that in our analysis:
---------------------------------------------------------------------------

    \773\ See, e.g., G-30 Report, supra note 5, at 1; Joint Staff 
Report, supra note 4, at 3-4, 36, 55 (``PTFs now account for more 
than half of the trading activity in the futures and electronically 
brokered interdealer cash markets.''); Harkrader and Puglia FEDS 
Notes, supra note 641; Doug Brain, Michiel De Pooter, Dobrislav 
Dobrev, Michael Fleming, Pete Johansson, Collin Jones, Frank Keane, 
Michael Puglia, Liza Reiderman, Tony Rodrigues, and Or Shachar, 
Unlocking the Treasury Market Through TRACE (FEDS Notes, Sept. 28, 
2018), available at https://www.federalreserve.gov/econres/notes/feds-notes/unlocking-the-treasury-market-through-trace-20180928.htm. 
See also Peter Ryan and Robert Toomey, Improving Capacity and 
Resiliency in US Treasury Markets: Part III (Nov. 15, 2021), 
available at https://www.sifma.org/resources/news/improving-capacity-and-resiliency-in-us-treasury-markets-part-3/. (While in 
the interdealer cash market, U.S. Treasury securities are often 
cleared and settled through FICC, ``dealer trades with principal 
trading firms (``PTFs'')--a very large share of this market--are 
generally cleared bilaterally because most PTFs are not members of 
the FICC.''). See also 2021 IAWG Report, supra note 4, at 21 (``on 
February 25, 2021, a large shift in investor sentiment triggered 
very high trading volumes [ ] that temporarily overwhelmed the 
intermediation capacity of the Treasury market. Some market 
participants observed that the stresses on February 25, 2021, were 
exacerbated by lack of elasticity in liquidity supply resulting from 
activity limits that IDB platforms impose on some firms, especially 
PTFs that do not participate in central clearing.'').
    \774\ Further Definition of ``As a Part of a Regular Business'' 
in the Definition of Dealer and Government Securities Dealer, 
Exchange Act Rel. No. 94524 (Mar. 28, 2022), 87 FR 23054, 23072, and 
23080 (Apr. 18, 2022) (``Because regulatory TRACE data pertaining to 
Treasury securities reported by certain ATSs contains the identity 
of non-FINRA member trading parties, we are able to analyze PTFs' 
importance in the U.S. Treasury market during July 2021 and 
summarize the number and type of market participants by monthly 
trading volume . . . .''). ``Although FNRA membership is not 
synonymous with dealer registration status, the Commission believes 
that many of the market participants who are not FINRA members are 
also likely not registered as government securities dealers.'' Id. 
at 23072 n. 167.
    \775\ In Aug. 2023, the SEC adopted amendments to an exemption 
from the requirement for certain broker-dealers to join a national 
securities association. The amendments will, among other effects, 
enhance the oversight of participants in Treasury markets and the 
transparency of the market by requiring certain broker-dealers 
significantly involved in the proprietary trading of Treasury 
securities to become FINRA members and report their Treasury 
transactions to TRACE. See Exemption for Certain Exchange Members, 
Exchange Act Release No. 98202 (Sept. 7, 2023), 88 FR 61850 
(``Exemption for Certain Exchange Members Release'').
    \776\ Id. at 23072.

    PTFs had by far the highest volumes among identified non-FINRA 
member participants in the U.S. Treasury market, and the largest 
PTFs had trading volumes that were roughly comparable to the volumes 
of the largest dealers. A Federal Reserve staff analysis found that 
PTFs were particularly active in the interdealer segment of the U.S. 
Treasury market in 2019, accounting for 61 percent of the volume on 
[electronic] interdealer broker platforms. . . .\777\
---------------------------------------------------------------------------

    \777\ Id. at 23080. Harkrader and Puglia FEDS Notes, supra note 
641. See also Doug Brain et al. supra note 773. Harkrader and Puglia 
used FINRA TRACE data on the trading volume shares of different 
participant types on IDB platforms for nominal coupon securities 
from April 1, 2019, to Dec. 31, 2019. They identified $191 billion 
of average daily dollar volume on electronic/automated IDB platforms 
during the period. They also noted data limitations, which they 
estimated amounted to ``a very small fraction of total activity.'' 
Id.

Based on this Federal Reserve study and assuming that all PTFs are not 
FICC members and that PTF trading on IDB electronic platforms during 
the final three quarters 2019 was a reasonable proxy for the average 
daily current volume of such trading today by PTFs, the requirement to 
clear eligible secondary market transactions would subject as much as 
approximately $116.51 billion per day in PTF trades on electronic/
automated IDBs to central clearing.\778\
---------------------------------------------------------------------------

    \778\ Harkrader and Puglia FEDS Notes, supra note 641, at table 
1 (61% of $191 billion = $116.51 billion).
---------------------------------------------------------------------------

v. State and Local Governments
    According to the United States Census Bureau's 2017 Census of 
Governments data, there were over 90,000 local governments in the 
United States, including county, city, municipality, township, and 
special purpose governments as well as nearly 13,000 independent school 
district governments.\779\ These state and local governments are 
significant holders of U.S. Treasury securities. As of March 2023, 
state and local governments held approximately $1.6 trillion in U.S. 
Treasury securities \780\ as part of their budgetary and short-term 
investment duties.
---------------------------------------------------------------------------

    \779\ 2017 Census of Governments--Organization, Table 2: Local 
Governments by Type and State: 2017 & Table 9: Public School System 
by Types of Organization and State: 2017, U.S. Census Bureau, 
https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
    \780\ Financial Accounts of the U.S., supra note 766 (Line 19).
---------------------------------------------------------------------------

vi. Private Pensions Funds and Insurance Companies.
    Insurance companies and pension funds also have significant 
positions in U.S. Treasury securities. As of March 2023, private 
pension funds and insurance companies are large holders of U.S. 
Treasury securities, holding $479.3 billion and $405.9 billion 
respectively.\781\
---------------------------------------------------------------------------

    \781\ Id. (Lines 29, 32, and 35).
---------------------------------------------------------------------------

e. Triparty Agent: Bank of New York Mellon \782\
---------------------------------------------------------------------------

    \782\ Paddrik et al., supra note 631(``The Federal Reserve 
Board, through the Federal Reserve Bank of New York (FRBNY), 
supervises triparty custodian banks and, on a mandatory basis 
pursuant to its supervisory authority, collects transaction-level 
data at the daily frequency.'').
---------------------------------------------------------------------------

    Although triparty repo transactions are bilaterally negotiated, 
they are settled through BNY Mellon, which currently plays a central 
role in the triparty repo market as the sole triparty agent.\783\ 
Besides providing collateral valuation, margining, and management 
services, BNY Mellon also provides back-office support to both parties 
by settling transactions on its books and confirming that the terms of 
the repo are met. Additionally, the clearing bank acts as custodian for 
the securities held as collateral and allocates collateral to trades at 
the close of the business day. As discussed previously, FICC recently 
introduced the Sponsored GC Service that extends FICC's GCF repo 
service to allow for the clearing of triparty repo.\784\
---------------------------------------------------------------------------

    \783\ J.P. Morgan Chase previously served as a custodian in the 
triparty space but largely exited the market in 2019. Id. at 2-3.
    \784\ Exchange Act Release No. 92808 (Aug. 30, 2021), 86 FR 
49580 (Sept. 3, 2021). Currently, the Bank of New York Mellon 
operates the triparty platform that facilitates trades conducted via 
the GCF Repo Service and Sponsored GC Service.
---------------------------------------------------------------------------

    An expansion of central clearing under the requirement to clear 
eligible secondary market transactions could affect BNY Mellon's 
triparty business. It is, however, unclear whether increased central 
clearing would increase or decrease the amount of repo traded that 
makes use of triparty agent's services previously described.
f. Custodian Banks/Fedwire Securities Service (FSS)
    Currently, custodian banks handle much of the trading activity for 
long-only buy-side clients in the U.S. Treasury securities cash and 
repo markets. When an asset buyer and seller engage bilaterally as 
principals in a collateralized securities transaction, a repo for 
example, a custodian bank will often provide various services to 
support the transaction. Custodian services include transaction 
settlement verification, verifying the amount of the relevant credit 
exposure, calculating required initial and variation margin, and making 
margin calls. In a triparty repo transaction that is not centrally 
cleared, a custodian performs a clearing function by settling the 
transaction on its own books without a corresponding transfer of 
securities on the books of a central securities depository.\785\
---------------------------------------------------------------------------

    \785\ The Clearing House, The Custody Services of Banks (July 
2016), available at https://www.davispolk.com/sites/default/files/20160728_tch_white_paper_the_custody_services_of_banks.pdf.
---------------------------------------------------------------------------

    FSS, operated by the Federal Reserve Bank system, provides 
issuance, maintenance, transfer and settlement services for all 
marketable U.S. Treasury securities to its 3,800 participants.\786\ For 
example, FSS offers the ability to transfer securities and funds to 
settle secondary-market trades, to facilitate the pledging of 
collateral used to secure obligations, and to facilitate repo 
transactions.\787\
---------------------------------------------------------------------------

    \786\ See Fedwire Securities Service (``FSS brochure''), 
FRBservices.org, https://www.frbservices.org/binaries/content/assets/crsocms/financial-services/securities/securities-product-sheet.pdf. The Federal Reserve Banks offer highly competitive 
transaction, per-issue and monthly maintenance prices. Account 
maintenance fees are waived for accounts holding only U.S. Treasury 
securities and for certain accounts used to pledge securities to the 
U.S. Treasury and Federal Reserve Banks. Fees for services are set 
by the Federal Reserve Banks. See Fedwire Securities Service 2023 
Fee Schedules, FRBservices.org, https://www.frbservices.org/resources/fees/securities-2023.
    \787\ FSS brochure, supra note 786.
---------------------------------------------------------------------------

C. Analysis of Benefits, Costs, and Impact on Efficiency, Competition, 
and Capital Formation

1. Benefits
    The amendments being adopted will likely yield benefits associated 
with increased levels of central clearing in the secondary market for 
U.S. Treasury securities. The Commission previously has stated that 
``the centralization of clearance and settlement activities at covered 
clearing agencies allows market participants to reduce costs, increase 
operational efficiency, and manage risks more effectively.'' \788\ 
These benefits could be particularly significant in times of market 
stress, as CCPs will mitigate the potential for a single market 
participant's failure to destabilize other market participants, 
destabilize the financial system more broadly, and/or reduce the 
effects of misinformation and rumors.\789\ A CCP also will address 
concerns about counterparty risk by substituting the creditworthiness 
and

[[Page 2799]]

liquidity of the CCP for the creditworthiness and liquidity of 
counterparties.\790\ However, the Commission has also recognized that 
this centralization of activity at clearing agencies makes risk 
management at such entities a critical function.\791\
---------------------------------------------------------------------------

    \788\ See CCA Standards Proposing Release, supra note 8, 79 FR 
at 29587.
    \789\ See, e.g., Liffe Order, supra note 7, 74 FR at 140.
    \790\ Id.
    \791\ Id.
---------------------------------------------------------------------------

    Commenter(s) agreed that certain benefits of increased central 
clearing--increasing liquidity, resilience, and intermediation 
capacity--exist but disagree that these benefits have been 
``sufficiently proven'' to outweigh the potential costs.\792\ As 
discussed in part IV.A, supra, improvements to market resilience imply 
potentially large expected benefits as the cost of financial market 
crises can be high. As discussed in part IV.C.2, infra, the Commission 
acknowledges the costs associated with the rule but believes that some 
of the costs incurred by market participants are commensurate with the 
risks and particular attributes of the market participants' 
transactions. It further believes that the overall benefits of 
increased clearing U.S. Treasury Securities transactions discussed 
below, including improvements to market resiliency, justify the costs.
---------------------------------------------------------------------------

    \792\ SIFMA/IIB Letter, supra note 37, at 1-2.
---------------------------------------------------------------------------

    Bilateral clearing arrangements do not allow for multilateral 
netting of obligations, which reduce end-of-day settlement 
obligations.\793\ Larger gross settlement obligations, which increase 
with leverage, increase operational risks and subsequently the 
possibility of settlement fails. Central clearing of transactions nets 
down gross exposures across participants, which reduces firms' 
exposures while positions are open, and typically reduces the magnitude 
of cash and securities flows required at settlement.\794\ These 
reductions, particularly in cash and securities flow ``would reduce 
liquidity risks associated with those settlements and counterparty 
credit risks associated with failures to deliver on the contractual 
settlement date,'' not only for CCP members but for the CCP 
itself.\795\
---------------------------------------------------------------------------

    \793\ See part IV.A supra for a discussion of central clearing 
and the mitigation of clearance and settlement risks. However, 
bilateral clearing does allow for balance sheet netting under 
certain conditions and for margining of net positions that may 
include multiple asset classes.
    \794\ See 2021 IAWG Report, supra note 4, at 30.
    \795\ See G-30 Report, supra note 5; see also PIFS Paper, supra 
note 76 at 28-31.
---------------------------------------------------------------------------

    It has been suggested that wider central clearing could have 
lowered dealers' daily settlement obligations in the cash market by up 
to 60 percent in the run-up to and aftermath of the March 2020 U.S. 
Treasury securities market disruption and reduced settlement 
obligations by up to 70 percent during the disruption itself.\796\ The 
reduction in exposure is not limited to the cash market; it has been 
estimated that the introduction of central clearing for dealer-to-
client repos would have reduced dealer exposures from U.S. Treasury 
repos by over 80% (from $66.5 billion to $12.8 billion) in 2015.\797\
---------------------------------------------------------------------------

    \796\ Id. See also Michael Fleming & Frank Keane, Netting 
Efficiencies of Marketwide Central Clearing (Staff Report No. Staff 
Report No. 964), Federal Reserve Bank Of New York (Apr. 2021) 
(``Fleming & Keane (2021''), available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr964.pdf.
    \797\ PIFS Paper, supra note 76, at 29 (citing OFFICE OF 
FINANCIAL RESEARCH, Benefits and Risks of Central Clearing in the 
Repo Market, 5-6 (Mar. 9, 2017) (``2017 OFR Report''), available at 
https://www.financialresearch.gov/briefs/files/OFRBr_2017_04_CCP-for-Repos.pdf).
---------------------------------------------------------------------------

    The benefits of multilateral netting flowing from central clearing 
can improve market safety by lowering exposure to settlement 
failures.\798\ Multilateral netting can also reduce the regulatory 
capital required to support a given level of intermediation activity 
\799\ and could also enhance capacity to make markets during normal 
times and stress events because existing bank capital and leverage 
requirements recognize the risk-reducing effects of multilateral 
netting of trades that CCP clearing accomplishes.\800\ By reducing the 
level of margin required to support a given total level of trading 
activity, central clearing may reduce total risk to the system. 
Financial crises are sometimes precipitated by margin calls following a 
period of increased volatility. If a market participant holds 
offsetting positions, then margin calls that might occur could be 
avoided. Because financial markets are forward-looking, reducing the 
anticipation of margin calls on other market participants can avoid 
costly ``bank-run'' type dynamics.\801\
---------------------------------------------------------------------------

    \798\ Duffie, supra note 27, at 15.
    \799\ See part IV.A supra for an example of how multilateral 
netting can reduce margin required to support a given level of 
trading activity.
    \800\ See 2021 IAWG Report, supra note 4, at 30; Liang & 
Parkinson, supra note 725, at 9; Duffie, supra note 27, at 16-17. It 
is important to note that this netting may offset any potentially 
higher liquidity charges faced by major participants from clearing 
at the CCP. See Duffie, supra note 27, at 17 (``To the contrary, the 
netting of most purchases against sales at a CCP would lower the 
overall liquidity requirements of dealers, assuming that dealers 
continue to intermediate the market effectively.'').
    \801\ See Menkveld and Vuillemey supra note 568.
---------------------------------------------------------------------------

    Some benefits associated with capital reductions are particularly 
relevant for overnight and term repo. In the case of financing activity 
in U.S. Treasury securities market--U.S. Treasury repo--the entire 
notional value of the position has to be recorded on a dealer's balance 
sheet as soon as the start leg of the repo settles, and unless the 
dealer faces the same legal counterparty with respect to an offsetting 
financing trade of the same tenor, the dealer will not be able to net 
such balance sheet impact against any other position. The grossing up 
of the dealer's balance sheet in this manner can have implications with 
respect to the amount of capital the dealer is required to reserve 
against such activity. When transactions are cleared through a CCP, 
dealers can offset their centrally cleared repo positions of the same 
tenor, and thereby free up their capital to increase funding capacity 
to the market.\802\ According to research that Finadium conducted among 
repo dealers, netting can compress High Quality Liquid Asset (HQLA) 
bilateral trading books by 60% to 80%.\803\
---------------------------------------------------------------------------

    \802\ The positive impact on dealer's ability to increase 
funding capacity will be offset, in part, by the direct and indirect 
costs of central clearing. See id. and part IV.C.2 infra. One 
commenter, although not supporting all aspects of the requirement to 
clear eligible secondary market transaction, agreed that a clearing 
mandate applied to bilateral repo transactions would be beneficial, 
pointing to the balance sheet efficiency resulting from repo 
clearing. See MFA Letter, supra note 81, at 13.
    \803\ Finadium LLC, Netting Rules for Repo, Securities Lending 
and Prime Brokerage (Sept. 2014), available at https://finadium.com/finadium-report-desc/netting-rules-for-repo-securities-lending-and-prime-brokerage/. Assets are considered to be HQLA if they can be 
easily and immediately converted into cash at little or no loss of 
value. The test of whether liquid assets are of ``high quality'' is 
that, by way of sale or repo, their liquidity-generating capacity is 
assumed to remain intact even in period of severe idiosyncratic and 
market stress. See Liquidity Coverage Ratio Standards LCR30.2, LCR 
30.3 (Basel Comm. On Banking Supervision 2019), available at https://www.bis.org/basel_framework/chapter/LCR/30.htm?tldate=20191231&inforce=20191215.
---------------------------------------------------------------------------

    Cash and repo trades cleared and settled outside of a CCP may not 
be subject to the same level of uniform and transparent risk management 
associated with central clearing.\804\ By contrast, FICC is subject to 
the Commission's risk management requirements addressing financial, 
operational, and legal risk management, which include, among other 
things, margin requirements commensurate with the risks and particular 
attributes of each relevant product, portfolio, and market.\805\ As the 
Commission believes that the amendments being adopted will incentivize 
and facilitate additional central clearing in the U.S. Treasury 
securities market, risk management should improve. To offset the risks 
it faces as a central counterparty, the CCP requires its members to 
post margin,

[[Page 2800]]

and the CCP actively monitors the positions its members hold. Moreover, 
in the event that the posted margin is not enough to cover losses from 
default, the CCP has a loss-sharing procedure that mutualizes loss 
among its members.
---------------------------------------------------------------------------

    \804\ See TMPG Repo White Paper, supra note 75.
    \805\ G-30 Report, supra note 5, at 13; 17 CFR 240.17ad-
22(e)(6).
---------------------------------------------------------------------------

    By lowering counterparty risk, central clearing also allows for the 
``unbundling'' of counterparty risk from other characteristics of the 
asset that is being traded. This unbundling makes the financial market 
for Treasury securities more competitive.\806\
---------------------------------------------------------------------------

    \806\ ``One of the conditions for a perfectly competitive market 
is that [market participants] are happy to [buy or sell] from any of 
the many [sellers or buyers] of the [asset]. No [buyer or seller] of 
the [asset] has any particular advantage . . .'' David M. Kreps, ``A 
Course in Microeconomic Theory'' Princeton University Press (1990), 
at 264 (describing the conditions of a perfectly competitive 
market.) When the transaction is novated to the CCP, market 
participants substitute the default risk of the CCP for that of the 
original counterparty.
---------------------------------------------------------------------------

    The Commission also believes that these amendments will help avoid 
a potential disorderly default by a member of any U.S. Treasury 
securities CCA. Defaults in bilaterally settled transactions are likely 
to be disorganized and subject to variable default management 
techniques, often subject to bilaterally negotiated contracts with 
potentially limited uniformity. Independent management of bilateral 
credit risk creates uncertainty about the levels of exposure across 
market participants and may make runs more likely; any loss stemming 
from closing out the position of a defaulting counterparty is a loss to 
the non-defaulting counterparty and hence a reduction in its capital in 
many scenarios.\807\
---------------------------------------------------------------------------

    \807\ See TMPG White Paper, supra note 13, at 32.
---------------------------------------------------------------------------

    Increased use of central clearing should enhance regulatory 
visibility in the critically important U.S. Treasury securities market. 
Specifically, central clearing increases the transparency of settlement 
risk to regulators and market participants and, in particular, allows 
the CCP to identify concentrated positions and crowded trades, 
adjusting margin requirements accordingly, which should help avoid 
significant risk to the CCP and to the system as a whole.\808\
---------------------------------------------------------------------------

    \808\ Duffie, supra note 27, at 15; DTCC October 2021 White 
Paper, supra note 681, at 1; 2021 IAWG Report, supra note 4.
---------------------------------------------------------------------------

    As discussed further below, the Commission is unable to quantify 
certain economic benefits of these amendments. The Commission solicited 
comment, including estimates and data from interested parties, that 
would help inform the estimates of the economic effects of the 
amendments but received only limited data, discussed further in part 
IV.C.2.a infra, that could be used to improve these estimates.
a. U.S. Treasury Securities CCA Membership Requirements
    The Commission is amending Rule 17ad-22(e)(18) to require any 
covered clearing agency that provides central counterparty services for 
transactions in U.S. Treasury securities to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable, require that direct participants of a 
covered clearing agency submit all eligible secondary market U.S. 
Treasury securities transactions in which they enter for clearing at a 
covered clearing agency.\809\ As previously explained in part II.A.2 
supra, as proposed an eligible secondary market transaction in U.S. 
Treasury securities was defined to include: (1) repurchase agreements 
and reverse repurchase agreements in which one of the counterparties is 
a direct participant; (2) any purchases and sales entered into by a 
direct participant that is an interdealer broker, meaning if the direct 
participant of the covered clearing agency brings together multiple 
buyers and sellers using a trading facility (such as a limit order 
book) and is a counterparty to both the buyer and seller in two 
separate transactions; (3) any purchases and sales of U.S. Treasury 
securities between a direct participant and a counterparty that is 
either a registered broker-dealer, government securities dealer, or 
government securities broker; a hedge fund; \810\ or an account at a 
registered broker-dealer, government securities dealer, or government 
securities broker where such account may borrow an amount in excess of 
one-half of the net value of the account or may have gross notional 
exposure of the transactions in the account that is more than twice the 
net value of the account.\811\ However, any transaction (both cash 
transactions and repos) where the counterparty to the direct 
participant of the CCA is a central bank, sovereign entity, 
international financial institution, or a natural person would be 
excluded from the definition of an eligible secondary market 
transaction.
---------------------------------------------------------------------------

    \809\ See part II.A.1 supra.
    \810\ For the purpose of the proposed rule, a hedge fund is 
defined as any private fund (other than a securitized asset fund): 
(a) with respect to which one or more investment advisers (or 
related persons of investment advisers) may be paid a performance 
fee or allocation calculated by taking into account unrealized gains 
(other than a fee or allocation the calculation of which may take 
into account unrealized gains solely for the purpose of reducing 
such fee or allocation to reflect net unrealized losses); (b) that 
may borrow an amount in excess of one-half of its net asset value 
(including any committed capital) or may have gross notional 
exposure in excess of twice its net asset value (including any 
committed capital); or (c) that may sell securities or other assets 
short or enter into similar transactions (other than for the purpose 
of hedging currency exposure or managing duration). This definition 
of a hedge fund is consistent with the Commission's definition of a 
hedge fund in Form PF. See Proposing Release, supra note 14 at 
64623.
    \811\ Id.
---------------------------------------------------------------------------

    In a change from the proposal, the Commission is modifying the 
definition of an eligible secondary market transaction in Rule 17ad-
22(a) to conditionally exclude inter-affiliate transactions.\812\ 
Specifically, the Commission is excluding from that definition any 
repurchase or reverse repurchase agreement collateralized by U.S. 
Treasury securities entered into between a direct participant and an 
affiliated counterparty, provided that the affiliated counterparty 
submit for clearance and settlement all other repurchase or reverse 
repurchase agreements collateralized by U.S. Treasury securities to 
which the affiliated counterparty is a party.\813\
---------------------------------------------------------------------------

    \812\ See part IV.B.3.b.v supra.
    \813\ See part II.A.2.a supra.
---------------------------------------------------------------------------

    As discussed in part II.A.2.a.vi, supra, inter-affiliate 
transactions are used to transfer liquidity and risk within an 
affiliated group. These transactions may serve different purposes, 
including, but not limited to, providing U.S. Treasury securities for 
delivery when an affiliate has taken a long or short position in U.S. 
Treasury securities as a hedge against other exposures, allowing the 
movement of U.S. Treasury securities to allow them to be posted as 
margin on an affiliate's transaction, ensuring that U.S. Treasury 
securities can serve as a liquidity buffer for an affiliated bank,\814\ 
or to meet liquidity composition targets. To get the U.S. Treasury 
securities to the appropriate entity with an affiliated group, the 
affiliate often enters into repos or reverse repos with a direct 
participant of a U.S. Treasury securities CCA.
---------------------------------------------------------------------------

    \814\ See supra note 238.
---------------------------------------------------------------------------

    As discussed above, one commenter stated that requiring inter-
affiliate transactions to be centrally cleared would impose additional 
costs with limited benefits.\815\ While the costs of clearing inter-
affiliate transactions may be similar to those of other transactions, 
the Commission agrees with the commenter that the potential benefits of 
clearing these transactions is likely to be less. For example, the 
commenter noted that a direct participant's affiliate's credit risk is 
already part of the group-wide financial risks to which the Treasury 
CCP is exposed, and central clearing of inter-affiliate transactions is 
unlikely to meaningfully impact the risk

[[Page 2801]]

profile.\816\ As discussed above, in certain circumstances, the 
counterparty credit risk posed by inter-affiliate transactions may be 
less than other transactions.\817\ However, affiliated entities are 
separate legal entities and, generally, are not legally responsible for 
each other's contractual obligations therefore while there may be a 
benefit of reducing counterparty credit risk by centrally clearing such 
transactions, the benefit is likely to be less.
---------------------------------------------------------------------------

    \815\ SIFMA/IIB Letter, supra note 37, at 21-22.
    \816\ Id.
    \817\ See supra note 239.
---------------------------------------------------------------------------

    In additional changes from the proposal and for the reasons 
discussed above, the Commission is adding additional exclusions to the 
definition of an eligible secondary market transaction for any 
repurchase or reverse repurchase agreement collateralized by U.S. 
Treasury securities in which one counterparty is a state or local 
government, a covered clearing agency providing central counterparty 
services, a derivatives clearing organization (see 7 U.S.C. 7a-1 and 17 
CFR 39.3), or is regulated as a central counterparty in its home 
jurisdiction.\818\ In the absence of the exclusion, these types of 
entities may not be able to transact with netting members of a CCA, 
reducing the available counterparties with which they could transact 
and likely resulting in adverse impacts on the prices that are 
available to them.
---------------------------------------------------------------------------

    \818\ See part II.A.2.a supra.
---------------------------------------------------------------------------

    The amendment to Rule 17ad-22(e)(18) will increase the fraction of 
secondary market U.S. Treasury securities transactions required to be 
submitted for clearing at a covered clearing agency. The Commission 
believes that this should result in achieving the benefits associated 
with an increased level of central clearing discussed in this section.
i. Scope of the Requirement To Clear Eligible Secondary Market 
Transactions
    A significant share of both cash and repo transactions in U.S. 
Treasury securities, including those of direct participants in a 
covered clearing agency, are not currently centrally cleared.\819\ The 
Commission believes that covered clearing agency members not centrally 
clearing cash or repo transactions in U.S. Treasury securities create 
contagion risk to CCAs clearing and settling such transactions, as well 
as to the market as a whole, and that this contagion risk can be 
ameliorated by centrally clearing such transactions.
---------------------------------------------------------------------------

    \819\ See DTCC May 2021 White Paper, supra note 307, at 5; 2021 
IAWG Report, supra note 4, at 6.
---------------------------------------------------------------------------

    Currently, FICC, the only U.S. Treasury securities CCA, requires 
its direct participants to submit for central clearing their cash and 
repo transactions in U.S. Treasury securities with other members.\820\ 
However, FICC's rules do not require its direct participants, such as 
IDBs, to submit either cash or repo transactions \821\ with persons who 
are not FICC members for central clearing.
---------------------------------------------------------------------------

    \820\ FICC Rule 2A, section 7(e) (requirement that FICC Netting 
Members submit to FICC all of their eligible trades with other 
Netting Members); FICC Rule 18, section 2 (similar requirement with 
regard to Repo transactions); cf. FICC Rule 3, section 8(e) 
(providing clearing requirement for FICC IDB Members), supra note 
19.
    \821\ With regard to Sponsored GC Repos, as noted above, these 
transactions can be secured with generic CUSIPs that include U.S. 
Treasury securities, and with other generic CUSIPs that include 
other securities, such as agency securities and mortgage backed 
securities. Because the requirement to clear eligible secondary 
market transactions is limited to eligible secondary market 
transactions in U.S. Treasury securities, it would not apply to 
Sponsored GC Repo generic CUSIPs that do not include U.S. Treasury 
securities.
---------------------------------------------------------------------------

    The expanded scope of the requirement to clear eligible secondary 
market transactions should reduce instances of ``hybrid'' clearing, 
where FICC lacks visibility on the bilaterally cleared component of a 
trade. As discussed in the Proposing Release, trades cleared and 
settled outside of a CCP may not be subject to the same level of risk 
management associated with central clearing, which includes 
requirements for margin determined by a publicly disclosed method that 
applies objectively and uniformly to all members of the CCP, loss 
mutualization, and liquidity risk management.\822\ The requirement to 
clear eligible secondary market transactions should not only result in 
the consistent and transparent application of risk management 
requirements to trades that are now bilaterally cleared but also 
increase the CCA's awareness of those trades, which it now lacks.\823\
---------------------------------------------------------------------------

    \822\ See supra note 14, 87 FR at 64616; 2021 IAWG Report, supra 
note 4, at 30; G-30 Report, supra note 5.
    \823\ See supra note 369.
---------------------------------------------------------------------------

    The definition of an eligible secondary market transaction applies 
to all types of transactions that are of a type currently accepted for 
clearing at a U.S. Treasury securities CCA; it does not impose a 
requirement on a U.S. Treasury securities CCA to offer additional 
products for clearing. One commenter specifically agreed that the 
proposal should apply to the types of transactions that are eligible 
for clearing at a U.S. Treasury securities CCA, as those eligibility 
criteria evolve over time. The commenter stated that such an approach 
would ensure that the requirement would not inadvertently give rise to 
risk or undue costs by forcing into central clearing transaction types 
that have not gone through a methodical risk analysis or for which the 
costs may outweigh the benefits, while at the same time, it would allow 
the requirement to evolve as U.S. Treasury securities CCAs, their 
direct participants, and regulators identify transaction types that 
would benefit from central clearing.\824\
---------------------------------------------------------------------------

    \824\ DTCC/FICC Letter, supra note 33, at 12-13.
---------------------------------------------------------------------------

ii. Application of the Requirement To Clear Eligible Repo Transactions
    The requirement to clear eligible secondary market transactions 
requires that all direct participants of a U.S. Treasury securities CCA 
submit for clearing all eligible secondary market transactions that are 
repurchase agreements or reverse repurchase agreements. As discussed in 
part IV.B.5 supra, risk management practices in the bilateral clearance 
and settlement of repos are not uniform across market participants and 
are less transparent than analogous practices under central 
clearing.\825\ Many commenters supported the definition of an eligible 
secondary market transaction as it relates to repo and reverse repo 
transactions.\826\ These commenters encouraged a broad and 
comprehensive definition to limit market fragmentation and avoidance of 
central clearing.
---------------------------------------------------------------------------

    \825\ TMPG Repo White Paper, supra note 75, at 1.
    \826\ See supra note 81.
---------------------------------------------------------------------------

    The benefits of central clearing--including the benefits of 
netting--increase with the fraction of total volume of similar 
transactions submitting for clearing at a CCP. Significant gaps persist 
in the current coverage of transaction data in U.S. Treasury repo.\827\ 
The Commission understands that, among bilaterally settled repo, 
approximately half was centrally cleared as of 2021.\828\ Centrally

[[Page 2802]]

cleared triparty repo is a relatively new service, and the proportion 
may be smaller. Thus, despite the volume of centrally cleared repo 
transactions as seen in Figure 10 above, and the development of 
services to encompass more types of repo transactions at FICC, the 
Commission understands the volume of repo not currently centrally 
cleared to be substantial. The requirement that all U.S. Treasury CCA 
members submit all eligible repurchase agreements for central clearing 
would increase the fraction of total volume of such transactions 
submitted for central clearing, realizing the benefits described above 
in this section. In addition, because repo participants tend to be 
sophisticated market players, the requirement for repo transactions 
will cover a set of market participants many of whom will have built 
most of the necessary processes and infrastructure to comply with the 
rule.
---------------------------------------------------------------------------

    \827\ 2021 IAWG Report, supra note 4, at 29. Some of the 
benefits discussed here may be mitigated if central clearing of repo 
were to occur at multiple CCPs (e.g., in there was an additional 
registered clearing agency that accepted repo for clearing and in 
the absence of an agreement between those registered clearing 
agencies, the netting benefits may be less than those if there were 
but a single clearing agency accepting repo for clearing).
    \828\ Id. (``Non-centrally cleared bilateral repo represents a 
significant portion of the Treasury market, roughly equal in size to 
centrally cleared repo.'') (citing a 2015 pilot program by the U.S. 
Treasury Department); see also TMPG Repo White Paper, supra note 
804, at 1; Katy Burne, Future-Proofing the U.S. Treasury Market, BNY 
Mellon Aerial View 7 (2021), available at https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/aerial-view/future-proofing-the-us-treasury-market.pdf.coredownload.pdf (noting that 63% of repo 
transactions remain non-centrally cleared according to Office of 
Financial Research data as of Sept. 10, 2021).
---------------------------------------------------------------------------

    One commenter noted an additional potential benefit to money market 
funds (``MMFs'').\829\ The commenter stated that MMFs are only 
permitted to execute repo transactions with counterparties that are 
rated by one of the top rating agencies, a benefit typically accessible 
to only larger participants due to the prohibitive cost of obtaining 
and maintaining a rating from the top tier rating agencies. The 
commenter stated that this limits the number of potential 
counterparties with which MMFs can execute repo transactions, limiting 
liquidity and pricing options available to the MMFs. If MMFs are able 
to transact as sponsored members whose trades are centrally cleared and 
are able to look through the initial counterparty to the credit 
worthiness of the CCP itself, liquidity and pricing available to MMFs 
is likely to improve.
---------------------------------------------------------------------------

    \829\ Letter from the Independent Dealer & Trader Association, 
at 10-11 (Sept. 1, 2023) (``IDTA Letter 2'').
---------------------------------------------------------------------------

    Some commenters questioned the need for a requirement with respect 
to repo, noting that the balance sheet netting efficiencies already 
exist, providing a natural incentive to centrally clear such 
transactions.\830\ The Commission agrees that centrally cleared repo 
already benefits from favorable treatment on balance sheet, but 
believes that a requirement to clear repo transactions would result in 
more transactions being centrally cleared and, accordingly, additional 
balance sheet efficiency and capacity to intermediate repo 
transactions.\831\ Although FICC netting members may wish to increase 
the fraction of their repo business that is centrally cleared in order 
to take greater advantage of netting efficiencies, they are only able 
to do so to the extent that their counterparties have taken the steps 
necessary to access clearing. Requiring most repo transactions with a 
FICC netting member on one side to be centrally cleared assures that 
counterparties will have taken such steps. Thus, there would still be 
benefits from the requirement, despite the currently existing balance 
sheet treatment.
---------------------------------------------------------------------------

    \830\ See supra note 84.
    \831\ Duffie supra note 718, provides empirical evidence with 
supporting theory that the current intermediation capacity of the 
U.S. Treasury market impairs its resilience. Among the improvements 
he discusses that could increase the market's intermediation 
capacity under stress is broader central clearing. See Resilience 
redux in the US Treasury market, supra note 718. See also Dealer 
Capacity and US Treasury, presentation to SEC Staff (July 2023), 
supra note 702.
---------------------------------------------------------------------------

    The OFR published a 2023 report on an OFR pilot data collection of 
non-centrally cleared bilateral repurchase agreement (``NCCBR'') trades 
spanning nine dealers over three reporting dates in June 2022.\832\ Of 
the four bilateral repo segments discussed (centrally cleared 
transactions settled on the triparty platform, centrally cleared 
transactions using the FICC DVP service, non-centrally cleared 
transactions settled on the triparty platform, and NCCBR transactions), 
the NCCBR segment is the largest of the four segments of the repo 
market in terms of gross repo exposure by primary dealers.\833\ The 
OFR' report uses the pilot data collection to answer the question of 
why volume in this segment is so high despite the benefits of central 
clearing, including the ability of dealers to net their repo positions 
with one counterparty against reverse repo positions with another 
counterparty for the purpose of calculating certain regulatory ratios, 
thus reducing the balance sheet costs of participating in repo. The 
report's authors estimate that over 60% of all Treasury trades in the 
NCCBR market are naturally netted (matching repo and reverse repo with 
the same counterparty and tenor, typically as part of a relative value 
trade); however, they also show that substantial balance sheet netting 
benefits could still result from the trades that are not naturally 
netted if NCCBR trades were moved into central clearing.\834\
---------------------------------------------------------------------------

    \832\ See Hempel et al. (2023), supra note 564.
    \833\ Id.
    \834\ Id.
---------------------------------------------------------------------------

    Several commenters recommended excluding triparty repos from the 
definition of an eligible secondary market transaction.\835\ Four of 
these commenters suggested that the cost of including triparty repos 
would outweigh the benefits.\836\ Several commenters argued that 
including triparty repos would not significantly reduce the risks that 
the proposal seeks to address because the current triparty market 
infrastructure inherently mitigates the associated risks.\837\ 
Specifically, these commenters argue that credit risk in the triparty 
market is mitigated by the triparty agent's provision of custodial, 
collateral management, and settlement services.\838\ Moreover, one 
commenter stated that the infrastructure underlying the triparty repo 
market is robust and provides credit protections, operational 
safeguards, and strict internal controls akin to central clearing.\839\ 
One commenter added that the triparty market is relatively safe from 
credit risk because the triparty agent is subject to prudential 
regulation.\840\ One commenter added that settlement risk in the 
triparty market is nearly eliminated because collateral posted to the 
triparty platform cannot generally be repledged outside the 
platform.\841\ The commenter stated, therefore, that the only 
significant source of settlement risk is the rare occurrence of a 
counterparty's nonpayment of the repurchase price, which is generally 
attributable to operational risk as opposed to credit risk.\842\
---------------------------------------------------------------------------

    \835\ See supra note 85.
    \836\ See MFA Letter, supra note 81, at 6, 14; SIFMA/IIB Letter, 
supra note 37, at 20; ICI Letter, supra note 85, at 11; Federated 
Letter, supra note 85, at 5.
    \837\ See MFA Letter, supra note 81, at 14; SIFMA/AMG Letter, 
supra note 35, at 11; ICI Letter, supra note 85, at 12, 22; Citadel 
Letter, supra note 81, at 6; Federated Letter, supra note 85, at 5.
    \838\ See id.
    \839\ See ICI Letter, supra note 85, at 22.
    \840\ See MFA Letter, supra note 81, at 14.
    \841\ See Federated Letter, supra note 85, at 5.
    \842\ See Federated Letter, supra note 85, at 5.
---------------------------------------------------------------------------

    Despite supporting the exclusion of triparty repos from the 
definition of an eligible secondary market transaction, one commenter 
acknowledged that the triparty agent ``does not fulfill a CCP role--it 
does not guarantee either counterparty's performance through novation 
or otherwise and does not assume counterparty risk.'' \843\ The 
Commission recognizes that the current triparty market infrastructure 
incorporates credit protections, operational safeguards, and strict 
internal controls. However, as discussed above, the triparty agent does 
not fulfill a CCP role, and therefore, the Commission disagrees with 
the contention that the current market infrastructure incorporates 
controls akin to those available through central

[[Page 2803]]

clearing.\844\ Therefore, the benefits accruing to additional central 
clearing using a U.S. Treasury securities CCA apply in varying degree 
to triparty transactions as well.\845\
---------------------------------------------------------------------------

    \843\ ICI Letter, supra note 85, at 33.
    \844\ See supra part II.A.2.a supra.
    \845\ Id.
---------------------------------------------------------------------------

    In response to the commenter who stated that most risks are 
eliminated because collateral cannot be posted outside the triparty 
platform, the Commission disagrees. For example, significant risks 
exist if concerns emerge regarding the financial condition of borrowers 
in the triparty market.\846\ In such scenarios, even though collateral 
stays within the triparty platform, the repo buyer could still face the 
sudden default of a triparty repo counterparty.\847\ Moreover, the 
Commission understands that settlement failures occur regularly and 
tend to spike during market stress events.\848\ Even though not 
considered a default, settlement failures create credit exposure to the 
failing counterparty and market risk exposure with respect to the 
relevant Treasuries.\849\ Furthermore, settlement failures may prevent 
or make more costly the non-failing party's delivery of the relevant 
Treasuries in respect of other transactions.
---------------------------------------------------------------------------

    \846\ See 2013 Annual Report of the Financial Stability 
Oversight Council, at 4, 12-13, 133-134, available at https://home.treasury.gov/system/files/261/FSOC-2013-Annual-Report.pdf; 
Begalle et al., supra note 98 (discussing concern that stress caused 
by a potential default of a triparty repo counterparty can lead to 
either pre-default fire sales of assets by the counterparty or post-
default fire sales of collateral by the triparty repo investor and 
the related financial stability concerns).
    \847\ See SEC Division of Investment Management Guidance Update: 
Counterparty Risk Management Practices with Respect to Tri-Party 
Repurchase Agreements (July 2013), available at https://www.sec.gov/divisions/investment/guidance/im-guidance-2013-03.pdf.
    \848\ See e.g., Adam Copeland, Antoine Martin, Michael Walker, 
Repo Runs: Evidence from the Tri-Party Repo Market, N.Y. Fed Staff 
Report No. 506, at 26-30, available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr506.pdf; Tobias Adrian, 
Christopher R. Burke, and James J. McAndrews, The Federal Reserve's 
Primary Dealer Credit Facility, 15 Fed. Res. Bank N.Y. Current 
Issues in Econ. and Fin. 4, available at https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci15-4.pdf; see also 
Michael Fleming & Kenneth Garbade, Explaining Settlement Fails, 11 
Fed. Res. Bank N.Y. Current Issues in Econ. and Fin. 1 (Sept. 2005), 
available at https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-9.pdf.
    \849\ See Treasury Market Practice Group, U.S. Treasury 
Securities Fails Charge Trading Practice (July 27, 2018), available 
at https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/TMPG-UST-fails-charge-trading-practice-FINAL-07-27-18.pdf.
---------------------------------------------------------------------------

    One commenter stated that the Commission must address other aspects 
of the Sponsored Service to better promote the objectives of central 
clearing, with such issues including the treatment of the start leg of 
the transaction, FICC's obligations to complete settlement of a 
Sponsored Member's positions in the event of a Sponsoring Member's 
default, and a Sponsored Member's ability to engage with FICC to 
address issues arising from repo transactions that have been submitted 
through sponsored clearing.\850\ The commenter stated that, within the 
Sponsored Service, FICC does not novate the settlement of the start leg 
of a repo transaction that is submitted for clearing between a 
sponsoring Member and a sponsored Member, although it does novate the 
end leg of the transaction, meaning that the counterparties continue to 
be responsible for settlement outside of FICC and bear the risk of a 
settlement fail vis a vis one another. The commenter also states that 
the lack of central clearing for the start leg of repo transactions in 
the Sponsored Service means that a requirement to clear eligible 
secondary market transactions may not eliminate counterparty credit 
risk issues to the extent the Commission anticipates, which, in turn, 
means that the proposal may not increase competition or reduce spreads 
as the Commission predicted in the Proposing Release.
---------------------------------------------------------------------------

    \850\ ICI Letter, supra note 85, at 26-28.
---------------------------------------------------------------------------

    The Commission understands that, contrary to transactions cleared 
at FICC outside the Sponsored Service, FICC currently does not novate 
the start legs of same-day settling Sponsored DVP Repos where the 
Sponsored Member's pre-novation counterparty is its Sponsoring Member 
(i.e., ``done-with'' Sponsored DVP Repo) or of Sponsored GC Repos. 
However, the Commission does not believe that this failure to novate is 
inconsistent with the definition of an eligible secondary market 
transaction being adopted in this release.\851\ The Commission 
acknowledges that settlement of the start leg occurring outside central 
clearing could somewhat reduce the benefits of central clearing in this 
limited instance, but the counterparty credit risk arising from the 
start legs of such transactions are largely addressed by the fact that 
they usually settle on a delivery-versus-payment basis between the 
counterparties, meaning that the securities and funds are exchanged 
simultaneously and resulting in less counterparty credit risk to 
address. However, the Commission further understands that FICC has 
stated that it is able to clear the start leg of any repo and currently 
does clear the start leg of all repos between two direct participants, 
the start leg of any Sponsored DVP repo where the Sponsored Member's 
pre-novation counterparty is a third-party member of FICC (i.e., 
``done-away'' from the Sponsoring Member), and any Sponsored DVP Repo 
where the start leg of such repo is scheduled to settle on some 
business day in the future (i.e., forward-settling repos).\852\
---------------------------------------------------------------------------

    \851\ See Part II.C.2.c, supra.
    \852\ See FICC Rule 11, section 2, supra note 19; FICC Buyside 
FAQ, supra note 169, at 2-3.
---------------------------------------------------------------------------

    One commenter stated that neither the Sponsored Bilateral DVP 
Service nor the Sponsored GC Repo Service compel FICC to complete the 
settlement of a sponsored member's transactions in the event of a 
sponsoring member's default, and that this approach is not consistent 
with the Commission's assumption that central clearing increases the 
likelihood of settlement.\853\ The Commission understands that this 
ability to, potentially, terminate the Sponsored Member's transaction 
in such circumstances arises from the fact that, within the Sponsored 
Service, by design, the Sponsoring Member serves as the processing 
agent for all movement of funds and securities for its Sponsored 
Members, and FICC is not able to guarantee that an insolvent Sponsoring 
Member, which may be subject to the control of another legal entity, 
such as a bankruptcy trustee, would be able to continue processing such 
transactions. This aspect of FICC's rules is consistent with how other 
central counterparties have addressed the potential termination of 
customer transactions in the event of their agent's default.\854\ As 
discussed in Part II.B.2.c supra, the Commission does not believe that 
the potential for FICC to terminate these transactions, in the unlikely 
event of a Sponsoring Member default in which it is unable to work with 
the controlling legal entity, means that the benefits in the Proposing 
Release would not be, to a great extent, realized.
---------------------------------------------------------------------------

    \853\ ICI Letter, supra note 85, at 27.
    \854\ See supra note 438 and referencing paragraph.
---------------------------------------------------------------------------

iii. Application of the Requirement To Clear Eligible Secondary Market 
Transactions to Purchases and Sales of U.S. Treasury Securities
    As discussed above, 68 percent of cash market transactions in U.S. 
Treasury securities are not centrally cleared, and another 19 percent 
of such transactions are subject to so-called hybrid clearing.\855\ The 
Commission has identified certain categories of purchases and sales of 
U.S. Treasury securities that it believes should be part of the 
requirement to clear eligible

[[Page 2804]]

secondary market transactions, i.e., for which U.S. Treasury securities 
CCAs are obligated to impose membership rules to require clearing of 
such transactions. The benefits of including these categories are 
described below.
---------------------------------------------------------------------------

    \855\ Proposing Release, supra note 14, at 64613.
---------------------------------------------------------------------------

    As with repurchase transactions, the general benefits of central 
clearing discussed in part IV.A supra become greater as the fraction of 
total transaction volume that is centrally cleared increases. In other 
words, there are positive externalities associated with broader central 
clearing. However, unlike in the repo market, the Commission is not 
requiring that all cash market transactions completed with a FICC 
member be centrally cleared.\856\
---------------------------------------------------------------------------

    \856\ The G-30 report recommends an approach to clearing all of 
repo, and some cash trades. See generally G-30 Report, supra note 5.
---------------------------------------------------------------------------

    Several commenters suggested that the scope of eligible secondary 
market transactions in the cash market be broadened. One commenter 
stated that the Commission should align the scope of the definition 
with respect to cash transactions with the proposed scope for repos, 
subject to certain limited exceptions for investors that trade de 
minimis volumes. The commenter argued that the Commission's approach 
with respect to cash transactions will increase costs for a specific 
subset of market participants, thereby putting them at a competitive 
disadvantage, while failing to deliver the envisaged market-wide 
benefits associated with central clearing (i.e., it would materially 
reduce the associated multilateral netting benefits, impair the risk 
management practices of clearing agencies, and hinder the evolution in 
trading protocols that can be expected from a market-wide clearing 
requirement).\857\ For similar reasons, another commenter also stated 
that the benefits of central clearing detailed ``will only materialize 
if a market-wide mandate is implemented'' and supported defining the 
scope of eligible secondary market transactions for cash transactions 
as broadly as that proposed for repos.\858\ Another commenter stated 
that limiting the scope of the cash clearing mandate would result in 
unwarranted competitive disadvantages and related market distortions 
for some types of investors, such as hedge funds, or some types of 
trading platforms, such as anonymous trading facilities.\859\
---------------------------------------------------------------------------

    \857\ Citadel Letter, supra note 81, at 5.
    \858\ ARB et al. Letter, supra note 81, at 4 (stating that the 
netting benefits associated with transitioning only proprietary 
trading firm (``PTF'') transactions into central clearing are much 
smaller, given the substantial netting that already occurs directly 
with inter-dealer brokers (``IDBs''); the trading-related benefits 
of central clearing will only accrue to market participants if their 
transactions are covered by the proposed mandate; and that clearing 
agency resiliency will be negatively impacted if only one segment of 
the market is cleared).
    \859\ MFA Letter, supra note 81, at 2.
---------------------------------------------------------------------------

    The Commission proposed a targeted approach to clearing in the cash 
market in the Proposing Release, limiting the clearing requirement to 
specific types of entities transacting with members of a U.S. Treasury 
securities CCA that pose certain risks when clearing cash market 
treasury transactions bilaterally.\860\ As discussed in the Proposing 
Release and discussed in part II.2.b supra, the Commission believed 
that including within the scope of eligible transactions the cash 
transactions of levered funds and hedge funds is more important than 
those of other market participants that were not included in part 
because the strategies employed by hedge funds ``can increase the 
likelihood that the fund will experience stress or fail, and amplify 
the effects on financial markets.'' \861\ The Commission is not 
including purchases and sales of U.S. Treasury securities between a 
direct participant and either a hedge fund or a levered account within 
the definition of an eligible secondary market transaction in light of 
questions raised by commenters regarding the inclusion of a hedge fund 
and a leveraged account as proposed that merit further consideration, 
and the Commission will continue to evaluate the issues raised to 
determine if any further action is appropriate.\862\
---------------------------------------------------------------------------

    \860\ See part II.A.2.b supra for discussion of the 
justification for the scope as proposed.
    \861\ Proposing Release, supra note 14 at 64623-4.
    \862\ See part II.A.2.b.i supra.
---------------------------------------------------------------------------

    In response to the comment that characterized a market-wide mandate 
as a ``necessary condition'' for adoption of any mandate, the 
Commission does not believe that all benefits of central clearing exist 
only if the entire market is centrally cleared. The increased clearing 
of cash transactions, targeted to address the differing risk profiles 
of each market segment, would still bring the benefits of central 
clearing to an important part of the cash market. As explained below, 
cash and repo markets differ in important ways that suggest a broader 
definition of eligible secondary market transactions for repo and a 
less broad definition for cash transactions. Though there are linkages 
across markets, segments of the Treasury market are distinct, and for 
this reason, the Commission addresses the risks in each of these 
categories separately in parts II.A.2.b.ii through iii supra.
    The Commission understands the set of participants in U.S. Treasury 
securities cash markets to be far broader and more heterogeneous than 
in the repo markets. The cash market has many participants that trade 
in relatively small amounts, whereas the market for repo is dominated 
by larger, more sophisticated institutions. Although difficult to 
quantify precisely, the number of participants is one or more orders of 
magnitude greater in the cash market as compared with the repo market. 
Because the benefits increase with the number and size of transactions, 
whereas the costs have a large fixed component, extending the clearing 
mandate to institutions that are market participants in repo markets 
and a subset of the institutions that are participants in cash markets 
should capture a large fraction of market activity, while also 
capturing the most active market participants who may already have some 
ability to connect with the clearing agency and experience with central 
clearing.
a. IDB Transactions
    The amendments being adopted require that all purchases and sales 
of U.S. Treasury securities entered into by a direct participant of a 
U.S. Treasury securities CCA and any counterparty, if the direct 
participant of the CCA brings together multiple buyers and sellers 
using a trading facility (such as a limit order book) and serves as a 
counterparty to both the purchaser and seller in two separate 
transactions executed on its platform, be subject to the requirement to 
centrally clear eligible secondary market transactions. This 
requirement encompasses the transactions of those entities serving as 
IDBs in the U.S. Treasury securities market, in that it covers entities 
that are standing in the middle of transactions between two 
counterparties that execute a trade on the IDB's platform.\863\
---------------------------------------------------------------------------

    \863\ See Proposing Release, supra note 14, at 64616 for further 
discussion of IDBs and their role in the cash market for U.S. 
Treasury securities.
---------------------------------------------------------------------------

    The amendments being adopted will result in more central clearing 
of IDB trades. FICC Member IDBs do not take directional positions on 
the securities that trade on the IDB's platform. Consequently, a 
requirement that FICC member IDBs centrally clear all of their trades 
will give FICC better insight into the risk position of its clearing 
members though the elimination of the hybrid clearing transactions 
mentioned above.
    In contrast to other FICC members, FICC members that are also IDBs 
will be required to centrally clear all of their cash trades (and repo, 
as described above). As described in the TMPG White Paper and in the 
recent G-30

[[Page 2805]]

report,\864\ IDBs act as central nodes in the system, in effect serving 
as clearing agencies without the regulatory structure of clearing 
agency. Furthermore, the netting benefits to IDBs, as described in this 
section are likely to be particularly high, because each transaction on 
an IDB is matched by a transaction on the other side. IDBs are 
sophisticated institutions that have experience managing the central 
clearing of trades as they already centrally clear all trades with 
other FICC members.
---------------------------------------------------------------------------

    \864\ See generally G-30 Report, supra note 5.
---------------------------------------------------------------------------

    The configuration of counterparty risk presented by hybrid clearing 
allows FICC to manage the risks arising from the IDB-FICC member trade, 
but FICC cannot manage the risks arising from the IDB's offsetting 
trade with its non-FICC member counterparty and the potential 
counterparty credit risk and settlement risk arising to the IDB from 
that trade.\865\ Thus, the IDB is not able to net all of its positions 
for clearing at FICC, and the IDB's positions appear to FICC to be 
directional, which impacts the amount of margin that FICC collects for 
the visible leg of the ``hybrid'' transaction. This lack of visibility 
can increase risk during stress events, when margin requirements 
usually increase. Thus, FICC is indirectly exposed to the IDB's non-
centrally cleared leg of the hybrid clearing transaction, but it lacks 
the information to understand and manage its indirect exposure to this 
transaction. As a result, in the event that the non-FICC counterparty 
were to default to the IDB, causing stress to the IDB, that stress to 
the IDB could be transmitted to the CCP and potentially to the system 
as a whole.\866\ In particular, if the IDB's non-FICC counterparty 
fails to settle a transaction that is subject to hybrid clearing, such 
an IDB may not be able to settle the corresponding transaction that has 
been cleared with FICC, which could lead the IDB to default. As part of 
its existing default management procedures, FICC could seek to 
mutualize its losses from the IDB's default, which could in turn 
transmit stress to the market as a whole.
---------------------------------------------------------------------------

    \865\ See, e.g., TMPG White Paper, supra note 13, at 22 (noting 
that in a hybrid clearing arrangement, an ``IDB's rights and 
obligations towards the CCP are not offset and therefore the IDB is 
not in a net zero settlement position with respect to the CCP at 
settlement date.'').
    \866\ See DTCC May 2021 White Paper, supra note 307, at 5.
---------------------------------------------------------------------------

    The Commission has previously stated that membership requirements 
help to guard against defaults of any CCP member, as well to protect 
the CCP and the financial system as a whole from the risk that one 
member's default could cause others to default, potentially including 
the CCP itself.\867\ Further, contagion stemming from a CCP member 
default could be problematic for the system as a whole, even if the 
health of the CCP is not implicated. This is so because the default 
could cause others to back away from participating in the market. This 
risk of decreased market participation could be particularly acute if 
the defaulting participant were an IDB, whose withdrawal from the 
market could jeopardize other market participants' ability to access 
the market for on-the-run U.S. Treasury securities.\868\ And because 
IDBs facilitate a significant proportion of trading in on-the-run U.S. 
Treasury securities (that is, they form central nodes), such a 
withdrawal could have significant consequences for the market as a 
whole.\869\ The requirement to clear eligible secondary market 
transactions should therefore help mitigate this risk by mandating that 
a U.S. Treasury securities CCA ensure its IDB members clear both sides 
of their transactions, thereby eliminating the various facets of 
potential contagion risk posed by so-called hybrid clearing.
---------------------------------------------------------------------------

    \867\ See CCA Standards Proposing Release, supra note 8.
    \868\ TMPG White Paper, supra note 13, at 32.
    \869\ See id.
---------------------------------------------------------------------------

    Commenters generally supported the inclusion of IDB transactions in 
the definition of an eligible secondary market transaction.\870\ 
Another commenter, although not supporting a requirement to clear 
repos, stated that if such a requirement was adopted it should be 
limited to IDBs and broker-dealers because (1) the counterparties to 
such transactions are the most active participants in the Treasury repo 
markets, thereby allowing the Commission to meaningfully increase 
central clearing without applying a more categorical requirement, and 
(2) because such transactions are more interconnected with the rest of 
the market and have a higher possibility to transfer risk to outside 
parties (including potentially a U.S. Treasury securities CCA).\871\
---------------------------------------------------------------------------

    \870\ See AIMA Letter, supra note 81, at 7.
    \871\ See SIFMA/IIB Letter, supra note 37, at 19-20.
---------------------------------------------------------------------------

    However, certain commenters asserted that this aspect of the 
definition would inappropriately disadvantage IDBs, with uncertain 
benefits and potentially significant negative consequences that would 
result if market participants shifted their trading activity away from 
IDBs.\872\ Three commenters expressed concerns that including IDB 
transactions in the definition of an eligible secondary market 
transaction could draw trading activity away from IDBs, thereby 
reducing market liquidity and market stability.\873\ The commenters 
also noted that IDBs are anonymous platforms that currently support 
all-to-all trading, which the Commission has recognized would improve 
market structure and stability.\874\ The commenters argued that 
including IDB transactions in the definition of an eligible secondary 
market transaction could, therefore, hinder all-to-all trading.\875\ 
One of these commenters further argued that by discouraging market 
participants from trading on IDBs, the requirement to clear eligible 
secondary market transactions, as drafted, could limit the choices of 
market participants with respect to trading venues.\876\
---------------------------------------------------------------------------

    \872\ See ICI Letter, supra note 85, at 3, 11; MFA Letter, supra 
note 81, at 19-21; see also Tradeweb Letter, supra note 81, at 3-4.
    \873\ See ICI Letter, supra note 85, at 3, 11; MFA Letter, supra 
note 81, at 20; Tradeweb Letter, supra note 81, at 3-4.
    \874\ See id.
    \875\ See id.
    \876\ See MFA Letter, supra note 81, at 20.
---------------------------------------------------------------------------

    The Commission disagrees with these commenters. The inclusion of 
IDB transactions, along with other types of transactions, would not 
necessarily lead to decreased liquidity and market stability or 
negatively impact all-to-all trading in the U.S. Treasury market. The 
benefits to market participants from trading on an IDBs, that is the 
ability find counterparties and to trade anonymously are significant 
and will continue even if such transactions are eligible secondary 
market transactions, meaning that such transactions would incur the 
costs associated with central clearing and described below.
    Moreover, even in the event that some of these concerns materialize 
from the inclusion of IDB transactions, the inclusion of IDB 
transactions is justified as it would allow the U.S. Treasury 
securities CCA to better risk manage ``hybrid'' transactions that are 
currently not being submitted for central clearing. Specifically, 
including IDB transactions in the definition of an eligible secondary 
market transaction would address the potential for contagion risk 
associated with hybrid clearing. As explained in the Proposing Release, 
the configuration of counterparty risk presented by hybrid clearing 
allows the U.S. Treasury securities CCA to manage the risks arising 
from the IDB-CCA direct participant transaction, on the one hand, but 
the U.S. Treasury securities CCA cannot manage the risks arising from 
the IDB's offsetting transaction with its non-member counterparty and

[[Page 2806]]

the potential counterparty credit risk and settlement risk arising to 
the IDB from that trade.\877\ Thus, under the current hybrid clearing 
model, the U.S. Treasury securities CCA is indirectly exposed to the 
IDB's non-centrally cleared transaction, but it lacks the ability to 
risk manage its indirect exposure to this non-centrally cleared leg of 
the transaction. Specifically, it does not know who the ultimate 
counterparty of the transaction is and cannot collect margin on that 
transaction. This, in turn, results in margin collection at the CCP 
which is based upon only one transaction and has been calculated to 
cover this seemingly directional position, as well as an inability to 
net these offsetting transactions and provide the benefits of central 
clearing. In particular, if the IDB's non-CCP member counterparty fails 
to settle a transaction that is subject to hybrid clearing, such IDB 
may not be able to settle the corresponding transaction that has been 
cleared with the U.S. Treasury securities CCA due to a lack of 
financial resources at the IDB, which could lead the IDB to 
default.\878\ As part of its existing default management procedures, 
the U.S. Treasury securities CCA could seek to mutualize its losses 
from the IDB's default, which could in turn transmit stress to the 
market as a whole.
---------------------------------------------------------------------------

    \877\ See, e.g., TMPG White Paper, supra note 13, at 22 (noting 
that in a hybrid clearing arrangement, an IDB's rights and 
obligations to the CCP are not offset and the IDB is not in a net 
zero settlement position with respect to the CCP at settlement 
date). Thus, the IDB is not able to net all of its positions for 
clearing at a U.S. Treasury securities CCA, and the IDB's positions 
appear to the CCA to be directional, which impacts the amount of 
margin that the CCA collects for the transaction.
    \878\ See 2021 IAWG Report, supra note 4, at 31; See also DTCC 
May 2021 White Paper, supra note 307.
---------------------------------------------------------------------------

    As noted above, the Commission has previously stated that 
membership requirements help to guard against defaults of any CCP 
member, as well as to protect the CCP and the financial system as a 
whole from the risk that one member's default could cause others to 
default, potentially including the CCP itself.\879\ Further, contagion 
stemming from a CCP member default could undermine confidence in the 
financial system as a whole, even if the health of the CCP is not 
implicated. This is because the default could cause others to back away 
from participating in the market. This risk of decreased participation 
could be particularly problematic if the defaulting participant was an 
IDB, whose withdrawal from the market could impact other market 
participants' ability to access the market for on-the-run U.S. Treasury 
securities, approximately 49.7% of which trade on IDBs.\880\ Including 
such transactions as eligible secondary market transactions would 
therefore help protect against this risk by requiring that a U.S. 
Treasury securities CCA ensure that direct participants who are IDBs 
centrally clear both sides of their transactions, thereby eliminating 
the various aspects of potential contagion risk posed by so-called 
hybrid clearing.
---------------------------------------------------------------------------

    \879\ See supra note 308.
    \880\ TMPG White Paper, supra note 13, at 32; part IV.B.3 (Table 
1) supra.
---------------------------------------------------------------------------

b. Other Cash Transactions
    The Commission has identified additional categories of cash 
transactions of U.S. Treasury securities to include in the membership 
requirements for a U.S Treasury securities CCA that it believes will 
provide the benefits of increased central clearing of U.S. Treasury 
securities transactions described above.
    The Commission is defining an eligible secondary market transaction 
to include those cash purchase and sale transactions in which the 
counterparty of the direct participant is a registered broker-dealer, 
government securities broker, or dealer.\881\ These entities, by 
definition, are engaged in the business of effecting transactions in 
securities for the account of others (for brokers) or for their own 
accounts (for dealers). Thus, these entities already are participating 
in securities markets and have identified mechanisms to clear and 
settle their transactions.\882\ More generally, many registered brokers 
and dealers are familiar with transacting through introducing brokers 
who pass their transactions to clearing brokers for clearing and 
settlement.
---------------------------------------------------------------------------

    \881\ 15 U.S.C. 78o(a) and 78o-5(a) (requirement to register) 
and 78c(4), (5), (43), and (44) (definitions).
    \882\ See, e.g., FICC Rules 3A, 8, 18, supra note 663 (providing 
for prime brokerage and correspondent clearing and sponsored 
membership); see also October 2021 White Paper, supra note 681, at 
5-7.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission proposed to include in the 
definition of eligible secondary market transaction any purchases and 
sales of U.S. Treasury securities between a direct participant and a 
counterparty that is: (i) a hedge fund, that is any private fund (other 
than a securitized asset fund): (a) with respect to which one or more 
investment advisers (or related persons of investment advisers) may be 
paid a performance fee or allocation calculated by taking into account 
unrealized gains (other than a fee or allocation the calculation of 
which may take into account unrealized gains solely for the purpose of 
reducing such fee or allocation to reflect net unrealized losses); (b) 
that may borrow an amount in excess of one-half of its net asset value 
(including any committed capital) or may have gross notional exposure 
in excess of twice its net asset value (including any committed 
capital); or (c) that may sell securities or other assets short or 
enter into similar transactions (other than for the purpose of hedging 
currency exposure or managing duration) (``hedge fund transactions''), 
or (ii) an account at a registered broker-dealer, government securities 
dealer, or government securities broker where such account may borrow 
an amount in excess of one-half of the value of the account or may have 
gross notional exposure of the transactions in the account that is more 
than twice the value of the account (``leveraged account 
transactions'').\883\
---------------------------------------------------------------------------

    \883\ See part II.A.2.b supra.
---------------------------------------------------------------------------

    Some commenters supported the proposed inclusion of transactions 
with hedge funds within the definition of an eligible secondary market 
transaction.\884\ However, other commenters asserted that transactions 
with a hedge fund should not be within the definition of an eligible 
secondary market transaction. Specifically, one commenter stated that 
because of the nature of the definition, eligible secondary market 
transactions would include those with firms that may (but in practice 
might not actually) exceed the quantitative thresholds without regard 
to the risks that these firms actually take on, or their investment 
models and strategies. Further, the commenter stated that the 
definition would not reflect any effort to assess whether any 
particular fund or account actually imposes systemic risk, and would 
instead treat the mere ability to obtain leverage as a source of 
risk.\885\ Another commenter stated that there is no data to support 
imposing a clearing requirement that targets just hedge funds and 
leveraged accounts and expressed concern that a partial mandate may 
result in some dealers choosing to offer liquidity only in a cleared 
environment thereby reducing the liquidity available today to accounts 
in the uncleared cash market.\886\ Another commenter stated that the 
inclusion of hedge funds within the counterparties to an eligible 
secondary market transaction would arbitrarily single out hedge funds' 
cash Treasury transactions and would leave out other important market 
participants' cash

[[Page 2807]]

Treasury transactions that also comprise a large segment of Treasury 
market liquidity.\887\
---------------------------------------------------------------------------

    \884\ See DTCC/FICC Letter, supra note 33; Better Markets 
Letter, supra note 33; AFREF Letter, supra note 33.
    \885\ See MFA Letter, supra note 81 at 19-20.
    \886\ See SIFMA AMG Letter, supra note 35, at 11.
    \887\ See AIMA Letter, supra note 81, at 7.
---------------------------------------------------------------------------

    As the Commission stated in the Proposing Release, hedge funds 
generally can engage in trading strategies that may pose heightened 
risks of potential financial distress to their counterparties, 
including those who are direct participants of a U.S. Treasury 
securities CCA. The Commission previously has recognized that the 
strategies employed by hedge funds ``can increase the likelihood that 
the fund will experience stress or fail, and amplify the effects on 
financial markets.'' \888\ The Commission also has stated that 
significant hedge fund failures, resulting from their investment 
positions or use of leverage or both, could result in material losses 
at the financial institutions that lend to them if collateral securing 
this lending is inadequate, and that these losses could have systemic 
implications if they require these financial institutions to scale back 
their lending efforts or other financing activities generally.\889\
---------------------------------------------------------------------------

    \888\ See Form PF Proposing Release, supra note 279, 76 FR at 
8073 (citing President's Working Group on Financial Markets, Hedge 
Funds, Leverage, and the Lessons of Long Term Capital Management 
(Apr. 1999), at 23).
    \889\ Id. (also noting that the simultaneous failure of several 
similarly positioned hedge funds could create contagion through the 
financial markets if the failing funds had to liquidate their 
investment positions at fire sale prices).
---------------------------------------------------------------------------

    Similar to the risks posed to a U.S. Treasury securities CCA by 
non-centrally cleared trades entered into by an IDB, non-centrally 
cleared transactions entered into between hedge funds and direct 
participants of the CCA could cause risks to the CCA in the event that 
the hedge fund is not able to meet its obligations to the direct 
participant, which could, in turn, create stress to the direct 
participant and through to the CCA. Therefore, including the direct 
participant's purchase and sale transactions with hedge funds within 
the definition of an eligible secondary market transaction would have 
reduced the potential for financial distress arising from the 
transactions that could affect the direct participant and the U.S. 
Treasury securities CCA. This aspect of the proposal would also have 
resulted in consistent and transparent risk management being applied to 
such transactions, as discussed further in part II.A.2.a supra.
    However, in response to comments received and as discussed in part 
II.A.2.b supra, the Commission is not adopting a definition of eligible 
secondary market transaction in Rule 17ad-22(a) that includes these 
transactions.\890\
---------------------------------------------------------------------------

    \890\ Id.
---------------------------------------------------------------------------

iv. Exclusions From the Requirement To Clear Eligible Secondary Market 
Transactions
    The Commission is excluding certain otherwise eligible secondary 
market transactions in U.S. Treasury securities from the requirement to 
clear eligible secondary market transactions. Recognizing the 
importance of U.S. Treasury securities not only to the financing of the 
United States government, but also their central role in the 
formulation and execution of monetary policy and other governmental 
functions, the Commission is excluding from the requirement to clear 
eligible secondary market transactions any otherwise eligible secondary 
market transaction in U.S. Treasury securities between a direct 
participant of a U.S. Treasury securities CCA and a central bank.\891\ 
For similar reasons, the Commission is also excluding from the 
requirement to clear eligible secondary market transactions otherwise 
eligible secondary market transactions in U.S. Treasury securities 
between a direct participant of a U.S. Treasury securities CCA and a 
sovereign entity or an international financial institution.\892\ In a 
change from the proposal, and for the reasons given above, the 
Commission is excluding from the requirement to clear eligible 
secondary market transactions otherwise eligible secondary market 
transactions in U.S. Treasury securities between a direct participant 
of a U.S. Treasury securities CCA and either a state and local 
government or a covered clearing agency providing central counterparty 
services, a derivatives clearing organization (see 7 U.S.C. 7a-1 and 17 
CFR 39.3), or is regulated as a central counterparty in its home 
jurisdiction.\893\
---------------------------------------------------------------------------

    \891\ See Proposing Release, supra note 14, at 64625 for a 
discussion of the proposed definition of a central bank for the 
purposes of the rule.
    \892\ See id. for a discussion of the proposed definition of 
sovereign entity and international financial institution.
    \893\ See part II.A.2.a.vii supra and part II.A.2.a.iii supra.
---------------------------------------------------------------------------

    One commenter recommended that the Commission exempt transactions 
in U.S. Treasury securities between affiliates from any central 
clearing requirement. The commenter stated that inter-affiliate 
transactions are important to corporate groups, which may use them to 
achieve efficient risk and capital allocation and obtain flexibility 
for addressing customer demands.\894\ The commenter further stated that 
requiring inter-affiliate transactions to be centrally cleared would 
impose additional costs with limited benefits, for two reasons. First, 
if an inter-affiliate transaction is part of a ``back-to-back 
arrangement,'' meaning that the related external transaction between 
the affiliated counterparty and a non-affiliated counterparty is not 
centrally cleared, then subjecting the inter-affiliate transaction to a 
central clearing requirement does nothing to reduce the contagion risk 
presented by the non-affiliated counterparty. The commenter further 
asserted that if that external transaction is already centrally 
cleared, the contagion risk would already be addressed and requiring 
the inter-affiliate transaction to be cleared would not create 
additional benefits. Second, a direct participant's affiliate's credit 
risk is already part of the group-wide financial risks to which the 
Treasury CCP is exposed, and central clearing of inter-affiliate 
transactions is unlikely to meaningfully impact the risk profile.\895\
---------------------------------------------------------------------------

    \894\ SIFMA/IIB Letter, supra note 37, at 21-22.
    \895\ Id.
---------------------------------------------------------------------------

    The Commission agrees and in a change from the proposing release, 
the Commission is conditionally excluding inter-affiliate repo.\896\ 
The Commission believes that, in certain circumstances, the 
counterparty credit risk posed by inter-affiliate transactions may be 
less than other transactions.\897\ However, the credit risk is not 
eliminated because affiliated entities are separate legal entities and, 
generally, are not legally responsible for each other's contractual 
obligations. In the event that one or more affiliated entities becomes 
insolvent, the affiliates, as separate legal entities, would be managed 
as separate estates in a bankruptcy, with the trustee having a duty to 
the creditors of the affiliate, not the affiliated family. Other 
benefits of increased central clearing

[[Page 2808]]

such as consistent risk management and centralized default management 
are likely to be less important for transactions within an affiliated 
family. Therefore, the Commission believes the benefits of clearing 
such transactions are likely less than those from similar transactions 
with non-affiliates while the costs of doing so are likely similar.
---------------------------------------------------------------------------

    \896\ See part II.A.2.a, supra. The Commission is conditioning 
the availability of the exclusion for inter-affiliate transactions 
on an obligation for the affiliated counterparty to submit its 
eligible repo transactions for clearance and settlement. This 
condition should help ensure that a direct participant cannot rely 
upon an inter-affiliate transaction to avoid the requirement to 
clear eligible secondary market transactions. If there were no such 
condition, a direct participant could simply use inter-affiliate 
transactions to move securities and funds to affiliates, and the 
affiliate could then enter into external transactions with 
counterparties which, if entered into with the direct participant, 
would be eligible secondary market transactions.
    \897\ See, e.g., Clearing Exemption for Swaps Between Certain 
Affiliated Entities, 77 FR 50425, 50427 (Mar. 2012) (discussing the 
internalization of counterparty risk on inter-affiliate swap 
transactions as wholly owned members of the same corporate group, 
but also discussing that similar benefits may not accrue for other 
inter-affiliate swaps when the counterparties are not members of the 
same group).
---------------------------------------------------------------------------

    Although the Commission believes that the benefits of central 
clearing are generally increasing in the fraction of total volume that 
is centrally cleared, it also believes that the Federal Reserve System 
should be free to choose the clearance and settlement mechanisms that 
are most appropriate to effectuating its policy objectives.\898\ 
Further, the Commission believes that the exclusion should extend to 
foreign central banks, sovereign entities and international financial 
institutions for reasons of international comity.\899\ In light of 
ongoing expectations that Federal Reserve Banks and agencies of the 
Federal Government will not be subject to foreign regulatory 
requirements in their transactions in the sovereign debt of other 
nations, the Commission believes principles of international comity 
counsel in favor of exempting foreign central banks, sovereign 
authorities, and international institutions.
---------------------------------------------------------------------------

    \898\ See Proposing Release, supra note 14, for a discussion of 
the activities of Federal Reserve Bank of New York's open market 
operations conducted at the direction of the Federal Open Market 
Committee.
    \899\ See id., for a discussion of the Commission's belief in 
the principles of international comity.
---------------------------------------------------------------------------

    The Commission is also excluding transactions between U.S. Treasury 
CCA members and natural persons from the requirement to clear eligible 
secondary market transactions. The Commission believes that natural 
persons generally transact in small volumes and should not present 
much, if any, contagion risk to a U.S. Treasury securities CCA and 
therefore, the benefits discussed above are unlikely to be important 
for these transactions. Commenters expressed support for these 
exclusions.\900\
---------------------------------------------------------------------------

    \900\ SIFMA/IIB Letter, supra note 37, at 20; CME Letter, supra 
note 81.
---------------------------------------------------------------------------

    Two commenters asked the Commission to adopt an exemption that 
would allow FCMs to continue to engage in eligible secondary market 
transactions in U.S. Treasury securities outside of central clearing, 
and another commenter acknowledged the potential interaction between 
the proposal and the regulatory framework governing FCMs.\901\ FCMs can 
also be registered with the Commission as broker-dealers.\902\ 
Commenters expressed concern as to whether the account structure 
provided by FICC would be consistent with the regulatory framework 
governing FCMs.\903\ The Commission recognizes the apparent tension 
between the rule amendments being adopted and the application of Rule 
1.25(d)(2), as described in part II.A.2.a.iv, supra.
---------------------------------------------------------------------------

    \901\ See supra note 200. See also part II.A.2.a.iv, supra, for 
discussion of FCMs and the regulatory framework governing them.
    \902\ One commenter states that the majority of FCMs are dually 
registered as FCMs and broker-dealers. See FIA Letter, supra note 
200, at 2.
    \903\ See part II.A.2.a.iv, supra.
---------------------------------------------------------------------------

    For the reasons discussed above in part II.A.2.a.iv, the Commission 
does not believe that an exclusion for FCMs is necessary to accommodate 
the relevant provisions of the CFTC Rules. Moreover, an exclusion for 
FCMs would be inconsistent with the purpose of the rule which is to 
help reduce contagion risk to the CCA and bring the benefits of central 
clearing to more transactions involving U.S. Treasury securities, 
particularly in light of their significance to the Treasury market.
b. Other Changes to Covered Clearing Agency Standards
    The Commission believes that certain additional changes to its 
Covered Clearing Agency Standards that apply only to U.S. Treasury 
securities CCAs are warranted to facilitate additional clearing. Such 
changes should help ensure that the U.S. Treasury securities CCA can 
continue to manage the risks arising from more transactions from 
additional indirect participants and to facilitate the increased use of 
central clearing and the accompanying benefits. These changes, by 
making central clearing more efficient for market participants, also 
create incentives for greater use of central clearing.
i. Policies and Procedures Regarding Direct Participants' Transactions
    The Commission is adopting Rule 17ad-22(e)(18)(iv)(B) that requires 
a U.S. Treasury securities CCA establish, implement, maintain and 
enforce written policies and procedures to identify and monitor its 
direct participants' required submission of transactions for clearing, 
including, at a minimum, addressing a direct participant's failure to 
submit transactions. The Commission believes that such a requirement 
should help ensure that a U.S. Treasury securities CCA adopts policies 
and procedures directed at understanding whether and how its 
participants comply with the policies that will be adopted as part of 
the requirement to clear eligible secondary market transactions 
requiring the submission of specified eligible secondary market 
transactions for clearing. Without such policies and procedures, it 
would be difficult for the CCA to assess if the direct participants are 
complying with the requirement to clear eligible secondary market 
transactions.
    One commenter supported this aspect of the proposal.\904\ This 
commenter anticipated that implementation of this aspect of the 
proposal would be similar to implementation of other Covered Clearing 
Agency Standards provisions that use that phrase.\905\ The commenter 
stated that it expects a U.S. Treasury securities CCA would take steps 
to remediate non-compliance on the part of its direct participants in a 
manner consistent with the Covered Clearing Agency Standards and 
breaches of the CCA's own rules.\906\
---------------------------------------------------------------------------

    \904\ See FICC/DTCC Letter, supra note 33, at 21-22. See also 
part II.A.4 supra for additional discussion.
    \905\ Id.
    \906\ Id.
---------------------------------------------------------------------------

ii. Netting and Margin Practices for House and Customer Accounts
    The Commission is amending Rule 17ad-22(e)(6)(i) to require a U.S. 
Treasury securities CCA to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to, as applicable, 
calculate, collect, and hold margin amounts from a direct participant 
for its proprietary U.S. Treasury securities positions, separately and 
independently from margin calculated and collected from that direct 
participant in connection with U.S. Treasury securities transactions by 
an indirect participant that relies on the services provided by the 
direct participant to access the covered clearing agency's payment, 
clearing, or settlement facilities. As described further below, such 
changes should allow a U.S. Treasury securities CCA to better 
understand the source of potential risk arising from the U.S. Treasury 
securities transactions it clears and potentially further incentivize 
central clearing.
    In practice, at FICC, clearing a U.S. Treasury securities 
transaction between a direct participant and its customer, i.e., a 
dealer to client trade, would not result in separate collection of 
margin for the customer transaction. Except for transactions submitted 
under the FICC sponsored member program,\907\ FICC margins the 
transactions in the direct participant's (i.e., the dealer's) account 
on a net basis, allowing any of the trades for the participant's own 
accounts to net

[[Page 2809]]

against trades by the participant's customers.\908\
---------------------------------------------------------------------------

    \907\ See DTCC October 2021 White Paper, supra note 681.
    \908\ Id. at 5-6.
---------------------------------------------------------------------------

    Under the amendments to Rule 17ad-22(e)(6)(i), a U.S. Treasury 
securities CCA is required to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable, calculate margin amounts for all transactions that a direct 
participant submits to the CCP on behalf of others, separately from the 
margin that is calculated for transactions that the direct participant 
submits on its own behalf. Such policies and procedures must also 
provide that margin collateralizing customer positions be collected 
separately from margin collateralizing a direct participant's 
proprietary positions. Finally, the CCP will also be required to have 
policies and procedures reasonably designed to, as applicable, ensure 
that any margin held for customers or other indirect participants of a 
member is held in an account separate from those of the direct 
participant.
    Because the amendments to Rule 17ad-22(e)(6)(i) require separating 
positions in U.S. Treasury securities transactions of a direct 
participant in a U.S. Treasury securities CCA from those of customers 
or other indirect participants, the indirect participants' positions, 
including those submitted outside of the sponsored member program, will 
no longer be netted against the direct participant's positions. The 
indirect participants' positions will be subject to the covered 
clearing agency's risk management procedures, including collection of 
margin specific to those transactions. These changes should allow a 
U.S. Treasury securities CCA to better understand the source of 
potential risk arising from the U.S. Treasury securities transactions 
it clears. In addition, these changes should help avoid the risk of a 
disorderly default in the event of a direct participant default, in 
that FICC will be responsible for the central liquidation of the 
defaulting participant's trades without directly impacting the trades 
of the participant's customers or the margin posted for those trades.
    Moreover, the amendments to Rule 17ad-22(e)(6)(i) should result in 
dealer-to-customer trades gaining more benefits from central clearing. 
Because margin for a direct participant's (i.e., a dealer's) trades 
will be calculated, collected, and held separately and independently 
from those of an indirect participant, such as a customer, the direct 
participant's trades with the indirect participant can be netted 
against the direct participant's position vis-[agrave]-vis other 
dealers.\909\
---------------------------------------------------------------------------

    \909\ See Marta Chaffee and Sam Schulhofer-Wohl, supra note 678, 
at 3.
---------------------------------------------------------------------------

    Holding margin amounts from a direct participant of a U.S Treasury 
securities CCA separately and independently from those of an indirect 
participant may reduce incentives for indirect participants to trade 
excessively in times of high volatility.\910\ Such incentives exist 
because the customers of a broker-dealer do not always bear the full 
cost of settlement risk for their trades. Broker-dealers incur costs in 
managing settlement risk with CCPs. Broker-dealers can recover the 
average cost of risk management from their customers. However, if a 
particular trade has above-average settlement risk, such as when market 
prices are unusually volatile, it is difficult for broker-dealers to 
pass along these higher costs to their customers because fees typically 
depend on factors other than those such as market volatility that 
impact settlement risk. Holding margin of indirect participants 
separately from direct participants should reduce any such incentives 
to trade more than they otherwise would if they bore the full cost of 
settlement risk for their trades.
---------------------------------------------------------------------------

    \910\ See Sam Schulhofer-Wohl, Externalities in Securities 
Clearing and Settlement: Should Securities CCPs Clear Trades for 
Everyone? (Fed. Res. Bank Chi. Working Paper No. 2021-02, 2021).
---------------------------------------------------------------------------

    Commenters generally supported the proposed amendment to Rule 17ad-
22(e)(6)(i).\911\ However, commenters also raised several additional 
issues with respect to the separation of house and customer margin that 
are addressed in part II.B.1 supra. As discussed below,\912\ an 
additional commenter stated that the proposed separation of house and 
customer margin would negatively impact small and mid-size broker-
dealers who are disproportionately affected by FICC's Excess Capital 
Premium (``ECP'') charge, which is a margin add-on that collects a 
premium when a member's VaR charge exceeds the member's Net Capital, 
net assets or equity capital (as applicable to that member based on its 
type of regulation).\913\ As discussed in part II.B1 supra, the 
commenter's concerns regarding the interplay between purported required 
gross margining and the ECP charge rests on the assumption that gross 
margin is required under the proposal, which, as discussed in the prior 
paragraph, is not the case. In addition, FICC recently has indicated 
that it intends to make available client clearing models that do not 
require gross margin, consistent with its current offerings.\914\
---------------------------------------------------------------------------

    \911\ See note 33 supra.
    \912\ See part IV.C.3.b infra.
    \913\ IDTA Letter, supra note 66, at 4; IDTA Letter 2, supra 
note 829, at 7; see also FICC Rule 4, section 14, supra note 19.
    \914\ See DTCC 2023 White Paper, supra note 107, at 6 
(discussing that the proposal would allow the option to calculate 
and collect margin associated with customer activity on a gross or 
net basis depending on the client clearing model selected by the 
member and stating that FICC would offer options via different 
access models that would allow those parties to balance the benefits 
of netting and segregation in different ways).
---------------------------------------------------------------------------

    A commenter requested that the SEC encourage FICC to establish a 
feature allowing (but not requiring) registered fund sponsored members 
to support their obligations by having margin posted with FICC (``FICC 
registered fund margin framework'') rather than by paying fees to the 
sponsoring member.\915\ While the commenter noted that the Sponsored 
Service under current FICC rules does not raise custody issues for 
registered funds under the 1940 Act because registered funds are not 
required to post margin to FICC, if a fund's margin were permitted to 
be posted with FICC, that could raise custody issues for funds unless 
such funds had relief from certain provisions of the 1940 Act.\916\ The 
commenter stated that permitting registered funds' margin to be posted 
with FICC could reduce costs for registered funds and facilitate their 
use of cleared reverse repos and term repos.\917\ The Commission 
understands that FICC's current rules for the Sponsored Service do not 
require sponsored and sponsoring member margin to be calculated or held 
separately implying that the sponsoring member is satisfying all FICC 
margin requirements. Thus, current practice bundles trade execution and 
clearing, including the posting of margin. As such, registered funds in 
effect pay the costs associated with the posting of margin either 
through fees or through inferior pricing. Enabling registered fund 
margin to be posted at FICC creates the potential for unbundling these 
activities, and for greater competition.
---------------------------------------------------------------------------

    \915\ See supra note 125.
    \916\ See part II.A.2.a.ii supra.
    \917\ ICI Letter, supra note 85.
---------------------------------------------------------------------------

    The Commission agrees that facilitating the ability for a 
registered fund's margin to be posted at FICC as an alternative to the 
sponsoring member satisfying all FICC margin requirements and passing 
the cost of doing so through to the registered fund may lower the cost 
of trading for the fund, and the Commission's five year position 
discussed in part II.A.2.a.ii supra, will help facilitate the posting 
of registered fund margin to satisfy a U.S. Treasury securities CCA's 
margin deposit

[[Page 2810]]

requirements. The ability to separate the trade execution and clearing 
services of sponsoring a registered fund's transactions with the CCA 
from the posting margin may facilitate done-away trading and enhance 
the ability of smaller CCA netting members to become sponsoring members 
or expand the capacity of sponsoring members in the Sponsored Service.
iii. Facilitating Access to U.S. Treasury Securities CCAs
    The various access models currently available to access central 
clearing in the U.S. Treasury securities market may not meet the needs 
of the many different types of market participants who transact in U.S. 
Treasury securities with the direct members of a U.S. Treasury 
Securities CCA. The additional provision to Rule 17ad-22(e)(18)(iv)(C) 
requires a U.S. Treasury securities CCA to establish, implement, 
maintain and enforce certain written policies and procedures regarding 
access to clearance and settlement services, which, while not 
prescribing specific methods of access, is intended to ensure that all 
U.S. Treasury security CCAs have appropriate means to facilitate access 
to clearance and settlement services in a manner suited to the needs of 
market participants, including indirect participants.
    Some market participants have commented on the current practice of 
tying clearing services to trading under the sponsored clearing 
model.\918\ Under this model, the decision to clear the trades of an 
indirect participant appears to be contingent on that indirect 
participant trading with the direct participant sponsoring the indirect 
member.\919\ If the indirect participant is a competitor of the 
sponsoring direct participant and the direct participant has discretion 
on which trades to clear, the indirect participant may have difficulty 
accessing clearing. The rule requires the U.S. Treasury securities CCA 
to ensure appropriate means to facilitate access; for some current 
indirect participants this may imply direct membership (with a 
potential change in membership criteria); alternatively, requiring 
something similar to a ``done-away'' clearing model may be another 
means of facilitating clearing.
---------------------------------------------------------------------------

    \918\ See Futures Industry Association Principal Traders Group, 
Clearing a Path to a More Resilient Treasury Market, at 10 (July 
2021), available at https://www.fia.org/sites/default/files/2021-07/FIA-PTG_Paper_Resilient%20Treasury%20Market_FINAL.pdf (``FIA-PTG 
Whitepaper'').
    \919\ See id. at 7.
---------------------------------------------------------------------------

    Other considerations relate to the services available through the 
sponsored clearing model. For example, buy-side participants, currently 
engage in both triparty and bilateral repo, across multiple tenors 
(both overnight and long term), and on either side (selling or buying) 
of the transaction. At present, it appears that FICC direct members may 
be able to decline to submit a trade with counterparties who are not 
FICC direct members for central clearing at their discretion.\920\ Thus 
some indirect participants who are unable to enter into a similar 
transaction using a different FICC direct member who is willing to 
submit the trade for central clearing would not be able to access 
central clearing under the current practice. The rule requires FICC to 
create new policies and procedures to facilitate access to clearing for 
these participants.
---------------------------------------------------------------------------

    \920\ See part IV.B.3 supra.
---------------------------------------------------------------------------

    One commenter opposed the inclusion of registered funds because the 
current clearing framework is not sufficiently developed to support 
such a central clearing requirement.\921\ The commenter identified 
several issues to be addressed prior to adopting such a requirement, 
including improvements to the Sponsored Service and develop a ``done 
away'' model (see part II.B.2 supra for additional discussion of the 
issues raised by this commenter).
---------------------------------------------------------------------------

    \921\ ICI Letter, supra note 85.
---------------------------------------------------------------------------

    In addition, the Rule 17ad-22(e)(18)(iv)(C) requires the CCA's 
written policies and procedures be annually reviewed by the CCA's board 
of directors to ensure that the CCA has appropriate means to facilitate 
access to clearance and settlement services of all eligible secondary 
market transactions in U.S. Treasury securities, including those of 
indirect participants. This review should help ensure that such 
policies regarding access to clearance and settlement services, 
including for indirect participants, are reviewed annually by the U.S. 
Treasury securities CCA's board of directors. The annual review ensures 
that such policies and procedures be reviewed periodically and 
potentially updated to address any changes in market conditions.
c. Amendments to Rules 15c3-3 and 15c3-3a
    The rules and rule amendments being adopted and that are discussed 
above could cause a substantial increase in the margin broker-dealers 
must post to a U.S. Treasury securities CCA resulting from their 
customers' cleared U.S. Treasury securities positions. Currently, Rules 
15c3-3 and 15c3-3a do not permit broker-dealers to include a debit in 
the customer reserve formula equal to the amount of margin required and 
on deposit at a U.S. Treasury securities CCA. This is because no U.S. 
Treasury securities CCA has implemented rules and practices designed to 
segregate customer margin and limit it to being used solely to cover 
obligations of the broker-dealer's customers. Therefore, increases in 
the amount of margin required to be deposited at a U.S. Treasury 
securities CCA as a result of the requirement to clear eligible 
secondary market transactions would result in corresponding increases 
in the need to use broker-dealers' cash and securities to meet these 
requirements.
    The amendment to Rule 15c3-3a permits, under certain conditions, 
margin required and on deposit at a U.S. Treasury securities CCA to be 
included as a debit item in the customer reserve formula. This new 
debit item will offset credit items in the Rule 15c3-3a formula and, 
thereby, free up resources that could be used to meet the margin 
requirements of a U.S. Treasury securities CCA. The amendment allows a 
customer's broker to use customer funds to meet margin requirements at 
the CCP generated by the customer's trades, lowering the cost of 
providing clearing services.
    As discussed further below, we expect these changes to allow more 
efficient use of margin for cleared trades relative to the baseline. 
This change, alone, could create incentives for greater use of central 
clearing, and thus could promote the benefits described in previous 
sections.
    Overall, commenters supported the proposal to permit this debit 
item.\922\ One commenter stated that the practical effect of this 
change would be to allow broker-dealers to use margin collected from 
customers to satisfy margin requirements associated with such 
customers' transactions, rather than using proprietary funds to finance 
customer margin as is the case today, and expressed its support for 
this amendment because it will free up broker-dealer resources by 
reducing the amount of proprietary funds needed to finance customer 
margin and therefore lower the cost of clearing, while continuing to 
protect customer funds.\923\ Another commenter stated that this change 
would reduce the costs of centrally clearing U.S. Treasury securities 
transactions and thus incentivize more central clearing of such 
transactions.\924\
---------------------------------------------------------------------------

    \922\ See supra note 446.
    \923\ See MFA Letter, supra note 81, at 10.
    \924\ See SIFMA/IIB Letter, supra note 37, at 12.

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

[[Page 2811]]

2. Costs
    The Commission has, where practicable, attempted to quantify the 
economic effects it expects may result from the amendments and new 
rules that it is adopting. In some cases, however, data needed to 
quantify these economic effects is not currently available or depends 
on the particular changes made to the U.S. Treasury securities CCA 
policies and procedures. As noted below, in the Proposing Release the 
Commission was unable to quantify certain economic effects and 
solicited comment, including estimates and data from interested 
parties, which could help inform the estimates of the economic effects 
of the new rules and amendments.
    Significant costs of central clearing for market participants may 
include: (i) initial margin requirements (which in practice are held as 
``clearing fund'' at FICC and subject to loss mutualization and the 
attendant adverse capital implications); (ii) clearing fees; (iii) 
obligations with respect to FICC's capped contingency liquidity 
facility (``CCLF''); (iv) the operational build necessary to access 
central clearing (either as a direct participant or as an indirect 
participant); and (v) legal costs and time associated with onboarding 
customers for indirect central clearing, including, e.g., the need for 
Sponsoring Members to file UCC financing statements with respect to 
Sponsored Members under the Sponsored Member program. These costs are 
discussed in more detail below. Not all costs are expected to be borne 
by all participants and may depend on rules of the clearing agency.
    One commenter stated that the increased costs of centrally clearing 
U.S. Treasury security transactions may reduce liquidity and diversity 
in the Treasury market if firms reduce activity, leave the market, or 
if barriers to entry are too high, given the significant costs of 
clearing for market participants.\925\ The commenter identified several 
types of costs, including initial margin requirements, clearing fees, 
obligations with respect to FICC's CCLF, the operational build 
necessary to access central clearing either as a direct or indirect 
participant, and legal costs and time associated with onboarding 
customers for indirect central clearing, including, e.g., the need for 
Sponsoring Members to file UCC financing statements with respect to 
Sponsored Members under the Sponsored Member program. The commenter 
stated that the impact of these costs would be disproportionately felt 
by small and mid-sized participants in the U.S. Treasury market, and 
that they would reduce diversity in the market and further increase 
concentration among market participants (which may increase systemic 
risk) if such participants leave the market.\926\
---------------------------------------------------------------------------

    \925\ See SIFMA/IIB Letter, supra note 37.
    \926\ See SIFMA/IIB Letter, supra note 37, at 8.
---------------------------------------------------------------------------

    Increased transaction costs will, all else equal, reduce the 
expected return of a particular investment. If this were the only 
effect then the risk/return tradeoff would worsen and transaction 
volume could fall and liquidity deteriorate. However, central clearing 
also provides numerous benefits described above, including a possible 
decrease in transaction costs.\927\ Many of these benefits could be 
expected to particularly benefit small and mid-sized participants, for 
example the reduction in counterparty credit risk that can result from 
central clearing may particularly benefit smaller market participants.
---------------------------------------------------------------------------

    \927\ See part IV.C.1 supra.
---------------------------------------------------------------------------

    Commenters mentioned the potential concentration risk that would 
arise because of the requirement to clear eligible secondary market 
transactions, specifically because only one covered clearing agency 
currently provides such services. One commenter stated that 
concentrating such significant levels of settlement, operational, 
liquidity and credit risk in one institution means that were there 
operational or liquidity stress at FICC, widespread dysfunction in the 
Treasury markets could result.\928\ One commenter agreed that the 
existence of one covered clearing agency serving the U.S. Treasury 
market is highly problematic as it creates enormous concentration risk 
for market participants, and highlighted that, given the importance of 
the U.S. Treasury market to the overall global economy, there needs to 
be a compelling reason for increasing the concentration of cleared 
trading activity in a single clearing house particularly when there is 
no alternative or fallback venue should the clearing house experience a 
disruption to its operations or more significantly were to fail.\929\
---------------------------------------------------------------------------

    \928\ See SIFMA/IIB Letter, supra note 37, at 10.
    \929\ SIFMA/AMG Letter, supra note 37, at 9.
---------------------------------------------------------------------------

    The Commission also recognizes the risks associated with increased 
centralization of clearance and settlement activities. In particular, 
the Commission has previously noted that ``[w]hile providing benefits 
to market participants, the concentration of these activities at a 
covered clearing agency implicitly exposes market participants to the 
risks faced by covered clearing agencies themselves, making risk 
management at covered clearing agencies a key element of systemic risk 
mitigation.'' \930\
---------------------------------------------------------------------------

    \930\ See CCA Standards Proposing Release, supra note 8, 79 FR 
at 29587.
---------------------------------------------------------------------------

    As discussed previously, currently only FICC provides CCP services 
for U.S. Treasury securities transactions, including outright cash 
transactions and repos.\931\ Were FICC unable to provide its CCP 
services for any reason then this could have a broad and severe impact 
on the overall U.S. economy. The FSOC recognized this when it 
designated FICC as a systemically important financial market utility in 
2012,\932\ which subjects it to heightened risk management requirements 
and additional regulatory supervision, by both its primary regulator 
and the Board of Governors.\933\ In addition, FICC is subject to the 
Covered Clearing Agency Standards, which address the various types of 
risk that FICC faces as a CCP, including settlement, operational, 
liquidity, and credit risk. FICC also must meet its obligations under 
both Section 19(b) of the Exchange Act, as a self-regulatory 
organization, and Title VIII of the Dodd-Frank Act. The Commission 
believes that this overall supervisory framework, including the Covered 
Clearing Agency Standards, should help ensure that FICC continues to be 
subject to robust supervision and oversight and to be able to manage 
the risks presented to it, even those arising from increased Treasury 
clearing.
---------------------------------------------------------------------------

    \931\ See Proposing Release, supra note 14 at 64612. See also 
part II.A.1.b supra.
    \932\ See supra note 369.
    \933\ Id. at 119. The Commission previously stated that Congress 
has recognized in the Clearing Supervision Act that the operation of 
multilateral payment, clearing or settlement activities may reduce 
risks for clearing participants and the broader financial system, 
while also creating new risks that require multilateral payment, 
clearing or settlement activities to be well-designed and operated 
in a safe and sound manner. The Clearing Supervision Act is 
designed, in part, to create a regulatory framework to help deal 
with such risk management issues, which is generally consistent with 
the Exchange Act requirement that clearing agencies organize 
themselves in a manner to facilitate prompt and accurate clearance 
and settlement, safeguard securities and funds and protect 
investors. See CCA Standards Proposing Release, supra note 8, 76 FR 
at 14474; see also 12 U.S.C. 5462(9), 5463(a)(2).
---------------------------------------------------------------------------

a. Costs to FICC and Its Members of the Requirement To Clear Eligible 
Secondary Market Transactions
    The Commission believes that many of the direct costs of the rules 
and amendments it is adopting to the U.S. Treasury securities CCA are a 
result of new policies and procedures requirements, the costs of which 
are likely to be modest. This is because all

[[Page 2812]]

but one of these amendments and rules require the CCA to make certain 
changes to its policies and procedures. The other amends Rule 15c3-3a 
to permit margin required and on deposit at a U.S. Treasury securities 
CCA to be included as a debit item in the customer reserve formula for 
broker-dealers, subject to the conditions discussed above. As discussed 
above, the amendments to Rule 15c3-3a require several conditions to be 
met, including that the U.S. Treasury securities CCA calculate a 
separate margin amount for each customer on a gross basis.\934\ 
Comments submitted by the single current U.S. Treasury securities CCA 
acknowledged that it would need to make documentation, operational, 
organizational, and systems changes in order to comply with the 
proposal.\935\
---------------------------------------------------------------------------

    \934\ See part II.C.2.c supra.
    \935\ See DTCC/FICC Letter, supra note 33, at v. Although DTCC/
FICC acknowledged there would be required system and other changes, 
it did not provide any estimate of the costs of such changes.
---------------------------------------------------------------------------

    Rule 17ad-22(e)(18)(iv) requires a U.S. Treasury securities CCA to 
establish, implement, maintain and enforce written policies and 
procedures, as discussed above.\936\ Because policies and procedures 
regarding the clearing of all eligible secondary market transactions 
entered into by a direct participant in a U.S. Treasury securities CCA 
are not currently required under existing Rule 17ad-22, the Commission 
believes that Rule 17ad-22(e)(18)(iv) may require a covered clearing 
agency to make substantial changes to its policies and procedures. The 
rule amendment contains similar provisions to existing FICC rules but 
will also impose additional requirements that do not appear in existing 
Rule 17ad-22. As a result, the Commission believes that a U.S. Treasury 
securities CCA will incur burdens of reviewing and updating existing 
policies and procedures in order to comply with the provisions of Rule 
17ad-22(e)(18)(iv) and, in some cases, may need to create new policies 
and procedures.\937\
---------------------------------------------------------------------------

    \936\ See part II.A.4 supra for a discussion of the requirement 
that a U.S. Treasury securities CCA establish, implement, maintain 
and enforce written policies and procedures reasonably designed to, 
as applicable, identify and monitor its direct participants' 
required submission of transactions for clearing, including, at a 
minimum, addressing a direct participant's failure to submit 
transactions. See part II.B.2 supra for a discussion of the 
requirement that U.S. Treasury securities CCA establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable, ensure that it has appropriate means to 
facilitate access to clearance and settlement services of all 
eligible secondary market transactions in U.S. Treasury securities, 
including those of indirect participants, which policies and 
procedures the U.S. Treasury securities CCA's board of directors 
reviews annually.
    \937\ See part IV.C.2.c.ii, infra.
---------------------------------------------------------------------------

    The Commission estimates that U.S. Treasury securities CCAs will 
incur an aggregate one-time direct cost of approximately $207,000 to 
create new policies and procedures.938 939 The rule also 
requires ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the rule. 
The Commission estimates that the ongoing activities required by Rule 
17ad-22(e)(18)(iv) impose an aggregate ongoing cost on covered clearing 
agencies of approximately $61,000 per year.\940\
---------------------------------------------------------------------------

    \938\ To monetize the internal costs, the Commission staff used 
data from SIFMA publications, modified by Commission staff to 
account for an 1800 hour work-year and multiplied by 5.35 
(professionals) or 2.93 (office) to account for bonuses, firm size, 
employee benefits and overhead. See SIFMA, Management and 
Professional Earnings in the Security Industry--2013 (Oct. 7, 2013); 
SIFMA, Office Salaries in the Securities Industry--2013 (Oct. 7, 
2013). These figures have been adjusted for inflation using data 
published by the Bureau of Labor Statistics.
    \939\ This figure was calculated as follows: Assistant General 
Counsel for 40 hours (at $518 per hour) + Compliance Attorney for 80 
hours (at $406 per hour) + Computer Operations Manager for 20 hours 
(at $490 per hour) + Senior Risk Management Specialist for 40 hours 
(at $397 per hour) + Business Risk Analyst for 80 hours (at $305 per 
hour) = $103,280 x 2 respondent clearing agencies = $206,560. See 
part V.A infra.
    \940\ This figure was calculated as follows: Compliance Attorney 
for 25 hours (at $406 per hour) + Business Risk Analyst for 40 hours 
(at $305 per hour) + Senior Risk Management Specialist for 20 hours 
(at $397 per hour) = $30,290 x 2 respondent clearing agencies = 
$60,580. See part V.A infra.
---------------------------------------------------------------------------

i. Costs Attendant to an Increase in CCLF
    The new rules and amendments being adopted will likely result in a 
significant increase in the volume of U.S. Treasury securities 
transactions submitted to clearing. The G-30 has reported that FICC 
differs qualitatively from other CCPs in that counterparty credit risks 
are relatively small but liquidity risks in the event of member 
defaults could be extraordinarily large.\941\ This is because net long 
positions generate liquidity obligations for FICC since, in the event 
of a member default, FICC would have to deliver cash in order to 
complete settlement of such positions with non-defaulting parties. 
Increased clearing volume of cash and repo transactions as a result of 
the rule could increase FICC's credit and liquidity exposure to its 
largest participant family, including those participants acting as 
sponsors of non-members.\942\ FICC is obligated by Commission rule to 
maintain liquidity resources to settle all obligations of its largest 
participant family, in the event of default.\943\ These resources 
include the CCLF in which Members will be required to hold and fund 
their deliveries to an insolvent clearing member up to a predetermined 
cap by entering into repo transactions with FICC until it completes the 
associated close-out. This facility allows clearing members to 
effectively manage their potential financing requirements with 
predetermined caps.\944\
---------------------------------------------------------------------------

    \941\ G-30 Report, supra note 5, at 14.
    \942\ Participant family means that if a participant directly, 
or indirectly through one or more intermediaries, controls, is 
controlled by, or is under common control with, another participant 
then the affiliated participants shall be collectively deemed to be 
a single participant family. See Rule 17ad-22(a).
    \943\ See part IV.B.3 supra.
    \944\ FICC Disclosure Framework 2021 at 88, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf.
---------------------------------------------------------------------------

    As reported in the CPMI-IOSCO disclosure by FICC for Q2 of 2023, 
the combined liquidity commitment by clearing members to the FICC's 
CCLF was $86.3 billion for all repos and cash trades of U.S. Treasury 
and Agency securities. Since the inception of the CCLF in 2018, the 
CCLF has ranged in size from $82.5B to $108B.\945\ Commitments by bank-
affiliated dealers to the CCLF count against regulatory liquidity 
requirements, including the Liquidity Coverage Ratio (LCR).\946\ 
Dealers affiliated with banks may satisfy their CCLF obligations using 
a guarantee from that affiliated bank but dealers not affiliated with 
banks may incur costs to obtain commitments to meet CCLF liquidity 
requirements. FICC states that when examining the impact of the rule 
amendments being adopted, its findings are inconclusive about the 
potential impact of the incremental indirect participant Treasury 
volume on FICC's liquidity needs or its CCLF.\947\
---------------------------------------------------------------------------

    \945\ See part IV.B.3 supra.
    \946\ LCR is calculated as the ratio of High-Quality Liquid 
Assets (HQLA) divided by estimated total net cash outflow during a 
30-day stress period. Because commitments by bank-affiliated dealers 
to the CCLF would increase the denominator of the ratio, a bank-
affiliated dealer would have to increase HQLA to reach a required 
level of LCR.
    \947\ See DTCC 2023 White Paper, supra note 107, at 3, 19.
---------------------------------------------------------------------------

    The size and cost of a firm's liquidity plan is tied not only to 
its own exposure at FICC, but also to the maximum exposure of the 
largest systemically important financial institution (``SIFI'') banks. 
One commenter stated that its members have reduced their portfolios as 
part of their CCLF liquidity plans.\948\ At the same time, SIFIs have 
increased the size of their portfolios, and

[[Page 2813]]

correspondingly, the very risk that the CCLF was designed to 
reduce.\949\
---------------------------------------------------------------------------

    \948\ IDTA Letter, supra note 66, at 8-9.
    \949\ Id.
---------------------------------------------------------------------------

ii. Costs of the Requirement To Clear Eligible Secondary Market 
Transactions in Terms of Increased Margining for Existing FICC Members
    As discussed above, the Commission recognizes that these amendments 
could cause an increase in the margin clearing members must post to a 
U.S. Treasury securities CCA resulting from the additional transactions 
that will be submitted for clearing as a result of these amendments. 
Although various SRO margin rules provide for the collection of margin 
for certain transactions in U.S. Treasury securities, the Commission 
understands that transactions between dealers and institutional 
customers are subject to a variable ``good-faith'' margin standard, 
which the Commission understands--based on its supervisory experience--
can often result in fewer financial resources collected for margin 
exposures than those that would be collected if a CCP margin model, 
like the one used at FICC, were used.\950\ Mitigating the potential for 
higher margin requirements for transactions submitted for clearing at a 
U.S. Treasury securities CCA is the benefit of netting that results 
from additional centrally cleared transactions.\951\ As described in 
part IV.C.1 supra, this mitigant is likely to be especially significant 
in the case of IDB members. Also, potentially substantially mitigating 
the costs for clearing members is the ability for broker-dealers to 
include a debit in the customer reserve formula equal to the amount of 
margin required and on deposit at a U.S. Treasury securities CCA, as 
described in part II.C supra.
---------------------------------------------------------------------------

    \950\ See supra note 27.
    \951\ See part IV.C.1 supra for a discussion of the benefits of 
multilateral netting expected to result from higher volumes of 
centrally cleared transactions.
---------------------------------------------------------------------------

    Based on a survey of its members, FICC estimates that incremental 
indirect participant Treasury volume could result in a corresponding 
increase in Value at Risk (VaR) margin of approximately $26.6 billion 
across the FICC/GSD membership.952 953 Netting members' 
required fund deposits to the clearing fund are primarily driven by a 
VaR charge; however, other margin charges may be collected when 
applicable.\954\ The cost to the netting members of the additional 
required fund deposits estimated by FICC is likely be less than this 
for three reasons. First, the definition of an eligible secondary 
market transaction with respect to cash transactions that is being 
adopted is narrower than that which was proposed and on which FICC's 
estimates were based. Second, some fraction of the additional secondary 
market transactions that will be centrally cleared due to the new rules 
that would otherwise have been cleared bilaterally would also have been 
subject to margin requirements. Finally, since margin is only posted 
pending settlement, the cost to the posting entity is the opportunity 
cost of the funds.
---------------------------------------------------------------------------

    \952\ See DTCC 2023 White Paper, supra note 107, at 3, 16. FICC 
estimates that, in aggregate, there will be an incremental $500 
billion of indirect participant Treasury repo activity, $520 billion 
of indirect participant Treasury reverse repo activity and $605 
billion of indirect participant Treasury cash activity that could be 
submitted to FICC under the Proposing Release if it were adopted. 
The increase in margin is based on this estimate of increased 
central clearing activity. The estimates assume that all incremental 
indirect participant volume clears through one of FICC's client 
clearing models that calculate margin on a gross basis. The 
estimates could decrease if the activity were cleared through one of 
FICC's client clearing models that calculate margin on a net basis. 
See also note 377, supra, regarding margin methodologies. BNY Mellon 
estimates as much as $370 billion in additional Treasury cash 
activity and $2.8 trillion in additional Treasury repo and reverse 
repo activity that could be submitted to FICC although they note 
that exemptions could reduce these amounts. See BNY Mellon, 
Reassembly Required: Central Clearing could Reshape the U.S. 
Treasury Market (November 2023), available at https://www.bnymellon.com/us/en/insights/all-insights/central-clearing-us-treasury-market.html.
    \953\ There is uncertainty among market participants about how 
much additional margin would have to be collected by FICC. For 
example, in an article in the Financial Times' Alphaville, an 
analyst at Barclays is quoted as estimating the additional margin 
could be $45 billion. Bryce Elder, Repo reform is a $2tn mystery 
wrapped in an enigma of dodgy data, FT Alphaville (Oct.13, 2023), 
available at https://www.ft.com/content/518cbd3b-b1ed-4c3e-bd5e-9ac5bee99d9f. The discussion concluding that the cost to netting 
members of the additional required fund deposits estimated by FICC 
applies to this alternative estimate as well.
    \954\ See DTCC, F.A.Q. FICC--Risk Management, available at 
https://www.dtcc.com/USTclearing/-/media/Files/Downloads/Microsites/Treasury-Clearing/FICC-Risk-Management-FAQ.pdf (last visited Dec. 
11, 2023).
---------------------------------------------------------------------------

    One commenter, on behalf of its broker-dealer members, stated that 
there is a transaction cost difference between current bilateral trades 
that are cleared using the triparty platform and an identical 
transaction that must be centrally cleared.\955\ The commenter further 
noted that this cost across a volume of trades is borne by clients of 
broker-dealers. The commenter stated that while the actual costs may 
vary across its membership, its members are currently paying about 
$3.00 per transaction settled on the triparty platform and bilaterally 
cleared over $7.00 for a similar tri-party transaction that was 
centrally cleared through FICC. The commenter stated that this is 
because FICC imposes intraday and end-of-day position management 
charges, among other charges, making it materially cost prohibitive to 
transact with FICC and thereby increasing the cost of trading to the 
end customer. Besides the direct impact of these costs, which could 
limit trading, costs of central clearing may incentivize non-direct 
participants of a Treasury CCP to look for ways to trade away from 
direct participants in order to not have to centrally clear Treasury 
transactions, negatively affecting both liquidity and competition.
---------------------------------------------------------------------------

    \955\ IDTA Letter, supra note 66, at 4.
---------------------------------------------------------------------------

    Several commenters discussed facilitating cross-margining of 
indirect participants' transactions in U.S. Treasury securities with 
those in U.S. Treasury futures as a method to lower costs of trading 
and thereby incentivize additional clearing.\956\ One commenter stated 
that cross-margining would lower costs for market participants by 
allowing them to apply margin across positions submitted for clearing 
through various clearinghouses. The commenter stated that this would 
ensure that a market participant can post margin adequate to support 
its positions without having to post margin in excess of regulatory 
requirements due to an inability to apply margin across platforms.\957\ 
As discussed above, other commenters made additional suggestions 
lowering costs by creating additional cross margining 
opportunities.\958\ The current cross-margining agreement between FICC 
and CME is part of the GSD rulebook, and any changes to it have to be 
filed with the Commission pursuant to Section 19(b) of the Exchange 
Act. The Commission agrees that cross-margining can be beneficial to 
market participants.\959\ Rules requiring segregation of client margin 
should facilitate cross-margining. If such cross-margining were 
adopted, some costs of clearing would be mitigated.
---------------------------------------------------------------------------

    \956\ MFA Letter at 11; SIFMA/IIB Letter, supra note 37, at 13; 
SIFMA AMG Letter at 8.
    \957\ MFA Letter at 11.
    \958\ See part II.A.1.0 supra.
    \959\ Id.
---------------------------------------------------------------------------

    One commenter stated that central clearing can have procyclical 
effects in times of market stress due to the margin requirements of 
clearing agencies, further reducing liquidity when it is most 
needed.\960\ The commenter stated that, depending on the applicable 
margin models, clearing can be procyclical in times of market turmoil, 
as increased margin requirements (including intraday and ad hoc calls) 
drive demand for liquid assets, which,

[[Page 2814]]

in turn, increases the scarcity of those assets and further drives 
market stress. The commenter described FICC's rules as allowing FICC to 
demand, at any time in its discretion, additional margin from its 
members in times of market volatility, including through intraday 
calls, to safeguard the clearing infrastructure.\961\
---------------------------------------------------------------------------

    \960\ SIFMA/IIB Letter, supra note 37, at 9.
    \961\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges that, in times of market stress, margin 
calls may increase to address the ongoing market volatility. This is by 
design, as margin models are built to be responsive to current market 
conditions. The Commission has specifically required that CCAs have the 
authority and operational capacity to make intraday margin calls in 
defined circumstances.\962\ This ability is important to the CCA's 
ability to manage the risk and cover the credit exposures that its 
participants may bring to the CCA. When considering a CCA's authority 
with respect to intraday margin, the Commission may consider its 
potential procyclicality.\963\ In addition, the Commission may consider 
the transparency of the margin model, such that market participants can 
understand when the CCA may make margin calls.\964\ In addition to the 
FICC rules cited by the commenter, FICC has provided additional 
transparency regarding how it determines the need for intraday margin 
calls, including the specific criteria that it uses to assess the 
need.\965\ FICC is also subject to Rule 17ad-22(e)(23), which requires 
certain levels of public disclosure regarding FICC's margin methodology 
and the costs of participating in FICC, as discussed further in part 
II.B.2 supra. The Commission's ongoing consideration of the role and 
function of intraday margin calls, as well as market participants' 
ability to understand such calls, obviates the need for separate study 
in connection with this proposal.\966\
---------------------------------------------------------------------------

    \962\ 17 CFR 240.17ad-22(e)(6)(ii).
    \963\ See, e.g., Self-Regulatory Organizations; Fixed Income 
Clearing Corporation; Order Approving a Proposed Rule Change to 
Modify the Calculation of the MBSD VaR Floor to Incorporate a 
Minimum Margin Amount, Exchange Act Release No. 92303, at 32 (June 
30, 2021) (discussing commenter's concern regarding potential 
procyclical nature of a margin methodology change); Self-Regulatory 
Organizations; The Options Clearing Corporation; Order Granting 
Approval of Proposed Rule Change Concerning The Options Clearing 
Corporation's Margin Methodology for Incorporating Variations in 
Implied Volatility, Exchange Act Release No. 95319, at 3 (July 19, 
2022) (referencing the impact of a change to margin methodology on 
procyclicality of margin).
    \964\ See, e.g., Self-Regulatory Organizations; National 
Securities Clearing Corporation; Order Approving a Proposed Rule 
Change to Enhance National Securities Clearing Corporation's 
Haircut-Based Volatility Charge Applicable to Illiquid Securities 
and UITs and Make Certain Other Changes to Procedure XV, Exchange 
Act Release No. 34-90502, at 56-59 (Nov. 24, 2020) (discussing 
commenter's concerns regarding transparency of change to margin 
methodology).
    \965\ See Self-Regulatory Organizations; Fixed Income Clearing 
Corporation; Notice of Filing of Proposed Rule Changes to the 
Required Fund Deposit Calculation in the Government Securities 
Division Rulebook, Exchange Act Release No. 82588 (Jan. 26, 2018) 
(identifying the following specific parameter breaks: (i) a dollar 
threshold that evaluates whether a Netting Member's Intraday VaR 
Charge equals or exceeds a set dollar amount (then set at 
$1,000,000) when compared to the VaR Charge that was included in the 
most recently collected Required Fund Deposit including, any 
subsequently collected Intraday Supplemental Fund Deposit; (ii) a 
percentage threshold, that evaluates whether the Intraday VaR Charge 
equals or exceeds a percentage increase (then set at 100%) of the 
VaR Charge that was included in the most recently collected Required 
Fund Deposit including, if applicable, any subsequently collected 
Intraday Supplemental Fund Deposit; (iii) the coverage target, that 
evaluates whether a Netting Member is experiencing backtesting 
results below the 99% confidence level). FICC has updated this 
information via Important Notices to its participants. See, e.g., 
Important Notice GOV1244-22, GSD Intraday Supplemental Fund Deposit 
Parameter Change (Apr. 11, 2022), available at https://www.dtcc.com/-/media/Files/pdf/2022/4/11/GOV1244-22.pdf (raising the coverage 
target).
    \966\ See also Proposed Rule, Covered Clearing Agency Resilience 
and Recovery and Wind-Down Plans, Exchange Act Release No. 97516 
(May 17, 2023), 88 FR 34708 (May 30, 2023) (proposing additional 
requirements with respect to intraday margin that CCAs require 
intraday monitoring of their exposures and specifying particular 
circumstances in which the CCA should make intraday margin calls).
---------------------------------------------------------------------------

iii. Other Costs
    Several commenters raised additional issues related to costs or 
limitations on benefits of the new rules and amendments. One commenter 
explained that registered funds' access to the Treasury repo market 
could be restricted by the number or willingness of the FICC netting 
members to provide sponsoring services, with attending negative effect 
on the market liquidity.\967\
---------------------------------------------------------------------------

    \967\ ICI Letter, supra note 85, at 30-31.
---------------------------------------------------------------------------

    Commenters have raised concerns that increases in demand for the 
Sponsored Service may put pressure on existing sponsoring members and 
reduce their ability or willingness to onboard additional clients. Such 
outcomes may result in these market participants not being able to 
trade with some of the largest banks and broker dealers who are direct 
members of FICC unless they are able to access clearing using an 
alternative clearing model, reducing the number of potential 
counterparties, possibly raising trading costs. Demand for sponsored 
access to clearing could also drive up the price of providing such 
services and provide an incentive for new competitors to enter the 
market for providing sponsored clearing services. Alternatively, it is 
possible that as part of review of its access models and related 
policies and procedures required by Rule 17ad-22(e)(18)(iv)(C), that 
FICC may modify its access models in a way that results in improved 
access for market participants who otherwise be so affected. Another 
commenter explained the impact of the ECP charge in conjunction with 
FICC's Sponsored Service, stating that ``the combination of gross 
margining and ECP currently in use under the Sponsored Model, and what 
is prescribed in the Proposed Rule, effectively prevents smaller and 
middle market broker dealers from materially participating in the 
Treasury market.\968\
---------------------------------------------------------------------------

    \968\ IDTA Letter, supra note 66, at 5. This commenter's stated 
concern regards the interplay between the ECP and gross margining 
and rests on the assumption that gross margining is required by the 
rule which is not the case. See supra part II.B.1. However, the ECP 
in its current form may impact the willingness of small and middle 
market broker dealers from sponsoring additional market 
participants.
---------------------------------------------------------------------------

    However, another commenter explained that, in addition to the 
Sponsored Service, the U.S. Treasury securities CCA offers a variety of 
way to access central clearing for indirect participants.\969\ For 
example, FICC's Prime Brokerage Clearing and Correspondent Clearing 
models currently support clearing of transactions between indirect 
participants although, at present, these models are rarely used.\970\ 
As stated in the Proposing Release, the Commission continues to believe 
that the U.S. Treasury securities CCA generally should consider a wide 
variety of appropriate means to facilitate access to clearance and 
settlement services of all eligible secondary market transactions in 
U.S. Treasury securities, including those of indirect participants. In 
view of the critical services it provides, the U.S. Treasury securities 
CCA generally should seek to provide access in as flexible a means as 
possible, consistent with its responsibility to provide sound risk 
management and comply with other provisions of the Exchange Act, the 
Covered Clearing Agency Standards, and other applicable regulatory 
requirements.
---------------------------------------------------------------------------

    \969\ DTCC Letter, supra note 33, at 18-21.
    \970\ Id. at 20.
---------------------------------------------------------------------------

b. Costs to Non-Members of a U.S Treasury Securities CCA as a Result of 
the Requirement To Clear Eligible Secondary Market Transactions
    The requirement to clear eligible secondary market transactions 
requires that all repo transactions with a direct participant be 
centrally cleared and that

[[Page 2815]]

certain cash transactions with a direct participant to be centrally 
cleared. The costs incurred by non-members of a U.S. Treasury 
securities CCA to comply with this requirement will depend on the 
policies and procedures developed by the CCA, as discussed in parts 
IV.C.2.a supra and IV.C.2.d infra.
    As stated above, the Commission believes that these amendments will 
increase central clearing in the U.S Treasury securities market. 
Transactions that are not currently submitted for central clearing but 
would be under the amendments being adopted will be subject to certain 
transaction, position, and other fees as determined by the U.S. 
Treasury securities CCA.\971\
---------------------------------------------------------------------------

    \971\ The fee structure for FICC is described in its rulebook. 
See FICC Rules, supra note 19, at 307.
---------------------------------------------------------------------------

    Market participants who enter into eligible secondary market 
transactions with members of U.S. Treasury securities CCAs who do not 
have access to clearing may incur costs related to establishing the 
required relationships with a clearing member in order to submit the 
eligible transactions for clearing. These market participants may also 
incur additional costs related to the submission and management of 
margin. It is possible that such market participants may seek 
alternative counterparties that are not U.S. Treasury securities CCA 
members in order to avoid incurring these costs.
    As discussed in the baseline, the majority of repo and cash 
transactions in the dealer-to-customer segment are not centrally 
cleared. This differentiates the U.S. Treasury securities market from 
the markets for swaps and for futures. There is currently some clearing 
of customer repo; the majority of this clearing is ``done-with''--the 
clearing broker and the counterparty are one and the same. However, in 
the swaps and futures markets, and in the equities market, clearing is 
``done-away''--meaning that the clearing broker may be other than the 
trading counterparty. Market participants have identified costs with 
the done-with model. Market participants in the secondary market for 
U.S Treasury securities that will be required to be centrally cleared 
could incur direct costs for arranging clearing-related legal 
agreements with every potential counterparty. Depending on the customer 
there may be a large number of such arrangements.
    There are indirect costs arising when a trading counterparty is a 
competitor. For example, the pricing and offering of clearing services 
may be determined by forces other than the costs and benefits of the 
clearing relationship itself, such as the degree of competition between 
the counterparties. Other economic arrangements facilitating customer 
clearing are possible and may develop, as in other markets.\972\ One 
such arrangement is direct CCA membership. However, for smaller 
entities, CCA membership may not be economically viable, and for some 
entities, legal requirements may prevent direct membership. Another 
possibility is seeking out counterparties other than CCA members. The 
``done away'' structure of clearing has worked effectively in other 
markets, and, if it were to develop so that all market participants 
with demand could trade using the ``done-away'' structure, would 
significantly mitigate these costs.
---------------------------------------------------------------------------

    \972\ See FIA-PTG Whitepaper, supra note 918 (for a description 
of different client clearing models).
---------------------------------------------------------------------------

    Some participants may not currently post margin for cash clearing 
and may be now required to do so, depending on the form the clearing 
relationship takes. There may be costs associated with the transfer of 
margin. An institutional investor self-managing its account would 
instruct its custodian to post margin with the CCA on the execution 
date, and post a transaction in its internal accounting system showing 
the movement of margin. The day after trade execution, the investor 
would oversee the return of margin from FICC, with an attendant mark of 
a transaction on the investor's internal accounting system. Similar 
steps would occur for an institutional investor trading through an 
investment adviser, though in this case the adviser might instruct the 
custodian and mark the transaction, depending on whether the adviser 
has custody. The institutional investor might also pay a wire fee 
associated with the transfer of margin.
    Besides the costs of developing new contracts with counterparties 
to support central clearing, there will also be a cost to non-CCA 
members associated with margin, to the extent that more margin is 
required than in a bilateral agreement. This cost of margining is 
analogous to that borne by CCA members and is discussed further above.
    As a result of the rule, a potential cost to money market fund 
participants that face FICC as a counterparty is that the funds' credit 
ratings could be affected if FICC becomes a substantially large 
counterparty of these participants, which could be interpreted by 
credit models and ratings methodologies as a heightened concentration 
risk factor. As concentration risk in a CCP is typically not viewed in 
the same way as concentration risk with a bilateral trading party, 
credit rating agencies may quickly adapt their methods to distinguish 
the CCA from a conventional counterparty. In the absence of such 
changes at credit rating agencies, money market fund participants may 
find it necessary to either alter their investment strategies to 
substitute purchases of Treasury securities for repo or to enter into 
repo transactions with entities that are not direct members of a 
Treasury securities CCA.
    As discussed above, increased demand for the Sponsored Service and 
the existence of compliance and capital costs for sponsoring members 
may limit the ability of some market participants to access clearing 
through the Sponsored Service. Unless these market participants are 
able to access clearing through alternative clearing models, they may 
be unable to trade repo with some of the largest banks and broker 
dealers who are direct members of FICC, reducing the number of 
potential counterparties, and possibly resulting in inferior pricing 
for such market participants. Alternatively, it is possible that as 
part of review of its access models and related policies and procedures 
required by Rule 17ad-22(e)(18)(iv)(C), that FICC may modify its access 
models in a way that results in improved access for market participants 
who otherwise be so affected.
    One commenter argued that including triparty repos in the 
definition of an eligible secondary market transaction would likely 
impair the cash and collateral management processes of hedge funds and 
alternative asset managers.\973\ Specifically, the commenter suggested 
that such firms currently conduct same-day bilateral transactions that 
they would not be able to conduct with a direct participant of a U.S. 
Treasury securities CCA required to centrally clear its repo 
transactions.\974\
---------------------------------------------------------------------------

    \973\ See MFA Letter at 17.
    \974\ See id.
---------------------------------------------------------------------------

    The Commission disagrees with this commenter. In its supervisory 
capacity, the Commission is aware that registered funds, hedge funds, 
and alternative asset managers currently conduct centrally cleared 
triparty repo transactions. For example, the Commission is aware that 
numerous hedge funds conduct such same-day transactions as sponsored 
members of FICC. Therefore, the existing operational infrastructure 
supports centrally cleared triparty repo transactions.
    As discussed above, two commenters asked the Commission to adopt an 
exemption that would allow FCMs to continue to engage in eligible 
secondary

[[Page 2816]]

market transactions in U.S. Treasury securities outside of central 
clearing.\975\ For the reasons discussed above in part II.A.2.a.iv 
supra, the Commission is not excluding repo transactions between FICC 
netting members and FCMs from the definition of eligible secondary 
market transactions. However, the Commission recognizes that the 
tension between the rules governing FCMs and the rule amendments being 
adopted may raise costs for FCMs if it restricts the choice of models 
that can be used to access central clearing or reduces the number of 
potential counterparties. For example, one of the commenters explained 
that FCMs are permitted to invest customer funds in certain securities 
determined by the CFTC to be ``consistent with the objectives of 
preserving capital and maintaining liquidity.'' \976\ The commenter 
stated that permitted investments include, among other things, U.S. 
Treasury securities, and investments with U.S. Treasury securities may 
be made by either direct purchase or sale or by entering into repo 
transactions.\977\ The commenter further explained that, for repo 
transactions, an FCM's ``permitted counterparties are limited to a bank 
. . . , securities broker-dealer, or government securities dealer 
registered with the [Commission],'' and a clearing agency is not a 
permitted counterparty.\978\ If an FCM is unable to clear repo 
transactions then it would not be able to trade with FICC netting 
members, reducing the number of potential counterparties available to 
it.
---------------------------------------------------------------------------

    \975\ See supra note 901 and referencing text.
    \976\ FIA Letter, supra note 200, at 4-5 (discussing 17 CFR 
1.25(b)).
    \977\ FIA Letter, supra note 200, at 4-5 (discussing 17 CFR 
1.25(a)).
    \978\ FIA Letter, supra note 200, at 5 (discussing 17 CFR 
1.25(d)(2))).
---------------------------------------------------------------------------

c. Other Changes to Covered Clearing Agency Standards
i. Netting and Margin Practices for House and Customer Accounts
    The amendments to Rule 17ad-22(e)(6)(i) require a U.S. Treasury 
securities CCA to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable, 
calculate, collect, and hold margin amounts from a direct participant 
for its proprietary U.S. Treasury securities positions, separately and 
independently from margin calculated and collected from that direct 
participant in connection with U.S. Treasury securities transactions by 
an indirect participant that relies on the services provided by the 
direct participant to access the covered clearing agency's payment, 
clearing, or settlement facilities.\979\ The amendments to Rule 17ad-
22(e)(6)(i) contain similar provisions to existing FICC rules, 
specifically with respect to its Sponsored Member program, but also 
impose additional requirements that do not appear in existing Rule 
17ad-22. As a result, the Commission believes that a U.S. Treasury 
securities CCA will incur burdens of reviewing and updating existing 
policies and procedures in order to comply with the amendments to Rule 
17ad-22(e)(6) and, in some cases, may need to create new policies and 
procedures.\980\
---------------------------------------------------------------------------

    \979\ See part II.B.1 supra.
    \980\ For general information and statistics regarding the 
Sponsored Service, see DTCC, Sponsored Service, supra note 669. The 
Sponsored Service also allows the submission of cash transactions; 
however, at this time, the service is generally used only for U.S. 
Treasury repo transactions.
---------------------------------------------------------------------------

    The Commission estimates that U.S. Treasury securities CCAs will 
incur an aggregate one-time cost of approximately $106,850 to create 
new policies and procedures.\981\ The amendments to the rule also 
require ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the rule. 
The Commission estimates that the ongoing activities required by the 
amendments to Rule 17ad-22(e)(6) will impose an aggregate ongoing cost 
on covered clearing agencies of approximately $60,580 per year.\982\
---------------------------------------------------------------------------

    \981\ This figure was calculated as follows: Assistant General 
Counsel for 20 hours (at $518 per hour) + Compliance Attorney for 40 
hours (at $406 per hour) + Computer Operations Manager for 12 hours 
(at $490 per hour) + Senior Programmer for 20 hours (at $368 per 
hour) + Senior Risk Management Specialist for 25 hours (at $397 per 
hour) + Senior Business Analyst for 12 hours (at $305 per hour) = 
$53,425 x 2 respondent clearing agencies = $106,850. See part V.B 
infra.
    \982\ This figure was calculated as follows: Compliance Attorney 
for 25 hours (at $406 per hour) + Business Risk Analyst for 40 hours 
(at $305 per hour) + Senior Risk Management Specialist for 20 hours 
(at $397 per hour) = $30,290 x 2 respondent clearing agencies = 
$60,580. See part V.B infra.
---------------------------------------------------------------------------

ii. Facilitating Access to U.S. Treasury Securities CCAs
    Rule 17ad-22(e)(18)(iv)(C) requires a U.S. Treasury securities CCA 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, ensure that it has 
appropriate means to facilitate access to clearance and settlement 
services of all eligible secondary market transactions in U.S. Treasury 
securities, including those of indirect participants, which policies 
and procedures the U.S. Treasury securities CCA's board of directors 
reviews annually.
    The rule requires a U.S. Treasury securities CCA to establish, 
implement, maintain and enforce written policies and procedures. The 
Commission believes that a respondent U.S. Treasury securities CCA will 
incur burdens of reviewing and updating existing policies and 
procedures and will need to create new policies and procedures in order 
to comply with the provisions of Rule 17ad-22(e)(18)(iv)(C). These 
costs are included in the costs of creating new policies and procedures 
associated with Rule 17ad-22(e) discussed above.
    Commenters generally supported the Commission's attention to the 
need for appropriate access to the U.S. Treasury securities CCA, and 
several commenters specifically agreed that the Commission should not 
prescribe any particular model. One commenter stated that the commenter 
``fully agree[s] with the Commission that flexibility and an open-
access approach are critical to facilitating access to clearing. [ ], 
dictating a single model of clearing would close off clearing to many 
market participants, force indirect participants to bear additional 
clearing costs, increase concentration, reduce competition, and 
negatively impact market liquidity.'' \983\ In addition, another 
commenter supported the proposal to rely on the clearing agencies to 
develop the model and infrastructure and that clearing agencies should 
have flexibility to innovate in this area. This commenter also noted 
many market stakeholders may prefer an agency model or some form of 
limited membership with a clearing agency.\984\
---------------------------------------------------------------------------

    \983\ FICC/DTCC Letter, supra note 33, at 18.
    \984\ ICE Letter, supra note 85, at 3.
---------------------------------------------------------------------------

    Another commenter stated that the Commission should encourage FICC 
to improve the existing Sponsored Service in several ways: (1) to 
further develop a ``give up'' structure to facilitate best execution 
(and accommodate ``done-away'' trades), noting that FICC's prime 
broker/correspondent clearing infrastructure could be leveraged to 
develop a give up model outside of prime brokerage (which would need to 
provide for standardized documentation that facilitates additions and 
deletions of approved brokers, agreed-upon terms for rejection of 
trades by a sponsoring member and centralized storage of delegations); 
and (2) to add a feature permitting (but not requiring) sponsored 
members to directly support their obligations to FICC through margin 
posting rather than by paying fees to the sponsoring member reflecting 
the cost of

[[Page 2817]]

its clearing fund contributions.\985\ As stated in the Proposing 
Release, the Commission believes that U.S. Treasury securities CCAs 
should continue to develop access models that would best serve the 
needs of market participants, and the Commission encourages such CCAs 
to take all appropriate steps to accommodate ``done-away'' trades. The 
Commission would consider any proposals in this regard consistent with 
its obligations under Section 19 of the Exchange Act.
---------------------------------------------------------------------------

    \985\ ICI Letter, supra note 85.
---------------------------------------------------------------------------

d. Amendments to Rules 15c3-3 and 15c3-3a
    The amendment to Rule 15c3-3a permits, under certain conditions, 
margin required and on deposit at a U.S. Treasury securities CCA to be 
included as a debit item in the customer reserve formula. This new 
debit item offset credit items in the Rule 15c3-3a formula and, 
thereby, free up resources that could be used to meet the margin 
requirements of a U.S. Treasury securities CCA. The amendment allows a 
customer's broker to use customer funds to meet margin requirements at 
the CCP generated by the customer's trades, lowering the cost of 
providing clearing services. Broker-dealers may incur costs from 
updating procedures and systems to be able to use customer funds to 
meet customer margin requirements. However, the amended rule does not 
require that the broker-dealer does so.
    Overall, commenters supported the proposal to permit this debit 
item.\986\ Commenters stated that the proposed amendments would make 
clearing more efficient and free up resources that could be used to 
meet the CCA's margin requirements, while continuing to protect 
customer funds.\987\ Commenters also stated that the proposal would 
incentivize central clearing.\988\ A commenter stated that the proposal 
would extend to margin held at a U.S. Treasury securities CCA the same 
treatment as margin posted to other clearing organizations.\989\ As a 
result, this commenter stated that the proposal would facilitate 
greater access to clearing and eliminate an undue burden on 
competition. Another commenter--in supporting the proposal--stated that 
it does not make sense that margin cannot be freely rehypothecated from 
a customer through a broker-dealer to a U.S. Treasury securities CCA 
without the broker-dealer receiving a beneficial adjustment as part of 
its customer reserve formula calculation.\990\ For greater and more 
efficient client clearing, another commenter encouraged the Commission 
to adopt this proposal irrespective of whether the requirement to clear 
eligible secondary market transactions is adopted.\991\
---------------------------------------------------------------------------

    \986\ See AIMA Letter, supra note 81; CME Letter, supra note 81; 
DTCC/FICC Letter, supra note 33; ICE Letter, supra note 33; MFA 
Letter, supra note 81; ISDA Letter, supra note 391; SIFMA AMG 
Letter, supra note 35.
    \987\ See AIMA Letter, supra note 81; MFA Letter, supra note 81; 
SIFMA/IIB Letter supra note 37.
    \988\ See CME Letter, supra note 81; SIFMA AMG Letter, supra 
note 35.
    \989\ See DTCC/FICC Letter, supra note 33.
    \990\ See SIFMA AMG Letter, supra note 35.
    \991\ See ISDA Letter, supra note 391.
---------------------------------------------------------------------------

    One commenter sought clarification that the conditions of Rule 
15c3-3 would not preclude a U.S. Treasury securities CCA from entering 
into a repurchase transaction involving customer cash margin, so long 
as the purchased securities under such repurchase transaction consist 
of U.S. Treasury securities held in a segregated account for the 
benefit of customers and satisfy certain other requirements.\992\ The 
commenter provided a summary of potential protections that could be put 
in place to ensure that--if a U.S. Treasury securities CCA uses cash in 
the broker-dealer's segregated account for liquidity purposes--the cash 
would be protected through collateral comprising U.S. Treasury 
securities deposited into the account and other measures.\993\ As 
discussed in part II.C.4.iii, supra the Commission would need to review 
a more detailed plan for how the cash will be used and customers 
protected before taking any action on the commenter's request. The 
Commission acknowledges that the degree to which costs that are 
incurred in order to maintain sufficient qualifying liquid resources 
are directly born by various participants depends in part on the use of 
customer margin as a qualifying liquid resource.\994\
---------------------------------------------------------------------------

    \992\ DTCC/FICC Letter II, supra note 503. See also part 
II.C.4.iii, supra for additional discussion of the issue raised by 
this comment letter.
    \993\ Id.
    \994\ One such source is FICC's CCLF. See part IV.B.4, supra and 
part IV.C.2.a.i, supra. See also supra note 688, and referencing 
text regarding the Commission's requiring FICC to hold qualifying 
liquid resources sufficient to meet a cover-1 standard.
---------------------------------------------------------------------------

e. Other Costs
    One commenter stated that the Commission should consider that ``the 
sheer number and complexity of the Proposals, when considered in their 
totality, if adopted, would impose staggering aggregate costs, as well 
as unprecedented operational and other practical challenges.'' \995\ 
But, consistent with its long-standing practice, the Commission's 
economic analysis in each adopting release considers the incremental 
benefits and costs for the specific rule--that is the benefits and 
costs stemming from that rule compared to the baseline. In doing so, 
the Commission acknowledges that in some cases resource limitations can 
lead to higher compliance costs when the compliance period of the rule 
being considered overlaps with the compliance period of other rules. In 
determining compliance periods, the Commission considers the benefits 
of the rules as well as the costs of delayed compliance periods and 
potential overlapping compliance periods.
---------------------------------------------------------------------------

    \995\ MFA Letter 2, supra note 600, at 3; see ICI Letter 2, 
supra note 600, at 3 (stating that the Commission should consider 
``practical realities such as the implementation timelines as well 
as operational and compliance requirements'').
---------------------------------------------------------------------------

    In this regard, some commenters mentioned the proposals which 
culminated in the recent adoptions of the May 2023 SEC Form PF Amending 
Release, the Beneficial Ownership Amending Release, the Private Fund 
Advisers Adopting Release, the Rule 10c-1a Adopting Release, the Short 
Position Reporting Adopting Release, and the Securitizations Conflicts 
Adopting Release.\996\ The Commission acknowledges that there are 
compliance periods for certain requirements of these rules that overlap 
in time with the final rule, which may impose costs on resource 
constrained entities affected by multiple rules.\997\
---------------------------------------------------------------------------

    \996\ See supra note 600. As stated above, commenters also 
specifically suggested the Commission consider potential overlapping 
compliance costs between the final rule and certain proposing 
releases. See supra note 608. These proposals have not been adopted 
and thus have not been considered as part of the baseline here. To 
the extent those proposals are adopted in the future, the baseline 
in those subsequent rulemakings will reflect the regulatory 
landscape that is current at that time.
    \997\ See supra notes 602 to 607 (summarizing compliance dates).
---------------------------------------------------------------------------

    However, the Commission does not think these increased costs from 
overlapping compliance periods will be significant for several reasons. 
First, the number of market participants who directly or indirectly 
engage in eligible secondary market transactions in Treasury securities 
that will be subject to the final rule and who will be subject to one 
or more of the other recently adopted rules could be limited based on 
whether those participants' activities fall within the scope of the 
other rules.\998\ Second, for the reasons

[[Page 2818]]

discussed above, we have adopted a phased approach to implementation 
and compliance based on input from commenters.\999\ Further, all of the 
other rules have long compliance periods, which is expected to 
facilitate planning, preparation and investment and thereby limit the 
cost of overlapping compliance periods.\1000\ Third, commenters' 
concerns about the costs of overlapping compliance periods were raised 
in response to the proposal and as discussed above, we have taken steps 
to reduce costs of the final rule.\1001\
---------------------------------------------------------------------------

    \998\ The Rule 10c-1a Adopting Release will require only persons 
who agree to a covered securities loan to report that activity. The 
Short Position Reporting Adopting Release will require only 
institutional investment managers that meet or exceed certain 
reporting thresholds to report short position and short activity 
data for equity securities. And the Securitizations Conflicts 
Adopting Release will affect only certain entities--and their 
affiliates and subsidiaries--that participate in securitization 
transactions. See supra notes 605 to 607. In addition, FICC will not 
be affected by any of the six rules identified by commenters.
    \999\ See part III supra.
    \1000\ See supra notes 602 to 607.
    \1001\ The final rule mitigates costs relative to the proposal 
in the following ways. First, the scope of the definition of 
eligible secondary market transaction in Rule 17ad-22(a) has been 
revised to exclude repos by other clearing organizations, repos by 
state and local governments, and inter-affiliate repos. Second, the 
scope of the definition of eligible secondary market transaction has 
been modified to no longer include cash transactions by hedge funds 
and leveraged accounts. Third, the Commission is modifying paragraph 
(a) of Note H to Rule 15c3-3a to permit ``qualified customer 
securities'' to be used to meet the customer position margin 
requirement in addition to cash and U.S. Treasury securities. 
Finally, to reduce operational burdens on broker-dealers, the 
Commission is removing the proposed requirement to return excess 
collateral within one business day that was part of fifth rule set--
identified in paragraph (b)(2)(v) of proposed Note H.
---------------------------------------------------------------------------

3. Effect on Efficiency, Competition, and Capital Formation
a. Efficiency
i. Price Transparency
    As mentioned in part IV.B supra, the majority of trading in on-the-
run U.S. Treasury securities in the interdealer market occurs on 
electronic platforms operated by IDBs that bring together buyers and 
sellers anonymously using order books or other trading facilities 
supported by advanced electronic trading technology. These platforms 
are usually run independently in the sense that there is no centralized 
market for price discovery or even a ``single virtual market with 
multiple points of entry''.\1002\ As a result, pre-trade transparency 
is suboptimal: quotations and prices coming from and going to an IDB 
may be distributed unevenly to market participants who have a 
relationship with that IDB. Efficiency, which measures the degree to 
which prices can quickly respond to relevant information, is impaired 
because of this market fragmentation; some areas of the market may not 
reflect information passed on by prices in other sectors. Central 
clearing can promote price discovery in several ways: first, the 
clearing agency itself becomes a source of data; \1003\ and second, the 
accessibility of central clearing could promote all-to-all trading as 
previously mentioned in part II.A.1 supra, which should reduce the 
obstacles to information flow that come from fragmentation.\1004\
---------------------------------------------------------------------------

    \1002\ Maureen O'Hara and Mao Ye, Is Market Fragmentation 
Harming Market Quality?, 100 J. Fin. Econ. 459 (2011).
    \1003\ FIA-PTG Whitepaper, supra note 918.
    \1004\ See supra note 31.
---------------------------------------------------------------------------

ii. Operational and Balance Sheet Efficiency
    Greater use of central clearing could also increase the operational 
efficiency of trading U.S. Treasury securities. Central clearing 
replaces a complex web of bilateral clearing relationships with a 
single relationship to the CCP. In that sense, the complex network of 
relationships that a market participant may have for bilaterally 
clearing U.S. Treasury securities would shrink, with attendant 
reductions in paperwork, administrative costs, and operational risk.
    Central clearing also enhances balance sheet efficiency, allowing 
firms to put capital to more productive uses. The amendments to Rule 
15c3-3a permit, under certain conditions, margin required and on 
deposit at a U.S. Treasury securities CCA to be included as a debit 
item in the customer reserve formula. This new debit item offset credit 
items in the Rule 15c3-3a formula and, thereby, free up resources that 
could be used to meet the margin requirements of a U.S. Treasury 
securities CCA. The amendment allows a customer's broker to use 
customer funds to meet margin requirements at the CCP generated by the 
customer's trades, lowering the cost of providing clearing services. 
Though these lower costs may or may not be fully passed on to 
customers, in a competitive environment the Commission expects that at 
least some of these savings will pass through to customers.
b. Competition
    With respect to the market for execution of U.S. Treasury 
securities by broker-dealers, increased central clearing can enhance 
the ability of smaller participants to compete with incumbent 
dealers.\1005\ Similarly, decreased counterparty credit risk--and 
potentially lower costs for intermediation--could result in narrower 
spreads, thereby enhancing market quality.\1006\ While estimating this 
quantitatively is difficult, research has demonstrated lower costs 
associated with central clearing in other settings.\1007\ Moreover, 
increased accessibility of central clearing in U.S. Treasury securities 
markets could support all-to-all trading, which should further improve 
competitive pricing, market structure and resiliency.\1008\
---------------------------------------------------------------------------

    \1005\ See G-30 Report, supra note 5, at 13.
    \1006\ Id.
    \1007\ See Y.C. Loon & Z.K. Zhong, The Impact of Central 
Clearing on Counterparty Risk, Liquidity, and Trading: Evidence From 
the Credit Default Swap Market, 112 J. Fin. Econ. 91 (2014).
    \1008\ See 2021 IAWG Report, supra note 4, at 30; Duffie, supra 
note 27, at 16; G-30 Report, supra note 5, at 13.
---------------------------------------------------------------------------

    Commenters suggest that costs of clearing may be disproportionately 
felt by small and mid-size participants in the Treasury market.\1009\ 
An additional commenter stated that the proposed separation of house 
and customer margin would negatively impact small and mid-size broker-
dealers who are disproportionately affected by FICC's Excess Capital 
Premium (``ECP'') charge, which is a margin add-on that collects a 
premium when a member's VaR charge exceeds the member's Net Capital, 
net assets or equity capital (as applicable to that member based on its 
type of regulation).\1010\ The commenter explained the impact of the 
ECP charge in conjunction with FICC's Sponsored Service, stating that 
``the combination of gross margining and ECP currently in use under the 
Sponsored Model, and what is prescribed in the Proposed Rule, 
effectively prevents smaller and middle market broker dealers from 
materially participating in the Treasury market.\1011\ The commenter 
states that the ultimate effect of the ECP charge is exacerbated when 
customer/institutional counterparty margin is included in the 
calculation, and the surcharge prevents smaller independent broker-
dealers from sponsoring institutional counterparties/customers.\1012\ 
The commenter's concerns regarding the interplay between purported 
required gross margining and the ECP charge rests on the assumption 
that gross margin is required under the proposal, which, as discussed 
in part II.B.1 supra, is not the case.\1013\ With respect to the

[[Page 2819]]

ECP charge on its own, the Commission is not taking any action with 
respect to the ECP charge as part of adopting these new requirements. 
The ECP charge is part of FICC's existing rulebook, which is an SRO 
rule, and any change to that rulebook would be made pursuant to the 
proposed rule change process under Section 19(b).\1014\
---------------------------------------------------------------------------

    \1009\ Letter from Evan Gerhard, President and CEO of ASL 
Capital Markets (Dec. 23, 2022) and letter from SIA Partners (Aug. 
31, 2023) at 22 (``SIA Partners 2'').
    \1010\ IDTA Letter, supra note 66, at 4; see also FICC Rule 4, 
section 14, supra note 19.
    \1011\ IDTA Letter, supra note 66, at 5.
    \1012\ IDTA Letter, supra note 66, at 5.
    \1013\ The rule does require that a proprietary position not be 
netted against a customer position. This could enhance competition 
because dealers with customers are no longer advantaged relative to 
those without. It enhances the unbundling of clearing and trading 
services described in part IV.C.1 supra.
    \1014\ Exchange Act Section 19(b); see also Section 19(c).
---------------------------------------------------------------------------

    While the rule does not require gross margining of customers, the 
rule does require members to clear additional transactions relative to 
the baseline. Because the dominant clearing model is the sponsored 
model, and because the sponsored model does use gross margining, which 
implicates the ECP, the Commission acknowledges the commenter's 
concerns regarding possible competitive effects on the Treasury market. 
Specifically, the existence of the ECP links the costs of sponsorship 
with the capital of the entity, and hence sponsorship is more 
economical for some than for others. Because current market practice is 
to bundle execution with clearing, some entities may face additional 
hurdles in trade execution in that it may be uneconomical for them to 
serve as sponsoring members for a large dollar value of trades.
    There are two factors that mitigate any potential impact of the ECP 
on competitiveness. First, there are alternatives to the sponsored 
clearing model that do not require gross margining. The commenter cites 
one such model, and notes ambiguity as to whether this model can indeed 
be used by independent dealers.\1015\ The Commission acknowledges the 
commenter's concern but notes that FICC recently has indicated that it 
intends to make available client clearing models that do not require 
gross margin, consistent with its current offerings.\1016\ Second, the 
amendments to Rule 15c3-3a, which permit margin required and on deposit 
at a U.S. Treasury securities CCA to be included as a debit item in the 
customer reserve formula makes it economical for dealers to post margin 
on behalf of their customers. This may encourage the development of 
clearing models that are based on counterparty risk, rather than the 
capital of the trading entity. In a second letter, the same commenter 
advocates for a common margining regime for FICC, where members 
participating in the MBSD, GSD, or the CME are accounted for properly 
in terms of offsetting positions \1017\ and while that subject is not 
within the scope of this release, permitting rehypothecation of margin 
may have directionally similar effects.
---------------------------------------------------------------------------

    \1015\ See IDTA Letter, supra note 66, at 7.
    \1016\ See DTCC 2023 White Paper, supra note 107, at 6 
(discussing that the proposal would allow the option to calculate 
and collect margin associated with customer activity on a gross or 
net basis depending on the client clearing model selected by the 
member and stating that FICC would offer options via different 
access models that would allow those parties to balance the benefits 
of netting and segregation in different ways).
    \1017\ IDTA Letter 2, supra note 829, at 2.
---------------------------------------------------------------------------

    With respect to the market for U.S. Treasury securities clearing 
services, currently there is a single provider of central clearing. The 
amendments will likely engender indirect costs associated with 
increased levels of central clearing in the secondary market for U.S. 
Treasury securities. Generally, the economic characteristics of a 
financial market infrastructure (``FMI''), including clearing agencies, 
include specialization, economies of scale, barriers to entry, and a 
limited number of competitors.1018 1019 The Commission noted 
in its proposal of rules applicable to covered clearing agencies that 
such characteristics, coupled with the particulars of an FMI's legal 
mandate, could result in market power, leading to lower levels of 
service, higher prices, and under-investment in risk management 
systems.\1020\ Market power may also affect the allocation of benefits 
and costs flowing from these new rules and amendments that are being 
adopted, namely the extent to which these benefits and costs are passed 
through by FICC to participants.\1021\ The centralization of clearing 
activities for a particular class of transaction in a single clearing 
agency may also result in a reduction in its incentives to innovate and 
to invest in the development of appropriate risk management practices 
on an ongoing basis.
---------------------------------------------------------------------------

    \1018\ See Comm. on Payment and Settlement Sys. and Tech. Comm. 
Int'l Org. Sec. Comms, Principles for Financial Market 
Infrastructures (Apr. 16, 2012), available at https://www.bis.org/cpmi/publ/d101a.pdf.
    \1019\ See generally Nadia Linciano et al., The Clearing and 
Settlement Industry: Structure Competition and Regulatory Issues 
(Italian Secs. & Exch. Comm'n Research Paper 58, May 2005), 
available at https://www.ssrn.com/abstract=777508 (concluding in 
part that the core services offered by the clearance and settlement 
industry tend toward natural monopolies because the industry can be 
characterized as a network industry, where consumers buy systems 
rather than single goods, consumption externalities exist, costs 
lock-in consumers once they choose a system, and production improves 
with economies of scale).
    \1020\ See CCA Standards Proposing Release, supra note 8. See 
also ICE Letter, supra note 31, at 2.
    \1021\ For a discussion of cost pass-through, including when 
there lacks competition, see for example, RBB Econ., Cost pass-
through: theory, measurement and policy implications, A Report 
prepared for the Office of Fair Trading (2014), available at https://www.gov.uk/government/publications/cost-pass-through-theory-measurement-and-policy-implications.
---------------------------------------------------------------------------

    Finally, the scope of the rule does not preclude members of FICC 
from strategically renouncing membership if they assess that the 
benefits of maintaining their ability to trade without centrally 
clearing their trades exceed their costs of surrendering their 
membership with the CCA. If this scenario materializes for a number of 
FICC members, then there will be costs to the overall market. Those 
costs could be the product of a smaller number of clearing members 
competing in the market for clearing services. Costs could also 
manifest themselves as increased risk from non-centrally cleared 
transactions and a reduction in the margin, operational and capital 
efficiencies related to central clearing. Further, if the number of 
clearing members falls, then the exposure of FICC to its largest 
clearing member could increase resulting in additional increases in the 
required size of the CCLF.
    In addition, as stated above, some commenters requested the 
Commission consider interactions between the economic effects of the 
proposed rule and other recent Commission rules, as well as practical 
realities such as implementation timelines.\1022\ As discussed above, 
the Commission acknowledges that overlapping compliance periods may in 
some cases increase costs. This may be particularly true for smaller 
entities with more limited compliance resources. This effect can 
negatively impact competition because these entities may be less able 
to absorb or pass on these additional costs, making it more difficult 
for them to remain in business or compete. However, we have mitigated 
the overall costs of the final rules relative to the proposal.\1023\ 
Moreover, all of the other rules have long compliance periods to 
facilitate planning, preparation and investment, thereby mitigating the 
cost to smaller entities of overlapping compliance periods.\1024\ We 
therefore do not expect the risk of negative competitive effects from 
increased compliance costs from simultaneous compliance periods to be 
significant.
---------------------------------------------------------------------------

    \1022\ See parts IV.B, supra.
    \1023\ See supra note 1003.
    \1024\ See supra notes 604 to 607.
---------------------------------------------------------------------------

c. Capital Formation
    The new rule and amendments may encourage private-sector capital 
formation. U.S. Treasury securities form a benchmark for fixed income 
and even equity rates of return, and the new rule could lower the cost 
of capital for

[[Page 2820]]

private-sector issuers.\1025\ If the yield required by investors to 
hold U.S. Treasury securities reflects, in part, the risks associated 
with the buying and selling of U.S. Treasury securities, and increased 
central clearing of these transactions lowers those risks, then the new 
rule may put downward pressure on required yields.
---------------------------------------------------------------------------

    \1025\ Standard textbook treatments of finance use the U.S. 
Treasury rate of return as a benchmark in computing the cost of 
capital for private companies. The link between interest rates of 
government debt and corporate debt is a long-standing feature of the 
financial landscape. See, e.g., Benjamin Friedman, Implications of 
Government Deficits for Interest Rates, Equity Returns, and 
Corporate Financing, Fin. Corp. Cap. Form. (1986). See also 
Philippon, The Bond Market's Q, Q. J. Econ. (Aug. 2009) (noting a 
link between the level of interest rates and investment).
---------------------------------------------------------------------------

    Research has shown that investors value both the safety and 
liquidity of U.S. Treasury securities. Because prices in the primary 
market both reflect and are driven by prices in the secondary market, 
liquidity could be one of the factors translating into lower rates of 
borrowing costs for U.S. taxpayers.\1026\
---------------------------------------------------------------------------

    \1026\ See Arvind Krishnamurthy & Annette Vissing-Jorgensen, The 
Aggregate Demand for Treasury Debt, 120 J. Pol. Econ. (Apr. 2012).
---------------------------------------------------------------------------

D. Reasonable Alternatives

1. Require U.S. Treasury Securities CCAs To Have Policies and 
Procedures Requiring Only IDB Clearing Members To Submit U.S. Treasury 
Securities Cash Trades With Non-Members for Central Clearing
    In the Proposing Release, the Commission considered the alternative 
of narrowing the scope of the requirement to clear eligible secondary 
market transactions as it pertains to cash transactions in the 
secondary market for U.S. Treasury securities. The narrower definition 
of eligible secondary market transaction contemplated in this 
alternative included (1) a repurchase or reverse repurchase agreement 
collateralized by U.S. Treasury securities, in which one of the 
counterparties is a direct participant; or (2) a purchase or sale 
between a direct participant and any counterparty, if the direct 
participant of the covered clearing agency (A) brings together multiple 
buyers and sellers using a trading facility (such as a limit order 
book) and (B) is a counterparty to both the buyer and seller in two 
separate transactions.\1027\ This alternative differs from the proposal 
by omitting from the definition of eligible transactions those cash 
transactions between a direct participant and a registered broker-
dealer, government securities broker, government securities dealer, 
hedge fund, or account at a registered broker-dealer, government 
securities dealer, or government securities broker where such account 
may borrow an amount in excess of one-half of its net assets or may 
have gross notional exposure in excess of twice its net assets.\1028\
---------------------------------------------------------------------------

    \1027\ See Proposing Release. Such direct participants are 
referred to in this section and the alternatives below as ``IDBs''.
    \1028\ See Proposing Release, supra note 14, 88 FR at 64663; see 
also id. at 64622 for a discussion of cash transactions included in 
the definition of eligible transactions.
---------------------------------------------------------------------------

    Several commenters supported the Commission's proposal overall, 
including the cash clearing requirement.\1029\ By contrast, other 
commenters opposed cash clearing generally.\1030\ Other commenters 
suggested that the scope of eligible secondary market transactions in 
the cash market be broadened.\1031\
---------------------------------------------------------------------------

    \1029\ AFREF Letter, supra note 33, at 2; Better Markets Letter, 
supra note 33, at 2, 6-8.
    \1030\ See part II.A.2.b supra for a discussion of comments 
received regarding cash clearing.
    \1031\ Id.
---------------------------------------------------------------------------

    As discussed in the proposing release, the benefits arising from 
cash clearing for IDB members are particularly high. Hybrid clearing 
creates unique issues for FICC because FICC is able to manage the risks 
arising from the IDB-FICC member trade, but it lacks any knowledge of 
the IDB's offsetting trade with its other counterparty and the 
potential exposure arising to the IDB from that trade, leaving the IDB, 
from FICC's perspective, as apparently having a directional exposure 
despite the non-centrally cleared trade that would leave the IDB 
flat.\1032\ This lack of knowledge could prevent FICC from ``accurately 
identifying, measuring and managing its direct and indirect 
counterparty risk exposure and can affect its decision-making,'' \1033\ 
which in turn potentially increases the likelihood that a default of an 
IDB member could in turn harm the CCP or the system as a whole. As 
stated in the Proposing Release, the Commission has previously stated 
that membership requirements help to guard against defaults of any CCP 
member, as well to protect the CCP and the financial system as a whole 
from the risk that one member's default could cause others to default, 
potentially including the CCP itself. Further, contagion stemming from 
a CCP member default could be problematic for the system as a whole, 
even if the health of the CCP is not implicated. The default could 
cause others to back away from participating in the market, 
particularly if the defaulting participant was an IDB, whose withdrawal 
from the market could jeopardize other market participants' ability to 
access the market for U.S. Treasury securities.\1034\
---------------------------------------------------------------------------

    \1032\ See TMPG White Paper, supra note 13 at 22 (noting that in 
a hybrid clearing arrangement, an ``IDB's rights and obligations 
vis-a-vis the CCP are not offset and therefore the IDB is not in a 
net zero settlement position with respect to the CCP at settlement 
date.'').
    \1033\ See TMPG White Paper, supra note 13, at 27.
    \1034\ See TMPG White Paper, supra note 13, at 32.
---------------------------------------------------------------------------

    This alternative would, with a more limited scope, move a large 
portion of secondary market transactions in U.S. Treasury securities 
that are not currently centrally cleared into central clearing.\1035\ 
The degree of central clearing would still allow for a partial picture 
of concentrated positions to the clearing agency. That said, there 
would be a limited benefit in terms of operational and balance sheet 
efficiency, and the benefits other than those specifically related to 
the IDB would be greatly reduced. Specifically, the reduced scope of 
this alternative would not capture types of participants that are 
usually leveraged such as hedge funds.
---------------------------------------------------------------------------

    \1035\ Id.
---------------------------------------------------------------------------

    As discussed in part II.A.2.b supra, the Commission is not 
including transactions with hedge funds and leveraged accounts in the 
definition of eligible transactions. The definition of eligible 
secondary market transaction in Rule 17ad-22(a) is being adopted as 
proposed with respect to IDB transactions and transactions that involve 
a purchase or sale between a direct participant and a registered 
broker-dealer, government securities broker, or government securities 
dealer. Including these transactions within the scope of eligible 
transactions increases the benefits discussed above associated with an 
increased proportion of transactions being centrally cleared.\1036\ 
However, as discussed above, the costs associated with including these 
transactions within the scope of eligible transactions may be less than 
those transactions not included by this alternative.\1037\
---------------------------------------------------------------------------

    \1036\ See Proposing Release, supra note 14, and part IV.A, 
supra of this release for a discussion of the benefits associated 
with increased central clearing.
    \1037\ See Proposing Release, supra note 14, at 64665 for a 
discussion of the familiarity of many registered brokers with 
methods of central clearing of U.S. Treasury securities 
transactions. See also Id at 64669 for a discussion of the costs to 
non-FICC members, including the entities included within this 
alternative, of the requirement to clear eligible secondary market 
transactions.

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

[[Page 2821]]

2. Require U.S. Treasury Securities CCAs To Have Policies and 
Procedures Requiring the Submission of All Repurchase Agreements 
Without Requirements for the Submission of Cash Transactions
    In the Proposing Release, the Commission considered excluding the 
cash U.S. Treasury securities market from the proposed rule, and 
instead only requiring that covered clearing agencies have policies and 
procedures reasonably designed to require that direct participants of 
the covered clearing agency submit for central clearing all 
transactions in U.S. Treasury repo transactions into which it 
enters.\1038\
---------------------------------------------------------------------------

    \1038\ See Proposing Release, supra note 14.
---------------------------------------------------------------------------

    Several commenters supported the Commission's proposal overall, 
including the cash clearing requirement.\1039\ By contrast, other 
commenters opposed cash clearing generally.\1040\
---------------------------------------------------------------------------

    \1039\ AFREF Letter, supra note 33, at 2; Better Markets Letter, 
supra note 33, at 2, 6-8.
    \1040\ See part II.A.2.b supra for a discussion of comments 
received regarding cash clearing.
---------------------------------------------------------------------------

    The Commission understands that there is a likely benefit of 
additional balance sheet capacity that flows from clearing repo 
transactions in U.S. Treasury securities that might not occur with the 
clearing of cash transactions. Multilateral netting can reduce the 
amount of balance sheet capacity required for intermediation of repo 
and could enhance dealer capacity to make markets during normal times 
and stress events, because existing bank capital and leverage 
requirements recognize the risk-reducing effects of multilateral 
netting of trades that CCP clearing accomplishes.\1041\
---------------------------------------------------------------------------

    \1041\ See 2021 IAWG Report, supra note 4; Liang & Parkinson, 
supra note 725, at 9; Duffie, supra note 27, at 16-17.
---------------------------------------------------------------------------

    The upfront costs of adjusting to the rule would be lower under 
this alternative than under the current proposal, as a result of a 
smaller number of participants and activities in scope and also the 
current level of interconnectedness among those participants. As 
previously mentioned, the number of participants in the U.S. Treasury 
repo market is significantly smaller than the number of participants in 
the cash market and is composed of sophisticated investors who have 
already incurred the costs of building the ability to novate 
transactions to the CCP. Infrastructure for Sponsored Clearing already 
exists, so processing changes should be less than in other more 
comprehensive alternatives and costs would be concentrated on the 
implementation of similar agreements at a larger scale.
    Nevertheless, excluding the cash U.S. Treasury securities market 
from the rule would omit the largest sector of the U.S. Treasury 
market, both in terms of activity and number of participants. This 
alternative would yield smaller benefits in the areas of financial 
stability, risk visibility, margin offset efficiencies, and capital 
requirement reductions. The Commission believes that, given the scale-
intensive nature of clearing, there are economies of scale that can 
only be realized when a larger number of financial market participants 
clear their U.S. Treasury securities cash trades.
3. Include All Cash Transactions Within the Scope of Eligible Secondary 
Market Transactions With Exceptions for Central Banks, Sovereign 
Entities, International Financial Institutions, and Natural Persons
    In the Proposing Release, the Commission considered requiring 
covered clearing agencies to have policies and procedures reasonably 
designed to require that direct participants of the covered clearing 
agency submit for central clearing all cash and repo transactions in 
U.S. Treasury securities into which they enter, except for natural 
persons, central banks, sovereign entities and international finance 
institutions. This policy option would include cash transactions 
between direct participants of a U.S. Treasury securities CCA and any 
counterparty except for those that fall within one of the 
aforementioned exceptions.\1042\ Several commenters opposed cash 
clearing generally.\1043\
---------------------------------------------------------------------------

    \1042\ See Proposing Release, supra note 14.
    \1043\ See part II.A.2.b supra for a discussion of comments 
received regarding cash clearing.
---------------------------------------------------------------------------

    This alternative would capture more of the potential benefits and 
positive externalities that result from increased central clearing, 
more closely resembling the assumptions and estimated benefits of 
Fleming and Keane's calculations on clearing benefits.\1044\ By virtue 
of requiring all repo and most cash transactions to be centrally 
cleared, the alternative goes the furthest in solving the underlying 
collective action problem whereby some participants may find it optimal 
to not participate in central clearing, reducing the benefits that may 
accrue to the market as a whole.
---------------------------------------------------------------------------

    \1044\ Fleming & Keane (2021), supra note 796.
---------------------------------------------------------------------------

    Several commenters suggested that the scope of eligible secondary 
market transactions in the cash market be broadened. One commenter 
stated that the Commission should align the scope of the definition 
with respect to cash transactions with the proposed scope for repos, 
subject to certain limited exceptions for investors that trade de 
minimis volumes. The commenter argued that the Commission's approach 
with respect to cash transactions will increase costs for a specific 
subset of market participants, thereby putting them at a competitive 
disadvantage, while failing to deliver the envisaged market-wide 
benefits associated with central clearing (i.e., it would materially 
reduce the associated multilateral netting benefits, impair the risk 
management practices of clearing agencies, and hinder the evolution in 
trading protocols that can be expected from a market-wide clearing 
requirement).\1045\ For similar reasons, another commenter also stated 
that the benefits of central clearing detailed will only materialize if 
``a market-wide mandate is implemented'' and supported defining the 
scope of eligible secondary market transactions for cash transactions 
as broadly as that proposed for repos.\1046\ Another commenter stated 
that limiting the scope of the cash clearing mandate would result in 
unwarranted competitive disadvantages and related market distortions 
for some types of investors, such as hedge funds, or some types of 
trading platforms, such as anonymous trading facilities.\1047\ An 
additional commenter stated that the proposed definition leaves out 
other important market participants' cash Treasury transactions that 
also comprise a large segment of Treasury market liquidity, and that 
the Commission should require other market participants' cash Treasury 
transactions in which a direct participant is involved to be cleared, 
so that the benefits of central clearing that the Commission cites will 
accrue throughout the broader cash Treasury market.\1048\ In addition, 
another commenter acknowledged the benefits of a comprehensive clearing 
requirement, but acknowledged the need for a pragmatic approach and 
supported the Commission's proposed requirements as a reasonable 
foundation

[[Page 2822]]

to begin mandatory central clearing in this market.\1049\
---------------------------------------------------------------------------

    \1045\ Citadel Letter, supra note 81, at 5.
    \1046\ ARB et al. Letter, supra note 81, at 4 (stating that the 
netting benefits associated with transitioning only proprietary 
trading firm (``PTF'') transactions into central clearing are much 
smaller, given the substantial netting that already occurs directly 
with inter-dealer brokers (``IDBs''); the trading-related benefits 
of central clearing will only accrue to market participants if their 
transactions are covered by the proposed mandate; and that clearing 
agency resiliency will be negatively impacted if only one segment of 
the market is cleared).
    \1047\ MFA Letter, supra note 81, at 2.
    \1048\ AIMA Letter, supra note 81, at 7.
    \1049\ GTS Letter, supra note 81, at 3-5.
---------------------------------------------------------------------------

    As discussed above, the benefits of clearing are scale-dependent, 
so that a more comprehensive clearing directive would result in larger 
positive externalities (e.g., lower contagion risk, less financial 
network complexity) and larger economies of scale (e.g., larger margin 
offsets) for the U.S. Treasury securities market. Another benefit of 
this alternative would be an enhanced ability of FICC (and, by 
extension, regulatory agencies) to observe the dynamics and manage the 
risks in the U.S. Treasury securities markets.
    Nevertheless, there are compelling reasons for the exclusions that 
the proposal makes for a specific sample of market participants. Buy-
side participants in the U.S. Treasury securities markets that do not 
take on any leverage, or take less than one-half their assets in 
leverage, such as the majority of bond mutual funds, typically have 
lower daily turnover. As a result of their lower turnover and 
subsequent lower volume, they typically do not have the existing 
infrastructure to readily connect to the CCP, making their up-front 
costs significantly higher than for other participants. This implies 
that the costs of subjecting these participants to the requirement to 
clear eligible secondary market transactions are likely higher than 
those of participants included in the proposal and the benefits 
smaller.
4. Require U.S. Treasury Securities CCAs To Change CCA Access 
Provisions and Netting and Margin Practices for House and Customer 
Accounts and Rule 15c3-3
    In the Proposing Release the Commission considered, as an 
alternative to the policy choices it proposed, only amending Rules 
15c3-3, 17ad-22(e)(6)(i), and 17ad-22(e)(18)(iv)(C).\1050\ This 
alternative would not include a requirement to clear eligible secondary 
market transactions, as set forth in Proposed Rule 17ad-
22(e)(18)(iv)(A) and (B).\1051\
---------------------------------------------------------------------------

    \1050\ See Proposing Release, supra note 14.
    \1051\ Id.
---------------------------------------------------------------------------

    Overall, commenters supported the proposed amendments to Rule 15c3-
3a.\1052\ For increased and more efficient client clearing, another 
commenter encouraged the Commission to adopt this proposal irrespective 
of whether the Commission adopts the requirement to clear eligible 
secondary market transactions, as set forth in Proposed Rule 17ad-
22(e)(18)(iv)(A) and (B).\1053\
---------------------------------------------------------------------------

    \1052\ See AIMA Letter, supra note 81, at 8; CME Letter, supra 
note 81, at 4; DTCC/FICC Letter, supra note 33, at 28-29; ICE 
Letter, supra note 33, at 3; MFA Letter, supra note 81, at 10; ISDA 
Letter, supra note 391, at 2; SIFMA AMG Letter, supra note 35, at 8. 
See part II.C supra for a discussion of comments received.
    \1053\ See ISDA Letter, supra note 391, at 2.
---------------------------------------------------------------------------

    This alternative would require a U.S. Treasury securities CCA to 
establish, implement, maintain and enforce certain written policies and 
procedures that would be reasonably designed to, as applicable, 
calculate, collect, and hold margin amounts from a direct participant 
for its proprietary U.S. Treasury securities positions separately and 
independently from margin that would be held for an indirect 
participant. Specifically, the requirement to separately and 
independently hold an indirect participant's margin would apply to 
margin calculated by and collected from a direct participant in 
connection with its U.S. Treasury securities transactions with an 
indirect participant that relies on the direct participant's services 
to access the covered clearing agency's payment, clearing, or 
settlement facilities.
    The alternative would also include changes to 17ad-
22(e)(18)(iv)(C), directing FICC to, as more fully described above, 
have policies and procedures, to be annually reviewed by its board of 
directors, to have appropriate means to facilitate access to clearing 
all eligible secondary market transactions in U.S. Treasury securities. 
This alternative would also include changes to Rule 15c3-3a, to permit 
margin required and on deposit at a U.S. Treasury securities CCA to be 
included as a debit item in the customer reserve formula, subject to 
the conditions discussed below. This new debit item would offset credit 
items in the Rule 15c3-3a formula and, thereby, free up resources that 
could be used to meet the margin requirements of a U.S. Treasury 
securities CCA. The new debit item would be reported on a newly created 
Item 15 of the Rule 15c3-3a reserve formula.
    As discussed in part IV.C.2.b supra, the proposed amendments to 
Rule 17ad-22(e)(6)(i) should produce benefits for dealer-to-customer 
trades. Because margin for a direct participant's (i.e., a dealer's) 
trades that have been novated to the CCP would be calculated, 
collected, and held separately and independently from those of an 
indirect participant, such as a customer, the direct participant's 
trades with the indirect participant that have been novated to the CCP 
would be able to be netted against the direct participant's position 
with other dealers. Such netting is not currently available. In 
summary, the Commission expects changes in the customer reserve formula 
and expanded margin offset possibilities to allow more efficient use of 
margin for cleared trades relative to current market practice.
    As discussed in part II.A.1.a supra, commenters identified several 
methods by which the Commission could or should incentivize additional 
central clearing without adopting a requirement to clear eligible 
secondary market transactions. One of the methods commenters identified 
was to adopt Rule 15c3-3 discussed in part II.C infra as a method to 
incentivize additional central clearing.\1054\ As discussed in part 
II.5 supra the Commission agrees that the methods identified by the 
commenters could incentivize and facilitate additional central 
clearing. The Commission therefore is adopting the amendments to Rule 
15c3-3, the requirement to segregate house and customer margin, and the 
need to ensure access to central clearing, as discussed in parts II.C, 
II.B.1, and II.B.2 supra respectively. The Commission does not believe 
that these changes should be made without also requiring that U.S. 
Treasury securities CCAs obligate their direct participants to submit 
eligible secondary market transactions for clearing. Merely 
incentivizing and facilitating greater central clearing, as opposed to 
requiring central clearing, would not sufficiently address the current 
risks to U.S. Treasury securities CCAs. Therefore, for the reasons 
discussed in part II.2.a and b, the requirement to clear is also 
necessary.
---------------------------------------------------------------------------

    \1054\ See supra note 344.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

A. Proposed Changes to Covered Clearing Agency Standards

    As discussed in the Proposing Release,\1055\ the amendments to Rule 
17ad-22(e) contain ``collection of information'' requirements within 
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\1056\ The 
Commission submitted the proposed collections of information to the 
Office of Management and Budget (``OMB'') for review in accordance with 
the PRA. The title of the information collection for Rule 17ad-22(e) is 
``Clearing Agency Standards for Operation and Governance'' (OMB Control 
No. 3235-0695). The amendments to Rule 17ad-22(e) add two new 
information collections, titled ``17ad-22(e)(6)

[[Page 2823]]

(Treasury Clearing)'' and ``17ad-22(e)(18) (Treasury Clearing),'' 
respectively, to OMB Control No. 3235-0695. An agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \1055\ Proposing Release, supra note 14, 87 FR at 64675-77.
    \1056\ See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Respondents under this rule are Treasury securities CCAs, of which 
there is currently one. The Commission anticipates that one additional 
entity may seek to register as a clearing agency to provide CCP 
services for Treasury securities in the next three years, and so for 
purposes of this rulemaking the Commission has assumed two respondents.
    As described above in parts II.A and B supra, the Commission is 
adopting the amendments to Rules 17ad-22(e)(6) and (e)(18) as proposed, 
and the Commission has received no comments on the burden estimates 
provided in the Proposing Release. Accordingly, the Commission is not 
adjusting the burden estimates from the Proposing Release, except with 
respect to minor changes to correct mathematical errors, as described 
more fully below.
1. Amendment to Rule 17ad-22(e)(6)
    The purpose of this collection of information is to enable a 
covered clearing agency for Treasury securities to better understand 
and manage the risks presented by transactions that a direct 
participant may submit on behalf of its customer, i.e., an indirect 
participant which relies upon the direct participant to access the 
covered clearing agency. The collection is mandatory. To the extent 
that the Commission receives confidential information pursuant to this 
collection of information, such information would be kept confidential 
subject to the provisions of applicable law.\1057\
---------------------------------------------------------------------------

    \1057\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of 
Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    The amendment to Rule 17ad-22(e)(6) requires a Treasury securities 
CCA to establish, implement, maintain and enforce written policies and 
procedures. The amendment contains similar provisions to existing FICC 
rules, specifically with respect to its Sponsored Member program, but 
also imposes additional requirements that did not previously appear in 
Rule 17ad-22. As a result, the Commission believes that a respondent 
Treasury securities CCA will incur burdens of reviewing and updating 
existing policies and procedures in order to comply with the amendment 
to Rule 17ad-22(e)(6) and, in some cases, may need to create new 
policies and procedures.\1058\ The Commission believes that the PRA 
burdens for the amendment to Rule 17ad-22(e)(6) may require a 
respondent clearing agency to make substantial changes to its policies 
and procedures. Based on the similar policies and procedures 
requirements and the corresponding burden estimates previously made by 
the Commission for several rules in the Covered Clearing Agency 
Standards where the Commission anticipated similar burdens,\1059\ the 
Commission estimates that the amendment to Rule 17ad-22(e)(6) would 
impose on each respondent Treasury securities CCA an initial burden of 
129 hours in the first year.\1060\
---------------------------------------------------------------------------

    \1058\ See Proposing Release, supra note 14, 87 FR at 64622 
(discussing existing FICC rules for sponsored member program).
    \1059\ See CCA Standards Adopting Release, supra note 10, 81 FR 
at 70895-97 (discussing Rules 17ad-22(e)(13), (15), and (18)). 
Although the rule amendment is with respect to Rule 17ad-22(e)(6), 
the Commission believes that these Rules present the best overall 
comparison to the rule amendment, in light of the nature of the 
changes needed to implement the rule amendment here and what was 
proposed in the Covered Clearing Agency Standards.
    \1060\ This figure was calculated as follows: (Assistant General 
Counsel for 20 hours) + (Compliance Attorney for 40 hours) + 
(Computer Operations Manager for 12 hours) + (Senior Programmer for 
20 hours) + (Senior Risk Management Specialist for 25 hours) + 
(Senior Business Analyst for 12 hours) = 129 hours x 2 respondent 
clearing agencies = 258 hours.
---------------------------------------------------------------------------

    In addition, the amendment to Rule 17ad-22(e)(6) imposes ongoing 
burdens on a respondent Treasury securities CCA. The amended rule 
requires ongoing monitoring and compliance activities with respect to 
the written policies and procedures created in response to the amended 
rule. Based on the similar reporting requirements and the corresponding 
burden estimates previously made by the Commission for several rules in 
the Covered Clearing Agency Standards where the Commission anticipated 
similar burdens,\1061\ the Commission estimates that the ongoing 
activities required by the amendment to Rule 17ad-22(e)(6) would impose 
an ongoing burden of 85 hours per year (including the first 
year).\1062\ Therefore, the aggregate ongoing industry burden 
associated with the amendments to Rule 17ad-22(e)(6) for the two 
respondents is approximately 170 hours per year.\1063\
---------------------------------------------------------------------------

    \1061\ See CCA Standards Adopting Release, supra note 10, 81 FR 
at 70893 and 70895-96 (discussing Rules 17ad-22(e)(6) and (13)).
    \1062\ This figure was calculated as follows: (Compliance 
Attorney for 25 hours + Business Risk Analyst for 40 hours + Senior 
Risk Management Specialist for 20 hours) = 85 hours x 2 respondent 
clearing agencies = 170 ongoing burden hours. (This figure is a 
corrected version from that in the 2022 Proposing Release, which 
contained a calculation error in the chart that overstated the 
estimated burden by 6 hours per respondent, and another calculation 
error in the accompanying footnote that understated the estimated 
burden by 5 hours per respondent. See Proposing Release, supra note 
14, 87 FR at 64675, footnote 505 and accompanying text.)
    \1063\ This figure was calculated as follows: 85 hours x 2 
respondent clearing agencies = 170 hours.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Initial burden       Aggregate      Ongoing burden       Aggregate
     Name of information collection            Type of burden         Number of      per entity      initial burden      per entity      ongoing burden
                                                                     respondents       (hours)           (hours)           (hours)           (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
17ad-22(e)(6) (Treasury Clearing)......  Recordkeeping............            2               129               258            \a\ 85           \b\ 170
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ See supra note 963.
\b\ See id.

2. Amendment to Rule 17ad-22(e)(18)(iv)
    The purpose of the collection of information under Rule 17ad-
22(e)(18)(iv) is to enable a U.S. Treasury securities CCA to ensure 
that its direct participants submit for clearance and settlement, as a 
requirement of membership in the CCA, all eligible secondary market 
transactions in U.S. Treasury securities to the U.S. Treasury 
securities CCA to which the direct participants are a counterparty. 
This should, in turn, help ensure that the risk presented by the 
eligible secondary market transactions of that direct participant that 
are not centrally cleared would not be transmitted to the U.S. Treasury 
securities CCA, and to enable the CCA to identify and manage the risks 
posed by those transactions that are currently not submitted for 
central clearing. In addition, the purpose of this rule is to ensure 
that the U.S. Treasury

[[Page 2824]]

securities CCA adopts policies and procedures to identify and monitor 
its direct participants' submission of transactions for clearance and 
settlement, including how the CCA would address a failure to submit 
transactions that are required to be submitted. Finally, the purpose of 
the rule is to ensure that the CCA has appropriate means to facilitate 
access to clearance and settlement services of all eligible secondary 
market transactions in U.S. Treasury securities, including those of 
indirect participants, which policies and procedures the board of 
directors of such covered clearing agency reviews annually.
    This additional collection is mandatory. To the extent that the 
Commission receives confidential information pursuant to this 
collection of information, such information would be kept confidential 
subject to the provisions of applicable law.\1064\
---------------------------------------------------------------------------

    \1064\ See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of the 
Freedom of Information Act provides an exemption for trade secrets 
and commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    The amendment to Rule 17ad-22(e)(18)(iv) requires a U.S. Treasury 
securities CCA to establish, implement, maintain and enforce written 
policies and procedures, as discussed above. Because such policies and 
procedures are not currently required under existing Rule 17ad-22, the 
Commission believes that the estimated PRA burdens for the amendment to 
Rule 17ad-22(e)(18)(iv) would be significant and may require a 
respondent clearing agency to make substantial changes to its policies 
and procedures. The amendment contains similar provisions to existing 
rules, but also imposes additional requirements that did not previously 
appear in Rule 17ad-22.\1065\ As a result, the Commission believes that 
a respondent U.S. Treasury securities CCA would incur burdens of 
reviewing and updating existing policies and procedures in order to 
comply with the provisions of amended Rule 17ad-22(e)(18)(iv) and, in 
some cases, may need to create new policies and procedures. Based on 
the similar policies and procedures requirements and the corresponding 
burden estimates previously made by the Commission for several rules in 
the Covered Clearing Agency Standards where the Commission anticipated 
similar burdens,\1066\ the Commission estimates that the amendment to 
Rule 17ad-22(e)(18)(iv) would impose on each respondent Treasury 
securities CCA an initial burden of 260 hours in the first year.\1067\
---------------------------------------------------------------------------

    \1065\ See Proposing Release, supra note 14, 87 FR n.34 and 
accompanying text (discussing current FICC rules).
    \1066\ See CCA Standards Adopting Release, supra note 10, 81 FR 
at 70895-97 (discussing Rules 17ad-22(e)(13), (15), and (18)). The 
Commission believes that these Rules present the best comparison to 
the rule amendment, in light of the nature of the rule amendment. 
Although the rule amendment is with respect to Rule 17ad-22(e)(18), 
the Commission believes that considering additional rules in the 
Covered Clearing Agency Standards is reasonable in light of the 
nature of the rule amendment and the changes necessary to establish 
and implement the requirements of the rule amendment, as compared to 
the current Commission rules and U.S. Treasury securities CCA rules.
    \1067\ This figure was calculated as follows: Assistant General 
Counsel for 40 hours + Compliance Attorney for 80 hours + Computer 
Operations Manager for 20 hours + Senior Risk Management Specialist 
for 40 hours + Business Risk Analyst for 80 hours = 260 hours x 2 
respondent clearing agencies = 520 hours.
---------------------------------------------------------------------------

    In addition, the amendment to Rule 17ad-22(e)(18)(iv) imposes 
ongoing burdens on a respondent Treasury securities CCA. The amended 
rule requires ongoing monitoring and compliance activities with respect 
to the written policies and procedures created in response to the 
amendment. Based on the similar reporting requirements and the 
corresponding burden estimates previously made by the Commission for 
several rules in the Covered Clearing Agency Standards where the 
Commission anticipated similar burdens,\1068\ the Commission estimates 
that the ongoing activities required by the amendment to Rule 17ad-
22(e)(18)(iv) would impose an ongoing burden of 85 hours per year 
(including the first year).\1069\ Therefore, the aggregate ongoing 
industry burden associated with the amendment to Rule 17ad-
22(e)(18)(iv) for the two respondents is approximately 170 hours per 
year.\1070\
---------------------------------------------------------------------------

    \1068\ See supra note above (discussing relevant aspects of the 
Covered Clearing Agency Standards).
    \1069\ This figure was calculated as follows: (Compliance 
Attorney for 25 hours + Business Risk Analyst for 40 hours + Senior 
Risk Management Specialist for 20 hours) = 85 ongoing burden hours 
per year.
    \1070\ This figure was calculated as follows: 85 hours x 2 
respondent clearing agencies = 170 hours.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Initial burden       Aggregate      Ongoing burden      Aggregated
     Name of information collection            Type of burden         Number of      per entity      initial burden      per entity      ongoing burden
                                                                     respondents       (hours)           (hours)           (hours)           (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
17ad-22(e)(18) (Treasury Clearing).....  Recordkeeping............            2               260               520            \a\ 85               170
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ This figure is a corrected version from that in the 2022 Proposing Release, which contained an error in the calculation that understated the
  estimated burden by 5 hours. See Proposing Release, supra note 13, 87 FR 64675.

B. Broker-Dealers

    The final rule amendment to Rule 15c3-3a does not require a new 
collection of information on the part of any entities subject to these 
rules. Accordingly, the requirements imposed by the PRA are not 
applicable to this rule.

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\1071\ Section 603(a) of the Administrative Procedure 
Act,\1072\ as amended by the RFA, generally requires the Commission to 
undertake a final regulatory flexibility analysis of all proposed rules 
to determine the impact of such rulemaking on ``small entities.'' 
\1073\ Section 605(b) of the RFA states that this requirement shall not 
apply to any proposed rule which, if adopted, would not have a 
significant economic impact on a substantial number of small 
entities.\1074\ In the Proposing Release, the Commission certified that 
the proposed amendments to Rules 17ad-22 and 15c3-3a would not have a 
significant economic impact on a substantial number of small entities 
for purposes of the RFA. The Proposing Release solicited comment on the 
certification. The Commission received no comments on this 
certification.
---------------------------------------------------------------------------

    \1071\ See 5 U.S.C. 601 et seq.
    \1072\ 5 U.S.C. 603(a).
    \1073\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this rulemaking, are set forth in 17 CFR 
240.0-10.
    \1074\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Clearing Agencies

    The amendments to Rule 17ad-22 would apply to covered clearing 
agencies, which would include

[[Page 2825]]

registered clearing agencies that provide the services of a central 
counterparty or central securities depository.\1075\ For the purposes 
of Commission rulemaking and as applicable to the proposed amendments 
to Rule 17ad-22, a small entity includes, when used with reference to a 
clearing agency, a clearing agency that (i) compared, cleared, and 
settled less than $500 million in securities transactions during the 
preceding fiscal year, (ii) had less than $200 million of funds and 
securities in its custody or control at all times during the preceding 
fiscal year (or at any time that it has been in business, if shorter), 
and (iii) is not affiliated with any person (other than a natural 
person) that is not a small business or small organization.\1076\
---------------------------------------------------------------------------

    \1075\ 17 CFR 240.17ad-22(a)(5).
    \1076\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission, the Commission 
believes that such entities exceed the thresholds defining ``small 
entities'' set out above. While other clearing agencies may emerge and 
seek to register as clearing agencies, the Commission does not believe 
that any such entities would be ``small entities'' as defined in 
Exchange Act Rule 0-10.\1077\ In any case, clearing agencies can only 
become subject to the new requirements under Rule 17ad-22(e) should 
they meet the definition of a covered clearing agency, as described 
above. Accordingly, the Commission believes that any such registered 
clearing agencies will exceed the thresholds for ``small entities'' set 
forth in Exchange Act Rule 0-10.
---------------------------------------------------------------------------

    \1077\ See 17 CFR 240.0-10(d). The Commission based this 
determination on its review of public sources of financial 
information about registered clearing agencies and lifecycle event 
service providers for OTC derivatives.
---------------------------------------------------------------------------

B. Broker-Dealers

    For purposes of Commission rulemaking in connection with the RFA, a 
small entity includes a broker-dealer that: (1) had total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the date 
in the prior fiscal year as of which its audited financial statements 
were prepared pursuant to Rule 17a-5(d) under the Exchange Act, or, if 
not required to file such statements, a broker-dealer with total 
capital (net worth plus subordinated liabilities) of less than $500,000 
on the last day of the preceding fiscal year (or in the time that it 
has been in business, if shorter); and (2) is not affiliated with any 
person (other than a natural person) that is not a small business or 
small organization.\1078\ Under the standards adopted by the Small 
Business Administration, small entities in the finance and insurance 
industry include the following: (1) for entities in credit 
intermediation and related activities, firms with $175 million or less 
in assets; (2) for non-depository credit intermediation and certain 
other activities, firms with $7 million or less in annual receipts; (3) 
for entities in financial investments and related activities, firms 
with $7 million or less in annual receipts; (4) for insurance carriers 
and entities in related activities, firms with $7 million or less in 
annual receipts; and (5) for funds, trusts, and other financial 
vehicles, firms with $7 million or less in annual receipts.
---------------------------------------------------------------------------

    \1078\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    The final rule amendment to Rule 15c3-3a would permit margin 
required and on deposit with covered clearing agencies for U.S. 
Treasury securities to be included by broker-dealers as a debit in the 
reserve formulas for accounts of customers and proprietary accounts of 
broker-dealers, subject to certain conditions. Only carrying broker-
dealers will be impacted by the final rule amendment. This is because 
only carrying broker-dealers are required to maintain a customer or PAB 
reserve account and may collect customer margin.
    Based on FOCUS Report data, the Commission estimates that as of 
June 30, 2023, there were approximately 772 broker-dealers that were 
``small'' for the purposes of Rule 0-10. Of these, the Commission 
estimates that there are less than ten broker-dealers that are carrying 
broker-dealers (i.e., can carry customer or PAB margin accounts and 
extend credit). However, based on June 30, 2023, FOCUS Report data, 
none of these small carrying broker-dealers carried debit balances. 
This means that any ``small'' carrying firms are not extending margin 
credit to their customers, and therefore, the final rule amendment 
likely would not apply to them. Therefore, while the Commission 
believes that some small broker-dealers could be affected by the final 
amendment, the amendment will not have a significant impact on a 
substantial number of small broker-dealers.

C. Certification

    For the reasons described above, the Commission certifies that the 
final amendments to Rules 17ad-22 and 15c3-3a would not have a 
significant economic impact on a substantial number of small entities 
for purposes of the RFA.

VII. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\1079\ the Office of 
Information and Regulatory Affairs has designated these rules as a 
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \1079\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

Statutory Authority

    The Commission is amending Rule 17ad-22 under the Commission's 
rulemaking authority set forth in section 17A of the Exchange Act, 15 
U.S.C. 78q-1, and section 805 of the Clearing Supervision Act, 15 
U.S.C. 5464 respectively. Pursuant to the Exchange Act, 15 U.S.C. 78a 
et seq., and particularly, sections 15 and 23(a) (15 U.S.C. 78o and 
78w(a)), thereof, the Commission is amending Sec.  240.15c3-3a under 
the Exchange Act.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendments

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for part 240 continues to read, and 
the sectional authority for Sec.  240.17ad-22 is revised to read, as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., 
and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; 
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.15c3-3a is also issued under Pub. L. 111-203, Sec.  
939, 939A, 124. Stat. 1376 (2010) (15 U.S.C. 78c, 15 U.S.C. 78o-7 
note).
* * * * *
    Section 240.17ad-22 is also issued under 12 U.S.C. 5461 et seq.
* * * * *

[[Page 2826]]


0
2. Revise and republish Sec.  240.15c3-3a to read as follows:


Sec.  240.15c3-3a  Exhibit A--Formula for determination of customer and 
PAB account reserve requirements of brokers and dealers under Sec.  
240.15c3-3.

------------------------------------------------------------------------
                                                    Credits     Debits
------------------------------------------------------------------------
1. Free credit balances and other credit                XXX   ..........
 balances in customers' security accounts. (See
 Note A)........................................
2. Monies borrowed collateralized by securities         XXX   ..........
 carried for the accounts of customers (See Note
 B).............................................
3. Monies payable against customers' securities         XXX   ..........
 loaned (See Note C)............................
4. Customers' securities failed to receive (See         XXX
 Note D)........................................
5. Credit balances in firm accounts which are           XXX   ..........
 attributable to principal sales to customers...
6. Market value of stock dividends, stock splits        XXX   ..........
 and similar distributions receivable
 outstanding over 30 calendar days..............
7. Market value of short security count                 XXX   ..........
 differences over 30 calendar days old..........
8. Market value of short securities and credits         XXX   ..........
 (not to be offset by longs or by debits) in all
 suspense accounts over 30 calendar days........
9. Market value of securities which are in              XXX   ..........
 transfer in excess of 40 calendar days and have
 not been confirmed to be in transfer by the
 transfer agent or the issuer during the 40 days
10. Debit balances in customers' cash and margin  ..........        XXX
 accounts excluding unsecured accounts and
 accounts doubtful of collection. (See Note E)..
11. Securities borrowed to effectuate short       ..........        XXX
 sales by customers and securities borrowed to
 make delivery on customers' securities failed
 to deliver.....................................
12. Failed to deliver of customers' securities    ..........        XXX
 not older than 30 calendar days................
13. Margin required and on deposit with the       ..........        XXX
 Options Clearing Corporation for all option
 contracts written or purchased in customer
 accounts. (See Note F).........................
14. Margin required and on deposit with a         ..........        XXX
 clearing agency registered with the Commission
 under section 17A of the Act (15 U.S.C. 78q-1)
 or a derivatives clearing organization
 registered with the Commodity Futures Trading
 Commission under section 5b of the Commodity
 Exchange Act (7 U.S.C. 7a-1) related to the
 following types of positions written, purchased
 or sold in customer accounts: (1) security
 futures products and (2) futures contracts (and
 options thereon) carried in a securities
 account pursuant to an SRO portfolio margining
 rule (See Note G)..............................
15. Margin required and on deposit with a         ..........        XXX
 clearing agency registered with the Commission
 under section 17A of the Act (15 U.S.C. 78q-1)
 resulting from the following types of
 transactions in U.S. Treasury securities in
 customer accounts that have been cleared,
 settled, and novated by the clearing agency:
 (1) purchases and sales of U.S. Treasury
 securities; and (2) U.S. Treasury securities
 repurchase and reverse repurchase agreements
 (See Note H)...................................
                                                 -----------------------
    Total credits...............................  ..........  ..........
    Total debits................................  ..........  ..........
                                                 -----------------------
16. Excess of total credits (sum of items 1-9)    ..........        XXX
 over total debits (sum of items 10-15) required
 to be on deposit in the ``Reserve Bank
 Account'' (Sec.   240.15c3-3(e)). If the
 computation is made monthly as permitted by
 this section, the deposit must be not less than
 105 percent of the excess of total credits over
 total debits...................................
------------------------------------------------------------------------

Notes Regarding the Customer Reserve Bank Account Computation

    Note A. Item 1 must include all outstanding drafts payable to 
customers which have been applied against free credit balances or 
other credit balances and must also include checks drawn in excess 
of bank balances per the records of the broker or dealer.
    Note B. Item 2 must include the amount of options-related or 
security futures product-related Letters of Credit obtained by a 
member of a registered clearing agency or a derivatives clearing 
organization which are collateralized by customers' securities, to 
the extent of the member's margin requirement at the registered 
clearing agency or derivatives clearing organization. Item 2 must 
also include the amount of Letters of Credit which are 
collateralized by customers' securities and related to other futures 
contracts (and options thereon) carried in a securities account 
pursuant to an SRO portfolio margining rule. Item 2 must include the 
market value of customers' securities on deposit at a ``qualified 
clearing agency'' as defined in Note H below.
    Note C. Item 3 must include in addition to monies payable 
against customers' securities loaned the amount by which the market 
value of securities loaned exceeds the collateral value received 
from the lending of such securities.
    Note D. Item 4 must include in addition to customers' securities 
failed to receive the amount by which the market value of securities 
failed to receive and outstanding more than thirty (30) calendar 
days exceeds their contract value.
    Note E. (1) Debit balances in margin accounts must be reduced by 
the amount by which a specific security (other than an exempted 
security) which is collateral for margin accounts exceeds in 
aggregate value 15 percent of the aggregate value of all securities 
which collateralize all margin accounts receivable; provided, 
however, the required reduction must not be in excess of the amounts 
of the debit balance required to be excluded because of this 
concentration rule. A specified security is deemed to be collateral 
for a margin account only to the extent it represents in value not 
more than 140 percent of the customer debit balance in a margin 
account.
    (2) Debit balances in special omnibus accounts, maintained in 
compliance with the requirements of Section 7(f) of Regulation T (12 
CFR 220.7(f)) or similar accounts carried on behalf of another 
broker or dealer, must be reduced by any deficits in such accounts 
(or if a credit, such credit must be increased) less any calls for 
margin, mark to the market, or other required deposits which are 
outstanding five business days or less.
    (3) Debit balances in customers' cash and margin accounts 
included in the formula under Item 10 must be reduced by an amount 
equal to 1 percent of their aggregate value.
    (4) Debit balances in cash and margin accounts of household 
members and other persons related to principals of a broker or 
dealer and debit balances in cash and margin accounts of affiliated 
persons of a broker or dealer must be excluded from the Reserve 
Formula, unless the broker or dealer can demonstrate that such debit 
balances are directly related to credit items in the formula.
    (5) Debit balances in margin accounts (other than omnibus 
accounts) must be reduced by the amount by which any single 
customer's debit balance exceeds 25 percent (to the extent such 
amount is greater than $50,000) of the broker-dealer's tentative net 
capital (i.e., net capital prior to securities haircuts) unless the 
broker or dealer can demonstrate that the debit balance is directly 
related to credit items in the Reserve Formula. Related accounts 
(e.g., the separate accounts of an individual, accounts under common 
control or subject to cross guarantees) will be deemed to be a 
single customer's accounts for purposes of this provision. If the 
registered national securities exchange or the registered national 
securities association having responsibility for

[[Page 2827]]

examining the broker or dealer (``designated examining authority'') 
is satisfied, after taking into account the circumstances of the 
concentrated account including the quality, diversity, and 
marketability of the collateral securing the debit balances or 
margin accounts subject to this provision, that the concentration of 
debit balances is appropriate, then such designated examining 
authority may grant a partial or plenary exception from this 
provision. The debit balance may be included in the reserve formula 
computation for five business days from the day the request is made.
    (6) Debit balances in joint accounts, custodian accounts, 
participation in hedge funds or limited partnerships or similar type 
accounts or arrangements that include both assets of a person or 
persons who would be excluded from the definition of customer 
(``noncustomer'') and assets of a person or persons who would be 
included in the definition of customer must be included in the 
Reserve Formula in the following manner: if the percentage ownership 
of the non-customer is less than 5 percent then the entire debit 
balance shall be included in the formula; if such percentage 
ownership is between 5 percent and 50 percent then the portion of 
the debit balance attributable to the non-customer must be excluded 
from the formula unless the broker or dealer can demonstrate that 
the debit balance is directly related to credit items in the 
formula; or if such percentage ownership is greater than 50 percent, 
then the entire debit balance must be excluded from the formula 
unless the broker or dealer can demonstrate that the debit balance 
is directly related to credit items in the formula.
    Note F. Item 13 must include the amount of margin required and 
on deposit with the Options Clearing Corporation to the extent such 
margin is represented by cash, proprietary qualified securities and 
letters of credit collateralized by customers' securities.
    Note G. (a) Item 14 must include the amount of margin required 
and on deposit with a clearing agency registered with the Commission 
under section 17A of the Act (15 U.S.C. 78q-1) or a derivatives 
clearing organization registered with the Commodity Futures Trading 
Commission under section 5b of the Commodity Exchange Act (7 U.S.C. 
7a-1) for customer accounts to the extent that the margin is 
represented by cash, proprietary qualified securities, and letters 
of credit collateralized by customers' securities.
    (b) Item 14 will apply only if the broker or dealer has the 
margin related to security futures products, or futures (and options 
thereon) carried in a securities account pursuant to an approved SRO 
portfolio margining program on deposit with:
    (1) A registered clearing agency or derivatives clearing 
organization that:
    (i) Maintains security deposits from clearing members in 
connection with regulated options or futures transactions and 
assessment power over member firms that equal a combined total of at 
least $2 billion, at least $500 million of which must be in the form 
of security deposits. For the purposes of this Note G, the term 
``security deposits'' refers to a general fund, other than margin 
deposits or their equivalent, that consists of cash or securities 
held by a registered clearing agency or derivative clearing 
organization; or
    (ii) Maintains at least $3 billion in margin deposits; or
    (iii) Does not meet the requirements of paragraphs (b)(1)(i) 
through (b)(1)(iii) of this Note G, if the Commission has 
determined, upon a written request for exemption by or for the 
benefit of the broker or dealer, that the broker or dealer may 
utilize such a registered clearing agency or derivatives clearing 
organization. The Commission may, in its sole discretion, grant such 
an exemption subject to such conditions as are appropriate under the 
circumstances, if the Commission determines that such conditional or 
unconditional exemption is necessary or appropriate in the public 
interest, and is consistent with the protection of investors; and
    (2) A registered clearing agency or derivatives clearing 
organization that, if it holds funds or securities deposited as 
margin for security futures products or futures in a portfolio 
margin account in a bank, as defined in section 3(a)(6) of the Act 
(15 U.S.C. 78c(a)(6)), obtains and preserves written notification 
from the bank at which it holds such funds and securities or at 
which such funds and securities are held on its behalf. The written 
notification will state that all funds and/or securities deposited 
with the bank as margin (including customer security futures 
products and futures in a portfolio margin account), or held by the 
bank and pledged to such registered clearing agency or derivatives 
clearing agency as margin, are being held by the bank for the 
exclusive benefit of clearing members of the registered clearing 
agency or derivatives clearing organization (subject to the interest 
of such registered clearing agency or derivatives clearing 
organization therein), and are being kept separate from any other 
accounts maintained by the registered clearing agency or derivatives 
clearing organization with the bank. The written notification also 
will provide that such funds and/or securities will at no time be 
used directly or indirectly as security for a loan to the registered 
clearing agency or derivatives clearing organization by the bank, 
and will be subject to no right, charge, security interest, lien, or 
claim of any kind in favor of the bank or any person claiming 
through the bank. This provision, however, will not prohibit a 
registered clearing agency or derivatives clearing organization from 
pledging customer funds or securities as collateral to a bank for 
any purpose that the rules of the Commission or the registered 
clearing agency or derivatives clearing organization otherwise 
permit; and
    (3) A registered clearing agency or derivatives clearing 
organization establishes, documents, and maintains:
    (i) Safeguards in the handling, transfer, and delivery of cash 
and securities;
    (ii) Fidelity bond coverage for its employees and agents who 
handle customer funds or securities. In the case of agents of a 
registered clearing agency or derivatives clearing organization, the 
agent may provide the fidelity bond coverage; and
    (iii) Provisions for periodic examination by independent public 
accountants; and
    (iv) A derivatives clearing organization that, if it is not 
otherwise registered with the Commission, has provided the 
Commission with a written undertaking, in a form acceptable to the 
Commission, executed by a duly authorized person at the derivatives 
clearing organization, to the effect that, with respect to the 
clearance and settlement of the customer security futures products 
and futures in a portfolio margin account of the broker or dealer, 
the derivatives clearing organization will permit the Commission to 
examine the books and records of the derivatives clearing 
organization for compliance with the requirements set forth in Sec.  
240.15c3-3a, Note G (b)(1) through (3).
    (c) Item 14 will apply only if a broker or dealer determines, at 
least annually, that the registered clearing agency or derivatives 
clearing organization with which the broker or dealer has on deposit 
margin related to securities future products or futures in a 
portfolio margin account meets the conditions of this Note G.
    Note H. (a) Item 15 must include the amount of margin required 
and on deposit with a clearing agency registered with the Commission 
under section 17A of the Act (15 U.S.C. 78q-1) that clears, settles, 
and novates transactions in U.S. Treasury securities (``qualified 
clearing agency'') to the extent that the margin is:
    (1) In the form of cash, U.S. Treasury securities, or qualified 
customer securities; and
    (2) Being used to margin U.S. Treasury securities positions of 
the customers of the broker or dealer that are cleared, settled, and 
novated by the qualified clearing agency.
    (b) Item 15 will apply only if the cash and securities required 
and on deposit at the qualified clearing agency:
    (1)(i) Are cash owed by the broker or dealer to the customer of 
the broker or dealer that was delivered by the broker or dealer to 
the qualified clearing agency to meet a margin requirement resulting 
from that customer's U.S. Treasury securities positions cleared, 
settled, and novated at the qualified clearing agency and not for 
any other customer's or the broker's or dealer's U.S. Treasury 
securities positions cleared, settled, and novated at the qualified 
clearing agency;
    (ii) U.S. Treasury securities or qualified customer securities 
held in custody by the broker or dealer for the customer of the 
broker or dealer that were delivered by the broker or dealer to the 
qualified clearing agency to meet a margin requirement resulting 
from that customer's U.S. Treasury securities positions cleared, 
settled, and novated at the qualified clearing agency and not for 
any other customer's or the broker's or dealer's U.S. Treasury 
securities positions cleared, settled, and novated at the qualified 
clearing agency; or
    (iii) U.S. Treasury securities owned by the broker or dealer 
that were delivered by the broker or dealer to the qualified 
clearing agency to meet a margin requirement resulting from a 
customer's U.S. Treasury securities positions cleared, settled, and 
novated at the qualified clearing agency under the following 
conditions:
    (A) The broker or dealer did not owe to the customer or hold in 
custody for the customer

[[Page 2828]]

sufficient cash, U.S. Treasury securities, and/or qualified customer 
securities to meet a margin requirement resulting from that 
customer's U.S. Treasury securities positions cleared, settled, and 
novated at the qualified clearing agency at the time the margin 
requirement arose;
    (B) The broker or dealer calls for the customer to deliver a 
sufficient amount of cash, U.S. Treasury securities, and/or 
qualified customer securities to meet the margin requirement on the 
day the margin requirement arose; and
    (C) The broker or dealer receives a sufficient amount of cash, 
U.S. Treasury securities, and/or qualified customer securities to 
meet the margin requirement by the close of the next business day 
after the margin requirement arose.
    (2) Are treated in accordance with rules of the qualified 
clearing agency that impose the following requirements and the 
qualified clearing agency and broker or dealer are in compliance 
with the requirements of the rules (as applicable):
    (i) Rules requiring the qualified clearing agency to calculate a 
separate margin amount for each customer of the broker or dealer and 
the broker or dealer to deliver that amount of margin for each 
customer on a gross basis;
    (ii) Rules limiting the qualified clearing agency from investing 
cash delivered by the broker or dealer to margin U.S. Treasury 
security transactions of the customers of the broker or dealer or 
cash realized through using U.S. Treasury securities delivered by 
the broker or dealer for that purpose in any asset other than U.S. 
Treasury securities with a maturity of one year or less;
    (iii) Rules requiring that the cash, U.S. Treasury securities, 
and qualified customer securities used to margin the U.S. Treasury 
securities positions of the customers of the broker or dealer be 
held in an account of the broker or dealer at the qualified clearing 
agency that is segregated from any other account of the broker or 
dealer at the qualified clearing agency and that is:
    (A) Used exclusively to clear, settle, novate, and margin U.S. 
Treasury securities transactions of the customers of the broker or 
dealer;
    (B) Designated ``Special Clearing Account for the Exclusive 
Benefit of the Customers of [name of broker or dealer]'';
    (C) Subject to a written notice of the qualified clearing agency 
provided to and retained by the broker or dealer that the cash, U.S. 
Treasury securities, and qualified customer securities in the 
account are being held by the qualified clearing agency for the 
exclusive benefit of the customers of the broker or dealer in 
accordance with the regulations of the Commission and are being kept 
separate from any other accounts maintained by the broker or dealer 
or any other clearing member at the qualified clearing agency; and
    (D) Subject to a written contract between the broker or dealer 
and the qualified clearing agency which provides that the cash, U.S. 
Treasury securities, and qualified customer securities in the 
account are not available to cover claims arising from the broker or 
dealer or any other clearing member defaulting on an obligation to 
the qualified clearing agency or subject to any other right, charge, 
security interest, lien, or claim of any kind in favor of the 
qualified clearing agency or any person claiming through the 
qualified clearing agency, except a right, charge, security 
interest, lien, or claim resulting from a cleared U.S. Treasury 
securities transaction of a customer of the broker or dealer 
effected in the account;
    (iv) Rules requiring the qualified clearing agency to hold the 
customer cash, U.S. Treasury securities, and qualified customer 
securities used to margin the U.S. Treasury securities positions of 
the customers of the broker or dealer itself or in an account of the 
clearing agency at a U.S. Federal Reserve Bank or a ``bank,'' as 
that term is defined in section 3(a)(6) of the Act (15 U.S.C. 
78c(a)(6)), that is insured by the Federal Deposit Insurance 
Corporation, and that the account at the U.S. Federal Reserve Bank 
or bank must be:
    (A) Segregated from any other account of the qualified clearing 
agency or any other person at the U.S. Federal Reserve Bank or bank 
and used exclusively to hold cash, U.S. Treasury securities, and 
qualified customer securities to meet current margin requirements of 
the qualified clearing agency resulting from positions in U.S. 
Treasury securities of the customers of the broker or dealer members 
of the qualified clearing agency;
    (B) Subject to a written notice of the U.S. Federal Reserve Bank 
or bank provided to and retained by the qualified clearing agency 
that the cash, U.S. Treasury securities, and qualified customer 
securities in the account are being held by the U.S. Federal Reserve 
Bank or bank pursuant to Sec.  240.15c3-3 and are being kept 
separate from any other accounts maintained by the qualified 
clearing agency or any other person at the U.S. Federal Reserve Bank 
or bank; and
    (C) Subject to a written contract between the qualified clearing 
agency and the U.S. Federal Reserve Bank or bank which provides that 
the cash, U.S. Treasury securities, and qualified customer 
securities in the account are subject to no right, charge, security 
interest, lien, or claim of any kind in favor of the U.S. Federal 
Reserve Bank or bank or any person claiming through the U.S. Federal 
Reserve Bank or bank; and
    (v) Rules requiring systems, controls, policies, and procedures 
to return cash, U.S. Treasury securities, and qualified customer 
securities to the broker or dealer that are no longer needed to meet 
a current margin requirement resulting from positions in U.S. 
Treasury securities of the customers of the broker or dealer; and
    (3) The Commission has approved rules of the qualified clearing 
agency that meet the conditions of this Note H and has published 
(and not subsequently withdrawn) a notice that brokers or dealers 
may include a debit in the customer reserve formula when depositing 
cash, U.S. Treasury securities, and/or qualified customer securities 
to meet a margin requirement of the qualified clearing agency 
resulting from positions in U.S. Treasury securities of the 
customers of the broker or dealer.
    (c) As used in this Note H, the term ``qualified customer 
securities'' means the securities of a customer of the broker or 
dealer (other than U.S. Treasury securities) that are held in 
custody by the broker or dealer for the customer and that under the 
rules of the qualified clearing agency are eligible to be used to 
margin U.S. Treasury securities positions of the customer that are 
cleared, settled, and novated by the qualified clearing agency.

Notes Regarding the PAB Reserve Bank Account Computation

    Note 1. Broker-dealers should use the formula in Exhibit A for 
the purposes of computing the PAB reserve requirement, except that 
references to ``accounts,'' ``customer accounts, or ``customers'' 
will be treated as references to PAB accounts.
    Note 2. Any credit (including a credit applied to reduce a 
debit) that is included in the computation required by Sec.  
240.15c3-3 with respect to customer accounts (the ``customer reserve 
computation'') may not be included as a credit in the computation 
required by Sec.  240.15c3-3 with respect to PAB accounts (the ``PAB 
reserve computation'').
    Note 3. Note E(1) to Sec.  240.15c3-3a does not apply to the PAB 
reserve computation.
    Note 4. Note E(3) to Sec.  240.15c3-3a which reduces debit 
balances by 1 percent does not apply to the PAB reserve computation.
    Note 5. Interest receivable, floor brokerage, and commissions 
receivable of another broker or dealer from the broker or dealer 
(excluding clearing deposits) that are otherwise allowable assets 
under Sec.  240.15c3-1 need not be included in the PAB reserve 
computation, provided the amounts have been clearly identified as 
payables on the books of the broker or dealer. Commissions 
receivable and other receivables of another broker or dealer from 
the broker or dealer that are otherwise non-allowable assets under 
Sec.  240.15c3-1 and clearing deposits of another broker or dealer 
may be included as ``credit balances'' for purposes of the PAB 
reserve computation, provided the commissions receivable and other 
receivables are subject to immediate cash payment to the other 
broker or dealer and the clearing deposit is subject to payment 
within 30 days.
    Note 6. Credits included in the PAB reserve computation that 
result from the use of securities held for a PAB account (``PAB 
securities'') that are pledged to meet intra-day margin calls in a 
cross-margin account established between the Options Clearing 
Corporation and any regulated derivatives clearing organization may 
be reduced to the extent that the excess margin held by the other 
clearing corporation in the cross-margin relationship is used the 
following business day to replace the PAB securities that were 
previously pledged. In addition, balances resulting from a portfolio 
margin account that are segregated pursuant to Commodity Futures 
Trading Commission regulations need not be included in the PAB 
Reserve Bank Account computation.
    Note 7. Deposits received prior to a transaction pending 
settlement which are $5 million or greater for any single 
transaction or $10 million in aggregate may be excluded as credits 
from the PAB reserve computation if such balances are placed and 
maintained in a separate PAB Reserve Bank Account by

[[Page 2829]]

12 p.m. Eastern Time on the following business day. Thereafter, the 
money representing any such deposits may be withdrawn to complete 
the related transactions without performing a new PAB reserve 
computation.
    Note 8. A credit balance resulting from a PAB reserve 
computation may be reduced by the amount that items representing 
such credits are swept into money market funds or mutual funds of an 
investment company registered under the Investment Company Act of 
1940 on or prior to 10 a.m. Eastern Time on the deposit date 
provided that the credits swept into any such fund are not subject 
to any right, charge, security interest, lien, or claim of any kind 
in favor of the investment company or the broker or dealer. Any 
credits that have been swept into money market funds or mutual funds 
must be maintained in the name of a particular broker or for the 
benefit of another broker.
    Note 9. Clearing deposits required to be maintained at 
registered clearing agencies may be included as debits in the PAB 
reserve computation to the extent the percentage of the deposit, 
which is based upon the clearing agency's aggregate deposit 
requirements (e.g., dollar trading volume), that relates to the 
proprietary business of other brokers and dealers can be identified. 
However, Note H to Item 15 of Sec.  240.15c3-3a applies with respect 
to margin delivered to a U.S. Treasury securities clearing agency.
    Note 10. A broker or dealer that clears PAB accounts through an 
affiliate or third party clearing broker must include these PAB 
account balances and the omnibus PAB account balance in its PAB 
reserve computation.


0
3. Redesignate Sec.  240.17Ad-22 as Sec.  240.17ad-22 and amend newly 
redesignated Sec.  240.17ad-22 by:
0
a. In paragraph (a):
0
i. Removing the designations for paragraphs (a)(1) through (19) and 
placing the paragraphs alphabetical order, and
0
ii. Adding in alphabetical order definitions for ``Affiliated 
counterparty'', ``Central bank'', ``Eligible secondary market 
transaction'', ``International financial institution'', ``State or 
local government'', ``Sovereign entity'', and ``U.S. Treasury 
security''.
0
b. Revising paragraphs (e)(6)(i) and (18).
    The revisions and additions read as follows:


Sec.  240.17ad-22  Standards for clearing agencies.

    (a) * * *
    Affiliated counterparty means any counterparty which meets the 
following criteria:
    (i) The counterparty is either a bank (as defined in 15 U.S.C. 
78c(6)), broker (as defined in 15 U.S.C. 78c(4)), dealer (as defined in 
15 U.S.C. 78c(5)), or futures commission merchant (as defined in 7 
U.S.C. 1a(28)), or any entity regulated as a bank, broker, dealer, or 
futures commission merchant in its home jurisdiction;
    (ii) The counterparty holds, directly or indirectly, a majority 
ownership interest in the direct participant, or the direct 
participant, directly or indirectly, holds a majority ownership 
interest in the counterparty, or a third party, directly or indirectly, 
holds a majority ownership interest in both the direct participant and 
the counterparty; and
    (iii) The counterparty, direct participant, or third party 
referenced in paragraph (ii) of this definition as holding the majority 
ownership interest would be required to report its financial statements 
on a consolidated basis under U.S. Generally Accepted Accounting 
Principles or International Financial Reporting Standards, and such 
consolidated financial statements include the financial results of the 
majority-owned party or of both majority-owned parties.
* * * * *
    Central bank means a reserve bank or monetary authority of a 
central government (including the Board of Governors of the Federal 
Reserve System or any of the Federal Reserve Banks) and the Bank for 
International Settlements.
* * * * *
    Eligible secondary market transaction refers to a secondary market 
transaction in U.S. Treasury securities of a type accepted for clearing 
by a registered covered clearing agency that is:
    (i) A repurchase or reverse repurchase agreement collateralized by 
U.S. Treasury securities, in which one of the counterparties is a 
direct participant; or
    (ii) A purchase or sale, between a direct participant and:
    (A) Any counterparty, if the direct participant of the covered 
clearing agency brings together multiple buyers and sellers using a 
trading facility (such as a limit order book) and is a counterparty to 
both the buyer and seller in two separate transactions; or
    (B) Registered broker-dealer, government securities broker, or 
government securities dealer; except that:
    (iii) Any purchase or sale transaction in U.S. Treasury securities 
or repurchase or reverse repurchase agreement collateralized by U.S. 
Treasury securities in which one counterparty is a central bank, a 
sovereign entity, an international financial institution, or a natural 
person shall be excluded from the definition set forth in this section 
of an eligible secondary market transaction;
    (iv) Any repurchase or reverse repurchase agreement collateralized 
by U.S. Treasury securities in which one counterparty is a covered 
clearing agency providing central counterparty services or a 
derivatives clearing organization (see 7 U.S.C. 7a-1 and 17 CFR 39.3), 
or is regulated as a central counterparty in its home jurisdiction, 
shall be excluded from the definition set forth in this section of an 
eligible secondary market transaction;
    (v) Any repurchase or reverse repurchase agreement collateralized 
by U.S. Treasury securities in which one counterparty is a state or 
local government shall be excluded from the definition set forth in 
this section of an eligible secondary market transaction;
    (vi) Any repurchase or reverse repurchase agreement collateralized 
by U.S. Treasury securities entered into between a direct participant 
and an affiliated counterparty shall be excluded from the definition 
set forth in this section of an eligible secondary market transaction, 
provided that the affiliated counterparty submit for clearance and 
settlement all other repurchase or reverse repurchase agreements 
collateralized by U.S. Treasury securities to which the affiliate is a 
party.
* * * * *
    International financial institution means the African Development 
Bank; African Development Fund; Asian Development Bank; Banco 
Centroamericano de Integraci[oacute]n Econ[oacute]mica; Bank for 
Economic Cooperation and Development in the Middle East and North 
Africa; Caribbean Development Bank; Corporaci[oacute]n Andina de 
Fomento; Council of Europe Development Bank; European Bank for 
Reconstruction and Development; European Investment Bank; European 
Investment Fund; European Stability Mechanism; Inter-American 
Development Bank; Inter-American Investment Corporation; International 
Bank for Reconstruction and Development; International Development 
Association; International Finance Corporation; International Monetary 
Fund; Islamic Development Bank; Multilateral Investment Guarantee 
Agency; Nordic Investment Bank; North American Development Bank; and 
any other entity that provides financing for national or regional 
development in which the U.S. Government is a shareholder or 
contributing member.
* * * * *
    Sovereign entity means a central government (including the U.S. 
Government), or an agency, department, or ministry of a central 
government.
* * * * *

[[Page 2830]]

    State or local government means a state or any political 
subdivision thereof, or an agency or instrumentality of a State or any 
political subdivision thereof, but shall not include any pension or 
retirement plan established and maintained by a State, its political 
subdivisions, or any agency or instrumentality of a State or its 
political subdivisions, for the benefit of its employees.
* * * * *
    U.S. Treasury security means any security issued by the U.S. 
Department of the Treasury.
* * * * *
    (e) * * *
    (6) * * *
    (i) Considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market, and, if the covered clearing agency provides central 
counterparty services for U.S. Treasury securities, calculates, 
collects, and holds margin amounts from a direct participant for its 
proprietary positions in Treasury securities separately and 
independently from margin calculated and collected from that direct 
participant in connection with U.S. Treasury securities transactions by 
an indirect participant that relies on the services provided by the 
direct participant to access the covered clearing agency's payment, 
clearing, or settlement facilities;
* * * * *
    (18) Establish objective, risk-based, and publicly disclosed 
criteria for participation, which:
    (i) Permit fair and open access by direct and, where relevant, 
indirect participants and other financial market utilities;
    (ii) Require participants to have sufficient financial resources 
and robust operational capacity to meet obligations arising from 
participation in the clearing agency;
    (iii) Monitor compliance with such participation requirements on an 
ongoing basis; and
    (iv) When the covered clearing agency provides central counterparty 
services for transactions in U.S. Treasury securities,
    (A) Require that any direct participant of such covered clearing 
agency submit for clearance and settlement all of the eligible 
secondary market transactions to which such direct participant is a 
counterparty;
    (B) Identify and monitor its direct participants' submission of 
transactions for clearing as required in paragraph (e)(18)(iv)(A) of 
this section, including how the covered clearing agency would address a 
failure to submit transactions in accordance with paragraph 
(e)(18)(iv)(A) of this section; and
    (C) Ensure that it has appropriate means to facilitate access to 
clearance and settlement services of all eligible secondary market 
transactions in U.S. Treasury securities, including those of indirect 
participants, which policies and procedures the board of directors of 
such covered clearing agency reviews annually.
* * * * *

    By the Commission.

    Dated: December 13, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-27860 Filed 1-12-24; 8:45 am]
BILLING CODE 8011-01-P