[Federal Register Volume 89, Number 61 (Thursday, March 28, 2024)]
[Notices]
[Pages 21586-21602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06578]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99845; File No. SR-FICC-2024-802]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing and Extension of Review Period of Advance Notice To
Modify the GSD Rules (i) Regarding the Separate Calculation, Collection
and Holding of Margin for Proprietary Transactions and That for
Indirect Participant Transactions, and (ii) To Address the Conditions
of Note H to Rule 15c3-3a
March 22, 2024.
Pursuant to section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on March
14, 2024, Fixed Income Clearing Corporation (``FICC'') filed with the
Securities and Exchange Commission (``Commission'') the advance notice
as described in Items I, II and III below, which Items have been
prepared by the clearing agency.\3\ The Commission is publishing this
notice to solicit comments on the
[[Page 21587]]
advance notice from interested persons and to extend the review period
of the Advance Notice.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ On March 14, 2024, FICC filed this advance notice as a
proposed rule change (SR-FICC-2024-007) with the Commission pursuant
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change is
available at dtcc.com/legal/sec-rule-filings.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This advance notice consists of modifications to FICC's Government
Securities Division (``GSD'') Rulebook (``Rules'') \4\ to (1) provide
for FICC to calculate, collect, and hold margin for the proprietary
transactions of a Netting Member separately and independently from the
margin for transactions that the Netting Member submits to FICC on
behalf of indirect participants; (2) simplify and revise the account
types through which Members may record transactions at FICC and adopt a
new Rule 2B to provide clearer public disclosures through the Rules
regarding the GSD account structure; (3) allow Netting Members to elect
for margin for indirect participant transactions to be calculated on a
gross basis (i.e., an indirect participant-by-indirect participant
basis) and legally segregated from the margin for the Netting Member's
proprietary transactions (as well as those of other indirect
participants); (4) align FICC's margin calculation methodology with the
expanded account types and enhance public disclosure through the Rules
of that calculation methodology; and (5) simplify the requirements for
brokered transactions so that they only apply to transactions executed
by an Inter-Dealer Broker Netting Member on the trading platform
offered by that Inter-Dealer Broker Netting Member.
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\4\ Terms not defined herein are defined in the Rules, available
at www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf.
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These proposed rule changes are primarily designed to ensure that
FICC has appropriate rules regarding the separate and independent
calculation, collection, and holding of margin for proprietary
transactions and that for indirect participant transactions in
accordance with the requirements of Rule 17Ad-22(e)(6)(i) under the
Act, and that FICC has appropriate rules to satisfy the conditions of
Note H to Rule 15c3-3a under the Act for a broker-dealer to record a
debit in the customer and broker-dealer proprietary account reserve
formulas.\5\
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\5\ See Securities Exchange Act Release No. 99149 (Dec. 13,
2023), 89 FR 2714 (Jan. 16, 2024) (S7-23-22) (``Adopting Release'',
and the rules adopted therein referred to herein as ``Treasury
Clearing Rules''). See also 17 CFR 240.15c3-3a.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the advance notice
and discussed any comments it received on the advance notice. The text
of these statements may be examined at the places specified in Item IV
below. The clearing agency has prepared summaries, set forth in
sections A and B below, of the most significant aspects of such
statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants, or Others
FICC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at www.sec.gov/regulatory-actions/how-to-submit-comments. General questions regarding
the rule filing process or logistical questions regarding this filing
should be directed to the Main Office of the SEC's Division of Trading
and Markets at [email protected] or 202-551-5777.
FICC reserves the right not to respond to any comments received.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing
Supervision Act
Executive Summary of Proposed Changes
On December 13, 2023, the Commission adopted amendments to the
covered clearing agency standards that apply to covered clearing
agencies that clear transactions in U.S. Treasury securities (each a
``Treasury CCA''), including FICC.\6\ These amendments require, among
other things, that FICC ``calculates, collects, and holds margin
amounts from a direct participant for its proprietary positions in U.S.
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.'' \7\ As described below, the proposed rules are designed
to comply with these requirements.
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\6\ See supra note 5.
\7\ 17 CFR 240.17Ad-22(e)(6)(i).
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Additionally, in the Treasury Clearing Rules, the Commission
amended its broker-dealer customer protection rule (``Rule 15c3-3'')
\8\ and the reserve formulas thereunder (``Rule 15c3-3a'') \9\ to
permit broker-dealers to include margin required and on deposit at a
Treasury CCA as a debit item in the reserve formulas under certain
conditions.\10\ The proposed rules are also designed to satisfy these
conditions and, therefore, would permit broker-dealer Netting Members
of FICC to include margin collected from their customers and on deposit
at a Treasury CCA as a debit item in the reserve formulas.
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\8\ 17 CFR 240.15c3-3.
\9\ 17 CFR 240.15c3-3a.
\10\ See supra note 5.
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First, the proposed changes would provide for the separate and
independent calculation, collection, and holding of (i) margin
deposited by a Netting Member to support its proprietary transactions
and (ii) margin deposited by a Netting Member to support the
transactions of an indirect participant. Specifically, FICC would
provide in a new Rule 2B that FICC can establish proprietary Accounts
to record the transactions that the Netting Member enters into for its
own benefit and separately establish indirect participant Accounts to
record transactions that the Netting Member submits to FICC for
clearance and settlement on behalf of an indirect participant. Under
this proposed Rule 2B, only proprietary transactions may be recorded in
a proprietary Account, and only indirect participant transactions may
be recorded in an indirect participant Account. FICC is also proposing
revisions in Rule 4 to identify what types of transactions may be
included together in a Margin Portfolio that FICC utilizes to determine
a Netting Member's margin requirement. Specifically, FICC would revise
the Margin Portfolio definition to make clear that a Margin Portfolio
cannot include both proprietary and indirect
[[Page 21588]]
participant Accounts. Because proposed Rule 2B would not permit
transactions of indirect participants to be recorded in the same
Account as a Netting Member's proprietary transactions, a Margin
Portfolio would only be able to consist of the same type of proprietary
or indirect participant transactions, not both. As a result, the
transactions a Netting Member submits to FICC on behalf of an indirect
participant would no longer be netted against a Netting Member's
proprietary transactions for purposes of calculating a Netting Member's
margin requirements. In addition, to ensure separate collection and
holding of margin deposited for proprietary and indirect participant
transactions, FICC is specifying its practice in Rule 4 that a Netting
Member must identify the different Account types for which a deposit is
made on its wire instructions.
In order to facilitate these proposed changes, the rule changes
would clarify the types of accounts in which Netting Members may record
transactions. FICC's ``Accounts'' are not custodial accounts in which
FICC holds assets, but rather a mechanism for FICC to record and group
transactions. These records are utilized by FICC in connection with its
calculation of a Netting Member's margining, settlement, and other
obligations. The proposed rule changes would provide greater clarity
regarding the purpose and use of these accounts through the public
disclosures in the Rules. The proposed rules would do this by revising
the definition of ``Account'' in Rule 1 and changing the names of
certain Accounts to better reflect their function. The proposed rule
changes would also create in a new Rule 2B a roadmap of the types of
Accounts FICC maintains and what is recorded in those Accounts.
Second, the proposed rule changes would allow for the segregation
of certain customer margin in a manner that satisfies the conditions
for a broker-dealer to record a debit in the customer or PAB reserve
formula under recently added Note H to Rule 15c3-3a.\11\ As noted
above, the Commission amended Rule 15c3-3a to permit broker-dealers to
include margin required and on deposit at a Treasury CCA as a debit
item in the reserve formulas under certain conditions, including that
the margin be collected in accordance with the rules of the Treasury
CCA that impose the certain requirements.\12\
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\11\ 17 CFR 240.15c3-3a.
\12\ See supra note 5.
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Such requirements are set forth in the Treasury Clearing Rules and
Section (b)(2) of Note H to Rule 15c3-3a, and include, among other
things, (1) the margin must be calculated separately for each customer
and the broker-dealer must deliver that amount of margin for each
customer on a gross basis; (2) the margin must be held in an account of
the broker-dealer at the Treasury CCA that is segregated from any other
account of the broker-dealer at the Treasury CCA and that is, among
other things, used exclusively to clear, settle, novate, and margin
U.S. Treasury securities transactions of the customers of the broker-
dealer; and (3) the Treasury CCA has systems, controls, policies, and
procedures to return the assets to the broker-dealer that are no longer
needed to meet current margin requirements resulting from positions in
U.S. Treasury securities of the customers of the broker-dealer.\13\ The
proposed changes are designed to comply with these requirements.
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\13\ See 17 CFR 240.15c3-3a. Supra note 5.
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Specifically, FICC is proposing to permit a Netting Member,
including a non-broker-dealer Netting Member, to designate any of its
indirect participants Accounts for segregation. For any Account so
designated, FICC would calculate the margin requirements applicable to
the Account on a gross basis, meaning that FICC would not net the
transactions of one indirect participant against the transactions of
another indirect participant. In addition, FICC would segregate the
margin deposited to support the transactions in the Account from any
margin securing a Netting Member's proprietary positions, both on
FICC's own books and records and at FICC's custodians. FICC would only
be able to use such segregated margin to satisfy the obligations of the
customer for whom such margin is held. FICC would not be able to apply
such margin to the proprietary obligations of the Netting Member that
deposited it with FICC or to the obligations of any other Netting
Member or participant. FICC would also set forth specific procedures to
allow Netting Members to obtain the return of excess segregated margin.
The aim of these changes is both to allow broker-dealer Netting Members
to collect margin from customers and deposit it with FICC and to
provide all customers, including those that access FICC through non-
broker-dealers, to be able to segregate margin they deposit.
Third, the proposed rules would align the description of FICC's
margin methodology with the revised Account types, consolidate the
terms relating to margin calculation in a single, easily identifiable
schedule, and make certain changes to the methodology to increase
precision and predictability. To achieve these goals, the proposed
rules would move the margin calculation methodology, including the
relevant defined terms currently located in various Rules, into a new
Margin Component Schedule. The proposed rules would also revise Rule 4
to make clear that a Netting Member's margin requirement is the sum of
the margin amounts calculated for each type of Account in which
transactions are recorded for the Netting Member. Further, the proposed
rules would set forth a method for allocating net unsettled positions
to individual indirect participants for purposes of calculating margin
requirements. In addition, the proposed rules would revise and clarify
the calculation of the excess capital premium component of the Clearing
Fund, to cap such amount at two times the amount by which a Netting
Member's VaR Charge exceeds its Netting Member Capital, clarify the
capital amounts that are used in the calculation of such amount, limit
FICC's discretion to waive the amount, and provide that FICC may
calculate the premium based on updated available information. The
proposed changes would also take steps to ensure that the excess
capital premium does not result in differential treatment of indirect
participants simply because of the particular capital level of the
Netting Member providing access to FICC's clearance and settlement
systems.
Lastly, the proposed rule changes would modify the terms relating
to brokered transactions to require that only transactions that an
Inter-Dealer Broker Netting Member executes on the Inter-Dealer Broker
Netting Member's own trading platform benefit from favorable loss
allocation treatment.\14\ FICC believes that making these changes would
improve FICC's risk management and promote access by ensuring that its
differential treatment of different parties and transactions has a
sound risk management justification.
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\14\ See Rule 4, Section 7 (``Notwithstanding the foregoing,
however, an Inter-Dealer Broker Netting Member, or a Non-IDB Repo
Broker with respect to activity in its Segregated Repo Account,
shall not be subject to an aggregate loss allocation in an amount
greater than $5 million pursuant to this Section 7 for losses and
liabilities resulting from an Event Period.''), supra note 4.
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Background
FICC, through GSD, serves as a central counterparty and provider of
clearance and settlement services for the U.S. government securities
markets. Margin is a key tool that FICC uses to manage its credit
exposures to its members. The aggregated amount of all GSD members'
[[Page 21589]]
margin constitutes the GSD Clearing Fund (referred to herein as the
``Clearing Fund''). The objective of the Clearing Fund is to mitigate
potential losses to FICC associated with liquidating a member's
portfolio in the event FICC ceases to act for that member (hereinafter
referred to as a ``default'').\15\
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\15\ The Rules identify when FICC may cease to act for a member
and the types of actions FICC may take. For example, FICC may
suspend a firm's membership with FICC or prohibit or limit a
member's access to FICC's services in the event that member defaults
on a financial or other obligation to FICC. See Rule 21
(Restrictions on Access to Services), supra note 4.
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Under Rule 4 (Clearing Fund and Loss Allocation), Netting Members
are required to make deposits to the Clearing Fund in an amount
(``Required Fund Deposit'') determined by reference to certain
components. In determining a Netting Member's Required Fund Deposit,
FICC may consider not only the Netting Member's proprietary
transactions, but also the transactions that the Netting Member submits
on behalf of indirect participants. However, the treatment of the
indirect participant transactions for purposes of calculating the
Required Fund Deposit can vary depending on whether those transactions
are cleared under the Sponsored Service or prime brokerage/
correspondent clearing services. Netting Members are required to
instruct FICC to record those transactions in one of the position-
keeping accounts (each, an ``Account'') that FICC establishes and
maintains for the Netting Member. The Account in which a transaction is
recorded is relevant for determining the margin requirement associated
with that transaction under the Rules. Currently, a Netting Member may
instruct FICC to record in the same Account, currently known as a
``Netting Member Account,'' both the proprietary transactions of the
Netting Member and transactions that the Netting Member carries for
indirect participants through the prime brokerage/correspondent
clearing services. Sponsored Member Trades, discussed in greater detail
below, must be recorded in a separate Account.
Under Rule 4, a Netting Member's Clearing Fund requirement, other
than that arising from Sponsored Member Trades, is calculated on a net
basis across all transactions recorded in the same Account of the
Netting Member (or, if the Netting Member has elected to have multiple
Accounts form part of the same ``Margin Portfolio,'' all transactions
recorded in all such Accounts).\16\
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\16\ See Rule 4, supra note 4.
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The Sponsored Service permits Netting Members that are approved to
be ``Sponsoring Members,'' to sponsor certain institutional firms,
referred to as ``Sponsored Members,'' into GSD membership.\17\ FICC
establishes and maintains a ``Sponsoring Member Omnibus Account'' on
its books in which it records the transactions of the Sponsoring
Member's Sponsored Members (``Sponsored Member Trades'').\18\ To
determine a Sponsoring Member's Clearing Fund requirement in relation
to Sponsored Member Trades recorded in the Sponsoring Member's
Sponsoring Member Omnibus Account, FICC calculates the ``VaR Charge''
\19\ and the ``MLA Charge'' \20\ component for each Sponsored Member
such that it does not net the Sponsored Member Trades of one Sponsored
Member against the Sponsored Member Trades of another Sponsored Member,
even though those Sponsored Member Trades are recorded in the same
Sponsoring Member Omnibus Account.\21\ For all of the other components,
FICC calculates the components by reference to the Sponsoring Member
Omnibus Account as a whole (i.e., without regard to which Sponsored
Member entered into which Sponsored Member Trade). In no instance does
FICC net transactions recorded in a Sponsoring Member's Sponsoring
Member Omnibus Account against other transactions of the Sponsoring
Member for purposes of calculating the Sponsoring Member's Required
Fund Deposit.
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\17\ See Rule 3A, supra note 4.
\18\ See Rule 1 (definition of ``Sponsored Member Trades''),
supra note 4.
\19\ See Rule 1 (definition of ``VaR Charge''), supra note 4.
\20\ See Rule 1 (definition of ``MLA Charge''), supra note 4.
\21\ See Rule 3A, Section 10 (describing how the Required Fund
Deposit for Sponsored Member Trades is calculated), supra note 4.
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As an alternative to the Sponsored Service, a Netting Member (in
such capacity, a ``Submitting Member'') may submit to FICC eligible
transactions on behalf of the Submitting Member's customers (each, in
such capacity, an ``Executing Firm'') through FICC's existing prime
broker/correspondent clearing services.\22\ As noted above, under the
current Rules, a Submitting Member may instruct FICC to record such a
transaction in the same Account at FICC as the Submitting Member's
proprietary transactions. Accordingly, if transactions a Submitting
Member submits on behalf of Executing Firms through the prime broker/
correspondent clearing services are recorded in the same Account as the
Netting Member's proprietary transactions (or in an Account that forms
part of the same Margin Portfolio as an Account in which a Netting
Member's proprietary transactions are recorded), FICC nets such
transactions against one another in calculating the Netting Member's
Required Fund Deposit.\23\
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\22\ See Rule 8, supra note 4.
\23\ Contemporaneously with this proposed rule change, FICC has
submitted a separate proposed rule change (File No. SR-FICC-2024-
005) under which FICC is proposing to rename its primer broker/
correspondent clearing services the ``Agent Clearing Service,''
``Submitting Members'' as ``Agent Clearing Members'', and
``Executing Firms'' as ``Executing Firm Customers.'' This separate
proposed rule change would require that a Netting Member using the
Agent Clearing Service submit transactions for Executing Firm
Customers through an Agent Clearing Member Omnibus Account, to be
recorded separately from its other clearing activity, including its
proprietary activity. It would also add a definition for
transactions eligible to be submitted by an Agent Clearing Member on
behalf of its Executing Firm Customers (``Agent Clearing
Transactions''). These proposed terms are used throughout this
filing. These proposed changes are pending regulatory approval. A
copy of this proposed rule change is available at www.dtcc.com/legal/sec-rule-filings.
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As noted above, the proposed rules would implement the amendments
to Rule 17Ad-22(e)(6)(i) that require FICC to calculate, collect, and
hold margin from a direct participant for its proprietary transactions
in U.S. Treasury securities separately and independently from the
margin calculated and collected for the U.S. Treasury transactions of
an indirect participant that relies on the services provided by the
direct participant to access FICC's payment, clearing, or settlement
facilities.\24\ The proposed rules would also clarify and simplify
FICC's account structure and improve the transparency of FICC's public
disclosures of its margining methodology.
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\24\ 17 CFR 240.17Ad-22(e)(6)(i). See supra note 5.
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The proposed rules are also designed to allow broker-dealer Netting
Members of FICC to collect margin from their customers and deposit that
margin with FICC. As stated above, a Netting Member is responsible for
the Clearing Fund obligations arising from the activity of indirect
participant customers (i.e., Sponsored Members and Executing Firms).
FICC understands from engagement with broker-dealer Netting Members and
their indirect participant customers that, due to the requirements of
Rule 15c3-3 \25\ and Rule 15c3-3a,\26\ broker-dealer Netting Members
are effectively unable to deposit with FICC any margin collected from
indirect participants to support those indirect participants'
transactions and must instead use proprietary resources.
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\25\ 17 CFR 240.15c3-3.
\26\ 17 CFR 240.15c3-3a.
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The Treasury Clearing Rules' recent amendments to Rule 15c3-3a
permit
[[Page 21590]]
broker-dealers to include margin required and on deposit at a Treasury
CCA as a debit item in the reserve formulas under certain
conditions.\27\ As described in more detail below, the proposed changes
would address those conditions. Therefore, the proposal would allow
broker-dealer Netting Members to collect margin from customers and
deposit it with FICC and to permit all customers, including those that
access FICC through non-broker-dealers, to segregate margin they
deposit.
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\27\ See supra note 5.
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Finally, the proposed rule changes would address the treatment of
transactions submitted to FICC by Inter-Dealer Broker Netting Members
and certain Netting Members that operate similarly to Inter-Dealer
Broker Netting Members (``Non-IDB Repo Brokers''). The Rules currently
cap the amount of loss allocation that may applied to an Inter-Dealer
Broker Netting Member or Non-IDB Repo Broker in respect of transactions
submitted by such Netting Members to FICC for clearance and settlement
(``Brokered Transactions''). This treatment is based on the more
limited risk that Brokered Transactions present relative to other
transactions.
Description of Proposed Rule Changes
1. Segregate Indirect Participant Margin Requirements and Amend the GSD
Account Structure
The proposed rule changes would provide for the separate
calculation, collection, and holding of margin supporting a Netting
Member's Proprietary Transactions and the margin supporting the
transactions a Netting Member submits on behalf of indirect
participants, in accordance with the requirements of Rule 17Ad-
22(e)(6)(i), adopted under the Treasury Clearing Rules.\28\ In
connection with these changes, the proposal would also clarify the
types of accounts in which Netting Members may record transactions and
adopt a roadmap to its account structure in a new Rule 2B.
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\28\ 17 CFR 240.17Ad-22(e)(6)(i).
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A. Separately Calculate, Collect and Hold Indirect Participant and
Proprietary Margin Requirements
i. Limit Margin Portfolios to Accounts of the Same Type
The separate calculation of proprietary and customer margin would
be accomplished by clarifying that each Margin Portfolio may only
include Accounts of the same Type (i.e., Dealer Accounts, Broker
Accounts, Agent Clearing Member Omnibus Account, and Sponsoring Member
Omnibus Accounts).
FICC would make this clarification by amending the definition of
``Margin Portfolio'' in Rule 1 and revising Rule 4, Section 1a, which
would be renumbered Section 1b in light of changes described below, to
provide that each Margin Portfolio may not contain more than one Type
of Account (even if such Accounts are both Segregated Indirect
Participants Accounts).
By virtue of these changes, transactions recorded in different
Types of Accounts could not be netted against each other when
calculating Required Fund Deposit or Segregated Customer Margin
Requirements. Since Proprietary Transactions and transactions submitted
for indirect participants could not (by virtue of the changes described
below) be recorded in the same Type of Account, the changes relating to
Margin Portfolios would result in margin for a Netting Member's
Proprietary Transactions being calculated separately and independently
from margin calculated for the transactions that the Netting Member
submits on behalf of indirect participants. As conforming changes,
paragraphs (b) and (c) of Section 1b, which currently provide for such
separate margin calculations in certain contexts, would no longer be
needed since the Margin Portfolio definition and other changes
described above would achieve such separate calculations.
ii. Required Fund Deposit Portions and Segregated Customer Margin
Requirements
To further clarify how FICC would calculate and collect a Netting
Member's margin requirements, the proposed rule changes would make
other revisions to Rule 4. Specifically, Rule 4, Section 2, which
currently describes a Netting Member's Required Fund Deposit
requirement, would be revised to provide that a Netting Member's
Required Fund Deposit consists of the sum of amounts (each, a
``Required Fund Deposit Portion'') calculated for each Type of Account,
other than Segregated Indirect Participants Accounts. For Segregated
Indirect Participants Accounts, there would, as mentioned below, be a
Segregated Customer Margin Requirement, which would be the sum of the
amounts calculated for the Netting Member's (i) Sponsoring Member
Omnibus Accounts designated as Segregated Indirect Participants
Accounts and (ii) Agent Clearing Member Omnibus Accounts designated as
Segregated Indirect Participants Accounts.
In connection with these changes, FICC would add a corresponding
definition of ``Required Fund Deposit Portion'' to Rule 1. FICC would
also adopt a defined term referring to the Required Fund Deposit
Portion for a Netting Member's Agent Clearing Member Omnibus Account
(``Agent Clearing Member Omnibus Account Required Fund Deposit'') and
amend the defined term for the Required Fund Deposit Portion for a
Netting Member's Sponsoring Member Omnibus Account (the Sponsoring
Member Omnibus Account Required Fund Deposit). In addition, conforming
changes would be made to the separately proposed Rule 8, Section 7(g)
that would describe the requirement of an Agent Clearing Member to make
and maintain an Agent Clearing Member Omnibus Account Required Deposit
and that the calculation of such requirement would be performed
separately from the calculation for Margin Portfolios consisting of the
Agent Clearing Member's Proprietary Transactions. Similar conforming
changes would be made to Rule 3A, Section 10 relating to a Sponsoring
Member's Sponsoring Member Omnibus Account Required Fund Deposit.
iii. Separate Deposit IDs To Facilitate Separate Collection and Holding
of Margin
To ensure that margin for Proprietary Transactions is not only
calculated separately and independently but also collected and held
separately and independently of margin for indirect participant
transactions, a new Rule 4, Section 2a would be added to the Rules.
This section would require each Required Fund Deposit Portion to be
made to FICC using a separate Deposit ID, which is an existing
operational mechanism used by Netting Members to identify the type of
Account for which a Required Fund Deposit is being made.
A new Rule 4, Section 2b would impose a similar requirement in
respect of Segregated Customer Margin Requirements. The use of these
separate Deposit IDs would result in margin for each Type of Account
being separately transferred to FICC and FICC recording on its books
the separate margin amounts for each Type of Account. FICC would also
adopt a definition of ``Deposit ID'' in Rule 1.
Rule 4, Sections 2a and 2b would also require FICC to report a
Netting Member's Required Fund Deposit and Segregated Customer Margin
Requirement twice daily, which is the same timing interval on which
FICC currently reports a Netting Member's margin requirement. The
report would
[[Page 21591]]
also specify the amount of margin attributable to each Required Fund
Deposit Portion or Segregated Indirect Participants Account, as
applicable, so that the Netting Member can transfer the different
margin amounts separately.
iv. Eliminate Permitted Margin Affiliates
In connection with these proposed rule changes, the proposal would
eliminate the concept of Permitted Margin Affiliates, which allows a
Member to elect to include its Accounts in the same Margin Portfolio
with the Accounts of an affiliate that is also a Member, in accordance
with the Rules.\29\ In this way, a Member and its affiliate can net
their transactions for purposes of calculating their margin
requirements.
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\29\ See Rule 1 (defining ``Permitted Margin Affiliates'') and
Rule 4, Section 1a(a) and (b) (permitting Members to include
Accounts of their Permitted Margin Affiliates in their Margin
Portfolio). Supra note 4.
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In order to support the proposed change described above, which are
designed to provide for the separate calculation, collection, and
holding of margin, FICC believes that retaining the option for Members
to designate Permitted Margin Affiliates would create unnecessary
complexity. No Netting Member currently has a Permitted Margin
Affiliate, and FICC would need to examine how such a cross-affiliate
margining arrangement would function within the context of the proposed
revisions to the account structure and margin methodology in order to
determine what steps would be needed to implement such an arrangement
consistently with the standards applicable to covered clearing
agencies. Therefore, FICC is proposing to eliminate the Permitted
Margin Affiliate concept at this time.
In order to implement this change, the proposal would remove the
definition of ``Permitted Margin Affiliate'' from Rule 1, and remove
references to Permitted Margin Affiliates from Rule 4, Section 1a (to
be renamed Section 1b, as noted above); Rule 4, Section 1b (which would
be removed and replaced by disclosures in the proposed Margin Component
Schedule, as discussed below); Rule 4, Sections 4 and 6; Rule 21,
Section 1; Rule 22, Section 2; and Rule 29, Section (a).
B. Proposed Roadmap to Account Structure Through New Rule 2B and
Revision to Account Structure
FICC is proposing to adopt a new Rule 2B that would describe the
types of Accounts FICC is able to maintain for Netting Members,
identify the activity that would be recorded in each type of Account,
and generally provide a roadmap to market participants of FICC's
account structure.
i. Section 1--Establishment of Proprietary Accounts
Rule 2B, Section 1 would provide that FICC can establish and
maintain certain ``Proprietary Accounts'' to record transactions that a
Netting Member enters into for its own benefit (``Proprietary
Transactions''), rather than for the benefit of indirect participants.
Proprietary transactions would not include transactions that a Netting
Member enters into on behalf of an affiliate.
The Proprietary Accounts available for recording Proprietary
Transactions would include ``Dealer Accounts,'' which would be
available for all Netting Members, and ``Cash Broker Accounts'' and
``Repo Broker Accounts,'' which would only be available for Inter-
Dealer Broker Netting Members. Dealer Accounts would be for purposes of
recording a Netting Member's Proprietary Transactions (other than, in
the case of an Inter-Dealer Broker Netting Member, its Brokered
Transactions), while Cash Broker Accounts would be for purposes of
recording an Inter-Dealer Broker Netting Member's Brokered Transactions
(other than Brokered Repo Transactions), and Repo Broker Accounts would
be for purposes of recording an Inter-Dealer Broker Netting Member's
Brokered Repo Transactions. Rule 2B, Section 1 would make clear that,
as under FICC's existing Rules, FICC can establish multiple Proprietary
Accounts of the same Type for the Netting Member.
In connection with these changes, FICC is proposing to adopt new,
corresponding definitions of Proprietary Transactions, Proprietary
Accounts, and Cash Broker Accounts in Rule 1, and to make corresponding
amendments to the definitions of Dealer Account and Repo Broker
Account. FICC is also proposing to remove from Rule 1 the defined term
``Netting Member Account'' and replace references to such Account with
references to Dealer Account.
ii. Section 2--Establishment of Non-Proprietary Accounts
Rule 2B, Section 2 would provide that FICC can establish and
maintain certain ``Indirect Participants Accounts'' to record
transactions that a Netting Member submits to FICC on behalf of
Sponsored Members and Executing Firm Customers. These Indirect
Participants Accounts would include, in the case of a Sponsoring
Member, Sponsoring Member Omnibus Accounts for purposes of recording
Sponsored Member Trades, and, in the case of an Agent Clearing Member,
Agent Clearing Member Omnibus Accounts for purposes of recording Agent
Clearing Transactions of its Executing Firm Customers. Rule 2B, Section
2 would also make clear that FICC can establish multiple Indirect
Participants Accounts of the same Type for the Netting Member.
In connection with these changes, FICC is proposing to add to Rule
1 a new definition of Indirect Participants Account, which would
include Agent Clearing Member Omnibus Accounts and Sponsoring Member
Omnibus Accounts, and to correspondingly amend the definition of
Sponsoring Member Omnibus Accounts.
iii. Section 3--Segregation Designations for Indirect Participants
Accounts
Rule 2B, Section 3 would permit a Sponsoring Member or Agent
Clearing Member to designate any of its Indirect Participants Accounts
as a segregated customer account (a ``Segregated Indirect Participants
Account''). The purpose of such a designation, as further described
below, would be to give Netting Members a mechanism to direct FICC to
calculate and segregate margin deposited in connection with the Account
in accordance with the conditions described in Note H to Rule 15c3-3a
(``Note H''), as further described below.\30\
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\30\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------
In connection with this revision, a new definition for ``Segregated
Indirect Participant'' would be added to Rule 1 to mean a Sponsored
Member or an Executing Firm Customer whose transactions are recorded in
a Segregated Indirect Participants Account.
Rule 2B, Section 3 would provide that the designation of an Account
as a Segregated Indirect Participants Account constitutes a
representation to FICC by the Netting Member that the Netting Member
intends to meet all margin requirements with respect to such Account
using assets deposited by the Segregated Indirect Participants with the
Netting Member, with the exception of temporary ``prefunding'' by the
Netting Member while a margin call to the Segregated Indirect
Participant is outstanding. The purpose of this representation is to
ensure that only margin deposited by customers, not the Netting
Member's proprietary assets, is eligible for segregation.
Rule 2B, Section 3 would further provide that the margin
requirement (``Segregated Customer Margin
[[Page 21592]]
Requirement'') calculated for a Segregated Indirect Participants
Account would equal the sum of the margin requirements that apply to
each Segregated Indirect Participant whose transactions are recorded in
the Account, as though each such Segregated Indirect Participant were a
Netting Member. By virtue of this change and as further described
below, in calculating the Segregated Customer Margin Requirement for a
Segregated Indirect Participants Account, FICC would not net the
transactions of multiple Segregated Indirect Participants against one
another. A corresponding definition of ``Segregated Customer Margin
Requirement'' would be added to Rule 1 to mean the amount of cash and
securities that a Netting Member is required to deposit with FICC to
support the obligations arising under transactions recorded in its
Segregated Indirect Participants Accounts. As described in greater
detail below, such amounts would be further described and addressed in
Rule 4, Section 2(a)(v) and (vi).
iv. Section 4--Designation of Account When Submitting Transactions
Lastly, Rule 2B, Section 4 would require a Netting Member, at the
time it submits a Transaction to FICC for clearance and settlement, to
designate the Account in which the particular transaction should be
recorded. Any such designation would constitute a representation to
FICC that the transaction is of a type that may be recorded in that
Account in accordance with the Rules. The purpose of such
representation would be to ensure that Netting Members record only
their Proprietary Transactions in Proprietary Accounts, which separate
recordation is necessary for the separate and independent calculation,
collection, and holding of margin for direct participant and indirect
participant transactions.
In addition, Rule 2B, Section 4 would provide that, when submitting
a transaction on behalf of a Sponsored Member or Executing Firm
Customer, a Netting Member must include an identifier for the
applicable Sponsored Member or Executing Firm Customer. This
requirement is consistent with an existing requirement in the Schedule
of Required Data Submission Items in the Rules and ensures that FICC
continues to have the ability to accurately calculate the Required Fund
Deposit and Segregated Customer Margin Requirements appropriately. This
requirement also facilitates FICC's ability to engage in risk
management and market surveillance in accordance with the covered
clearing agency standards.
In connection with these changes, FICC also proposes to remove from
Rule 1 the term ``Netting Member Account,'' as such defined term would
no longer be used. References to Netting Member Accounts throughout the
Rules would be revised to ``Dealer Accounts'', which would more clearly
distinguish these Accounts from Broker Accounts, the other type of
Proprietary Accounts. FICC would also remove Section 11 of Rule 3,
which currently concern the types of Accounts that Netting Members may
open. Rule 2B would now describe the Types of Accounts Netting Members
may request as well as the transactions that may be recorded in such
Accounts.
The foregoing changes are designed to ensure that proprietary and
indirect participant transactions are recorded in separate Accounts.
This would assist FICC in tracking and managing the risks associated
with a Netting Member's proprietary and indirect participant
transactions. It would also facilitate compliance with the revised
covered clearing agency standards regarding the separate calculation,
collection, and holding of indirect participant and proprietary margin,
which is described in further detail below.
v. Simplification and Revision of Account Structure
To support the foregoing changes, FICC is proposing to provide
further clarity on what an Account is for purposes of the Rules. Under
the Rules, ``Accounts'' at FICC are not cash, securities, or other
kinds of custodial accounts through which FICC holds assets for a
Netting Member. Instead, FICC Accounts are a recordkeeping mechanism by
which FICC records certain transactions submitted by Netting Members to
FICC for clearance and settlement. This recordkeeping mechanism allows
FICC to determine which transactions should be netted against one
another in determining various obligations of the Netting Member,
including its funds-only settlement amount and securities settlement
obligations and its Required Fund Deposit. As discussed above,
generally speaking, all transactions recorded in the same Account are
netted for purposes of determining these obligations (though certain
components of the Required Fund Deposit arising from Sponsored Member
Trades are calculated on a gross basis, as described above). FICC is
proposing to amend the definition of ``Account'' in Rule 1 to make
clear that an ``Account'' means an account maintained by FICC to record
transactions. In addition, FICC is proposing to adopt a new defined
term, ``Type of Account'' or ``Type,'' to refer to the different kinds
of Accounts described above.
FICC is also proposing to eliminate the concept of a Market
Professional Cross-Margining Account, which refers to an Account
carried by FICC for a Netting Member that is limited to Eligible
Positions of Market Professionals or an Account that is carried by a
Netting Member for Market Professionals that are party to a Market-
Professional Agreement for Cross-Margining. FICC does not currently
have in place a cross-margining arrangement for market professional
indirect participants and would need to examine how such an arrangement
would function within the context of the proposed revisions to the
Account structure and margin methodology in order to determine what
steps would be needed to implement such an arrangement consistently
with the standards applicable to covered clearing agencies. Therefore,
FICC is proposing to eliminate the Market Professional Cross-Margining
Account concept at this time.
In order to implement this change, the proposal would remove the
definition of ``Market Professional Cross-Margining Account'' from Rule
1 and remove provisions concerning Market Professional Cross-Margining
Accounts from Rule 1, Rule 4 and Rule 29.
2. Proposed Rule Changes Relating to Note H of Rule 15c3-3a
As described above, FICC would permit Netting Members to designate
certain Indirect Participants Accounts as Segregated Indirect
Participants Accounts. Such a designation would have the effect of
causing FICC to calculate, collect, and hold the required margin for
transactions recorded in such Accounts in accordance with the
conditions for recording a debit in the customer reserve formula set
forth in Note H of Rule 15c3-3a.\31\
---------------------------------------------------------------------------
\31\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------
A. Gross Calculation of Segregated Customer Margin Requirements
In order to satisfy the requirement of Section (b)(2)(i) of Note H
to Rule 15c3-3a that the margin requirement be calculated on a gross
basis,\32\ new Rule 2B would, as noted above, provide that when
calculating the Segregated Customer Margin Requirement, FICC would not
net the transactions of multiple Segregated Indirect Participants, but
would net the transactions of a single Segregated
[[Page 21593]]
Indirect Participant that are recorded in the same Account.
---------------------------------------------------------------------------
\32\ Id.
---------------------------------------------------------------------------
In addition, the revised Rule 4, Section 1b would require FICC to
calculate a Netting Member's Segregated Customer Margin Requirement
with respect to a particular Segregated Indirect Participants Account
as the sum of the margin requirements applicable to each Segregated
Indirect Participant whose transactions are recorded in such Account,
as though each Segregated Indirect Participant were a separate Netting
Member with a single Margin Portfolio consisting of such transactions.
These provisions would result in FICC calculating separate margin
amounts for each Segregated Indirect Participant and for such amounts
to be collected on a gross basis.
FICC would also include language in the new Margin Component
Schedule to achieve gross margining of Segregated Indirect Participants
Accounts. Specifically, in Section 1 of the new Margin Component
Schedule discussed below, new language would require each Netting
Member for which FICC maintains a Segregated Indirect Participants
Account to deposit with FICC Segregated Customer Margin equal to the
sum of the Segregated Customer Margin Requirements for all such
Accounts. Such language would further provide that each Segregated
Customer Margin Requirement will be calculated twice daily and equal
the sum of the amounts calculated pursuant to Section 3 of the Margin
Component Schedule for each Segregated Indirect Participant whose
transactions are recorded in the relevant Segregated Indirect
Participants Account.
Section 3 of the new Margin Component Schedule, in turn, would set
out the methodology for calculating such margin amounts. That section
would provide for FICC to perform substantially the same calculation it
currently performs when determining a Netting Member's Required Fund
Deposit, except (i) such calculation would be performed on a Segregated
Indirect Participant-by-Segregated Indirect Participant basis as though
each Segregated Indirect Participant represented a separate Margin
Portfolio and (ii) FICC would not impose an Excess Capital Premium.
With regard to the latter, FICC does not believe it would be
appropriate to require an indirect participant to deposit with FICC
additional margin on account of the capital position of its Netting
Member. The Excess Capital Premium is designed to address the risk that
a Netting Member with low capital relative to its VaR Charge will not
be able to perform its obligations. However, Segregated Customer Margin
cannot be applied to a Netting Member's obligations (other than to
perform on behalf of the individual indirect participant for whom the
Segregated Customer Margin is held). Accordingly, requiring indirect
participants to deposit an additional Excess Capital Premium would not
serve a risk management purpose. Further, requiring indirect
participants who access FICC's clearance and settlement systems through
a Netting Member with low capital to deposit more margin than indirect
participants who access FICC's clearance and settlement system through
other Netting Members would treat similarly situated indirect
participants differently without an appropriate basis to do so.
Moreover, it could lead to concentration among Netting Members, as
indirect participants would be disincentivized to access clearing
through smaller Netting Members, since smaller Netting Members
typically have lower net capital.
For similar reasons, FICC would not add Segregated Customer Margin
to Section 4 of the Margin Component Schedule, which describes FICC's
ability to impose increased Required Fund Deposits under certain
circumstances. However, when determining whether to increase the
Required Fund Deposit of a Netting Member under the circumstances
described in Section 4, FICC may consider the risk presented by a
Netting Member in view of all activity it submits to FICC, including
activity of indirect participants.
As a conforming change, FICC would revise the definitions of most
of the components utilized for calculating a Netting Member's
Segregated Customer Margin Requirement as well as associated
definitions to provide that these apply to Segregated Indirect
Participants on a Segregated Indirect Participant-by-Segregated
Indirect Participant basis. These definitions include the Backtesting
Charge, the Holiday Charge, the Intraday Supplemental Fund Deposit, the
Margin Liquidity Adjustment or MLA Charge, the Margin Proxy, the
Minimum Margin Amount,\33\ the Portfolio Differential Charge, the
Unadjusted GSD Margin Portfolio Amount, and the VaR Charge.
---------------------------------------------------------------------------
\33\ FICC has filed a proposed rule change and related advance
notice to adopt a Minimum Margin Amount at GSD (File Nos. SR-FICC-
2024-003 and SR-FICC-2024-801). This proposal is pending regulatory
approval, and the filings are available at www.dtcc.com/legal/sec-rule-filings.
---------------------------------------------------------------------------
B. Segregation of Customer Margin Deposits
In order to satisfy the segregation requirements of Section
(b)(2)(iii) of Note H to Rule 15c3-3a,\34\ FICC is proposing a number
of changes to the Rules. First, FICC is proposing to adopt a new
definition of ``Segregated Customer Margin'' in Rule 1, which
definition would refer to ``all securities and funds deposited by a
Sponsoring Member or an Agent Clearing Member with the Corporation to
satisfy its Segregated Customer Margin Requirement.'' FICC would also
adopt a new Rule 4, Section 1a. That provision would require a Netting
Member to deposit Segregated Customer Margin with FICC equal to the
Netting Member's Segregated Customer Margin Requirement in accordance
with the timing provisions generally applicable to Required Fund
Deposits.
---------------------------------------------------------------------------
\34\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------
i. Establishment of Segregated Accounts
In order to satisfy the requirements of Section (b)(2)(iii) of Note
H that margin ``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,'' \35\ Rule 4,
Section 1a would provide for FICC to establish on its books and records
for each Netting Member that deposits Segregated Customer Margin a
``Segregated Customer Margin Custody Account'' corresponding to each
Segregated Indirect Participants Account of such Netting Member.
Segregated Customer Margin Custody Account would be defined in Rule 1
as ``a securities account within the meaning of the NYUCC maintained by
the Corporation, in its capacity as securities intermediary as such
term is used in the NYUCC, for an Agent Clearing Member or Sponsoring
Member for the benefit of such Member's Segregated Indirect
Participants.'' In other words, in contrast to the other FICC Accounts,
which, as discussed above, are position record-keeping accounts rather
than custodial accounts, each Segregated Customer Margin Custody
Account would be a ``securities account'' within the meaning of the
NYUCC.
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
As noted above, FICC is also proposing to amend the definition of
``Account'' in Rule 1 to make clear that such term refers only to an
account maintained by FICC for a Netting Member to record transactions
submitted by that Netting Member. FICC believes this change would help
to
[[Page 21594]]
distinguish ``Accounts,'' which are simply a transaction recordation
mechanism, from the ``Segregated Customer Margin Custody Account,''
which is a traditional custodial account to which FICC would credit
cash and securities.
Rule 4, Section 1a would further provide that any assets credited
to the Segregated Customer Margin Custody Account would be treated as
financial assets within the meaning of the NYUCC. These changes would
have the effect of making FICC the ``securities intermediary'' in
respect of each Segregated Customer Margin Custody Account and the
Netting Member, on behalf of its Segregated Indirect Participants, the
``entitlement holder'' under the NYUCC.\36\ By virtue of these
designations, the Segregated Customer Margin held by FICC would be
reserved for the Netting Member (on behalf of its Segregated Indirect
Participants), including in an FICC insolvency.\37\
---------------------------------------------------------------------------
\36\ UCC Sec. 8-102(7) (```Entitlement holder' means a person
identified in the records of a securities intermediary as the person
having a security entitlement against the securities intermediary. .
. .'').
\37\ See UCC Sec. 8-503.
---------------------------------------------------------------------------
Rule 4, Section 1a would further provide that all Segregated
Customer Margin deposited with FICC to support the obligations arising
under the transactions recorded in a given Segregated Indirect
Participants Account be credited to the corresponding Segregated
Customer Margin Custody Account. In other words, rather than treat
Segregated Customer Margin as general Clearing Fund, FICC would record
such margin in a specific Segregated Customer Margin Custody Account
maintained by FICC on its books and records for the Netting Member that
deposited such Segregated Customer Margin, which Account would be
separate from any other Accounts maintained by FICC for the Netting
Member, including fellow Segregated Customer Margin Custody Accounts.
In furtherance of the goal of segregation, FICC would also amend Rule
4, Section 3a to provide that any interest on Segregated Customer
Margin consisting of cash be paid to Netting Members.\38\
---------------------------------------------------------------------------
\38\ Rule 4, Section 1a would also specify New York as the
``securities intermediary's jurisdiction'' for purposes of the NYUCC
and specify that New York law would govern all issues specified in
Article 2(1) of the Convention on the Law Applicable to Certain
Rights in Respect of Securities Held with an Intermediary, July 5,
2006, 17 U.S.T. 401, 46 I.L.M. 649 (entered into force Apr. 1, 2017)
(the ``Hague Securities Convention''). These changes are designed to
ensure that New York law governs each Segregated Customer Margin
Custody Account.
---------------------------------------------------------------------------
ii. Exclusive Use, Account Designation, and Exclusive Benefit
To satisfy the requirements of Section (b)(2)(iii)(A) of Note H
that customer margin be ``used exclusively to clear, settle, novate,
and margin U.S. Treasury securities transactions of the customers of
the broker or dealer;'' \39\ FICC would provide in Rule 4, Section 1a
that the Segregated Customer Margin credited to a Segregated Customer
Margin Custody Account would be used exclusively to settle and margin
transactions in U.S. Treasury securities recorded in the corresponding
Segregated Indirect Participants Account.
---------------------------------------------------------------------------
\39\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------
Rule 4, Section 1a would also provide that the Segregated Customer
Margin Custody Account would be designated on FICC's books and records
as a ``Special Clearing Account for the Exclusive Benefits of the
Customers of [the relevant Sponsoring Member or Agent Clearing
Member].'' This is in accordance with the designation requirements of
Section (b)(2)(iii)(B) of Note H.\40\
---------------------------------------------------------------------------
\40\ Id.
---------------------------------------------------------------------------
Section (b)(2)(iii)(C) of Note H requires that the account at the
clearing agency to which customer margin is credited be subject to a
written notice from the clearing agency to the broker-dealer stating
that the margin credited to the account is being held ``for the
exclusive benefit of the customers of the broker or dealer in
accordance with the regulations of the Commission and [is] being kept
separate from any other accounts maintained by the broker or dealer or
any other clearing member at the qualified clearing agency.'' \41\ Rule
4, Section 1a would provide for FICC to provide this notice to any
Netting Member that is a Registered Broker or Registered Dealer and has
designated an account as a Segregated Indirect Participants Account.
---------------------------------------------------------------------------
\41\ Id.
---------------------------------------------------------------------------
iii. Limitation on Permitted Liens and Use of Margin Deposits
FICC is also proposing changes to the Rules to satisfy the
condition of Section (b)(2)(iii)(D) of Note H that the account
established pursuant to Section (b)(2)(iii), i.e., each Segregated
Customer Margin Custody Account, be subject to a written contract
providing that the customer margin in the account, i.e., the Segregated
Customer Margin, not be available to cover claims arising from the
broker-dealer or any other clearing member defaulting on an obligation
to the Treasury CCA, or be 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-dealer effected in the account.\42\
---------------------------------------------------------------------------
\42\ Id.
---------------------------------------------------------------------------
Specifically, FICC is proposing to amend the security interest each
Netting Member provides to FICC under Rule 4, Section 4. That security
interest, which is binding on the Netting Member and FICC through the
incorporation of the Rules into the membership agreement between FICC
and such Netting Member, currently applies to all cash and securities
deposited by a Netting Member with FICC pursuant to Rule 4 and Rule 13
(defined in the Rules as the ``Actual Deposit'') and secures all
obligations of the Netting Member to FICC. FICC is proposing to amend
Rule 4, Section 4 to exclude Segregated Customer Margin from the scope
of the Actual Deposit. Such Segregated Customer Margin would instead be
subject to a separate security interest pursuant to which the
Segregated Customer Margin would secure only obligations arising out of
Segregated Indirect Participants Accounts. FICC would also make a
conforming change to Rule 3A, Section 10(f) to make clear that the
security interest described therein only applies to the security
interest granted in the Actual Deposit.
In addition, the bulk of the provisions of the Rules concerning
Clearing Fund, including those relating to FICC's ability to use
Clearing Fund, would not apply to Segregated Customer Margin since such
margin would not form part of the Clearing Fund. The only exceptions
are the language in Rule 3A, Section 10(f) stating that margin
obligations are secured by the Actual Deposit; the language in Rule 3A,
Section 10(g) concerning fines applicable to a failure to meet margin
requirements; the language in Rule 4, Section 3a concerning the
requirement that cash margin deposits be made in immediately available
funds; the language in Rule 4, Section 3b regarding the haircutting,
delivery, qualification, and substitution requirements for securities
margin; and the language in Rule 4, Section 9 relating to the
requirement of Netting Members to deliver margin. These changes would
ensure that FICC's broad use rights in respect of Clearing Fund, e.g.,
for loss mutualization, do not apply to Segregated Customer Margin.
In addition, FICC is proposing to amend Rule 4, Section 5 to
provide that, on each Business Day, FICC would
[[Page 21595]]
calculate the portion of Segregated Customer Margin that supports each
Segregated Indirect Participant's transactions. FICC may only use such
portion to secure or settle the performance of the obligations of that
Segregated Indirect Participant (or its Sponsoring Member or Agent
Clearing Member with respect to the Segregated Indirect Participant) or
for permitted investment purposes described below. It would further
provide that FICC would not be permitted to use Segregated Customer
Margin supporting one Segregated Indirect Participant's transaction to
secure or settle any other person's transactions, including those of a
fellow Segregated Indirect Participant.
These changes would thus not only prohibit FICC from using
Segregated Customer Margin to cover the obligations of the broker-
dealer Netting Member in respect of its Proprietary Transactions or
those of any other Netting Member in accordance with the requirements
of Section (b)(2)(iii)(D) of Note H, but they would also limit ``fellow
customer risk'' for Segregated Indirect Participants (i.e., the risk
that one customer incurs a loss on account of a default of another
customer because the clearing organization applies margin deposited by
the first customer to the second customer's obligations).\43\ FICC
believes these changes would facilitate greater access to its clearance
and settlement services.
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\43\ In the event of the insolvency, resolution, or liquidation
of a Netting Member, a Segregated Indirect Participant's ability to
recover any funds or securities it has posted to its Netting Member
in connection with an FICC-cleared transaction or that the Netting
Member receives from FICC in connection with such a transaction will
depend on the relevant insolvency, resolution, or liquidation
regime. FICC would not, except as directed by the relevant
insolvency, resolution, or liquidation officials in accordance with
applicable law, make any payments or transfer any assets directly to
an indirect participant.
---------------------------------------------------------------------------
FICC is proposing to require that the Segregated Margin Requirement
be no lower than $1 million per Segregated Indirect Participant, and
that the same form of deposit requirements set forth in Rule 4, Section
3 apply to Segregated Customer Margin such that no less than $1 million
per Segregated Indirect Participant consist of cash. These changes
would be accomplished through a new subsection (c) of Rule 4, Section 3
and reflected in the Margin Component Schedule.
First, this minimum requirement is consistent with the $1 million
minimum cash requirement applicable to each Margin Portfolio of a
Netting Member. FICC believes it is appropriate to apply the same
minimum cash requirement to each Segregated Indirect Participant that
it currently applies to each Margin Portfolio because, as described
above, FICC would be required to calculate the margin requirements for
these participants on a gross basis, as if each Segregated Indirect
Participant were a separate Margin Portfolio, and would be restricted
from using these funds to address any losses other than losses
resulting from the participant for whom the funds are held.
Second, because FICC would be restricted from using these funds to
address any losses other than losses resulting from the indirect
participant for whom these funds are deposited, FICC believes this
minimum requirement is appropriate to mitigate the risk exposures
presented by this limitation. FICC's daily backtesting of the
sufficiency of Clearing Fund deposits has revealed a heightened
likelihood of backtesting deficiencies for those Members with lower
deposits that are not sufficient to mitigate any abrupt intraday change
in their exposures.\44\ Based on the analysis and impact studies FICC
conducted in connection with a recent increase to minimum Required Fund
Deposit for Netting Members,\45\ FICC has determined that a $1 million
minimum requirement is the appropriate minimum amount to optimize the
balance between financial impact of the requirement to Members and
FICC's ability to continue to meet its regulatory obligation to
maintain a backtesting performance coverage ratio above its 99 percent
coverage target.
---------------------------------------------------------------------------
\44\ As a covered clearing agency, FICC is required under Rule
17Ad-22(e)(6)(vi) to conduct backtests of its margin model at least
once a day. 17 CFR 240.17Ad-22(e)(6)(vi). FICC's backtesting
performance target is 99 percent.
\45\ See Securities Exchange Act Release No. 96136 (Oct. 24,
2022), 87 FR 65268 (Oct. 28, 2022) (SR-FICC-2022-006).
---------------------------------------------------------------------------
FICC is not able to predict how many indirect participants may
elect to submit activity to FICC through a Segregated Indirect
Participants Account, or the size and volume of that activity. However,
because the margin requirements for each Segregated Indirect
Participant would be calculated in the same manner as the requirements
for each Margin Portfolio, it believes that these studies provide it
with an appropriate approximation of the risks it may face if margin
deposits for these Accounts are not subject to a minimum requirement.
C. Holding Segregated Customer Margin Deposits in Bank and FRBNY
Accounts
To satisfy the eligible custodian conditions set forth in Section
(b)(2)(iv) of Note H,\46\ FICC is proposing to amend Rule 4, Section 1a
to provide that all Segregated Customer Margin be held in an account of
FICC at a bank within the meaning of the Act that is insured by the
Federal Deposit Insurance Corporation, or at the Federal Reserve Bank
of New York. Rule 4, Section 1a would also provide that such account
would be segregated from any other account of FICC and would be used
exclusively to hold Segregated Customer Margin, in accordance with
Section (b)(2)(iv)(A) of Note H to Rule 15c3-3a.\47\ To satisfy the
requirements of Sections (b)(2)(iv)(B) and (C) of Note H,\48\ Rule 4,
Section 1a would further provide that each such account would be
subject to (i) a written notice of the bank or Federal Reserve Bank
provided to and retained by FICC that the account is being held by the
bank or Federal Reserve Bank pursuant to Rule 15c3-3 and is being kept
separate from any other accounts maintained by FICC or any other person
at the bank or Federal Reserve Bank and (ii) a written contract between
FICC and the bank or Federal Reserve Bank which provides that the
Segregated Customer Margin in the account is subject to no right,
charge, security interest, lien, or claim of any kind in favor of the
bank or Federal Reserve Bank or any person claiming through the bank or
Federal Reserve Bank.
---------------------------------------------------------------------------
\46\ 17 CFR 240.15c3-3a.
\47\ Id.
\48\ Id.
---------------------------------------------------------------------------
D. Investment Restrictions on Segregated Customer Margin Cash
In accordance with Section (b)(2)(ii) of Note H,\49\ Rule 4,
Section 1a would be amended to require FICC to only invest Segregated
Customer Margin consisting of cash in U.S. Treasury securities with a
maturity of one year or less. FICC will propose changes to the Clearing
Agency Investment Policy by a separate proposed rule change filing to
address the separate holding and investment of Segregated Customer
Margin cash, consistent with the disclosures proposed to be added to
Rule 4. Pursuant to those changes, FICC would only hold Segregated
Customer Margin consisting of cash in a cash deposit account at the
Federal Reserve Bank of New York or, pending the opening of such
account, another FDIC-insured bank and does not intend to make any
other investment of these funds.
---------------------------------------------------------------------------
\49\ Id.
---------------------------------------------------------------------------
E. Return of Segregated Customer Margin
Lastly, in order to satisfy the condition in section (b)(2)(v) of
Note H
[[Page 21596]]
that a Treasury CCA adopt rules requiring systems, controls, policies,
and procedures to return excess customer margin to a broker-dealer,\50\
FICC is proposing to adopt certain amendments to Rule 4, Section 10.
Under the proposed rule changes, Rule 4, Section 10 would be revised to
require FICC to calculate twice each Business Day the excess of a
Netting Member's Segregated Customer Margin over the Segregated
Customer Margin Requirement (such amount, the ``Excess Segregated
Customer Margin'').\51\ In addition, FICC would adopt a new Rule 4,
Section 10(b) that would require FICC to return a Netting Member's
Excess Segregated Customer Margin at the Netting Member's request. In
order to manage the risk of a Segregated Indirect Participant's
transactions in accordance with the requirements of Rule 17Ad-22(e)(6)
under the Act,\52\ FICC would retain the discretion to retain such
Excess Segregated Customer Margin if the Netting Member has any
outstanding payment or margin obligation with respect to the
transactions of any Segregated Indirect Participant.
---------------------------------------------------------------------------
\50\ Id.
\51\ The twice each Business Day interval would also apply to
the calculation of a Netting Member's excess Required Fund Deposit,
since that is the interval on which FICC currently performs such
calculation.
\52\ 17 CFR 240.17Ad-22(e)(6).
---------------------------------------------------------------------------
However, proposed Section 10(b) of Rule 4 would provide that,
unlike in the case with Clearing Fund, FICC would not be able to retain
Excess Segregated Customer Margin due to any obligation of the Netting
Member that is unrelated to the Segregated Indirect Participants
Account, unless FICC is either required to do so by applicable law or
is authorized to do so by the Commission.
3. Align Margin Methodology With Proposed Account Structure and Enhance
Public Disclosures of Margin Components and Clearing Fund Methodology
FICC is proposing changes to the Rules to reorganize, clarify, and
refine its margin calculation methodology. FICC is not changing the
method by which it calculates the various margin components.
A. Consolidate Margin Components and Clearing Fund Calculation
Methodology in Proposed Margin Component Schedule
In order to improve the clarity and transparency of its margin
components and Clearing Fund calculation methodology, FICC is proposing
to move the calculation methodology from Rule 4, Sections 1b, and 2a,
Rule 3, Section 14, and Rule 3A, Section 10, as well as the associated
definitions of the margin components and associated terms, including
Backtesting Charge, Blackout Period Exposure Adjustment, Excess Capital
Differential, Excess Capital Ratio, Excess Capital Premium, Holiday
Charge, Intraday Supplemental Fund Deposit, Margin Liquidity Adjustment
Charge or MLA Charge, Margin Proxy, Minimum Margin Amount,\53\
Portfolio Differential Charge, Unadjusted GSD Margin Portfolio Amount,
VaR Charge, VaR Floor and VaR Floor Percentage Amount to a new Margin
Component Schedule. As noted above, this methodology would not change,
and would continue to be substantively the same as that which currently
exists under Rule 4 and Rule 3A, Section 10.
---------------------------------------------------------------------------
\53\ Supra note 33.
---------------------------------------------------------------------------
The Margin Component Schedule would include existing and refined
descriptions of the manner and method by which FICC would calculate a
Netting Member's Required Fund Deposit and Segregated Customer Margin
Requirement. FICC believes that describing its margin calculation
methodology in a single schedule would facilitate access to its
clearing and settlement services by making it easier for market
participants to identify and review that methodology. FICC would also
make conforming changes to provisions of the Rules that reference the
margin calculation methodology of Rule 4 so that such provisions
reference the Schedule of Margin Components.
Section 1 of the Margin Component Schedule would provide that both
a Netting Member's Required Fund Deposit and its Segregated Customer
Margin Requirement would be calculated twice each Business Day and that
the Netting Member would be required to meet such requirements. This is
the same time interval in which FICC currently calculates and collects
a Netting Member's margin requirements. Section 2 of the Margin
Component Schedule would set forth the methodology for calculating a
Netting Member's Required Fund Deposit. As discussed above, Section 3
of the Margin Component Schedule would set forth the methodology for
calculating a Netting Member's Segregated Customer Margin Requirement.
Section 4 of the Margin Component Schedule would set forth the terms
under which FICC may impose increased Required Fund Deposits. These
terms would be substantively the same as those currently in Rule 4 and
Rule 3A, Section 10.
Section 5 of the Margin Component Schedule would contain the
relevant definitions for the margin methodology calculation. These
would be substantively the same as the existing definitions in Rule 1,
with certain changes. As noted above, the definitions of Backtesting
Charge, Blackout Period Exposure Adjustment, Excess Capital
Differential, Excess Capital Ratio, Excess Capital Premium, Holiday
Charge, Intraday Supplemental Fund Deposit, Margin Liquidity Adjustment
or MLA Charge, Margin Proxy, Minimum Margin Amount,\54\ Portfolio
Differential Charge, Unadjusted GSD Margin Portfolio Amount, VaR
Charge, VaR Floor and VaR Floor Percentage Amount would be revised to
provide for such charges to be calculated for purposes of Segregated
Customer Margin Requirements on a Segregated Indirect Participant-by-
Segregated Indirect Participant basis. In addition, the MLA Charge
definition would be amended to provide that, if a Segregated Indirect
Participant clears through multiple Accounts (including Accounts of
different Netting Members), then the MLA Charge applicable to its
transactions carried in a given Segregated Indirect Participants
Account would equal the greater of (i) an amount calculated only with
regard to the transactions maintained in that Account (i.e., without
regard to the other Accounts in which the Segregated Indirect
Participant's transactions are recorded) and (ii) an amount calculated
on a consolidated portfolio basis (i.e., taking into account the
transactions carried in each of the Accounts). This is currently the
same methodology that is used for Sponsored Members that clear through
multiple Accounts.
---------------------------------------------------------------------------
\54\ Supra note 33.
---------------------------------------------------------------------------
B. Revise Definition of ``Current Net Settlement Positions''
In order to refine its margin calculation methodology, FICC is also
proposing to amend the definition in Rule 1 of Current Net Settlement
Positions to provide for Current Net Settlement Positions in a
Sponsoring Member Omnibus Account or Segregated Indirect Participants
Account that are not clearly allocable to an individual Sponsored
Member or Segregated Indirect Participant to be allocated, for purposes
of calculating margin requirements, pro rata to the Sponsored Members
or Segregated Indirect Participants that had, as of the end of the
preceding Business Day, positions in the same direction and CUSIP as
the un-allocable Current Net Unsettled Positions. This situation could
arise if, for example, a transaction
[[Page 21597]]
recorded in a Sponsoring Member Omnibus Account or Segregated Indirect
Participants Account fails to settle. FICC believes this methodology
facilitates a reasonable and fair allocation for purposes of
calculating gross margin requirements.
FICC would make a corresponding deletion to the language of Rule
3A, Section 7 that addresses the treatment of such positions in
Sponsoring Member Omnibus Accounts. Currently Rule 3A, Section 7(a)(i)
provides that Net Settlement Positions per CUSIP shall be calculated
for each Sponsored Member in the same manner set forth in Rule 11 for
Netting Members. The proposed changes to the definition of Current Net
Settlement Positions would, however, result in a different calculation
of the Net Settlement Positions per CUSIP for Sponsored Members whose
positions are recorded in a Sponsoring Member Omnibus Account than for
Netting Members. Therefore, the statement in Rule 3A, Section 7 would
no longer be correct and would be removed from the Rules.
C. Enhance the Methodology for Calculating the Excess Capital Premium
FICC is also proposing to amend the terms related to the Excess
Capital Premium, one of the components of the Required Fund Deposit
calculation, in order to make such calculation more precise and
predictable. Currently, the Excess Capital Premium applicable to a
Netting Member equals the Netting Member's ``Excess Capital Ratio''
(i.e., its VaR Charge divided by its Netting Member Capital) multiplied
by its ``Excess Capital Differential'' (i.e., the amount by which a
Netting Member's VaR Charge exceeds its Netting Member Capital).
However, FICC currently reserves the right to collect less than this
amount or to return some or all of this amount.
FICC is proposing to make the Excess Capital Premium more precise
and predictable by revising the definition to (i) cap such amount at
two times a Netting Member's Excess Capital Differential, (ii) provide
that FICC would use the Netting Member Capital amounts set forth in the
Netting Member's most recent Form X-17-A-5 (Financial and Operational
Combined Uniform Single (``FOCUS'') Report or Consolidated Report of
Condition and Income (``Call Report''), as applicable, (iii) permit
FICC in its discretion to accept updated amounts provided by a Netting
Member prior to the issuance of the Netting Member's next financial
report, and (iv) set forth a specific procedure through which FICC may
waive the Excess Capital Premium. With regard to (iv), the proposed
rule changes would provide that only a Managing Director in FICC's
Group Chief Risk Office could grant waiver of an Excess Capital Premium
and only in exigent circumstances if FICC observed extreme market
conditions or other unexpected changes in factors, based on all
relevant facts and circumstances, including the degree to which a
Netting Member's capital position and trading activity compare or
correlate to the prevailing exigent circumstances and whether FICC can
effectively address the risk exposure presented by a Netting Member
without the collection of the Excess Capital Premium from that Netting
Member. Any such waiver would need to be documented in a written report
made available to the relevant Netting Member. FICC believes that these
changes, which are substantially similar to changes recently adopted by
the National Securities Clearing Corporation, would enhance the ability
of Netting Members to identify what their Excess Capital Premium will
be and to ensure such amount is accurately calibrated.\55\
---------------------------------------------------------------------------
\55\ See Securities Exchange Act Release No. 96786 (Feb. 1,
2023), 88 FR 8013 (Feb. 7, 2023) (SR-NSCC-2022-005).
---------------------------------------------------------------------------
FICC would also amend the defined term ``Netting Member Capital''
in Rule 1 to refer to a Netting Member's Net Capital, Net Assets, or
Equity Capital, as applicable based on the Netting Member's type of
regulation. The definition of ``Net Capital,'' in turn, would be
revised to refer specifically to the net capital of a Netting Member as
reported on its most recent FOCUS Report or, if a Netting Member is not
required to file a FOCUS Report, on its most recent financial
statements or equivalent reporting. ``Equity Capital'' would be defined
in Rule 1 to mean the equity capital of a Netting Member as reported on
its most recent Call Report, or if a Netting Member is not required to
file a Call Report, on its most recent financial statements or
equivalent reporting. FICC believes these changes would increase
predictability and understanding of how FICC calculates the Excess
Capital Premium.
FICC would also remove obsolete references to margin requirements
for pending transactions since FICC does not apply margin requirements
to such transactions.
D. Exclude Segregated Customer Margin From Calculation of Excess
Capital Premium Charge
FICC is also proposing to revise the definitions of Excess Capital
Ratio and Excess Capital Differential in the Margin Component Schedule
to exclude the VaR Charge calculated with respect to Segregated
Indirect Participants.
The VaR Charge assessed for each Segregated Indirect Participant
would be satisfied by the Segregated Indirect Participant, and not by
the Netting Member. As noted above, the Excess Capital Premium is
designed to address the risk that a Netting Member with low capital
relative to value-at-risk is not able to perform its obligations.
However, Segregated Customer Margin cannot be applied to satisfy a
Netting Member's obligations (other than to perform on behalf of the
individual indirect participant for whom the Segregated Customer Margin
is held). Therefore, including the VaR Charge that is calculated for a
Segregated Indirect Participant and is satisfied by the capital of that
Segregated Indirect Participant in the calculation of the Netting
Member's Excess Capital Premium could result in assessing an Excess
Capital Premium for that Netting Member that is greater than the amount
required to mitigate the risk that the Excess Capital Premium is
designed to address.
The proposed change is also designed to ensure that the Excess
Capital Premium does not result in differential treatment of Netting
Members that act as intermediaries for Segregated Indirect
Participants.
E. Other Clarifications and Conforming Changes
In connection with the changes described above, FICC would make
other clarifications and conforming changes to the Rules. First, FICC
would move the definition of ``Legal Risk'' from Rule 4 to the
definitions in Rule 1. This term refers to the risk that FICC may be
unable to either access Required Fund Deposits or take action following
the insolvency or bankruptcy of a Netting Member as the result of a
law, rule or regulation applicable to the Netting Member.\56\ Because
this term is used in multiple places in the Rules, including in the new
Margin Component Schedule, moving the definition to Rule 1 would make
it easier for a reader to find that definition.
---------------------------------------------------------------------------
\56\ See Rule 4, Section 2(d), supra note 4.
---------------------------------------------------------------------------
FICC would also delete the definition of the term ``Minimum
Charge'' from Rule 1 and move the use of this term from Rule 4 to
Sections 2(c) and 3(c) of the Margin Component Schedule. While FICC
would continue to apply a requirement that Netting Members maintain a
minimum amount for each Margin Portfolio or Segregated Margin
Requirement, as discussed above, FICC
[[Page 21598]]
believes using a defined term for this concept is not necessary and
could cause confusion about the requirement. The proposed change to
remove the defined term and instead just explain the requirement in
these sections of the Margin Component Guide would simplify and,
therefore, clarify, the Rules in this regard.
4. Clarifications to Treatment of Brokered Transactions
FICC is proposing to refine the definition of Brokered Transactions
and remove conditions that Inter-Dealer Broker Netting Members and Non-
IDB Repo Brokers must meet in order to receive favorable loss
allocation treatment.
Currently, Inter-Dealer Broker Netting Members and Non-IDB Repo
Brokers must meet a set of conditions described in Section 8 of Rule 3
to be subject to a cap on the application of FICC's loss allocation
procedure of no greater than $5 million.\57\ FICC believes this
favorable loss allocation treatment is appropriate because the Netting
Member is not undertaking a directional position with respect to the
transactions. Instead, each transaction has a counterparty other than
the Netting Member that will ultimately deliver the securities or pay
the cash.
---------------------------------------------------------------------------
\57\ See Rule 3, Section 8 (such conditions require that an
Inter-Dealer Broker Netting Member ``(A) limit its business to
acting exclusively as a Broker; (B) conduct all of its business in
Repo Transactions with Netting Members; and (C) conduct at least 90
percent of its business in transactions that are not Repo
Transactions, measured based on its overall dollar volume of
submitted sides over the prior month, with Netting Members'') and
Rule 4, Section 7, supra note 4.
---------------------------------------------------------------------------
FICC is proposing to revise the Rules related to Brokered
Transactions so that the favorable loss allocation treatment applies
only to the transactions that present this limited risk. In particular,
FICC is proposing to revise the definition of Brokered Transactions to
only encompasses transactions entered into by an Inter-Dealer Broker
Netting Member on the Inter-Dealer Broker Netting Member's own trading
platform. This rule change would limit the definition of these
transactions to transactions for which an Inter-Dealer Broker is
standing in between two counterparties and is thus completely flat.
In connection with this change, FICC would eliminate the conditions
that Inter-Dealer Broker Netting Members and Non-IDB Repo Brokers must
meet in order to be subject to such favorable treatment. As noted
above, the proposed Rule 2B would clarify that only Inter-Dealer Broker
Netting Members are able to maintain Cash Broker Accounts or Repo
Broker Accounts, and that only Brokered Transactions may be submitted
through such Accounts, as appropriate. Therefore, FICC believes the
revised definition of Brokered Transactions and the revisions to the
Account structure would collectively serve the risk-mitigation function
that the conditions in Rule 3, Section 8 achieve, but in a much more
effective manner and in a manner that is easier for FICC to monitor. As
such, those conditions would be removed from the Rules.
Finally, FICC would remove the category of Non-IDB Repo Brokers
from the Rules. Non-IDB Repo Brokers are currently defined as Netting
Members other than Inter-Dealer Broker Netting Members that operate in
the same manner as a Broker and have agreed to meet the same
requirements imposed on Inter-Dealer Broker Netting Members.\58\ As
described above, FICC believes the favorable loss allocation treatment
is appropriate only for Inter-Dealer Broker Netting Members that submit
Brokered Transactions, as such term would be defined. Therefore, FICC
would delete the references to such parties and associated terms. In
connection with these changes, the proposal would delete the defined
term for ``Non-IDB Repo Broker'' as that term would no longer be used
in the Rules.
---------------------------------------------------------------------------
\58\ Currently, only one Netting Member is a Non-IDB Repo
Broker.
---------------------------------------------------------------------------
Implementation Timeframe
Subject to the completion of all regulatory actions required with
respect to this proposal,\59\ FICC expects to implement the proposal by
no later than March 31, 2025, and would announce the effective date of
the proposed changes by an Important Notice posted to FICC's website.
---------------------------------------------------------------------------
\59\ Supra note 3.
---------------------------------------------------------------------------
Expected Effect on Management of Risk
FICC believes that the proposed rule changes to separately and
independently calculate, collect, and hold the margin for a Netting
Member's proprietary transactions from the margin for the transactions
of indirect participants, to limit Brokered Transactions to those
entered into by an Inter-Dealer Broker Netting Member on its own
trading platform, to set forth a segregation arrangement for certain
indirect participant margin, and to clarify FICC's account structure
and consolidate its margin methodology in a single accessible Margin
Component Schedule would enhance FICC's and its Netting Members' risk
management.
The separate calculation of margin for a Netting Member's
proprietary and indirect participant transactions would ensure that the
quantum of margin that FICC collects from a Netting Member more
precisely reflects the separate risk profiles of the Netting Member's
proprietary portfolio of transactions and the portfolio of transactions
that the Netting Member submits to FICC on behalf of indirect
participants. This approach would also provide FICC with a more
detailed understanding of potential risks arising from the various
types of transactions that it clears.
The revisions to the Brokered Transactions definition would also
help facilitate a more precise identification and calibration of
potential risks attendant to different transaction types. In this
context, the revisions would ensure that only those transactions that
present the limited risk for which FICC's Brokered Transactions
provisions are designed benefit from a more favorable loss allocation
treatment. And they would ensure that other types of transactions are
maintained in Dealer Accounts, alongside other regular market activity.
FICC further believes that the proposed changes to clarify FICC's
account structure and consolidate its margin methodology in a single
accessible Margin Component Schedule would enhance risk management by
furthering public awareness of how FICC assesses margin requirements.
Such greater awareness would allow Netting Members and indirect
participants to make more informed choices about how the various types
of portfolios they present for clearing would be risk managed by FICC,
which in turn should allow such parties to better anticipate and
provision for any financial resourcing and liquidity needs that might
arise from margin calls for those portfolios.
FICC additionally believes that the proposed margin segregation
arrangement would reduce risk by enhancing the ability of Netting
Members to collect margin from indirect participants and deposit that
margin with FICC. Currently, broker-dealer Netting Members must finance
the margin obligations of their indirect participants' transactions
because they cannot record a debit in the Rule 15c3-3a formulas for
margin deposited with FICC. In addition, non-broker-dealer Netting
Members may often need to finance the margin obligations of their
indirect participants' transactions because the absence of a
segregation arrangement makes it impossible or undesirable for indirect
participants to use their own assets to satisfy such
[[Page 21599]]
margin obligations. Such financing can expose Netting Members to the
risk of an indirect participant default. FICC's proposed segregation
arrangement would serve to reduce the need for Netting Members to
provide financing by allowing Netting Members to collect margin from
indirect participants and deposit that margin with FICC. Such
collection and depositing would reduce the risk to a Netting Member of
an indirect participant default because the Netting Member can look to
the margin for credit support. As a result, collecting and depositing
the indirect participant's margin in a segregated account at FICC would
limit the likelihood that a default of an indirect participant gives
rise to distress at the Netting Member that could limit its ability to
perform to FICC. By the same token, the segregated account structure
FICC is proposing to hold indirect participant margin should help those
indirect participants manage their risks to their Netting Member,
fellow Netting Member customers, and even FICC itself because the
account structure would ensure that such margin is only available to
cover losses arising from a default by the indirect participant's
position.
Consistency With Section 805 of the Clearing Supervision Act
FICC believes the proposed rule changes are consistent with the
Clearing Supervision Act.\60\ Specifically, FICC believes these changes
are consistent with the risk management objectives and principles of
Section 805.\61\
---------------------------------------------------------------------------
\60\ 12 U.S.C. 5461 et seq.
\61\ 12 U.S.C. 5464.
---------------------------------------------------------------------------
1. Consistency With Section 805(b) of the Clearing Supervision Act
Section 805(b) provides that ``[t]he objectives and principles for
the risk management standards prescribed under subsection (a) shall be
to (1) promote robust risk management; (2) promote safety and
soundness; (3) reduce systemic risks; and (4) support the stability of
the broader financial system.'' \62\ As described in greater detail
below, the proposed rule changes to clarify FICC's account structure
and margin calculation methodology would improve public understanding
of FICC's margining and recordkeeping processes and thereby facilitate
greater access to the systemic risk-reducing benefits of FICC's central
clearing services. The proposed changes would do this by revising the
definition of ``Account'' to make clear that FICC Accounts are for
purposes of recording transactions, providing a roadmap in Rule 2B
identifying the types of Accounts FICC maintains for Netting Members
and which transactions may be recorded in such Accounts, amending Rule
4 to clarify the types of transactions that may be included in a Margin
Portfolio, and consolidating the components of FICC's margin
calculation methodology currently in Rules 1 and 4 into an accessible
Margin Component Schedule and refining the description of FICC's margin
calculation methodology. The proposed change to eliminate the Permitted
Margin Affiliates from the Rules would also lead to clearer Rules and,
therefore, improved public understanding of FICC's margining practices
by removing a concept that is not being used by Netting Members.
---------------------------------------------------------------------------
\62\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
The collective impact of these changes would be to enhance the
ability of Netting Members and indirect participants to make more
informed choices about how the various types of portfolios they present
for clearing would be risk managed by FICC, which in turn should allow
such parties to better anticipate and provision for any financial
resourcing and liquidity needs that might arise from margin calls for
those portfolios. Enhanced understanding and decision-making by market
participants of FICC's risk-reducing central clearing services would
promote easier and more diverse access to such services. This expanded
access, in turn, would promote robust risk management across the U.S.
Treasury market since expanded access also result in expanded
application of FICC's risk management measures, including margin
requirements. With this expanded application also comes clearer
understanding by market participants of the potential financial
resource and liquidity needs necessary to satisfy FICC's margin
requirements, and therefore the ability of market participants to
anticipate and manage those needs on a more organized and orderly
basis. Thus, expanded and more transparent application of these risk
management measures would promote safety and soundness across the
diversity of participants in the U.S. Treasury markets, thereby also
reducing systemic risk and supporting stability of the broader
financial system.
The proposed changes to create a segregation arrangement for
certain indirect participant margin would also facilitate broader
access to the risk-reducing benefits of FICC's central clearing
services. As noted above, broker-dealer and other Netting Members must
often finance the margin obligations of their indirect participants. In
addition to increasing a Netting Member's risk exposure to indirect
participants, such financing increases the costs to the Netting Member
of providing access to central clearing. The proposed rules would
facilitate greater access to FICC's clearance and settlement systems by
creating a segregation arrangement that would allow broker-dealer and
other Netting Members to collect margin from their indirect
participants and deposit that margin with FICC. Such collection and
depositing would reduce the costs and attendant liquidity needs to such
Netting Members of providing access to FICC's clearance and settlement
services via margin payments, thereby increasing the diversity and
scope of market participants able to access central clearing while also
ensuring that expanded access to central clearing does not increase
funding and liquidity risk for the Netting Members. By improving the
position of the Netting Members in this regard, the proposed changes
can reduce systemic risk that can be triggered by a large Netting
Member liquidity stress event or where an indirect participant default
also causes a Netting Member to default. For the same reasons, the
outcome of these proposed changes promotes safety and soundness and the
stability of the broader financial system.
By the same token, the segregated account structure FICC is
proposing to hold indirect participant margin should help indirect
participants who access central clearing to manage more effectively
their risks to their Netting Member, fellow Netting Member customers,
and even FICC itself because the account structure would ensure that
such margin is only available to cover losses arising from a default by
the indirect participant's position. Thus, the proposed changes would
promote robust risk management at indirect participants and, by
reducing the risk that indirect participants may not be able to access
their margin upon the default of another party, also reduce the risk
that the indirect participant will suffer a related default or market
stress event. For this reason, the proposals further promote safety and
soundness, reduce systemic risk, and support the stability of the
broader financial system.
The proposed rule changes to separately and independently calculate
the margin for a Netting Member's proprietary transactions from the
margin for the transactions of indirect participants, adopt a method
for allocating net unsettled positions to individual indirect
participants for purposes of calculating margin requirements, and to
limit the scope of Brokered Transactions to those executed by an Inter-
Dealer Broker Netting
[[Page 21600]]
Member on its own trading platform would also promote robust risk
management, and safety and soundness at FICC by reducing the potential
risk to FICC arising from indirect participant transactions and provide
FICC with a better understanding of the source of potential risk
arising from the transactions that it clears.\63\ They would also
ensure that only those transactions that present the limited risk for
which FICC's Brokered Transactions provisions are designed benefit from
the favorable loss allocation treatment, which further promotes robust
risk management at FICC. The proposed changes would also incentivize
Netting Members and indirect participants to make more informed choices
about how the various types of portfolios they present for clearing
would be risk managed by FICC, which in turn should allow such parties
to better anticipate and provision for any financial resourcing and
liquidity needs that might arise from margin calls for those
portfolios. As already explained above, these outcomes applied across
the various actors in the U.S. Treasury market would, in turn, reduce
systemic risks and support the stability of the broader financial
system.
---------------------------------------------------------------------------
\63\ See Adopting Release, supra note 2, at 144.
---------------------------------------------------------------------------
As a result, FICC believes the proposed changes will collectively
advance Section 805(b)'s objectives and principles of promoting robust
risk management, promoting safety and soundness, reducing systemic
risks, and supporting the stability of the broader financial
system.\64\
---------------------------------------------------------------------------
\64\ Id.
---------------------------------------------------------------------------
2. Consistency With Section 805(a)(2) of the Clearing Supervision Act
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe risk management standards for the payment,
clearing, and settlement activities of designated clearing entities,
like FICC. Accordingly, the Commission has adopted risk management
standards under this section and under section 17A of the Act.\65\ The
Section 17A standards require registered clearing agencies to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for their operations and risk management practices on an
ongoing basis.\66\ FICC believes that the proposed changes are
consistent with Rules 17Ad-22(e)(4)(i), (e)(6)(i), (e)(18)(ii),
(e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii), each
promulgated under the Act.\67\
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\65\ 17 CFR 240.17Ad-22(e).
\66\ Id.
\67\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(18)(ii),
(e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii).
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Rule 17Ad-22(e)(4)(i) under the Act requires that FICC establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to participants and those arising from its
payment, clearing, and settlement processes by maintaining sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence.\68\ The proposed rule changes
to separately and independently calculate, collect, and hold the margin
for a Netting Member's proprietary transactions from the margin for the
transactions of indirect participants, to limit Brokered Transactions
to those entered into by an Inter-Dealer Broker Netting Member on its
own trading platform, and to increase the precision of the Excess
Capital Premium would enhance FICC's risk management. These changes
would ensure that the quantum of margin that FICC collects from a
Netting Member reflects the separate risk profiles of the Netting
Member's portfolio of Proprietary Transactions and portfolio
transactions that the Netting Member submits to FICC on behalf of
indirect participants, ensure that only those transactions that present
the limited risk for which FICC's Brokered Transactions provisions are
designed benefit from favorable loss allocation treatment, and
calibrate the Excess Capital Premium based on the most readily
available information.
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\68\ 17 CFR 240.17Ad-22(e)(4)(i).
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Collectively, these changes would enhance the ability of FICC to
manage the risk of the transactions it clears and settles and cover its
credit exposure to its participants with a high degree of confidence.
The proposed change to require a minimum cash requirement of $1
million per Segregated Indirect Participant would mitigate the greater
risk exposure presented to FICC by the limitations on its use of these
deposits. As discussed above, FICC's daily backtesting of the
sufficiency of Clearing Fund deposits has revealed a heightened
likelihood of backtesting deficiencies for those Members with lower
deposits that are not sufficient to mitigate any abrupt intraday change
in their exposures, and a $1 million minimum requirement was
appropriate to mitigate the risks of backtesting deficiencies while
balancing the financial impact of this requirement on Members.\69\
Because FICC is required to calculate the margin requirements for
Segregated Indirect Participants on a gross basis, as if each
Segregated Indirect Participant were a separate Margin Portfolio, it
believes it is also appropriate to apply the same minimum requirement
that it applies to each Margin Portfolio. By maintaining sufficient
resources to cover its credit exposures fully with a high degree of
confidence, the proposed change supports FICC's ability to identify,
measure, monitor, and, through the collection of Segregated Customer
Margin, manage its credit exposures to these indirect participants.
Therefore, FICC believes adopting this minimum requirement is
consistent with the requirements of Rule 17Ad-22(e)(4)(i) under the
Act.\70\
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\69\ Supra note 45.
\70\ 17 CFR 240.17Ad-22(e)(4)(i).
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Rule 17Ad-22(e)(6)(i) under the Act requires FICC to establish
written policies and procedures reasonably designed to calculate,
collect, and hold 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 FICC's payment, clearing, or settlement
facilities.\71\ The proposed rule changes would require that each
Margin Portfolio only consist of activity from the same Type of
Account, ensuring that proprietary transactions and transactions
submitted to FICC on behalf of indirect participants are margined
separately, and to require Netting Members to use separate Deposit IDs
for different transaction types. As noted above, the proposed changes
to Rule 2B, Section 3 would require FICC to calculate the Segregated
Customer Margin Requirement for a particular Segregated Indirect
Participants Account as the sum of the requirements applicable to each
Segregated Indirect Participant whose transactions are recorded in such
Account, as though each Segregated Indirect Participant were a separate
Netting Member with a single Margin Portfolio consisting of such
transactions. These provisions would result in FICC calculating
separate margin amounts for each Segregated Indirect Participant and
for such amounts to be collected on a gross basis. Finally, the
proposed changes to Rule 4, Section 1a would
[[Page 21601]]
provide for FICC to establish on its books and records for each Netting
Member that deposits Segregated Customer Margin a ``Segregated Customer
Margin Custody Account'' corresponding to each Segregated Indirect
Participants Account of such Netting Member. Collectively, these
proposed changes would ensure that a Netting Member's proprietary
transactions are not netted with indirect participant transactions for
purposes of margin calculation and that margin for indirect participant
transactions is collected and held separately and independently from
margin for a Netting Member's proprietary transactions.
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\71\ 17 CFR 240.17Ad-22(e)(6).
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Rule 17Ad-22(e)(18)(ii) under the Act requires FICC to establish
objective, risk-based, and publicly disclosed criteria for
participation, which require participants to have sufficient financial
resources and robust operational capacity to meet obligations arising
from participation in FICC.\72\ The proposed changes to consolidate
FICC's margin methodology in a Margin Component Schedule, to identify
the particular Required Fund Deposit Portions and Segregated Customer
Margin Requirements, and to elaborate on the calculation of the Excess
Capital Premium and the circumstances in which FICC would waive the
application of such premium would improve public disclosure of FICC's
margin methodology and the obligations that Netting Members and their
indirect participants would have as a result of their participation in
FICC's clearance and settlement system. In particular, the proposed
changes would provide Netting Members and their indirect participants
with a single, standalone schedule that they can review in order to
understand how FICC would calculate margin obligations for their
transactions. The proposed changes would also improve public disclosure
by allowing Netting Members and their indirect participants to see how
the various Accounts and Margin Portfolios give rise to separate inputs
into the total margin calculation and how and when a Netting Member may
face an increase in margin on account of the Excess Capital Premium.
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\72\ 17 CFR 240.17Ad-22(e)(18)(ii).
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Rule 17Ad-22(e)(18)(iii) under the Act requires that FICC establish
written policies and procedures reasonably designed to monitor
compliance with its participant requirements on an ongoing basis.\73\
The proposed changes to require Netting Members to designate the
Account in which a transaction is to be recorded and to identify the
Sponsored Member or Executing Firm Customer for whom the transaction is
submitted on that transaction record would help facilitate FICC's
ability to monitor which transactions are being entered into by which
entities. This enhanced monitoring of participant activity would thus
allow FICC to better monitor participants' compliance with FICC's
various requirements in accordance with Rule 17Ad-22(e)(18)(iii).\74\
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\73\ 17 CFR 240.17Ad-22(e)(18)(iii).
\74\ Id.
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Rule 17Ad-22(e)(18)(iv)(C) under the Act requires, among other
things, that FICC, as a covered clearing agency that provides central
counterparty services for transactions in U.S. Treasury securities,
ensure that it has appropriate means to facilitate access to clearance
and settlement services of all eligible secondary market transactions
in U.S. Treasury securities, including those of indirect
participants.\75\ FICC believes that the proposed changes giving
Netting Members the ability to elect for margin deposited by indirect
participants and deposited with FICC to be segregated would facilitate
access to FICC's clearance and settlement systems by giving indirect
participants greater optionality. The proposed rule changes would allow
a Netting Member and its indirect participant to choose whether (i) the
indirect participant will post margin under a customer protection
framework that is similar to that which exists in other cleared
contexts,\76\ (ii) the Netting Member will finance the margin for the
indirect participant's transactions, or (iii) the indirect participant
will deposit margin but without the protection (or higher margin
requirements) associated with a segregation arrangement. FICC believes
that such optionality would facilitate access in accordance with Rule
17Ad-22(e)(18)(iv)(C) by allowing Netting Members and their indirect
participants to adopt a margining arrangement that is most consistent
with their business objectives and applicable regulatory, operational,
and practical constraints.
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\75\ 17 CFR 240.17Ad-22(e)(18)(iv)(C). Contemporaneously with
this proposed rule change, FICC and its affiliates, National
Securities Clearing Corporation and The Depository Trust Company,
have submitted separate proposed rule changes (File Nos. SR-FICC-
2024-006, SR-NSCC-2024-003 and SR-DTC-2024-003) under which they are
proposing to amend the Clearing Agency Risk Management Framework to
address the requirement under Rule 17Ad-22(e)(18)(iv)(C) that FICC's
Board review its policies and procedures related to compliance with
that rule on an annual basis. These proposed changes are pending
regulatory approval. Copies of the proposed rule changes are
available at www.dtcc.com/legal/sec-rule-filings.
\76\ Both the Options Clearing Corporation and the U.S.
derivatives clearing organizations allow for, or require, the
segregation of customer margin and/or positions. See generally OCC
By-Laws Sections 3, 27 (outlining the various accounts that OCC may
maintain for a clearing member and the extent to which the positions
and margin recorded to such accounts may applied to other
obligations); 7 U.S.C. 6d (outlining the segregation rules
applicable to commodity futures and cleared swap transactions);
Order Granting Conditional Exemptions under the Securities Exchange
Act of 1934 in Connection with the Portfolio Margining of Cleared
Swaps and Security-Based Swaps that are Credit Default Swaps,
Securities Exchange Release No. 93501 (Nov. 1, 2021), 86 FR 61357
(Nov. 5, 2021) (S7-13-12) (providing that certain cleared security-
based swaps may be portfolio margined in a cleared swaps account
subject to the rules generally applicable to cleared swaps).
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Rule 17Ad-22(e)(19) under the Act requires that FICC identify,
monitor, and manage the material risks to the covered clearing agency
arising from arrangements in which firms that are indirect participants
in FICC rely on the services provided by direct participants to access
FICC's clearance and settlement facilities.\77\ The proposed changes to
separately and independently calculate margin for proprietary and
indirect participant transactions, adopt a method for allocating net
unsettled positions to individual indirect participants for purposes of
calculating margin requirements and require a Netting Member to
represent that margin deposited in relation to a Segregated Indirect
Participants Account is generally margin collected from an indirect
participant would reduce the potential risk to FICC arising from
indirect participant transactions.
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\77\ 17 CFR 240.17Ad-22(e)(19).
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These changes would ensure that the margin FICC collects from a
Netting Member reflects the separate risk profiles of the Netting
Member's proprietary portfolio and the portfolio of transactions it
submits to FICC on behalf of indirect participants. They would also
provide FICC with a better understanding of the source of potential
risk arising from the transactions that it clears and incentivize
Netting Members to maintain more balanced proprietary portfolios, since
such portfolios would lead to lower margin requirements. In addition,
the proposed representation by Netting Members that they generally
intend to satisfy Segregated Customer Margin Requirements with assets
collected from indirect participants rather than proprietary assets
would reduce the risk of FICC's proposed margin segregation arrangement
by limiting such arrangement to indirect participant assets and
ensuring that proprietary assets a Netting Member deposits with FICC
are available for loss mutualization purposes.
Rule 17Ad-22(e)(23)(ii) under the Act requires FICC to establish
written
[[Page 21602]]
policies and procedures providing sufficient information to enable
participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in FICC.\78\ The proposed
rule changes to consolidate and clarify FICC's margin calculation
methodology in the proposed Margin Component Schedule, adopt a method
for allocating net unsettled positions to individual indirect
participants for purposes of calculating margin requirements and to
clarify the calculation of the Excess Capital Premium would make it
easier for both Netting Members and indirect participants to identify
and price the potential margining costs associated with how one chooses
to submit transactions to FICC for clearance and settlement.
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\78\ 17 CFR 240.17Ad-22(e)(23)(ii).
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III. Date of Effectiveness of the Advance Notice, and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency shall not implement the proposed change
if the Commission has any objection to the proposed change.
The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
The clearing agency shall post notice on its website of proposed
changes that are implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the advance
notice is consistent with the Clearing Supervision Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-FICC-2024-802 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to file number SR-FICC-2024-802. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the advance notice that are filed
with the Commission, and all written communications relating to the
advance notice between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
Copies of the filing also will be available for inspection and copying
at the principal office of FICC and on DTCC's website (https://
dtcc.com/legal/sec-rule-filings.aspx). Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to file number SR-FICC-2024-802 and should be submitted on or
before April 18, 2024.
V. Date and Timing for Commission Action
Section 806(e)(1)(G) of the Clearing Supervision Act provides that
FICC may implement the changes if it has not received an objection to
the proposed changes within 60 days of the later of (i) the date that
the Commission receives an advance notice or (ii) the date that any
additional information requested by the Commission is received,\79\
unless extended as described below.
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\79\ 12 U.S.C. 5465(e)(1)(G).
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Pursuant to section 806(e)(1)(H) of the Clearing Supervision Act,
the Commission may extend the review period of an advance notice for an
additional 60 days, if the changes proposed in the advance notice raise
novel or complex issues, subject to the Commission providing the
clearing agency with prompt written notice of the extension.\80\
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\80\ 12 U.S.C. 5465(e)(1)(H).
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Here, as the Commission has not requested any additional
information, the date that is 60 days after FICC filed the advance
notice with the Commission is May 13, 2024. However, the Commission is
extending the review period of the Advance Notice for an additional 60
days under section 806(e)(1)(H) of the Clearing Supervision Act \81\
because the Commission finds the Advance Notice is both novel and
complex, as discussed below.
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\81\ Id.
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The Commission believes that the changes proposed in the Advance
Notice raise novel and complex issues. The Advance Notice concerns a
matter of first impression for the Commission, as it concerns recently
adopted margin collection and account segregation requirements for
Treasury CCAs.\82\ The Commission has not yet considered such a
proposal pursuant to Rule 17Ad-22(e)(6)(i) and the amendments to Rule
15c3-3 under the Act \83\ and the material aspects of the proposal are
detailed, substantial, and interrelated with other risk management
practices at FICC.
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\82\ See supra note 5.
\83\ 17 CFR 240.17Ad-22(e)(6)(i) and 17 CFR 240.15c3-3.
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Accordingly, the Commission, pursuant to section 806(e)(1)(H) of
the Clearing Supervision Act,\84\ extends the review period for an
additional 60 days so that the Commission shall have until July 12,
2024 to issue an objection or non-objection to advance notice SR-FICC-
2024-802.
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\84\ 12 U.S.C. 5465(e)(1)(H).
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All submissions should refer to File Number SR-FICC-2024-802 and
should be submitted on or before April 18, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\85\
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\85\ 17 CFR 200.30-3(a)(91) and 17 CFR 200.30-3(a)(94).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-06578 Filed 3-27-24; 8:45 am]
BILLING CODE 8011-01-P