[Federal Register Volume 89, Number 124 (Thursday, June 27, 2024)]
[Notices]
[Pages 53690-53692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14069]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100401; File No. SR-FICC-2024-007]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change 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

June 21, 2024.

I. Introduction

    On March 14, 2024, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-FICC-2024-007 pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
\2\ thereunder to modify FICC's Government Securities Division 
(``GSD'') Rulebook (``GSD Rules'') to calculate, collect, and hold 
margin for proprietary transactions of a Netting Member separately from 
margin that the Netting Member submits to FICC on behalf of indirect 
participants and to address conditions of Note H to Rule 15c3-3a under 
the Exchange Act (the ``Proposed Rule Change'').\3\ The Proposed Rule 
Change was published for public comment in the Federal Register on 
March 28, 2024.\4\ The Commission has received comments regarding the 
substance of the changes proposed in the Proposed Rule Change.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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 as ``Treasury Clearing Rules''). See 
also 17 CFR 240.15c3-3a.
    \4\ Securities Exchange Act Release No. 99844 (March 22, 2024), 
89 FR 21603 (March 28, 2024) (File No. SR-FICC-2024-007) (``Notice 
of Filing''). FICC also filed a related Advance Notice with the 
Commission 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 and Rule 
19b-4(n)(1)(i) under the Exchange Act. 12 U.S.C. 5465(e)(1). 15 
U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. The Advance 
Notice was published in the Federal Register on March 28, 2024. 
Securities Exchange Act Release No. 99845 (Mar. 22, 2024), 89 FR 
21586 (Mar. 28, 2024) (File No. SR-FICC-2024-802).
    \5\ Comments on the Proposed Rule Change are available at 
https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007.htm.
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    On April 24, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\6\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\7\ The Commission is 
instituting proceedings, pursuant to Section 19(b)(2)(B) of the 
Exchange Act,\8\ to determine whether to approve or disapprove the 
Proposed Rule Change.
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    \6\ 15 U.S.C. 78s(b)(2).
    \7\ Securities Exchange Act Release No. 100022 (Apr. 24, 2024), 
89 FR 34289 (Apr. 30, 2024) (File No. SR-FICC-2023-007).
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

A. Background

    FICC, through its GSD, is a central counterparty and provider of 
clearance and settlement services for the U.S. government securities 
markets. FICC manages its credit exposures to its Netting Members 
through the collection of margin to mitigate potential losses from a 
member default.
    On December 13, 2023, the Commission adopted amendments to the 
standards applicable to covered clearing agencies, such as FICC.\9\ 
These amendments require covered clearing agencies that clear 
transactions in U.S. Treasury securities (``Treasury CCAs'') to 
calculate, collect, and hold margin for direct participants and their 
customers separately.\10\ The Commission also amended its broker-dealer 
customer protection rule (``Rule 15c3-3'') \11\ and the reserve 
formulas thereunder (``Rule 15c3-3a'') \12\ to permit margin required 
and on deposit with Treasury CCAs to be included under certain 
conditions as a debit in the broker-dealer reserve formulas.\13\
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    \9\ See supra note 3.
    \10\ 17 CFR 240.17Ad-22(e)(6)(i).
    \11\ 17 CFR 240.15c3-3.
    \12\ 17 CFR 240.15c3-3a.
    \13\ See supra note 3.
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    Currently, the GSD Rules \14\ allow Netting Members to record 
proprietary transactions that a Netting Member enters into for its own 
benefit in the same account as transactions Netting Members submit on 
behalf of non-member market participants (``indirect participants'') 
through the prime brokerage/correspondent clearing services.\15\ 
Transactions submitted on behalf of an indirect participant through the 
correspondent clearing/prime broker services currently can be netted 
against a Netting Member's proprietary transactions for purposes of 
calculating the Netting Member's margin requirements.
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    \14\ The GSD Rules are available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/ficc_gov_rules.pdf. Terms not 
otherwise defined herein are defined in the GSD Rules.
    \15\ Indirect participants currently may access GSD's clearing 
services indirectly through a Netting Member through two indirect 
participation models: the correspondent clearing/prime broker 
services and the Sponsored Service. For the Sponsored Service, 
Netting Members are approved to be ``Sponsoring Members'' to sponsor 
certain institutional firms (``Sponsored Members'') into GSD 
membership. FICC's existing prime broker/correspondent clearing 
services are an alternative to the Sponsored Service, where a 
Netting Member may submit to FICC eligible transactions on behalf of 
its customer (an ``Executing Firm'').
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B. Proposed Rule Change

    The Proposed Rule Change seeks to address the Commission's new 
margin and account separation requirements and the conditions for 
including margin in the broker-dealer reserve formulas discussed in 
part II.A above.\16\ First, the Proposed Rule Change 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 
do so by providing for the establishment of proprietary accounts to 
record the transactions that the Netting Member enters into for its own 
benefit and of separate indirect participant accounts to record 
transactions that the Netting Member submits on behalf of an indirect 
participant. FICC would also provide that a Netting Member's Margin 
Portfolio, which is utilized to determine a Netting Member's margin 
requirement, cannot include both proprietary and indirect participant 
accounts. 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.
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    \16\ See supra note 3.
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    The Proposed Rule Change would also clarify the types of accounts 
in which Netting Members may record transactions to clarify the purpose 
and use of these accounts.\17\
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    \17\ 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 its 
calculation of a Netting Member's margining, settlement, and other 
obligations. Proprietary Accounts 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. Non-Proprietary 
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.

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[[Page 53691]]

    Second, FICC states that the Proposed Rule Change 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.\18\ 
Specifically, FICC would 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 (i.e., FICC would not net the transactions of one 
indirect participant against the transactions of another indirect 
participant). FICC would also segregate the margin deposited for 
transactions in that account from any margin for 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.
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    \18\ 17 CFR 240.15c3-3a. See Notice of Filing, supra note 4, at 
89 FR 21603.
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    FICC would also provide specific procedures to allow Netting 
Members to obtain the return of excess segregated margin. FICC notes 
that these changes would 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, 
and to be able to segregate margin they deposit.\19\
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    \19\ Id. at 21606.
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    FICC is also proposing a minimum $1 million cash margin requirement 
for each Segregated Indirect Participant, similar to the $1 million 
minimum cash margin requirement currently applicable to each Netting 
Member. FICC believes that this minimum margin amount is appropriate 
because FICC's analysis has shown a heightened risk of backtesting 
deficiencies for members with lower deposits, and segregated customer 
margin would not be available to address losses from other direct or 
indirect participants.\20\
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    \20\ Id. at 21611.
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    Third, the Proposed Rule Change would seek to 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. Further, the 
Proposed Rule Change would provide a method for allocating net 
unsettled positions to individual indirect participants for calculating 
margin requirements.
    In addition, the Proposed Rule Change 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 Rule Change 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 Change 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.\21\ FICC believes that 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.\22\
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    \21\ 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 14.
    \22\ See Notice of Filing, supra note 4, at 89 FR 21604.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act to determine whether the Proposed Rule 
Change should be approved or disapproved.\23\ Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the Proposed Rule Change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
which would provide the Commission with arguments to support the 
Commission's analysis as to whether to approve or disapprove the 
Proposed Rule Change.
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    \23\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\24\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, the 
Proposed Rule Change's consistency with Section 17A of the Exchange Act 
\25\ and the rules thereunder, including the following provisions:
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    \24\ Id.
    \25\ 15 U.S.C. 78q-1.
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     Rule 15c3-3 under the Exchange Act,\26\ which permits 
permit margin required and on deposit at a U.S. Treasury securities CCA 
to be included as a debit item in a registered broker-dealer's customer 
reserve formula, subject to the conditions specified in the rule;
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    \26\ 17 CFR 240.15c3-3a.
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     Section 17A(b)(3)(F) of the Exchange Act,\27\ which 
requires, among other things, that the rules of a clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, as well as to foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions; and, in general, to protect investors and the 
public interest;
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17ad-22(e)(4)(i) under the Exchange Act,\28\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
effectively identify, measure, monitor, and manage

[[Page 53692]]

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;
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    \28\ 17 CFR 240.17ad-22(e)(4)(i).
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     Rule 17ad-22(e)(6)(i) under the Exchange Act,\29\ which 
requires that a covered clearing agency 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 the 
covered clearing agency's payment, clearing, or settlement facilities;
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    \29\ 17 CFR 240.17ad-22(e)(6)(i).
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     Rule 17ad-22(e)(18)(iv)(C) under the Exchange Act,\30\ 
which requires that a covered clearing agency establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to establish objective, risk-based, and publicly disclosed 
criteria for participation, which, when the covered clearing agency 
provides central counterparty services in 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;
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    \30\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
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     Rule 17ad-22(e)(19) under the Exchange Act,\31\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
identify, monitor, and manage the material risks to the covered 
clearing agency arising from arrangements in which firms that are 
indirect participants in the covered clearing agency rely on the 
services provided by direct participants to access the covered clearing 
agency's payment, clearing, or settlement facilities;
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    \31\ 17 CFR 240.17ad-22(e)(19).
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     Rule 17ad-22(e)(23)(ii) under the Exchange Act,\32\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
provide sufficient information to enable participants to identify and 
evaluate the risks, fees, and other material costs they incur by 
participating in the covered clearing agency.
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    \32\ 17 CFR 240.17ad-22(e)(23)(ii).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Section 17A(b)(3)(F) \33\ and Rules 
15c3-3, 17Ad-22(e)(4)(i), (e)(6)(i), (e)(18)(iv)(C), (e)(19), and 
(e)(23)(ii) \34\ of the Exchange Act, or any other provision of the 
Exchange Act, or the rules and regulations thereunder. Although there 
do not appear to be any issues relevant to approval or disapproval that 
would be facilitated by an oral presentation of views, data, and 
arguments, the Commission will consider, pursuant to Rule 19b-4(g) 
under the Exchange Act,\35\ any request for an opportunity to make an 
oral presentation.\36\
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    \33\ 15 U.S.C. 78q-1(b)(3)(F).
    \34\ 17 CFR 240.15c3-3 and 17ad-22(e)(4)(i), (e)(6)(i), 
(e)(18)(iv)(C), (e)(19), and (e)(23)(ii).
    \35\ 17 CFR 240.19b-4(g).
    \36\ Section 19(b)(2) of the Exchange Act grants to the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    The Commission asks that commenters address the sufficiency of 
FICC's statements in support of the Proposed Rule Change, which are set 
forth in the Notice of Filing \37\ in addition to any other comments 
they may wish to submit about the Proposed Rule Change.
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    \37\ See Notice of Filing, supra note 4.
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-FICC-2024-007 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-FICC-2024-007. 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 Proposed Rule Change that are 
filed with the Commission, and all written communications relating to 
the Proposed Rule Change 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 such filing also will be available for 
inspection and copying at the principal office of FICC and on FICC's 
website (www.dtcc.com/legal/sec-rule-filings).
    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-2024-007 and 
should be submitted on or before July 18, 2024. Rebuttal comments 
should be submitted by August 1, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(31).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-14069 Filed 6-26-24; 8:45 am]
BILLING CODE 8011-01-P