[Federal Register Volume 89, Number 126 (Monday, July 1, 2024)]
[Notices]
[Pages 54602-54616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14378]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100417; File No. SR-FICC-2024-009]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Modify the GSD Rules 
Relating to the Adoption of a Trade Submission Requirement

June 25, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 12, 2024, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to FICC's 
Government Securities Division (``GSD'') Rulebook (``Rules'') \3\ to 
(1) adopt a requirement that each Netting Member submits all eligible 
secondary market transactions, both for repurchase agreements and 
certain categories of cash transactions, to which it is a counterparty 
to FICC for clearance and settlement and define the scope of such trade 
submission requirement; (2) adopt ongoing membership requirements and 
other measures that would facilitate FICC's ability to identify and 
monitor Netting Members' compliance with the trade submission 
requirement, and adopt fines and other disciplinary actions to address 
a Netting Member's failure to submit transactions in compliance with 
that requirement; (3) enhance the Rules relating to the initial 
qualifications and ongoing standards for membership to improve FICC's 
ability to manage the credit risks presented by Netting Members; and 
(4) make other revisions to the Rules to clarify, conform and enhance 
the disclosures of the Rules, as described below.
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    \3\ 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 comply with 
the requirements of Rule 17ad-22(e)(18)(iv)(A) and (B) under the Act, 
as described below.\4\
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    \4\ 17 CFR 240.17ad-22(e)(18)(iv)(A) and (B). See Securities 
Exchange Act Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16, 
2024) (``Adopting Release'', and the rules adopted therein referred 
to herein as ``Treasury Clearing Rules'').
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. 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, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
Executive Summary
    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, including 
FICC.\5\ These amendments require, among other things, that FICC 
establish objective, risk-based, and publicly disclosed criteria for 
participation that (i) require FICC's Netting Members submit for 
clearance and settlement all of the

[[Page 54603]]

eligible secondary market transactions to which they are a 
counterparty; and (ii) identify and monitor Netting Members' submission 
of eligible secondary market transactions to which they are a 
counterparty, including how FICC would address a failure to submit 
transactions in accordance with this requirement.\6\
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    \5\ Supra note 4.
    \6\ Id. 17 CFR 240.17ad-22(e)(18)(iv)(A), (B).
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    Therefore, under the Treasury Clearing Rules, FICC must require its 
Netting Members, as direct participants, to submit all eligible 
secondary market transactions to which they are a counterparty to it 
for central clearing. FICC is also obligated to adopt provisions that 
would facilitate its monitoring of Netting Members' compliance with the 
trade submission requirement and how it would address a Member's 
failure to comply. As described below, the proposed rules are designed 
to comply with those requirements.
    First, the proposed changes would adopt an ongoing membership 
requirement that all Netting Members submit to FICC for clearance and 
settlement eligible secondary market transactions to which they are a 
party in a new GSD Rule 5 and would specify the scope of this 
requirement by defining ``Eligible Secondary Market Transactions''. The 
proposed rules would adopt the definition of Eligible Secondary Market 
Transactions and related definitions from the Treasury Clearing 
Rules,\7\ and would conform certain aspects of those defined terms to 
the GSD Rules to provide Netting Members with clarity on the scope of 
this trade submission requirement. FICC would also incorporate language 
into the defined terms that provides further clarification of the scope 
of this requirement, as described in greater detail below.
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    \7\ Supra note 4. See also 17 CFR 240.17ad-22(a).
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    Second, the proposed changes would adopt provisions to enable FICC 
to identify and monitor Netting Members' ongoing compliance with the 
proposed trade submission requirement. These provisions would include 
affirmative obligations of Netting Members to notify FICC of non-
compliance and confirm their ongoing compliance with this requirement. 
These provisions would also provide FICC with the authority to request 
information or review a Netting Member's books and records to monitor 
and verify, as needed, such compliance. Therefore, FICC's proposal 
would require Netting Members to utilize their existing frameworks for 
monitoring adherence to applicable regulatory obligations--
specifically, their compliance and independent audit functions--to 
monitor and affirm their ongoing compliance with the trade submission 
requirement. FICC's authority to request information and examine a 
Netting Member's books and records would allow FICC to take affirmative 
action when it deems such action necessary to fulfill its requirement 
to identify and monitor Netting Members' compliance with the 
requirement.
    The proposed rule changes would also adopt disciplinary measures 
FICC would take if a Netting Member fails to meet its obligations under 
the new rules, which would include continuing fines until the failure 
has been remediated and notifications to applicable regulatory 
authorities. This fine would be incorporated into the GSD Fine 
Schedule.
    In adopting the Treasury Clearing Rules, the Commission recognized 
the benefits central clearing brings to the markets served by a central 
counterparty, like FICC, and, consequently, the importance of the risk 
management measures employed by central counterparties.\8\ Therefore, 
in connection with adopting the trade submission requirement, these 
proposed rule changes would also include enhancements to the initial 
qualifications for direct membership with GSD and the ongoing 
membership obligations of Netting Members. The proposed enhancements 
would improve the clarity and transparency of the GSD Rules regarding 
the standards for membership and would provide FICC with additional 
measures to strengthen its ability to manage the counterparty credit 
risks that are presented by its Netting Members.
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    \8\ Supra note 4.
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    Finally, the proposed rule changes would include non-substantive 
revisions to re-organize, clarify and conform the GSD Rules, as 
described below.
Background
    FICC, through GSD, serves as a central counterparty and provider of 
clearance and settlement services for the U.S. government securities 
markets. GSD's central counterparty services are available directly to 
entities that are approved to be Netting Members and indirectly to 
other market participants through its indirect access models--the 
Sponsored Service or correspondent clearing/prime broker services.\9\ 
FICC's direct participants include brokers, dealers, inter-dealer 
brokers and both U.S. and non-U.S. banks. Currently, other market 
participants, including investment funds, pension plans and other buy-
side institutions, generally access GSD's central counterparty services 
through one of its indirect access models.
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    \9\ See Rule 2 (Members) (providing that FICC shall make its 
services available to entities that are approved to be Members of 
GSD); Rule 3A (Sponsoring Members and Sponsored Members) (describing 
the Sponsored Service) and Rule 8 (Executing Firm Trades) (currently 
describing the correspondent clearing/prime broker services), supra 
note 3. FICC has separately proposed enhancements to its access 
models, including revisions to rename the correspondent clearing/
prime broker service as the Agent Clearing Service, designed to 
facilitate greater access to its services. See Securities Exchange 
Act Release No. 99817 (Mar. 21, 2024), 89 FR 21362 (Mar. 27, 2024) 
(SR-FICC-2024-005).
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    Through GSD, FICC provides real-time trade matching, clearing, risk 
management and netting for cash purchases and sales of eligible 
securities, as well as repurchase and reverse repurchase transactions 
involving eligible securities (``Repo Transactions''). Eligible 
securities include securities issued by the U.S. Treasury Department 
(``U.S. Treasury Securities'') and securities issued or guaranteed by 
U.S. government agencies and government sponsored enterprises.\10\
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    \10\ See definition of ``Eligible Securities'' in Rule 1, supra 
note 3.
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    In its role as central counterparty, FICC novates eligible 
transactions that are submitted to it for clearance and settlement. 
Novation is defined in the Rules as the termination of deliver, 
receive, and related payment obligations between Netting Members and 
the replacement of such obligations with identical obligations to and 
from FICC, pursuant to the provisions of the Rules, and occurs at the 
time a submitted transaction is compared by FICC.\11\ As recognized by 
the Commission in the Adopting Release, by ``novating transactions 
(that is, becoming the counterparty to both sides of a transaction), 
[FICC] addresses concerns about counterparty risk by substituting its 
own creditworthiness and liquidity for the creditworthiness and 
liquidity of the counterparties.'' \12\
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    \11\ See definition of ``Novation'' in Rule 1, supra note 3.
    \12\ Supra note 4, at 8-9.
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    The Adopting Release identifies the important operational, risk 
management and other benefits of central clearing, which include the 
reduction in counterparty credit risk through novation of trades by the 
central counterparty, centralized default management, and efficiencies 
provided by multilateral netting.\13\ The efficacy of FICC's own risk 
management framework

[[Page 54604]]

is critical to its ability to provide these benefits to the market it 
serves. This framework includes initial and ongoing participation 
criteria and requirements relating to financial resources, 
creditworthiness and operational capability.
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    \13\ Supra note 4, at 14-17.
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    These membership standards are designed to limit the risks a 
Netting Member may present to FICC and the other Netting Members by 
ensuring, among other things, that applicants to be Netting Members 
have the financial and operational capabilities to meet the obligations 
of membership on an ongoing basis. The Rules also provide FICC with the 
ability to monitor Netting Members' adherence to continued suitability 
for membership. These requirements are designed to balance appropriate 
risk management with providing fair and open access by market 
participants; they are objective, risk-based, and are set forth in 
Rules 2A and 3.
Description of Proposed Rule Changes
1. Adopt Trade Submission Requirement and Define Scope of Requirement
    The proposed rule changes would adopt an ongoing membership 
obligation that each Netting Member submit to FICC for clearance and 
settlement all ``Eligible Secondary Market Transactions'' to which it 
is a counterparty. This requirement would be added to a new Rule 5 \14\ 
and would be adopted to comply with the amendments to Rule 17ad-
22(e)(18)(iv)(A) under the Act.\15\
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    \14\ The rules currently in Rule 5, describing the Comparison 
System, would be moved to a new Rule 6. References to Rule 5 would 
be updated throughout the Rules to reflect this change. See 
definitions of ``Novate'' and ``Yield Comparison Trade'' in Rule 1; 
Sections 6 and 7 of Rule 3A; and Section 9 of Rule 3B. Supra note 3.
    \15\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
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    Rule 5 would also provide that Netting Members are permitted, but 
not required, to submit to FICC transactions that are outside the scope 
of the new trade submission requirement.
a. Scope of Trade Submission Requirement
    The proposed rule changes would specify the scope of the trade 
submission requirement by adopting the definition of ``Eligible 
Secondary Market Transactions'' and other related definitions from the 
Treasury Clearing Rules.
    The Commission's definition of Eligible Secondary Market 
Transactions includes secondary market transactions in U.S. Treasury 
Securities where the transaction is of a type that is accepted by FICC 
for clearance and settlement and is one of three specified types of 
transactions. FICC would adopt this language as codified in the 
definition of ``Eligible secondary market transaction'' in Rule 17ad-
22(a) under the Act,\16\ with revisions to conform the language of the 
definition to defined terms in the Rules. Specifically, FICC would 
adopt a new defined term for ``U.S. Treasury Securities'' in Rule 1 and 
would use this term in the definition. FICC would also replace 
reference to ``clearance and settlement'' in the definition with its 
defined term for ``Novation'', which, as described above, encompasses 
its central counterparty role in the clearance and settlement process.
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    \16\ 17 CFR 240.17ad-22(a).
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    Rule 5 would further provide, as required by the Treasury Clearing 
Rules, that Eligible Secondary Market Transactions that meet the 
initial criteria must also be one of three types of transactions: (1) 
any Repo Transaction collateralized by U.S. Treasury Securities in 
which at least one counterparty is a Netting Member; or (2) purchase or 
sale cash transactions in U.S. Treasury Securities between a Netting 
Member and (a) any counterparty if the Netting Member brings together 
multiple buyers and sellers using a trading facility (such as a limit 
order book) and is a counterparty to both the buyer and seller in two 
separate transactions; or (b) a Broker or Dealer. Again, FICC would 
adopt this language from the statutory definition of Eligible Secondary 
Market Transactions, with revisions only to incorporate defined terms 
from the Rules. For example, FICC would replace references to ``direct 
participant'' in the statutory definition of Eligible Secondary Market 
Transactions with ``Netting Member'' and would use the defined terms 
for ``Broker'' and ``Dealer'' from Rule 1.
    FICC would also adopt new defined terms to improve the clarity of 
the scope of the trade submission requirement. Such revisions would not 
change the scope or applicability of the statutory definition of 
Eligible Secondary Market Transactions and would be intended only to 
provide clarity regarding the applicability of this term within the 
Rules.
    First, FICC would define ``Treasury Repo Transaction'' in Rule 1 to 
mean a Repo Transaction collateralized by Eligible Treasury Securities. 
FICC would use this new defined term in the definition of Eligible 
Secondary Market Transactions. Second, FICC would define ``Buy/Sell 
Transactions'' in Rule 1 to mean a Transaction that is either the 
purchase or sale of an Eligible Netting Security in exchange for cash 
for which the trade data is submitted to FICC for Novation. FICC would 
use this term in the definition of Eligible Secondary Market 
Transactions.\17\
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    \17\ The term ``Buy/Sell Transaction'' would also be used in the 
definition of ``Bilateral Transaction'' and ``Brokered Transaction'' 
in Rule 1 to clarify the meaning of those terms and would replace 
lowercase uses of this term in other places in the Rules with the 
proposed defined term. Supra note 3.
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    The statutory definition of Eligible Secondary Market Transactions 
also specifically excludes four types of Repo Transactions. FICC would 
similarly adopt these exclusions, updating the language only to 
incorporate defined terms to improve the clarity of the requirement. 
For example, FICC would use the proposed definition of ``Treasury Repo 
Transaction'' in each of the four exclusions from the definition of 
Eligible Secondary Market Transactions.
    The statutory exclusions to the trade submission requirement that 
FICC would include in Rule 5 are (1) Treasury Repo Transactions and 
Buy/Sell Transactions in which one of the counterparties is a central 
bank, a sovereign entity, an international financial institution, or a 
natural person; (2) Treasury Repo Transactions in which one of the 
counterparties is either a U.S. covered clearing agency, a derivatives 
clearing organization or a foreign central counterparty; (3) Treasury 
Repo Transactions in which one of the counterparties is a state or 
local government; and (4) Treasury Repo Transactions in which one of 
the counterparties is an ``Affiliated Counterparty'' of the Netting 
Member, provided that the affiliate submits to FICC for Novation all 
other Treasury Repo Transactions to which it is a counterparty.
    For the first exclusion, FICC would adopt the statutory definitions 
of ``Central Bank'', ``Sovereign Entity'', ``International Financial 
Institution'' and ``Local Government'' into Rule 1 from Rule 17ad-22(a) 
under the Act, without any alteration to these definitions.\18\
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    \18\ 17 CFR 240.17ad-22(a).
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    For the fourth exclusion from the trade submission requirement, 
FICC would adopt the statutory definition of ``Affiliated 
Counterparty'' but would include in this definition additional language 
to allow the definition to interoperate with the Commission's 
application and interpretation of this particular exclusion. 
Specifically, FICC would provide that an ``Affiliated Counterparty'' 
means a counterparty that meets the specified criteria ``or as

[[Page 54605]]

otherwise may be provided for by the SEC pursuant to the Exchange 
Act''. FICC is proposing to include this language to make clear that 
this defined term is intended to incorporate the Commission's own 
application and interpretation of this exclusion from the scope of the 
trade submission requirement.\19\ The additional language proposed to 
the defined term would allow FICC to continue to apply the Commission's 
interpretation of this definition, including any further interpretation 
that the Commission may provide through future rulemaking.
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    \19\ Additionally, the Adopting Release discusses how the 
exclusion for Affiliated Counterparties is conditioned on the 
affiliate submitting all Treasury Repo Transactions to which it is a 
counterparty for central clearing. However, the Adopting Release 
also specifies that ``[b]y referring to all other repos or reverse 
repos, the exemption clarifies that the requirement does not 
encompass transactions between the [Netting Member] and the 
[Affiliated Counterparty], i.e., the transactions that are excluded, 
and also does not encompass the [Affiliated Counterparty's] 
transactions that would otherwise be excluded'' from the trade 
submission requirement under other exclusions described above. Supra 
note 4, at 86.
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    FICC is also proposing to clarify language in the Rules to make 
clear that a bank and its branches must all apply under the same 
membership, as one Bank Netting Member. This proposed revision would 
clarify that a branch and its parent bank are considered the same legal 
entity under the GSD Rules and not separate affiliates. The proposed 
changes would remove reference to a bank applying for membership 
through its branch or agency from various places in Rules 2A and 3, 
including (1) updating eligibility to be a Bank Netting Member to 
remove the limitation that non-U.S. banks participate through a U.S. 
branch in Section 3(a)(i) of Rule 2A; (2) updating the description of 
financial requirements applicable to Foreign Persons that are banks to 
remove reference to an application for membership through a U.S. branch 
in Section 3(b)(ii)(E)(2) of Rule 2A; and (3) removing reference to a 
bank's branch in the description of the annual attestation that must be 
provided by non-U.S. bank Netting Members in Section 2(iii)(a) of Rule 
3.
b. Remove Existing Trade Submission Requirements
    In connection with adopting this trade submission requirement, FICC 
would remove the existing trade submission requirements from the GSD 
Rules. These requirements are currently set forth in Section 3 of Rule 
11, Section 2 of Rule 15, and Section 2 of Rule 18.
    Section 3 of Rule 11 requires Netting Members to submit data on all 
of that Netting Member's trades other than Repo Transactions (i) with 
other Netting Members that are eligible for netting and (ii) executed 
by a Covered Affiliate (as defined in Rule 1) that meet certain 
criteria. Section 2 of Rule 18 includes an identical trade submission 
obligation with respect to trade data on Netting Members' Repo 
Transactions. Both Rules exclude certain trades from the submission 
requirement, including trades executed between Netting Members and 
their Affiliates (defined in these Rules as ``Affiliate Trades''). 
Section 2 of Rule 15 requires that certain broker Netting Members 
submit to FICC trade data regarding their brokered activity upon FICC's 
request.
    FICC is proposing to remove these provisions from the Rules.\20\ 
The activity that would be required to be submitted to FICC pursuant to 
the trade submission requirement proposed to be added to Rule 5 
pursuant to the Treasury Clearing Rules would include activity that is 
covered by these existing requirements. Therefore, FICC believes it is 
unnecessary to retain these trade submission requirements in the Rules 
with the adoption of the new requirements to Rule 5.
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    \20\ FICC has separately proposed to remove Section 1 of Rule 
15, see Securities Exchange Act Release No. 99817 (Mar. 21, 2024), 
89 FR 21362 (Mar. 27, 2024) (SR-FICC-2024-005). Therefore, with the 
proposed removal of Section 2 of Rule 15, Rule 15 will be revised to 
be reserved for future use.
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    In connection with this change FICC would delete the defined term 
``Covered Affiliate'' from Rule 1.
c. Retain Prohibition Against Pre-Netting Trade Data
    FICC is proposing to move and consolidate the existing restriction 
against pre-netting practices from Section 3 of Rule 11 and Section 2 
of Rule 18 into Section 4 of the new Rule 5. These provisions provide 
that any trade data that is required to be submitted to FICC must be 
submitted on a trade-by-trade basis with the original terms of the 
trade unaltered, and specifically prohibits pre-netting practices. The 
receipt of unaltered trade data permits FICC's market risk management 
processes to monitor trades closer to the time of execution and manage 
the risk exposures of those trades earlier in the day. Maintaining the 
prohibition against pre-netting practices for trades that are required 
to be submitted to FICC will, therefore, support the application of the 
risk management benefits of central clearing to this trading activity 
and support the goals of the Treasury Clearing Rules.
    In moving and consolidating these provisions into Rule 5, FICC 
would also update the disciplinary action it may take if a Netting 
Member fails to comply with these requirements. Currently, Rules 11 and 
18 provide that a Netting Member that violates this requirement ``may 
be reported to the appropriate regulatory body, placed on the Watch 
List and/or subject to an additional fee'' and that FICC may further 
discipline the Netting Member pursuant to Rule 48.\21\ FICC is 
proposing to remove these disciplinary measures and instead provide 
that a Netting Member that has violated the prohibition against pre-
netting practices pursuant to the new Section 4 of Rule 5 may be 
subject to an existing provision in the Rules that requires, in certain 
circumstances, an additional charge to a Netting Member's Required Fund 
Deposit, which would, as part of this proposed rule change, be defined 
as a ``Credit Compliance Charge''.
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    \21\ Section 3 of Rule 11, Section 2 of Rule 18, supra note 3. 
See also Rule 48 (addressing FICC's general authority to discipline 
any Member for violation of the Rules), id.
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    FICC currently has the authority to collect an additional charge as 
part of a Netting Member's Required Fund Deposit if the Member fails to 
comply with applicable continuing membership standards, pursuant to 
Section 8 of Rule 3.\22\ This additional amount is currently calculated 
as equal to the greater of either: (i) $1,000,000, or (ii) 25 percent 
of the normal calculation of the Netting Member's Required Fund 
Deposit. FICC proposes to define this existing additional charge as the 
``Credit Compliance Charge'' and replace the description of this charge 
in Rule 3 with a defined term in Rule 1 and in the Margin Component 
Schedule.\23\ Because the prohibition against pre-netting practices is 
designed to support FICC's risk management of trades submitted for 
clearance and settlement, FICC believes this charge is an appropriate 
disciplinary measure for a violation of the requirement. This proposed 
change would apply a disciplinary measure that is consistent with the 
disciplinary measure applicable when a Netting Member fails to comply 
with other membership obligations that are also designed to mitigate 
risk presented to FICC and its other Netting Members.
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    \22\ Supra note 3.
    \23\ FICC recently proposed changes to the Rules that would move 
the margin calculation methodology, including the relevant defined 
terms currently located in Rules 1 and 4, into a new Margin 
Component Schedule. See Securities Exchange Act Release No. 99844 
(Mar. 22, 2024), 89 FR 21603 (Mar. 28, 2024) (SR-FICC-2024-007). 
Therefore, FICC is proposing to also describe the calculation of the 
Credit Compliance Charge in the proposed Margin Component Schedule.
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    In connection with this proposed change, FICC would also delete the

[[Page 54606]]

defined term for ``Pre-Netting of Trades'' from Rule 1 as that term 
would be incorporated into the new Section 4 of Rule 5.
2. Adopt Provisions To Monitor and Enforce the Trade Submission 
Requirement
    The proposed changes would adopt provisions to facilitate FICC's 
ability to identify and monitor the trade submission requirement. These 
proposed changes would specify FICC's ability to request information 
from both the Netting Member and from its applicable regulatory 
authority, and to review Netting Members' books and records, as and 
when FICC deems it necessary to monitor Members' compliance with the 
requirement. The proposed changes would also adopt affirmative, ongoing 
membership obligations of Netting Members to monitor their own 
continuous compliance with the requirement, proactively report any 
instances of non-compliance with the requirement, and periodically 
affirm ongoing compliance to FICC, as described below.
    While FICC would adopt provisions that would allow it to request 
information from Netting Members and their applicable regulatory 
authority, and to inspect Netting Members' books and records when it 
deems such review necessary, given that Netting Members' internal 
operations, organizational structures and trading practices vary 
greatly, FICC believes it is also appropriate to apply an approach that 
entails some degree of Netting Member self-monitoring and self-
reporting under the general obligation to comply with FICC's ongoing 
membership requirements. Therefore, and as recommended in the Adopting 
Release,\24\ FICC is proposing to require that Netting Members monitor 
their own compliance with the requirement and affirm such compliance to 
FICC through a written attestation and report, as described in detail 
below.
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    \24\ Supra note 4, at 129 (``. . . U.S. Treasury securities CCA 
could require direct participants to submit to the CCA information 
regarding their U.S. Treasury securities transactions or to require 
attestations from senior officials of the CCA's direct participants 
as to their submission of the required transactions and compliance 
with their obligations to submit such transactions.'')
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a. FICC's Authority To Request Information and Inspect Books and 
Records
    FICC would describe in Section 2 of Rule 5 its authority to take 
certain actions, and Netting Members' agreement to comply with such 
actions, in connection with its monitoring of Netting Members' ongoing 
compliance with the trade submission requirement. FICC currently has 
the authority to take each of these actions under Rules 2A and 3 in 
connection with its monitoring of Members' compliance with the 
requirements of membership generally. Therefore, FICC is not proposing 
to expand its authority to request information, or review the books and 
records of its Members, but would clarify that it may exercise these 
existing rights in connection with its monitoring of the trade 
submission requirement.
    First, Netting Members would be required to submit to FICC any 
reports or other information that FICC may reasonably request, as also 
set forth in Section 2 of Rule 3, which requires that Netting Members 
submit to FICC ``the reports, financial or other information set forth 
below and such other reports, financial and other information as the 
Corporation from time to time may reasonably require.'' The proposed 
rule change would specify that this information could include, for 
example, reports of trading activity, trade data, and the Netting 
Member's policies, procedures or other controls related to its 
compliance with the trade submission requirement. Second, Netting 
Members would agree that FICC may inspect their books and records, as 
also set forth in Section 10 of Rule 3. Finally, Netting Members would 
authorize FICC to request information regarding a Netting Member from 
that firm's Designated Examining Authority or Appropriate Regulatory 
Agency, which FICC may also do under Rule 2A, Section 6 in evaluating 
an applicant to be a Netting Member. This provision would incorporate a 
suggestion in the Adopting Release that reviewing information from 
regulatory organizations would be an appropriate method for FICC to 
assess its Netting Members' compliance with the requirement.\25\ The 
proposed rule would specify that the information that FICC may request 
from such authority or agency could include, for example, information 
related to such authority or agency's examination of the Netting 
Member's trading practices, trading reports and other records.
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    \25\ See id., (``The Commission further agrees that a U.S. 
Treasury securities CCA also could review publicly available 
information and information made available to it by regulatory and 
self-regulatory organizations as part of its assessment of its 
direct participants' compliance.'').
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    As noted above and described below, FICC would primarily rely on 
Netting Members to monitor their own compliance with the trade 
submission requirement. However, these proposed changes to clarify 
FICC's existing rights to request information and examine Netting 
Members' books and records would allow FICC to verify such compliance, 
for example, before it takes action to enforce the requirement.
b. Requirement To Notify FICC of Non-Compliance
    Second, the proposed rule changes would require each Netting Member 
to notify FICC in writing within 2 Business Days from the date on which 
it learns that it is no longer in compliance with the trade submission 
requirement. Currently, under Section 7 of Rule 3, Members are required 
to notify FICC if they are no longer in compliance with the 
qualifications, standards or other requirements of membership.\26\ This 
proposed rule change would clarify for Members the application of this 
existing requirement to a failure to comply with the trade submission 
requirement.
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    \26\ Section 7 of Rule 3, supra note 3.
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    The proposed rule change would also specify that notification of 
non-compliance shall include all relevant facts that are known to the 
Netting Member at the time of the notification and would identify 
examples of such information. Examples of such relevant facts would 
include (i) the approximate duration of the non-compliance with the 
trade submission requirement; (ii) either the time when non-compliance 
with the trade submission requirement was remediated or the anticipated 
steps to be taken to remediate such non-compliance and the approximate 
time when non-compliance is expected to remediated; and (iii) 
identification and contact information of the member of the Netting 
Member's Controlling Management (as such term is defined in the Rules) 
\27\ that is overseeing the matter.
---------------------------------------------------------------------------

    \27\ See Rule 1 (``The term ``Controlling Management'' shall 
mean the Chief Executive Officer, the Chief Financial Officer, and 
the Chief Operations Officer, or their equivalents, of an applicant 
or Member or such other individuals or entities with direct or 
indirect control over the applicant or Member; provided that with 
respect to a Registered Investment Company Netting Member or an 
applicant to become a Registered Investment Company Netting Member, 
the term ``Controlling Management'' shall include the investment 
manager.''), supra note 3. See discussion below regarding a proposed 
change to include a Netting Member's Chief Risk Officer to this 
definition.
---------------------------------------------------------------------------

    FICC believes this information would assist it in assessing the 
status and extent of the Netting Member's non-compliance with this 
requirement and the appropriate, applicable disciplinary measures. As 
discussed below, FICC would provide Netting Members that self-report 
non-compliance with the trade submission requirement with a cure period 
before applying disciplinary

[[Page 54607]]

measures. Finally, by requiring that a Netting Member identify a member 
of its Controlling Management that is overseeing the matter, the 
proposed rule change would ensure that the Netting Member has 
appropriately escalated the non-compliance internally and that the 
matter is being addressed by its senior management.
c. Annual Trade Submission Attestation
    Third, the proposed changes would require each Netting Member to 
provide FICC with an annual attestation regarding its ongoing 
compliance with the trade submission requirement. The requirement to 
provide this attestation would be included in Section 2 of Rule 5, and 
the attestation would be described in Section 2(iii)(c)(1) of Rule 3, 
as an ongoing requirement of membership. FICC would also adopt a 
definition of the ``Annual Trade Submission Attestation'' in Rule 1.
    The Annual Trade Submission Attestation would be required to be 
submitted to FICC by each Netting Member no less than annually, and 
FICC would set the date such attestations are due on an annual basis. 
Such an attestation would be signed by the Netting Member's Chief 
Compliance Officer or most senior authorized officer of the Netting 
Member who performs a similar function. FICC believes that a Netting 
Member's Chief Compliance Officer, or similar senior officer, is the 
appropriate level of authority to sign and deliver this attestation as 
such officers are typically responsible for monitoring a firm's 
compliance with applicable laws, regulations, and other ongoing 
requirements.
    Each Annual Trade Submission Attestation would be required to be on 
a form that is provided by FICC and would include the following 
attestations, as would be set forth in Rule 3: (i) the attesting 
officer has read and understands the trade submission requirement set 
forth in Rule 5; (ii) the Netting Member has established, maintains and 
enforces policies, procedures or other controls that are reasonably 
designed to ensure ongoing and continued compliance with the trade 
submission requirement; (iii) such controls are reasonably designed to 
promptly identify and remediate any occurrences of non-compliance with 
the trade submission requirement; and (iv) the Netting Member has, at 
all times during the 12 months prior to the date of the attestation, 
complied with the trade submission requirement set forth in Rule 5.
    Netting Members have an existing similar requirement to submit an 
annual attestation with respect to their obligations to the Capped 
Contingency Liquidity Facility under Rule 22A. Therefore, while this 
attestation covers a different area of ongoing membership requirements, 
the requirement will not be unfamiliar to existing Netting Members.
    FICC would adopt a fine in the Fine Schedule that would apply when 
a Netting Member fails to submit the Annual Trade Submission 
Attestation on time and in the form required. The fine would be 
$10,000, would apply on the Business Day following the day on which the 
attestation was required to be provided to FICC and would continue to 
be applied every 10 Business Days until the completed and correct 
attestation is provided to FICC. By setting this fine at a relatively 
higher value than other existing fines and by structuring the fine to 
be applied periodically until this requirement has been fulfilled, FICC 
believes this continuing fine would be an appropriate and effective 
measure to deter non-compliance and signal to Netting Members that the 
delivery of the attestation is an important obligation of membership.
d. Triennial Independent Trade Submission Review and Report
    FICC is proposing to require that each Netting Member conduct an 
independent review of its ongoing compliance with the trade submission 
requirement on a triennial basis and provide a report of that review to 
both FICC and the Netting Member's most senior governing body. FICC 
believes that a more comprehensive review of a Netting Member's 
compliance, performed by an independent body on a less frequent basis 
would be an important mitigant to any contravention of the trade 
submission requirement. The requirement to conduct a review and provide 
a report of the review to FICC would be included in Section 2 of Rule 
5, and the review and report would be described in Section 2(iii)(c)(2) 
of Rule 3, as an ongoing requirement of membership. FICC would also 
adopt definitions of the ``Triennial Independent Trade Submission 
Review'' and the ``Triennial Independent Trade Submission Report'' in 
Rule 1.
    The Triennial Independent Trade Submission Review would be required 
to be conducted following procedures and standards that each Netting 
Member has established to ensure the review is comprehensive and 
adequate to sufficiently assess and confirm the Netting Member's 
ongoing compliance with the trade submission requirement for the three-
year period prior to the review. Because each Netting Member's review 
would need to be appropriate for its own business practices and 
organization, FICC would permit each Netting Member to establish its 
own procedures and standards for conducting this review. FICC would 
have the authority, as discussed above, to review such procedures and 
standards when it deems necessary to confirm they are designed to 
ensure an appropriate assessment of compliance pursuant to the Rules.
    The proposed rule would permit Netting Members to engage either an 
internal independent group or an external third party to conduct this 
review. An independent external third party could include, for example, 
an auditor, consultant, or other independent firm that has experience 
providing independent attestations, certifications or opinions in the 
securities market industry. Netting Members that choose to engage an 
external independent third party to conduct the Triennial Independent 
Trade Submission Review would need to receive FICC's prior approval of 
that third party. In approving an independent third party, FICC would 
verify that the third party has the requisite expertise, as set forth 
in the Rules, to conduct the triennial review. If a Netting Member 
chooses to use an internal independent group to conduct the triennial 
review, such group must report directly to the Netting Member's board 
of directors, a committee of that board or to the equivalent senior 
most governing body. Such requirement would ensure the independence of 
this group from the business areas that are subject to the review. 
Allowing Netting Members to choose to use either an internal group or 
an external third party to conduct the Triennial Independent Trade 
Submission Review provides flexibility and acknowledges the different 
internal capabilities and resources of different Netting Members.
    Each Netting Member would be required to complete a report of the 
Triennial Independent Trade Submission Review, in a form that would be 
prescribed by FICC, that is signed by the individual who oversaw the 
review and, similar to the annual attestation, by the firm's Chief 
Compliance Officer or most senior officer who performs a substantially 
similar function. FICC would require that Netting Members provide the 
Triennial Independent Trade Submission Report to its board of directors 
or equivalent senior most governing body, before delivering the report 
to FICC. FICC believes that involving the senior leaders at a Netting 
Member in the triennial review and report would allow for appropriate

[[Page 54608]]

oversight and would signal the criticality of compliance with this 
trade submission requirement to senior levels of a Netting Member's 
organization.
    Proposed Section 2(iii)(c)(2) of Rule 3 would identify the 
components of the Triennial Independent Trade Submission Report, which 
would (i) describe the procedures, methodology and/or standards 
employed in conducting the Triennial Independent Trade Submission 
Review, (ii) identify the books, records, processes, operations and/or 
controls of the Netting Member that were examined in conducting the 
triennial review; and (iii) state the conclusions of the review, 
including whether the Netting Member has complied with the trade 
submission requirement on an ongoing basis during the period covered by 
the review.
    FICC would adopt a fine in the Fine Schedule that would apply when 
a Netting Member fails to complete the triennial review and submit the 
triennial report to FICC by the time and in the form prescribed by 
FICC. The fine would be $15,000 and would apply on the Business Day 
following the day on which the attestation was required to be provided 
to FICC and would continue to be applied every 10 Business Days until 
the completed and correct attestation is provided to FICC.
    Section 2(iii)(c)(2) of Rule 3 would address what would occur if 
FICC determines, in its sole discretion, that a Triennial Independent 
Trade Submission Review conducted on behalf of a Netting Member is 
incomplete, inadequate or otherwise does not meet the requirements of 
the Rule. If this were to occur, the Rule would provide that FICC shall 
require the Netting Member to complete a revised review that addresses 
the deficiencies of the prior review and would impose a fine on the 
Netting Member as if such firm had not submitted a Triennial 
Independent Trade Submission Report. Such fine would continue to apply 
until the revised report is provided to FICC.
e. Enforcement of Trade Submission Requirement
    Finally, Section 3 of Rule 5 would provide that a Netting Member 
that fails to comply with the trade submission requirement would be 
subject to a fine under the Fine Schedule and that the Netting Member's 
Designated Examining Authority or Appropriate Regulatory Agency, as 
applicable, and the Commission would be notified of that failure. FICC 
believes that notice of a Netting Member's failure to comply with the 
trade submission requirement to other appropriate regulatory 
organizations is an appropriate measure and would be an effective 
deterrent to non-compliance.
    Within the Fine Schedule, FICC would adopt a fine of $20,000 and, 
similar to the fines that would be imposed for a failure to submit a 
required attestation or triennial report, the fine would continue to be 
assessed until FICC has determined, in its sole discretion, that the 
failure to comply has been remediated. FICC would assess this fine on a 
longer timeframe--every 30 Business Days--to provide Netting Members 
with an appropriate period of time to remediate non-compliance.
    Section 3 of Rule 5 would provide Netting Members who notify FICC 
of their non-compliance with the trade submission requirement with a 
cure period of 10 Business Days before the applicable disciplinary 
measures are taken. FICC believes it is appropriate to adopt this cure 
period to encourage Netting Members to effectively monitor their own 
compliance with the requirement and notify FICC when non-compliance is 
discovered.
3. Adopt Enhancements to the Initial Qualifications and Ongoing 
Membership Standards Applicable to Netting Members
    The proposed revisions to the Rules would also enhance the 
membership standards for applicants and Netting Members subject to 
GSD's initial and ongoing requirements under Rules 2A and 3. These 
enhancements, described below, are designed to clarify and strengthen 
GSD's membership standards to help mitigate the credit exposure that 
Netting Members present and, thus, continue to promote the safety and 
soundness of FICC, its Members, and the industry it serves.
    These proposed changes are consistent with the authority provided 
to FICC under Section 17A(b)(4)(B) of the Act, which provides that a 
registered clearing agency such as FICC may, among other things, deny 
participation to, or condition the participation of, any person if such 
person does not meet such standards of financial responsibility, 
operational capability, experience, and competence as prescribed by the 
rules of the registered clearing agency.\28\ Furthermore, the 
registered clearing agency may examine and verify the qualifications of 
an applicant to be a participant in accordance with procedures 
established by the rules of the clearing agency.\29\
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78q-1(b)(4)(B).
    \29\ Id.
---------------------------------------------------------------------------

    First, FICC proposes to make several changes to Rule 2A, which 
addresses initial membership requirements. In addition to various 
technical, ministerial, supplemental, and other conforming and 
clarifying changes, FICC proposes the following changes to Rule 2A:
     Require applicants to always maintain adequate liquidity 
resources to meet their actual or projected funding obligations to 
FICC, as determined by FICC. Although already implicit in the Rules, 
explicitly stating this requirement would provide greater notice and 
transparency to applicants.
     In assessing the adequacy of an applicant's liquidity 
resources, authorize FICC to consider, for example, the source of 
liquidity and clearly state that FICC may deny membership to an 
applicant if the applicant is unable to satisfactorily demonstrate to 
FICC, in FICC's judgement, that the applicant maintains adequate 
liquidity resources. Given the importance liquidity serves in 
supporting an applicant's resiliency, it is imperative that FICC be 
able to fully assess the quality and quantity of liquidity of its 
applicants.
     Update current language that addresses consideration of 
the financial resources of the applicant's parent company to more 
broadly address the financial resources of a Guarantor, as such term 
would be defined in Rule 1 by the proposal, since a guaranty may come 
from an entity other than the parent company, and allow such 
consideration to be made by FICC instead of its Board, as such a 
decision aligns better with FICC management than with the Board.
     When a guaranty is provided, (i) authorize FICC the option 
to engage external legal counsel to review the validity and 
enforceability of a Guarantor's guaranty, with the costs and expenses 
of such review being borne by the applicant or Member; and (ii) require 
a Guarantor to provide FICC the Guarantor's annual audited Financial 
Statements and such other information as FICC believes necessary or 
appropriate in order to assess the Guarantor's ability to guarantee the 
obligations of the applicant or Member to FICC for the duration of the 
guaranty. Given the importance that a Guarantor's guaranty plays in 
supporting an applicant, it is imperative that FICC be able to fully 
assess the validity of that guaranty and the Guarantor's financials.
     Clarify the concept of ``business history'' of an 
applicant to the ``operating and management history and outlook'' of 
the applicant, to more clearly encompass the scope of ``business 
history'' that FICC considers.
     Extend the required operating history of an applicant from 
six months

[[Page 54609]]

to one year or, in the alternative, permit FICC to determine whether 
the applicant has not only personnel with sufficient operational 
background and experience, as currently allowed, but also sufficient 
financial background and experience as well, to conduct the business of 
the applicant. FICC believes one full year of operating history would 
be a better measure of the applicant's wherewithal than merely six 
months, and that the financial background and experience of the 
applicant's personnel are equally as important to consider as their 
operational background and experience.
     Require applicants to provide FICC with a business plan, 
supported by financial assumptions and projections that includes the 
applicant's proposed use of GSD's services that demonstrates, to the 
satisfaction of FICC, that the applicant has a viable plan to meet and 
sustain the financial and operational responsibility standards and 
financial obligations under the Rules. Absent a viable business plan, 
FICC could be exposed to greater risk from the applicant, if it were to 
become a Member.
     As part of an applicant's membership application, allow 
FICC to require an assessment of the applicant's business plan by an 
independent third-party consultant, at the expense of the applicant, to 
evaluate the reasonableness and viability of the plan, including its 
assumptions and projections, and explicitly state that failure to 
provide such a plan, when requested, may result in denial of the 
application. Again, given the importance that a viable business plan 
can have in supporting an applicant's obligations to FICC, it is 
imperative that FICC be able to fully assess that plan.
     Explicitly authorize FICC to deny an applicant's 
application if FICC believes the applicant does not have individuals 
with relevant industry experience and appropriate history of compliance 
with laws and regulations staffed in the following senior management 
roles, as applicable, prior to activation of the applicant's 
membership: President and/or Chief Executive Officer, Chief Financial 
Officer, Chief Risk Officer (who would also be added to the current 
definition of ``Controlling Management'' in Rule 1), General Counsel, 
OFAC Officer and Cybersecurity Officer. Similar to having a viable 
business plan, it is important that Members are adequately staffed with 
key personnel to help manage the Member's obligations to FICC.
     Clarify, with respect to financial or other reports, 
opinions, or information (collectively, ``information'') that an 
applicant may be required to provide FICC, that (i) FICC may request 
such information as it deems not only appropriate but also necessary in 
order to evaluate the applicant's financial responsibility, 
operational, legal and regulatory capabilities, experience and 
competence; and (ii) such information may include, without limitation, 
documented risk management practices, liquidity stress tests, credit 
agreements, risk assessments, opinions of counsel and other independent 
professionals, audited financial statements (including, without 
limitation, those of the applicant's Affiliates and/or Guarantor), 
consolidated and consolidating financial statements, financial 
projections, and organizational documents and charts (including, but 
not limited to, certificates of incumbency and the corporate structure 
of the applicant's Affiliates and/or Guarantor). Although already 
implicit in the Rules, clarifying this requirement would provide 
greater notice and transparency to applicants.
     Clarify that if FICC determines to apply a limitation or 
restriction on an applicant in lieu of applying a membership standard, 
as FICC is currently authorized to do, that such limitations and 
restrictions also include conditions and, in addition to the examples 
already provided in the Rules, such limitations, restrictions, and 
conditions also may include increased or adjusted ongoing membership 
financial requirements or an ongoing requirement to provide additional 
information or reports to FICC. Although already implicit in the Rules, 
clarifying this requirement would provide greater notice and 
transparency to applicants.
     Clearly authorize FICC to deny membership to an applicant 
if FICC becomes aware of any factor or circumstance about the applicant 
or its Controlling Management that may impact the suitability of the 
applicant as a Member, such as, without limitation, (i) if the 
applicant would be placed on the Watch List upon admission; (ii) 
concerns relating to compliance with anti-money laundering or sanctions 
laws, rules, and regulations; (iii) concerns relating to the amount or 
degree of leverage maintained or proposed to be maintained by the 
applicant; and/or (iv) pending, adjudicated or settled regulatory or 
other legal actions involving the applicant or its management, 
including the applicant being subject to a Statutory Disqualification, 
as such term is defined in Rule 1. Although already implicit in the 
Rules, explicitly stating this authority would provide greater notice 
and transparency to applicants.
     If an applicant is denied membership, restrict the 
applicant from reapplying for membership until the applicant has 
demonstrated to the satisfaction of FICC that the applicant has 
adequately addressed the specific grounds upon which the application 
was denied. This change would help stop an applicant from immediately 
reapplying for membership and tying up FICC resources without first 
taking the time to address the underlying issue for the denial.
    Second, FICC proposes to make several changes to Rule 3, which 
addresses ongoing membership requirements. In addition to various 
technical, ministerial, and other conforming and clarifying changes, 
FICC proposes the following changes to Rule 3:
     Expand the requirement that information provided to FICC 
under the Rules must be in English and move the requirement into 
Section 1 of Rule 3. Currently the requirement that information 
provided to FICC must be in English is at the end of Section 2 of Rule 
3 and only applies to information that is provided to FICC under Rule 
3. The proposed change would move this statement into Section 1, which 
addresses ongoing membership requirements generally, and would expand 
the requirement to apply to all information provided under the Rules.
     Update the type of financial information that FICC may, in 
its discretion, request from a Member's Affiliate and not just the 
Member's parent, including Affiliates of Members that are a Broker or 
Dealer, U.S. bank or trust company, Futures Commission Merchant, or 
non-U.S. organized entity, to include the annual audited Financial 
Statements for the applicable fiscal year, certified by an independent 
certified public accountant and prepared in accordance with generally 
accepted accounting principles, of the Affiliate, and if annual audited 
Financial Statements are not available, allow FICC, in its discretion, 
to accept unaudited Financial Statements, audited consolidated 
Financial Statements, or other financial information of the entity, as 
applicable.
     Require Members to provide accurate, complete and timely 
responses to FICC's annual and periodic due diligence information 
requests, which could include, for example, the delivery of additional 
reports and other information. Although already implicit in the Rules, 
explicitly stating this requirement would provide greater notice and 
transparency to Members.

[[Page 54610]]

     Subject Members to (i) a fine, pursuant to the Fine 
Schedule; (ii) require adequate assurances of their financial 
responsibility and operational capability as provided for in Section 7 
of Rule 3; and/or (iii) if the requested information is outstanding for 
more than 60 calendar days and until such time that the information is 
received by FICC to FICC's satisfaction, a Credit Compliance Charge, 
calculated pursuant to the Margin Component Schedule, added to the 
Required Fund Deposit of such Member, if the Member fails to provide 
accurate, complete and timely information, including responses to due 
diligence requests, in the manner requested. Although already subject 
to fines for failing to timely provide financial and related 
information, expanding such fines to explicitly include failing to 
respond to other information requests, particularly due diligence 
requests, and adding the ability to assess adequate assurances or a 
Credit Compliance Charge, would further support the importance of 
Members providing timely responses to requests for key information.
     Clarify the timing and manner in which Members must notify 
FICC if a Member is no longer in compliance with applicable membership 
standards or is the subject of an investigation or proceeding, 
including the Member's Controlling Management, that would cause it to 
no longer meet an applicable membership standard, and that failure to 
provide such notification shall subject the Member to a fine. Although 
already implicit in the Rules, clarifying this requirement would 
provide greater notice and transparency to Members.
     Authorize FICC to require Funds-Only Settling Bank Members 
to provide adequate assurances that could limit the number of Netting 
Members for which the Funds-Only Settling Bank Member provides 
settlement services. Given the significant risk that Funds-Only 
Settling Bank Members present to FICC and Netting Members in settling 
for Netting Members, it is imperative that FICC be able to adequately 
mitigate that risk exposure, when needed, by limiting the number of 
Netting Members for which such a bank can settle, when FICC deems such 
measure necessary to mitigate risk presented by the Funds-Only Settling 
Bank Member.
     Clarify that the ongoing monitoring of Members includes, 
without limitation, monitoring through annual and periodic due 
diligence requests. Although already implicit in the Rules, clarifying 
this requirement would provide greater notice and transparency to 
Members.
    Third, FICC proposes to make several changes to the Fine Schedule. 
In addition to various technical, ministerial, and other conforming and 
clarifying changes to the Fine Schedule, FICC proposes the following 
changes:
     Replace the ``Financial Reports'' fine category and 
associated fines with a new category titled ``Reports, Information and 
Due Diligence Requests,'' where the first, second, third, and fourth 
occasions for failing to timely provide such information would result 
in $5,000, $10,000, $15,000, and $20,000 fines, respectively, and 
provide that for more than four occasions, fines will be determined by 
FICC with the concurrence of the Board of Directors. FICC believes that 
providing a broader fine category, with higher fines, would help 
improve Member's compliance with the obligation.
     Provide notice that (i) the fine for failure to deliver 
timely and accurate responses to due diligence requests, in the form 
required by FICC, would be assessed on the 31st Business Day following 
the day on which such responses are due; (ii) the fine for failure to 
deliver all other information would be assessed on the Business Day 
following the day on which such information is due; and (iii) in all 
cases, the applicable fine shall be assessed every 10 Business Days and 
shall increase by $5,000 each time it is assessed, as shown in the Fine 
Schedule, until such responses have been delivered to FICC. Providing 
better notice of when the fines will be assessed, and applying a 
continuing, meaningful fine for a Member's ongoing failure to comply, 
would help improve compliance with the obligation.
4. Other Revisions and Clarifications to the Rules
    Finally, the proposed rule changes would make other revisions to 
clarify and conform provisions of the Rules to improve their accuracy 
and transparency.
    First, the proposed rule changes would revise and clarify certain 
defined terms in Rule 1. The revisions would update the definition of 
``Affiliate'' to replace a citation to a particular regulatory 
definition of this term set forth in rules promulgated under the Act, 
with the text of the particular regulatory definition of this term.\30\ 
This revision would not change the meaning of this term as it is used 
in the Rules, but would provide further clarity by including the actual 
definition and not requiring a reader to find that definition in the 
cited regulation.
---------------------------------------------------------------------------

    \30\ 17 CFR 230.405.
---------------------------------------------------------------------------

    The proposed rule changes would also update the definition of 
``Designated Examining Authority'' to include the appropriate 
regulatory bodies that may apply to other legal entity types and to 
permit FICC to choose the applicable regulatory body when a Member has 
multiple overseeing regulators. The additional regulatory authorities 
that would be included in this defined term are already listed along 
with the term Designated Examining Authority in Section 6 of Rule 3. 
Expanding the defined term to include these additional regulatory 
agencies in the defined term would allow FICC to remove that additional 
language from Rule 3 and simplify the uses of this term in other places 
in the Rules, including in Sections 2 and 3 of proposed Rule 5 
regarding the monitoring and enforcement of the trade submission 
requirement.
    The proposed rule changes would also update the defined term for 
``Eligible Treasury Security'' to clarify the meaning of this term by 
using the new proposed defined term for ``U.S. Treasury Security'' and 
the existing defined term for ``Eligible Security''.
    Second, the proposed rule changes would reorganize the sections 
within Rules 2A and 3, regarding the initial and ongoing requirements 
of membership, to identify similar requirements together in the same 
sections and ensure members have a clear understanding of these 
obligations. In Rule 2A, these proposed changes would include adding 
subheadings to Section 5, which describes the various documents and 
other application requirements, to improve the transparency of this 
section and better identify these requirements to the reader.
    These proposed changes would also rename Section 1 of Rule 3 
``General'' and move general statements that are applicable to the 
provisions of both Rule 3 and the Rules generally into this section. 
For example, Section 1 of Rule 3 would now include a statement that 
clarifies for Members which requirements apply when a firm qualifies 
for multiple types of Netting Member and would include and expand the 
requirement that information provided to FICC under the Rules generally 
must be in English, as discussed above.
    The proposed changes to Rule 3 would also rename Section 2 
``Financial Statements, Regulatory Reports and Other Reporting 
Requirements'', create subheadings to more clearly describe the types 
of information and reports that Netting Members must provide on an

[[Page 54611]]

ongoing basis, and move other ongoing reporting requirements into new 
Section 2(i). For example, Section 2(i) would include an existing 
ongoing requirement to provide regulatory reports that are submitted to 
a Member's regulatory supervisors and other authorities. The proposed 
changes would move all statements in Rule 3 regarding the timing of 
ongoing membership reporting requirements into a new Section 2(ii). The 
definition of ``Financial Statements'' would be moved out of Section 3 
of Rule 3 and into Rule 1, with the other defined terms. The ongoing 
requirement that Members maintain a current Legal Entity Identifier 
would be moved into Section 3 of Rule 3.
    The proposed changes to Rule 3 would also move the existing 
requirement that Members maintain or upgrade their systems into Section 
6 of Rule 3, where other operational requirements are currently 
described. The proposed changes would add new subheadings to Section 7 
of Rule 3, which describes the general continuance standards for 
membership, to make these standards easier to identify. The proposed 
changes would simplify the description of the requirement to notify 
FICC of events that impact a Member's compliance with applicable 
ongoing membership requirements in new Section 7(a) of Rule 3, and to 
specify that failure to provide this notification will result in a fine 
pursuant to the Fine Schedule. These proposed changes would not change 
Members' notification obligations or impose new disciplinary measures 
but would improve the clarity of these requirements in the Rules.
    The proposed changes would move the description of the requirement 
that Netting Members that are Foreign Persons notify FICC if they 
become subject to disciplinary action by their home regulator to 
Section 9 of Rule 3, which already addresses the ongoing requirement 
that Members comply with applicable laws. Finally, the proposed changes 
would move the statement that a Netting Member may be required to 
provide FICC with a legal opinion if FICC determines that the Member 
could be subject to ``Legal Risk'' (as such term is defined in the 
Rules) to Section 11 of Rule 3, which already addresses FICC's ongoing 
monitoring of Members.
    As noted above, these proposed changes are not intended to alter 
the requirements of Members or rights of FICC with respect to ongoing 
membership standards, but would re-arrange, clarify and simplify the 
descriptions in Rule 3 to improve the transparency of those provisions.
    Third, the proposed rule changes would move descriptions of the 
ongoing and regular attestation, acknowledgement and certification 
requirements into new Section 2(iii) of Rule 3 and would amend the Fine 
Schedule to adopt fines that would be assessed for a failure to deliver 
such attestations when required. The attestations that would be 
included in this new subsection are (1) an existing requirement that 
Bank Netting Members that are Foreign Persons provide an attestation on 
at least an annual basis regarding their capital requirements and 
capital ratios, which is currently described in Rule 3; (2) the 
existing requirement that Netting Members, Sponsoring Members and CCIT 
Members deliver a ``Cybersecurity Confirmation'' (as such term is 
defined in Rule 1) at least every two years, as currently described in 
Section 2 of Rule 3; (3) the proposed Annual Trade Submission 
Attestation and the proposed Triennial Independent Trade Submission 
Review and Report requirements that are proposed to be added to new 
Rule 5, as described above; and (4) the existing requirement that 
Netting Members provide an annual attestation and periodic 
acknowledgements regarding their obligations under the Capped 
Contingency Liquidity Facility (``CCLF'', as such term is defined in 
the Rules) pursuant to Rule 22A, which is currently described in Rule 
22A.\31\
---------------------------------------------------------------------------

    \31\ FICC recently proposed changes to the Rules to require that 
each Netting Member provide certain acknowledgements to FICC 
concerning their understanding of and ability to meet their CCLF 
obligations. See Securities Exchange Act Release No. 100137 (May 14, 
2024), 89 FR 43938 (May 20, 2024) (SR-FICC-2024-008). The changes 
proposed herein would move the separately proposed disclosures of 
those acknowledgements from Rule 22A to Rule 3.
---------------------------------------------------------------------------

    In connection with these proposed changes, FICC would delete the 
definition of ``Required Attestation'', which currently refers to the 
attestation regarding a Netting Member's CCLF obligations and replace 
that definition with a defined term for ``CCLF Attestation'' in Rule 1, 
to better reflect the nature of this required attestation. FICC would 
also amend Rule 22A to remove the descriptions of the CCLF attestation 
and acknowledgement requirements and replace those descriptions with a 
reference to Rule 3.
    FICC would also specify in the Fine Schedule the applicable fines 
for a failure to provide the attestations that would be identified in 
Section 2(iii) of Rule 3. While FICC has the authority under Rule 48 to 
take disciplinary action, including imposing a fine, if a Netting 
Member violates any provision of the Rules, the proposed change to 
specify the applicable fines for failure to deliver the Cybersecurity 
Confirmation and the CCLF attestation and acknowledgements would 
improve the transparency of the Rules and permit Members to better 
anticipate the consequences of failing to comply with these 
requirements.
    Finally, the proposed rule changes would amend Sections 4(b)(iii) 
and 6 of Rule 2A and Section 5 of Rule 3 to remove references to FICC's 
Board of Directors as being responsible for approving or authorizing 
certain actions and replacing such references with references to FICC. 
As provided in Rule 44, action by FICC may include action by the Board 
or by another authorized person as may be designated by the Board from 
time to time. This proposed change would permit the Board to either 
retain the authority to take the actions specified in these sections of 
the Rules or to authorize management of FICC to do so, consistent with 
Rule 44 and the Board's authority under the FICC By-laws. Specifically, 
the Board's authority to empower management with certain 
responsibilities originates in the FICC By-laws, which have been filed 
as a Rule of FICC.\32\ The By-laws document the responsibilities of the 
Board in electing and appointing officers of FICC, and prescribing and 
assigning to those officers their respective powers, authority and 
duties.\33\ This revision would simplify these statements in the Rules, 
consistent with Rule 44.
---------------------------------------------------------------------------

    \32\ See Securities Exchange Act Release Nos. 54173 (July 19, 
2006), 71 FR 42890 (July 28, 2006) (SR-DTC-2006-10, SR-FICC-2006-09, 
and SR-NSCC-2006-08); 82917 (Mar. 20, 2018) 83 FR 12982 (Mar. 26, 
2018) (SR-FICC-2018-002).
    \33\ See Sections 3.2 through 3.9, id.
---------------------------------------------------------------------------

Implementation Timeframe
    Subject to approval by the Commission, FICC expects to implement 
the proposal by no later than March 31, 2025, and would announce the 
effective date of the proposed rule change by an Important Notice 
posted to FICC's website.
    As provided for in the Treasury Clearing Rules, while the Rules 
would be updated to reflect the changes proposed by this filing by no 
later than March 31, 2025, Netting Members would not be obligated to 
comply with the trade submission requirement proposed by this filing 
until December 31, 2025, with respect to Buy/Sell Transactions that are 
considered Eligible Secondary Market Transactions, and June 30, 2026, 
with respect to Treasury Repo Transactions that are considered Eligible 
Secondary Market Transactions.

[[Page 54612]]

2. Statutory Basis
    FICC believes the proposed changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, FICC 
believes the proposed rule changes are consistent with Section 
17A(b)(3)(F) and (G) of the Act,\34\ and Rules 17ad-22(e)(18)(ii), 
(iii), (iv)(A) and (B), and (e)(23)(ii), each promulgated under the 
Act,\35\ for the reasons described below.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78q-1(b)(3)(F) and (G).
    \35\ 17 CFR 240.17ad-22(e)(18)(ii), (iii), (e)(18)(iv)(A) and 
(B), and (e)(23)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the rules of FICC be 
designed to, among other things, promote the prompt and accurate 
clearance and settlement of securities transactions and assure the 
safeguarding of securities and funds which are in its custody or 
control or for which it is responsible.\36\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The proposed rule changes to require that each Netting Member 
submit to FICC for Novation all Eligible Secondary Market Transactions 
to which it is a counterparty would promote the prompt and accurate 
clearance and settlement of securities transactions, consistent with 
Section 17A(b)(3)(F) of the Act, by ensuring that such transactions are 
subject to the risk mitigation benefits of central clearing at FICC. 
Such benefits are described by the Commission in the Adopting Release 
and include, for example, (1) reduction in overall counterparty credit 
risk when FICC Novates such transactions, becoming a counterparty to 
each transaction, as the buyer to every seller and the seller to every 
buyer; (2) enhancing the efficiency of, and market confidence in, 
centralized default management at FICC if a Netting Member defaults; 
and (3) increasing multilateral netting of these transactions, thereby 
reducing operational and other risks associated with such 
transactions.\37\ By implementing the trade submission requirement and 
adopting provisions to monitor and enforce Members' compliance with 
that requirement, as required by the Treasury Clearing Rules, the 
proposal would extend the benefits of central clearing to all Eligible 
Secondary Market Transactions and, thereby, promote the prompt and 
accurate clearance and settlement of securities transactions, as 
recognized by the Adopting Release. In this way, the proposal is 
consistent with the requirements of Section 17A(b)(3)(F) of the 
Act.\38\
---------------------------------------------------------------------------

    \37\ See supra note 4, at 14-18.
    \38\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, FICC proposes changes that would enhance GSD's 
initial and ongoing membership standards provided under Rules 2A and 3, 
respectively. In particular, for Rule 2A, FICC proposes to, in summary, 
(i) explicitly require adequate liquidity through adequate resources; 
(ii) when an applicant or Member relies on a Guarantor, permit FICC to 
engage external counsel, at the applicant or Member's expense, to 
review the guaranty provided, and require the Guarantor to provide FICC 
with information FICC deems necessary or appropriate in assessing the 
guaranty; (iii) clarify that FICC considers ``business history'' to 
encompass more broadly the ``operating and management history and 
outlook'' of the applicant, and require that an applicant have at least 
one year of such history and outlook, or, absent one year, permit FICC 
instead of its Board, to determine whether the applicant has personnel 
with sufficient operational and financial background and experience; 
(iv) require applicants to provide FICC with a business plan, which 
FICC may require to be assessed by a third-party at the participant's 
expense, that, in FICC's judgement, demonstrates the applicant's 
ability to meet its requirements to FICC; (v) explicitly state that 
FICC can deny an application if the applicant does not have adequate 
personnel in key senior management roles; (vi) clarify what information 
FICC may require an applicant, or the applicant's Affiliates or 
Guarantor, to provide FICC; (vii) clarify that in addition to 
limitations and restrictions, conditions may also be placed on an 
applicant, and provide further examples of such; (viii) clearly 
authorize FICC to deny an applicant's membership under certain 
additional circumstances, and if membership is denied under any 
circumstance, not permit reapplication until the applicant has 
adequately addressed the reason for the denial, to FICC's satisfaction.
    Also as described above, for Rule 3, FICC proposes to, in summary, 
(i) require Affiliates of a Member to provide FICC, at FICC's 
discretion, certain financial statements; (ii) explicitly state that 
Members are required to provide accurate, complete and timely responses 
to FICC's annual and periodic due diligence information requests, which 
are used for ongoing monitoring of a Member, and that failure to do so 
could subject the Member to fines, adequate assurances, or a Credit 
Compliance Charge; (iii) clarify the time and manner in which a Member 
must notify FICC if the Member breaches its GSD membership standards, 
or whether it or its Controlling Management are the subject of an 
investigation or proceeding that may cause the Member to breach its 
membership standards; and (iv) include an adequate assurances condition 
on Funds-Only Settling Bank Members that could limit the number of 
Netting Members for which the bank provides settlement services.
    Finally, as described above, FICC also proposes to update the Fine 
Schedule by replacing the current ``Financial Reports'' category and 
associated fines with a new ``Reports, Information and Due Diligence 
Requests'' category, which would include more meaningful fine amounts, 
as well as notices regarding when fines would be charged and what 
continuing fines would be levied if the Member does not provide the 
outstanding information.
    FICC believes these proposed enhancements to GSD's membership 
standards would clarify, streamline, and improve FICC's ability to 
assess and manage applicants and Members, as applicable. FICC also 
believes the level of detail and clarity offered by the proposed 
changes provides greater transparency and notice to all applicants and 
Members that are or would be subject to Rules 2A and 3. By enhancing 
the authority and tools available to FICC to assess and manage 
applicants and Members, FICC would better position itself to identify 
and mitigate the credit risk presented to it and, thus, promote the 
safety and soundness of FICC, its Members, and the industry it serves, 
all of which helps assure the safeguarding of securities and funds in 
the custody or control of FICC, consistent with Section 17A(b)(3)(F) of 
the Act.\39\
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Section 17A(b)(3)(G) of the Act requires that the rules of FICC 
provide that its participants shall be appropriately disciplined for 
violation of any provision of the rules of the clearing agency by 
expulsion, suspension, limitation of activities, functions, and 
operations, fine, censure, or any other fitting sanction.\40\ The 
proposed rule changes would adopt measures in Rule 5 and in the Fine 
Schedule to address a failure to comply with the trade submission 
requirement. Under these provisions, FICC would impose a continuing 
fine and notification to the applicable Netting Members' Designated 
Examining Authority or Appropriate Regulatory Agency and to the 
Commission. The disciplinary action would be clearly described in Rule 
5 and the proposed

[[Page 54613]]

fine amounts would be set forth in the Fine Schedule. FICC is also 
proposing to adopt a cure period of 10 Business Days before it takes 
disciplinary measures if a Netting Member self-reports a failure to 
comply with the requirement. FICC believes these measures, including 
the cure period that would be available to Members who self-report a 
failure to comply with the trades submission requirements, are 
appropriate deterrents to non-compliance and are consistent with the 
requirements of Section 17A(b)(3)(G).\41\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1(b)(3)(G).
    \41\ Id.
---------------------------------------------------------------------------

    Additionally, the proposed rule changes would define a broader 
category for fines applicable when a Netting Member fails to timely 
submit required reports, information and responses to due diligence 
requests, and would increase the applicable fines. The proposed fine 
amounts were determined in consideration of, and in alignment with, the 
other existing fines applicable. The proposed rule changes are designed 
to apply meaningful and appropriate disciplinary action that would 
signal to Netting Members the criticality of these risk management 
requirements. As such, the proposed rule changes are also consistent 
with the requirements of Section 17A(b)(3)(G).\42\
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

    Rule 17ad-22(e)(18)(ii) and (iii) under the Act requires that FICC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which . . . (ii) require 
participants to have sufficient financial resources and robust 
operational capacity to meet obligations arising from participation in 
the clearing agency, and (iii) monitor compliance with such 
participation requirements on an ongoing basis.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------

    As described above, FICC proposes several changes to GSD's initial 
and ongoing membership requirements under Rules 2A and 3. FICC believes 
each of those proposed changes is objective, risk-based, and, of 
course, would be publicly disclosed as part of the Rules. FICC also 
believes the proposed changes support fair and open access to GSD 
services, as the proposed changes are agnostic to any individual or 
group of applicants or Members but, instead, are simply designed to 
clarify and strengthen GSD's current membership standards. 
Additionally, with respect to the specific proposed changes to (i) 
enhance FICC's ability to consider, assess, and require adequate 
liquidity of an applicant or Member; (ii) require applicants to have 
personnel with adequate experience and background; and (iii) explicitly 
require responses to due diligence requests, which are a key tool to 
assessing a Member's credit risk, FICC believes that those changes 
would help ensure that applicants and Members have sufficient financial 
resources and robust operational capacity to meet their obligations to 
FICC. For those reasons, FICC believes the proposed changes are 
consistent with Rule 17ad-22(e)(18)(ii) and (iii) under the Act.\44\
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

    Rule 17ad-22(e)(18)(iv)(A) 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, 
require that any direct participant of such covered clearing agency 
submit for clearance and settlement all of the eligible secondary 
market transactions to which such direct participant is a 
counterparty.\45\ The proposed rule changes would adopt a requirement 
that all Netting Members submit to FICC for clearing and settlement all 
Eligible Secondary Market Transactions to which they are a party, and 
would adopt the definition of Eligible Secondary Market Transactions 
and other related terms from the Treasury Clearing Rules in defining 
the scope of this requirement. The proposed changes to adopt this 
requirement, and related defined terms, into Rules 1 and 5 would 
directly comply, and, therefore, be consistent, with the requirements 
of Rule 17ad-22(e)(18)(iv)(A).\46\
---------------------------------------------------------------------------

    \45\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
    \46\ Id.
---------------------------------------------------------------------------

    Rule 17ad-22(e)(18)(iv)(B) 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, 
identify and monitor its direct participants' submission of 
transactions for clearing as required by Rule 17ad-22(e)(18)(iv)(A), 
including how FICC would address a failure to submit transactions in 
accordance with Rule 17ad-22(e)(18)(iv)(A).\47\ FICC is proposing to 
adopt provisions that would specify its authority to request 
information and inspect its Netting Members' books and records in 
connection with monitoring their compliance with the trade submission 
requirement. FICC is also proposing to adopt ongoing membership 
requirements that would require each Netting Member to (1) report to 
FICC if the Netting Member is not in compliance with the trade 
submission requirement; (2) deliver an annual attestation regarding its 
ongoing compliance with the trade submission requirement; (3) conduct 
an independent review of its ongoing compliance with the trade 
submission requirements on a triennial basis; and (4) submit a report 
of that review to its senior most governing body and FICC. As discussed 
above, FICC believes it is appropriate to identify and monitor Netting 
Members' submission of transactions for clearing by adopting both 
provisions that Netting Members take specific affirmative actions to 
review their compliance and affirm such compliance to FICC, and 
provisions that specify FICC's own authority to inspect and verify such 
compliance. Collectively, these provisions provide a comprehensive 
framework for identifying and monitoring compliance with the trade 
submission requirements and are consistent with the requirements of 
Rule 17ad-22(e)(18)(iv)(B).\48\
---------------------------------------------------------------------------

    \47\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
    \48\ Id.
---------------------------------------------------------------------------

    FICC is also proposing to adopt measures in Rule 5 to specify how 
FICC would address a failure to comply with the trade submission 
requirement. Under these provisions, FICC would impose a continuing 
fine and notification to the applicable Netting Members' Designated 
Examining Authority or Appropriate Regulatory Agency and to the 
Commission. FICC is also proposing to adopt a cure period of 10 
Business Days before it takes disciplinary measures if a Netting Member 
self-reports a failure to comply with the requirement. FICC believes 
these measures, including the cure period, are appropriate deterrents 
to non-compliance and are consistent with the requirements of Rule 
17ad-22(e)(18)(iv)(B).\49\
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

    Rule 17ad-22(e)(23)(ii) under the Act requires that FICC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for providing sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in FICC.\50\ As described 
above, FICC is proposing a number of clarifications and revisions to 
the Rules that do not create new rights or obligations, but are 
designed instead to improve the clarity and transparency of the Rules. 
For example, by reorganizing the sections of Rule 3, which addresses 
the ongoing membership requirements, these proposed changes create 
clearer disclosures and improve Netting

[[Page 54614]]

Members' ability to identify and evaluate the material costs they incur 
by participating in membership. Similarly, by moving all of the 
required attestations, certifications and acknowledgments that are 
required of Members on regular and ongoing basis into one section 
within Rule 3, these proposed changes make the Rules easier to read and 
understand. In this way, the proposed changes that are designed to 
clarify and conform provisions of the Rules are consistent with the 
requirements of Rule 17ad-22(e)(23)(ii).\51\
---------------------------------------------------------------------------

    \50\ 17 CFR 240.17ad-22(e)(23)(ii).
    \51\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    The proposed rule changes to adopt a trade submission requirement 
and define the scope of that requirement by adopting definitions from 
the Treasury Clearing Rules could impose a burden on competition. 
Specifically, Netting Members that are subject to the trade submission 
requirement may incur additional costs related to submitting those 
transactions to FICC for central clearing, such as applicable clearing 
fees and risk management charges. These costs could burden Netting 
Members that have lower operating margins or higher costs of capital 
than other Netting Members or market participants. However, FICC 
believes that any burden on competition would be necessary and 
appropriate in furtherance of the purposes of the Act, as permitted by 
Section 17A(b)(3)(I) of the Act.\52\
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    First, as described above, the proposed rule changes to adopt a 
trade submission requirement would be necessary in furtherance of the 
Act. By subjecting Eligible Secondary Market Transactions to the risk 
mitigation benefits of central clearing at FICC, including reducing 
overall counterparty credit risk, enhancing the efficiency of, and 
market confidence in, centralized default management at FICC if a 
Netting Member defaults, and increasing multilateral netting of these 
transactions, the proposed trade submission requirement would promote 
the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(F) of the Act.\53\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the proposed trade submission requirement that 
would be adopted in Rule 5 and the proposed scope of transactions that 
are subject to that requirement that would be adopted through the 
definition of ``Eligible Secondary Securities Transactions'' as such 
term is defined in the Exchange Act are necessary in furtherance of 
Rule 17ad-22(e)(18)(iv)(A) under the Act.\54\ The proposed measures 
that address how FICC would identify and monitor Netting Members' 
compliance with the trade submission requirement and how FICC would 
address a failure to submit transactions in compliance with the trade 
submission requirement are also necessary in furtherance of Rule 17ad-
22(e)(18)(iv)(B) under the Act.\55\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
    \55\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
---------------------------------------------------------------------------

    Second, FICC believes the proposed changes are appropriate in 
furtherance of the Act. Specifically, the proposed trade submission 
requirement would apply equally to all Netting Members, without any 
distinction between Members that are different legal entities or have 
different locations of incorporation, organizational structure or 
sizes. Under the proposed rules, which are being adopted to comply with 
the requirements of Rule 17ad-22(e)(18)(iv)(A), all Netting Members 
would be subject to the same obligation to submit Eligible Secondary 
Market Transactions to which they are a counterparty to FICC for 
clearing and settlement.\56\
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17ad-22(e)(18)(iv)(A).
---------------------------------------------------------------------------

    Similarly, the ongoing reporting requirement, Annual Trade 
Submission Attestation, Triennial Independent Trade Submission Review 
and Triennial Independent Trade Submission Report, proposed to comply 
with the requirements of Rule 17ad-22(e)(18)(iv)(B), would apply to all 
Netting Members equally, without distinction.\57\ FICC is proposing to 
provide Netting Members with some flexibility in how they conduct the 
Triennial Independent Trade Submission Review by permitting them to 
either engage an internal independent group or an external independent 
third party to conduct the review. By providing this flexibility, the 
proposed rules acknowledge that Netting Members may have different 
organizational structures and internal capabilities, but would continue 
to apply the same ongoing monitoring and attestation obligations on all 
Members. Similarly, the fines and regulatory reporting measures that 
FICC is proposing to adopt to address non-compliance with the trade 
submission requirement, would apply equally to all Netting Members. 
Finally, FICC is also proposing to adopt a cure period to incentivize 
Netting Members to self-report any non-compliance with the requirement. 
In these ways, FICC believes the proposed rule changes are appropriate 
and designed in a way to minimize the impact the proposal could have on 
competition.
---------------------------------------------------------------------------

    \57\ 17 CFR 240.17ad-22(e)(18)(iv)(B).
---------------------------------------------------------------------------

    Therefore, while the proposed rule changes may cause some burden on 
competition, FICC believes that the proposed rule changes are necessary 
and appropriate in furtherance of the purposes of the Act.
    FICC believes that some of the proposed enhancements to GSD's 
initial and ongoing membership standards under Rules 2A and 3 could 
impact competition and that impact could be a burden: (i) authorizing 
FICC, at its discretion, the option to engage external legal counsel to 
review the validity and enforceability of a Guarantor's guaranty, with 
the costs and expenses of such review being borne by the GSD applicant 
or Member; (ii) requiring an assessment of an applicant's business 
plan, by an independent third-party consultant, at the expense of the 
applicant, to assess the reasonableness and viability of the 
applicant's business plan, including its assumptions and projections; 
(iii) extending the required operating history of a GSD applicant from 
six months to one year; (iv) subjecting Members to increased fines, 
adequate assurances, or a risk management charge for failing to provide 
FICC requested information; and (v) authorizing FICC the option to 
apply an adequate assurances condition on Funds-Only Settling Bank 
Members that could limit the number of Netting Members for which the 
bank provides settlement services.
    FICC believes that requiring GSD applicants and Members to bear the 
cost of external legal counsel that FICC would have the option to 
engage to review the validity and enforceability of a Guarantor's 
guaranty could impose a burden on competition on such applicants and 
Members because they could now be required to expend financial 
resources on something that they currently may not be required to do. 
Similarly, requiring an applicant to bear the cost of an independent 
third-party consultant to assess the reasonableness and viability of 
the applicant's business plan could impose a burden on competition for 
the same reason. However, in both circumstances, FICC does not believe 
the burden would be significant because FICC does not anticipate that 
these new authorities would be exercised often, nor does FICC believe 
the costs would be ongoing or extensive in consideration of the amount 
of funds it takes to engage in the securities industry as a FICC 
participant. Moreover, FICC believes

[[Page 54615]]

that these costs are likely avoidable where the guaranty or business 
plan is sound, clear, complete, and leaves little open to question.
    FICC believes that extending the required operating history of a 
GSD applicant from six months to one year could cause a burden on 
competition because the applicant's competitive position may rest on 
its FICC membership. The significance of this potential burden would 
likely depend on the facts and circumstances of each individual 
applicant. However, FICC notes that it offers access to GSD services 
through its Sponsored Members service,\58\ that one year of operating 
history is still not a long period, and that FICC maintains the option 
to alternatively consider, at FICC's discretion, whether the applicant 
has personnel with sufficient operational and financial background and 
experience if the one-year operating history is not yet met.
---------------------------------------------------------------------------

    \58\ See Rule 3A, supra note 3.
---------------------------------------------------------------------------

    FICC believes that subjecting Members to increased fines, adequate 
assurances, or a risk management charge for failing to provide FICC 
requested information may cause a burden on competition because funds 
paid to or held by FICC means fewer financial resources available to 
the Member for, possibly, competitive engagement. However, FICC does 
not believe the burden would be significant because whether a Member is 
subject to such charges would be within the control of the Member and 
avoidable if the Member simply provides the information requested by 
FICC in a timely and complete manner.
    Finally, FICC believes that providing it the option to subject a 
Funds-Only Settling Bank Member to an adequate assurances condition 
that limits the number of Netting Members for which the bank provides 
settlement services could cause a burden on competition for that Member 
because it could limit the bank's business. However, FICC does not 
believe such burden would be significant because FICC does not 
anticipate exercising this authority often, and the circumstance in 
which such a bank would be subject to such a condition is likely within 
the control of the bank (i.e., FICC would not be exercising this 
authority but for addressing a risk presented by the bank that the bank 
could likely control).
    Regardless of their significance, FICC believes that the potential 
competitive burdens of these proposed changes are necessary and 
appropriate in furtherance of the purposes of the Act, as permitted by 
Section 17A(b)(3)(I) thereof.\59\ More specifically, FICC believes 
these proposed changes are necessary and appropriate in furtherance of 
Section 17A(b)(3)(F) of the Act \60\ and Rule 17ad-22(e)(18)(ii) and 
(iii) promulgated thereunder.\61\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78q-1(b)(3)(I).
    \60\ 15 U.S.C. 78q-1(b)(3)(F).
    \61\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------

    First, FICC believes the proposed changes that could cause a burden 
on competition discussed above (i.e., independent review of a guaranty 
at the applicant or Member's cost; independent assessment of an 
applicant's business plan at the applicant's cost; extending the 
operating history requirement to one year; increasing and adding 
charges for failure to provide complete and timely information; and 
providing the option for an adequate assurance condition that could 
limit the number of Netting Member clients at a Funds-Only Settling 
Bank) are necessary in furtherance of Section 17A(b)(3)(F) of the Act 
\62\ because they would improve FICC's ability to assess and manage 
applicants and Members, as applicable, to help ensure they can or will 
be able to meet their obligations to FICC and, to the extent Members 
are not providing FICC with needed information or certain settling bank 
Members are presenting a unique risk, the proposed changes would 
provide enhanced charges and assurances to help incentivize Members and 
protect FICC. By furthering FICC's ability to assess, manage, 
incentivize, and seek assurances of its applicants and Members, as 
applicable, the proposed changes are necessary to improve FICC's 
ability to assure the safeguarding of safeguarding of securities and 
funds which are in its custody or control or for which it is 
responsible, as required under Section 17A(b)(3)(F) of the Act, as 
cited above.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC also believes those proposed changes are necessary in 
furtherance of Rule 17ad-22(e)(18)(ii) and (iii) under the Act.\63\ As 
required by Rule 17ad-22(e)(18)(ii) and (iii), those proposed changes 
are reasonably designed to help ensure that (A) applicants and Members, 
as applicable, have sufficient financial resources and robust 
operational capacity to meet the obligations arising from participation 
in FICC, and (B) FICC has more meaningful tools to help ensure 
compliance with its Rules, all of which is in furtherance of and 
consistent with Rule 17ad-22(e)(18)(ii) and (iii) under the Act, as 
cited above.
---------------------------------------------------------------------------

    \63\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------

    Second, FICC believes those proposed changes are appropriate in 
furtherance of both Section 17A(b)(3)(F) of the Act \64\ and Rule 17ad-
22(e)(18)(ii) and (iii) \65\ promulgated thereunder because the changes 
are reasonably tailored, objective, risk-based, and agnostic in their 
application to applicants and Members, as applicable. In fact, FICC 
believes the potential burdens discussed above are, essentially, within 
the control of the applicant or Member, as applicable. For example, if 
the subject guaranty or business plan is sound, clear, complete, and 
leaves little open to question, then it is highly unlikely that the 
applicant or Member would incur the additional cost of an independent 
assessment. Similarly, if the applicant has personnel with sufficient 
operational and financial background and experience, then it may not 
need a year's worth of operating history. Finally, if the subject 
Member simply provides the information requested by FICC in a timely 
and complete manner, or the Funds-Only Settling Bank Member mitigates 
the risk at issue from its side, then the corresponding charges and 
assurances proposed would not likely be imposed. For these reasons, 
FICC believes those proposed changes are appropriate in furtherance of 
and consistent with Section 17A(b)(3)(F) of the Act and Rule 17ad-
22(e)(18)(ii) and (iii) under the Act, as each are cited above.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78q-1(b)(3)(F).
    \65\ 17 CFR 240.17ad-22(e)(18)(ii) and (iii).
---------------------------------------------------------------------------

    FICC does not believe the proposal to make technical corrections 
and other clarification changes to the Rules would impact competition. 
These changes are being proposed to ensure the clarity and accuracy of 
the Rules. They would not change FICC's current practices or affect 
Members' rights and obligations. As such, FICC believes those changes 
would not have any impact on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
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

[[Page 54616]]

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.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the 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-2024-009 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-2024-009. 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 the filing also will be available for 
inspection and copying at the principal office of FICC and on DTCC's 
website (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-2024-009 and should be submitted on or 
before July 22, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\66\
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    \66\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-14378 Filed 6-28-24; 8:45 am]
BILLING CODE 8011-01-P