[Federal Register Volume 90, Number 245 (Monday, December 29, 2025)]
[Notices]
[Pages 60791-60807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-23885]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104485; File No. SR-FICC-2025-025]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Amend and Restate the
Second Amended and Restated Cross-Margining Agreement Between FICC and
CME and Amend Related GSD Rules
December 22, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on December 12, 2025, 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.\3\ On December 19, 2025, FICC filed Partial Amendment No. 1 to
the proposed rule change to make certain changes to the narrative
description of the filing and exhibits provided by FICC.\4\ The
Commission is publishing
[[Page 60792]]
this notice to solicit comments on the proposed rule change, as
modified by Partial Amendment No. 1 (hereafter ``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.
\3\ On December 12, 2025, FICC filed this proposed rule change
as an advance notice (SR-FICC-2025-801) with the Commission pursuant
to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act entitled the Payment, Clearing,
and Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and
Rule 19b-4(n)(1)(i) under the Exchange Act, 17 CFR 240.19b-
4(n)(1)(i). A copy of the advance notice is available at
www.dtcc.com/legal/sec-rule-filings.
\4\ Partial Amendment No. 1 makes clarifications and corrections
to the narrative description of the proposed rule change and Exhibit
5A of the filing. Specifically, the Amendment corrects the narrative
description of a proposed change to the GSD Rules to accurately
reflect the change, as it appears in Exhibit 5A. The Amendment also
modifies Exhibit to correct a typographical error and mismarked rule
text as compared to the currently effective GSD Rules. These
clarifications and corrections have been incorporated, as
appropriate, into the description of the proposed rule change in
Item II below.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
FICC is proposing a rule change related to its cross-margining
arrangement (the ``Cross-Margining Arrangement'') with the Chicago
Mercantile Exchange Inc. (``CME,'' and collectively with FICC, the
``Clearing Organizations'' or ``Parties''). The proposed rule change
consists of (i) a proposed Third Amended and Restated Cross-Margining
Agreement (the ``Third A&R Agreement'') between FICC and CME, which
would replace the Second Amended and Restated Cross-Margining Agreement
between the Parties (the ``Second A&R Agreement'') in its entirety and
would be incorporated into the FICC Government Securities Division
(``GSD'') Rulebook (``GSD Rules''), and (ii) a number of related rule
changes to the GSD Rules. Together, the proposed changes would extend
the availability of the Cross-Margining Arrangement to positions
cleared and carried for customers by a dually registered broker-dealer
(``BD'') and futures commission merchant (``FCM'') that is a common
member of FICC and CME (an ``Eligible BD-FCM'').\5\
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\5\ The Commission recently approved FICC's proposed rule change
to enter into the Second Amended and Restated Cross-Margining
Agreement between FICC and CME. See Self-Regulatory Organizations;
Fixed Income Clearing Corporation; Order Approving Proposed Rule
Change to Amend and Restate the Cross-Margining Agreement between
FICC and CME, 90 FR 22538 (May 28, 2025). The Second A&R Agreement
has thus been incorporated in the GSD Rules available at
www.dtcc.com/legal/rules-and-procedures. Unless otherwise specified,
capitalized terms not defined herein shall have the meanings
ascribed to them in the GSD 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
Currently, the Cross-Margining Arrangement allows FICC and CME to
recognize for margin purposes the offsetting risk of certain positions
in futures on U.S. Treasury securities and other interest rate futures
and Treasury market transactions (``Eligible Positions'') maintained by
a member of both Clearing Organizations (a ``Joint Clearing Member'')
for itself or certain eligible affiliates (an ``Eligible Affiliate''),
or by affiliated members of CME and FICC (each, a ``Cross-Margining
Affiliate,'' and each Joint Clearing Member and each Cross-Margining
Affiliate, a ``Cross-Margining Participant''), at the two Clearing
Organizations in circumstances when the Clearing Organizations can look
to all of those positions (and all associated margin) for performance
of the Joint Clearing Member's or a pair of Cross-Margining Affiliates'
obligations (the ``Proprietary Cross-Margining Arrangement''). In
particular, the Proprietary Cross-Margining Arrangement allows the
Clearing Organizations to consider the net risk of a Joint Clearing
Member's and its Eligible Affiliates' Eligible Positions or a pair of
Cross-Margining Affiliates' Eligible Positions at FICC and CME when
setting margin requirements for such positions.\6\ Any resulting margin
reductions create capital efficiencies for the Cross-Margining
Participants and their Eligible Affiliates and incentivize them to
maintain or carry portfolios that present lower overall risk.
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\6\ See Section 4 of the Second A&R Agreement, supra note 4.
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FICC and CME have submitted to the Commission and the Commodity
Futures Trading Commission (the ``CFTC'') petitions for exemptive
relief from certain provisions of the Commodity Exchange Act (``CEA'')
and Exchange Act that would enable FICC and CME to make cross-margining
available to customers (other than an Eligible Affiliate) of an
Eligible BD-FCM (``Cross-Margining Customers'').\7\ The proposed rule
changes aim to set forth a customer cross-margining arrangement that is
consistent with the descriptions in the Petitions and the requirements
of the Proposed Orders (the ``Customer Cross-Margining Arrangement'').
The Customer Cross-Margining Arrangement would allow Cross-Margining
Customers to benefit from the margin reductions that are currently only
available to Cross-Margining Participants and their Eligible Affiliates
under the Proprietary Cross-Margining Arrangement. As a result, it
would facilitate access to clearing for indirect participants, promote
the maintenance of more balanced portfolios that present lower risk,
and enhance liquidity in, and otherwise promote the resilience and
robustness of, the Treasury market.
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\7\ See Letter from the Fixed Income Clearing Corporation and
Chicago Mercantile Exchange Inc. to Vanessa Countryman dated as of
December 11, 2025 and filed as Confidential Exhibit 3B (the ``SEC
Petition'') and Letter from the Fixed Income Clearing Corporation
and Chicago Mercantile Exchange Inc. to Christopher J. Kirkpatrick
dated as of May 14, 2025 and filed as Confidential Exhibit 3C (the
``CFTC Petition'', and collective with the SEC Petition, the
``Petitions'', and the proposed Commission and CFTC orders as
described in the Petitions, the ``Proposed Orders'').
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The Third A&R Agreement would effectuate the Customer Cross-
Margining Arrangement via the following features:
Eligibility Criteria and Participation Requirements. The
Third A&R Agreement would set out the eligibility criteria for a Joint
Clearing Member and its Cross-Margining Customer to participate in the
Customer Cross-Margining Arrangement, as well as the requirements that
would apply to such a Joint Clearing Member and its Cross-Margining
Customer. These include the requirements that:
[cir] A Joint Clearing Member be an Eligible BD-FCM;
[cir] Each Cross-Margining Customer be a ``futures customer''
within the meaning of CFTC Regulation 1.3 and a ``Sponsored Member'' or
``Executing Firm Customer'' as defined under the GSD Rules;
[cir] The Joint Clearing Member enter into a participant agreement
with the Clearing Organizations; and
[cir] The Joint Clearing Member enter into an agreement with each
Cross-Margining Customer containing certain terms, including that the
Cross-Margining Customer agrees to subordinate its claims under the
Securities Investor Protection Act of 1970 (``SIPA'') and Subchapter
III of Chapter 7 of the U.S. Bankruptcy Code in relation to its cross-
margined positions and associated margin (the ``Subordination
Agreement'').
As discussed in greater detail below, these criteria and
requirements for participation are designed to ensure that each
participating Cross-Margining Customer and its Joint Clearing Member
satisfy certain conditions set forth in the Proposed Orders.
Customer Cross-Margining Accounts. The Third A&R Agreement
would include provisions to enable Eligible BD-FCMs to establish
``Customer Cross-Margining Accounts'' for purposes of recording
Eligible
[[Page 60793]]
Positions at the Clearing Organizations (such Eligible Positions in a
Customer Cross-Margining Account, ``Customer Positions'') and set forth
a definition of ``Proprietary Cross-Margining Accounts'' to refer to
the accounts established by Eligible BD-FCMs at the Clearing
Organizations for the purposes of recording positions subject to the
Proprietary Cross-Margining Arrangement (``Proprietary Positions'').
Margin Methodology. The Third A&R Agreement would include
provisions describing the methodology for calculating potential
reductions to the margin requirements for Customer Positions. As
discussed in greater detail below, FICC is proposing to apply the same
margin reduction methodology to Customer Positions as it applies to
Proprietary Positions, with margin reductions calculated on a customer-
by-customer basis for each Cross-Margining Customer.
Default Management. The Third A&R Agreement would include
provisions to address how the Clearing Organizations would manage a
default of a Cross-Margining Participant (a ``Defaulting Member'')
carrying positions for Cross-Margining Customers. Under the Third A&R
Agreement, the Clearing Organizations would follow substantially the
same approach to handling Customer Positions carried by a Defaulting
Member as applies to Proprietary Positions. However, Customer Positions
and Proprietary Positions and associated margin would form part of
separate ``Liquidation Portfolios'' and therefore would not be netted
against one another in calculating Net Gain or Net Loss (or VM Net Gain
or VM Net Loss) under the Cross-Margining Agreement. By virtue of these
changes, the Clearing Organizations would not be able to apply Customer
Positions or associated margin to the obligations arising under a
Defaulting Member's Proprietary Positions. The Third A&R Agreement
would also include edits clarifying that the Clearing Organizations may
``port'' Customer Positions to another clearing member in a default
scenario.
In addition to replacing the Second A&R Agreement with the Third
A&R Agreement, FICC proposes the following changes to the GSD Rules to
effectuate the Customer Cross-Margining Arrangement:
Account Structure. FICC proposes to create a new Account
type, the ``Cross-Margining Customer Account,'' for purposes of
recording FICC-cleared Customer Positions.
Margin Methodology and Treatment. As discussed in greater
detail below, under the proposed changes, FICC would collect and hold
Cross-Margining Customer Margin in a substantially similar manner to
how it collects and holds ``Segregated Customer Margin'' (as defined
under the GSD Rules), with certain adjustments to ensure consistency
with the requirements of the Proposed Orders and the general
requirements and conventions applicable to futures. Consistent with how
it treats Segregated Customer Margin, FICC would credit all Cross-
Margining Customer Margin collected from an Eligible BD-FCM to a
securities account on its books and records in the name of the Eligible
BD-FCM for the benefit of its customers (a ``Cross-Margining Customer
Margin Custody Account''). FICC would also agree to treat all assets
credited to the Cross-Margining Customer Margin Custody Account as
``financial assets'' credited to a ``securities account'' for which
FICC is the ``securities intermediary,'' as such terms are used in
Article 8 of the Uniform Commercial Code as in effect in the State of
New York (``NYUCC''). This treatment is designed to ensure that Cross-
Margining Customer Margin does not form part of FICC's bankruptcy
estate and is not exposed to the claims of FICC's general creditors,
and is instead reserved for Eligible BD-FCMs claiming on behalf of
their Cross-Margining Customers. Consistent with how it holds
Segregated Customer Margin, FICC would hold Cross-Margining Customer
Margin in a segregated account at a bank insured by the Federal Deposit
Insurance Corporation and at the Federal Reserve Bank of New York (the
``FRBNY''). In accordance with the Proposed Orders, any such account
(other than one at the FRBNY) would need to be subject to a written
notice consistent with the Proposed Orders.
Conforming and Clarifying Changes. FICC proposes to make a
number of clarifying and conforming edits to the GSD Rules, including
(i) adding references to Cross-Margining Customer, Cross-Margining
Customer Margin, Cross-Margining Customer Account, and Cross-Margining
Customer Margin Requirements to relevant provisions that refer to
Indirect Participants, initial margin collected by FICC, position
accounts maintained by FICC, and FICC's initial margin requirements;
(ii) removing the existing prohibition under Section 10(e) of Rule 3A
on Sponsored Members from participating in the Cross-Margining
Arrangement; (iii) expanding Rule 43, which sets forth certain terms
related to the Proprietary Cross-Margining Arrangement, to encompass
the Customer Cross-Margining Arrangement; and (iv) removing references
to the Market Professionals cross-margining arrangement, which is no
longer offered by FICC.
The Third A&R Agreement would also include a number of clarifying
and conforming edits, including to make clear that, with respect to
both the Proprietary Cross-Margining Arrangement and Customer Cross-
Margining Arrangement, FICC and CME would only manage a default of a
Joint Clearing Member independently of one another if a joint
management or buy-out by one of the Clearing Organizations were not
legally permissible or possible or would result in substantially
greater losses to each Clearing Organization.
In addition, the Second A&R Agreement is supplemented by a Service
Level Agreement (``SLA'') between FICC and CME. FICC and CME will make
edits to the SLA as necessary to ensure conformance with the proposed
Third A&R Agreement.\8\
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\8\ The SLA is provided as confidential Exhibit 3 to this
proposed rule change.
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(i) The Proposed Third A&R Agreement
As noted above, FICC proposes to enter into the Third A&R Agreement
with CME. The proposed changes to the Second A&R Agreement contained in
the Third A&R Agreement are designed to make cross-margining available
to Cross-Margining Customers consistently with the framework set out in
the Proposed Orders. FICC believes that such amendments would promote
the maintenance of more balanced portfolios that present lower risk and
facilitate the access of indirect participants to central clearing in
accordance with Rule 17ad-22 under the Exchange Act.
A. Eligibility Criteria and Participation Requirements
a. Eligibility Criteria for Joint Clearing Members
The Third A&R Agreement would set forth the eligibility criteria
for a Cross-Margining Participant to participate in the Customer Cross-
Margining Arrangement. To facilitate compliance with the conditions and
limitations of the Proposed Orders, Section 2(a) of the Third A&R
Agreement would provide that, to become a Cross-Margining Participant
for the Customer Cross-Margining Arrangement and establish a Customer
Cross-Margining Account, a Clearing Member would need to be a Joint
Clearing Member that is both a BD registered with the Commission and an
FCM registered with the CFTC (i.e., an
[[Page 60794]]
Eligible BD-FCM).\9\ Section 3(a) of the Third A&R Agreement would
further require that the Eligible BD-FCM hold the Cross-Margining
Customer's Customer Positions at FICC and associated money, securities
and property together with such customer's Customer Positions at CME
and the associated ``futures customer funds,'' as defined in CFTC
Regulation 1.3, held by the Eligible BD-FCM, in a ``futures account,''
as defined in CFTC Regulation 1.3, ``in accordance with any conditions
set forth in the regulatory approvals of [the Third A&R Agreement]
issued by [the Commission] and CFTC and applicable law.'' \10\
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\9\ See Section 2(a) of the proposed Third A&R Agreement.
\10\ See Section 3(a) of the proposed Third A&R Agreement.
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In addition, the Eligible BD-FCM would be required to enter into a
participant agreement with FICC and CME in the form of Appendix C to
the Third A&R Agreement (the ``Customer Cross-Margining Clearing Member
Agreement''), which is further described below.\11\ The definition of
``Clearing Member Agreement'' would correspondingly be amended to
refer, with respect to the Proprietary Cross-Margining Arrangement, to
the existing participant agreement currently in Appendix A or Appendix
B of the Second A&R Agreement (the ``Proprietary Clearing Member
Agreement''), as applicable, and with respect to the Customer Cross-
Margining Arrangement, to the Customer Cross-Margining Clearing Member
Agreement.\12\
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\11\ See infra Part 3(a)(i)(G) ``Customer Cross-Margining
Clearing Member Agreement;'' Section 2(d) of the proposed Third A&R
Agreement; Appendix C ``Fixed Income Clearing Corporation/Chicago
Mercantile Exchange Inc. Cross-Margining Participant Agreement
(Common Member) [Customer Cross-Margining Program]'' of the proposed
Third A&R Agreement.
\12\ See Section 1 of the proposed Third A&R Agreement.
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As a conforming change, Sections 2(a) and (c) and the first
sentence of Section 2(a) of the Third A&R Agreement would also be
amended to provide that the pre-existing language therein applies to a
Cross-Margining Participant for the Proprietary Cross-Margining
Arrangement.\13\
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\13\ See Sections 2(a), (c) of the proposed Third A&R Agreement.
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b. Definition of Customer and Non-Customer
The Customer Cross-Margining Arrangement would only be available
for the positions carried by an Eligible BD-FCM for ``Customers.'' To
ensure compliance with the limitations under the Proposed Orders of the
types of persons eligible to be Cross-Margining Customers, the Third
A&R Agreement would define ``Customer'' as an indirect clearing
participant that meets the definition of futures customer set out in
CFTC Regulation 1.3 and is a ``Sponsored Member'' or ``Executing Firm
Customer'' as defined under the GSD Rules.\14\ CFTC Regulation 1.3
defines ``futures customer'' to mean any person who uses an FCM as an
agent in connection with trading in any futures contract, but excludes
persons whose futures positions are held in a ``proprietary account.''
\15\ Any Customer wishing to participate in the Customer Cross-
Margining Arrangement would need to enter into an agreement with its
Eligible BD-FCM that includes certain terms described in greater detail
below (the ``Customer Agreement'').\16\ Because affiliates of the
Eligible BD-FCM would generally have their CME-cleared futures
positions held in a proprietary account of the Eligible BD-FCM, such
affiliates would not constitute ``futures customers'' under CFTC
Regulation 1.3. However, Eligible Affiliates would continue to be able
to access cross-margining under the Proprietary Cross-Margining
Arrangement so long as they constitute ``Non-Customers.'' \17\ The
Third A&R Agreement would revise the definition of ``Non-Customer'' to
mean any affiliate of the Eligible BD-FCM or any person that is an
officer, director, partner or other related person of the Eligible BD-
FCM (i) that is not a ``customer'' of the Eligible BD-FCM within the
meaning of SIPA, Subchapter III of Chapter VII of the U.S. Bankruptcy
Code, or Exchange Act Rule 15c3-3, and (ii) whose CME-cleared positions
are carried in a proprietary account of the Eligible BD-FCM.\18\
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\14\ See Section 1 of the proposed Third A&R Agreement.
\15\ See CFTC Regulation 1.3, definition of ``futures customer''
(defining ``futures customer'' as ``any person who uses a futures
commission merchant, introducing broker, commodity trading advisor,
or commodity pool operator as an agent in connection with trading in
any contract for the purchase of sale of a commodity for future
delivery or any option on such contract; Provided, however, an owner
or holder of a proprietary account as defined in this section shall
not be deemed to be a futures customer within the meaning of
sections 4d(a) and 4d(b) of the [CEA], the regulations in this
chapter that implement sections 4d and 4f of the [CEA] and [CFTC
Regulation] Sec. 1.35, and such an owner or holder of such a
proprietary account shall otherwise be deemed to be a futures
customer within the meaning of the [CEA] and [CFTC Regulations]
Sec. Sec. 1.37 and 1.46 and all other sections of these rules,
regulations, and orders which do not implement sections 4d and 4f of
the [CEA].''); CFTC Regulation 1.3, definition of ``proprietary
account'' (defining ``proprietary account'' as ``futures, commodity
option, or swap trading account carried on the books and records
of'' a person or entity for such person or entity itself or certain
affiliates, as well as such account ``of which ten percent or more
is owned by. . . or an aggregate of ten percent or more of which is
owned by more than one'' such persons, entities, or affiliates).
\16\ See infra Part 3(a)(i)(H) ``Customer Agreement.''
\17\ See Section 3(b) of the proposed Third A&R Agreement
(allowing the transactions, positions and margin that are maintained
by an ``Eligible Affiliate'' to be maintained in a Cross-Margining
Account provided that certain conditions, which are not proposed to
be modified in the Third A&R Agreement, are satisfied); Self-
Regulatory Organizations; Fixed Income Clearing Corporation; Order
Approving Proposed Rule Change to Amend and Restate the Cross-
Margining Agreement between FICC and CME, 90 FR 31043 (July 11,
2025).
\18\ See Section 1 of the proposed Third A&R Agreement.
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c. Relationship Between the Clearing Organizations and Cross-Margining
Customers
Because a Cross-Margining Customer's participation in the Customer
Cross-Margining Arrangement would be intermediated through the Eligible
BD-FCM, Section 2(a) of the Third A&R Agreement would specify that the
Clearing Organizations would have no obligation to deal directly with a
Cross-Margining Customer, and that a Cross-Margining Customer would
have no right to assert a claim against a Clearing Organization with
respect to, nor would a Clearing Organization be liable to a Cross-
Margining Customer for, any obligations of a Clearing Organization in
connection with the Cross-Margining Customer's participation in the
Customer Cross-Margining Arrangement pursuant to the Third A&R
Agreement.\19\ These terms are consistent with those applicable to
Eligible Firm Customers under the GSD Rules, as well as those
applicable to customers under CME's rules.\20\
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\19\ See Section 2(a) of the proposed Third A&R Agreement.
\20\ See GSD Rules, Rule 2, Section 4; Rule 8, Section 6(c)-(e);
CME Rulebook, Rule 803.
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B. Customer Cross-Margining Account
To effectuate the Customer Cross-Margining Arrangement, the Third
A&R Agreement would include changes to enable an Eligible BD-FCM to
establish a ``Customer Cross-Margining Account'' separate from any of
its ``Proprietary Cross-Margining Accounts.''
A Customer Cross-Margining Account would be defined as, with
respect to FICC, an Indirect Participants Account (as defined in the
GSD Rules) at FICC maintained for Cross-Margining Customers and
identified in FICC's books and records as being subject to the Third
A&R Agreement (which, as discussed below, would be the ``Cross-
Margining Customer Account'' under the GSD Rules) and with respect to
[[Page 60795]]
CME, an account carried on the books and records of CME for an Eligible
BD-FCM, which contains only the positions, transactions, and margin of
that Eligible BD-FCM's Cross-Margining Customers.\21\ A Proprietary
Cross-Margining Account would be defined as, with respect to FICC, a
Proprietary Account at FICC (as defined in the GSD Rules) or an
Indirect Participants Account at FICC that is maintained for Non-
Customers and identified in FICC's books and records as being subject
to the Third A&R Agreement, and, with respect to CME, an account
carried on the books and records of CME for an Eligible BD-FCM, which
contains only the positions, transactions, and margin of the
``proprietary accounts'' (as defined in CFTC Regulation 1.3) of the
Eligible BD-FCM.\22\
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\21\ See id.
\22\ See id.
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The Third A&R Agreement would also define ``Cross-Margining
Account'' to mean either a Proprietary Cross-Margining Account or a
Customer Cross-Margining Account.\23\ An Eligible BD-FCM would be
required to designate each Cross-Margining Account it opens at the
Clearing Organizations as either a Customer Cross-Margining Account or
a Proprietary Cross-Margining Account.\24\
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\23\ See Section 1 of the proposed Third A&R Agreement.
\24\ See Section 2(a) of the proposed Third A&R Agreement.
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C. Margin Methodology
The Third A&R Agreement would also specify how potential margin
reductions would be calculated for Customer Positions carried in a
Customer Cross-Margining Account. As with Proprietary Positions, each
Clearing Organization would calculate the margin savings that would
result from viewing the ``Combined Portfolio'' of CME-cleared Customer
Positions and FICC-cleared Customer Positions as a single portfolio
rather than as separate standalone portfolios. The Clearing
Organizations would then compare the respective margin reduction
percentages, and each would then reduce the margin required for the
Combined Portfolio by the lower percentage (subject to a cap of 80%).
For Customer Positions, this process would occur on a Cross-Margining
Customer-by-Cross-Margining Customer basis. In other words, each Cross-
Margining Customer's Customer Positions would form part of a separate
Combined Portfolio. This customer-by-customer approach is consistent
both with how futures contracts are required to be margined under the
rules of the CFTC, as well as how FICC margins Segregated Indirect
Participant positions.\25\
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\25\ 17 CFR 39.13(g)(8)(i); GSD Rules, Rule 4, Section 1b(b).
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To implement this margin reduction methodology, the Third A&R
Agreement would redefine ``Combined Portfolio'' to mean, in the case of
a Pair of Cross-Margining Accounts consisting of Proprietary Cross-
Margining Accounts, all Eligible Positions in such Cross-Margining
Accounts, and in the case of a Pair of Cross-Margining Accounts
consisting of Customer Cross-Margining Accounts, all Eligible Positions
of a single Customer in such Cross-Margining Accounts.\26\ The term
``Pair of Cross-Margining Accounts,'' in turn, would be defined to mean
a Customer Cross-Margining Account at CME and a Customer Cross-
Margining Account at FICC or a Proprietary Cross-Margining Account at
CME and a Proprietary Cross-Margining Account at FICC.\27\ The Third
A&R Agreement would clarify that an Eligible BD-FCM would only be able
to establish one Pair of Cross-Margining Accounts for each type of
Indirect Participants Account offered at FICC under the GSD Rules and
that the Customer Positions of the same Cross-Margining Customer may
not be maintained in multiple Pairs of Cross-Margining Accounts of the
same Eligible BD-FCM.\28\ This limitation is aimed at ensuring that, as
is the case with futures contracts, an Eligible BD-FCM would not be
permitted to establish a separate account at the Clearing Organization
for a particular customer or group of customers.
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\26\ See Section 1 of the proposed Third A&R Agreement.
\27\ See id.
\28\ See Section 2(d) of the proposed Third A&R Agreement.
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In addition to these changes, the Third A&R Agreement would include
conforming changes in Section 4 to make clear that the margin
calculations are performed on the Combined Portfolio and to provide
that Sections 4(c) and 4(e), concerning the ability of the Clearing
Organizations to require margin equal to or in excess of the Standalone
Margin Requirement, would apply in relation to each Cross-Margining
Account.\29\ The Third A&R Agreement would also make conforming changes
to a number of defined terms by:
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\29\ See Sections 4(a), (c), and (e) of the proposed Third A&R
Agreement.
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Revising the definition of ``Cross-Margin Requirement'' to
refer to the joint amount of Margin required by FICC and CME in
connection with a Combined Portfolio as provided for in Section 4(a) of
the Third A&R Agreement;
Revising definitions of ``Margin Reduction'' and
``Variation Margin'' to clarify that these terms apply separately with
respect to Proprietary Cross-Margining Accounts and Customer Cross-
Margining Accounts;
Further revising the ``Variation Margin'' definition to
reflect that amounts may be owed by or to a Cross-Margining Customer in
relation to positions recorded in a Customer Cross-Margining Account;
Revising the definition of ``Stand-Alone Margin
Requirement'' to provide that it is determined with respect to a
particular Cross-Margining Account, and that with regard to a Stand-
Alone Margin Requirement of FICC, such requirement is calculated
without regard to any netting across positions of multiple Executing
Firm Customers in the same Agent Clearing Member Omnibus Account (as
such terms are defined in the GSD Rules);
Revising the definition of ``Margin'' to include Cross-
Margining Customer Margin securing the obligations of a Cross-Margining
Customer and to contemplate a Joint Clearing Member having multiple
Cross-Margining Accounts; and
Removing the definition of ``Cross-Margin Positions,''
which would no longer be used.\30\
---------------------------------------------------------------------------
\30\ See Section 1 of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
Section 6(b) of the Third A&R Agreement would be revised to require
FICC and CME to notify each other in the event a material problem
arises with respect to a Cross-Margining Customer in the same manner as
they are currently required to do with respect to Cross-Margining
Participants.\31\
---------------------------------------------------------------------------
\31\ See Section 6(b) of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
D. Default Management
The Third A&R Agreement would include certain adjustments to the
default management provisions to describe how the Clearing
Organizations would address a default of an Eligible BD-FCM that is
carrying Customer Positions for Cross-Margining Customers, elaborate on
the steps the Clearing Organizations may take in a joint liquidation,
and clarify when the Clearing Organizations may manage the default of a
Cross-Margining Participant independently of one another.
The Third A&R Agreement would subject Customer Positions to
substantially the same default management process as Proprietary
Positions. In particular, under Section
[[Page 60796]]
7(b) of the Third A&R Agreement, the Clearing Organizations would
attempt in good faith to jointly transfer, liquidate, or close-out the
Proprietary Positions or Customer Positions, which may include a joint
liquidating auction so that hedged positions can be closed-out
simultaneously or, in the case of a transfer of Customer Positions, so
that the positions of each Cross-Margining Customer in a Combined
Portfolio can, if feasible, be transferred to the same clearing firm.
Section 7(b) would further provide that if one Clearing Organization
determines that such joint action is not feasible or advisable for any
Liquidation Portfolio, then either Clearing Organization could buy-out
the Proprietary Positions or Customer Positions in such Liquidation
Portfolio at the other Clearing Organization in accordance with the
existing terms of the Third A&R agreement related to buy-outs. Lastly,
Section 7(b) would provide that if one Clearing Organization determines
that neither the joint transfer, liquidation, or close-out option nor
the buy-out option is legally permissible or possible as to a
particular Liquidation Portfolio, or if such methods would result in
substantially greater losses to each Clearing Organization than in the
case of a separate liquidation by each Clearing Organization, the
Clearing Organizations could conduct separate liquidations in
accordance with the existing terms related to such separate
liquidations.\32\ The Clearing Organizations do not foresee particular
circumstances that could lead to separate liquidations being
applicable. To the contrary, the Clearing Organizations believe it is
highly unlikely that they would engage in separate liquidations.
However, the Clearing Organizations believe it is prudent to have a
separate liquidation option so that there is a clear methodology in the
very unlikely event that some unforeseen circumstance causes it not to
be possible or legally permissible to conduct a joint liquidation or
buy-out or for such methods to result in substantially greater costs.
---------------------------------------------------------------------------
\32\ See Section 7(b) of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
The Third A&R Agreement would also include provisions designed to
ensure that Customer Positions and associated margin are not used by
either Clearing Organization to satisfy obligations arising from
Proprietary Positions. The principal mechanism to achieve this would be
a new concept of a ``Liquidation Portfolio,'' which would be defined
as, with respect to a Defaulting Member, all such Defaulting Member's
Proprietary Cross-Margining Account(s) or all such Defaulting Member's
Customer Cross-Margining Account(s).\33\ The definitions of
``Collateral on Hand,'' ``Net Gain,'' ``Net Loss,'' ``Cross-Margin VM
Gain,'' ``Cross-Margin VM Loss,'' ``Other VM Gain,'' ``Liquidation
Cost,'' and ``Share of the Cross-Margining Requirement,'' in turn,
would be revised so that they are separately determined by reference to
each Liquidation Portfolio, rather than to a Defaulting Member or
Cross-Margining Account.\34\ The Third A&R Agreement would also provide
for the concept of a ``Related GSD Account,'' which would be defined
as, with respect to a Liquidation Portfolio of a Defaulting Member
consisting of Proprietary Cross-Margining Accounts, the ``Proprietary
Accounts'' (as defined in the GSD Rules) of the Defaulting Member at
FICC, and with respect to a Liquidation Portfolio of a Defaulting
Member consisting of Customer Cross-Margining Accounts, the Indirect
Participant Account(s) of the Defaulting Member at FICC.\35\
---------------------------------------------------------------------------
\33\ See Section 1 of the proposed Third A&R Agreement.
\34\ Id.
\35\ Id.
---------------------------------------------------------------------------
In addition, the Third A&R Agreement would revise Sections 7(b)
through (g) to clarify that the provisions thereof would apply
separately to each Liquidation Portfolio. These changes include
replacing certain references to ``Cross-Margining Account'' with
``Liquidation Portfolio,'' \36\ additional language specifying that
provisions apply with respect to each Liquidation Portfolio,\37\ and
deletions of language providing for liquidation actions or calculations
to be performed with respect to a Defaulting Member.\38\ In addition,
as mentioned above, the definition of ``Combined Portfolio'' would be
revised to mean, in the case of a Pair of Cross-Margining Accounts
consisting of Proprietary Cross-Margining Accounts, all Eligible
Positions in such Cross-Margining Accounts, and in the case of a Pair
of Cross-Margining Accounts consisting of Customer Cross-Margining
Accounts, all Eligible Positions of a single Customer in such Cross-
Margining Accounts.\39\
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\36\ See Sections 7(c), (d), and (e) of the proposed Third A&R
Agreement.
\37\ See Sections 7(b), (c), (e), (f), and (g) of the proposed
Third A&R Agreement.
\38\ See Section 7(c) of the proposed Third A&R Agreement.
\39\ See Section 1 of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
By virtue of these changes, upon a default of a Joint Clearing
Member, the Proprietary Positions and associated margin of the Joint
Clearing Member would be closed-out and netted into a single Net Gain
or Net Loss, and the Customer Positions and associated margin would be
separately close-out and netted into a separate Net Gain or Net Loss.
As a result of these separate calculations, Customer Positions and
associated margin could not be used to satisfy obligations arising
under any Proprietary Positions. Similarly, variation margin gains in
respect of Customer Positions would not be available to address losses
on Proprietary Positions. However, the definition of ``Other VM Gains''
would be modified to make clear that, if there were Cross-Margin VM
Gains in relation to Proprietary Positions at a time when the Clearing
Organization with those Cross-Margin VM Gains also had losses on
account of Customer Positions, the VM Gains may first be applied to
satisfy the losses on the Customer Positions before being remitted to
the other Clearing Organization.\40\
---------------------------------------------------------------------------
\40\ See id.
---------------------------------------------------------------------------
Although the Clearing Organizations would generally close-out and
net the Liquidation Portfolios of a Defaulting Member separately,
Section 7(a) of the Third A&R Agreement would provide that the decision
as to whether to commence the liquidation process with respect to a
Joint Clearing Member would be made based on the Joint Clearing Member
itself, rather than a particular Liquidation Portfolio. In accordance
with this framework, Section 7(a) of the Third A&R Agreement would
provide that if one Clearing Organization decides not to take default
action against a Defaulting Member following a Default Event (the
``Non-Liquidating CO''), the Non-Liquidating CO shall immediately
require the Defaulting Member to pay the Non-Liquidating CO in
immediately available funds the sum of (x) its Margin Reduction at the
other Clearing Organization for all Combined Portfolios of the
Defaulting Member, and (y) its Margin Reduction at the Non-Liquidating
CO for all Combined Portfolios of the Defaulting Member, within one
hour of demand.\41\
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\41\ See Section 7(a) of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
E. Conforming Changes
The Third A&R Agreement would also include a number of conforming
changes in light of the addition of the Customer Cross-Margining
Arrangement. These would include new recitals which describe the
purpose of the Third A&R Agreement as to establish the Customer Cross-
Margining Arrangement, introduce defined terms
[[Page 60797]]
for the ``Proprietary Cross-Margining Arrangement'' and ``Customer
Cross-Margining Arrangement,'' and define the prior versions of the
agreement as the ``Original Agreement,'' the ``First A&R Agreement,''
and the ``Second A&R Agreement.'' They would also include non-
substantive revisions and movements of defined terms as shown in
Exhibit 5 to conform to the addition of the Customer Cross-Margining
Arrangement and the provisions described above.\42\
---------------------------------------------------------------------------
\42\ See Section 1 of the proposed Third A&R Agreement; see,
e.g., Section 3(c) of the proposed Third A&R Agreement (updating
references to ``Cross-Margining Account(s)'' to refer to
``Proprietary Cross-Margining Account(s)''); Section 7(a) of the
proposed Third A&R Agreement (updating a reference to ``Eligible
Affiliates'' to refer to ``Eligible Affiliates or Customers'').
---------------------------------------------------------------------------
The Third A&R Agreement would also revise Section 3(b), which sets
out certain requirements applicable to positions of Eligible
Affiliates, to provide that it does not apply to Proprietary Positions
of a Joint Clearing Member or to Customer Positions.\43\
---------------------------------------------------------------------------
\43\ See Section 3(b) of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
In addition, the Third A&R Agreement would revise Section 7(i) to
clarify that the requirement for a Defaulting Member to reimburse a
Clearing Organization in the event that the Clearing Organization is
obligated to make a guaranty payment to the other Clearing Organization
in respect of an obligation of such Defaulting Member applies in
respect of the obligations of any Cross-Margining Customer.\44\
---------------------------------------------------------------------------
\44\ See Section 7(i) of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
F. Clarifying Edits
The Third A&R Agreement would also include a number of clarifying
edits not specifically related to the Customer Cross-Margining
Arrangement. Specifically, Section 2(f) of the Third A&R Agreement
would specify that FICC or CME may terminate the participation of a
particular Cross-Margining Participant with respect to some or all
Cross-Margining Accounts of the Cross-Margining Participant upon two
business days' prior written notice to the other Clearing Organization,
provided that no such termination would be effective with respect to
any reimbursement obligation or guaranty with respect to such Cross-
Margining Participant that was incurred prior to such termination, or
with respect to Section 7 of the Third A&R Agreement until the Stand-
Alone Margin Requirement with respect to each Cross-Margining Account
subject to such termination has been fully satisfied.\45\
---------------------------------------------------------------------------
\45\ See Section 2(f) of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
The Third A&R Agreement would also include a new Section 5 to make
clear that, as is currently the case, the collateral acceptable to
satisfy the Cross-Margin Requirement must meet the respective
eligibility requirements of the Clearing Organization to which the
collateral is posted.\46\
---------------------------------------------------------------------------
\46\ See Recitals, Section 1, and Section 5 of the proposed
Third A&R Agreement.
---------------------------------------------------------------------------
In addition, the titles of the Proprietary Cross-Margining
Agreements in Appendix A and Appendix B of the Third A&R Agreement
would be amended to specify that they are for use in connection with
the Proprietary Cross-Margining Arrangement.\47\
---------------------------------------------------------------------------
\47\ See Appendix A ``Fixed Income Clearing Corporation/Chicago
Mercantile Exchange Inc. Cross-Margining Participant Agreement
(Common Member) [Proprietary Cross-Margining Program]'' of the
proposed Third A&R Agreement; Appendix B ``Fixed Income Clearing
Corporation/Chicago Mercantile Exchange Inc. Cross-Margining
Participant Agreement (Common Member) [Proprietary Cross-Margining
Program]'' of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
G. Customer Cross-Margining Clearing Member Agreement
As described above, an Eligible BD-FCM would be required to enter
into the Customer Cross-Margining Clearing Member Agreement in order to
participate in the Customer Cross-Margining Agreement. The Customer
Cross-Margining Clearing Member Agreement would be set forth in
Appendix C to the Third A&R Agreement.\48\
---------------------------------------------------------------------------
\48\ See Appendix C ``Fixed Income Clearing Corporation/Chicago
Mercantile Exchange Inc. Cross-Margining Participant Agreement
(Common Member) [Customer Cross-Margining Program]'' of the proposed
Third A&R Agreement.
---------------------------------------------------------------------------
The Customer Cross-Margining Clearing Member Agreement would be
modeled on the Proprietary Clearing Member Agreement in Appendix A of
the Second A&R Agreement (the ``Existing Joint Clearing Member
Proprietary Clearing Member Agreement''), with changes designed to
facilitate compliance with the conditions in the Proposed Orders and to
clarify the rights and obligations of the Clearing Organizations, the
Eligible BD-FCM, and the Cross-Margining Customers.\49\
---------------------------------------------------------------------------
\49\ See id.
---------------------------------------------------------------------------
The first three paragraphs of the Customer Cross-Margining Clearing
Member Agreement would be substantially identical to those of the
Existing Joint Clearing Member Proprietary Clearing Member Agreement,
except that the first paragraph would note that the Eligible BD-FCM is
electing to become a Cross-Margining Participant for purposes of the
Customer Cross-Margining Arrangement, rather than the Cross-Margining
Arrangement generally, and the third paragraph (concerning the Eligible
BD-FCM's payment obligations) would reference the payment obligations
arising in respect of Customer Cross-Margining Accounts.
The Customer Cross-Margining Clearing Member Agreement would
provide that the Eligible BD-FCM makes application to the Clearing
Organizations to establish a Customer Cross-Margining Account at CME
and one or more Customer Cross-Margining Accounts at FICC in the name
of the Eligible BD-FCM, and clarify that each such account would be in
addition to any Proprietary Cross-Margining Account of the Eligible BD-
FCM established pursuant to the Third A&R Agreement. The Customer
Cross-Margining Clearing Member Agreement would provide that each
Customer Cross-Margining Account shall be limited to transactions and
positions carried by the Eligible BD-FCM for Cross-Margining Customers
who have signed a Customer Agreement. The Eligible BD-FCM would be
required to agree that it shall not commence clearing transactions
through or carrying positions in a Customer Cross-Margining Account for
any Cross-Margining Customer until such Cross-Margining Customer has
executed a Customer Agreement.
The Eligible BD-FCM would be required under the Customer Cross-
Margining Clearing Member Agreement to indemnify and hold harmless the
Clearing Organizations, their respective directors, officers and
employees and each person, if any, who controls either of the Clearing
Organizations against any claims, losses, liabilities and expenses,
including, without limitation, reasonable legal fees and expenses and
amounts paid or payable in settlement of any action, proceeding or
investigation arising from any claim by any party resulting from the
carrying of positions in a Customer Cross-Margining Account that belong
to any person other than a Cross-Margining Customer for whom a Customer
Agreement is in effect.
The Customer Cross-Margining Clearing Member Agreement would
provide that the Eligible BD-FCM, as agent for each of its Cross-
Margining Customers, (i) unconditionally promises immediate payment of
any payment or reimbursement obligations to a Clearing Organization
arising under the Third
[[Page 60798]]
A&R Agreement or the GSD Rules or rules of CME in respect of a Cross-
Margining Customer's positions in a Customer Cross-Margining Account,
and (ii) agrees that each Cross-Margining Customer is bound by the GSD
Rules and the rules of CME as applicable to them and by the provisions
of the Customer Cross-Margining Clearing Member Agreement and the Third
A&R Agreement. The Eligible BD-FCM would also be required to represent
and warrant to the Clearing Organizations that it has full power and
authority to bind each of its Cross-Margining Customers to the terms in
the foregoing sentence.
The Customer Cross-Margining Clearing Member Agreement would also
provide for the Eligible BD-FCM to pledge, as security for its and its
Cross-Margining Customers' present and future payment and reimbursement
obligations to FICC and CME arising from its Customer Cross-Margining
Accounts or otherwise under the Customer Cross-Margining Clearing
Member Agreement on behalf of itself and each Cross-Margining Customer,
and grant to each Clearing Organization a first priority continuing
security interest in, lien on and right of set-off against all of the
positions, margin deposits or other property held by or subject to the
control of or owing from either Clearing Organization including any and
all Net Gains in respect of the Eligible BD-FCM's Customer Cross-
Margining Accounts and the proceeds in respect thereof.
The Eligible BD-FCM would also provide for the Eligible BD-FCM to
agree that (i) the rights of each Clearing Organization set forth in
the preceding paragraph are in addition to any other rights arising out
of the NYUCC or other statute, common law, or governmental regulation,
or under their respective rules, (ii) the Eligible BD-FCM will execute,
deliver, file and record any financing statement, specific assignment
or other document and take any other action necessary or desirable and
reasonably requested by FICC or CME to create, preserve, perfect or
validate the security interest or lien granted in this paragraph, to
enable such Clearing Organization to exercise or enforce its rights,
(iii) the Eligible BD-FCM will promptly give notice to the Clearing
Organizations of, and defend against, any suit, action, proceeding or
lien that involves or could adversely affect the security interest and
lien granted by the Eligible BD-FCM, and (iv) the Eligible BD-FCM
authorizes FICC to comply with CME's entitlement orders with respect to
any Cross-Margining Customer Margin pursuant to the Third A&R Agreement
without further consent of the Eligible BD-FCM or Cross-Margining
Customer for whom such Cross-Margining Customer Margin is held. Clauses
(i) through (iii) broadly align with the Existing Joint Clearing Member
Proprietary Clearing Member Agreement, while clause (iv) would be
designed to facilitate the perfection of CME's security interest in the
Cross-Margining Customer Margin and help ensure that Cross-Margining
Customer Margin is treated as ``customer property'' under Part 190 of
the CFTC's regulations, as described in the Petitions.
The Customer Cross-Margining Clearing Member Agreement would
contain the same provision regarding the disclosure of Clearing Data as
in the Existing Joint Clearing Member Proprietary Clearing Member
Agreement. Consistently with the Existing Joint Clearing Member
Proprietary Clearing Member Agreement, it would also provide that
neither FICC nor CME guarantees to the Eligible BD-FCM that the
calculation of the margin reduction for a Combined Portfolio pursuant
to the Third A&R Agreement will yield any, or the highest possible,
margin reduction for the Combined Portfolio. The Customer Cross-
Margining Clearing Member Agreement would also, as in the Existing
Joint Clearing Member Proprietary Clearing Member Agreement, provide
that, without limiting any provision of the GSD Rules, the rules of CME
or any other agreement between the Eligible BD-FCM and FICC or CME, any
transfer by the Eligible BD-FCM or any Cross-Margining Customer of any
rights it may have in the Net Gain (or any component thereof) shall be
null and void and, in any event, subject to the prior payment in full
of all payment and reimbursement obligations under the Third A&R
Agreement. The Customer Cross-Margining Clearing Member Agreement would
contain the same representations as the Existing Joint Clearing Member
Proprietary Clearing Member Agreement, except those concerning the
proprietary nature of the positions and Eligible Affiliates.
The Customer Cross-Margining Clearing Member Agreement would
specify that the Eligible BD-FCM may terminate the Customer Cross-
Margining Clearing Member Agreement upon two business day's written
notice to FICC and CME, and that such termination shall be effective
upon written acknowledgement by both FICC and CME provided that (i) all
positions in the Customer Cross-Margining Accounts have been closed-out
or transferred to other accounts in accordance with the GSD Rules or
the rules of CME, and (ii) all Stand-alone Margin Requirement in
respect of any such transferred positions and all obligations of the
Eligible BD-FCM to the Clearing Organizations in respect of the
Customer Cross-Margining Accounts have been fully satisfied.
The Customer Cross-Margining Clearing Member Agreement would also
specify that either Clearing Organization may terminate the Eligible
BD-FCM's participation with respect to any Customer Cross-Margining
Account (defined as an ``Affected Customer Cross-Margining Account'')
of the Eligible BD-FCM at any time upon written notice to the other
Clearing Organization pursuant to the Third A&R Agreement and to the
Eligible BD-FCM. In connection with such termination, the Clearing
Organizations would be permitted to require the Eligible BD-FCM to
close-out or transfer all positions in the Affected Customer Cross-
Margining Accounts in accordance with the GSD Rules or the rules of
CME, and the Customer Cross-Margining Clearing Member Agreement would
thereupon terminate with respect to Affected Customer Cross-Margining
Accounts, provided that the Stand-alone Margin Requirement in respect
of the transferred positions and all obligations of the Eligible BD-FCM
to the Clearing Organizations in respect of the Affected Customer
Cross-Margining Accounts have been fully satisfied.
The Customer Cross-Margining Clearing Member Agreement would also
include the same governing law, choice-of-jurisdiction, and execution
in counterparts provisions as the Existing Joint Clearing Member
Proprietary Clearing Member Agreement. The Customer Cross-Margining
Clearing Member Agreement would also provide that it would become
effective upon the later of execution of the Customer Cross-Margining
Clearing Member Agreement, or on the receipt of all necessary
regulatory approvals from the Commission and the CFTC.
H. Customer Agreement
The Customer Agreement would include the terms of the Subordination
Agreement and acknowledgements corresponding to the disclosures
required by the Proposed Orders.\50\ In particular, the Customer
Agreement would require the Cross-Margining Customer to acknowledge and
agree that:
---------------------------------------------------------------------------
\50\ See Appendix C, Exhibit I ``Customer Required Terms Annex
or Agreement'' of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
it agrees to the terms of the Subordination Agreement,
under which
[[Page 60799]]
the Cross-Margining Customer agrees that all of its Customer Positions
and Customer Property (including any margin at FICC) (i) will not
receive customer treatment under the Exchange Act or SIPA or be treated
as ``customer property'' as defined in 11 U.S.C. 741 in a liquidation
of Clearing Member, and (ii) will be subject to any applicable
protections under Subchapter IV of Chapter 7 of the U.S. Bankruptcy
Code and rules and regulations thereunder including Part 190 of the
CFTC's Regulations (``Part 190''), and that the Cross-Margining
Customer's claims to ``customer property'' as defined in SIPA or 11
U.S.C. 741 against the Eligible BD-FCM with respect to its Customer
Positions and Customer Property (including any margin held at FICC)
will be subordinated to the claims of all other customers, as the term
``customer'' is defined in 11 U.S.C. 741 or SIPA; \51\
---------------------------------------------------------------------------
\51\ See id., Section 2(b).
---------------------------------------------------------------------------
all money, securities and property deposited with the
Eligible BD-FCM by the Cross-Margining Customer to margin, guarantee or
secure Customer Positions (the ``Customer Property'') will be held in a
``futures account'' as defined in CFTC Regulation 1.3 and subject to
CEA Section 4d(a) and (b); \52\
---------------------------------------------------------------------------
\52\ See id., Section 2(a).
---------------------------------------------------------------------------
its Customer Positions and associated margin may be
commingled with the positions and property of other customers of the
Eligible BD-FCM and may be used by the Eligible BD-FCM to purchase,
margin, secure, settle, or otherwise carry positions on behalf of the
Cross-Margining Customer or other futures customers of the Eligible BD-
FCM; \53\
---------------------------------------------------------------------------
\53\ See id., Section 2(c).
---------------------------------------------------------------------------
property held in connection with Customer Positions will
be treated in a manner consistent with the CFTC Order and that such
property held on the Cross-Margining Customer's behalf by the Eligible
BD-FCM will be customer property received by an FCM to be accounted
for, treated and dealt with by such FCM in a manner consistent with
Section 4d of the CEA; \54\
---------------------------------------------------------------------------
\54\ See id.
---------------------------------------------------------------------------
in the event a Clearing Organization suspends or ceases to
act for Clearing Member, it shall be within the sole discretion of the
Clearing Organizations to determine whether to transfer, liquidate, or
settle Customer Positions in the relevant Customer Cross-Margining
Account; \55\
---------------------------------------------------------------------------
\55\ See id., Section 2(d).
---------------------------------------------------------------------------
its participation in the Customer Cross-Margining
Arrangement is subject to the terms of (i) the Third A&R Agreement,
(ii) the Customer Cross-Margining Clearing Member Agreement, and (iii)
the GSD Rules and the rules of CME; \56\ and
---------------------------------------------------------------------------
\56\ See id., Section 3.
---------------------------------------------------------------------------
if CME determines at any time that any Eligible Positions
of the Cross-Margining Customer cleared through the Customer Cross-
Margining Account at CME are non-risk reducing, CME may either restrict
the Cross-Margining Customer from adding positions or require the
Cross-Margining Customer to move or liquidate Eligible Positions in the
Customer Cross-Margining Account at CME; \57\
---------------------------------------------------------------------------
\57\ See id.
---------------------------------------------------------------------------
The Customer Agreement would also require the Cross-Margining
Customer to pledge, as security for the Cross-Margining Customer's
present and future payment and delivery obligations in respect of its
Customer Positions (including, without limitation, any obligation of
the Cross-Margining Customer to reimburse the Eligible BD-FCM as a
result of the Eligible BD-FCM's performance of such obligations), and
grant to the Eligible BD-FCM a continuing security interest in, lien on
and right of set-off against its right, entitlement, and interest in
all of positions in each Customer Cross-Margining Account, all margin
posted by the Cross-Margining Customer in connection with such
positions, and the proceeds in respect thereof.\58\ The Customer
Agreement would also require the Cross-Margining Customer to agree that
the Eligible BD-FCM may enter into agreements with the Clearing
Organizations on the Cross-Margining Customer's behalf as set forth in
the Customer Cross-Margining Clearing Member Agreement.\59\
---------------------------------------------------------------------------
\58\ See id., Section 4.
\59\ See id., Section 5.
---------------------------------------------------------------------------
(ii) Other Proposed Changes to the GSD Rules
A. Overview
FICC is proposing to make a number of changes to the GSD Rules to
effectuate the Customer Cross-Margining Arrangement.
First, FICC proposes to create a new position Account type, the
``Cross-Margining Customer Account,'' in which Customer Positions would
be recorded. The Cross-Margining Customer Account would constitute an
``Indirect Participants Account.'' A Netting Member that is an Eligible
BD-FCM and approved participant in the Customer Cross-Margining
Arrangement would be permitted to designate an Indirect Participants
Account (other than a Segregated Indirect Participants Account) as a
Cross-Margining Customer Account.\60\ Any such designation would
constitute a representation to FICC by the Netting Member that the
Netting Member has complied with all regulatory requirements applicable
to it in connection with its participation in the Customer Cross-
Margining Arrangement, including the conditions in the Proposed Orders,
and this representation would be deemed repeated each time the Netting
Member deposits Cross-Margining Customer Margin.
---------------------------------------------------------------------------
\60\ As mentioned above, the Third A&R Agreement would provide
that a Netting Member may only designate one Sponsoring Member
Omnibus Account and one Agent Clearing Member Omnibus Account as a
Cross-Margining Customer Account. See Section 2(d) of the proposed
Third A&R Agreement.
---------------------------------------------------------------------------
Second, FICC proposes to adopt rule changes to set forth how FICC
would calculate, collect, and hold margin for positions recorded in a
Cross-Margining Customer Account. As noted above, FICC proposes to
collect and hold Cross-Margining Customer Margin pursuant to
substantially similar provisions as apply to Segregated Customer
Margin, with certain modifications to satisfy the requirements of the
Proposed Orders and align with the treatment of futures margin.
Specifically:
Consistent with Segregated Customer Margin and in
accordance with the Proposed Orders, FICC would credit all Cross-
Margining Customer Margin deposited by a Netting Member to a
``securities account,'' as defined in the NYUCC,\61\ on its books and
records maintained for that Netting Member for the benefit of its
Cross-Margining Customers (i.e., a Cross-Margining Customer Margin
Custody Account). The GSD Rules would further provide that all cash and
securities credited to the Cross-Margining Customer Margin Custody
Account shall be treated as ``financial assets'' within the meaning of
Article 8 of the NYUCC, New York shall be the ``securities
intermediary's jurisdiction'' for purposes of the NYUCC and New York
law shall govern all issues specified in Article 2(1) of the Hague
Securities Convention.\62\ Such provisions are designed to ensure the
Cross-Margining Customer Margin would not form part of FICC's estate in
the event FICC became subject to insolvency proceedings. They would
also facilitate the ability of CME to perfect its security interest in
the Cross-Margining Customer Margin. Such
[[Page 60800]]
perfection would serve to protect CME, and in turn both the Cross-
Margining Customers and the non-participating futures customers in the
event of a Cross-Margining Participant default. It would also aim to
ensure that the Cross-Margining Customer Margin is treated as
``customer property'' under Part 190 in the event of an Eligible BD-
FCM's insolvency, by helping to establish that the Cross-Margining
Customer Margin is held to secure the futures positions of customers.
---------------------------------------------------------------------------
\61\ NYUCC Sec. 8-501(a).
\62\ NYUCC Sec. 8-102(9); NYUCC Sec. 8-110(e); The Convention
on the Law Applicable to Certain Rights in Respect of Securities
Held with an Intermediary, July 5, 2006, 17 U.S.T. 401, 46 I.L.M.
649 (entered into force Apr. 1, 2017).
---------------------------------------------------------------------------
In accordance with the Proposed Orders, FICC would hold
Cross-Margining Customer Margin in (i) an account of FICC at a bank
insured by the Federal Deposit Insurance Corporation (``FDIC'') that is
segregated from any other account of FICC and used exclusively to hold
Cross-Margining Customer Margin, and (ii) an account at the FRBNY that
is segregated from any other account of FICC and used exclusively to
hold Segregated Customer Margin and Cross-Margining Customer Margin.
The GSD Rules would provide that any such account (other than one at
the FRBNY) would need to be subject to a written notice consistent with
the Proposed Orders.
The same requirements applicable to Segregated Customer
Margin with respect to the form and composition of eligible collateral,
the minimum amounts of cash and Eligible Clearing Fund Treasury
Securities, substitution and withdrawal, and treatment of excess margin
would be applicable to Cross-Margining Customer Margin, except that (i)
a Netting Member's rights or FICC's obligation with respect to any
excess Cross-Margining Customer Margin would be subject to the Third
A&R Agreement and the Customer Cross-Margining Clearing Member
Agreement, and (ii) FICC would be permitted to retain the excess Cross-
Margining Customer Margin deposited by a Netting Member with respect to
a Cross-Margining Customer when the Netting Member has any outstanding
payment or margin obligation arising from any Customer Positions,
including those of another Cross-Margining Customer.
With regard to calculation, FICC proposes that, as with Segregated
Customer Margin and in accordance with the requirements of the Proposed
Orders, FICC would calculate the margin requirement in respect of each
Cross-Margining Customer Account (the ``Cross-Margining Customer Margin
Requirement'') on a gross (i.e., Cross-Margining Customer-by-Cross-
Margining Customer) basis, as though each Cross-Margining Customer were
a separate Netting Member. However, such margin requirement would be
subject to any margin reduction pursuant to the Third A&R Agreement
(which, as discussed above, would be determined using the same margin
reduction methodology under Proprietary Cross-Margining Arrangement).
Third, FICC proposes to provide that Cross-Margining Customer
Margin would be pledged to FICC to secure all obligations of the
Netting Member and its Cross-Margining Customers arising under Customer
Positions.\63\
---------------------------------------------------------------------------
\63\ We note that in this regard, unlike Segregated Customer
Margin, FICC would be able to use all Cross-Margining Customer
Margin to satisfy the obligations arising from all Customer
Positions recorded in the same Cross-margining Customer Account,
even if such Customer Positions are not the particular ones of the
individual Cross-Margining Customer that posted such margin. This
treatment would be consistent with how futures customer margin is
generally treated.
---------------------------------------------------------------------------
Fourth, FICC proposes to remove the existing Section 10(e) of Rule
3A, which currently prohibits Sponsored Members from participating in
the Cross-Margining Arrangement.
Fifth, FICC proposes to make conforming changes to Rule 43, which
sets out the terms related to Cross-Margining Arrangements, so that the
Rule encompasses the Customer Cross-Margining Arrangement. In
particular, FICC proposes to specify in Rule 43 that a Netting Member
that is an Eligible BD-FCM may become a Cross-Margining Participant in
connection with the Customer Cross-Margining Arrangement with the
consent of FICC and CME. An Eligible BD-FCM would become such a Cross-
Margining Participant and be permitted to establish a Cross-Margining
Customer Account upon acceptance by FICC and CME of an executed
Customer Cross-Margining Clearing Member Agreement. FICC further
proposes to make clear that if FICC becomes obligated to make a payment
to CME pursuant to the cross-guaranty under the Third A&R Agreement in
relation to the obligations of a Cross-Margining Customer, both the
Cross-Margining Customer and the relevant Eligible BD-FCM would be
responsible for the reimbursement obligation that is owed to FICC as a
result. If FICC receives a payment from CME pursuant to the Third A&R
Agreement in connection with the Customer Cross-Margining Arrangement,
FICC would not be permitted to apply such payment to any obligation
other than the obligations of Cross-Margining Customers (whether or not
arising in connection with any Eligible Positions).
Lastly, FICC proposes to remove provisions relating to ``Market
Professional'' and ``Market Professional Agreement for Cross-
Margining'' from the GSD Rules. Those provisions were adopted in
connection with a ``market professional'' cross-margining program
between FICC and New York Portfolio Clearing, LLC.\64\ That program--
which permitted certain ``market professional'' customers of Netting
Members to participant in cross-margining--is no longer active as New
York Portfolio Clearing, LLC has since become defunct.
---------------------------------------------------------------------------
\64\ See Self-Regulatory Organizations; Fixed Income Clearing
Corporation; Order Approving Proposed Rule Change To Expand the One-
Pot Cross-Margining Program With New York Portfolio Clearing, LLC to
Certain ``Market Professionals,'' 77 FR 30032 (May 21, 2012).
---------------------------------------------------------------------------
B. Summary of Proposed Rule Changes
To effectuate the proposed changes described above, FICC proposes
to make the following amendments to its Rules.
New Defined Terms. FICC would revise Rule 1 to add the following
new defined terms: (1) ``Cross-Margining Customer,'' (2) ``Cross-
Margining Customer Account,'' (3) ``Cross-Margining Customer Margin
Custody Account,'' (4) ``Cross-Margining Customer Margin,'' (5)
``Cross-Margining Customer Margin Requirement,'' and (6) ``Customer
Cross-Margining Arrangement.''
The term ``Cross-Margining Customer'' would mean a Sponsored Member
or Executing Firm Customer whose Transactions are recorded in a Cross-
Margining Customer Account.
The term ``Cross-Margining Customer Account'' would mean an
Indirect Participants Account maintained by FICC for a Sponsoring
Member or an Agent Clearing Member that has been designated pursuant to
Rule 2B for purposes of recording Transactions of Cross-Margining
Customers.
The term ``Cross-Margining Customer Margin Custody Account'' would
mean a securities account within the meaning of the NYUCC maintained by
FICC, in its capacity as securities intermediary as such term is used
in the NYUCC, for an Agent Clearing Member or Sponsoring Member for the
benefit of such Member's Cross-Margining Customers.
The term ``Cross-Margining Customer Margin'' would mean all
securities and funds deposited by a Sponsoring Member or an Agent
Clearing Member with FICC to satisfy its Cross-Margining Customer
Margin Requirement.
The term ``Cross-Margining Customer Margin Requirement'' would mean
the amount of cash or Eligible Clearing Fund Securities that an Agent
Clearing Member or Sponsoring Member is required to deposit with FICC
to support the obligations arising from Transactions recorded in its
Cross-
[[Page 60801]]
Margining Customer Accounts. Specifically, a Netting Member's Cross-
Margining Customer Margin Requirement would be the amount of the item
listed in Section 2(a)(vii) of Rule 4 (as described below). This
definition would specify that references to the Cross-Margining
Customer Margin Requirement ``for'' or ``with respect to'' a particular
Cross-Margining Customer Account or Cross-Margining Customer (or
similar language) would mean the portion of a Netting Member's Cross-
Margining Customer Margin Requirement arising from such Account or
Cross-Margining Customer.
The term ``Customer Cross-Margining Arrangement'' would mean a
Cross-Margining Arrangement pursuant to which a Cross-Margining
Participant, at the discretion of FICC and in accordance with the
provisions of Rule 43, may elect to have any of its Cross-Margining
Customers' margin requirement in respect of Eligible Positions at FICC
and such Cross-Margining Customer's margin requirements in respect of
Eligible Positions at a clearing organization for a board of trade
designated as a contract market under Section 5 of the CEA that has
entered into a Cross-Margining Agreement with FICC (an ``FCO'')
calculated by taking into consideration the net risk of such Eligible
Positions at each of the clearing organizations.
Revisions to Defined Terms. In addition, FICC would make conforming
revisions to the following defined terms in Rule 1: (1) ``Cross-
Margining Affiliate,'' (2) ``Cross-Margining Agreement'' (3) ``Current
Net Settlement Positions,'' (4) ``Indirect Participants Account,'' and
(5) ``Type of Account'' and ``Type.''
FICC proposes to amend the definition to ``Cross-Margining
Affiliate'' to remove existing prong (ii), which relates to the
``market professional'' cross-margining program.
FICC proposes to amend the definition to ``Cross-Margining
Agreement'' to encompass the Customer Cross-Margining Arrangement by
specifying that the applicable Cross-Margining Participant may have any
of its Cross-Margining Customers' margin requirement in respect of
Eligible Positions at FICC and such Cross-Margining Customer's margin
requirements in respect of Eligible Positions at a relevant FCO
calculated by taking into consideration the net risk of such Eligible
Positions at each of the clearing organizations. FICC also proposes to
remove the last sentence of this definition, which relates to the
``market professional'' cross-margining program.
FICC proposes to make conforming edits to the definition of
``Current Net Settlement Positions'' to add references to ``Cross-
Margining Customer,'' ``Cross-Margining Customer Account,'' and
``Cross-Margining Customer Margin Requirement'' after each reference to
``Segregated Indirect Participant,'' ``Segregated Indirect Participants
Account,'' and ``Segregated Customer Margin Requirement,''
respectively.
FICC proposes to amend the definitions of ``Indirect Participants
Account,'' ``Type of Account'' and ``Type'' to include a Cross-
Margining Customer Account.
Removal of defined terms. FICC proposes to remove the following
defined terms from Rule 1: (1) ``Market Professional'' and (2) ``Market
Professional Agreement for Cross-Margining.''
Establishment of Cross-Margining Customer Accounts. FICC proposes
to amend Section 3 of Rule 2B to provide that a Cross-Margining
Customer Account may not be designated as a Segregated Indirect
Participants Account.
In addition, FICC proposes to add a new Section 3a of Rule 2B to
provide that (i) a Netting Member that is an Eligible BD-FCM and has
been approved to become a Cross-Margining Participant in a Customer
Cross-Margining Arrangement pursuant to a Cross-Margining Agreement may
designate any of its Indirect Participants Accounts (other than a
Segregated Indirect Participants Account) as a Cross-Margining Customer
Account; (ii) any such designation of an Account shall constitute a
representation to FICC by the Netting Member that the Netting Member
has complied with all regulatory requirements applicable to it in
connection with its participation in the Customer Cross-Margining
Arrangement, including the conditions in the Proposed Orders; and (iii)
the Netting Member shall be deemed to repeat this representation each
time it deposits Cross-Margining Customer Margin.
Treatment of Cross-Margining Customer Margin. FICC proposes to make
the following changes in relation to FICC's calculation, collection,
and holding of Cross-Margining Customer Margin:
FICC proposes to amend Section 1a of Rule 4 to make clear that
FICC's account at the FRBNY that is currently used to hold Segregated
Customer Margin would also hold Cross-Margining Customer Margin.
FICC proposes to renumber current Section 1b of Rule 4 to Section
1c and add a new Section 1b. The new Section 1b would provide that:
Each Netting Member shall deposit Cross-Margining Customer
Margin with FICC in an amount equal to its Cross-Margining Customer
Margin Requirement, which requirement shall be determined in accordance
with Rule 4 and the Margin Component Schedule. The timing of the
satisfaction of the Cross-Margining Customer Margin Requirement shall
be determined in accordance with the provisions of Section 9 of Rule 4.
FICC shall establish and maintain on its books and records
a Cross-Margining Customer Margin Custody Account to which all Cross-
Margining Customer Margin deposited with FICC shall be credited. The
Cross-Margining Customer Margin credited to a Cross-Margining Customer
Margin Custody Account shall be used exclusively to secure the present
and future payment and reimbursement obligations of the Netting Member
and its Cross-Margining Customers in relation to Eligible Positions of
the Netting Member's Cross-Margining Customers at FICC and CME.
All assets credited to each Cross-Margining Customer
Margin Custody Account shall be treated as ``financial assets'' within
the meaning of Article 8 of the NYUCC. New York is the ``securities
intermediary's jurisdiction'' for purposes of the NYUCC and New York
law shall govern all issues specified in Article 2(1) of the Hague
Securities Convention.
FICC shall hold all Cross-Margining Customer Margin in an
account of FICC at an FDIC-insured bank within the meaning of the
Exchange Act that is a qualified custodian under the Investment Company
Act of 1940, as amended, or at the FRBNY. Any account at an FDIC-
insured bank shall be segregated from any other account of FICC and
shall be used exclusively to hold Cross-Margining Customer Margin, and
shall be subject to a written notice of the bank provided to and
retained by FICC consistent with the Proposed Orders. The account at
the FRBNY shall be segregated from any other account of FICC and shall
be used exclusively to hold Cross-Margining Customer Margin and
Segregated Customer Margin (the account at the FRBNY would not be
subject to a written notice).
FICC proposes to amend current Section 1b (to be renumbered as
Section 1c) of Rule 4 to (i) add references to ``Cross-Margining
Customer Accounts'' after references to ``Segregated Indirect
Participants Accounts'' in current Section 1b(a), and (ii) add a new
sentence at the end of current Section 1b(b) to provide that FICC would
[[Page 60802]]
calculate the Cross-Margining Customer Margin Requirement for a Cross-
Margining Customer Account as the sum of the requirements applicable to
each Cross-Margining Customer whose Transactions are recorded in such
Account, as though each such Cross-Margining Customer were a separate
Netting Member with a single Margin Portfolio consisting of such
Transactions, in accordance with the Margin Component Schedule.
FICC proposes to amend Section 2 of Rule 4 by (i) adding references
to ``Cross-Margining Customer Margin Requirement'' after references to
``Segregated Customer Margin Requirement'' in the title of Section 2
and Section 2(a), and (ii) adding a new clause (vii) of Section 2(a) to
specify that the Cross-Margining Customer Margin Requirement would be
an amount calculated with respect to the Netting Member's Cross-
Margining Customer Accounts.
FICC proposes to add a new Section 2c of Rule 4 entitled ``Cross-
Margining Customer Margin Requirement'' to provide that (i) each
Netting Member shall deposit any Cross-Margining Customer Margin with
FICC by the Required Fund Deposit Deadline through a separate Deposit
ID established by the Netting Member for each Cross-Margining Customer
Account, and (ii) FICC shall report the Cross-Margining Customer Margin
Requirements to each Netting Member twice daily in a Report which shall
specify the Cross-Margining Customer Margin Requirement for each Cross-
Margining Customer Account.
FICC proposes to add a new Section 3(d) of Rule 4 and insert it
before the last sentence of Section 3. The new Section 3(d) would
provide that each Cross-Margining Customer Margin Requirement for a
particular Cross-Margining Customer Account would be subject to the
requirements that (i) a minimum of 40 percent of the Cross-Margining
Customer Margin Requirement for such Account shall be satisfied with
cash and/or Eligible Clearing Fund Treasury Securities, and (ii) a
minimum of the product of $1 million and the number of Cross-Margining
Customers whose Transactions are recorded in such Cross-Margining
Account must be made and maintained in cash. In addition, FICC proposes
to amend the last sentence of Section 3 by adding a reference to
``Cross-Margining Customer Margin Requirement'' after the reference to
``Segregated Indirect Participants Requirement.''
FICC proposes to amend Section 3a of Rule 4 to add a reference to
``Cross-Margining Customers'' after the reference to ``Segregated
Indirect Participants.'' FICC also proposes to amend Section 3b of Rule
4 to add a reference to ``Cross-Margining Customer Margin Custody
Account'' after the reference to ``Segregated Customer Margin Custody
Account.''
FICC proposes to amend Sections 3a, 3b, and 9 of Rule 4 to add
references to ``Cross-Margining Customer Margin,'' after each reference
to ``Segregated Customer Margin.'' FICC also proposes to amend Sections
3b and 9 of Rule 4 to add references to ``Cross-Margining Customer
Margin Requirement,'' after each reference to ``Segregated Customer
Margin Requirement.''
FICC proposes to add a new Section 4(c) of Rule 4 to provide that
(i) as security for any and all obligations and liabilities of a
Netting Member and any of its Cross-Margining Customers to FICC arising
out of or in connection with any Cross-Margining Customer Accounts of
such Netting Member or Transactions recorded therein, each such Netting
Member on behalf of itself and its Cross-Margining Customers grants to
FICC a first priority perfected security interest in its right, title
and interest in and to all Cross-Margining Customer Margin, each Cross-
Margining Customer Margin Custody Account, and all distributions
thereon and proceeds thereof, and (ii) FICC shall be entitled to
exercise the rights of a pledgee under common law and a secured party
under Articles 8 and 9 of the NYUCC with respect to such assets.
FICC proposes to amend Section 5 of Rule 4 by (i) adding a
reference to ``Cross-Margining Customer Margin'' after the reference to
``Segregated Customer Margin'' in the title of Section 5, and (ii)
adding a new paragraph at the end of Section 5 to provide that FICC
shall only use Cross-Margining Customer Margin deposited by a Netting
Member to (A) secure the Transactions of Cross-Margining Customers of
such Netting Member recorded in any Cross-Margining Customer Account
and satisfy payment and delivery obligations owing to FICC (including
liquidating or otherwise using such Cross-Margining Customer Margin to
obtain relevant cash or securities) in connection with a default in
respect of such Transactions; and (B) for investment in U.S. Treasury
securities with a maturity of one year or less.
FICC proposes to amend Section 10 of Rule 4 by (i) adding a
reference to ``Cross-Margining Customer Margin'' after the reference to
``Segregated Customer Margin'' in the title of Section 10, (ii)
amending the first paragraph of Section 10 to require FICC to
separately determine whether the amount of Cross-Margining Customer
Margin supporting a Cross-Margining Customer's Transactions is in
excess of the Cross-Margining Customer Margin Requirement for such
Cross-Margining Customer (``Excess Cross-Margining Customer Margin''),
and (iii) adding a new Section 10(c) to provide that upon a Member's
request, and in accordance with such procedures as FICC may set forth
from time to time, the Corporation shall return to the Member its
Excess Cross-Margining Customer Margin, subject to the minimum amount
of cash or Eligible Clearing Fund Securities required to be maintained
pursuant to the GSD Rules (valued at their collateral value on the day
of such withdrawal) and the terms of the Third A&R Agreement and
Customer Cross-Margining Clearing Member Agreement, as the Member
requests, provided that, subject to the Third A&R Agreement and the
Customer Cross-Margining Clearing Member Agreement, and except to the
extent required by applicable law or authorized by the Commission, FICC
shall not retain Excess Cross-Margining Customer Margin due to any
obligations of the Member unrelated to a Cross-Margining Customer
Account of such Member. Section 10(c) of Rule 4 would further provide
that FICC may, at its discretion, retain some or all of the Excess
Cross-Margining Customer Margin if the Member has an outstanding
payment or margin obligation to the Corporation with respect to the
Transactions of any Cross-Margining Customer.
FICC proposes to amend the Margin Component Schedule to set out how
Cross-Margining Customer Margin Requirements would be determined.
Specifically, FICC proposes to insert a new paragraph at the end of
Section 1 to provide that (i) on each Business Day, each Netting Member
for which FICC maintains a Cross-Margining Customer Account shall be
required to deposit with FICC Cross-Margining Customer Margin equal to
the sum of all Cross-Margining Customer Margin Requirements for all
such Accounts, (ii) each Cross-Margining Customer Margin Requirement
shall equal the sum of the amounts calculated pursuant to Section 3a of
the Margin Component Schedule for each Cross-Margining Customer whose
Transactions are recorded in the relevant Cross-Margining Customer
Account, and (iii) each such calculation shall be performed twice daily
or on a more frequent basis if FICC deems it appropriate pursuant to
the Margin Component Schedule and subject to the provisions of Rule 4.
Further, FICC
[[Page 60803]]
proposes to add a new Section 3a to the Margin Component Schedule
titled ``Cross-Margining Customer Margin Requirement Calculations'' to
set out how specifically such requirement would be calculated, which
would be substantially identical to how Segregated Customer Margin
Requirement is calculated as set out in Section 3 of the Margin
Component Schedule. Finally, FICC proposes to amend Section 5 to add
references to ``Cross-Margining Customer,'' ``Cross-Margining Customer
Account,'' and ``Cross-Margining Customer Margin Requirement'' after
each reference to ``Segregated Indirect Participant,'' ``Segregated
Indirect Participants Account,'' and ``Segregated Customer Margin
Requirement,'' respectively.
Description of the Customer Cross-Margining Arrangement. FICC
proposes to amend Rule 43 to explicitly describe the Customer Cross-
Margining Arrangement as follows:
FICC proposes to add a new Section 2(c) of Rule 43 to provide that
(i) a Netting Member that is an Eligible BD-FCM may become a Cross-
Margining Participant in connection with the Customer Cross-Margining
Arrangement with the consent of FICC and CME, and (ii) an Eligible BD-
FCM that would become such a Cross-Margining Participant shall be
permitted to establish a Cross-Margining Customer Account upon
acceptance by FICC and CME of an executed Customer Cross-Margining
Clearing Member Agreement.
FICC proposes to amend Section 3 of Rule 43 to provide that, if
FICC becomes obligated to make a payment to CME pursuant to the cross-
guaranty under the Third A&R Agreement in relation to the obligations
of a Cross-Margining Participant, its Cross-Margining Affiliate, or its
Cross-Margining Customer, the Cross-Margining Participant (and, if FICC
becomes obligated to make such a payment in respect of the obligations
of a Cross-Margining Customer, the Cross-Margining Customer) shall
thereupon immediately be obligated, whether or not FICC has then made
payment to CME, to pay to FICC the amount of the reimbursement
obligation that is owed to FICC as a result.
FICC proposes to add a new sentence at the end of Section 5 of Rule
43 to provide that, if FICC receives a payment from CME pursuant to the
Third A&R Agreement in connection with the Customer Cross-Margining
Arrangement, FICC would not be permitted to apply such payment to any
obligation other than the obligations of Cross-Margining Customers
(whether or not arising in connection with any Eligible Positions).
Conforming and Clarifying Changes. FICC proposes to make the
following conforming or clarifying changes:
FICC proposes to amend Section 4(b)(i) of Rule 2A to make clear
that an applicant to become a Netting Member must have sufficient
financial ability to make anticipated required deposits to not only
Clearing Fund and Segregated Customer Margin, but also any Cross-
Margining Customer Margin.
FICC proposes to remove Section 10(e) of Rule 3A to remove the
current prohibition of Sponsored Members from participating in any
Cross-Margining Arrangements, and accordingly renumber current Section
10(f) of Rule 3A to Section 10(e).
FICC proposes to remove (i) the language in parentheticals in the
first sentence of Section 1 of Rule 13, (ii) the second sentence in
Section 2(b) of Rule 22A, and (iii) the portions of Sections 2(a) and
2(b) of Rule 43 that are crossed out in Exhibit 5, because those
provisions relate to the ``market professional'' cross-margining
program, which is no longer active and would not be used if the
Customer Cross-Margining Arrangement becomes available.
(iii) Implementation of the Proposal
The proposed Third A&R Agreement would not become effective and
replace the Second A&R Agreement until the latest of (i) the date on
which all necessary regulatory approvals of the proposed Third A&R
Agreement have been received by FICC and CME and (ii) a date agreed by
FICC and CME.\65\ Not later than two (2) business days following the
date of the Commission's approval of the proposed rule changes, FICC
would add a legend to the proposed Third A&R Agreement to state that
the specified changes are approved but not yet operative. The legend
would also include the file number of the approved proposed rule
change, and would state that once operative, the legend would
automatically be removed from the proposed Third A&R Agreement. FICC
would issue a notice to members providing notice of the specific
operative date at least two weeks prior to such date.
---------------------------------------------------------------------------
\65\ See Section 18(j) of the proposed Third A&R Agreement.
---------------------------------------------------------------------------
2. Statutory Basis
FICC believes that the proposed rule change is consistent with
Section 17A of the Exchange Act \66\ and the rules thereunder
applicable to FICC.
---------------------------------------------------------------------------
\66\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Exchange Act, requires, in part, that
the rules of a clearing agency be designed to assure the safeguarding
of securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\67\ FICC believes that
the proposed rule change would assure the safeguarding of securities
and funds which are in its custody or control for which it is
responsible for a number of reasons.
---------------------------------------------------------------------------
\67\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
First, the proposed Third A&R Agreement and the proposed changes to
the GSD Rules would provide for funds and securities posted by Cross-
Margining Participants in respect of Customer Positions, i.e., Cross-
Margining Customer Margin, to be credited to the Cross-Margining
Customer Margin Custody Account and treated as financial assets within
the meaning of the NYUCC. These changes would have the effect of making
FICC the ``securities intermediary'' in respect of such Cross-Margining
Customer Margin and the Eligible BD-FCM, on behalf of its Cross-
Margining Customers, the ``entitlement holder'' under the NYUCC.\68\ By
virtue of these designations, the Cross-Margining Customer Margin held
by FICC would be unavailable to satisfy the claims of FICC's general
creditors and would be reserved for the Eligible BD-FCM (on behalf of
its Cross-Margining Customers), including in an FICC insolvency.\69\
Furthermore, the proposed changes would prohibit FICC from using Cross-
Margining Customer Margin, except to satisfy the obligations arising
from Customer Positions of the Cross-Margining Participant that posted
such margin. Accordingly, it would reduce the possibility of such
margin being exposed to loss on account of not only FICC's insolvency,
but also the default of the Cross-Margining Participant or another
Netting Member. The proposed changes would thus assure the safeguarding
of the Cross-Margining Customer Margin.
---------------------------------------------------------------------------
\68\ NYUCC Sec. 8-102(7) (`` `Entitlement holder' means a
person identified in the records of a securities intermediary as the
person having a security entitlement against the securities
intermediary . . .'').
\69\ See UCC Sec. 8-503(a) (``To the extent necessary for a
securities intermediary to satisfy all security entitlements with
respect to a particular financial asset, all interests in that
financial asset held by the securities intermediary are held by the
securities intermediary for the entitlement holders, are not
property of the securities intermediary, and are not subject to
claims of creditors of the securities intermediary, except as
otherwise provided in Section 8-511''). The exceptions to the
foregoing rule in Section 8-511 only apply in the event that the
securities intermediary has pledged the financial assets underlying
the security entitlements to creditors, which would not be relevant
here. See UCC Sec. 8-511(b)-(c).
---------------------------------------------------------------------------
[[Page 60804]]
Second, the proposed changes adopting and implementing the Customer
Cross-Margining Arrangement would reduce the likelihood of FICC, each
Netting Member, and indirect participants incurring a loss on account
of a default by aligning each Cross-Margining Customer's margin
requirements with the risk of such Cross-Margining Customer's Eligible
Positions. Such alignment would serve to incentivize a Cross-Margining
Customer to maintain portfolios that present lower because such lower
risk would generally lead to lower margin requirements. Lower risk
portfolios, in turn, would serve to reduce the risk of such Cross-
Margining Customer's default and the Cross-Margining Participant's and
FICC's exposure thereto. Accordingly, by allowing a Cross-Margining
Customer to engage in cross-margining activity, the proposed changes
would serve to promote the risk-reducing effects of cross-margining
that are currently only available to Cross-Margining Participants and
their Eligible Affiliates. They would thus serve to enhance FICC's
ability to safeguard the securities and funds in its control or for
which it is responsible.
The lower margin requirements which would result from these changes
would also incentivize Cross-Margining Customers to post initial margin
in respect of their Eligible Positions, rather than rely on their
Eligible BD-FCM to do so. Currently, FICC understands that it is common
practice for Sponsoring Members and Agent Clearing Members to use their
own assets to satisfy the FICC initial margin requirements associated
with FICC-cleared positions that Eligible BD-FCMs carry for their
customers.\70\ This increases the costs to Sponsoring Members and Agent
Clearing Members of offering customer clearing services and limits
their capacity to do so. As a result of the proposed changes adopting
and implementing the Customer Cross-Margining Arrangement, a Cross-
Margining Customer's Eligible Positions at FICC would be eligible for a
margin reduction if the Cross-Margining Customer posts the initial
margin instead of requiring its Eligible BD-FCM to do so. It would thus
incentivize Cross-Margining Customers to post such margin, which would
likely result in an associated cost reduction from their Eligible BD-
FCMs. Such posting would, in turn, serve to reduce Eligible BD-FCMs'
risk to their Cross-Margining Customers and thereby promote the
safeguarding of securities and funds in FICC's control or for which it
is responsible.
---------------------------------------------------------------------------
\70\ See Treasury Market Practices Group, Consultative White
Paper: Non-Centrally Cleared Bilateral Repo and Indirect Clearing in
the U.S. Treasury Market: Focus on Margining Practices (Feb. 26,
2025).
---------------------------------------------------------------------------
The proposed changes adopting and implementing the Customer Cross-
Margining Arrangement would also promote the safeguarding of funds and
securities for which FICC is responsible by ensuring that Customer
Positions and Cross-Margining Customer Margin benefit from the customer
protection regime applicable to futures contracts and associated
margin. They would do this by requiring that Customer Positions and
Cross-Margining Customer Margin be carried by the Cross-Margining
Participant in a futures account and by satisfying the conditions
necessary under the Proposed Orders to allow the Cross-Margining
Participant to do that. Because the Customer Positions and Cross-
Margining Customer Margin would be carried in a futures account, an
Eligible BD-FCM would generally be required to safeguard Customer
Positions and Cross-Margining Customer Positions to a substantially
similar extent as is required for futures and associated margin.
Furthermore, by requiring that Customer Positions and Cross-Margining
Customer Margin be carried in a futures account and satisfying the
other conditions of the Proposed Orders, the proposed changes would
help to ensure that Customer Positions and Cross-Margining Customer
Margin constitute ``customer property'' for purposes of Part 190 and
that Cross-Margining Customer claims therefor constitute the claims of
``customers'' on account of their ``net equity'' within the meaning of
Part 190.\71\ Part 190 provides that, in the insolvency of an FCM,
``customer property'' shall be distributed to ``customers'' ratably on
the basis of their ``net equity'' claims, in priority to all other
claims (except administrative claims related to the administration of
customer property).\72\ Accordingly, by ensuring that Customer
Positions and Cross-Margining Customer Margin constitute ``customer
property'' and that Cross-Margining Customer claims therefore
constitute ``customer'' ``net equity'' claims, the proposed changes
would aim to provide Cross-Margining Customers with the same priority
right to receive distributions on their allowed claims with respect to
the Customer Positions and Cross-Margining Customer Margin as other
public customers of the insolvent Eligible BD-FCM have in respect of
their futures positions and associated margin. Accordingly, it would
promote the safeguarding of Cross-Margining Customer Margin and the
cash and securities distributed in respect of Customer Positions from
the insolvency of the Cross-Margining Participant.
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\71\ See 17 CFR 190.01; 190.08; 190.09(a)(1)(i)(A).
\72\ See 17 CFR 190.09.
---------------------------------------------------------------------------
In addition, the proposed changes would promote the safeguarding of
funds and securities for which FICC is responsible by ensuring that
customers of an Eligible BD-FCM that do not participate in cross-
margining under the Customer Cross-Margining Arrangement (as well as
Cross-Margining Customers in relation to positions and margin not
subject to the arrangement) remain entitled to the full suite of
protections under Section 15(c)(3) of the Exchange Act, Rule 15c3-3
under the Exchange Act, and SIPA. The proposed changes are designed to
ensure this protection by requiring that Cross-Margining Customers
enter into a Customer Agreement that includes the terms of the
Subordination Agreement. Pursuant to such terms, each Cross-Margining
Customer would agree that its claims to ``customer property'' as
defined in SIPA or 11 U.S.C. 741 against the Cross-Margining
Participant with respect to its Customer Positions at FICC and
associated Cross-Margining Customer Margin will be subordinated to the
claims of all other customers.\73\ Such subordination is designed to
ensure that the claims of Cross-Margining Customers in relation to
Customer Positions or Cross-Margining Customer Margin do not dilute the
claims of non-participating customers of Eligible BD-FCMs in relation
to Segregated Customer Margin (as well as any claims Cross-Margining
Customers in relation to Segregated Customer Margin) in a SIPA
proceeding. Accordingly, the Cross-Margining Arrangement would help to
ensure that such Segregated Customer Margin remains safeguarded to the
same extent as would be the case in the absence of the Customer Cross-
Margining Arrangement.
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\73\ See Appendix C, Exhibit I ``[Customer Required Terms Annex
or Agreement]'' of the proposed Third A&R Agreement.
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Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency be designed to remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions.\74\ For the reasons set out below, FICC believes that the
proposed rule change would remove impediments to and perfect the
mechanism of a national system for the prompt and
[[Page 60805]]
accurate clearance and settlement of securities transactions.
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\74\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed changes would extend the existing cross-margining
arrangement to Customer Positions, which is currently only available
for clearing members (and certain Eligible Affiliates) at FICC and CME
with respect to proprietary positions. By doing so, the proposed
changes would serve to eliminate impediments to Cross-Margining
Customers submitting transactions for central clearing. Specifically,
the proposed rule change would serve to align the margin requirements
for Customer Positions with the risk the positions present. As a
result, they would eliminate impediments to clearing that can arise
from unduly high margin requirements. Furthermore, by aligning margin
requirements with risk, the proposed changes would incentivize market
participants to submit more Treasury securities transactions eligible
to be cross-margined to be cleared at FICC. The maintenance of such
incentives to submit transactions for clearance and settlement at FICC
would promote the diversity and scope of market participants able to
utilize FICC's multilateral netting, trade guaranty and centralized
default management services. Therefore, the proposed rule change would
also serve to promote prompt and accurate clearance and settlement of
securities transactions.\75\ Accordingly, FICC believes that the
proposed rule change is designed to remove impediments to and perfect
the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions.\76\
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\75\ Id.
\76\ 15 U.S.C. 78q-1(b)(3)(F).
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Rule 17ad-22(e)(6)(i) under the Exchange Act requires that a
covered clearing agency establish a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market and, if the covered clearing agency provides central
counterparty services for U.S. Treasury securities, calculates,
collects, and holds margin amounts from a direct participant for its
proprietary positions in Treasury securities separately and
independently from margin calculated and collected from that direct
participant in connection with U.S. Treasury securities transactions by
an indirect participant that relies on the services provided by the
direct participant to access the covered clearing agency's payment,
clearing, or settlement facilities.\77\ FICC believes that the proposed
changes would ensure the satisfaction of these requirements.
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\77\ 17 CFR 240.17ad-22(e)(6)(i).
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First, the Customer Cross-Margining Arrangement would produce
margin levels commensurate with the risks and particular attributes of
the Eligible Positions. This is because FICC would calculate initial
margin requirements for Customer Positions using the same methodology
as under the Proprietary Cross-Margining Arrangement, with each Cross-
Margining Customer treated effectively as an independent Netting
Member. The Commission recently approved this methodology, finding in
particular that it satisfied the requirements of Rule 17ad-
22(e)(6).\78\
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\78\ See Order Granting Approval of Proposed Rule Change To
Amend and Restate the Cross-Margining Agreement Between FICC and
CME, Securities Exchange Act Release No. 98327 (Sept. 8, 2023), 88
FR 63185 (Sept. 14, 2023).
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Second, the proposed changes would provide that FICC-cleared
Customer Positions of a Cross-Margining Customer would be recorded in a
Cross-Margining Customer Account, which account would be a separate
Type of Account for purposes of the GSD Rules.\79\ By virtue of these
changes, the margin applicable to Customer Positions would be
calculated separately and independently of the margin for any positions
recorded in a different Type of Account, including any Proprietary
Account of the Cross-Margining Participant. In addition, the proposed
rule changes would provide for Customer Cross-Margining Margin to be
collected and held in substantially a similar manner to Segregated
Customer Margin. The Commission recently approved FICC's arrangements
for Segregated Customer Margin, finding in particular that they
``should ensure that a Netting Member's proprietary transactions are
not netted with indirect participant transactions for margin
calculations and that margin for indirect participant transactions is
collected and held separately and independently from margin for a
Netting Member's proprietary transactions.'' Accordingly, the proposed
rule change would ensure compliance with Rule 17ad-22(e)(6)(i).
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\79\ See Section 1, ``Definitions.'' of the proposed Third A&R
Agreement.
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Rule 17ad-22(e)(4)(i) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes by maintaining sufficient financial resources to
cover its credit exposure to each participant fully with a high degree
of confidence.\80\ FICC believes that the proposed changes would ensure
that FICC continues to effectively measure and manage its credit
exposure to participants by maintaining sufficient financial resources
to cover its exposure thereto with a high degree of confidence. This is
because, under the Customer Cross-Margining Arrangement, FICC would
calculate the margin requirement applicable to Customer Positions on a
gross (i.e., Cross-Margining Customer-by-Cross-Margining Customer)
basis, with margin reductions for offsetting positions calculated using
a methodology that the Commission recently approved.\81\ Examining the
similar customer-by-customer gross margining arrangements adopted by
FICC for Segregated Indirect Participants, the Commission found that
they would ``better isolate the risk profiles of individual indirect
participants from Netting Members, which should help FICC better
understand and monitor each individual participant's risk exposures.''
\82\ In addition, the proposed rule change would require each Eligible
BD-FCM for whom FICC maintains one or more Cross-Margining Customer
Account(s) to deposit to FICC cash or eligible securities to meet the
Cross-Margining Customer Margin Requirement that is calibrated to the
risks of each Cross-Margining Customer's portfolio. Such Eligible BD-
FCM would also be required to enter into a Customer Cross-Margining
Clearing Member Agreement with FICC and CME, pursuant to which the
Eligible BD-FCM would pledge to FICC, on behalf of itself and each
Cross-Margining Customer, the positions and margin subject to the
Customer Cross-Margining Arrangement at both FICC and CME. This pledge,
coupled with the cross-guarantee set forth in the Third A&R Agreement,
would ensure that FICC and CME are able to look to the full portfolio
of Customer Positions and associated margin at FICC and CME in order to
satisfy any obligations arising
[[Page 60806]]
under Customer Positions. Accordingly, the proposed changes would
ensure that FICC will have sufficient resources to rely on to cover
cross-margining exposures under the Customer Cross-Margining
Arrangement.
---------------------------------------------------------------------------
\80\ 17 CFR 240.17ad-22(e)(4)(i).
\81\ See Self-Regulatory Organizations; the Fixed Income
Clearing Corporation; Order Granting Approval of Proposed Rule
Change To Amend and Restate the Cross-Margining Agreement Between
FICC and CME, 88 FR 63185 (Sept. 15, 2023).
\82\ See Self-Regulatory Organizations; Fixed Income Clearing
Corporation; Order Approving Proposed Rule Change, as Modified by
Partial Amendment No. 1, To Modify the GSD Rules (i) Regarding the
Separate Calculation, Collection and Holding of Margin for
Proprietary Transactions and That for Indirect Participant
Transactions, and (ii) To Address the Conditions of Note H to Rule
15c3-3a, 89 FR 93763, 93776 (Nov. 27, 2024).
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Rule 17ad-22(e)(18)(iv)(C) under the Exchange Act requires, among
other things, that a covered clearing agency that provides central
counterparty services for transactions in U.S. Treasury securities
ensure that it has appropriate means to facilitate access to clearance
and settlement services of all eligible secondary market transactions
in U.S. Treasury securities, including those of indirect participants.
As described above, the proposed changes would expand the Cross-
Margining Arrangement, which currently is only available for
proprietary positions of Cross-Margining Participants and those of
their Eligible Affiliates, to Customer Positions. This expansion would
serve to facilitate access for indirect participants to FICC's
clearance and settlement services for Treasury transactions by aligning
the margin requirements applicable to such participants' positions with
the risk those positions present. Such alignment would serve to
eliminate impediments to access that can arise when there is a mismatch
between margin and risk. Furthermore, by creating an incentive for
Cross-Margining Customers to cover the margin requirements for their
own positions, the proposed rule change would serve to reduce the need
for Netting Members to use their own resources to cover such margin
obligations. As a result, it would reduce the costs and increase the
capacity of Netting Members to provide clearing services, which would
in turn allow Netting Members to increase the volume of transactions
they clear and reduce the prices at which they provide such clearing
services. Moreover, by creating significant cost savings and
efficiencies for Cross-Margining Customers that consolidate offsetting
positions into a single clearing member regardless of execution
counterparty, the proposed changes would create a natural incentive for
Netting Members to offer done-away clearing services. For such Netting
Members, carrying Treasury securities positions entered into by a
customer with other parties would provide a potential opportunity to
reduce the risk of the customer's futures positions and earn clearing
revenue without the cost of funding the customer's margin obligations,
and such clearing services could create opportunities to increase the
Netting Member's scope of customers. Therefore, the proposed changes
would facilitate access to clearance and settlement services of all
eligible secondary market transactions in U.S. Treasury securities,
including those of indirect participants.\83\
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\83\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed changes to the GSD Rules and the
Third A&R Agreement would promote competition by enabling customers of
Eligible BD-FCMs to benefit from cross-margining.
As described above, under the Existing Agreement, cross-margining
is currently only available for a Cross-Margining Participant's
proprietary positions and those of an Eligible Affiliate. Accordingly,
customers of Cross-Margining Participants are not able to benefit from
cross-margining; they must continue to have their Eligible Securities
Positions margined without regard to potential risk offsets involving
other Eligible Futures Positions. By extending availability of cross-
margining to Customer Positions, the proposed rule change would serve
to place customers of Eligible BD-FCMs on a more level playing field
with Cross-Margining Participants and Eligible Affiliates. It would
ensure that such customers have the ability to achieve similar margin
efficiencies and pursue similar trading strategies on similar terms as
Cross-Margining Participants and Eligible Affiliates. As a result, the
proposed changes would improve competitive parity in the U.S. Treasury
market between direct participants and indirect participants at FICC.
The proposed rule change would also promote competition by allowing
all customers of Eligible BD-FCMs, rather than only market
professionals or a similar subset, to access central clearing. As a
result, the propose rule change would ensure that introducing cross-
margining maintains competitive parity among customers of Eligible BD-
FCMs.
FICC believes that the proposed rule change would introduce a
burden of competition as between Eligible BD-FCMs and other Netting
Members because the Customer Cross-Margining Arrangement would only be
available for Customer Positions carried by Eligible BD-FCMs. However,
FICC believes that this burden on competition is necessary in order to
ensure that Customer Positions and associated Cross-Margining Customer
Margin are safeguarded pursuant to robust customer protections. In
particular, the dual registration of an Eligible BD-FCM as a broker-
dealer and FCM is necessary to ensure that the Customer Positions and
associated margin can be carried in a futures account under the CEA and
applicable CFTC regulations and that they benefit from the Part 190
distributional rules in the event of the clearing member's failure.
FICC has concluded that it would not be feasible to achieve similar
customer protections if Customer Positions were carried at a Netting
Member not registered as a BD and FCM. Indeed, FICC has observed that
other U.S. cross-margining arrangements involving customers similarly
require such dual registration as a condition to participation in the
arrangement.\84\
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\84\ See Order Granting Conditional Exemptions Under the
Securities Exchange Act of 1934 in Connection With the Portfolio
Margining of Cleared Swaps and Security-Based Swaps That Are Credit
Default Swaps, Securities Exchange Act Release No. 93501 (Nov. 1,
2021), 86 FR 61357 (Nov. 5, 2021); Order Granting Conditional
Exemptions Under the Securities Exchange Act of 1934 in Connection
With Portfolio Margining of Swaps and Security-Based Swaps,
Securities Exchange Act Release No. 68433 (Dec. 14, 2012), 77 FR
75211 (Dec. 19, 2012); Order, Treatment of Funds Held in Connection
with Clearing by LCH SA of Single-Name Credit Default Swaps,
Including Spun-Out Component Transactions (Nov. 1, 2021); Order,
Treatment of Funds Held in Connection with Clearing by ICE Clear
Credit of Credit Default Swaps (Jan. 14, 2013).
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In addition, the proposed rule change would promote competition by
providing market participants with greater flexibility in the methods
through which transactions in U.S. Treasury securities can be cleared.
With the introduction of the Customer Cross-Margining Arrangement,
clearing members will be able to offer a wider variety of clearing
methods to their indirect participant customers. Such indirect
participants will accordingly be able to participate in a wider variety
of clearing methods, and will be able to choose whether to clear
transactions under the Customer Cross-Margining Arrangement or whether
to clear transactions at FICC without engaging in cross-margining.
Accordingly, the proposed rule change would promote competition by
allowing Cross-Margining Customers to obtain the benefits associated
with cross-margining, ensuring that Cross-Margining Customers are not
at an undue competitive disadvantage relative to clearing members and
certain Eligible Affiliates who are currently able to access such
benefits under the Proprietary Cross-Margining Arrangement, and
providing market participants with greater flexibility in the access
models available for the clearing of transactions in U.S. treasury
securities.
[[Page 60807]]
(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 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/rules-regulations/how-submit-comment. General questions regarding the rule
filing process or logistical questions regarding this filing should be
directed to the Main Office of the Commission's Division of Trading and
Markets at [email protected] or 202-551-5777.
FICC reserves the right to not 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.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange 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-2025-025 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-2025-025. 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 filing will be available for inspection and
copying at the principal office of FICC and on DTCC's website
(www.dtcc.com/legal/sec-rule-filings). Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-FICC-2025-025 and should be submitted on or
before January 20, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\85\
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\85\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-23885 Filed 12-23-25; 8:45 am]
BILLING CODE 8011-01-P