12144 Federal Register / Vol. 76, No. 43 / Friday, March 4, 2011 / Notices 

1 15 U.S.C. 78s(b)(1). 

2Securities Exchange Act Release No. 63361 

(November 23, 2010), 75 FR 74110 (November 30, 

2010) (FICC–2010–09). In its filing with the 

Commission, FICC included statements concerning 

the purpose of and basis for the proposed rule 

change. The text of these statements are 

incorporated into the discussion of the proposed 

rule change in Section II below. 

3Letter from Jack DiMaio, Managing Director, 

Morgan Stanley (December 2, 2010); Letter from 

Douglas Engmann, President, Engmann Options, 

Inc. (December 6, 2010); Letter from Ronald Filler, 

Professor of Law and Director of the Center on 

Financial Services Law, New York Law School 

(December 8, 2010); Letter from John C. Hiatt, Chief 

Administrative Officer, Ronin Capital (December 

10, 2010); Letter from Richard D. Marshall, Ropes 

& Gray on behalf of ELX Futures, LP (December 15, 

2010); Letter from John Willian, Managing Director, 

Goldman Sachs (December 17, 2010); Letter from 

James B. Fuqua and David Kelly, Managing 

Directors, Legal, UBS Securities, LLC (December 20, 

2010); Letter from Donald J. Wilson, Jr., DRW 

Trading Group (December 21, 2010); Letter from 

John A. McCarthy, General Counsel, GETCO 

(December 21, 2010); Letter from Gary DeWaal, 

Senior Managing Director and Group General 

Counsel, Newedge USA, LLC (December 21, 2010); 

Letter from Adam C. Cooper, Senior Managing 

Director and Chief Legal Officer, Citadel, LLC 

(December 21, 2010); Letter from William H. Navin, 

Executive Vice President and General Counsel, The 

Options Clearing Corporation (December 21, 2010); 

and Letter from Joan C. Conley, Senior Vice 

President & Corporate Secretary, NASDAQ OMX 

(December 21, 2010). 

4Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011); Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation and Walt Lukken, Chief 

Executive Officer, New York Portfolio Clearing, LLC 

(February 7, 2011); Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation and Walt Lukken, Chief 

Executive Officer, New York Portfolio Clearing, LLC 

(February 27, 2011); and Letter from Alex Kogan, 

Vice President and Deputy General Counsel, 

NASDAQ OMX (January 10, 2011). 

5NYPC is jointly owned by NYSE Euronext and 

The Depository Trust & Clearing Corporation 

(‘‘DTCC’’). DTCC is the parent company of FICC. On 

January 31, 2011, the Commodity Futures Trading 

Commission (‘‘CFTC’’) approved NYPC’s registration 

as a derivatives clearing organization (‘‘DCO’’) 

pursuant to Section 5b of the Commodity Exchange 

Act and Part 39 of the Regulations of the CFTC. 

6 ‘‘FCO’’ is defined in GSD Rule 1 as a clearing 

organization for a board of trade designated as a 

contract market under Section 5 of the Commodity 

Exchange Act that has entered into a CrossMargining Agreement with FICC. 

7See GSD Rule 43, Cross-Margining 

Arrangements, Section 2. The cross-margining 

agreement between FICC and NYPC as well as the 

cross-margining participant agreements for joint 

and permitted affiliates are attached to FICC’s filing 

of proposed rule change SR–FICC–2010–09. 

8The term ‘‘Eligible Position’’ is currently defined 

in GSD’s rules as a position in certain Eligible 

Netting Securities netted by FICC, or certain 

Government securities futures contracts or interest 

rate futures contracts cleared by a FCO as identified 

in a Cross-Margining Agreement as eligible for 

cross-margining treatment. 

‘‘Eligible Netting Security’’ is defined in GSD Rule 

1 as an Eligible Security that FICC has designed as 

eligible for netting. 

‘‘Eligible Security’’ is defined generally in GSD 

Rule 1 as a security issued or guaranteed by the 

Filing Dates: The applications were 

filed on December 9, 2010, and 

amended on February 11, 2011. 

Applicants’ Address: 9920 Corporate 

Campus Drive, Suite 1000, Louisville, 

Kentucky 40223. 

For the Commission, by the Division of 

Investment Management, pursuant to 

delegated authority. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2011–4861 Filed 3–3–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[File No. 500–1] 

Advanced Optics Electronics, Inc.; 

Order of Suspension of Trading 

March 2, 2011. 

It appears to the Securities and 

Exchange Commission that there is a 

lack of current and accurate information 

concerning the securities of Advanced 

Optics Electronics, Inc. because it has 

not filed any periodic reports since the 

period ended March 31, 2007. 

The Commission is of the opinion that 

the public interest and the protection of 

investors require a suspension of trading 

in Advanced Optics Electronics, Inc. 

Therefore, it is ordered, pursuant to 

Section 12(k) of the Securities Exchange 

Act of 1934, that trading in the 

securities of the above-listed company is 

suspended for the period from 9:30 a.m. 

EST on March 2, 2011, through 11:59 

p.m. EDT on March 15, 2011. 

By the Commission. 

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2011–5038 Filed 3–2–11; 4:15 pm] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63986; File No. SR–FICC– 

2010–09] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order 

Granting Approval of a Proposed Rule 

Change To Introduce Cross-Margining 

of Certain Positions Cleared at the 

Fixed Income Clearing Corporation 

and Certain Positions Cleared at New 

York Portfolio Clearing, LLC 

February 28, 2011. 

I. Introduction 

On November 12, 2010, Fixed Income 

Clearing Corporation (‘‘FICC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) proposed 

rule change SR–FICC–2010–09 pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’ 

or ‘‘Act’’).1 Notice of the proposed rule 

change was published in the Federal 

Register on November 30, 2010.2 The 

Commission initially received thirteen 

comments to the proposed rule change.3

FICC, as well as one of the commenters, 

submitted letters responding to the 

comments.4 For the reasons discussed 

below, the Commission is granting 

approval of the proposed rule change. 

II. Description 

The proposed rule change allows 

FICC to offer cross-margining of certain 

positions cleared at its Government 

Securities Division (‘‘GSD’’) and certain 

positions cleared at New York Portfolio 

Clearing, LLC (‘‘NYPC’’).5 GSD members 

will be able to combine their positions 

at GSD with their positions at NYPC, or 

those positions of certain permitted 

affiliates cleared at NYPC, within a 

single margin portfolio (‘‘Margin 

Portfolio’’). The proposed rule change 

also makes certain other related changes 

to GSD’s rules. 

A. Cross-Margining With NYPC 

Under the proposed rule, a member of 

FICC that is also an NYPC clearing 

member (‘‘Joint Clearing Member’’) 

could in accordance with the provisions 

of the GSD and NYPC Rules, elect to 

participate in the cross-margining 

arrangement. FICC’s rules permit a GSD 

netting member that is a member (or 

that has an affiliate that is a member) of 

one or more Futures Clearing 

Organizations (‘‘FCO’’),6 such as NYPC, 

to become a cross-margining participant 

in a cross-margining arrangement 

between FICC and one or more FCOs 

with the consent of FICC and each such 

FCO. A netting member shall become a 

cross-margining participant upon 

acceptance of FICC and each applicable 

FCO of an agreement executed by such 

cross-margining participant in the form 

specified in the applicable crossmargining agreement.7

Participating in the cross-margining 

arrangement would permit a Joint 

Clearing Member to have its margin 

requirement calculated taking into 

account both its positions at FICC and 

NYPC, which should provide a clearer 

picture of its risk exposure and 

generally facilitate better risk 

assessment by FICC. Specifically, each 

Joint Clearing Member would have its 

margin requirement with respect to 

Eligible Positions (i.e., positions in 

certain securities netted by FICC or 

certain futures contracts cleared by an 

FCO) 8 in its proprietary account at 


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United States, a U.S. government agency or 

instrumentality, a U.S. government-sponsored 

corporation, or any other security approved by 

FICC’s board of directors from time to time, or one 

or more categories of such securities as represented 

by a generic CUSIP number, that FICC has listed on 

the Eligible Securities master file maintained by it 

pursuant to GSD Rule 30. 

9The term ‘‘Permitted Margin Affiliate’’ is being 

added to GSD Rule 1 and is defined as an affiliate 

of a Member that is (i) also a member of GSD, and/ 

or (ii) a member of an FCO with which FICC has 

entered into a Cross-Margining Agreement that 

provides for margining of positions between FICC 

and the FCO as if such positions were in a single 

portfolio and that directly or indirectly controls 

such particular member, or that is directly or 

indirectly controlled by or under common control 

with such particular member. Ownership of more 

than 50% of the common stock of the relevant 

entity (or equivalent equity interests in the case of 

a form of entity that does not issue common stock) 

will be conclusive evidence of prima facie control 

of such entity for purposes of this definition. 

10A ‘‘Sponsored Member’’ of GSD is any person 

that has been approved by FICC to be sponsored 

into membership by a ‘‘Sponsoring Member’’ 

pursuant to GSD Rule 3A. A ‘‘Sponsoring Member’’ 

is a member of GSD’s comparison and netting 

system whose application to become a sponsoring 

member has been approved by the FICC’s board of 

directors pursuant to GSD Rule 3A. See GSD Rule 

1, Definitions. 

11The definition of ‘‘Inter-Dealer Broker Netting 

Member,’’ as revised by the proposed rule change, 

is an inter-dealer broker admitted to membership in 

GSD’s netting system. See GSD Rule 2A, Initial 

Membership Requirements. 

12The definition of a ‘‘Dealer Netting Member,’’ as 

revised by the proposed rule change, is a registered 

government securities dealer admitted to 

membership in GSD’s netting system. See GSD Rule 

2A, Initial Membership Requirements. 13Under GSD Rule 2A, a person shall be eligible 

to apply to become a ‘‘Bank Netting Member’’ of 

GSD if it is a bank or trust company chartered as 

such under the laws of the United States, or a State 

thereof, or is a bank or trust company established 

or chartered under the laws of a non-U.S. 

jurisdiction, and participates in FICC through its 

U.S. branch or agency. A bank or trust company 

that is admitted to membership in GSD’s netting 

system, the netting system, pursuant to these Rules, 

and whose membership in the netting system has 

not been terminated, shall be a Bank Netting 

Member. See GSD Rule 2A, Initial Membership 

Requirements, Section 2. 

14See GSD Rule 4, Clearing Fund and Loss 

Allocation, Section 1a as proposed to be amended 

by the proposed rule change. 

15The term ‘‘Cross-Margining Participant’’ is 

defined in GSD Rule 1 as a Netting Member that is 

authorized by FICC to participate in the CrossMargining Arrangement between FICC and one or 

more FCOs pursuant to a Cross-Margining 

Agreement. GSD Rule 1 defines the term ‘‘CrossMargining Arrangement’’ as the arrangement 

established between FICC and one or more FCOs 

pursuant to Cross-Margining Agreements and GSD 

Rule 43. 

16The definition of ‘‘Required Fund Deposit,’’ as 

revised by the proposed rule change, is the amount 

that a Netting Member is required by a GSD rule 

to contribute to GSD’s clearing fund. See GSD Rule 

1, Definitions. 

17See, e.g., Securities Exchange Act Release No. 

44301 (May 11, 2001), 66 FR 28207 (approving a 

proposed rule change establishing cross-margining 

between FICC and CME) and Securities Exchange 

Act Release No. 27296 (September 26, 1989), 54 FR 

41195 (approving a proposed rule change 

establishing cross-margining between The Options 

Clearing Corporation and the CME). 

18The NYPC Agreement and the cross-margining 

participant agreements for Joint Members and 

Permitted Affiliates were filed with the Commission 

as part of the proposed rule change. 

19Original margin is the NYPC equivalent of the 

FICC clearing fund. 

NYPC and its margin requirement with 

respect to Eligible Positions at FICC 

calculated as a single portfolio, which 

would factor in the net risk of such 

Eligible Positions at both clearing 

organizations. In addition, an affiliate of 

a member of FICC that is also a clearing 

member of NYPC (‘‘Permitted Margin 

Affiliate’’) 9 could similarly elect to 

participate in the cross-margining 

arrangement and have its margin 

requirement with respect to Eligible 

Positions in its proprietary account at 

NYPC calculated as a single portfolio 

with the Eligible Positions of the FICC 

member. 

The proposed rule allows (i) Joint 

Clearing Members and (ii) members of 

FICC and their Permitted Margin 

Affiliates to have their margin 

requirements for positions at FICC and 

NYPC determined as a single portfolio, 

with FICC and NYPC each having a 

security interest in such members’ and 

Permitted Margin Affiliates’ margin 

deposits and other collateral to secure 

their obligations to FICC and NYPC. 

The following types of FICC members 

will not be eligible to participate in the 

cross-margining arrangement (‘‘NYPC 

Arrangement’’), in order to allow FICC to 

maintain segregation of certain business 

or member types that are treated 

differently for purposes of loss 

allocation: (i) GSD Sponsored 

Members,10 (ii) Inter-Dealer Broker 

Netting Members,11 and (iii) Dealer 

Netting Members 12 with respect to their 

segregated brokered accounts. In 

addition, in order for a Bank Netting 

Member 13 to combine its accounts into 

a Margin Portfolio with any other 

accounts, it will have to demonstrate to 

the satisfaction of FICC and NYPC that 

doing so will comply with the 

regulatory requirements applicable to 

the Bank Netting Member (e.g., by 

providing an opinion of counsel or 

otherwise outlining compliance with 

relevant statutory provisions).14

In order to distinguish the NYPC 

Arrangement from an existing crossmargining arrangement between the 

Chicago Mercantile Exchange (‘‘CME’’) 

and FICC (‘‘CME Arrangement’’), the 

proposed rule amends the definition of 

‘‘Cross-Margining Agreement’’ in the 

GSD rules to mean an agreement entered 

into between FICC and one or more 

FCOs pursuant to which a CrossMargining Participant,15 in accordance 

with the provisions of the GSD Rules 

and otherwise at the discretion of FICC, 

could elect to have its Required Fund 

Deposit 16 with respect to Eligible 

Positions at FICC, and its (or its 

Permitted Margin Affiliates’ Required 

Fund Deposit, if applicable) margin 

requirements with respect to Eligible 

Positions at such FCO(s), calculated 

either (i) by taking into consideration 

the net risk of such Eligible Positions at 

each of the clearing organizations or (ii) 

as if such positions were in a single 

portfolio. The CME Arrangement falls 

into clause (i) of the definition, whereas 

the NYPC Arrangement will fall into 

clause (ii). Conforming changes will be 

made to GSD Rule 1, Definitions, 

relating to cross-margining. GSD Rule 

43, Cross-Margining Arrangements, also 

will be amended to add provisions 

regarding single-portfolio margining 

(i.e., the proposed NYPC Arrangement). 

To implement this proposal, FICC and 

NYPC will enter into a cross-margining 

agreement (‘‘NYPC Agreement’’). The 

NYPC Agreement was filed with the 

Commission as part of proposed rule 

change SR–FICC–2010–09 and will be 

appended to the GSD Rules and made 

a part thereof. 

Pursuant to the NYPC Agreement, and 

consistent with previous approvals of 

cross-margining arrangements involving 

DCOs,17 cross-margining with certain 

NYPC positions will be limited to 

positions carried in proprietary 

accounts of clearing members of NYPC. 

Customers of NYPC clearing members 

will not be permitted to participate in 

the NYPC Arrangement, as their 

participation would require the 

resolution of additional issues 

associated with fund segregation and 

operations. Neither FICC nor NYPC 

rules require their members to 

participate in the NYPC Arrangement, 

and any such participation by FICC and 

NYPC members will be voluntary. Joint 

Clearing Members and members of FICC 

and their Permitted Margin Affiliates 

will be required to execute the requisite 

cross-margining participant 

agreements.18

FICC will be responsible for 

performing the margin calculations in 

its capacity as the Administrator under 

the terms of the NYPC Agreement. 

Specifically, FICC will determine the 

combined FICC clearing fund and NYPC 

original margin requirement for each 

participant.19 FICC will calculate those 

requirements using a Value-at-Risk 

(‘‘VaR’’) methodology, with a 99-percent 

confidence level and a 3-day liquidation 

period for cash positions and a 1-day 

liquidation period for futures positions. 

In addition, each cross-margining 

participant’s ‘‘one-pot’’ margin 

requirement will be subject to a daily 


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20Extreme value theory is used to analyze 

outcomes beyond the 99 percent confidence 

interval used for VaR and provides an assessment 

of the size of these events. 

back test, and a supplemental riskrelated charge referred to as a coverage 

component that will be applied to the 

participant in the event that the back 

test reflects insufficient coverage. The 

‘‘one-pot’’ margin requirement for each 

participant would then be allocated 

between FICC and NYPC in proportion 

to the clearing organizations’ respective 

‘‘stand-alone’’ margin requirements—in 

other words, an amount reflecting the 

ratio of what each clearing organization 

would have required from that 

participant if it was not participating in 

the cross-margining program 

(‘‘Constituent Margin Ratio’’). The NYPC 

Agreement provides that either FICC or 

NYPC can, at any time, require 

additional margin to be deposited by a 

Cross-Margining Participant above what 

is calculated under the NYPC 

Agreement based upon the financial 

condition of the participant, unusual 

market conditions, or other special 

circumstances (e.g., in the event of 

regulatory or criminal proceedings). The 

standards that FICC proposes to use for 

these purposes are the standards 

currently contained in the GSD rules, so 

that notwithstanding the calculation of 

a Cross-Margin Participant’s clearing 

fund requirement pursuant to the NYPC 

Agreement, FICC will retain its rights 

under the GSD rules to charge 

additional clearing fund contributions 

under the circumstances specified in the 

GSD rules. For example, the GSD rules 

provide that if a Dealer Netting Member 

falls below its minimum financial 

requirement, it shall be required to 

make additional clearing fund 

contributions equal to the greater of (i) 

$1 million or (ii) 25 percent of its 

Required Fund Deposit. 

FICC will utilize the same VaR 

methodology for calculating margin for 

futures and cash positions. Under this 

method, the prior 250 days of historical 

information for futures positions and 

the prior 252 days of historical 

information for cash positions, 

including prices, spreads and market 

variables such as Treasury zero-coupon 

yields and London Interbank Offered 

Rate curves, are used to simulate the 

market environments in the forthcoming 

1 day for futures positions and the 

forthcoming 3 days for cash positions. 

Projected portfolio profits and losses are 

calculated assuming these simulated 

environments will actually be realized. 

These simulations will be used to 

calculate VaR. Historical simulation is a 

continuation of the FICC margin 

methodology. 

With respect to the confidence level, 

FICC currently utilizes extreme value 

theory 20 to determine the 99th 

percentile of loss distribution. Upon 

implementation of the NYPC 

Arrangement, FICC will utilize a frontweighting mechanism to determine the 

99th percentile of loss distribution. This 

front-weighting mechanism will place 

more emphasis on more recent 

observations. Additionally, FICC’s VaR 

methodology will be enhanced to 

accommodate more securities; as a 

result, certain CUSIPs, which are now 

considered to be ‘‘non-priceable’’ 

(because, for example, of a lack of 

historical information regarding the 

security) and subject to a ‘‘haircut’’ 

requirement (i.e., fixed percentage 

charge) where offsets are not permitted, 

will be treated as ‘‘priceable’’ and 

therefore included in the core VaR 

calculation. 

Based on preliminary analyses, FICC 

expects that the FICC VaR component of 

the clearing fund requirement may be 

reduced by as much as approximately 

20 percent for common FICC–NYPC 

members as a result of the NYPC 

Arrangement. In order to help ensure 

that this reduction in clearing fund is 

appropriately correlated to more precise 

assessment of exposures associated with 

considering offsetting positions and will 

not result in increased risks to the 

clearing agency, FICC has performed 

back testing analysis to verify that there 

will be sufficient coverage after the 

FICC–NYPC cross-margining reductions 

are applied. 

In the event of the insolvency or 

default of a member that participates in 

the NYPC Arrangement, the positions in 

such participant’s ‘‘one-pot’’ portfolio, 

including, where applicable, the 

positions of its Permitted Margin 

Affiliate at NYPC, will be liquidated by 

FICC and NYPC as a single portfolio and 

the liquidation proceeds will be applied 

to the defaulting participant’s 

obligations to FICC and NYPC in 

accordance with the provisions of the 

NYPC Agreement. 

The NYPC Agreement provides for the 

sharing of losses by FICC and NYPC in 

the event that the ‘‘one-pot’’ portfolio 

margin deposits of a defaulting 

participant are not sufficient to cover 

the losses resulting from the liquidation 

of that participant’s trades and 

positions. This loss-sharing arrangement 

can be summarized as follows: 

• If either clearing organization had a 

net loss (‘‘worse-off party’’), and the 

other had a net gain (‘‘better-off party’’) 

that is equal to or exceeds the worse-off 

party’s net loss, then the better-off party 

pays the worse-off party the amount of 

the latter’s net loss. In this scenario, one 

clearing organization’s gain will 

extinguish the entire loss of the other 

clearing organization. 

• If either clearing organization had a 

net loss (‘‘worse-off party’’) and the other 

clearing organization had a net gain 

(‘‘better-off party’’) that is less than or 

equal to the worse-off party’s net loss, 

then the better-off party will pay the 

worse-off party an amount equal to the 

net gain. Thereafter, if such payment 

did not extinguish the net loss of the 

worse-off party, the better-off party will 

pay the worse-off party an amount equal 

to the lesser of: (i) The amount 

necessary to ensure that the net loss of 

each clearing organization is in 

proportion to the Constituent Margin 

Ratio or (ii) the better-off party’s 

‘‘Maximum Transfer Payment’’ less the 

better-off party’s net gain. The 

‘‘Maximum Transfer Payment’’ will be 

defined with respect to each clearing 

organization to mean an amount equal 

to the product of (i) the sum of the 

aggregate margin reductions of the 

clearing organizations and (ii) the other 

clearing organization’s Constituent 

Margin Ratio—in other words, the 

amount by which the other clearing 

organization reduced its margin 

requirements in reliance on the crossmargining arrangement. In this scenario, 

one clearing organization’s gain does 

not completely extinguish the entire 

loss of the other clearing organization, 

and the better-off party will be required 

to make an additional payment to the 

worse-off party. This potential 

additional payment will be capped as 

described in this paragraph. 

• If either clearing organization had a 

net loss, and the other had the same net 

loss, a smaller net loss, or no net loss, 

then: 

Æ In the event that the net losses of 

the clearing organizations were in 

proportion to the Constituent Margin 

Ratio, no payment will be made. 

Æ In the event that the net losses of 

the clearing organizations were not in 

proportion to the Constituent Margin 

Ratio, then the clearing organization 

that had a net loss which was less than 

its proportionate share of the total net 

losses incurred by the clearing 

organizations (‘‘better-off party’’) will 

pay the other clearing organization 

(‘‘worse-off party’’) an amount equal to 

the lesser of: (i) The better-off party’s 

Maximum Transfer Payment or (ii) the 

amount necessary to ensure that the 

clearing organizations’ respective net 

losses were allocated between them in 

proportion to the Constituent Margin 

Ratio. 


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21FICC’s predecessors, the Government Securities 

Clearing Corporation (‘‘GSCC’’) and the MBS 

Clearing Corporation (‘‘MBSCC’’), filed rule filings 

in 2001 to enter into the Cross-Guaranty Agreement 

with The Depository Trust Company, National 

Securities Clearing Corporation, Emerging Markets 

Clearing Corporation, and The Options Clearing 

Corporation. Securities Exchange Act Release No. 

45868 (May 2, 2002), 67 FR 31394. Under the 

agreement, if the assets of a defaulting member at 

one clearing agency exceed its liabilities to that 

clearing agency, those excess assets may be made 

available to satisfy the liabilities of that defaulting 

common member to another clearing agency. 

22Section 16 of the NYPC Agreement provides 

that FICC covenants and agrees that, during the 

term of the NYPC Agreement: (i) NYPC-cleared 

contracts shall have priority for margin offset 

purposes over any other cross-margining agreement; 

(ii) FICC will not enter into any other crossmargining agreement if such agreement would 

adversely affect the priority of NYPC and FICC 

under the NYPC Agreement with respect to 

available assets; and (iii) FICC will not, without the 

prior written consent of NYPC, amend the CME 

Agreement, if such further amendment would 

adversely affect NYPC’s right to cross-margin 

positions in eligible products prior to any crossmargining of CME positions with FICC-cleared 

contracts or adversely affect the priority of NYPC 

and FICC under the NYPC Agreement with respect 

to available assets. 

23See NYPC Agreement, Section 14. 

24NYPC’s rules can be viewed as part of NYPC’s 

DCO registration application on the CFTC’s Web 

site (http://.www.cftc.gov), as well as on NYPC’s 

Web site (http://www.nypclear.com). 

25See NYPC Rule 801(b)(1). 

26See NYPC Rule 801(b)(2). 

27The NYPC Agreement provides that except as 

otherwise provided in a limited purpose participant 

agreement, a limited purpose participant shall make 

a contribution to the NYPC Guaranty Fund in form 

and substance similar to and in an amount that is 

no less than the amount of the NYSE Guaranty, 

which will initially consist of a $50,000,000 

guaranty secured by $25,000,000 in cash during the 

first year of NYPC’s operations. FICC and NYPC 

have subsequently clarified and affirmatively 

represented that the limited purpose participant 

agreements will be individually negotiated and that 

‘‘the Guaranty Fund contribution that will be 

required by NYPC from any Limited Purpose 

Participant will be determined by risk-based factors 

without regard to whether such contribution 

amount is more or less than the amount contributed 

to the NYPC Guaranty Fund by NYSE Euronext.’’ 

See Letter from Michael Bodson, Executive 

Managing Director, Fixed Income Clearing 

Corporation and Walt Lukken, Chief Executive 

Officer, New York Portfolio Clearing, LLC (February 

7, 2011). See also Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation and Walt Lukken, Chief 

Executive Officer, New York Portfolio Clearing, LLC 

(February 27, 2011). 

28See NYPC Rule 801(c)(1)(i). 

29See NYPC Rule 801(c)(1)(ii). 

• If FICC had a net gain after making 

a payment as described above, FICC will 

pay to NYPC the amount of any 

deficiency in the defaulting member’s 

customer segregated funds accounts or, 

if applicable, such defaulting member’s 

Permitted Margin Affiliate held at NYPC 

up to the amount of FICC’s net gain. 

• If FICC received a payment under 

the Netting Contract and Limited CrossGuaranty (‘‘Cross-Guaranty 

Agreement’’) 21 to which it is a party 

(i.e., because FICC had a net loss), and 

NYPC had a net loss, FICC will share 

the cross-guaranty payment with NYPC 

pro rata, where such pro rata share is 

determined by comparing the ratio of 

NYPC’s net loss to the sum of FICC’s 

and NYPC’s net losses. This allocation 

is appropriate because the ‘‘one-pot’’ 

combines FICC and NYPC proprietary 

positions into a unified portfolio that 

will be margined and liquidated as a 

single unit. FICC will no longer need to 

share the cross-guaranty payments with 

NYPC once NYPC becomes a party to 

the Cross-Guaranty Agreement. 

The GSD rules will further provide 

that FICC will offset its liquidation 

results in the event of a close out of the 

positions of a Cross-Margining 

Participant in the NYPC Agreement first 

with NYPC because the liquidation will 

essentially be of a single Margin 

Portfolio and then will present its 

results for purposes of the multilateral 

Cross-Guaranty Agreement. 

B. Access to NYPC Arrangement 

FICC has represented that the NYPC 

Arrangement has been structured in a 

way that access to, and the benefits of, 

the ‘‘one-pot’’ are provided to other 

futures exchanges and DCOs on fair and 

reasonable terms as described below. 

The proposed ‘‘one-pot’’ cross-margining 

method is expected to allow members to 

post margin that should more accurately 

reflect the net risk of their aggregate 

positions across asset classes, thereby 

releasing excess capital into the 

economy for more efficient use. By 

linking positions in fixed income 

securities held at FICC with interest rate 

products traded on NYSE Liffe U.S. and 

other designated contract markets 

(‘‘DCMs’’), the NYPC Arrangement has 

the potential to create a substantial pool 

of highly correlated assets that are 

capable of being cross-margined. This 

pool will deepen as more DCOs and 

DCMs join NYPC, creating the potential 

for even greater margin and risk offsets. 

The proposed ‘‘one-pot’’ is required to 

be accessed by other futures exchanges 

and DCOs via NYPC.22 FICC stated that 

this is done to ensure the uniformity 

and consistency of risk methodologies 

and risk management, to simplify and 

standardize operational requirements 

for new participants and to maximize 

the effectiveness of the one-pot 

arrangement. 

FICC stated that NYPC will initially 

clear certain contracts transacted on 

NYSE Liffe U.S. and that NYPC will 

clear for additional DCMs that seek to 

clear through NYPC as soon as it is 

feasible for NYPC do so. Such 

additional DCMs will be treated in the 

same way as NYSE Liffe US, i.e., they 

must: (i) Be eligible under the rules of 

NYPC, (ii) contribute to NYPC’s 

guaranty fund, (iii) demonstrate that 

they have the operational and technical 

ability to clear through NYPC, and (iv) 

enter into a clearing services agreement 

with NYPC. 

Moreover, NYPC has also committed 

to admit other DCOs as limited purpose 

participants as soon as it is feasible, 

thereby allowing such DCOs to 

participate in the one-pot margining 

arrangement with FICC through their 

limited purpose membership in 

NYPC.23 Such DCOs will be required to 

satisfy pre-defined, objective criteria set 

forth in NYPC’s rules.24 In particular, 

such DCOs must: (i) Submit trades 

subject to the limited purpose 

participant agreement between NYPC 

and each DCO that would otherwise be 

cleared by the DCO to NYPC, with 

NYPC acting as central counterparty and 

DCO with respect to such trades,25 (ii) 

be eligible under the rules of NYPC and 

agree to be bound by the NYPC rules,26

(iii) contribute to NYPC’s guaranty 

fund,27 (iv) provide clearing services to 

unaffiliated markets on a ‘‘horizontal’’ 

basis (i.e., not limit their provision of 

clearing services on a vertical basis to a 

single market or limited number of 

markets),28 and (v) agree to participate 

using the uniform risk methodology and 

risk management policies, systems and 

procedures that have been adopted by 

FICC and NYPC for implementation and 

administration of the NYPC 

Arrangement.29 Reasonable clearing fees 

will be allocated between NYPC and the 

limited purpose participant DCO as may 

be agreed by NYPC and the DCO, taking 

into account factors such as the cost of 

services (including capital expenditures 

incurred by NYPC), technology that may 

be contributed by the limited purpose 

participant, the volume of transactions, 

and such other factors as may be 

relevant. 

FICC and NYPC anticipate that the 

limited purpose participant agreement 

will encompass the foregoing 

requirements for limited purpose 

membership contained in NYPC’s rules. 

Because each DCO could present 

different operational issues, terms 

beyond the basic rules provisions will 

be discussed on a case-by-case basis and 

reflected in the respective limited 

purpose participant agreement 

accordingly. FICC and NYPC envision 

that a possible structure for DCO limited 

purpose participation could be an 

omnibus account, with the DCO limited 

purpose participant essentially acting as 


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30See GSD Rule 4, Clearing Fund and Loss 

Allocation, Section 2a as proposed to be amended 

by the proposed rule change. 

31 Id. FICC shall establish procedures for 

collection of an amount calculated in respect of a 

Member’s Intraday Supplemental Fund Deposit, 

including parameters regarding threshold amounts 

that require payment, and the form and time by 

which payment is required to be made to FICC. 

a processing agent for its clearing 

members vis-a-vis NYPC with respect to 

the submission of eligible positions of 

the DCO’s clearing members to NYPC 

for purposes of inclusion in the one-pot 

arrangement with FICC. In order for 

their eligible positions to be included in 

the ‘‘one-pot,’’ clearing members of the 

DCO limited purpose participant would 

be required to authorize the DCO to 

submit their positions to NYPC. Under 

such a structure, the DCO would be 

responsible for fulfilling all margin and 

guaranty fund requirements associated 

with the activity in the omnibus 

account. 

With respect to both the clearance of 

trades for unaffiliated DCMs and the 

admission of DCOs as limited purpose 

participants, FICC has indicated that 

NYPC has committed that it will 

complete the process to allow one or 

more DCMs or DCOs to be admitted and 

integrated into the ‘‘one-pot’’ crossmargining arrangement as soon as 

feasible, but no later than 24 months 

from the start of operations. FICC has 

represented that this provision is 

necessary to the effective 

implementation of the one-pot crossmargining methodology and that this 

window of time is required to allow for 

refinement and enhancement of certain 

systems after operations commence, to 

allow time for the possible simultaneous 

integration with multiple major clearing 

members so that fair market access is 

assured, and to allow time for the 

completion of the material operational 

challenge of connecting and integrating 

NYPC with the separate technologies of 

other DCMs and/or DCOs. However, 

during this interim period, NYPC may 

engage, and FICC has represented in its 

filing to the Commission that NYPC is 

engaging, in discussions with other 

DCMs and DCOs. FICC has also 

represented in its filing that NYPC 

anticipates that it will be able to 

complete the integration of additional 

DCMs and/or DCOs in advance of this 

two-year period. 

C. Other GSD Proposed Rule Changes 

The proposed rule filing allows FICC 

to permit margining of positions held in 

accounts of an affiliate of a member 

within GSD, akin to the inter-affiliate 

margining in the CME Arrangement and 

the proposed NYPC Arrangement. Thus, 

as in those arrangements, if a GSD 

member defaults, its GSD clearing fund 

deposits, cash settlement amounts and 

other available collateral will be 

available to FICC to cover the member’s 

default, as will the GSD clearing fund 

deposits and available collateral of any 

Permitted Margin Affiliate with which it 

cross-margins. 

1. Loss Allocation 

Under the current loss allocation 

methodology in GSD Rule 4, Clearing 

Fund and Loss Allocation, GSD 

allocates losses first to the most recent 

counterparties of a defaulting member. 

The proposed changes to GSD Rule 4 

will delete this step in the loss 

allocation methodology in order to 

achieve a more even distribution of 

losses among GSD members without a 

focus on recent counterparties. 

Under the proposed rule change any 

loss allocation will be made first against 

the retained earnings of FICC 

attributable to GSD in an amount up to 

25 percent of FICC’s retained earnings 

or such higher amount as may be 

approved by the Board of Directors of 

FICC. 

If a loss still remains, GSD will divide 

the loss between the FICC Tier 1 Netting 

Members and the FICC Tier 2 Netting 

Members. The terms ‘‘Tier 1 Netting 

Member’’ and ‘‘Tier 2 Netting Member’’ 

have been introduced in the GSD Rules 

to reflect two different categories of 

membership, which have been 

designated as such by FICC for loss 

allocation purposes. Currently, only 

investment companies registered under 

the Investment Company Act of 1940, as 

amended, (which companies are subject 

to regulatory requirements restricting 

their ability to mutualize losses) will 

qualify as Tier 2 Netting Members. Tier 

2 Netting Members will only be subject 

to loss to the extent they traded with the 

defaulting members and will not be 

responsible for mutualizing losses with 

participants with which they do not 

trade, in order to account for regulatory 

requirements applicable to such 

registered investment companies. 

Tier 1 Netting Members will be 

allocated the loss applicable to them 

first by assessing the Clearing Fund 

deposit of each such member in the 

amount of up to $50,000, equally. If a 

loss remains, Tier 1 Netting Members 

will be assessed ratably in accordance 

with the respective amounts of their 

Required Fund Deposits based on the 

average daily amount of the member’s 

Required Fund Deposit over the prior 

twelve months. Consistent with the 

current GSD rules, GSD members that 

are acting as inter-dealer brokers will be 

limited to a loss allocation of $5 million 

with respect to their inter-dealer broker 

activity. 

2. Margin Calculation—Intraday Margin 

Calls 

GSD proposes to calculate Clearing 

Fund requirements twice per day. GSD 

will retain its regular calculation and 

call as set out in the GSD rules. An 

additional daily intra-day calculation 

and call (‘‘Intraday Supplemental 

Clearing Fund Deposit’’) are being added 

to GSD’s rules.30 The intra-day call will 

be subject to a threshold that will be 

identified in FICC’s risk management 

procedures.31 In addition, GSD will 

process a mark-to-market pass-through 

twice per day, instead of the current 

practice of once daily. The second 

collection and pass-through of mark-tomarket amounts will include a limited 

set of components to be defined in 

FICC’s risk management procedures. All 

mark-to-market debits will be collected 

in full. FICC will pay out mark-tomarket credits only after any intra-day 

clearing fund deficit is met. 

Since GSD will be recalculating and 

margining a GSD member’s exposure 

intra-day, the margin calculation 

methodology set forth in GSD Rule 4, 

Clearing Fund and Loss Allocation, will 

be revised to eliminate the ‘‘Margin 

Requirement Differential’’ component of 

the FICC clearing fund calculation. In 

addition, GSD Rule 4 will be revised to 

provide that in the case of a Margin 

Portfolio that contains accounts of a 

Permitted Margin Affiliate, FICC will 

apply the highest VaR confidence level 

applicable to the GSD member or the 

Permitted Margin Affiliate, in the event 

that multiple confidence levels are used 

to determine margin. Application of a 

higher VaR confidence level will result 

in a higher margin rate. Consistent with 

current GSD rules, a minimum Required 

Fund Deposit of $5 million will apply 

to a member that maintains broker 

accounts. 

3. Consolidated Funds-Only Settlement 

The funds-only settlement process at 

GSD currently requires a member to 

appoint a settling bank that will settle 

the member’s net debit or net credit 

amount due to or from GSD by way of 

the National Settlement Service of the 

Board of Governors of the Federal 

Reserve System (‘‘NSS’’). Any fundsonly settling bank that will settle for a 

member that is also an NYPC member 

or that will settle for a member and a 

Permitted Margin Affiliate that is an 

NYPC member will have its net-net 

credit or debit balances at each clearing 

corporation, other than balances with 

respect to futures positions of a 

‘‘customer’’ as such term is defined in 


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32The term ‘‘Locked-In Trade’’ means a trade 

involving Eligible Securities that is deemed a 

compared trade once the data on such trade is 

received from a single, designated source and meets 

the requirements for submission of data on a 

locked-in trade pursuant to GSD’s rules, without the 

necessity of matching the data regarding the trade 

with data provided by each member that is or is 

acting on behalf of an original counterparty to the 

trade. The data regarding a locked-in trade are 

provided to FICC by a locked-in trade source that 

has been authorized by a member that is a party to 

the trade to provide such data to FICC. 

33Securities Exchange Act Release No. 55217 

(January 31, 2007), 72 FR 5774. 

CFTC Regulation 1.3(k), aggregated and 

netted for operational convenience and 

will pay or be paid such netted amount. 

The proposed rule change makes clear 

that, notwithstanding the consolidated 

settlement, the member will remain 

obligated to GSD for the full amount of 

its funds-only settlement amount. 

4. Submission of Locked-In Trades from 

NYPC 

The current GSD rules allow for 

submission of ‘‘locked-in trades’’ (i.e., 

trades that are deemed compared when 

the data on the trade is received from a 

single source) 32 submitted by a lockedin trade source on behalf of a GSD 

member. Currently, designated lockedin trade sources are Federal Reserve 

Banks on behalf of the Treasury 

Department, Freddie Mac, and GCFAuthorized Inter-Dealer Brokers for GCF 

Repo transactions. Under the proposed 

rule change, GSD Rule 6C, Locked-In 

Comparison, will be amended to 

include NYPC as an additional lockedin trade source. This is necessary 

because there will be futures 

transactions cleared by NYPC that will 

proceed to physical delivery. NYPC will 

submit the trade data as a locked-in 

trade source for processing through 

FICC, identifying the GSD member that 

had authorized FICC to accept the 

locked-in trade from NYPC. Once these 

transactions are submitted to FICC, they 

will no longer be futures, but rather will 

be in the form of buys or sells eligible 

for processing by GSD. As will be the 

case with other locked-in trade 

submissions accepted by FICC, the GSD 

member designated in the trade 

information must have executed 

appropriate documentation evidencing 

to FICC its authorization of NYPC. 

5. Deletion of the Category 1/Category 2 

Distinction 

The proposed rule change will delete 

the legacy characterization of certain 

types of members as either ‘‘Category 1’’ 

or ‘‘Category 2,’’ a distinction that 

currently applies to ‘‘Dealer Netting 

Members,’’ ‘‘Futures Commission 

Merchant Netting Members’’ and ‘‘InterDealer Broker Netting Members’’ at GSD. 

Historically, the two categories were 

used to margin lower capitalized 

members (i.e., Category 2) at a higher 

rate. Following FICC’s adoption of the 

VaR methodology for GSD in 2006,33

FICC has determined that the 

distinction between Category 1 and 

Category 2 members is no longer 

necessary. Rather than margin netting 

members at higher rates solely due to a 

single static capitalization threshold, 

FICC is able, by use of the VaR margin 

methodology, to margin netting 

members at a higher rate by applying a 

higher confidence level against any 

netting member, which, regardless of 

size, FICC has determined poses a 

higher risk. 

With the deletion of the Category 1/ 

Category 2 distinction, Section 1 of GSD 

Rule 13, Funds-Only Settlement, is 

proposed to be changed to provide that 

all netting members could receive 

forward mark adjustment payments, 

subject to FICC’s general discretion to 

withhold credits that would be 

otherwise due to a distressed netting 

member. 

6. Amendment of CME Agreement 

The proposed NYPC Arrangement 

will necessitate an amendment to the 

CME Agreement to clarify that the 

NYPC Arrangement will take priority 

over the CME Arrangement when 

determining residual FICC positions 

that will be available for crossmargining with the CME. As a result, 

only those FICC positions that are not 

able to be cross-margined with NYPC 

positions under the NYPC Arrangement 

will generally be considered for crossmargining with the CME. In addition, 

when calculating and presenting 

liquidation results under the CME 

Agreement, the amendment will provide 

that FICC’s liquidation results will 

include FICC’s liquidation results in 

combination with NYPC’s liquidation 

results because the NYPC Agreement 

will provide for a right of first offset 

between FICC and NYPC. The CME 

Agreement showing the proposed 

changes was filed as an attachment to 

the proposed rule change as part of 

Exhibit 5. 

D. Summary of Other Proposed Changes 

to Rule Text 

In GSD Rule 1, Definitions, the 

following definitions are proposed to be 

added, revised or deleted: 

The terms ‘‘Broker Account’’ and 

‘‘Dealer Account’’ will be added to the 

text of the GSD Rules. A ‘‘Broker 

Account’’ is an account that is 

maintained by an inter-dealer broker 

netting member, or a segregated broker 

account of a netting member that is not 

an inter-dealer broker netting member. 

An account that is not a Broker Account 

is referred to as a Dealer Account. 

‘‘Coverage Charge’’ will be revised to 

refer to the additional charge with 

respect to the member’s Required Fund 

Deposit (rather than its VaR Charge) 

which brings the member’s coverage to 

a targeted confidence level. 

‘‘Current Net Settlement Positions’’ 

will be corrected to clarify its current 

intent, that it is calculated with respect 

to a certain business day and not 

necessarily on that day, since it may be 

calculated after market close on the day 

prior to its application (i.e., before or 

after midnight between the close of 

business one day and the open of 

business on the next day). 

‘‘Excess Capital Differential’’ will be 

corrected to refer to the amount by 

which a member’s VaR Charge exceeds 

its excess capital, instead of by reference 

to the amount by which its required 

clearing fund deposit exceeds its excess 

capital. 

‘‘Excess Capital Premium Calculation 

Amount’’ will be deleted because, with 

the introduction of VaR methodology, 

the calculation is no longer applicable. 

The terms ‘‘Excess Capital Differential’’ 

and ‘‘Excess Capital Ratio’’ will be 

amended to delete archaic references to 

‘‘Excess Capital Premium Calculation 

Amount’’ and to refer instead to the 

comparison of a member’s capital 

calculation to its VaR Charge. In 

addition, the text of Section 14 of GSD 

Rule 3 will be amended to provide that 

the ‘‘Excess Capital Premium’’ charge 

applies to any type of entity that is a 

GSD netting member rather than 

limiting its applicability to only the 

specified types formerly identified in 

the text. 

‘‘Excess Capital Ratio’’ will be 

amended to mean the quotient resulting 

from dividing the amount of a member’s 

VaR Charge by its excess net capital. 

‘‘GSD Margin Group’’ will be added to 

refer to the GSD accounts within a 

Margin Portfolio. 

‘‘Margin Portfolio’’ will be added to 

refer to the positions designated by the 

member as grouped for cross-margining, 

subject to the rules set forth in GSD Rule 

4. ‘‘Dealer Accounts’’ and ‘‘Broker 

Accounts’’ cannot be combined in a 

common Margin Portfolio. A 

‘‘Sponsoring Member Omnibus 

Account’’ cannot be combined with any 

other accounts. 

‘‘Unadjusted GSD Margin Portfolio 

Amount’’ will be added to define the 

amount calculated by GSD with regard 

to a Margin Portfolio, before application 

of premiums, maximums or minimums. 


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34The term ‘‘NFE-Related Account’’ means each 

securities account and deposit account maintained 

by a GCF Clearing Agent Bank for an Interbank 

Pledging Member in which the GCF Clearing Agent 

Bank has, pursuant to agreement with the Interbank 

Pledging Member or by operation of law, a security 

interest or right of setoff securing or supporting the 

payment of obligations of such Interbank Pledging 

Member to the Bank, including each such account 

to which such Interbank Pledging Member’s 

Prorated Interbank Cash Amount is debited. See 

GSD Rule 1, Definitions. 

35See supra notes 3 and 4. 

36Letter from Adam C. Cooper, Senior Managing 

Director and Chief Legal Officer, Citadel, LLC 

(December 21, 2010); Letter from Gary DeWaal, 

Senior Managing Director and Group General 

Counsel, Newedge USA, LLC (December 21, 2010); 

Letter from John A. McCarthy, General Counsel, 

GETCO (December 21, 2010); Letter from Donald J. 

Wilson, Jr., DRW Trading Group (December 21, 

2010); Letter from James B. Fuqua and David Kelly, 

Managing Directors, Legal, UBS Securities, LLC 

(December 20, 2010); Letter from John Willian, 

Managing Director, Goldman Sachs (December 17, 

2010); Letter from Ronald Filler, Professor of Law 

and Director of the Center on Financial Services 

Law, New York Law School (December 8, 2010); 

Letter from Douglas Engmann, President, Engmann 

Options, Inc. (December 6, 2010); and Letter from 

Jack DiMaio, Managing Director, Morgan Stanley 

(December 2, 2010). 

37Letter from Jack DiMaio, Managing Director, 

Morgan Stanley (December 2, 2010); Letter from 

Ronald Filler, Professor of Law and Director of the 

Center on Financial Services Law, New York Law 

School (December 8, 2010); Letter from John 

Willian, Managing Director, Goldman Sachs 

(December 17, 2010); Letter from James B. Fuqua 

and David Kelly, Managing Directors, Legal, UBS 

Securities, LLC (December 20, 2010); Letter from 

Adam C. Cooper, Senior Managing Director and 

Chief Legal Officer, Citadel, LLC (December 21, 

2010); Letter from Gary DeWaal, Senior Managing 

Director and Group General Counsel, Newedge 

USA, LLC (December 21, 2010); and Letter from 

John A. McCarthy, General Counsel, GETCO 

(December 21, 2010). 

38Letter from Jack DiMaio, Managing Director, 

Morgan Stanley (December 2, 2010); Letter from 

Douglas Engmann, President, Engmann Options, 

Inc. (December 6, 2010); Letter from Ronald Filler, 

Professor of Law and Director of the Center on 

Financial Services Law, New York Law School 

(December 8, 2010); Letter from John A. McCarthy, 

General Counsel, GETCO (December 21, 2010); 

Letter from James B. Fuqua and David Kelly, 

Managing Directors, Legal, UBS Securities, LLC 

(December 20, 2010); and Letter from Donald J. 

Wilson, Jr., DRW Trading Group (December 21, 

2010). 

39Letter from Jack DiMaio, Managing Director, 

Morgan Stanley (December 2, 2010); Letter from 

Ronald Filler, Professor of Law and Director of the 

Center on Financial Services Law, New York Law 

School (December 8, 2010); Letter from James B. 

Fuqua and David Kelly, Managing Directors, Legal, 

UBS Securities, LLC (December 20, 2010); Letter 

from Adam C. Cooper, Senior Managing Director 

and Chief Legal Officer, Citadel, LLC (December 21, 

2010); Letter from John A. McCarthy, General 

Counsel, GETCO (December 21, 2010); and Letter 

from Donald J. Wilson, Jr., DRW Trading Group 

(December 21, 2010). 

40Letter from William H. Navin, Executive Vice 

President and General Counsel, The Options 

Clearing Corporation (December 21, 2010); Letter 

from Richard D. Marshall, Ropes & Gray on behalf 

of ELX Futures, LP (December 15, 2010); and Letter 

from John C. Hiatt, Chief Administrative Officer, 

Ronin Capital (December 10, 2010). 

41Letter from Joan C. Conley, Senior Vice 

President & Corporate Secretary, NASDAQ OMX 

(December 21, 2010). 

42Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011); Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation and Walt Lukken, Chief 

Executive Officer, New York Portfolio Clearing, LLC 

(February 7, 2011); and Letter from Michael 

Bodson, Executive Managing Director, Fixed 

Income Clearing Corporation and Walt Lukken, 

Chief Executive Officer, New York Portfolio 

Clearing, LLC (February 27, 2011). 

43Letter from William H. Navin, Executive Vice 

President and General Counsel, The Options 

Clearing Corporation (December 21, 2010); Letter 

from Richard D. Marshall, Ropes & Gray on behalf 

of ELX Futures, LP (December 15, 2010); Letter from 

John C. Hiatt, Chief Administrative Officer, Ronin 

Capital (December 10, 2010); and Letter from Joan 

C. Conley, Senior Vice President & Corporate 

Secretary, NASDAQ OMX (December 21, 2010). 

It includes the VaR Charge and the 

coverage charge for GSD. In the case of 

a Cross-Margining Participant of GSD, 

the Unadjusted GSD Margin Portfolio 

Amount also will include the crossmargining reduction, if any. 

The terms ‘‘Category 2 Gross Margin 

Amount,’’ ‘‘Margin Adjustment 

Amount,’’ ‘‘Repo Volatility Factor,’’ and 

‘‘Revised Gross Margin Amount’’ will be 

deleted from GSD Rule 1 since they are 

no longer used elsewhere in the GSD 

Rules. The Schedule of Repo Volatility 

Factors will be deleted because it is no 

longer applicable. 

In Section 2 of GSD Rule 3, Ongoing 

Membership Requirements, the 

requirement that GCF counterparties 

submit information relating to the 

composition of their NFE-related 

accounts,34 will be amended to require 

the submission of such information 

periodically, rather than on a quarterly 

basis. GSD currently requires this 

information every other month and by 

this change, FICC could institute 

periodic reporting on a schedule that is 

appropriate at such time, in response to 

current conditions. This has the 

potential to help tailor the frequency of 

reporting based on market conditions 

and thereby facilitate the risk 

management of the clearing agency. 

In Section 9 of GSD Rule 4, Clearing 

Fund and Loss Allocation, concerning 

the return of excess deposits and 

payments, FICC’s discretion to withhold 

the return of excess clearing fund to a 

member that has an outstanding 

payment obligation to FICC will be 

changed from being based on FICC’s 

determination that the member’s 

anticipated transactions or obligations 

over the next 90 calendar days may be 

reasonably expected to be materially 

different than those of the 90 prior 

calendar days, under the current rule, to 

being based on FICC’s determination 

that the member’s anticipated 

transactions or obligations in the near 

future may be reasonably expected to be 

materially different than those in the 

recent past. In addition, technical and 

clarifying changes are proposed to be 

made to the rules and cross-references 

to rule sections contained throughout. 

The rules have been reviewed by FICC 

and proposed to be corrected as needed 

to reflect the correct rule section 

references as originally intended. 

III. Comments 

The Commission received thirteen 

comments to the proposed rule change 

and four response letters responding to 

comments.35 Nine commenters 

supported the proposed rule.36 Of this 

group, seven commenters generally 

stated that the cross-margining proposal 

benefits competition by permitting 

‘‘open access’’ to cross-margining.37 In 

addition, six commenters argued that 

the proposed rule change permits risk 

minimization 38 and promotes 

transparency.39

Three commenters opposed the 

proposed rule, absent changes to 

mitigate what they identified as anticompetitive features.40 One commenter 

recommended further study of the rule 

and its risk methodology, but agreed 

with the commenters opposing the 

proposed rule change on the grounds 

that the rule should permit only nonexclusive arrangements that promote 

competition.41 The commenters against 

the proposed rule change generally 

stated that the cross-margining scheme 

is anti-competitive and raises risk 

management issues. These commenters 

raised concerns or provided comments 

related to the following major aspects of 

the cross-margining proposal: (1) The 

effect on competition; (2) risk 

management; and (3) the effect on 

efficiency and costs. FICC responded to 

these comments in three comment 

letters that it submitted.42

A. Effect on Competition 

Many of the commenters’ concerns 

with respect to competition stemmed 

from FICC having an exclusive 

agreement to enter into a direct 

arrangement for ‘‘one-pot’’ crossmargining with NYPC.43 NYPC is jointly 

owned by NYSE Euronext and DTCC. 

DTCC is the parent company of FICC. 

NYSE Liffe is the global derivatives 

business of the NYSE Euronext. These 

affiliations combined with the exclusive 

nature of the direct arrangement raised 

concerns for these commenters. 

With regard to allowing other parties 

direct access to cross-margining, FICC 

argued that it is neither operationally 

feasible nor prudent to establish a 

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44Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011). 

45 Id. 

46 Id. 

47 Id. 

48Letter from William H. Navin, Executive Vice 

President and General Counsel, The Options 

Clearing Corporation (December 21, 2010); Letter 

from Richard D. Marshall, Ropes & Gray on behalf 

of ELX Futures, LP (December 15, 2010); Letter from 

John C. Hiatt, Chief Administrative Officer, Ronin 

Capital (December 10, 2010); and Letter from Joan 

C. Conley, Senior Vice President & Corporate 

Secretary, NASDAQ OMX (December 21, 2010). 

49Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011) and Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation; Walt Lukken, Chief Executive 

Officer, New York Portfolio Clearing, LLC (February 

7, 2011); and Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation and Walt Lukken, Chief 

Executive Officer, New York Portfolio Clearing, LLC 

(February 27, 2011). 

50 Id. 

51Letter from Michael Bodson, Executive 

Managing Director, Fixed Income Clearing 

Corporation and Walt Lukken, Chief Executive 

Officer, New York Portfolio Clearing, LLC (February 

27, 2011). 

52Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011) and Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation and Walt Lukken, Chief 

Executive Officer, New York Portfolio Clearing, LLC 

(February 7, 2011). 

53Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011); Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation and Walt Lukken, Chief 

Executive Officer, New York Portfolio Clearing, LLC 

(February 7, 2011); and Letter from Michael 

Bodson, Executive Managing Director, Fixed 

Income Clearing Corporation and Walt Lukken, 

Chief Executive Officer, New York Portfolio 

Clearing, LLC (February 27, 2011). 

54Letter from Michael Bodson, Executive 

Managing Director, Fixed Income Clearing 

Corporation and Walt Lukken, Chief Executive 

Officer, New York Portfolio Clearing, LLC (February 

7, 2011) and Letter from Michael Bodson, Executive 

Managing Director, Fixed Income Clearing 

Corporation and Walt Lukken, Chief Executive 

Officer, New York Portfolio Clearing, LLC (February 

27, 2011). 

55Letter from Richard D. Marshall, Ropes & Gray 

on behalf of ELX Futures, LP (December 15, 2010); 

Letter from William H. Navin, Executive Vice 

President and General Counsel, The Options 

Clearing Corporation (December 21, 2010); and 

Letter from Joan C. Conley, Senior Vice President 

& Corporate Secretary, NASDAQ OMX (December 

21, 2010). 

56Letter from Gary DeWaal, Senior Managing 

Director and Group General Counsel, Newedge 

USA, LLC (December 21, 2010) and Letter from 

Ronald Filler, Professor of Law and Director of the 

Center on Financial Services Law, New York Law 

School (December 8, 2010). 

57Letter from Ronald Filler, Professor of Law and 

Director of the Center on Financial Services Law, 

New York Law School (December 8, 2010). 

58FICC represented that ‘‘[f]ollowing the 

announcement of NYPC, FICC, the NYPC 

management team and senior management of NYSE 

Euronext have repeatedly reached out to [The 

Options Clearing Corporation], as well as other 

DCOs and DCMs, to initiate the process of 

integrating such other organizations into the ‘single 

pot’. While those efforts have not yet been 

productive, FICC and NYPC remain committed to 

expanding the ‘single pot’ to include other DCOs 

and DCMs.’’ Letter from Douglas Landy, Allen & 

Overy on behalf of the Fixed Income Clearing 

Corporation (January 4, 2011). See also supra 

Section II.B., at 16. 

59Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

Continued 

pots’’ with multiple, competing DCOs 

under this arrangement.44 Among other 

things, such an arrangement would 

result in FICC clearing members that are 

members of multiple DCOs crossmargining their futures positions against 

different segments of their portfolios at 

FICC, rather than having the risk of their 

positions being measured 

comprehensively.45 FICC stated that it 

believes that the attendant risk of delays 

and errors in processing would 

substantially increase systemic risk as 

clearing members continuously moved 

positions at FICC from one cross-margin 

pot to another in order to maximize 

their margin savings.46 For example, 

there is the potential that operational 

issues of managing such movements 

across multiple systems would create 

risks in the settlement process by 

adding complexities associated with 

linking and monitoring the use of 

multiple one cross-margin pot 

arrangements. Furthermore, FICC stated 

that the existence of multiple ‘‘one-pots’’ 

would likely greatly complicate the 

liquidation of a cross-margining 

participant that was in default at FICC 

and NYPC, thereby increasing systemic 

risk.47

Commenters recognized that other 

DCOs (i.e., DCOs other than NYPC) will 

have the ability to obtain indirect access 

to the cross-margining arrangement by 

entering into a Limited Purpose 

Participant (‘‘LPP’’) agreement and 

becoming an LPP of NYPC. Commenters 

raised concerns about the potential for 

this type of indirect access, citing 

concerns about the requirements to 

agree to be bound by the rules of NYPC, 

agree to an allocation of clearing fees, 

and contribute to the NYPC guaranty 

fund in an amount equal to the 

contribution made by NYSE Euronext.48

FICC responded to these comments.49

Specifically, FICC stated that, while 

DCOs that are LPPs clearing through 

NYPC would need to abide by NYPC’s 

rules, NYPC’s intention is that there 

would be separate requirements 

(including with respect to margin 

deposits and guaranty fund 

contributions applied) to the LPP, on 

the one hand, and the LPP’s members, 

on the other, unless: (i) NYPC and the 

LPP separately agree to allocate those 

amounts to the LPP and its members, or 

(ii) a clearing member of NYPC is also 

a clearing member of an LPP.50 FICC 

and NYPC also represented that the 

NYPC rules would apply to a LPP but 

not to the members of the LPP, unless 

such members are otherwise clearing 

members of NYPC.51 In addition, FICC 

noted that NYPC Rule 801 is designed 

to permit maximum flexibility in 

structuring the admission of LPPs, as it 

is contemplated that any such 

admission would be subject to 

substantial negotiation between NYPC 

and the prospective LPP regarding the 

operational mechanics of margin 

deposits and related subjects.52

In addition, FICC has represented to 

the Commission that the fees NYPC 

charges LPPs will be determined on a 

case-by-case basis based on the services 

provided to recoup operational and 

other costs that NYPC incurs in 

integrating the new LPP.53 Moreover, 

FICC and NYPC clarified and 

affirmatively represented that the 

limited purpose participant agreements 

will be individually negotiated and that 

‘‘the Guaranty Fund contribution that 

will be required by NYPC from any 

Limited Purpose Participant will be 

determined by risk-based factors 

without regard to whether such 

contribution amount is more or less 

than the amount contributed to the 

NYPC Guaranty Fund by NYSE 

Euronext’’.54

Three commenters also noted that 

under the proposed structure, it may 

take up to two years before other DCMs 

are permitted to clear at NYPC or before 

other DCOs might be given indirect 

access in order to participate in the 

NYPC Arrangement, which may cause 

commercial impairment.55 Two other 

commenters, however, argued that the 

delay is not unduly burdensome on 

competition,56 with one in particular 

explaining that ‘‘[a]ny new arrangement 

needs the requisite time to ensure that 

it satisfies all of the underlying concerns 

and issues that may occur with any new 

concept’’.57 FICC responded, saying that 

the transition period is necessary to 

complete implementation, systems 

integration, and testing, among other 

things, and that it and NYPC have 

pledged to open the arrangement to 

other participants as soon as 

operationally feasible.58 FICC also 

stated that attempting to integrate a preexisting clearinghouse directly into the 

‘‘one-pot’’ cross-margining arrangement 

would by necessity be even more 

difficult and likely more costly than the 

integration between FICC and NYPC, 

which was created in order to crossmargin positions with FICC.59 In 


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(January 4, 2011); and Letter from Michael Bodson, 

Executive Managing Director, Fixed Income 

Clearing Corporation and Walt Lukken, Chief 

Executive Officer, New York Portfolio Clearing, LLC 

(February 7, 2011). 

60See, e.g., Letter from John Willian, Managing 

Director, Goldman Sachs (December 17, 2010); 

Letter from Ronald Filler, Professor of Law and 

Director of the Center on Financial Services Law, 

New York Law School (December 8, 2010); and 

Letter from Adam C. Cooper, Senior Managing 

Director and Chief Legal Officer, Citadel, LLC 

(December 21, 2010). 

61Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011). 

62 Id. 

63Letter from Jack DiMaio, Managing Director, 

Morgan Stanley (December 2, 2010); Letter from 

John A. McCarthy, General Counsel, GETCO 

(December 21, 2010); Letter from James B. Fuqua 

and David Kelly, Managing Directors, Legal, UBS 

Securities, LLC (December 20, 2010); Letter from 

Ronald Filler, Professor of Law and Director of the 

Center on Financial Services Law, New York Law 

School (December 8, 2010); and Letter from Donald 

J. Wilson, Jr., DRW Trading Group (December 21, 

2010). 

64Letter from Jack DiMaio, Managing Director, 

Morgan Stanley (December 2, 2010); Letter from 

John A. McCarthy, General Counsel, GETCO 

(December 21, 2010); Letter from James B. Fuqua 

and David Kelly, Managing Directors, Legal, UBS 

Securities, LLC (December 20, 2010); Letter from 

Ronald Filler, Professor of Law and Director of the 

Center on Financial Services Law, New York Law 

School (December 8, 2010); and Letter from Donald 

J. Wilson, Jr., DRW Trading Group (December 21, 

2010). 

65Letter from Donald J. Wilson, Jr., DRW Trading 

Group (December 21, 2010) and Letter from John A. 

McCarthy, General Counsel, GETCO (December 21, 

2010). 

66Letter from Adam C. Cooper, Senior Managing 

Director and Chief Legal Officer, Citadel, LLC 

(December 21, 2010) and Letter from John A. 

McCarthy, General Counsel, GETCO (December 21, 

2010). 

67Letter from Joan C. Conley, Senior Vice 

President & Corporate Secretary, NASDAQ OMX 

(December 21, 2010) and Letter from John C. Hiatt, 

Chief Administrative Officer, Ronin Capital 

(December 10, 2010). 

68Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011). 

69 Id 

70Letter from Joan C. Conley, Senior Vice 

President & Corporate Secretary, NASDAQ OMX 

(December 21, 2010). 

71Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011). 

72Letter from Alex Kogan, Vice President and 

Deputy General Counsel, NASDAQ OMX (January 

10, 2011). 

73Letter from Michael Bodson, Executive 

Managing Director, Fixed Income Clearing 

Corporation and Walt Lukken, Chief Executive 

Officer, New York Portfolio Clearing, LLC (February 

7, 2011). The public record contains information 

regarding testing that went to the subject of risk 

management. The Commission also received from 

FICC proprietary, highly confidential information, 

including information about individual portfolios. 

This non-public information, in addition to the 

public information submitted in support of the rule 

proposal, supported the Commission’s conclusion 

that the proposal is consistent with the Act, but was 

not included in the public record because of its 

sensitivity. 

74 Id. 

75Letter from Alex Kogan, Vice President and 

Deputy General Counsel, NASDAQ OMX (January 

10, 2011). 

76Letter from Gary DeWaal, Senior Managing 

Director and Group General Counsel, Newedge 

USA, LLC (December 21, 2010); Letter from Adam 

C. Cooper, Senior Managing Director and Chief 

Legal Officer, Citadel, LLC (December 21, 2010); 

Letter from Ronald Filler, Professor of Law and 

Director of the Center on Financial Services Law, 

New York Law School (December 8, 2010); and 

Letter from James B. Fuqua and David Kelly, 

addition, FICC has previously stated 

that NYPC has committed that it will 

complete the process to allow one or 

more DCMs or DCOs to be admitted and 

integrated into the ‘‘one-pot’’ crossmargining arrangement as soon as 

feasible, but no later than 24 months 

from the start of operations. 

The nine commenters in favor of the 

proposed rule change generally argued 

that the rule change will increase 

competition in trade execution and 

clearing which, in turn, will encourage 

innovation, efficiency, and improved 

choices.60 Furthermore, FICC also 

indicated that its proposal promotes 

competition. Specifically, FICC stated 

that ‘‘[u]nlike the traditional ‘vertical’ 

relationship between futures exchanges 

and their affiliated * * * DCOs * * *, 

NYPC has been uniquely structured 

* * * to allow unaffiliated DCOs and 

* * * DCMs * * * ‘open access’ to the 

benefits of the ‘single pot’ crossmargining arrangement as soon as 

operationally feasible, subject to only 

certain object, reasonable and nondiscriminatory criteria’’.61 FICC also 

stated that the current market for 

clearing U.S. dollar-denominated 

interest rates is dominated by one entity 

and that its approach has the potential 

to introduce competition in this 

market.62

B. Risk Management 

Five commenters believed that the 

proposal would increase the 

transparency of risks across asset classes 

and allow regulators to better monitor 

and assess risk.63 These commenters 

supported the proposed rule’s use of the 

Value at Risk (VaR) methodology, 

because it is well understood, has been 

extensively tested, and relies on 

historical information to simulate the 

market.64 Moreover, two commenters 

noted that ‘‘one-pot’’ margining 

decreases the risk for market 

participants because it allows for the 

offset of risk between U.S. Treasury 

futures and U.S. Treasury cash bonds.65

Additionally, two commenters believed 

that the proposal allows for a greater 

portion of financial instruments to be 

centrally cleared, which, among other 

things, reduces overall risk.66

Two commenters, however, raised 

concerns about risk management, stating 

that because cross-margining allows for 

greater leverage than standard 

margining, in particular during periods 

of market stress and extreme volatility, 

the proposed rule may increase systemic 

risk.67 FICC responded by stating that 

‘‘the NYPC–FICC margin model does 

not necessarily increase leverage and 

may, in fact, reduce leverage in highly 

risky portfolios with limited hedges.’’68

FICC further explained that, ‘‘[a]t the 

same time, the NYPC–FICC model can 

offer margin reductions for hedged 

portfolios because it more accurately 

estimates true economic risk by taking 

into account the benefits of highly 

correlated, offsetting positions in a 

single portfolio.’’69

One commenter suggested that the 

VaR method for calculating margin 

requirements should be tested further.70

This commenter also suggested that the 

scenario-based Standard Portfolio 

Analysis of Risk (‘‘SPAN’’) method be 

considered and tested in comparison to 

VaR. FICC’s response noted that the 

proposed VaR methodology is based on 

a common method of historical 

simulation and that it has conducted 

risk-related testing, including sensitivity 

tests, back testing of the model’s 

validity, and stress tests of the 

sufficiency of the guaranty fund.71

One commenter requested that 

documentation of previous 

consideration of the risk aspects of the 

proposal be made public.72 In response, 

FICC provided a discussion and analysis 

of its VaR methodology compared to 

SPAN.73 FICC explained that because it 

needs to measure the risk of combined 

portfolios for futures and cash positions, 

it believes that a historical VaR-based 

margin model provides a more accurate 

estimate of portfolio risk than SPAN.74

FICC noted, however, that because it is 

standard practice for the futures 

industry to use SPAN to calculate and 

monitor margin requirements, it will 

make available SPAN formatted 

calculations of its VaR-based customer 

risk parameters to clearing members and 

their customers. FICC also noted that in 

initially listing NYPC-clearing contracts, 

NYSE Liffe U.S. will use, among other 

factors, SPAN-formatted input 

parameters to establish minimum 

customer initial margin requirements for 

each NYPC-cleared interest rate contract 

and intra- and inter-commodity 

spreads.75

C. Effect on Efficiency and Costs 

Four commenters stated that the 

proposal promotes the reduction of risk 

that will lead to margin and capital 

efficiencies and lower costs.76 One 


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Managing Directors, Legal, UBS Securities, LLC 

(December 20, 2010). 

77Letter from John Willian, Managing Director, 

Goldman Sachs (December 17, 2010). 

78Letter from Jack DiMaio, Managing Director, 

Morgan Stanley (December 2, 2010) and Letter from 

Donald J. Wilson, Jr., DRW Trading Group 

(December 21, 2010). 

79Letter from John C. Hiatt, Chief Administrative 

Officer, Ronin Capital (December 10, 2010) and 

Letter from William H. Navin, Executive Vice 

President and General Counsel, The Options 

Clearing Corporation (December 21, 2010). 

80Letter from Douglas Landy, Allen & Overy on 

behalf of the Fixed Income Clearing Corporation 

(January 4, 2011). 

81 Id. 

82 15 U.S.C. 78q–1(b)(2)(A)(ii). This provision 

directs the Commission to use its authority to 

facilitate the establishment of coordinated facilities 

for clearance and settlement of transactions in 

securities and contracts of sale for future delivery. 

83 15 U.S.C. 78q–1(b)(3)(A), (F) and I. In 

approving the proposed rule change, the 

Commission considered the proposal’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

84 15 U.S.C. 78q–1(b)(3)(F). 

85See, e.g., Securities Exchange Act Release No. 

27296 (September 26, 1989), 54 FR 41195 

(approving proposed rule changes establishing 

cross-margining between The Options Clearing 

Corporation and the Chicago Mercantile Exchange) 

and Securities Exchange Act Release No. 26153 

(October 3, 1988), 53 FR 39561 (approving proposed 

rule changes concerning cross-margining between 

The Options Clearing Corporation and the 

Intermarket Clearing Corporation). Previously, the 

Interim Report of the President’s Working Group on 

Financial Markets (May 1988) recommended that 

the SEC and CFTC facilitate cross-margining 

programs among clearing organizations. In addition, 

the Bachmann Task Force, which was formed by 

the Commission in response to the 1987 Market 

Break, presented its findings to the Commission in 

May 1992 that included, among other things, a 

recommendation that cross-margining programs 

among clearing agencies be implemented or 

expanded. See Securities Exchange Act Release No. 

31904 (February 23, 1993), 58 FR 11806 (March 1, 

1993). 

86See Securities and Exchange Act Release No. 

44301, 66 FR 28297 (May 11, 2001) (order 

approving a ‘‘two-pot’’ cross-margining proposal 

between FICC’s predecessor and CME). In addition, 

the Interim Report of the President’s Working 

Group on Financial Markets (May 1988) also 

recommended that the SEC and CFTC facilitate 

cross-margining programs among clearing 

organizations. 

87 15 U.S.C. 78q–1(b)(3)(F). 

commenter believed that ‘‘one-pot’’ 

margining would increase cash flow and 

margin efficiencies for certain clearing 

members.77 Two commenters also stated 

that the ‘‘one-pot’’ approach will reduce 

delivery costs because it offers direct 

delivery of expiring futures contracts 

into cash bonds held at FICC, which 

will minimize fails and squeezes and 

improve price convergence and stress 

on the settlement system.78

Additionally, two commenters that were 

opposed to the cross-margining 

agreement as proposed also expressed 

their general support for ‘‘one-pot’’ 

cross-margining on the ground that it 

reduces risk while facilitating more 

efficient uses of capital markets.79

According to FICC’s response, the 

proposed rule streamlines the delivery 

process for U.S. Treasury futures, which 

will improve operational efficiency and 

decrease systemic settlement risk.80

FICC also stated that the proposal 

should increase liquidity by providing 

market participants with an alternate 

venue for trading U.S. dollardenominated interest rate futures 

contracts.81

IV. Discussion 

The Commission has carefully 

considered the proposed rule change 

and the comments thereto and the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and the rules 

and regulations thereunder, including 

Sections 17A(a)(2)(A)(ii) 82 and 

17A(b)(3)(A), (F) and (I) of the Act.83

The proposed rule change provides 

for modifications to certain risk 

management related processes and 

definitions under GSD’s rules, including 

changes to the loss allocation 

methodology, intraday margining, 

categories of membership, and related 

definitional changes. The Commission 

believes that these changes to GSD’s 

rules are consistent with Sections 

17A(b)(3)(A) and (F) of the Act because 

they should help facilitate and promote 

the prompt and accurate clearance and 

settlement of securities transactions, 

and help assure the safeguarding of 

securities and funds under FICC’s 

control or for which it is responsible. In 

particular, the Commission believes that 

these changes to GSD’s rules, by virtue 

of strengthening FICC’s risk 

management and related operations, 

should result in a more timely, accurate, 

and efficient system of settlement. 

In addition, the proposed rule change 

would provide for a cross-margining 

arrangement between certain positions 

in GSD and NYPC. The Commission’s 

staff has closely evaluated the proposed 

cross-margining arrangement including 

the risk management, competition and 

efficiency issues raised by the proposed 

rule change (as discussed below) against 

the requirements of the Act, including 

Sections 17A(b)(3)(F) and (I) of the Act. 

Based on our staff’s analysis, and taking 

into consideration the matters discussed 

throughout, including the 

representations discussed below, the 

Commission finds the proposed rule 

change is consistent with the Act. 

A. Risk Management 

Section 17A(b)(3)(F) of the Act 

requires that the rules of a clearing 

agency be designed to promote the 

prompt and accurate clearance and 

settlement of securities transactions and 

assure the safeguarding of securities and 

funds in the custody or control of the 

clearing agency or for which it is 

responsible.84 The Commission has 

historically supported and approved 

cross-margining at clearing agencies and 

has previously recognized the potential 

benefits of cross-margining systems, 

which include freeing capital through 

reduced margin requirements, reducing 

clearing costs by integrating clearing 

functions, reducing clearing 

organization risk by centralizing asset 

management and harmonizing 

liquidation procedures.85 The 

Commission has encouraged crossmargining arrangements as a way to 

promote more efficient risk management 

across product classes.86 Crossmargining arrangements may be 

consistent with Section 17A(b)(3)(F) in 

that they may strengthen the 

safeguarding of assets through effective 

risk controls that more broadly take into 

account offsetting positions of 

participants in both the cash and futures 

markets, and promote prompt and 

accurate clearance and settlement of 

securities through increased 

efficiencies. 

As set forth in the proposal, FICC will 

perform margin calculations using VaR 

methodology with a 99 percent 

confidence level and 3-day liquidation 

for cash positions and 1-day liquidation 

for futures, using historical information 

for the prior year (250 trading days for 

futures and 252 for cash positions) and 

the margin calculations will employ a 

front weighted mechanism that places a 

greater emphasis on more recent 

observations. FICC will also conduct 

daily back testing and assess an 

additional coverage component charged 

to participants if the back tests show 

insufficient coverage. In the event of 

unusual market conditions, FICC or 

NYPC could at any time require 

additional margin provided such 

requirements are consistent with the 

standards in Section 17A of the 

Exchange Act. The Commission believes 

these actions assist in the promotion 

under the proposed cross-margining 

arrangement of prompt and accurate 

clearance and settlement of securities 

transactions and help assure the 

safeguarding of securities and funds 

consistent with the requirements under 

Section 17A(b)(3)(F) of the Act because 

they would facilitate appropriate risk 

management by FICC by providing 

flexibility and promoting ongoing 

monitoring of risk.87

The proposal also contains provisions 

for managing risk in the event of a 


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88 15 U.S.C. 78q–1(b)(3)(F). 

89Securities Exchange Act Release No. 26153 

(October 3, 1988), 53 FR 39561. 

90 15 U.S.C. 78q–1(b)(3)(F). 

91 15 U.S.C. 78q–1(b)(3)(I). 

92 15 U.S.C. 78q–1(b)(3)(F). 

93FICC represented that following the 

announcement of NYPC, FICC, the NYPC 

management team and senior management of NYSE 

Euronext have been in discussions with other DCOs 

and DCMs to initiate the process of integrating such 

other organizations into the ‘‘one-pot.’’ While those 

efforts have not yet been productive, FICC and 

NYPC remain committed to expanding the ‘‘onepot’’ to include other DCOs and DCMs. Letter from 

Douglas Landy, Allen & Overy on behalf of the 

Fixed Income Clearing Corporation (January 4, 

2011). 

member default. The NYPC Agreement 

provides for the sharing of losses by 

FICC and NYPC in the event that the 

‘‘one-pot’’ portfolio margin deposits of a 

defaulting participant are not sufficient 

to cover the losses resulting from the 

liquidation of that participant’s trades 

and positions. In the event of a member 

default, the proposal requires that FICC 

and NYPC would liquidate posted 

margin as a single portfolio, which will 

allow them to preserve the value of the 

assets posted as collateral. In addition, 

FICC and NYPC are providing financial 

guarantees to each other in the event the 

available collateral is insufficient. These 

features of the proposed rule change 

would help to ensure that FICC is able 

to meet its settlement obligations in the 

event of default. As a result, the 

Commission believes that the proposal 

would promote the prompt and accurate 

clearance and settlement of securities 

transactions and assure the safeguarding 

of securities and funds in a manner 

consistent with Section 17A(b)(3)(F) of 

the Act.88

The Commission has previously noted 

that cross-margining systems entail 

certain risks.89 For instance, even in 

normal market conditions, products that 

have been highly correlated in the past 

may diverge and may diverge even more 

so in extreme market conditions. Such 

a breakdown in correlation might lead 

to inadequate clearing margins or losses 

upon a liquidation. To address these 

concerns, as noted in the description of 

the proposed rule change and in FICC’s 

response letters, FICC has performed 

testing of the VaR margining model. 

This included sensitivity tests of the 

model to changing market conditions, 

back tests of sample portfolios to check 

model validity, stress tests of sample 

portfolios to test the sufficiency of the 

NYPC guaranty fund, and back tests to 

verify the sufficiency of coverage after 

the FICC–NYPC cross-margining 

reductions are applied. 

The Commission takes commenters’ 

concerns about risk management 

seriously. As discussed below, to 

provide the Commission with enhanced 

ability to monitor FICC’s risk 

management, FICC has represented and 

undertaken to make continuing risk 

analysis reports, discussed below, to the 

Commission. This ongoing reporting 

should also help FICC conduct its own 

monitoring of the NYPC Arrangement. 

In addition, FICC is subject to the 

Commission’s ongoing examination 

program, which examines registered 

clearing agencies with respect to their 

risk management systems and other 

aspects of their operations. The 

Commission believes FICC’s prior 

analysis, as discussed above, as well as 

FICC’s commitment to provide 

additional reports on a periodic basis 

will promote the prompt and accurate 

clearance and settlement of securities 

transactions and help assure the 

safeguarding of securities and funds in 

a manner consistent with Section 

17A(b)(3)(F) of the Act. 

B. Competition 

Section 17A(b)(3)(F) of the Act 

requires that the rules of a clearing 

agency are not designed to permit unfair 

discrimination in the admission of 

participants or among participants in 

the use of the clearing agency.90 Section 

17A(b)(3)(I) of the Act requires that the 

rules of the clearing agency do not 

impose any burden on competition not 

necessary and appropriate in 

furtherance of the purposes of the 

Exchange Act.91

The Commission has carefully 

considered the comments and the 

responses submitted to the Commission. 

With respect to commenters’ concerns 

regarding the exclusive nature of the 

agreement to enter into a direct 

arrangement for ‘‘one-pot’’ crossmargining with NYPC, the Commission 

believes that FICC has raised valid 

concerns regarding the potential for 

greater risk arising from connections to 

multiple DCOs. The Commission 

believes that the NYPC Arrangement, 

and FICC’s representations in its 

responses, discussed above, regarding 

how indirect access would operate in 

practice, would provide increased 

potential for indirect access to the crossmargining arrangement by entering into 

a LPP agreement and becoming an LPP 

of NYPC. 

The Commission believes that the 

proposed FICC indirect access 

arrangement would provide a viable 

option for those seeking to access the 

‘‘one-pot’’ cross-margining arrangement 

because it would be open to all DCOs 

and DCMs and would contain 

membership criteria that are 

commensurate with risks associated 

with accessing the ‘‘one-pot’’ crossmargining arrangement. Accordingly, 

the Commission believes the proposed 

cross-margining arrangement is not 

designed to permit unfair 

discrimination in the admission of 

participants or among participants in 

the use of the clearing agency consistent 

with Section 17A(b)(3)(F).92

The Commission acknowledges that 

the admission and integration of other 

DCMs or DCOs will not be immediate. 

However, the Commission believes that, 

in light of existing technological 

limitations, FICC has raised valid 

concerns regarding the operational 

feasibility of providing multiple links 

for direct access to the cross-margining 

arrangement at this time. These 

potential operational risks associated 

with managing such an arrangement, 

such as maintaining appropriate 

account of the positions of participants 

and calculating appropriate margin, 

must be weighed against the desire for 

greater direct access immediately. 

The Commission notes that FICC has 

previously indicated that NYPC has 

committed that it will complete the 

process to allow one or more DCMs or 

DCOs to be admitted and integrated into 

the ‘‘one-pot’’ cross-margining 

arrangement as soon as feasible, but no 

later than 24 months from the start of 

NYPC’s operations. FICC has stated that 

the transition period is necessary to 

complete implementation, systems 

integration, and testing, among other 

things, and that it would open the 

arrangement to other participants as 

soon as operationally feasible.93 The 

Commission believes that the 

operational issues, including those cited 

by FICC, would need to be resolved 

prior to admitting a DCM or DCO as an 

LPP. The Commission believes that this 

aspect of the proposal would not impose 

any burden on competition not 

necessary and appropriate in 

furtherance of the purposes of the 

Exchange Act consistent with Section 

17A(b)(3)(I) of the Act. 

Moreover, the Commission notes that 

FICC has stated that the proposal would 

provide market participants with an 

alternate venue for trading U.S. dollardenominated interest rate futures 

contracts, thereby potentially helping to 

increase competition in this market. The 

Commission believes that these procompetitive features of the proposal are 

consistent with the Act. 

The Commission takes seriously 

commenters’ concerns regarding 

competition. As discussed below, FICC 

has represented and undertaken to 

provide the Commission with 


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Federal Register / Vol. 76, No. 43 / Friday, March 4, 2011 / Notices 12155 

94 15 U.S.C. 78q–1(b)(3)(I). 

95 15 U.S.C. 78q–1(b)(3)(I). 

96See Securities and Exchange Act Release No. 

44301, 66 FR 28297 (May 11, 2001) (approving a 

‘‘two-pot’’ cross-margining proposal between FICC’s 

predecessor and CME). 

97 15 U.S.C. 78q–1(b)(3)(F). 

98Letter from Michael Bodson, Executive 

Managing Director, Fixed Income Clearing 

Corporation and Walt Lukken, Chief Executive 

Officer, New York Portfolio Clearing, LLC (February 

27, 2011). 

99 ‘‘Look-alike contracts’’ refers to contracts that 

have similar economic features but are traded 

separately on CME and NYSE Liffe. 

100 15 U.S.C. 78q–1. 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

information about the LLP agreements 

concerning the proposed crossmargining arrangements. 

The Commission believes FICC’s 

commitment to provide ongoing 

information with respect LLP 

agreements would help to evaluate its 

efforts to facilitate indirect access and 

would thereby help to ensure that the 

proposal would not impose any burden 

on competition not necessary and 

appropriate in furtherance of the 

purposes of the Exchange Act, 

consistent with Section 17A(b)(3)(I) of 

the Act.94 The Commission anticipates 

that this information will be primarily 

used for the limited purpose of 

identifying any instances in which there 

is potential non-compliance with the 

terms of this order or the 

representations made by FICC. 

The Commission has considered the 

concerns presented by commenters and 

has determined that the benefits of the 

proposal outweigh any anti-competitive 

effects of the proposal. The Commission 

believes that the proposal would not 

impose any burden on competition not 

necessary and appropriate in 

furtherance of the purposes of the 

Exchange Act consistent with Section 

17A(b)(3)(I) of the Act.95

C. Effect on Efficiency and Costs 

As previously discussed, both FICC 

and those commenting on the proposed 

rule change expect that the crossmargining proposal will reduce costs, 

including delivery costs, and increase 

cash flows through margin efficiencies. 

The Commission believes that the NYPC 

Arrangement has the potential to 

increase efficiencies by allowing 

clearing agencies to streamline the 

delivery process, employ common and 

coordinated risk management and 

margin methodologies, and lower costs 

for market participants. 

A ‘‘two-pot’’ arrangement allows for 

offsets and lowered margin based on 

correlations in a members’ cleared 

positions at different clearinghouses; 

however, there is not a unified 

arrangement for risk management or loss 

allocations.96 The ‘‘two-pot’’ crossmargining arrangements approved by 

the Commission in the past, including 

one between FICC and CME, have 

allowed clearinghouses to allow credit 

against the margin requirement for 

offsetting positions cleared at another 

clearinghouse, but each clearinghouse 

maintained and managed separate pools 

of collateral. The ‘‘one-pot’’ arrangement 

would offer greater margin reductions 

than a ‘‘two-pot’’ arrangement. 

As result of these benefits in 

facilitating a more accurate and costeffective system for settlement, the 

Commission believes that the proposal 

would promote the prompt and accurate 

clearance and settlement of securities 

transactions and help assure the 

safeguarding of securities and funds in 

a manner consistent with Section 

17A(b)(3)(F) of the Act.97

D. Additional Reporting 

As noted above, FICC has represented 

that it will provide certain information 

and reports to the Commission on an 

ongoing basis in order to facilitate 

ongoing monitoring of the crossmargining arrangement and thereby 

help ensure compliance with the 

standards in Section 17A of the Act.98

In particular, with respect to 

information pertaining to risk matters, 

the Commission believes that these 

reports would assist the Commission in 

its efforts to monitor risk management 

practices under the cross-margining 

arrangement by providing information 

to help confirm that the actual 

performance of the models and systems 

are consistent with those anticipated 

during tests prior to launch. 

Specifically, FICC has agreed to provide 

the following information upon the 

proposed rule change becoming 

effective: 

• For the first 250 trading days upon 

the proposed rule change becoming 

effective, FICC will provide the 

Commission staff with quarterly reports 

that itemize divergences between CME 

prices and NYSE Liffe prices for ‘‘lookalike contracts.’’ 99

• Semi-annually, FICC will provide 

the Commission staff with reports 

summarizing the sensitivity of the 

model used for the NYPC Agreement 

and the collected margin to the model’s 

assumptions and established 

parameters. 

• Quarterly, FICC will provide the 

Commission staff with detailed portfolio 

analyses of members participating in the 

NYPC Arrangement. 

• Monthly, FICC will provide the 

Commission staff with reports 

summarizing the details of: (1) Any 

instances in which the account of a 

member participating in the NYPC 

Agreement experienced a loss that 

exceeded its margin requirement and 

the magnitude of such loss; (2) FICC’s 

analysis of the sufficiency of NYPC’s 

guaranty fund in conjunction with 

NYPC; and (3) FICC’s analysis of daily 

correlations between the futures and 

cash products that are subject to the 

NYPC Arrangement. 

• FICC will provide the Commission 

staff with DTCC’s periodic default 

simulations that factor in members’ 

participation in the NYPC Agreement. 

• For 24 months upon the proposed 

rule change becoming effective, FICC 

will provide the Commission staff with 

information on a quarterly basis 

regarding potential LPPs, including 

progress on negotiations and 

discussions of agreements or potential 

agreements with potential LPPs. 

• FICC will provide the Commission 

all agreements entered into between 

NYPC and any LPPs, as well as all 

amendments to such agreements, 

including, but not limited to, those 

regarding changes in the fee 

arrangements. 

V. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and in 

particular Section 17A of the Act 100 and 

the rules and regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act, that the 

proposed rule change (File No. SR– 

FICC–2010–09) be, and hereby is, 

approved. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2011–4836 Filed 3–3–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63969; File No. SR–BATS– 

2011–007] 

Self-Regulatory Organizations; BATS 

Exchange, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change by BATS Exchange, Inc. 

to Adopt BATS Rule 11.21, entitled 

‘‘Input of Accurate Information’’ 

February 25, 2011. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2


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