2714 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

1See note 71 infra for further discussion of this 

amendment. The Commission refers to the 

redesignated Rule 17ad–22 throughout this release. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 240 

[Release No. 34–99149; File No. S7–23–22] 

RIN 3235–AN09 

Standards for Covered Clearing 

Agencies for U.S. Treasury Securities 

and Application of the Broker-Dealer 

Customer Protection Rule With 

Respect to U.S. Treasury Securities 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

adopting rules under the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’) 

to amend the standards applicable to 

covered clearing agencies for U.S. 

Treasury securities to require that such 

covered clearing agencies have written 

policies and procedures reasonably 

designed to require that every direct 

participant of the covered clearing 

agency submit for clearance and 

settlement all eligible secondary market 

transactions in U.S. Treasury securities 

to which it is a counterparty. In 

addition, the Commission is adopting 

additional amendments to the Covered 

Clearing Agency Standards with respect 

to risk management. These requirements 

are designed to protect investors, reduce 

risk, and increase operational efficiency. 

Finally, the Commission is amending 

the broker-dealer customer protection 

rule to permit margin required and on 

deposit with covered clearing agencies 

for U.S. Treasury securities to be 

included as a debit in the reserve 

formulas for accounts of customers and 

proprietary accounts of broker-dealers 

(‘‘PAB’’), subject to certain conditions. 

DATES: 

Effective date: March 18, 2024. 

Compliance date: The applicable 

compliance dates are discussed in Part 

III of this release. 

FOR FURTHER INFORMATION CONTACT: 

Elizabeth L. Fitzgerald, Assistant 

Director, and Robert Zak, Special 

Counsel, Office of Clearance and 

Settlement at (202) 551–5710, Division 

of Trading and Markets; Michael A. 

Macchiaroli, Associate Director, at (202) 

551–5525; Thomas K. McGowan, 

Associate Director, at (202) 551–5521; 

Randall W. Roy, Deputy Associate 

Director, at (202) 551–5522; Raymond 

Lombardo, Assistant Director, at 202– 

551–5755; Sheila Dombal Swartz, 

Senior Special Counsel, at (202) 551– 

5545; or Nina Kostyukovsky, Special 

Counsel, at (202) 551–8833, Office of 

Broker-Dealer Finances, Division of 

Trading and Markets; U.S. Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–7010. 

SUPPLEMENTARY INFORMATION: First, the 

Commission is amending 17 CFR 

240.17ad–22(e)(18) (‘‘Rule 17ad– 

22(e)(18)’’) to require covered clearing 

agencies that provide central 

counterparty (‘‘CCP’’) services for U.S. 

Treasury securities to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed, as applicable, to 

establish objective, risk-based and 

publicly disclosed criteria for 

participation, which require that any 

direct participant of such a covered 

clearing agency submit for clearance 

and settlement all the eligible secondary 

market transactions in U.S. Treasury 

securities to which such direct 

participant is a counterparty. In 

addition, these policies and procedures 

must be reasonably designed, as 

applicable, to identify and monitor the 

covered clearing agency’s direct 

participants’ submission of transactions 

for clearing as required above, including 

how the covered clearing agency would 

address a failure to submit transactions. 

These policies and procedures must also 

be reasonably designed, as applicable, to 

ensure that the covered clearing agency 

has appropriate means to facilitate 

access to clearance and settlement 

services of all eligible secondary market 

transactions in U.S. Treasury securities, 

including those of indirect participants, 

which policies and procedures the 

board of directors of such U.S. Treasury 

securities covered clearing agency 

(‘‘CCA’’) must review annually. The 

Commission is defining an eligible 

secondary market transaction as a 

secondary market transaction in U.S. 

Treasury securities of a type accepted 

for clearing by a registered covered 

clearing agency that is either a 

repurchase or reverse repurchase 

agreement collateralized by U.S. 

Treasury securities, in which one of the 

counterparties is a direct participant, or 

certain specified categories of cash 

purchase or sale transactions, including 

certain exclusions for transactions with 

sovereign entities, international 

financial institutions, natural persons, 

inter-affiliate repo transactions, state/ 

local governments, and other clearing 

organizations. Second, the Commission 

is amending 17 CFR 240.17ad– 

22(e)(6)(i) (‘‘Rule 17ad–22(e)(6)(i)’’) to 

require that a covered clearing agency 

providing central counterparty services 

for U.S. Treasury securities establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, as applicable, 

calculate, collect, and hold margin for 

transactions in U.S. Treasury securities 

submitted on behalf of an indirect 

participant separately from those 

submitted on behalf of the direct 

participant. Third, the Commission is 

amending Rule 17ad–22(e)(18) to 

require that a covered clearing agency 

providing central counterparty services 

for U.S. Treasury securities establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, as applicable, 

ensure that it has appropriate means to 

facilitate access to clearance and 

settlement services of all eligible 

secondary market transactions in U.S. 

Treasury securities, including those of 

indirect participants, which policies 

and procedures the board of directors of 

such covered clearing agency reviews 

annually. In connection with these 

proposed amendments, the Commission 

is including as part of 17 CFR 240.17ad– 

22(a) (‘‘Rule 17ad–22(a)’’) definitions of 

‘‘U.S. Treasury security,’’ ‘‘central 

bank,’’ ‘‘eligible secondary market 

transaction,’’ ‘‘international financial 

institution,’’ ‘‘sovereign entity,’’ ‘‘state 

and local government,’’ and ‘‘affiliated 

counterparty.’’ As part of this 

rulemaking, the Commission is also 

amending the CFR designation of Rule 

17Ad–22 to Rule 17ad–22.1 Fourth, the 

Commission is amending 17 CFR 

240.15c3–3a (‘‘Rule 15c3–3a’’) to permit 

margin required and on deposit at 

covered clearing agencies providing 

central counterparty services for U.S. 

Treasury securities to be included by 

broker-dealers as a debit in the customer 

and PAB reserve formulas, subject to 

certain conditions. 

Table of Contents 

I. Introduction 

II. Discussion of Comments Received and 

Final Rules 

A. U.S. Treasury Securities CCA 

Membership Requirements 

1. Requirement To Clear Eligible 

Secondary Market Transactions 

a. Comments Regarding the Requirement 

To Clear Eligible Secondary Market 

Transactions 

b. Comments Regarding the Concentration 

of Risk in One Covered Clearing Agency 

c. Final Rule 

2. Definition of Eligible Secondary Market 

Transactions 

a. Repo Transactions 

i. Triparty Repo 

ii. Repos by Registered Funds 

iii. Repos by Other Clearing Organizations 

iv. Repos by FCMs 

v. Repos Involving ‘‘End Users’’ 


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2See 15 U.S.C. 78q–1. 

3 Government Securities Act of 1986, section 

102(a); 15 U.S.C. 78c(a)(12)(B)(i). 

vi. Interaffiliate Repos 

vii. Repos by State and Local Governments 

viii. Other Repo Comments 

ix. Final Rule 

b. Purchases and Sales of U.S. Treasury 

Securities 

i. Comments Regarding Cash Clearing 

Generally 

ii. IDB Transactions 

iii. Other Cash Transactions 

iv. Comments Regarding Cash Transactions 

for Registered Funds 

v. Final Rule 

3. Other Exclusions From the Definition of 

an Eligible Secondary Market 

Transaction 

4. Policies and Procedures Regarding U.S. 

Treasury Securities CCA’s Monitoring of 

Its Direct Participants’ Transactions 

5. Alternative Approaches Proposed by 

Commenters 

B. Additional Changes to Covered Clearing 

Agency Standards 

1. Netting and Margin Practices for House 

and Customer Accounts 

2. Facilitating Access to U.S. Treasury 

Securities CCAs 

a. Comments Supporting the Commission’s 

Proposed Rule 

b. Comments Regarding the Commission’s 

Authority To Require a CCA To Accept 

Done Away Transactions 

c. Other Comments Regarding Access 

d. Final Rule 

C. Amendments to Rule 15c3–3a 

1. Introduction 

2. Credit Items 

3. New Debit Item 

4. Note to New Debit Item 

a. First Condition—Permitted Collateral 

b. Second Condition—Customer Position 

Margin 

c. Third Condition—Rules of U.S. Treasury 

Securities CCA 

d. Fourth Condition—Commission 

Approval of Rules of U.S. Treasury 

Securities CCA 

5. PAB Reserve Computation 

III. Compliance Dates 

IV. Economic Analysis 

A. Broad Economic Considerations 

B. Baseline 

1. U.S. Treasury Securities 

2. U.S. Treasury Repurchase Transactions 

3. Clearance and Settlement of U.S. 

Treasury Security Transactions 

a. Cash Market 

i. Interdealer 

ii. Dealer-to-Customer 

b. U.S. Treasury Repo Market 

i. Non-Centrally Cleared Bilateral Repo 

ii. Centrally Cleared Bilateral Repo 

iii. Non-Centrally Cleared Repo Settled on 

a Triparty Platform 

iv. Centrally Cleared Repo Settled on a 

Triparty Platform 

v. Inter-Affiliate Repo 

4. Central Clearing in the U.S. Treasury 

Securities Market 

5. Margin Practices in U.S. Treasury 

Secondary Markets 

6. Disruptions in the U.S. Treasury 

Securities Market 

a. COVID–19 Shock of March 2020 

b. September 2019 Repo Market 

Disruptions 

c. October 2014 Flash Rally 

7. Affected Parties 

a. Covered Clearing Agencies for U.S. 

Treasury Securities: FICC 

b. Direct Participants at U.S. Treasury 

Securities CCAs: FICC Netting Members 

c. Interdealer Brokers 

d. Other Market Participants 

i. Broker-Dealers That Are Not Direct 

Participants/FICC Netting Members 

ii. Hedge Funds, Family Offices, and 

Separately Managed Accounts 

iii. Registered Investment Companies 

(RICs) Including Money Market Funds, 

Other Mutual Funds, and ETFs 

iv. Principal Trading Firms (PTFs) 

v. State and Local Governments 

vi. Private Pensions Funds and Insurance 

Companies 

e. Triparty Agent: Bank of New York 

Mellon 

f. Custodian Banks/Fedwire Securities 

Service (FSS) 

C. Analysis of Benefits, Costs, and Impact 

on Efficiency, Competition, and Capital 

Formation 

1. Benefits 

a. U.S. Treasury Securities CCA 

Membership Requirements 

i. Scope of the Requirement To Clear 

Eligible Secondary Market Transactions 

ii. Application of the Requirement To Clear 

Eligible Repo Transactions 

iii. Application of the Requirement To 

Clear Eligible Secondary Market 

Transactions to Purchases and Sales of 

U.S. Treasury Securities 

iv. Exclusions From the Requirement To 

Clear Eligible Secondary Market 

Transactions 

b. Other Changes to Covered Clearing 

Agency Standards 

i. Policies and Procedures Regarding Direct 

Participants’ Transactions 

ii. Netting and Margin Practices for House 

and Customer Accounts 

iii. Facilitating Access to U.S. Treasury 

Securities CCAs 

c. Amendments to Rules 15c3–3 and 15c3– 

3a 

2. Costs 

a. Costs to FICC and Its Members of the 

Requirement To Clear Eligible Secondary 

Market Transactions 

i. Costs Attendant to an Increase in CCLF 

ii. Costs of the Requirement To Clear 

Eligible Secondary Market Transactions 

in Terms of Increased Margining for 

Existing FICC Members 

iii. Other Costs 

b. Costs to Non-Members of a U.S Treasury 

Securities CCA as a Result of the 

Requirement To Clear Eligible Secondary 

Market Transactions 

c. Other Changes to Covered Clearing 

Agency Standards 

i. Netting and Margin Practices for House 

and Customer Accounts 

ii. Facilitating Access to U.S. Treasury 

Securities CCAs 

d. Amendments to Rules 15c3–3 and 15c3– 

3a 

e. Other Costs 

3. Effect on Efficiency, Competition, and 

Capital Formation 

a. Efficiency 

i. Price Transparency 

ii. Operational and Balance Sheet 

Efficiency 

b. Competition 

c. Capital Formation 

D. Reasonable Alternatives 

1. Require U.S. Treasury Securities CCAs 

To Have Policies and Procedures 

Requiring Only IDB Clearing Members 

To Submit U.S. Treasury Securities Cash 

Trades With Non-Members for Central 

Clearing 

2. Require U.S. Treasury Securities CCAs 

To Have Policies and Procedures 

Requiring the Submission of All 

Repurchase Agreements Without 

Requirements for the Submission of Cash 

Transactions 

3. Include All Cash Transactions Within 

the Scope of Eligible Secondary Market 

Transactions With Exceptions for Central 

Banks, Sovereign Entities, International 

Financial Institutions, and Natural 

Persons 

4. Require U.S. Treasury Securities CCAs 

To Change CCA Access Provisions and 

Netting and Margin Practices for House 

and Customer Accounts and Rule 15c3– 

3 

V. Paperwork Reduction Act 

A. Proposed Changes to Covered Clearing 

Agency Standards 

1. Amendment to Rule 17ad–22(e)(6) 

2. Amendment to Rule 17ad–22(e)(18)(iv) 

B. Broker-Dealers 

VI. Regulatory Flexibility Act 

A. Clearing Agencies 

B. Broker-Dealers 

C. Certification 

VII. Other Matters 

Statutory Authority 

I. Introduction 

The Commission is responsible for 

facilitating the establishment of a 

national system for the prompt and 

accurate clearance and settlement of 

securities transactions.2 This 

responsibility includes the authority to 

regulate clearing agencies engaged in 

the clearance and settlement of 

government securities transactions, 

including U.S. Treasury securities.3

This inclusion of government securities, 

including U.S. Treasury securities, 

within the Commission’s authority for 

the national system of clearance and 

settlement underscores the importance 

of, among other things, the U.S. 

Treasury market. 

U.S. Treasury securities play a critical 

and unique role in the U.S. and global 

economy, serving as a significant 

investment instrument and hedging 

vehicle for investors, a risk-free 

benchmark for other financial 

instruments, and an important 

mechanism for the Federal Reserve’s 


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4See, e.g., Staffs of the U.S. Department of the 

Treasury, Board of Governors of the Federal Reserve 

System, Federal Reserve Bank of New York, U.S. 

Securities and Exchange Commission, and U.S. 

Commodity Futures Trading Commission, Recent 

Disruptions and Potential Reforms in the U.S. 

Treasury Market: A Staff Progress Report, at 1 (Nov. 

2021), available at https://home.treasury.gov/ 

system/files/136/IAWG-Treasury-Report.pdf (‘‘InterAgency Working Group for Treasury Market 

Surveillance (‘‘2021 IAWG Report’’); Staffs of the 

U.S. Department of the Treasury, Board of 

Governors of the Federal Reserve System, Federal 

Reserve Bank of New York, U.S. Securities and 

Exchange Commission, and U.S. Commodity 

Futures Trading Commission, Joint Staff Report: 

The U.S. Treasury Market on October 15, 2014, at 

1, 8 (2015), available at https://home.treasury.gov/ 

system/files/276/joint-staff-report-the-us-treasurymarket-on-10-15-2014.pdf (‘‘Joint Staff Report’’). 

These reports represent the views of Commission 

and other Federal regulatory staff. The reports are 

not a rule, regulation, or statement of the 

Commission. The Commission has neither 

approved nor disapproved the content in the 

reports. These reports, like all staff reports, have no 

legal force or effect: they do not alter or amend 

applicable law, and they create no new or 

additional obligations for any person. 

5 Group of Thirty Working Group on Treasury 

Market Liquidity, U.S. Treasury Markets: Steps 

Toward Increased Resilience, at 1 (2021), available 

at https://group30.org/publications/detail/4950 

(‘‘G–30 Report’’). 

6See Rule 17ad–22(a) (defining covered clearing 

agency and central counterparty) and Exchange Act 

Section 3(a)(23) (defining clearing agency). 

7See, e.g., Order Granting Temporary Exemptions 

Under the Securities Exchange Act of 1934 in 

Connection with Request of Liffe Administration 

and Management and Lch.Clearnet Ltd. Related to 

Central Clearing of Credit Default Swaps, and 

Request for Comments, Exchange Act Release No. 

59164 (Dec. 24, 2008), 74 FR 139, 140 (Jan. 2, 2009) 

(‘‘Liffe Order’’). 

8Covered Clearing Agency Standards Proposing 

Release, Exchange Act Release No. 71699 (Mar. 12, 

2014), 79 FR 29507, 29587 (May 27, 2014) (‘‘CCA 

Standards Proposing Release’’). 

9See, e.g., Liffe Order, supra note 7, 74 FR 140. 

10See Covered Clearing Agency Standards 

Adopting Release, Exchange Act Release No. 78961 

(Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016) (‘‘CCA 

Standards Adopting Release’’). 

11See generally id. 

12The Treasury Market Practices Group 

(‘‘TMPG’’) is a group of ‘‘market professionals 

committed to supporting the integrity and 

efficiency of the Treasury, agency debt, and agency 

mortgage-backed securities markets.’’ See Treasury 

Mark Practice Group, About the TMPG, available at 

https://www.newyorkfed.org/TMPG/index.html. 

The TMPG is sponsored by the Federal Reserve 

Bank of New York. Id. 

13TMPG, White Paper on Clearing and Settlement 

in the Secondary Market for U.S. Treasury 

Securities, at 12 (July 2019), available at https://

www.newyorkfed.org/medialibrary/Microsites/ 

tmpg/files/CS_FinalPaper_071119.pdf (‘‘TMPG 

White Paper’’). These estimates use FR2004 data, 

which are reports provided to the Federal Reserve 

Bank of New York regarding primary dealer market 

activity in U.S. Government securities, covering the 

first half of 2017 and are based on various 

assumptions specified in the TMPG White Paper. 

See also FR2004, Government Securities Dealer 

Reports, available at https://

www.federalreserve.gov/apps/reportforms/ 

reportdetail.aspx?sOoYJ+5BzDZq2f74T6b1cw. 

14Proposing Release, Standards for Covered 

Clearing Agencies for U.S. Treasury Securities and 

Application of the Broker-Dealer Customer 

Protection Rule With Respect to U.S. Treasury 

Securities, Exchange Act Release No. 95763 (Sept. 

14, 2022), 87 FR 64610 (Oct. 25, 2022) (‘‘Proposing 

Release’’). See also Report of the Joint TreasuryFederal Reserve Study of the U.S. Government 

Securities Market (Apr. 1969), available at https:// 

fraser.stlouisfed.org/title/joint-treasury-federalreserve-study-us-government-securities-market-318/ 

report-joint-treasury-federal-reserve-study-usgovernment-securities-market-6282. 

implementation of monetary policy.4

Consequently, confidence in the U.S. 

Treasury market, and in its ability to 

function efficiently, even in times of 

stress, is critical to the stability of the 

global financial system.5

CCPs provide an important role for 

securities markets, interposing 

themselves between the counterparties 

to securities transactions, acting 

functionally as the buyer to every seller 

and the seller to every buyer. The 

Commission regulates CCPs as covered 

clearing agencies (‘‘CCA’’).6 The 

Commission historically has 

acknowledged the benefits that a CCP 

brings to the markets it serves. By 

novating transactions (that is, becoming 

the counterparty to both sides of a 

transaction), a CCP addresses concerns 

about counterparty risk by substituting 

its own creditworthiness and liquidity 

for the creditworthiness and liquidity of 

the counterparties.7 Further, the 

Commission has recognized that ‘‘the 

centralization of clearance and 

settlement activities at covered clearing 

agencies allows market participants to 

reduce costs, increase operational 

efficiency, and manage risks more 

effectively.’’ 8 A CCP also provides a 

centralized system of default 

management that can mitigate the 

potential for a single market 

participant’s failure to destabilize other 

market participants or the financial 

system more broadly.9 However, the 

Commission has also recognized that 

this centralization of activity at clearing 

agencies makes risk management at 

such entities a critical function. 

Because of the importance of risk 

management at CCPs and to further the 

establishment of linked and coordinated 

facilities for clearance and settlement of 

securities transactions, in 2016, the 

Commission adopted the Covered 

Clearing Agency Standards.10 These 

standards address all aspects of a CCP’s 

operations, including financial risk 

management, operational risk, default 

management, governance, and 

participation requirements.11 The 

Commission has had the opportunity to 

administer this new regulatory 

framework, considering many rule 

filings with respect to proposed rule 

changes filed by CCAs pursuant to their 

rule filing obligations as self-regulatory 

organizations (‘‘SROs’’) under Section 

19(b) of the Exchange Act that address 

how the proposed rule changes are 

consistent with the Exchange Act and 

the Covered Clearing Agency Standards 

thereunder. 

The Commission also has had the 

opportunity to observe the U.S. 

Treasury market, including with respect 

to the clearance and settlement of U.S. 

Treasury security transactions in both 

the cash and repo market. In particular, 

the Commission understands that the 

proportion of transactions that are 

centrally cleared has declined over the 

past years. One recent analysis by the 

Treasury Market Practice Group 12

estimates that only 13 percent of the 

overall volume in U.S. dollars of U.S. 

Treasury cash transactions were 

centrally cleared as of the first half of 

2017, and that an additional 19 percent 

were what the TMPG refers to as 

‘‘hybrid’’ clearing, that is, executed on 

an interdealer broker platform (as 

discussed in parts II.A.1 and II.A.2.b.ii 

infra) in which one counterparty is a 

member of a CCA and submits its 

transaction with the interdealer broker 

for central clearing, while the other 

counterparty is not a member of a CCA 

and bilaterally clears its transaction 

with the interdealer broker.13 This use 

of both centrally cleared and not 

centrally cleared transactions introduces 

risk into the market, because bilateral 

clearing involves varying risk 

management practices that are less 

uniform and less transparent to the 

broader market and may be less efficient 

with regard to netting exposures and use 

of collateral as compared to central 

clearing. 

Therefore, the Commission proposed 

amendments to Rule 17ad–22(e)(18) to 

help reduce contagion risk to the CCA 

and bring the benefits of central clearing 

to more transactions involving U.S. 

Treasury securities, thereby lowering 

overall systemic risk in the market.14

Specifically, the Commission proposed 

amendments that would require CCAs 

for the U.S. Treasury market to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to require that their 

direct participants submit for clearance 

and settlement certain eligible 

secondary market transactions, both for 

repos and certain categories of cash 

transactions. In addition, the 

Commission proposed amendments to 

address certain other issues that could 

help facilitate increased central clearing 

in the U.S. These proposed changes 

included amending Rule 17ad– 

22(e)(6)(i) to require that a CCA 

establish, implement, maintain and 


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15Copies of all comment letters received by the 

Commission are available at https://www.sec.gov/ 

comments/s7-23-22/s72322.htm. 16 17 CFR 240.17ad–22(e)(19). See also CCA 

Standards Proposing Release, supra note 8, at 29553 

(noting that some market participants would not 

meet a covered clearing agency’s direct 

participation requirements and proposing risk 

management requirements for indirect and tiered 

participants). 

17See, e.g., 17 CFR 240.17ad–22(e)(6) (referring to 

participants) and (e)(2)(vi) (referring to direct 

participants’ customers). In addition, the Exchange 

Act defines a participant of a clearing agency as 

‘‘any person who uses a clearing agency to clear or 

settle securities transactions or to transfer, pledge, 

lend, or hypothecate securities.’’ 15 U.S.C. 

78c(a)(24). Indirect participants are expressly 

excluded from the Exchange Act definition of a 

‘‘participant’’ of a clearing agency because the 

Exchange Act provides that a person whose only 

use of a clearing agency is through another person 

who is a participant or as a pledgee of securities is 

not a ‘‘participant’’ of the clearing agency. Id. 

18See 17 CFR 240.17ad–22(e)(19) (referring to 

firms that are indirect participants in a covered 

clearing agency as those that ‘‘rely on the services 

provided by direct participants to access the 

covered clearing agency’s payment, clearing, or 

settlement facilities’’). 

19For example, FICC maintains the Sponsored 

Service. See Fixed Income Clearing Corporation, 

Government Securities Division Rulebook, Rule 3A, 

available at https://www.dtcc.com/∼/media/Files/ 

Downloads/legal/rules/ficc_gov_rules.pdf (‘‘FICC 

Rule’’). Because sponsored members cannot clear or 

settle government securities transactions without a 

sponsoring member, the Commission believes that 

these sponsored members are not ‘‘direct 

participants.’’ As noted above, such persons are 

referred to in this release as ‘‘indirect participants’’ 

or ‘‘customers.’’ 

20The Commission recognizes that some entities 

may access more limited services of a U.S. Treasury 

securities CCA without use of its CCP services. For 

example, FICC provides ‘‘comparison only’’ 

services for a certain membership type. See FICC 

Rule 8, supra note 19. Consistent with the 

definition of a ‘‘participant’’ under the Exchange 

Act, such entities would not be considered 

participants of a CCA and therefore would not be 

subject to any rules with respect to the clearing of 

eligible secondary market transactions that a CCA 

may adopt for its direct participants. 21See generally Proposing Release, supra note 14, 

87 FR 64626–29; see also part IV.C.1 infra. 22See Section 19(b) of the Exchange Act and Rule 

19b–4 thereunder. 

enforce written policies and procedures 

reasonably designed to calculate, 

collect, and hold proprietary margin 

separate from customer margin, 

amending Rule 17ad–22(e)(18) to 

require that CCAs establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

ensure that they have appropriate means 

to facilitate access to clearance and 

settlement services of all eligible 

secondary market transactions in U.S. 

Treasury securities, including those of 

indirect participants, and amending 

Rule 15c3–3 to permit margin required 

and on deposit at covered clearing 

agencies providing central counterparty 

services for U.S. Treasury securities to 

be included by broker-dealers as a debit 

in the customer and PAB reserve 

formulas. 

The Commission received many 

comments on the proposal.15 Having 

considered the comments received, the 

Commission is adopting the proposed 

new rules and rule amendments with 

modifications, as discussed further 

below. 

II. Discussion of Comments Received 

and Final Rules 

A. U.S. Treasury Securities CCA 

Membership Requirements 

1. Requirement To Clear Eligible 

Secondary Market Transactions 

Proposed Rule 17ad–22(e)(18)(iv)(A) 

would require that U.S. Treasury 

securities CCAs establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to, 

as applicable, establish objective, riskbased, and publicly disclosed criteria 

for participation, which require that the 

direct participants of such covered 

clearing agency submit for clearance 

and settlement all of the eligible 

secondary market transactions to which 

they are a counterparty. The proposed 

amendment would apply to ‘‘direct 

participants’’ in a U.S. Treasury 

securities CCA, which distinguishes 

entities that access a CCA directly (i.e., 

members of the CCA) from indirect 

participants who ‘‘rely on the services 

provided by direct participants to access 

the covered clearing agency’s payment, 

clearing or settlement facilities.’’ 16 For 

purposes of the Covered Clearing 

Agency Standards, ‘‘participants’’ of a 

CCA are referred to as ‘‘members’’ or 

‘‘direct participants’’ to differentiate 

these entities from ‘‘direct participants’ 

customers’’ or ‘‘indirect participants.’’ 17

Consequently, for purposes of this 

amendment and consistent with the 

terminology already used in the Covered 

Clearing Agency Standards,18 the term 

‘‘direct participants’’ refers to the 

entities that directly access a U.S. 

Treasury securities CCA (generally 

banks and broker-dealers), and the term 

‘‘indirect participants’’ would refer to 

those entities which rely on a direct 

participant to clear and settle their U.S. 

Treasury securities transactions with the 

U.S. Treasury securities CCA (generally 

their customers or clients, which 

typically include market participants 

such as money market funds, hedge 

funds, other asset managers, and smaller 

banks or broker-dealers).19

Moreover, persons who provide 

services in connection with clearance 

and settlement, such as settlement 

agent, settlement bank, or clearing bank 

services, and do not submit trades for 

clearing to a U.S. Treasury securities 

CCA would not be ‘‘direct participants’’ 

or ‘‘indirect participants’’ within the 

meaning of this amendment and the 

terminology used in the Covered 

Clearing Agency Standards.20

In the Proposing Release, the 

Commission stated that it believes that 

the requirement to clear eligible 

secondary market transactions would 

promote the prompt and accurate 

clearance and settlement of U.S. 

Treasury securities transactions, 

providing several benefits to the market 

for U.S. Treasury securities as a 

whole,21 which are summarized briefly 

here. 

First, the Commission stated that it 

believes that the requirement to clear 

eligible secondary market transactions 

would decrease the overall amount of 

counterparty credit risk in the 

secondary market for U.S. Treasury 

securities. Because a U.S. Treasury 

securities CCA would novate and 

guarantee each transaction submitted for 

central clearing, it would become a 

counterparty to each transaction, as the 

buyer to every seller and the seller to 

every buyer. The U.S. Treasury 

securities CCA would be able to risk 

manage these transactions centrally, 

pursuant to risk management 

procedures that the Commission has 

reviewed and approved,22 and would 

guarantee settlement of the trade in the 

event of a direct participant default. 

In particular, the requirement to clear 

eligible secondary market transactions is 

designed to reduce the amount of 

‘‘contagion risk’’ to a U.S. Treasury 

securities CCA arising from what has 

been described as ‘‘hybrid clearing,’’ as 

discussed in more detail in part 

II.A.2.b.iii. With this type of clearing, a 

direct participant’s transactions that are 

not submitted for central clearing pose 

an indirect risk to the covered clearing 

agency, as any default on a bilaterally 

settled transaction could impact the 

direct participant’s financial resources 

and ability to meet its obligations to the 

covered clearing agency. The 

Commission stated that it believes that 

requiring U.S. Treasury securities CCAs 

to impose, as a condition of 

membership, an obligation on their 

direct participants to submit all eligible 

secondary market transactions for 

central clearing should address the 

transactions most likely to cause 

contagion risk to the CCA. 

Second, the Commission stated that it 

believes that the requirement to clear 

eligible secondary market transactions 

would also help any U.S. Treasury 

securities CCA to avoid a potential 

disorderly member default. Defaults in 

bilaterally settled transactions are likely 


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2718 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

23A covered clearing agency, including a U.S. 

Treasury securities CCA, is required to establish, 

implement, maintain and enforce written policies 

and procedures reasonably designed to, as 

applicable, ensure the CCA has the authority and 

operational capacity to contain losses and liquidity 

demands and continue to meet its obligations, 

which must be tested annually, and publicly 

disclose all relevant rules and material procedures, 

including key aspects of its default rules and 

procedures. See Rule 17ad–22(e)(13) and (e)(23)(i). 

24CCA Standards Proposing Release, supra note 

8, 79 FR 29545 (a CCP’s default management 

procedures would provide certainty and 

predictability about the measures available to a 

covered clearing agency in the event of a default 

which would, in turn facilitate the orderly handling 

of member defaults and would enable members to 

understand their obligations to the covered clearing 

agency in extreme circumstances). 

25 2021 IAWG Report, supra note 4, at 30. 

26Proposing Release, supra note 14, 87 FR 64628 

& n. 182 (citing Self-Regulatory Organizations; 

Fixed Income Clearing Corporation; Order Granting 

Approval of a Proposed Rule Change Relating to 

Trade Submission Requirements and Pre-Netting, 

Exchange Act Release No. 51908 (June 22, 2005), 70 

FR 37450 (June 29, 2005) (describing a rule 

designed to bring additional transactions into 

FICC’s netting system as ‘‘clearly designed to 

promote the prompt and accurate clearance and 

settlement of those transactions and to preserve the 

safety and soundness of the national clearance and 

settlement system.’’)). 

27 Darrell Duffie, Still the World’s Safe Haven 

Redesigning the U.S. Treasury Market After the 

COVID–19 Crisis, Hutchins Center Working Paper 

# 62 (Brookings Inst.) at 15 (June 2020), available 

at https://www.brookings.edu/wp-content/uploads/ 

2020/05/WP62_Duffie_v2.pdf (‘‘Duffie’’). 

28 2021 IAWG Report, supra note 4, at 30; Nellie 

Liang & Patrick Parkinson, Enhancing Liquidity of 

the U.S. Treasury Market Under Stress, at 9 (Dec. 

16, 2020), available at https://www.brookings.edu/ 

wp-content/uploads/2020/12/WP72_LiangParkinson.pdf (‘‘Liang & Parkinson’’); Duffie, supra 

note 27, at 16–17. 

29Liang & Parkinson, supra note 28, at 9. 

30 G–30 Report, supra note 5, at 13. 

31 2021 IAWG Report, supra note 4, at 30; Duffie, 

supra note 27, at 16; G–30 Report, supra note 5, at 

13. All-to-all trading would be characterized by the 

ability for a bid or offer submitted by one market 

participant to be accepted by any other market 

participant, with trades executed at the best bid or 

offer. See, e.g., Liang & Parkinson, supra note 28, 

at 9. All-to-all trading could improve the quality of 

trade execution in normal market conditions and 

broaden and stabilize the supply of market liquidity 

under stress. See, e.g., G–30 Report, supra note 5, 

at 10. 

32 Duffie, supra note 27, at 15;2021 IAWG Report, 

supra note 4, at 30 (centralization of transactions at 

a CCP ‘‘can simplify data collection and improve 

visibility into market conditions for the authorities 

and, to some degree, for market participants’’). 

33See generally Letter from Americans for 

Financial Reform Education Fund (Dec. 27, 2022) 

(‘‘AFREF Letter’’); Letter from Stephen W. Hall, 

Legal Director and Securities Specialist, and Scott 

Farnin, Legal Counsel, Better Markets, Inc. (Dec. 23, 

2022) (‘‘Better Markets Letter’’); Letter from Murray 

Pozmanter, Managing Director, President of DTCC 

Clearing Agency Services, Head of Global Business 

Operations, and Laura Klimpel, General Manager of 

FICC, Head of SIFMU Business Development, 

Depository Trust and Clearing Corporation and 

Fixed Income Clearing Corporation (Dec. 27, 2022) 

(‘‘DTCC/FICC Letter’’); Letter from Robin Vince, 

President and Chief Executive Officer, The Bank of 

New York Mellon Corporation (Dec. 22, 2022) 

(‘‘BNY Mellon Letter’’); Letter from Rachel 

Goldberg, Head of Government Relations and 

Regulatory Strategy, Americas, London Stock 

Exchange Group (Dec. 27, 2022) (‘‘LSEG Letter’’); 

Letter from Chris Edmonds, Chief Development 

Officer, Intercontinental Exchange, Inc. (Jan. 12, 

2023) (‘‘ICE Letter’’). 

to be less orderly and subject to variable 

default management techniques because 

bilaterally settled transactions are not 

subject to the default management 

processes that are required to be in 

place and publicly disclosed at a CCP.23

Centralized default management is a key 

feature of central clearing.24 Because the 

CCP has novated and guaranteed the 

transactions, it is uniquely positioned to 

coordinate the default of a member for 

trades that it has centrally cleared, and 

the non-defaulting members can rely on 

the CCP to complete the transactions of 

the defaulting member and cover any 

resulting losses using the defaulting 

member’s resources and/or its default 

management tools. Even in a situation 

where two CCPs have to coordinate the 

default of a joint member, that 

coordination should result in more 

efficiency and market confidence than 

multiple bilateral settlements. 

Third, the Commission stated that it 

believes that the requirement to clear 

eligible secondary market transactions 

will further the prompt and accurate 

clearance and settlement of U.S. 

Treasury securities by increasing the 

multilateral netting of transactions in 

these instruments, thereby reducing 

operational and liquidity risks, among 

others. Central clearing of transactions 

nets down gross exposures across 

participants, which reduces firms’ 

exposures while positions are open and 

reduces the magnitude of cash and 

securities flows required at settlement.25

As the Commission stated in the 

Proposing Release, FICC’s failure to 

receive all eligible trading activity of an 

active market participant reduces the 

value of its vital multilateral netting 

process and causes FICC to be less wellsituated to prevent future market 

crises.26

The benefits of multilateral netting 

flowing from central clearing can 

improve market safety by lowering 

exposure to settlement failures, which 

would also tend to promote the prompt 

and accurate clearance and settlement of 

U.S. Treasury securities transactions.27

Multilateral netting can also reduce the 

amount of balance sheet required for 

intermediation and could also enhance 

dealer capacity to make markets during 

normal times and stress events because 

existing bank capital and leverage 

requirements recognize the riskreducing effects of multilateral netting 

of trades that CCP clearing 

accomplishes.28

Fourth, the Commission stated that 

the potential benefits associated with 

the multilateral netting of transactions 

at a CCP that the requirement to clear 

eligible secondary market transactions is 

designed to bring about could, in turn, 

help to unlock further improvements in 

U.S. Treasury market structure. For 

example, the increase in clearing and 

consequent reduction in counterparty 

credit risk could ‘‘enhance the ability of 

smaller bank and independent dealers 

to compete with the incumbent bank 

dealers.’’ 29 Similarly, decreased 

counterparty credit risk—and 

potentially lower costs for 

intermediation—could result in 

narrower spreads, thereby enhancing 

market quality.30 The Commission also 

stated that increased accessibility of 

central clearing in U.S. Treasury 

markets could support movement 

toward all-to-all trading, even 

potentially in the repo market, which 

would further improve market structure 

and resiliency, although a movement in 

that direction is not assured.31 This 

potential movement would stem from 

the fact that increased central clearing of 

U.S. Treasury securities transactions 

would, in turn, result in decreased 

counterparty risk, making all-to-all 

trading more attractive, that is, a market 

participant would be more willing to 

trade with any counterparty if a CCP 

were to serve as its ultimate 

counterparty. 

Finally, the Commission stated that 

increased central clearing should 

enhance regulatory visibility in the 

critically important U.S. Treasury 

market. Specifically, central clearing 

increases the transparency of settlement 

risk to regulators and market 

participants, and in particular allows a 

CCP to identify concentrated positions 

and crowded trades, adjusting margin 

requirements accordingly, which should 

help reduce significant risk to the CCP 

and to the system as a whole.32 In light 

of the role of U.S. Treasury securities in 

financing the Federal Government, it is 

important that regulators improve their 

visibility into this market. Increased 

central clearing would also allow for a 

more aggregated view of market activity 

in one place. 

a. Comments Regarding the 

Requirement To Clear Eligible 

Secondary Market Transactions 

Some commenters generally 

supported the proposal and its approach 

to requiring additional central clearing 

of transactions in U.S. Treasury 

securities.33 However, other 

commenters generally opposed the 

proposed requirement to clear eligible 


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34The Commission discusses the comments on 

incentives in its discussion of alternative 

approaches to a clearing requirement in part II.A.5 

infra. 

35Letter from William C. Thum, Managing 

Director and Assistant General Counsel, Securities 

Industry and Financial Markets Association 

(‘‘SIFMA’’) Asset Management Group, at 7 (Dec. 23, 

2022) (‘‘SIFMA AMG Letter’’). 

36Additional Information about Reference Rates 

Administered by the New York Fed, available at 

https://www.newyorkfed.org/markets/referencerates/additional-information-about-referencerates#tgcr_bgcr_sofr_calculation_methodology. 

37Letter from Robert Toomey, Managing Director 

and Associate General Counsel, Securities Industry 

and Financial Markets Association, and Michelle 

Meertens, Deputy General Counsel, Institute of 

International Bankers, at 8 (Dec. 22, 2022) 

(‘‘SIFMA/IIB Letter’’). 

38SIFMA/IIB Letter, supra note 37, at 8. 

39SIFMA/IIB Letter, supra note 37, at 8. 

40 Dodd-Frank Act section 723; 15 U.S.C. 3C(a). 

41See Primary Dealers, available at https://

www.newyorkfed.org/markets/primarydealers (‘‘In 

order to be eligible as a primary dealer, a firm must 

. . . Be a participant in the central counterparty 

service for the government securities market— 

DTCC’s FICC–GSD—to support clearing of primary 

market transactions.’’). 

42 Id. 

43SIFMA/IIB Letter, supra note 37, at 9. 

44SIFMA/IIB Letter, supra note 37, at 9. 

45SIFMA/IIB Letter, supra note 37, at 9. 

secondary market transactions, arguing 

that there was not sufficient information 

on the costs and benefits of such a 

requirement, that the Commission 

should do further study, and/or that the 

Commission should incentivize 

additional clearing instead of requiring 

it.34

One commenter also referenced the 

need to assess the potential impact of an 

increased volume of cleared repo 

transactions on the Secured Overnight 

Financing Rate (‘‘SOFR’’), given its 

importance as a reference rate replacing 

LIBOR and because SOFR is calculated 

largely based on implied financing rates 

of repo transactions cleared at FICC.35

SOFR is calculated as a volumeweighted median, which is the rate 

associated with transactions at the 50th 

percentile of transaction volume.36

Specifically, the volume-weighted 

median rate is calculated by ordering 

the transactions from lowest to highest 

rate, taking the cumulative sum of 

volumes of these transactions, and 

identifying the rate associated with the 

trades at the 50th percentile of dollar 

volume. Such volume weighting should 

allow preparation of the rate to take into 

account any increased transaction 

volume arising from additional central 

clearing in response to a requirement to 

clear eligible secondary market 

transactions, thereby making further 

study unnecessary. 

With respect to costs and benefits, one 

commenter stated that the increased 

costs of centrally clearing U.S. Treasury 

security transactions may reduce 

liquidity and diversity in the Treasury 

market if firms reduce activity, leave the 

market, or if barriers to entry are too 

high, given the significant costs of 

clearing for market participants.37 The 

commenter identified several types of 

costs, including initial margin 

requirements, clearing fees, obligations 

with respect to FICC’s Capped 

Contingent Liquidity Facility (‘‘CCLF’’), 

the operational build necessary to 

access central clearing either as a direct 

or indirect participant, and legal costs 

and time associated with onboarding 

customers for indirect central clearing, 

including, e.g., the need for Sponsoring 

Members to file UCC financing 

statements with respect to Sponsored 

Members under the Sponsored Member 

program. The commenter stated that the 

impact of these costs would be 

disproportionately felt by small and 

mid-sized participants in the U.S. 

Treasury market, and that these costs 

would reduce diversity in the market 

and further increase concentration 

among market participants (which may 

increase systemic risk) if such 

participants leave the market.38

As discussed in more detail in part 

IV.C.2, increased transaction costs will 

generally reduce the expected return of 

a particular investment. If the 

amendments regarding eligible 

secondary market transactions resulted 

only in such increased costs, then the 

potential risk/return tradeoff would 

worsen, resulting in decreased 

transaction volumes and decreased 

liquidity. However, central clearing 

provides other benefits, including those 

described in part IV.C.1, many of which 

could accrue to small and mid-sized 

market participants. Moreover, 

increased cost does not necessarily 

mean that firms will reduce activity or 

leave the market. 

The commenter also stated that these 

costs may incentivize non-direct 

participants of a U.S. Treasury securities 

CCA to look for ways to trade away from 

direct participants in order to not have 

to centrally clear U.S. Treasury 

transactions, undermining the policy 

goals of the proposal.39 The Commission 

acknowledges that the proposed 

requirement for U.S. Treasury securities 

CCAs to require their members to 

submit eligible secondary market 

transactions for clearing and settlement 

does not limit the ability of market 

participants to transact in U.S. Treasury 

securities transactions away from CCAs. 

This requirement is not a mandate to 

clear all transactions in U.S. Treasury 

securities, regardless of who executes 

the transaction, and differs from the 

swaps mandate imposed by Congress in 

the Dodd-Frank Act in 2010.40 However, 

given current market structure and 

requirements applicable to certain 

market participants, it would be 

challenging for market participants to 

simply shift all their activity to transact 

away from CCAs. For example, primary 

dealers, which serve as trading 

counterparties of the New York Fed in 

its implementation of monetary policy, 

are required to maintain a substantial 

presence as a market maker that 

provides two-way liquidity in U.S. 

government securities, particularly 

Treasury cash and repo operations.41

These primary dealers must be 

participants in FICC, as the CCP for the 

government securities market, to 

support clearing of primary market 

transactions.42 Therefore, if a market 

participant wants to transact with a 

primary dealer which is required to be 

a direct participant of FICC, it would 

have to determine an appropriate way to 

submit such transactions for clearing 

and settlement. Primary dealers are 

responsible for a significant portion of 

market activity in the U.S. Treasury 

market (see part IV.B infra), and 

therefore, market participants likely 

would continue to transact with such 

primary dealers. 

In addition, the commenter stated that 

central clearing can have procyclical 

effects in times of market stress due to 

the margin requirements of clearing 

agencies, further reducing liquidity 

when it is most needed.43 The 

commenter stated that, depending on 

the applicable margin models, clearing 

can be procyclical in times of market 

turmoil, as increased margin 

requirements (including intraday and ad 

hoc calls) drive demand for liquid 

assets, which, in turn, increases the 

scarcity of those assets and further 

drives market stress. The commenter 

described FICC’s rules as allowing FICC 

to demand, at any time in its discretion, 

additional margin from its members in 

times of market volatility, including 

through intraday calls, to safeguard the 

clearing infrastructure.44 The 

commenter suggested that the 

Commission should engage in 

additional study on the procyclical 

effects of central clearing before 

implementing a central clearing 

requirement, focusing on the 

appropriate balance from a systemic risk 

perspective of rigorously managing the 

risk of positions cleared through a CCP 

as compared to minimizing liquidity 

strains on the U.S. Treasury market.45

The Commission acknowledges that, 

in times of market stress, margin calls 


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46 17 CFR 240.17ad–22(e)(6)(ii). 

47See, e.g., Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order Approving a 

Proposed Rule Change to Modify the Calculation of 

the MBSD VaR Floor to Incorporate a Minimum 

Margin Amount, Exchange Act Release No. 92303, 

at 32 (June 30, 2021) (discussing commenter’s 

concern regarding potential procyclical nature of a 

margin methodology change); Self-Regulatory 

Organizations; The Options Clearing Corporation; 

Order Granting Approval of Proposed Rule Change 

Concerning The Options Clearing Corporation’s 

Margin Methodology for Incorporating Variations in 

Implied Volatility, Exchange Act Release No. 95319, 

at 3 (July 19, 2022) (referencing the impact of a 

change to margin methodology on procyclicality of 

margin). 

48See, e.g., Self-Regulatory Organizations; 

National Securities Clearing Corporation; Order 

Approving a Proposed Rule Change to Enhance 

National Securities Clearing Corporation’s HaircutBased Volatility Charge Applicable to Illiquid 

Securities and UITs and Make Certain Other 

Changes to Procedure XV, Exchange Act Release 

No. 34–90502, at 56–59 (Nov. 24, 2020) (discussing 

commenter’s concerns regarding transparency of 

change to margin methodology). 

49See Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Notice of Filing of 

Proposed Rule Changes to the Required Fund 

Deposit Calculation in the Government Securities 

Division Rulebook, Exchange Act Release No. 82588 

(Jan. 26, 2018) (identifying the following specific 

parameter breaks: (i) a dollar threshold that 

evaluates whether a Netting Member’s Intraday VaR 

Charge equals or exceeds a set dollar amount (then 

set at $1,000,000) when compared to the VaR 

Charge that was included in the most recently 

collected Required Fund Deposit including, any 

subsequently collected Intraday Supplemental 

Fund Deposit; (ii) a percentage threshold, that 

evaluates whether the Intraday VaR Charge equals 

or exceeds a percentage increase (then set at 100%) 

of the VaR Charge that was included in the most 

recently collected Required Fund Deposit 

including, if applicable, any subsequently collected 

Intraday Supplemental Fund Deposit; (iii) the 

coverage target, that evaluates whether a Netting 

Member is experiencing backtesting results below 

the 99% confidence level). FICC has updated this 

information via Important Notices to its 

participants. See, e.g., Important Notice GOV1244– 

22, GSD Intraday Supplemental Fund Deposit 

Parameter Change (Apr. 11, 2022), available at 

https://www.dtcc.com/-/media/Files/pdf/2022/4/ 

11/GOV1244-22.pdf (raising the coverage target). 

50See also Proposed Rule, Covered Clearing 

Agency Resilience and Recovery and Wind-Down 

Plans, Exchange Act Release No. 97516 (May 17, 

2023), 88 FR 34708 (May 30, 2023) (proposing 

additional requirements with respect to intraday 

margin that CCAs require intraday monitoring of 

their exposures and specifying particular 

circumstances in which the CCA should make 

intraday margin calls). 

51SIFMA/IIB Letter, supra note 37, at 10. 

52Comment Submission from SIA Partners, 

entitled CENTRAL CLEARING OF U.S. 

TREASURIES & REPO, A Study on the Impact to 

the Market and Market Participants, at 79–80 (Mar. 

2023) (‘‘SIA Partners Comment’’); see also id. at 8. 

53SIFMA/AMG Letter, supra note 37, at 3, 9. 

54SIFMA/AMG Letter, supra note 37, at 9. 

55For example, there is only one CCA in the U.S. 

equities market and in the U.S. listed derivatives 

market. 

may increase to address the ongoing 

market volatility. This is by design, as 

margin models are built to be responsive 

to current market conditions. The 

Commission has specifically required 

that CCAs have the authority and 

operational capacity to make intraday 

margin calls in defined circumstances.46

This ability is important to the CCA’s 

ability to manage the risk and cover the 

credit exposures that its participants 

may bring to the CCA. When 

considering a CCA’s authority with 

respect to intraday margin, the 

Commission may consider its potential 

procyclicality.47 In addition, the 

Commission may consider the 

transparency of the margin model, such 

that market participants can understand 

when the CCA may make margin calls.48

In addition to the FICC rules cited by 

the commenter, FICC has provided 

additional transparency regarding how 

it determines the need for intraday 

margin calls, including the specific 

criteria that it uses to assess the need.49

FICC is also subject to Rule 17ad– 

22(e)(23), which requires certain levels 

of public disclosure regarding FICC’s 

margin methodology and the costs of 

participating in FICC, as discussed 

further in part II.B.2 infra. The 

Commission’s ongoing consideration of 

the role and function of intraday margin 

calls, as well as market participants’ 

ability to understand such calls, 

obviates the need for separate study in 

connection with this proposal.50

b. Comments Regarding the 

Concentration of Risk in One Covered 

Clearing Agency 

Commenters also mentioned the 

potential concentration risk that would 

arise as a result of the requirement to 

clear eligible secondary market 

transactions, specifically because only 

one covered clearing agency currently 

provides such services. One commenter 

stated that concentrating such 

significant levels of settlement, 

operational, liquidity and credit risk in 

one institution means that were there 

operational or liquidity stress at FICC, 

widespread dysfunction in the Treasury 

markets could result.51 Another 

commenter which analyzed market 

views of the proposal identified 

increased concentration risk as a 

primary concern for market participants, 

who cited potential technical issues at 

FICC that would result in a ‘‘pause [of] 

counterparty trade transactions and lead 

to substantial losses for market 

participants.’’ However, the commenter 

also acknowledged that a smaller group 

of market participants explained that 

they were not opposed to a single 

clearinghouse model through FICC, 

stating that FICC has adequate risk 

models and that the concentration in 

one CCP is not of concern in the futures 

or derivatives markets, which, like 

FICC, also only have one CCP to serve 

their respective markets.52

In addition, one commenter stated 

that the Commission should only 

impose a clearing mandate once FICC 

and at least a second covered clearing 

agency are able to offer access to 

clearing solutions that will fulfill the 

enhanced rule requirements and meet 

the needs of market participants.53 The 

commenter noted that the existence of 

one covered clearing agency serving the 

U.S. Treasury market is highly 

problematic as it creates enormous 

concentration risk for market 

participants, and highlighted that, given 

the importance of the U.S. Treasury 

market to the overall global economy, 

there needs to be a compelling reason 

for increasing the concentration of 

cleared trading activity in a single 

clearing house that is member owned 

and operated on a for-profit basis, 

particularly when there is no alternative 

or fallback venue should the clearing 

house experience a disruption to its 

operations or more significantly were it 

to fail.54

The Commission acknowledges that, 

currently, there is only one U.S. 

Treasury securities CCA, FICC, and that 

this does create concentration risk for 

the clearing of U.S. Treasury securities 

transactions. However, this 

concentration risk is mitigated by the 

existence of a supervisory framework for 

the existing U.S. Treasury securities 

CCA, and it is not uncommon for one 

CCA to serve a particular market.55 The 

Commission therefore disagrees with 

the commenter that the existence of two 

CCAs is necessary for this requirement 

to be implemented. Moreover, the 

Commission is not requiring that the 

additional central clearing of U.S. 

Treasury securities transactions be 

concentrated in one clearing house. But, 

if that remains the case going forward, 

the benefits expected to arise from this 

additional clearing, as discussed further 

in part IV.C.1 infra, constitute a 

sufficient compelling reason to adopt 

the final rule, even if such concentration 

is present, which, as discussed, is 

subject to the appropriate mitigation of 

risk arising from the regulatory 

framework applicable to CCAs as 

discussed in this section. 

FICC has been designated by the 

Financial Stability Oversight Council as 

systemically important under Title VIII 

of the Dodd-Frank Act. This designation 

means that FICC is subject to heightened 

supervision and examination by the 

Commission, in consultation with the 

Board of Governors of the Federal 

Reserve System (‘‘Board of Governors’’. 


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56 17 CFR 240.17ad–22(e)(4)(vi) and (vii) and 

(e)(7)(vi) and (vii). 

57 17 CFR 240.17ad–22(e)(6). 

58 17 CFR 240.17ad–22(e)(18) and (19). 

59 17 CFR 240.17ad–22(e)(17). 

60Securities Exchange Act Release No. 73639 

(Nov. 19, 2014), 79 FR 72252, 72253, 72256 (Dec. 

5, 2014). 

61See 17 CFR 242.1001. 

62 17 CFR 240.17ad–22(e)(3)(ii). In the event of a 

wind-down in which the result is that the U.S. 

Treasury securities CCA no longer exists, Rule 

17ad–22(e)(18)(iv) would not apply, as there would 

be no CCA to impose such membership 

requirements. The requirement to clear eligible 

secondary market transactions arises under the 

CCA’s rules and is not a mandate to clear based on 

the nature of the security. 

FICC is subject to the Covered Clearing 

Agency Standards, which address the 

various types of risk that FICC faces as 

a CCP, including settlement, 

operational, liquidity, and credit risk. 

A CCA must be able to meet the 

requirements of the Covered Clearing 

Agency Standards regardless of the 

presence or absence of other CCAs. The 

Covered Clearing Agency Standards 

specifically address a CCA’s obligations 

in 23 specific areas, many of which 

directly relate to the CCA’s ability to 

manage the risks presented to it as a 

CCA. For example, a CCA must have 

policies and procedures in place to 

effectively identify, measure, monitor, 

and manage its credit exposures to 

participants and those arising from its 

payment, clearing, and settlement 

processes, including by, among other 

things, maintaining sufficient financial 

resources to cover its credit exposure to 

each participant fully with a high degree 

of confidence and maintain additional 

financial resources to enable it to cover 

a wide range of foreseeable stress 

scenarios, including the default of the 

largest or two largest participant 

families (depending on the nature of the 

CCA’s activities). A CCA also must have 

policies and procedures in place to 

effectively measure, monitor, and 

manage the liquidity risk that arises in 

or is borne by the CCA, including 

measuring, monitoring, and managing 

its settlement and funding flows on an 

ongoing and timely basis, and its use of 

intraday liquidity, by, among other 

things, holding qualifying liquid 

resources in an amount sufficient to 

effect same-day and, where appropriate, 

intraday and multiday settlement of 

payment obligations with a high degree 

of confidence under a wide range of 

foreseeable stress scenarios that 

includes, but is not limited to, the 

default of the largest participant family 

in extreme but plausible market 

conditions. With respect to both its 

credit and liquidity resources, the CCA 

is required to, among other things, test 

the sufficiency of such resources at least 

once each day using standard and 

predetermined parameters and 

assumptions, conduct a comprehensive 

analysis on at least a monthly basis of 

the existing scenarios, models, and 

underlying parameters and assumptions 

used to ensure that they are appropriate 

for determining the CCA’s needs and 

resources in light of current and 

evolving market conditions, and to 

perform a model validation of the 

models used for such testing at least 

annually.56

In addition, a CCA is required to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to cover its credit 

exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum and among other 

things, calculates margin sufficient to 

cover its potential future exposure to 

participants in the interval between the 

last margin collection and the close out 

of positions following a participant 

default, and is monitored by 

management on an ongoing basis and is 

regularly reviewed, tested, and verified 

by conducting backtests of its margin 

model at least once each day using 

standard predetermined parameters and 

assumptions and conducting a 

sensitivity analysis of its margin model 

and a review of its parameters and 

assumptions for backtesting on at least 

a monthly basis, among other things.57

A CCA also is required to have policies 

and procedures reasonably designed to 

establish objective, risk-based, and 

publicly disclosed criteria for 

participation, which permit fair and 

open access by direct and, where 

relevant, indirect participants and other 

financial market utilities, require 

participants to have sufficient financial 

resources and robust operational 

capacity to meet obligations arising from 

participation in the clearing agency, and 

monitor compliance with such 

participation requirements on an 

ongoing basis; and identify, monitor, 

and manage the material risks to the 

CCA arising from arrangements in 

which firms that are indirect 

participants in the CCA rely on the 

services provided by direct participants 

to access the CCA’s payment, clearing, 

or settlement facilities.58

These requirements should ensure 

that a CCA is able to accommodate the 

market needs for its clearance and 

settlement activity and that a CCA can 

appropriately risk manage the activity 

that its participants submit for clearing 

and settlement, which should, in turn, 

mitigate the potential concentration risk 

arising from the existence of only one 

CCA for a particular asset class. 

Further, regarding the comments 

raising concerns about potential 

operational or technical issues at a 

single CCA, the Covered Clearing 

Agency Standards include Rule 17ad– 

22(e)(17), which requires written 

policies and procedures reasonably 

designed to manage the covered clearing 

agency’s operational risks by (i) 

identifying the plausible sources of 

operational risk, both internal and 

external, and mitigating their impact 

through the use of appropriate systems, 

policies, procedures, and controls; (ii) 

ensuring that systems have a high 

degree of security, resiliency, 

operational reliability, and adequate, 

scalable capacity; and (iii) establishing 

and maintaining a business continuity 

plan that addresses events posing a 

significant risk of disrupting 

operations.59 In addition, CCAs, as 

registered clearing agencies, are subject 

to the requirements of Regulation 

Systems Compliance Integrity 

(‘‘Regulation SCI’’). Regulation SCI is 

designed to strengthen the infrastructure 

of the U.S. securities markets, reduce 

the occurrence of systems issues in 

those markets, improve their resiliency 

when technological issues arise, and 

implement an updated and formalized 

regulatory framework, thereby helping 

to ensure more effective Commission 

oversight of such systems.60 As entities 

subject to Regulation SCI, CCAs are 

required to have written policies and 

procedures reasonably designed to 

ensure that their key automated systems 

have levels of capacity, integrity, 

resiliency, availability, and security 

adequate to maintain their operational 

capability and promote the maintenance 

of fair and orderly markets, and that 

such systems operate in accordance 

with the Exchange Act and the rules and 

regulations thereunder and the entities’ 

rules and governing documents, as 

applicable.61 These requirements 

should work to mitigate the possibility 

that a CCA would experience an 

interruption to its operations. In the 

event that a CCA were to fail, it is 

required to have policies and 

procedures to establish a recovery and 

wind-down plan to address that 

situation.62

FICC also must meet its obligations 

under both Section 19(b) of the 

Exchange Act, as a self-regulatory 

organization, and Title VIII of the DoddFrank Act. This means that the 

Commission has the opportunity to 

review any proposed rule changes and 

imposes specific additional filing 

obligations for an entity designated as 

systemically important under Title VIII 


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2722 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

63 12 U.S.C. 5465(e); 17 CFR 240.19b–4. 

64The members of such clearing agencies are 

required to purchase common shares under DTCC’s 

Shareholders Agreement as a condition to use the 

clearing agencies’ services and facilities. See, e.g., 

FICC Rule 49, section 2, supra note 19. This differs 

from other clearing agencies or clearing 

organizations in which the shareholders are not 

limited to the participants of the clearing agency 

and the clearing agency may be owned by a 

publicly traded company. 

65See, e.g., Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Notice of Filing and 

Immediate Effectiveness of Proposed Rule Change 

to Amend Certain MBSD Fees, Exchange Act 

Release No. 96575 (Dec. 22, 2022). In addition, 

because FICC is member-owned, members may 

receive rebates when FICC collects excess net 

income, which is defined as either income of FICC 

or one business line of FICC after application of 

expenses, capitalization costs, and applicable 

regulatory requirements. See FICC Rules, Fee 

Structure, Section XII, supra note 19. 

66Letter from the Independent Dealer & Trader 

Association, at 9 (Dec. 27, 2022) (‘‘IDTA Letter’’). 

67 15 U.S.C. 78q–1(b)(3)(E). 

68 15 U.S.C. 78s(b); Dodd-Frank Act Section 

806(e); 17 CFR 240.19b–4. 

69 ICE Letter, supra note 33, at 2–3. 

70 15 U.S.C. 78q–1(b)(3)(I). 

71The Commission also amends the CFR 

designation of Rule 17Ad–22 in order to ensure the 

regulatory text conforms more consistently with 

section 2.13 of the Document Drafting Handbook. 

See Office of the Federal Register, Document 

Drafting Handbook (Aug. 2018 Edition, Revision 

2.1, dated Oct. 2023), available at https://

www.archives.gov/files/federal-register/write/ 

handbook/ddh.pdf. In particular, the Commission 

amends the CFR section designation for 17 CFR 

240.17Ad–22 (Rule 17Ad–22) to replace the 

uppercase letter with the corresponding lowercase 

letter, such that the rule is redesignated as 17 CFR 

240.17ad–22 (Rule 17ad–22). 

of the Dodd-Frank Act to provide 

advance notice to the Commission, 

which must consult with the Board of 

Governors, of any change to the entity’s 

procedures that may materially alter the 

nature or level of risk presented.63 This 

overall supervisory framework, 

including the Covered Clearing Agency 

Standards, should help ensure that FICC 

continues to be subject to robust 

supervision and oversight and to be able 

to manage the risks presented to it, even 

those arising from increased Treasury 

clearing. In light of the robust regulatory 

framework applicable to CCAs, the fact 

that only one CCA serves the market 

should not preclude the imposition of a 

requirement to clear eligible secondary 

market transactions. 

Further, the Commission is not 

persuaded that the ownership or 

organizational structure of the present 

U.S. Treasury securities CCA has an 

effect on its ability to serve the market. 

The Commission has not imposed 

particular requirements for the 

ownership or corporate structure of 

CCAs, and CCAs currently exhibit a 

variety of ownership and corporate 

structures. For example, FICC is wholly 

owned by the Depository Trust & 

Clearing Corporation (‘‘DTCC’’), which 

is, in turn, owned by the members of the 

clearing agencies owned by the DTCC.64

FICC operates on a cost plus low-margin 

model, meaning that its fees are costbased plus a markup as approved by the 

Board or management and that this 

markup or ‘‘low margin’’ is applied to 

recover development costs and 

operating expenses and to accumulate 

capital sufficient to meet regulatory and 

economic requirements.65 Nevertheless, 

a CCA’s status as a for-profit 

organization does not preclude its 

ability to meet its requirements under 

the Covered Clearing Agency Standards. 

An additional commenter stated its 

belief that relinquishing control of 

credit approval to a single entity poses 

a significant problem, particularly, with 

all transactions going through FICC and 

where margin requirements can be 

changed at any time. The commenter 

stated that every firm has a different risk 

appetite and quantitative and qualitative 

perspectives as it relates to credit 

analysis, which are part of the 

professional services and expertise that 

well-run firms offer, and that by 

inserting FICC into the center of the 

credit approval process, firms lose their 

ability to apply their deeply informed 

market views and differentiate 

themselves from competitors.66

The Commission disagrees that the 

requirement to clear eligible secondary 

market transactions, which currently 

can be done only at FICC, will remove 

firms’ ability to differentiate themselves 

from their competitors. FICC has no role 

in the relationship between a direct 

participant and the direct participant’s 

customers, and, indeed, the Exchange 

Act provides that its rules cannot 

impose any schedule of prices, or fix 

rates or other fees, for its participants’ 

services.67 FICC’s direct participants 

will remain free to determine what 

services they will offer to their 

customers, and at what price, thereby 

providing the ability for the direct 

participants to differentiate themselves 

from their competitors. 

The Commission also disagrees that 

margin requirements at FICC can change 

at any time. FICC’s margin methodology 

is part of its rules that have been 

approved by the Commission, and 

changes to that methodology must be 

filed with and reviewed by the 

Commission because of FICC’s status as 

a self-regulatory organization. The 

margin methodology, which is part of 

FICC’s approved rules, does provide 

some flexibility to FICC to manage risk, 

and potentially increase margin 

requirements, in times of market 

volatility and to guard against exposure 

to the CCP, but this flexibility is not 

equivalent to FICC being able to alter its 

margin requirements at any time. 

Pursuant to the Commission’s rules, 

FICC would be obligated to file for 

Commission review any proposed 

change to its margin methodology and 

to file an advance notice of any 

proposed change to its rules in the event 

that the change would materially alter 

the nature or level of risk presented by 

the CCA, with both of these processes 

involving notice and the opportunity for 

public comment.68

Finally, one commenter also stated 

that any final rule should expressly 

acknowledge the potential for multiple 

U.S. Treasury securities CCAs and 

prohibit a clearing agency’s rules from 

restricting or impeding in any way their 

members’ ability to clear U.S. Treasury 

securities cash or repo transactions at 

another CCA.69 Such clarification is 

unnecessary. The requirements being 

adopted apply to any U.S. Treasury 

securities CCA and do not rely on the 

existence of only one U.S. Treasury 

securities CCA. The Commission 

acknowledges that there is the potential 

for multiple clearing agencies serving 

the U.S. Treasury market under its 

regulatory framework, and that the 

existence of additional U.S. Treasury 

securities CCAs would lower the 

concentration risk that currently exists 

due to having a single CCA for that 

market. Moreover, a rule prohibiting a 

clearing agency from restricting or 

impeding in any way its member’s 

ability to clear at another CCA is also 

unnecessary because to be registered 

under Section 17A of the Exchange Act, 

a clearing agency’s rules must not 

impose any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of Section 17A.70

c. Final Rule 

For the reasons discussed in parts 

II.A.1.a and b supra, the Commission is 

adopting Rule 17ad–22(e)(18)(iv) as 

proposed.71 This requirement applies to 

all types of transactions that are of a 

type currently accepted for clearing at a 

U.S. Treasury securities CCA; it does 

not impose a requirement on a U.S. 

Treasury securities CCA to offer 

additional products for clearing. 

2. Definition of Eligible Secondary 

Market Transactions 

As part of Rule 17ad–22(a), the 

Proposing Release set forth a definition 

of an eligible secondary market 


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72The Commission did not receive any comments 

on its proposed definition of ‘‘U.S. Treasury 

security’’ and is adopting that definition as 

proposed. 

73As the Commission stated in the Proposing 

Release, the amendment does not apply to the 

primary market, i.e., the issuance and sale of a U.S. 

Treasury security to a primary dealer or other 

bidder in a U.S. Treasury auction. Proposing 

Release, supra note 14, 87 FR 64621. Further, as the 

Commission also stated in the Proposing Release, 

because trading in when-issued securities occurring 

the day after the auction shares similar 

characteristics to secondary market transactions and 

because such trading is already reported as a 

secondary market transaction, the definition of an 

eligible secondary market transaction would apply 

to when-issued trades that occur the day after the 

auction and are considered on-the-run on some 

IDBs, to the extent that such when-issued trades 

otherwise meet the definition of an eligible 

secondary market transaction, as discussed further 

in part II.A.2.ii infra. Id. However, because whenissued trading occurring before and on the day of 

the auction does not share these characteristics and 

is primarily used as a tool for price discovery 

leading to the auction, such transactions would not 

be encompassed by the definition. Id. 

74Proposing Release, supra note 14, 87 FR 64616. 

The effect of a repo transaction is similar to a cash 

loan, using U.S. Treasury securities as collateral. Id. 

However, standard industry documentation 

classifies the start and end legs of the repo 

transaction as purchases and sales of securities. See, 

e.g., SIFMA, Master Repurchase Agreement 

(September 1996 Version), available at https://

www.sifma.org/wp-content/uploads/2017/08/MRA_

Agreement.pdf. In this release, the term ‘‘seller’’ 

refers to the party selling U.S. Treasury securities 

on the start leg of the transaction and repurchasing 

them on the end leg of the transaction. The term 

‘‘buyer’’ refers to the party purchasing the U.S. 

Treasury securities on the start leg of the 

transaction and selling them on the end leg of the 

transaction. 

75Proposing Release, supra note 14, 87 FR 64616 

(citing 2021 IAWG Report, supra note 4, at 29 

(stating that non-centrally cleared bilateral repo 

represents a significant portion of the market, 

roughly equal in size to centrally cleared repo) 

(citing a 2015 pilot program by the Treasury 

Department); TMPG, Clearing and Settlement 

Practices for Treasury Secured Financing 

Transactions Working Group Update (‘‘TMPG Repo 

White Paper’’), at 1 (Nov. 5, 2021), available at 

https://www.newyorkfed.org/medialibrary/ 

Microsites/tmpg/files/CSP_SFT_Note.pdf; Katy 

Burne, ‘‘Future Proofing the Treasury Market,’’ BNY 

Mellon Aerial View, at 7 (Nov. 2021), available at 

https://www.bnymellon.com/content/dam/ 

bnymellon/documents/pdf/aerial-view/futureproofing-the-us-treasurymarket.pdf.coredownload.pdf (noting that 63% of 

repo transactions remain non-centrally cleared 

according to Office of Financial Research data as of 

Sept. 10, 2021); Sebastian Infante et al., Insights 

from revised Form FR2004 into primary dealer 

securities financing and MBS activity (Aug. 5, 

2022), available at https://www.federalreserve.gov/ 

econres/notes/feds-notes/insights-from-revisedform-fr2004-into-primary-dealer-securitiesfinancing-and-mbs-activity-20220805.htm (recent 

research with respect to primary dealers indicates 

that 38% of their repo and 60% of their reverse repo 

activity is not centrally cleared, and, overall, that 

20% of all their repo and 30% of their reverse repo 

activity is centrally cleared through FICC)). 

76 In effect, accounting rules allow purchases and 

sales of the same security to be netted but do not 

allow repos of the same security to be netted, unless 

the repos are with the same counterparty and the 

trades have been documented under a master 

netting agreement. See, e.g., Proposing Release, 

supra note 14, 87 FR 64621 (citing G–30 Report, 

supra note 5, at 13; Program on International 

Financial Systems, Mandatory Central Clearing for 

U.S. Treasuries and U.S. Treasury Repos, at 25–27 

(Nov. 2021), available at https://

www.pifsinternational.org/wp-content/uploads/ 

2021/11/PIFS-Mandatory-Central-Clearing-for-U.S.- 

Treasury-Markets-11.11.2021.pdf (‘‘PIFS Paper’’)). 

Thus, if a dealer’s repos are all with a U.S. Treasury 

securities CCA, greater netting is allowed. 

77See Committee on the Global Financial System, 

Repo Market Functioning, at 24 (Apr. 2017), 

available at https://www.bis.org/publ/cgfs59.pdf. 

78TMPG Repo White Paper, supra note 75, at 1. 

79 G–30 Report, supra note 5, at 13. 

80 17 CFR 240.17ad–22(e)(6). 

transaction in U.S. Treasury securities 72

subject to the requirement to submit for 

clearance and settlement discussed in 

part II.A.1 above. Specifically, the 

definition of an eligible secondary 

market transaction 73 would include: 

• Repurchase agreements and reverse 

repurchase agreements in which one of 

the counterparties is a direct 

participant; 

• Any purchases and sales entered 

into by a direct participant if the direct 

participant (A) brings together multiple 

buyers and sellers using a trading 

facility (such as a limit order book) and 

(B) is a counterparty to both the buyer 

and seller in two separate transactions; 

and 

• Any purchases and sales of U.S. 

Treasury securities between a direct 

participant and a counterparty that is a 

registered broker-dealer, government 

securities dealer, or government 

securities broker, a hedge fund, or an 

account at a registered broker-dealer, 

government securities dealer, or 

government securities broker where 

such account may borrow an amount in 

excess of one-half of the value of the 

account or may have gross notional 

exposure of the transactions in the 

account that is more than twice the 

value of the account. 

The Commission is adopting this rule, 

with modifications related to repos by 

other clearing organizations (see part 

II.A.2.a.iii), inter-affiliate repo 

transactions (see part II.A.2.a.vi), and 

state and local government repo 

transactions (see part II.A.2.a.vii) and 

related to cash transactions by hedge 

funds and leveraged accounts (see part 

II.A.2.b.iii). The Commission discusses 

the proposed definitions and the 

comments received thereupon in the 

following sections. 

a. Repo Transactions 

The proposed definition of an eligible 

secondary market transaction would 

include, among other things, all U.S. 

Treasury repurchase and reverse 

repurchase agreements entered into by a 

direct participant of a U.S. Treasury 

securities CCA, subject to the exclusions 

discussed in part XX infra. As explained 

in the Proposing Release, in a U.S. 

Treasury repo transaction, one party 

sells a U.S. Treasury security to another 

party (often referred to as the ‘‘start leg’’) 

and commits to repurchase the security 

at a specified price on a specified later 

date (often referred to as the ‘‘end leg’’), 

and a reverse repo transaction is the 

same transaction from the buyer’s 

perspective.74

In the Proposing Release, the 

Commission stated that the available 

data indicates that the volume of repo 

transactions that are bilaterally cleared 

and settled remains substantial.75

Because of this, FICC lacks visibility 

into its members’ non-centrally cleared 

repo trades, and the default of one 

counterparty can have cascading effects 

on multiple other market participants, 

including members of FICC, thereby 

risking contagion to the CCP. 

The Commission also stated its belief 

that, particularly with respect to banks 

and dealers, an important potential 

benefit of repo central clearing stems 

from mitigating the constraints on 

intermediaries’ balance sheets under the 

existing accounting and regulatory 

capital rules.76 The Commission further 

stated that it believes that the benefit of 

this resulting additional balance sheet 

capacity could be shared by all market 

participants through improved market 

liquidity and smooth market 

functioning.77

The Commission also referenced that, 

as with cash markets, risk management 

practices in the bilateral clearance and 

settlement of repos are not uniform 

across market participants and are not 

transparent.78 Indeed, a recent 

publication stated that competitive 

pressures in the bilaterally settled 

market for repo transactions have 

exerted downward pressure on haircuts, 

sometimes to zero.79 The reduction of 

haircuts, which serve as a counterparty 

credit risk mitigant in bilateral repos, 

could result in greater exposure to 

potential counterparty default risk in 

non-centrally cleared repos. The 

Commission stated that by contrast, a 

U.S. Treasury securities CCA is subject 

to the Commission’s risk management 

requirements addressing financial, 

operational, and legal risk management, 

which include, among other things, 

margin requirements commensurate 

with the risks and particular attributes 

of each relevant product, portfolio, and 

market.80 Therefore, repos cleared at a 

U.S. Treasury securities CCA would be 

subject to transparent risk management 

standards that are publicly available and 


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81See Letter from Jirı ́ Kro ́l, Deputy CEO, Global 

Head of Government Affairs, Alternative Investment 

Management Association, at 6–7 (Dec. 22, 2022) 

(‘‘AIMA Letter’’); AFREF Letter, supra note 33, at 

3; see generally Better Markets Letter, supra note 33; 

DTCC/FICC Letter, note 33; Letter from Ryan 

Sheftel, Global Head of Fixed Income, GTS 

Securities, LLC (Jan. 6, 2023) (‘‘GTS Securities 

Letter’’); LSEG Letter, supra note 33; Letter from 

ARB Trading Group LP, Citadel Securities, DRW 

Holdings, LLC, Eagle Seven LLC, Geneva Trading 

USA, LLC, Hard Eight Futures, LLC, Hudson River 

Trading LLC, IMC Trading, Jump Trading Group, 

Kore Trading LLC, Optiver, Quantlab Financial, 

LLC, WH Trading LLC, and XR Trading LLC, at 4 

(Dec. 27, 2022) (‘‘ARB et al. Letter’’); Letter from 

Manfred E. Will, Founder & CEO, MEW Consul 

(Oct. 24, 2022); Letter from Shiv Rao, Chairman, 

Sunthay Holdings LLC, at 2 (Dec. 27, 2022); and 

Letter from Elisabeth Kirby, Head of U.S. Market 

Structure, Tradeweb Markets Inc. (Dec. 27, 2022). 

One commenter, while broadly supporting the 

definition of an eligible secondary market repo and 

reverse repo transaction, recommended excluding 

Derivatives Clearing Organizations (‘‘DCO’’) 

registered with the CFTC. See Letter from Jonathan 

Marcus, Senior Managing Director and General 

Counsel, CME Group Inc., at 6–7 (Dec. 27, 2022) 

(‘‘CME Letter’’) and part II.A.2.iii infra. Other 

commenters, while broadly supporting the 

definition, recommended excluding transactions 

executed on the triparty repo platform. See Letter 

from Stephen John Berger, Managing Director, 

Global Head of Government & Regulatory Policy, 

Citadel and Citadel Securities (Dec. 27, 2022) 

(‘‘Citadel Letter’’), Letter from Jennifer W. Han, 

Executive Vice President, Chief Counsel & Head of 

Global Regulatory Affairs, Managed Funds 

Association at 6, 14 (Dec. 21, 2022) (‘‘MFA Letter’’), 

and part II.A.2.i infra. 

82MFA Letter, supra note 81, at 13 (supporting 

inclusion of bilateral repo and reverse repo). 

83SIFMA AMG Letter, supra note 35, at 11. 

84See, e.g., SIFMA AMG Letter, supra note 35, at 

4; SIFMA–IIB Letter, supra note 37, at 4. 

85See MFA Letter, supra note 81, at 6, 14; 

SIFMA–IIB Letter, supra note 37, at 20–21; SIFMA 

AMG Letter, supra note 35, at 6, 11; Letter from 

Sarah A. Bessin, Deputy General Counsel, and Nhan 

Nguyen, Assistant General Counsel, Investment 

Company Institute at 22–23 (Dec. 23, 2022) (‘‘ICI 

Letter’’); Citadel Letter, supra note 81, at 6; Letter 

from Deborah A. Cunningham, Executive Vice 

President, Chief Investment Officer of Global 

Liquidity Markets, and Senior Portfolio Manager, 

Susan R. Hill, Senior Vice President, Senior 

Portfolio Manager and Head of Government 

Liquidity, and David R. McCandless, Corporate 

Counsel, Federated Hermes at 5 (Dec. 28, 2022) 

(‘‘Federated Letter’’); Letter from Sebastian 

Crapanzano, Managing Director, Morgan Stanley, at 

2 (Nov. 15, 2023) (‘‘Morgan Stanley Letter’’). 

86See MFA Letter, supra note 81, at 6, 14; see 

also SIFMA/IIB Letter, supra note 37, at 20; ICI 

Letter, supra note 85, at 11; Federated Letter, supra 

note 85, at 5. 

87See MFA Letter, supra note 81, at 14; SIFMA/ 

AMG Letter, supra note 35, at 11; ICI Letter, supra 

note 85, at 12, 22; Citadel Letter, supra note 81, at 

6; Federated Letter, supra note 85, at 5. 

88See id. 

89See ICI Letter, supra note 85, at 22. 

90See Federated Letter, supra note 85, at 3. 

91See MFA Letter, supra note 81, at 14. 

92See Federated Letter, supra note 85, at 5. 

93See Federated Letter, supra note 85, at 5. 

94Morgan Stanley Letter, supra note 85, at 2. 

95 ICI Letter, supra note 85, at 33. 

applied uniformly and objectively to all 

participants in the CCA. 

Many commenters supported the 

definition of an eligible secondary 

market transaction as it relates to repo 

and reverse repo transactions.81 These 

commenters encouraged a broad and 

comprehensive definition to limit 

market fragmentation and avoidance of 

central clearing. Several other 

commenters that did not support a 

requirement to clear eligible secondary 

market transactions still acknowledged 

that repos were the most appropriate 

scope for such a requirement if one were 

to be adopted. For example, one 

commenter agreed that a clearing 

mandate applied to bilateral repo 

transactions would be beneficial, 

pointing to the balance sheet efficiency 

resulting from repo clearing, but 

stressing that this requirement be put in 

place only after the Commission has 

strengthened the ability for market 

participants to access central clearing.82

Another commenter stated that while 

the case for clearing repos is 

‘‘marginally stronger’’ than the case for 

clearing cash transactions, it is ‘‘far from 

convincing.’’ 83

Other commenters questioned the 

need for a requirement with respect to 

repo, noting that the balance sheet 

netting efficiencies already exist, 

providing a natural incentive to 

centrally clear such transactions.84 The 

Commission agrees that centrally 

cleared repo already benefits from 

favorable treatment on balance sheet, 

but also recognizes that, by definition, a 

requirement to clear repo transactions 

should result in more transactions being 

centrally cleared. Thus, there would 

still be benefits from the requirement, 

despite the currently existing balance 

sheet treatment, as discussed further in 

part IV.C.1.a.ii. 

In addition, some commenters 

supported excluding particular types of 

repos from the definition, and other 

commenters supported excluding 

particular types of market participants 

engaging in repos from the definition. 

The Commission discusses these 

comments in the following parts. 

i. Triparty Repo 

Several commenters supported 

excluding triparty repos from the 

definition of an eligible secondary 

market transaction.85 One commenter 

suggested that the cost of including 

triparty repos would outweigh the 

benefits, and other commenters raised 

similar concerns.86 The discussion of 

additional costs and benefits arising 

from the inclusion of triparty repos 

within the definition of an eligible 

secondary market transaction is 

provided in part IV.C.2 infra. Several 

commenters argued that including 

triparty repos would not significantly 

reduce the risks that the proposal seeks 

to address because the current triparty 

market infrastructure inherently 

mitigates the associated risks.87

Specifically, these commenters argue 

that credit risk in the triparty market is 

mitigated by the triparty agent’s 

provision of custodial, collateral 

management, and settlement services.88

Moreover, one commenter stated that 

the infrastructure underlying the 

triparty repo market is robust and 

provides credit protections, operational 

safeguards, and strict internal controls 

akin to central clearing.89 One 

commenter stated that the triparty 

agent’s ability to handle the settlement 

of triparty repos through its collateral 

allocation system has resulted in a wellfunctioning process that operates under 

severe time constraints.90 One 

commenter added that the triparty 

market is relatively safe from credit risk 

because the triparty agent is subject to 

prudential regulation.91 One commenter 

added that settlement risk in the triparty 

market is nearly eliminated because 

collateral posted to the triparty platform 

cannot generally be repledged outside 

the platform.92 The commenter stated, 

therefore, that the only significant 

source of settlement risk is the rare 

occurrence of a counterparty’s 

nonpayment of the repurchase price, 

which is generally attributable to 

operational risk as opposed to credit 

risk.93 Another commenter stated that 

these types of triparty repos, described 

as secured funding transactions where 

the funding counterparty has no 

rehypothecation rights, do not appear to 

raise concerns discussed in the proposal 

regarding the use of transactions to 

generate leverage that would warrant 

imposition of the requirement to clear 

eligible secondary market 

transactions.94

Despite supporting the exclusion of 

triparty repos from the definition of an 

eligible secondary market transaction, 

one commenter acknowledged that the 

triparty agent ‘‘does not fulfill a CCP 

role—it does not guarantee either 

counterparty’s performance through 

novation or otherwise and does not 

assume counterparty risk.’’ 95 For this 

reason, triparty repos will not be 

excluded from the definition of an 

eligible secondary market transaction. 

The Commission recognizes that the 

current triparty market infrastructure 

incorporates credit protections, 

operational safeguards, and strict 

internal controls. The Commission also 

recognizes that the triparty agent’s 

current processes for handling the 

settlement of triparty repos generally 


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96The triparty agent is supervised and/or 

regulated by, among others, New York State 

Department of Financial Services, and the Federal 

Reserve Bank of New York. See https://

www.bnymellon.com/us/en/disclaimers/businessdisclaimers. Additionally, the triparty agent is 

designated as a Global Systemically Important Bank 

by the Financial Stability Board. See https://

www.fsb.org/wp-content/uploads/P211122.pdf. 

97 17 CFR 240.17ad-22(e)(6). 

98See, e.g, Brian Begalle et al., The Risk of Fire 

Sales in the Tri-Party Repo Market, N.Y. Fed Staff 

Report No. 616 (‘‘Begalle et al.’’), at 9–14, available 

at, https://www.newyorkfed.org/medialibrary/ 

media/research/staff_reports/sr616.pdf. 

99See 2013 Annual Report of the Financial 

Stability Oversight Council, at 4, 12–13, 133–134, 

available at https://home.treasury.gov/system/files/ 

261/FSOC-2013-Annual-Report.pdf (‘‘FSOC 2013 

Annual Report’’); Begalle et al., supra note 98 

(discussing concern that stress caused by a potential 

default of a triparty repo counterparty can lead to 

either pre-default fire sales of assets by the 

counterparty or post-default fire sales of collateral 

by the triparty repo investor and the related 

financial stability concerns). See also 2019 Annual 

Report of the Financial Stability Oversight Council, 

at 11, available at https://home.treasury.gov/ 

system/files/261/FSOC2019AnnualReport.pdf 

(highlighting that the possibility of fire sales of 

collateral by creditors of a defaulted counterparty 

in the triparty repo market remains a financial 

system vulnerability despite the triparty repo 

infrastructure reform). 

100See FSOC 2013 Annual Report, supra note 99, 

at 12–13 (recognizing that a major broker-dealer’s 

default could threaten financial stability as the 

broker-dealers’ creditors liquidate the collateral 

pledged against their tri-party repo lending, with 

the fire sales of this collateral potentially 

destabilizing financial markets and amplifying the 

negative consequences of such a default). 

101See 17 CFR 270.2a–7(d)(1). In addition, the 

money market fund holding the collateral may 

cause liquidity concerns under rule 2a–7. See 17 

CFR 270.2a–7(d)(4). 

102 17 CFR 240.17ad–22(e)(13). 

103Baklanova, et al., Reference Guide to U.S. 

Repo and Securities Lending Markets, OFR Working 

Paper No15–17 (Sept. 2015), available at: https://

www.financialresearch.gov/working-papers/files/ 

OFRwp-2015-17_Reference-Guide-to-U.S.-Repoand-Securities-Lending-Markets.pdf. 

104See MFA Letter, supra note 81, at 17. 

105See id. 

106See ICI Letter, supra note 85, at 12, 22. 

107See DTCC, Looking to the Horizon: Assessing 

a Potential Expansion of U.S. Treasury Central 

Clearing, Sept. 2023 (‘‘DTCC 2023 White Paper’’), 

available at https://www.dtcc.com/-/media/Files/ 

Downloads/WhitePapers/Accessing-PotentialExpansion-US-Treasury-Clearing-White-Paper.pdf. 

function well. However, the triparty 

agent does not serve as a central 

counterparty, meaning that it does not 

guarantee either counterparty’s 

performance through novation or 

assume counterparty risk, and therefore, 

the Commission disagrees with the 

contention that the current market 

infrastructure incorporates controls 

equivalent to those available through 

central clearing. The Commission 

recognizes that the triparty agent is 

subject to heightened prudential 

regulation.96 However, the triparty agent 

is not subject to regulatory supervision 

as a CCP, which entails additional 

protections against the risk of many 

market participants acting to liquidate 

similar collateral in the event of a 

default in a non-centrally cleared 

environment. A U.S. Treasury securities 

CCA is subject to the Commission’s risk 

management requirements addressing 

financial, operational, and legal risk 

management, which include, among 

other things, margin requirements 

commensurate with the risks and 

particular attributes of each relevant 

product, portfolio, and market and also 

include certain requirements applicable 

only to covered clearing agencies that 

are serving as central counterparties.97

In contrast, a triparty agent is not 

equipped with a mechanism to manage 

the risk of collateral fire-sale in the 

aftermath of a counterparty default.98 As 

a result, a U.S. Treasury securities CCA 

is better positioned to handle a large, 

unexpected default than a triparty agent. 

The possibility that a direct participant 

in a U.S. Treasury securities CCA with 

large, unsettled trading volumes 

(bilateral or triparty) could fail creates 

contagion risk to the CCA, as well as to 

the market as a whole. This rulemaking 

is designed to ameliorate that contagion 

risk, at least in part. Accordingly, the 

Commission does not believe that the 

current triparty market infrastructure 

alone mitigates the aforementioned 

contagion risk sufficiently to warrant 

excluding triparty repos from the 

definition of an eligible secondary 

market transaction. In response to the 

commenter who stated that most risks 

are eliminated because collateral cannot 

be posted outside the triparty platform, 

the Commission disagrees. Significant 

risks exist if concerns emerge regarding 

the financial condition of sellers in the 

triparty market.99 In such scenarios, 

even though collateral stays within the 

triparty platform, the buyer could still 

experience distress following a sudden 

default of a triparty repo 

counterparty.100 For example, a triparty 

repo default may leave a money market 

fund holding long-dated Treasury 

securities collateral, which may cause 

the money market fund to no longer 

meet requirements under rule 2a–7 

relating to the weighted average life to 

maturity of the fund’s portfolio.101 A 

spike in market volatility accompanying 

an event of default and potential 

collateral liquidation activity by buyers 

could cause liquidity stress for the 

financial system leading to decline in 

collateral value even for the most 

creditworthy assets such as U.S. 

Treasury securities. A U.S. Treasury 

securities CCA is better positioned to 

manage a repo counterparty default by 

employing a range of available prefunded resources without reliance on 

repo collateral liquidation.102 In 

contrast, the triparty platform is not 

designed to manage risks associated 

with a repo counterparty default and a 

potential collateral liquidation 

following the default. In a triparty repo 

transaction, the triparty custodian bank 

holds the collateral on behalf of the 

buyer. However, the buyer is 

responsible for initiating and managing 

the collateral liquidation process, 

including Treasury securities, if the 

liquidation is necessary.103

One commenter argued that including 

triparty repos in the definition of an 

eligible secondary market transaction 

would likely impair the cash and 

collateral management processes of 

hedge funds and alternative asset 

managers.104 Specifically, the 

commenter suggested that such firms 

currently conduct same-day bilateral 

transactions that they would not be able 

to conduct with a direct participant of 

a U.S. Treasury securities CCA required 

to centrally clear its repo 

transactions.105 Similarly, another 

commenter argued that including 

triparty repos would prevent 

participants, such as money market 

funds, from conducting transactions on 

a short term (i.e., overnight) basis when 

U.S. Treasury securities CCAs are at full 

capacity.106

The Commission disagrees with these 

commenters. In its supervisory capacity, 

the Commission is aware that registered 

funds, hedge funds, and alternative 

asset managers currently conduct 

centrally cleared triparty repo 

transactions. For example, the 

Commission is aware that numerous 

hedge funds conduct such same-day 

transactions as sponsored members of 

FICC. Therefore, the existing operational 

infrastructure supports centrally cleared 

triparty repo transactions. The FICC 

novation window for all deliveryversus-payment trades, including the 

sponsored repo service, remains open 

until 8 p.m. (ET) and therefore is 

available for a later-day trading.107

Additionally, the Commission disagrees 

that there is a finite ‘‘full capacity’’ at a 

U.S. Treasury securities CCA. The 

Commission understands that increased 

demand for a CCA service may lead to 

a higher volume of trading activity by 

existing members and, in certain 

circumstances, reduce members’ ability 

or willingness to facilitate their clients’ 

access to central clearing, if such 

members do not wish to grow this line 

of business. However, higher demand 

for access to central clearing could also 

present an opportunity for dealers that 


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108 Id. 

109See MFA Letter, supra note 81, at 12, 14. 

110See id. 

111Securities Exchange Act Release No. 92799 

(Aug. 27, 2021), 86 FR 49387 (Sept. 2, 2021) (SR– 

FICC–2021–801); Securities Exchange Act Release 

No. 92014 (May 25, 2021), 86 FR 29334 (June 1, 

2021) (SR–FICC–2021–003). 

112Securities Exchange Act Release No. 40623 

(Oct. 30, 1998), 63 FR 59831 (Nov. 5, 1998) (SR– 

GSCC–98–02). 

113Federal Reserve, GCF Repo (showing that the 

daily snapshot of the Treasury securities value 

traded in the GCF repo segment was under $120 

billion on Mar. 10, 2020. The value reported on 

June 9, 2023 was over $320 billion, which includes 

sponsored activity), available at https://

www.newyorkfed.org/data-and-statistics/datavisualization/tri-party-repo#interactive/tripartygcf. 

114See DTCC 2023 White Paper, supra note 107. 

115See SIFMA/IIB Letter, supra note 37, at 20–21; 

Letter from Jiri Krol, Deputy CEO, Global Head of 

Government Affairs, Alternative Investment 

Management Association (Oct. 20, 2023) at 3 

(‘‘AIMA Letter II’’); see also Citadel Letter, supra 

note 81, at 6 (supporting that the Commission 

exclude triparty repos at this stage, noting that they 

may include both Treasury and non-Treasury 

securities as collateral). 

116For example, money market fund filings of 

portfolio data show that, on average, Treasury 

securities account for around 3% of collateral 

backing investments in non-government repos. 

117Money market fund filings of portfolio data 

show that, on average, Treasury securities account 

for around 20% of collateral backing investments in 

U.S. government agency repos. 

118Of this amount, approximately $1.5 trillion 

was invested in the Federal Reserve’s overnight 

reverse repo facility. See U.S. Securities and 

Exchange Commission, Money Market Fund 

Statistics (Sept. 2023), available at https://

www.sec.gov/divisions/investment/mmf-statistics. 

Repo transactions with the central bank are 

excluded from the scope of Eligible Secondary 

Market Transactions. 

119Federal Reserve, Financial Accounts of the 

United States, Table L.207 Federal Funds and 

Security Repurchase Agreements (2023 Q2). 

120 ICI Letter, supra note 85, at 13; Federated 

Letter, supra note 85, at 2; DTCC/FICC Letter, supra 

note 33, at 17. 

121See DTCC, Sponsored DVP and Sponsored GC 

Activity, available at https://www.dtcc.com/charts/ 

membership, which also shows data over a longer 

timeframe for reference. 

do not currently offer such services to 

enter the market, resulting in growing 

CCA capacity, more competition among 

its members, and a wider range of 

available repo counterparties. The 

Commission also understands that the 

existing U.S. Treasury securities CCA 

may consider, as appropriate, additional 

changes to their operational 

infrastructure and trading capacity, 

including revisions to the eligibility 

criteria for sponsored membership and 

an extension of the trade submission 

and novation windows later in the 

day,108 to enhance their ability to 

accommodate any increase in the 

volume of centrally cleared triparty repo 

transactions resulting from this 

rulemaking. 

One commenter expressed concern 

that the centrally cleared triparty repo 

market has only been available since 

2021 and is therefore, relatively 

untested.109 Therefore, the commenter 

suggested that the Commission should 

delay its decision whether to include 

triparty repos in the definition of an 

eligible secondary market transaction 

until after the Commission has had an 

opportunity to evaluate the effectiveness 

of the centrally cleared triparty repo 

infrastructure.110 The Commission 

disagrees. While FICC expanded its 

Sponsored Service in 2021 to enable 

sponsored members (e.g., registered 

funds) to conduct centrally cleared 

triparty repo transactions,111 FICC has 

been facilitating such transactions for its 

direct participants via the General 

Collateral Finance (‘‘GCF’’) Repo 

Service since 1998.112 Additionally, 

although the expanded Sponsored 

Service is relatively new, the 

infrastructure is operational, and its 

usage appears to be increasing. Data 

provided by the Federal Reserve show a 

significant increase in the gross value of 

Treasury securities traded in GCF Repo 

since March 2020.113 Additionally, as 

stated above, the Commission 

understands that the U.S. Treasury 

securities CCA is consulting with 

market participants and is considering 

steps to further enhance its operational 

infrastructure to support any increase in 

the volume of centrally cleared triparty 

repo transactions resulting from this 

rulemaking.114

Finally, commenters argued for the 

exclusion from the definition of an 

eligible secondary market transaction of 

triparty repos involving purchased 

securities that include both Treasury 

CUSIPs and securities with other 

CUSIPs or where permitted substitution 

may be made in CUSIPs other than 

Treasury CUSIPs. According to the 

commenters, the fact that some CUSIPs 

in a mixed triparty repo are U.S. 

Treasury security CUSIPs should not 

bring that transaction into the definition 

of an eligible secondary market 

transaction if it were of a type that is 

entered into in the ordinary course of 

business or otherwise in connection 

with a legitimate business purpose. The 

commenters stated that without such an 

exemption, the definition of an eligible 

secondary market transaction could 

scope in transactions of which U.S. 

Treasury securities only represent a 

small component, which would exceed 

the regulatory objective behind the 

proposal, and stated that such 

transactions do have margin 

collected.115

The Commission understands that 

market participants may use U.S. 

Treasury securities as permissible 

substitutions for other types of collateral 

and generally should not consider 

mixed CUSIP triparty repos resulting 

from such a permissible substitution as 

within the scope of part (i) of the 

definition of an eligible secondary 

market transaction. Collateral 

substitution allows a repo seller to 

complete trade settlement even if the 

type of collateral securities agreed upon 

at the time of trade initiation is no 

longer available. Typically, Treasury 

securities or cash can be permissible 

substitution.116 However, to the extent 

that a mixed CUSIP triparty repo 

contains U.S. Treasury CUSIPs from the 

outset of the transaction, such a 

transaction would be included in the 

scope of part (i) of the definition of an 

eligible secondary market transaction. 

An exclusion for such transactions is 

not necessary because the 

counterparties specifically structured 

the transaction to include U.S. Treasury 

securities; therefore, such a transaction 

is within the scope of the definition. 

Data submitted by money market funds 

on Form N–MFP shows that the 

holdings reported as U.S. Government 

Agency Repurchase Agreements are 

typically collateralized by U.S. 

government agency securities and are 

also partially collateralized by Treasury 

securities.117 Collateral management 

practices may evolve to better delineate 

collateral types in light of the definition 

of an eligible secondary market 

transaction. 

ii. Repos by Registered Funds 

Registered investment companies, or 

registered funds, that is, those entities 

that are registered under the Investment 

Company Act of 1940 (‘‘1940 Act’’), 

including money market funds and 

exchange-traded funds, are important 

participants in the U.S. Treasury repo 

market. Filings of Form N–MFP by 

money market funds show that, as of 

September 30, 2023, these funds 

invested approximately $2.2 trillion in 

Treasury repos.118 In addition, mutual 

funds invested $37 billion in repurchase 

agreements, including those backed by 

Treasury securities.119 Generally, 

commenters acknowledged that central 

clearing of Treasury repos and reverse 

repos through the FICC Sponsored 

Service, which has been available to 

registered funds since 2005, provides 

additional collateral supply.120 FICC 

data shows that at the end of November 

2023, the daily volume of sponsored 

‘‘delivery-versus-payment’’ Treasury 

repo activity was approximately $820 

billion, while the daily volume of 

sponsored activity in the triparty GCF 

repo was close to $130 billion.121


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122 ICI Letter, supra note 85, at 12–28; Federated 

Letter, supra note 85, at 2–6. 

123 ICI Letter, supra note 85, at 12. 

124 ICI Letter, supra note 85, at 13–14. 

125 ICI Letter, supra note 85, at 14; Letter from 

Jennifer W. Han, Executive Vice President, Chief 

Counsel & Head of Global Regulatory Affairs, 

Managed Funds Association (Dec. 4, 2023), at 4 

(‘‘MFA Letter II’’). See also MFA Letter, supra note 

81, at 7 (noting that ‘‘an indirect participant should 

have the ability (although not the obligation) to 

fund the margin obligations of the direct participant 

clearing on its behalf which are attributable to the 

indirect participant. In such case, the margin posted 

by the indirect participant should be segregated 

from the direct participant’s house margin, and it 

should not be subject to loss mutualization vis-a`- 

vis other direct participants. Given that many 

indirect participants have fiduciary obligations to 

their own clients, it is crucial that indirect 

participants are able to post margin on a segregated 

basis such that their clients are not subject to the 

credit risk of others (and, likewise, that their funds 

are not subject to loss mutualization).’’); SIFMA/IIB 

Letter, supra note 37, at 12–13 (noting that ‘‘it will 

be difficult to support expanding cleared trading in 

U.S. Treasury securities until we have a framework 

which ensures customers can access clearing 

solutions where their margin and collateral will be 

adequately protected, including from loss 

mutualization by the clearing agency’’). 

126FICC Rule 3A, section 10, supra note 19. 

127FICC Rule 4, supra note 19. 

128Section 17(f) of the 1940 Act (providing that 

‘‘[e]very registered management company shall 

place and maintain its securities and similar 

investments in the custody of (A) a bank or banks 

having the qualifications prescribed in paragraph 

(1) of section 26(a) of this title for the trustees of 

unit investment trusts; or (B) a company which is 

a member of a national securities exchange as 

defined in the Securities Exchange Act of 1934, 

subject to such rules and regulations as the 

Commission may from time to time prescribe for the 

protection of investors; or (C) such registered 

company, but only in accordance with such rules 

and regulations or orders as the Commission may 

from time to time prescribe for the protection of 

investors.’’). See also rule 17f–1 under the 1940 Act 

(permitting registered funds to custody assets with 

a member of a national securities exchange as 

defined in the 1934 Act pursuant to certain 

conditions). 

129 ICI Letter, supra note 85, at 14. 

130 Id. 

131See id. (‘‘Enhanced recordkeeping and related 

controls are critical to appropriately identifying 

ownership of assets during a Treasury repo or 

reverse repo transaction particularly since, unlike a 

typical derivates or cash transaction, ownership of 

the Treasury securities underlying a repo or reverse 

repo change owners during the transaction.’’). 

132See e.g., Delta Government Options Corp. NoAction Letter (pub. avail. Sept. 27, 1990) (‘‘Delta 

Letter’’); cf. CME Group, Inc. No-Action Letter (pub. 

avail. Dec. 19, 2017); FICC No-Action Letter (pub. 

avail. Mar. 13, 2003) (‘‘FICC 2003 Letter’’). In the 

FICC Letter, the staff observed certain operational 

features of FICC’s Mortgage-Backed Securities 

Division (‘‘MBSD’’), which differ from the current 

circumstances of FICC’s Government Securities 

Division, such as registered funds being direct 

participants in MBSD’s clearing scheme and 

participant trades not being novated to MBSD. Any 

staff statements cited represent the views of the 

staff. They are not a rule, regulation, or statement 

of the Commission. Furthermore, the Commission 

has neither approved nor disapproved their content. 

These staff statements, like all staff statements, have 

no legal force or effect: they do not alter or amend 

applicable law; and they create no new or 

additional obligations for any person. 

Several commenters stated that they 

did not support including repo 

transactions with registered funds as a 

counterparty in the definition of an 

eligible secondary market transaction, 

which, as proposed, would include repo 

transactions with all counterparties.122

One commenter stated that the 

Commission should not, at this time, 

require that repos between a fund and 

a direct participant of a U.S. Treasury 

securities CCA be subject to a clearing 

requirement because the current 

clearing framework is not sufficiently 

developed to support such a 

mandate.123 The commenter identified 

several issues to be addressed prior to 

adopting such a requirement, which are 

discussed in the following paragraphs. 

First, the commenter stated that the 

Commission should encourage FICC to 

enhance its Sponsored Service in 

several ways, to address regulatory, 

structural, and operational issues raised 

by the proposal. The commenter stated 

that the Commission should encourage 

FICC to further develop a ‘‘give up’’ 

structure to facilitate best execution. 

The commenter described this as a 

‘‘critically important step’’ to 

incentivize voluntary clearing, because 

it would generate increased competition 

among market participants, which may 

result in more efficient pricing. The 

commenter also stated that a ‘‘give up’’ 

structure would be essential under a 

requirement to centrally clear eligible 

secondary market transactions because 

the Sponsored Service may not be able 

to meet the increased capacity 

requirements due to the limited number 

of sponsoring members and the 

increased demand for sponsored 

clearing under such a requirement. The 

commenter suggested that the 

infrastructure currently used by FICC 

for prime brokerage clearing could be 

leveraged to develop a give up model, 

stating that any such model will need to 

provide for standardized documentation 

that facilitates additions and deletions 

of approved brokers, agreed-upon terms 

for rejection of trades by a sponsoring 

member, and centralized storage of 

delegation.124

The commenter requested that the 

SEC encourage FICC to establish a 

feature allowing (but not requiring) 

registered fund sponsored members to 

support their obligations by having 

margin posted with FICC (‘‘FICC 

registered fund margin arrangement’’) 

rather than by paying fees to the 

sponsoring member.125 FICC’s rules 

currently provide that each sponsoring 

member must make a deposit to FICC’s 

Clearing Fund based on the activity of 

its sponsored members.126 The 

contributions of all Netting Members, 

including those that are sponsoring 

members, are commingled in the 

Clearing Fund and are available to FICC 

for, among other things, securing 

members’ obligations and providing 

liquidity to meet its settlement 

obligations.127 While the commenter 

stated that the Sponsored Service under 

current FICC rules does not raise 

custody issues for registered funds 

under the 1940 Act because registered 

funds are not required to post margin to 

FICC, if a fund’s margin were permitted 

to be posted with FICC, that could raise 

custody issues for funds unless such 

funds receive relief from certain 

provisions of the 1940 Act.128 The 

commenter stated that permitting 

registered funds’ margin to be posted 

with FICC could reduce costs for 

registered funds and facilitate their use 

of cleared reverse repos and term 

repos.129 The commenter also stated 

that the final rule should require FICC 

to establish margin rules that ensure 

that margin is held in a segregated 

manner, not commingled with any 

direct participant’s house margin, and 

not be subject to loss mutualization 

associated with other direct 

participants.130 Finally, the commenter 

stated that in order to address concerns 

regarding the security of registered fund 

assets under a Treasury repo clearing 

mandate, FICC rules addressing margin 

posting would need to be amended to 

provide for enhanced recordkeeping, 

internal controls, and transparency 

around the positions and related 

margin.131

In order to support a clearing 

requirement for eligible secondary 

market transactions, the Commission is 

taking the position that, for a period of 

five years, registered funds utilizing 

such an arrangement in a manner 

consistent with the circumstances 

described below would not provide a 

basis for enforcement action under 

Section 17(f) of the 1940 Act. The 

Commission takes this position to 

recognize the unique circumstances 

facing registered funds in the context of 

entering into eligible secondary market 

transactions using FICC’s Sponsored 

Program. 

Our staff has previously stated that it 

would not recommend enforcement 

action under the custody provisions of 

the 1940 Act in the context of certain 

registered fund trading activities.132 For 

example, the staff issued the Delta Letter 

in connection with Delta’s options 

clearing service, which provided 

assurances that the staff would not 

recommend enforcement action under 


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133 Delta Letter. 

134 Id. 

135See FICC 2003 Letter. 

136See ICI Letter, supra note 85, at 14. 

137The Commission position is intended to 

address certain considerations under the 1940 Act 

specific to registered funds. Other types of buy-side 

participants may have different considerations to 

address in connection with their participation in 

the Sponsored Program beyond the scope of the 

1940 Act. 

138To the extent a registered fund becomes aware 

that its custodial arrangement is no longer 

consistent with the FICC registered fund margin 

framework, the registered fund may not utilize the 

FICC registered fund margin framework to enter 

into eligible secondary market transactions. 

139For the avoidance of doubt, FICC may only 

withdraw margin provided by a registered fund in 

the event that the registered fund defaults on a 

transaction that has been novated to FICC. 

140See FICC Letter; see also Institutional Equity 

Fund No-Action Letter (pub. avail. Feb. 27, 1984) 

(stating that the staff would not recommend 

enforcement action under Section 17(f) of the 1940 

Act if, among other things, the assets of a registered 

fund participating in the Options Clearing 

Corporation’s program were held in a ‘‘nonproprietary account at OCC which does not include 

any assets held by the Clearing Member agent other 

than as a fiduciary, custodian or otherwise for 

customers’’). 

141See Section 17(f) of the 1940 Act and the rules 

thereunder. 

142See FICC 2003 Letter at n. 18. 

143See e.g., FICC Rule 4, supra note 19. 

144For purposes of this Commission position, 

FICC is not permitted to use registered fund margin 

for default liquidity purposes. 

145The Commission notes that this position only 

applies with respect to the custody of registered 

fund margin, and does not apply to cash or 

collateral received under a sponsored repo or 

reverse repo trade. Further, this position does not 

impact any other obligation that a registered fund 

has in connection with its participation in the 

Sponsored Program or under the 1940 Act and rules 

thereunder. 

146The legislative history of section 17(f) 

indicates that Congress intended the assets of 

investment companies to be kept by a financially 

secure entity that has sufficient safeguards against 

misappropriation. See Investment Trusts and 

Investment Companies: Hearings on S. 3580 Before 

a Subcomm. of the Senate Comm. on Banking and 

Currency, 76th Cong., 3d Sess. 264 (1940). 

147See e.g., ICI Letter, supra note 85, at 14. 

148Cf. infra part II.C.2. 

149We note that a U.S. Treasury securities CCA 

could develop a different mechanism for a 

registered fund to post margin. For example, the 

Options Clearing Corporation has a ‘‘deposits in 

lieu of margin’’ framework whereby a customer of 

Section 17(f) of the 1940 Act if 

registered investment companies 

deposited margin with Delta.133 One 

representation in the Delta Letter was 

that Delta was permitted to withdraw 

the margin provided ‘‘only upon the 

investment company’s default on the 

option contract.’’ 134 Other previous staff 

no-action positions have been provided 

in different contexts. In one such noaction position, FICC represented that a 

registered fund’s margin would not be 

used to cover another client’s default 

and segregating fund assets from the 

custodian’s proprietary assets and other 

customers’ assets.135 These types of 

features would help protect fund client 

assets consistent with the 1940 Act 

under the FICC registered fund margin 

arrangement, and we have included 

similar types of features for purposes of 

our position that follows below. 

While the final rules do not require 

registered funds’ margin to be posted 

with FICC, and no current U.S. Treasury 

securities CCA has rules imposing such 

a requirement, as discussed above, a 

commenter requested that the 

Commission encourage FICC to 

establish a FICC registered fund margin 

arrangement.136 The Commission agrees 

that facilitating the ability for a 

registered fund’s margin to be posted at 

FICC as an alternative to the sponsoring 

member posting the margin and passing 

the cost of doing so through to the 

registered fund may lower the cost of 

trading for the fund, and the 

Commission position below will help 

facilitate the posting of registered fund 

margin 137 to satisfy a U.S. Treasury 

securities CCA’s margin deposit 

requirements. 

Specifically, the Commission takes 

the position that, for a period of five 

years beginning on the effective date of 

this adopting release, if a registered 

investment fund’s cash and/or securities 

are placed and maintained in the 

custody of FICC for purposes of meeting 

FICC’s margin deposit requirements that 

may be imposed for eligible secondary 

market transactions in connection with 

the fund’s participation in the 

Sponsored Program, it would not 

provide a basis for enforcement action 

under Section 17(f) of the 1940 Act so 

long as: 138

• FICC withdraws the margin 

provided by a sponsored member 

registered fund only upon that 

registered fund’s default; 139

• The margin provided by a registered 

fund is not commingled with, and is 

kept separate from, FICC’s assets; 140

• FICC segregates on its books and 

records the margin provided by a 

registered fund (or series thereof, as 

applicable), and identifies a value of 

margin in its books and records as being 

attributable to the registered fund; 

• The entity that FICC uses to custody 

such margin is an eligible fund 

custodian under the 1940 Act and the 

applicable rules thereunder; 141

• The margin provided by a registered 

fund is not subject to loss 

mutualization 142 or allocation; 143

• The margin provided by a registered 

fund is not used by FICC for any 

purpose other than in connection with 

that registered fund’s default as a 

sponsored member; 144

• Registered funds receive quarterly 

statements of accounts concerning the 

margin provided in connection with 

eligible secondary market transactions 

showing, at a minimum, the name of the 

account, asset movements during the 

quarter, and quarter-end positions; and 

• The account into which a registered 

fund’s margin is deposited is governed 

by a contract by and among the 

registered fund, its sponsoring member, 

and FICC providing for an arrangement 

consistent with this Commission 

position, (together, the ‘‘FICC registered 

fund margin framework’’).145

In general, Section 17(f) of the 1940 

Act and the rules thereunder govern the 

safekeeping of investment company 

assets.146 The FICC registered fund 

margin framework is designed to protect 

fund investor assets, consistent with the 

principles of the 1940 Act.147 The 

framework would seek to adequately 

protect registered fund assets by 

isolating them from FICC’s proprietary 

assets and segregating them on FICC’s 

books and records from the sponsoring 

member’s other customers, preventing 

registered fund assets from being used 

to cover any obligation other than an 

obligation of that registered fund, 

limiting FICC’s ability to use registered 

fund margin for any purpose other than 

an obligation of the registered fund as a 

sponsored member, and prohibiting 

registered fund assets from being subject 

to loss mutualization or allocation.148

Five years is intended to provide 

sufficient time for FICC to develop and 

file any proposed rule changes under 

Section 19(b) of the Exchange Act that 

may be relevant to facilitate a registered 

fund’s ability to have its margin posted 

at FICC consistent with the FICC 

registered fund margin framework. The 

Commission will consider any proposed 

rule changes consistent with its 

obligations under Section 19(b) of the 

Exchange Act in the event that FICC 

submits any proposal to facilitate a 

registered fund’s ability to have its 

margin posted at FICC consistent with 

the FICC registered fund margin 

framework in the future, and providing 

this position for five years will also 

provide sufficient time for the 

Commission to determine if extending 

or revising this position is appropriate. 

Five years is intended to provide 

sufficient time for market participants to 

consider other potential frameworks for 

the posting of registered fund margin to 

satisfy FICC’s margin deposit 

requirements and to gain insight into 

the merits of such frameworks.149


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a clearing member makes a deposit in lieu of margin 

through OCC’s escrow deposit program, and the 

relevant positions are excluded from the clearing 

member’s margin requirement to OCC. See OCC 

Rules 610, 610A, 610B, and 610C; see also SelfRegulatory Organization: The Options Clearing 

Corporation: Notice of Filing of Advance Notice 

Concerning the Options Clearing Corporation’s 

Escrow Deposit Program, Securities Exchange Act 

Rel. No. 34–78334 (Sept. 14, 2016), 81 FR 64537– 

38 (Sept. 20, 2016). Although there are fundamental 

differences in the purpose and use of margin in the 

OCC’s deposit in lieu of margin framework, a U.S. 

Treasury securities CCA could use the principles 

underlying the OCC’s program by analogy in 

developing its own margin posting framework. 

150See note 140 supra. 

151This Commission position would not apply to 

the extent that the sponsoring member holds an 

amount of registered fund assets that exceeds the 

registered fund’s margin obligations. If a sponsoring 

member were to hold registered fund assets in an 

amount that exceeds the registered fund’s margin 

obligations, then the sponsoring member would 

need to return such excess to the registered fund as 

promptly as possible or promptly comply with all 

requirements of Rule 17f–1 under the 1940 Act. 

152 17 CFR 240.17ad–22(a)(5) (defining a covered 

clearing agency); 15 U.S.C. 78c(a)(26) (defining an 

SRO to include a registered clearing agency). 

153An SRO must submit proposed rule changes 

to the Commission for review and approval 

pursuant to Rule 19b–4 under the Exchange Act. A 

stated policy, practice, or interpretation of an SRO, 

such as its written policies and procedures, would 

generally be deemed to be a proposed rule change. 

See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4. See 15 

U.S.C. 78s(b)(3)(A) (setting forth the types of 

proposed rule changes that take effect upon filing 

with the Commission). The Commission may 

temporarily suspend those rule changes within 60 

days of filing and institute proceedings to 

determine whether to approve or disapprove the 

rule changes. 15 U.S.C. 78s(b)(3)(C). 

154See 15 U.S.C. 78s(b)(1). Proposed rule changes 

are generally required to be approved by the 

Commission prior to going into effect; however, 

certain types of proposed rule changes take effect 

upon filing with the Commission. 

155 15 U.S.C. 78s(b)(1)(C)(i). On the other hand, 

the Commission shall disapprove a proposed rule 

change if it cannot make such a finding. 15 U.S.C. 

78s(b)(1)(C)(ii). 156See 12 U.S.C. 5462(6). 157The Dodd-Frank Act defines a ‘‘designated 

clearing entity’’ as a designated financial market 

utility that is either a derivatives clearing 

organization registered under section 5b of the 

Commodity Exchange Act (7 U.S.C. 7a–1) or a 

clearing agency registered with the Securities and 

Exchange Commission under section 17A of the 

Securities Exchange Act of 1934 (15 U.S.C. 78q–1). 

See 12 U.S.C. 5462(3). The Commission is the 

Supervisory Agency, as defined in 12 U.S.C. 

5462(8), for four designated clearing agencies (the 

Depository Trust Company, the National Securities 

Clearing Corporation, the Fixed Income Clearing 

Corporation, and the Options Clearing Corporation). 

See 12 U.S.C. 5465(e)(1)(A). The Commission 

published a final rule concerning the filing of 

advance notices for designated clearing agencies in 

2012. See 17 CFR 240.19b–4(n); Exchange Act 

Release No. 34–67286 (June 28, 2012), 77 FR 41602 

(July 13, 2012). 

158See 12 U.S.C. 5465(e)(1)(B). 

159See 12 U.S.C. 5465(e)(1)(E) and (F). 

A registered fund may wish to use a 

member of a national securities 

exchange as a sponsoring member. Such 

a sponsoring member that receives and 

posts margin to a U.S. Treasury 

securities CCA on behalf of registered 

funds may be deemed to have custody 

of fund assets and implicate Rule 17f– 

1 under the 1940 Act. Therefore, the 

Commission takes the position, for a 

period of five years from the effective 

date of this adopting release, that if a 

registered fund’s cash and/or securities 

are placed and maintained with a 

sponsoring member that is a member of 

a national securities exchange, solely in 

connection with facilitating the posting 

of margin to FICC on behalf of a 

registered fund in connection with the 

registered fund’s participation in the 

Sponsored Program, it would not 

provide the basis for an enforcement 

action against a registered fund under 

Section 17(f) of the 1940 Act so long as: 

(i) the fund complies with Rule 17f–1(a), 

(b)(5), and (d), and (ii) the contract 

between the registered fund and the 

member of the national securities 

exchange provides for the following: 

• The margin provided by a registered 

fund is not commingled with, and is 

kept separate from, the sponsoring 

member’s assets; 150

• The sponsoring member segregates 

on its books and records the margin 

provided by a registered fund (or series 

thereof, as applicable), and identifies a 

value of margin in its books and records 

as being attributable to the registered 

fund; 

• The registered fund’s provision of 

margin is consistent with the FICC 

registered fund margin framework; and 

• The sponsoring member does not 

hold registered fund assets that exceed 

the amount that is required to be 

deposited as margin to FICC with 

respect to the registered fund’s 

outstanding eligible secondary market 

transactions.151

As above, such an approach is 

intended to accomplish a similar 

purpose as the FICC registered fund 

margin framework and additionally 

limit the amount of assets held in 

custody at a sponsoring member that is 

a member of a national securities 

exchange to an amount of margin that is 

required by FICC. 

More generally, the Commission 

understands that the commenter which 

raised issues regarding the ability of 

registered funds to post margin to the 

CCA is referring to clearing models 

whereby an indirect participant in a 

U.S. Treasury securities CCA executes a 

transaction with a counterparty and 

then ‘‘gives up’’ the transaction to 

another party to submit for clearance 

and settlement. The Commission agrees 

with the commenter that the use of a 

‘‘give up’’ model could be helpful in 

further facilitating the increased 

demand for central clearing under a 

potential clearing requirement. The 

Commission understands that FICC 

currently has certain models that 

facilitate ‘‘give up’’ style clearing, and, 

consistent with the requirement 

discussed in part II.B.2 infra, 

encourages U.S. Treasury securities 

CCAs to consider how best to facilitate 

‘‘give up’’ clearing. 

The Commission’s ability to 

‘‘encourage’’ FICC, a covered clearing 

agency, must be considered in context 

of the relevant regulatory framework. 

Covered clearing agencies are SROs for 

purposes of the Exchange Act,152

meaning that, as an SRO, a covered 

clearing agency is required to file with 

the Commission any proposed rule or 

proposed change in its rules, including 

additions or deletions from its rules.153

The Commission publishes all proposed 

rule changes for comment.154 When 

considering whether to approve or 

disapprove a proposed rule change, the 

Commission shall approve the proposed 

rule change if it finds that such 

proposed rule change is consistent with 

the requirements of the Exchange Act 

and the rules and regulations 

thereunder applicable to the particular 

type of SRO.155

In addition, clearing agencies 

registered with the Commission are 

financial market utilities, as defined in 

section 803(6) of the Dodd-Frank Act.156

A clearing agency that has been 

designated by the Financial Stability 

Oversight Council as systemically 

important or likely to become 

systemically important, and for which 

the Commission is the Supervisory 

Authority (‘‘designated clearing 

agency’’), is required to file 60-days 

advance notice with the Commission of 

changes to rules, procedures, and 

operations that could materially affect 

the nature or level of risk presented by 

the designated clearing agency 

(‘‘advance notice’’).157 Such an advance 

notice also requires consultation with 

the Board of Governors.158 The Clearing 

Supervision Act authorizes the 

Commission to object to changes 

proposed in such an advance notice, 

which would prevent the clearing 

agency from implementing its proposed 

change(s).159

These statutory requirements 

applicable to covered clearing agencies 

mean that the Commission must 

consider proposed rule changes as they 

are filed. The Commission does not 

dictate particular proposed rule changes 

that a CCA should adopt, although a 

CCA may determine that it should 

propose certain rule changes in 

response to a new or amended 

Commission rule. In response to this 


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160 15 U.S.C. 78s(c) (establishing the 

Commission’s authority to, by rule, abrogate, add to, 

and delete from the rules of an SRO other than a 

registered clearing agency). 

161 15 U.S.C. 80a–17(f)(1). 

162 ICI Letter, supra note 85, at 15. 

163 17 CFR 270.17f–4. 

164 17 CFR 270.17f–4. 

165 ICI Letter, supra note 85, at 15. 

166 ICI Letter, supra note 85, at 15–16. 

167The commenter’s assertion that FICC has 

stated that it is not a securities depository and does 

not provide securities depository services comes 

from a statement in FICC’s Disclosure Framework 

concerning a different regulatory regime. 

Specifically, the statement concerns whether FICC 

is a ‘‘central securities depository’’ or provides 

‘‘central securities depository’’ services, for 

purposes of discussing FICC’s obligation to comply 

with Rule 17ad–22(e)(10), which applies to CCAs 

that provide central securities depository services. 

‘‘Central securities depository’’ is a defined term in 

the Covered Clearing Agency Standards, meaning a 

clearing agency that is a securities depository as 

described in Section 3(a)(23)(A) of the Act (15 

U.S.C. 78c(a)(23)(A). Section 3(a)(23)(A) defines a 

securities depository, in turn, as who (i) acts as a 

custodian of securities in connection with a system 

for the central handling of securities whereby all 

securities of a particular class or series of any issuer 

deposited within the system are treated as fungible 

and may be transferred, loaned, or pledged by 

bookkeeping entry without physical delivery of 

securities certificates, or (ii) otherwise permits or 

facilitates the settlement of securities transactions 

or the hypothecation or lending of securities 

without physical delivery of securities certificates. 

168 ICI Letter, supra note 85, at 16–17. 

169FICC Buyside FAQ at 4, available at https:// 

www.dtcc.com/ustclearing/-/media/Files/ 

Downloads/Microsites/Treasury-Clearing/FICCGSD-FAQ.pdf (‘‘FICC records positions of 

Sponsored Members and positions of Executing 

Firms of a Prime Broker as long as the Prime Broker 

submits the trades to FICC using a unique client 

identifier called the ‘‘Executing Firm symbol.’’) 

(‘‘FICC Buyside FAQ’’). 

commenter, and as discussed in part 

II.B.2 infra, the Commission will 

consider any proposed rule changes 

filed by FICC, or any other U.S. 

Treasury securities CCA, in due course, 

consistent with its obligations under 

Section 19(b) of the Exchange Act. The 

Commission does not have the ability to 

revise particular aspects of the rules of 

an SRO that is a registered clearing 

agency, like a CCA.160

Second, the commenter discussed 

potential custody issues for registered 

funds under Section 17(f) of the 1940 

Act and Rule 17f–4 thereunder. Section 

17(f) requires that a registered fund 

maintain its securities and similar 

investments in a bank, a company 

which is a member of a national 

securities exchange, or its own 

custody.161 The commenter stated that 

substantially all funds use a bank 

custodian, and that a bank custodian is 

particularly beneficial to funds in the 

context of repo and reverse repo 

transactions with respect to custodying 

both securities and cash.162

The Commission has adopted rules 

that specify required qualifications for 

entities other than those named in 

Section 17(f) to act as custodians of fund 

assets, including Rule 17f–4 which 

permits a registered fund to deposit the 

securities it owns in a securities 

depository, under certain conditions.163

A ‘‘securities depository’’ is defined to 

include a clearing corporation that is 

registered with the Commission under 

Section 17A of the Exchange Act.164 The 

commenter observed that FICC is 

registered as a clearing agency, but that 

FICC has stated that it is not a securities 

depository and does not provide 

securities depository services.165 The 

commenter asserted that, because FICC 

is not deemed to be a securities 

depository eligible to custody fund 

assets, expanding the Sponsored Service 

for funds would require addressing 

Section 17(f) ‘‘if the offering would 

require margin posting by funds,’’ and 

stated that one way to do this would be 

for FICC to obtain Commission relief to 

hold fund margin as an eligible 

securities depository within the 

meaning of Rule 17f–4.166

The Commission is not opining on 

whether FICC’s Government Securities 

Division could currently be considered 

a ‘‘securities depository’’ for purposes of 

Rule 17f–4.167 However, the 

amendments to Rule 17ad–22(e) do not 

require that registered funds post 

margin directly to a U.S. Treasury 

securities CCA, meaning that this issue 

is not implicated at this time. Therefore, 

the Commission does not believe that 

such concerns are ripe for 

consideration, as no U.S. Treasury 

securities CCA has proposed particular 

rules that would require the posting of 

registered funds’ securities at the CCA 

and such an arrangement is not 

specifically required by the requirement 

to clear eligible secondary market 

transactions. Moreover, as discussed in 

this part above, the Commission has 

taken the position regarding the FICC 

registered fund margin framework in 

light of the commenter’s concern. 

The Commission’s definition of an 

eligible secondary market transaction 

and the requirement to clear such 

transactions does not, on its own, 

mandate particular changes to FICC’s 

membership models, including the 

Sponsored Service. FICC has not 

proposed any rule changes with respect 

to the Sponsored Service in this regard 

at this time. The Commission will 

consider any proposed rule changes 

consistent with its obligations under 

Section 19(b) of the Exchange Act in the 

event that FICC submits any such 

proposal in the future. 

Third, the commenter stated that 

FICC’s rules addressing margin posting 

will need to be amended to provide for 

enhanced recordkeeping, internal 

controls, and transparency around the 

positions and related margin, to address 

fund concerns regarding the security of 

fund assets under a requirement to clear 

certain transactions. The commenter 

stated that enhanced recordkeeping and 

related controls are critical to 

appropriately identifying ownership of 

assets during a repo transaction 

particularly since, unlike a typical 

derivatives or cash transaction, 

ownership of the U.S. Treasury 

securities underlying a repo transaction 

changes during the transaction. The 

commenter asserted that FICC currently 

relies on its broker-dealer members and, 

in certain cases, designated agency 

banks to maintain records regarding 

margin positions, and that FICC has 

indicated that it is not able to identify 

positions or possess the assets of its 

members’ customers. The commenter 

states that notwithstanding FICC’s 

current lack of infrastructure, ‘‘the 

Proposal relies heavily on FICC to 

intermediate transactions under a 

clearing mandate and contemplates that 

this approach will provide a higher 

level of safety to the market than the 

current bilateral market, which relies on 

a well-diversified group of creditworthy banks to hold collateral, 

including through robust tri-party 

arrangements, and utilizes an industry 

standard agreement that is well 

understood by market participants.’’ 168

However, no U.S. Treasury securities 

CCA has proposed particular rules that 

would require the posting of registered 

funds’ securities at the CCA. The 

Commission’s definition of an eligible 

secondary market transaction and the 

requirement to clear such transactions 

does not, on its own, mandate particular 

changes to FICC’s membership models, 

including the Sponsored Service. The 

Commission will consider any proposed 

rule changes consistent with its 

obligations under Section 19(b) of the 

Exchange Act in the event that FICC 

submits any such proposal in the future. 

The Commission disagrees with the 

commenter’s assertion that FICC has 

indicated that it is not able to identify 

positions or possess the assets of its 

members’ customers. FICC currently is 

able to maintain position data for 

customer positions in all its indirect 

access models.169 In addition, under the 

amendments being adopted in this 

release, FICC will, as discussed in 

section II.B.1 infra, be required to 

separately calculate and hold customer 

margin (which it currently does for the 

Sponsored Service), which addresses 


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170SIFMA AMG Letter, supra note 35, at 5. 

171 ICI Letter, supra note 85, at 20–21. 

172FICC Rule 2A, Section 7, supra note 19; FICC 

Disclosure Framework, Principle 1, available at 

https://www.dtcc.com/-/media/Files/Downloads/ 

legal/policy-and-compliance/FICC_Disclosure_

Framework.pdf. 

173FICC Rule 5, section 8 (regarding novation 

generally) and Rule 3A, section 7(a) (regarding 

novation in the Sponsored Service), supra note 19. 

174FICC Rule 22A, Section 2, supra note 19. 

175See id. 

176See id. 

177FICC Rule 3A, Section 16(b), supra note 19. 

178 Id. 

179 Id. 

180 ICI Letter, supra note 85, at 22. 

the commenter’s concern that FICC 

calculate and hold customer margin 

separately. 

Fourth, the commenter highlighted its 

support for strong protections for fund 

assets, including ‘‘legally segregated, 

operationally commingled’’ (‘‘LSOC’’) 

protections. In addition, another 

commenter asserted that, without an 

exclusion from the definition of an 

eligible secondary market transaction 

for repos with registered funds, such 

funds could be subject to greater 

counterparty credit risk because the 

existing Sponsored Member clearing 

model at FICC has no requirement to 

segregate customer assets, while at 

present most registered funds use thirdparty custodians to hold securities and 

cash.170 The Commission addresses 

these comments in more detail in part 

II.B.1 below. 

Fifth, the commenter stated that the 

Commission and FICC must address the 

bankruptcy treatment of certain fund 

assets. Specifically, the commenter 

stated that FICC’s rules should confirm 

that agreements entered into by repo 

counterparties will be enforceable 

against both parties, notwithstanding 

that the transactions are cleared, and 

provide a clear process for closeout of 

transactions by FICC, including both the 

start and end legs of the transaction. The 

commenter also stated that FICC’s rules 

need to address what happens upon the 

insolvency of a sponsoring member in a 

variety of factual circumstances, 

including providing for prompt 

replacement of the sponsoring member 

by its sponsored members and handling 

of other functions typically performed 

by the sponsoring member to ensure 

that transactions by the sponsored 

member are maintained and allowing 

the sponsored member the authority to 

receive certain reports directly and to 

post to the clearing fund to preserve 

pending trades. The commenter also 

stated that FICC’s rules should provide 

clarity regarding how non-defaulting 

parties, such as funds, can exercise 

closeout rights, including those 

available under Sections 555, 559, 561, 

and similar sections of the U.S. 

Bankruptcy Code. The commenter 

stated that if, in the future, FICC decides 

to expand the Sponsored Service to 

permit (but not require) sponsored 

members to post margin, then the 

Commission and FICC should clarify 

that the margin posted by a sponsored 

member with its sponsoring member for 

on-posting with FICC would be eligible 

for customer treatment under the 

Securities Investor Protection Act 

(‘‘SIPA’’). The commenter also argues 

that clarification of FICC’s rules 

regarding closeout rights—particularly 

in respect to ‘‘done away’’ trades—is 

important to clarify a repo 

counterparty’s rights under different 

insolvency regimes applicable to cleared 

transactions.171

Regarding these bankruptcy-related 

comments, FICC’s rules already address 

the issues raised by the commenter. For 

example, with respect to the 

enforceability of the agreements entered 

into by repo counterparties, FICC 

requires applicants for membership to 

execute a Membership Agreement, in 

which the applicant agrees to be bound 

by FICC’s Rules, and FICC further 

requires applicants for membership to 

provide a legal opinion regarding the 

membership agreement, which 

incorporates FICC’s Rules.172 Novation 

consists of the termination of the 

deliver, receive, and related payment 

obligations between the parties to a 

trade, and their replacement with 

identical obligations to and from FICC 

in accordance with the Rules. Once it 

novates a transaction, FICC 

contractually replaces the original 

counterparties’ obligations to each other 

with two sets of obligations, both of 

which include FICC and one of the 

original counterparties.173 FICC is not a 

party to the pre-novation bilateral 

agreements between a Sponsoring 

Member and its Sponsored Members, 

and therefore, it cannot guarantee 

performance of those contracts. 

In addition, with respect to FICC’s 

need to establish a process for closeout, 

FICC’s Rules contain these processes. 

Upon ceasing to act for an insolvent 

member, FICC may promptly close out 

and manage the member’s positions, 

including with respect to the member’s 

pending transactions with nondefaulting members.174 Specifically, 

FICC would terminate and net all of the 

insolvent member’s positions, after 

which FICC would liquidate the net 

positions through market action and 

determine a single net amount owed to 

or from the insolvent member from or to 

FICC.175 After closing out the insolvent 

member’s final net positions, FICC’s 

Rules provide for the timely settlement 

of all deliver, receive, and related 

payment obligations that would have 

arisen had FICC not ceased to act for the 

insolvent member (i.e., FICC would seek 

to fulfill its settlement obligations with 

respect to the insolvent member’s 

pending transactions with nondefaulting members.) 176 Similarly, in 

the event that FICC determines to treat 

a Sponsoring Member as insolvent, FICC 

would cease to act for the Sponsoring 

Member.177 FICC would determine 

whether to close-out the affected 

Sponsored Member Trades and/or 

permit the Sponsored Members to 

complete their settlement.178 In the 

event that it closes out the Sponsored 

Member’s transactions, it would follow 

the same closeout process.179

Moreover, these comments generally 

relate to particular features of FICC’s 

Sponsored Service, including how the 

sponsored member is able to interact 

with FICC, FICC’s ability to settle the 

transactions in the event of a 

Sponsoring Member default, and the 

operation of certain bankruptcy 

provisions. For the reasons discussed in 

more detail in part II.B.2 infra, the 

Commission cannot change the rules 

governing the Sponsored Service. 

Sixth, the commenter identified 

issues for registered funds that would 

arise if additional clearing were to 

require funds to contribute to FICC’s 

CCLF. The commenter explained that 

contribution by a registered fund to the 

CCLF could result in a prohibited joint 

transaction in violation of: Section 17(d) 

of the 1940 Act if affiliates of the fund 

(e.g., other funds managed by the same 

investment adviser) also contribute to 

the fund; Section 18 of the 1940 Act, 

which prohibits a registered fund from 

issuing ‘‘senior securities;’’ Section 17(f) 

of the 1940 Act; the fund’s investment 

purpose, policies, and organization 

documents; or the fiduciary duties of 

the fund’s board and its investment 

adviser. The commenter asserts that the 

Commission would need to carefully 

evaluate the ability of a registered fund 

to become a FICC netting member and 

contribute to the CCLF, as well as 

amending its rules to confirm that view, 

or that, in the alternative, FICC could 

create a special category of netting 

member that would not require a fund 

to contribute to the CCLF.180

In response to this commenter, any 

requirement for a U.S. Treasury 

securities CCA to have policies and 

procedures requiring its direct 

participants to clear eligible secondary 

market transactions does not, on its 


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181Federated Letter, supra note 85, at 3; ICI 

Letter, supra note 85, at 5–8. 

182Federated Letter, supra note 85, at 3 (citing 

SEC. & EXCH. COMM’N, DIV. OF INV. MGMT 

GUIDANCE UPDATE: COUNTERPARTY RISK 

MANAGEMENT PRACTICES WITH RESPECT TO 

TRI-PARTY REPURCHASE AGREEMENTS (July 

2013), available at https://www.sec.gov/divisions/ 

investment/guidance/im-guidance-2013-03.pdf). 

183 17 CFR 270.5b–3(c)(1). Federated Letter, supra 

note 85, at 6; ICI Letter, supra note 85, at 23–24. 

184Federated Letter, supra note 85, at 6; ICI 

Letter, supra note 85, at 23–24. 

185 ICI Letter, supra note 85, at 23–24. 

186 ICI Letter, supra note 85, at 25. 

187Section 5(b) divides management investment 

companies into ‘‘diversified companies’’ and ‘‘nondiversified companies.’’ Under this section, (i) a 

‘‘diversified company’’ means a management 

company which meets the following requirements: 

At least 75 per centum of the value of its total assets 

is represented by cash and cash items (including 

receivables), Government securities, securities of 

other investment companies, and other securities 

for the purposes of this calculation limited in 

respect of any one issuer to an amount not greater 

in value than 5 per centum of the value of the total 

assets of such management company and to not 

more than 10 per centum of the outstanding voting 

securities of such issuer and (ii) a ‘‘non-diversified 

company’’ means any management company other 

than a diversified company. See section 5 of the 

1940 Act. 

188See Use of Derivatives by Registered 

Investment Companies and Business Development 

Companies, Investment Company Act Release No. 

34084 (Nov. 2, 2020), 85 FR 83162 (Dec. 21, 2020); 

17 CFR 270.18f–4. Rule 18f–4 establishes a 

framework for funds’ use of derivatives and certain 

other transactions, including reverse repurchase 

agreements. Money market funds are not permitted 

to rely on rule 18f–4 for these transactions. 

own, require any particular market 

participant to become a direct 

participant of a U.S. Treasury securities 

CCA, thereby taking on the membership 

obligations of such participation, 

including contribution to the CCLF. The 

Commission acknowledges the 

commenter’s view that certain 

regulatory provisions applicable to 

registered funds could effect a registered 

fund’s ability to join a U.S. Treasury 

securities CCA directly, but the 

Commission does not believe that these 

concerns should impact its 

consideration of the proposal as the 

proposal would not impose such 

requirements. Consistent with its 

obligations under Section 19 of the 

Exchange Act, in its review of any rule 

filings, the Commission would consider 

issues related to the ability of market 

participants, including registered funds, 

to participate in FICC. 

Seventh, the commenter stated that 

bilateral tri-party repo should be 

exempted from the definition of an 

eligible secondary market transaction. 

The Commission has considered this 

comment in part II.A.2.a.i supra. 

In addition, certain commenters also 

provided specific arguments regarding 

money market funds subject to Rule 2a– 

7 under the 1940 Act.181 One 

commenter stated that the Commission 

should not include repos with money 

market funds subject to Rule 2a–7 

within the definition of an eligible 

secondary market transaction, noting 

that the current ability to transact in 

Treasury repurchase agreements across 

a variety of clearance and settlement 

platforms allows these funds to be 

invested in a manner that is in the best 

interest of their shareholders. The 

commenter also referred to the planning 

and tools that have been developed that 

seek to avoid a disorderly default in 

repurchase agreement markets. The 

commenter also stated that the likely 

insolvency regimes for the major 

repurchase agreement participants that 

would be facilitated by a receiver (either 

the Federal Deposit Insurance 

Corporation or the Securities Investor 

Protection Corporation) allow the 

receiver to transfer or wind down 

repurchase agreements in an orderly 

manner.182

Two commenters raised questions 

with respect to regulatory 

diversification requirements, that is, 

whether registered funds, including 

money market funds, will continue to 

meet the definition of a ‘‘collateralized 

fully’’ repurchase agreement under Rule 

5b–3 under the Investment Company 

Act of 1940 if Treasury repo 

investments through the Sponsored 

Service grow significantly.183

Commenters explained that meeting the 

definition of a ‘‘collateralized fully’’ 

repurchase agreement under Rule 5b–3 

is necessary for Treasury repurchase 

agreements to remain permissible 

investments for a government money 

market fund and for achieving ‘‘look 

through’’ treatment for certain 

diversification requirements imposed 

under the 1940 Act and Internal 

Revenue Code.184 One commenter asked 

that the Commission confirm through 

rulemaking or guidance that repo 

clearing offerings made available by 

FICC to registered funds ‘‘would 

continue to satisfy’’ the ‘‘collateralized 

fully’’ standard set forth in Rules 5b–3 

and 2a–7 under the 1940 Act and would 

allow funds to achieve ‘‘look through 

treatment’’ for diversification 

purposes.185

One commenter also referenced the 

need for relief for reverse repo 

transactions. The commenter stated that, 

unlike Treasury repo agreements that 

are ‘‘collateralized fully,’’ Treasury 

reverse repo transactions entered into by 

funds (i.e., where a fund is the seller) 

currently are not eligible for lookthrough treatment. The commenter 

concludes that this means that, under 

the proposal, absent additional 

rulemaking or relief, most money 

market funds would be limited to 

investing no more than 5% of their total 

assets in reverse repo agreements 

because funds would face FICC as the 

counterparty, and that diversified nonmoney market funds would be limited 

to investing either no more than 25% of 

their total assets in reverse repo 

agreements or no more than 5%, with 

respect to 75% of their total assets, in 

reverse repo agreements. The 

commenter stated that registered funds 

may use Treasury reverse repo 

agreements as a form of short-term 

financing to facilitate shareholder 

redemption requests.186

The Commission acknowledges that 

the final rule could limit the extent to 

which some registered funds enter into 

Treasury reverse repo agreements. 

However, the Commission believes that 

this effect will be limited because a 

relatively small number of funds report 

Treasury reverse repo agreements on 

Form N–PORT, and funds generally 

have other available means to generate 

cash to meet shareholder redemption 

requests, such as lines of credit, 

securities lending, interfund lending, or 

selling portfolio investments, as 

applicable. The combined effect of the 

final rule and the diversification 

requirements in section 5(b) of the 1940 

Act could practically limit the amount 

some funds may invest in Treasury 

reverse repo.187

The commenter separately suggested 

that the final rule would affect money 

market funds’ use of Treasury reverse 

repo agreements, in light of additional 

diversification requirements for those 

funds. However, money market funds 

are not permitted to rely on rule 18f–4 

under the 1940 Act to enter into reverse 

repo transactions.188 Moreover, money 

market funds historically have not 

reported holdings of reverse repo 

agreements in their portfolio reports 

filed with the Commission. 

The Commission’s definition of an 

eligible secondary market transaction 

and the requirement to clear such 

transactions does not mandate 

particular changes to FICC’s 

membership models, including the 

Sponsored Service. FICC has not 

proposed any rule changes with respect 

to the Sponsored Service in this regard 

at this time. The Commission will 

consider any proposed rule changes 

consistent with its obligations under 

Section 19(b) of the Exchange Act in the 

event that FICC submits any such 

proposal in the future. In the event that 

any U.S. Treasury securities CCA 

proposes a clearing model in which 


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189 ICI Letter, supra note 85, at 30–31. 

190See Sponsored DVP and GC Repo Activity, 

available at https://www.dtcc.com/charts/ 

membership. 

191Federated Letter, supra note 85, at 6–7; ICI 

Letter, supra note 85, at 25–26; SIFMA AMG Letter, 

supra note 35, at 14. 

192 Id. 

193 7 U.S.C. 1a(15) (defining DCO) and 7a–1(a) 

(establishing DCO registration requirement). 

194CME Letter, supra note 81, at 6. 

195CME Letter, supra note 81, at 6–7. 

196Letter from Rachel Goldberg, Head of 

Government Relations and Regulatory Strategy, 

Americas, London Stock Exchange Group, at 2–3 

(June 15, 2023). 

197See BIS, Committee on the Global Financial 

System, Repo Market Functioning, Apr. 2017. 

198Proposing Release, supra note 14, 87 FR at 

64627. 

registered funds would be required to 

place and maintain assets to effect 

eligible secondary market transactions 

at the CCA, the Commission would 

consider the applicability of Section 

17(f) of the 1940 Act. 

One commenter explained that 

registered funds’ access to the Treasury 

repo market could be restricted by the 

number or willingness of the FICC 

netting members to provide sponsoring 

services with attending negative effect 

on the market liquidity.189 Although 

increases in demand for the Sponsored 

Service may put pressure on existing 

sponsoring members and reduce their 

ability or willingness to onboard 

additional clients, this could also 

present an opportunity for dealers that 

currently do not offer the Sponsored 

Service to enter the market, resulting in 

more competition and a wider range of 

counterparties. This is supported by an 

observation of a growing number of 

dealers offering the Sponsored Service 

and the growing volume of sponsored 

repo indicating increased adoption of 

this service by a wider range of market 

participants.190

Several commenters raised concerns 

about the potential effect of the proposal 

and a potential resultant high level of 

exposure to the U.S. Treasury securities 

CCA on ratings assigned to certain 

money market funds by Nationally 

Recognized Statistical Rating 

Organizations (NRSROs).191 The 

commentators explained that NRSROs 

typically establish exposure limits that 

a rated money market fund may have to 

any particular CCA and, if these limits 

are breached, a fund may not be able to 

maintain the currently assigned 

rating.192 The Commission does not 

have the authority to adjust the 

NRSROs’ rating criteria and 

methodologies, and it cannot anticipate 

how NRSROs may adjust their rating 

criteria and methodologies in response 

to the U.S. Treasury market 

infrastructure changes resulting from 

the adoption of the Membership 

Definition. 

iii. Repos by Other Clearing 

Organizations 

Several commenters supported a 

limited exclusion from the definition of 

an eligible secondary market transaction 

for U.S. securities transactions entered 

into by a derivatives clearing 

organization (‘‘DCO’’). A DCO is an 

entity that is regulated by the CFTC and 

is defined as a clearinghouse, clearing 

association, clearing corporation, or 

similar entity, facility, system, or 

organization that, with respect to an 

agreement, contract, or transaction (i) 

enables each party to the agreement, 

contract, or transaction to substitute, 

through novation or otherwise, the 

DCO’s credit for the credit of the parties; 

(ii) arranges or provides, on a 

multilateral basis, for the settlement or 

netting of obligations resulting from 

such agreements, contracts, or 

transactions executed by the DCO’s 

participants; or (iii) otherwise provides 

clearing services or arrangements that 

mutualize or transfer among the DCO’s 

participants the credit risk arising from 

such agreements, contracts, or 

transactions executed by the 

participants.193 Generally, DCOs 

perform similar functions as CCAs, but 

for commodities as opposed to 

securities. 

One commenter recognized that DCOs 

are not specifically enumerated as an 

entity type subject to the expanded 

clearing requirement, but stated that, in 

practice, it would be impractical for 

DCOs to avoid entering into repos with 

direct participants of U.S. Treasury 

CCAs, which would therefore be 

included in the definition of an eligible 

secondary market transaction.194 First, 

the commenter stated that an exclusion 

for DCOs was necessary to allow DCOs 

to retain the flexibility necessary to 

effectively manage risk when managing 

the default of a participant of the DCO, 

with respect both to access to the 

appropriate counterparties and to 

pressing time considerations. The 

commenter stated that requiring the 

central clearing of repos entered into for 

default management by a DCO could 

undermine the effectiveness of the 

DCO’s default management practices. 

Second, the commenter asserted that 

including transactions with a DCO 

within the definition of an eligible 

secondary market transaction would 

threaten DCOs’ effective cash 

management. The commenter stated that 

DCOs regularly receive U.S. dollar cash 

as margin from their clearing members 

and then enter into reverse repos, as 

permitted under the applicable CFTC 

regulations. However, the commenter 

expressed concern that the permissible 

counterparties and counterparty 

concentration limits included in CFTC 

Rule 1.25 would appear to be in tension 

with the requirement to clear eligible 

secondary market transactions because a 

clearing agency, which would become 

the counterparty to any transaction that 

is centrally cleared, is not a permissible 

counterparty. Finally, the commenter 

stated that allowing transactions with 

DCOs to be scoped into the definition of 

an eligible secondary market transaction 

would be inconsistent with the spirit, 

and the letter, of Section 5b(f)(1) of the 

Commodity Exchange Act, which states 

that ‘‘under no circumstances shall a 

[DCO] be compelled to accept the 

counterparty credit risk of another 

clearing organization.’’ 195

An additional commenter made 

similar arguments. This commenter 

stated that the rule as proposed could 

create contagion risk by increasing 

linkages between CCPs, stating that this 

risk would crystallize if a CCP clearing 

its investment trades contributed to the 

mutualized financial resources of 

another CCP via its default fund or was 

otherwise exposed to loss in the event 

of a member default of the other CCP. 

The commenter further stated that 

existing regulations under both U.S. and 

European regulatory frameworks 

recognize the potential financial 

stability risks of inter-CCP linkages and 

prohibit them from accepting the 

counterparty credit risk of another CCP. 

According to the commenter, one such 

conflict arises under the Commodity 

Exchange Act where, to minimize 

systemic risk, there is a requirement that 

‘‘[. . .] under no circumstances shall a 

derivatives clearing organization be 

compelled to accept the counterparty 

credit risk of another clearing 

organization.’’ Finally, the commenter 

states that a clearing model tailored to 

meet CCPs’ bespoke collateral 

management requirements would need 

to be developed before they could 

operationally clear investment trades.196

The Commission understands that 

reverse repos are used heavily by central 

counterparties as a means of investing 

their cash.197 The Commission also 

agrees that entities that provide central 

counterparty services, like DCOs and 

clearing agencies, must be able to 

effectively manage the default of a 

participant.198 In the event of a 

participant default, the need for such 

entities to be able to react within 

potentially compressed timeframes, 

including by engaging in repos of U.S. 


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2734 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

199The Commission is not opining on the 

proposal’s consistency with the Commodity 

Exchange Act or other regulatory regimes, but the 

commenter’s concern is moot in light of the 

modification to the definition of an eligible 

secondary market transaction that the Commission 

is adopting. 

200See comments from Walt L. Lukken, President 

and Chief Executive Officer, Futures Industry 

Association, at 2–7 (Dec. 23, 2022) (‘‘FIA Letter’’). 

See also SIFMA/IIB Letter, supra note 37, at 30–31 

(recognizing that the absent an exemption for FCMs 

from the central clearing requirement, FCMs 

engaging in repo transactions would be placed in 

the untenable position of violating either the SEC’s 

proposal or existing CFTC regulations). See also 

DTCC/FICC Letter, supra note 33, at 25 (recognizing 

that CFTC regulations currently limit FCM access 

to central clearing by preventing FCMs from 

entering into FICC-cleared repo transactions using 

customer property). 

201See 7 U.S.C. 1a(28)(A). 

202One commenter states that the majority of 

FCMs are dually registered as FCMs and brokerdealers. See FIA Letter, supra note 200, at 2. 

203See FIA Letter, supra note 200, at 4. 

204 7 U.S.C. 1–26. 

205 17 CFR 1.1–190.19. 

206See FIA Letter, supra note 200, at 3 

(discussing 17 CFR 1.20 (regarding futures traded 

on U.S. futures exchanges) and 17 CFR 22.4 

(regarding cleared swaps)). 

207FIA Letter, supra note 200, at 3–4 (discussing 

17 CFR 1.20, 22.2, and 30.7). 

208 DTCC 2023 White Paper, supra note 107, at 

22–23. 209FIA Letter, supra note 200, at 4–5 (discussing 

17 CFR 1.25(b)). 210FIA Letter, supra note 200, at 4–5 (discussing 

17 CFR 1.25(a)). 

Treasury securities held as margin to 

create liquidity, may be essential to 

their default management processes. 

The Commission agrees that including 

such transactions within the scope of an 

eligible secondary market transaction 

might have systemic risk implications 

and counteract the goals of effective and 

efficient default management by CCPs in 

such scenarios. Accordingly, it is 

appropriate to exclude repos entered 

into by an entity acting as a central 

counterparty from the definition of an 

eligible secondary market 

transaction.199

To do so, the Commission is 

modifying the definition of an eligible 

secondary market transaction in Rule 

17ad–22(a) to exclude any repurchase or 

reverse repurchase agreement 

collateralized by U.S. Treasury 

securities in which one counterparty is 

a covered clearing agency providing 

central counterparty services, a 

derivatives clearing organization (see 7 

U.S.C. 7a–1 and 17 CFR 39.3), or is 

regulated as a central counterparty in its 

home jurisdiction. With respect to a 

counterparty that is regulated as a 

central counterparty in its home 

jurisdiction, this portion of the 

exclusion encompasses entities that may 

serve as central counterparties in their 

home jurisdiction and may transact in 

repos with direct participants of a U.S. 

Treasury securities CCA. Although 

commenters did not specifically suggest 

this exclusion for a counterparty that is 

regulated as a CCP in its home 

jurisdiction, this aspect of the exclusion 

is appropriate to ensure that entities 

serving as central counterparties in 

other jurisdictions are similarly 

excepted from the definition of an 

eligible secondary market transaction as 

repo counterparties. 

iv. Repos by FCMs 

Two commenters asked the 

Commission to adopt an exemption that 

would allow Futures Commission 

Merchants (‘‘FCMs’’) to continue to 

engage in eligible secondary market 

transactions in U.S. Treasury securities 

outside of central clearing, and another 

commenter acknowledged the potential 

interaction between the proposal and 

the regulatory framework governing 

FCMs.200 An FCM is an entity engaged 

in soliciting or accepting orders for the 

purchase or sale of commodities, 

futures, swaps, or other instruments 

regulated by the CFTC.201 FCMs can 

also be registered with the Commission 

as broker-dealers.202 In their role as 

market intermediaries, FCMs hold 

customer funds and securities. The 

commenter explained that as of October 

31, 2022, FCMs held an aggregate 

amount of more than $500 billion in 

segregated customer accounts, a 

substantial percentage of which is held 

in the form of U.S. Treasury 

securities.203

As the commenter noted, FCMs are 

required under the Commodity 

Exchange Act 204 and the regulations 

promulgated thereunder 205 to assure the 

protection of customer funds. 

Specifically, as the commenter 

explained, FCMs are required to hold 

customer funds and securities in 

segregated accounts with a bank or other 

permitted depository that acknowledges 

such customer assets ‘‘will be separately 

accounted for and segregated’’ from the 

FCM’s own funds and ‘‘must otherwise 

be treated in accordance with the 

provisions of the [CEA]’’ and CFTC 

rules.206 The commenter highlighted 

that neither the bank/depository nor the 

FCM may use the FCM’s customer funds 

to ‘‘secure or guarantee any obligations’’ 

that the FCM might owe to the bank/ 

depository or make the funds ‘‘subject to 

any right of offset or lien for or on 

account of any indebtedness, 

obligations, or liabilities’’ the FCM may 

owe the bank/depository.207 The 

commenter expressed concern as to 

whether the account structure provided 

by FICC would be consistent with these 

rules. 

As an initial matter, the requirement 

for direct participants of a U.S. Treasury 

securities CCA to clear eligible 

secondary market transactions does not 

require that an FCM post customer 

assets directly to the U.S. Treasury 

securities CCA. An FCM could access 

central clearing through a customer 

model, such as the Sponsored Service or 

the Prime Broker/Correspondent 

clearing models, that allows the 

customer/FCM to hold customer assets 

elsewhere (such as at the Sponsoring 

Member) and does not require that the 

FCM post customer assets to the U.S. 

Treasury securities CCA. Therefore, the 

ability of the CCA to provide an account 

structure consistent with the CFTC 

Rules should not prevent an FCM’s 

transactions from being submitted to 

central clearing. 

Moreover, in light of the requirements 

regarding the segregation of house and 

customer margin, as discussed in part 

II.B.1 infra, and the amendments to Rule 

15c3–3, as discussed in part II.C infra, 

U.S. Treasury securities CCAs will have 

to ensure that they have adopted 

policies and procedures to separate 

house and customer margin and to 

establish certain types of segregated 

accounts. The Commission encourages 

FCMs seeking the ability to post 

customer funds directly to the CCP to 

engage with the CCAs to consider 

whether such new account structures 

may be sufficient to comply with the 

provisions of the CFTC regulations that 

the commenter has identified or 

whether such structures could be 

leveraged to meet the commenter’s 

needs. For example, the Commission 

understands that the existing U.S. 

Treasury securities CCA recently has 

indicated that it would develop 

customer clearing account structures in 

which each customer’s margin would be 

calculated on a gross basis and held 

physically segregated from all other 

FICC margin and would also be legally 

segregated from FICC member as well as 

fellow customer exposures.208

One of the commenters also explained 

that FCMs are permitted to invest 

customer funds in certain securities 

determined by the CFTC to be 

‘‘consistent with the objectives of 

preserving capital and maintaining 

liquidity.’’ 209 The commenter stated 

that permitted investments include, 

among other things, U.S. Treasury 

securities, and investments with U.S. 

Treasury securities may be made by 

either direct purchase or sale or by 

entering into repo transactions.210 The 

commenter further explained that, for 

repo transactions, an FCM’s ‘‘permitted 


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211FIA Letter, supra note 200, at 5 (discussing 17 

CFR 1.25(d)(2)). 

212FIA Letter, supra note 200, at 6. 

213FIA Letter, supra note 200, at 6; see also 

Proposing Release, supra note 14, 87 FR at 64612. 

214FIA Letter, supra note 200, at 6 (citing 17 CFR 

1.25(d)(2)). 

215See FIA Letter, supra note 200, at 6. 

216See CFTC Global Market Advisory Committee 

(‘‘GMAC’’), Global Market Structure Subcommittee, 

CFTC Rule1.25(d)(2) Recommendation (discussing 

the impact of Rule 1.25(d)(2) on FCMs’ ability to 

participate in cleared repo), available at https://

www.cftc.gov/PressRoom/Events/ 

opaeventgmac110623. The CFTC’s GMAC voted in 

favor of this recommendation to amend Rule 

1.25(d)(2) to include CCAs as permitted 

counterparties. 

217Proposing Release, supra note 14, 88 FR at 

64617. 

218CFTC Rule 1.25(a)(1) also identifies additional 

types of permitted investments available to an FCM 

for its customer funds, including municipal bonds, 

corporate bonds, and interests in money market 

mutual funds. 

219FIA Letter, supra note 200, at 5 (discussing 17 

CFR 1.25(d)(9)). 

220See id. 

221FIA Letter, supra note 200, at 5 (discussing 17 

CFR 1.25(d)(13)). 

222See id. The commenter also noted that the 

CFTC has advised that ‘‘in-house transactions’’ in 

which an FCM receiving customer collateral that is 

not acceptable at a Derivatives Clearing 

Organization (‘‘DCO’’) or foreign board of trade 

may, independent of CFTC Rule 1.25 requirements, 

exchange that collateral for acceptable collateral to 

the extent necessary to meet margin requirements. 

The commenter requested confirmation from the 

Commission that such ‘‘in-house transactions’’ 

would similarly not be subject to the proposed 

clearing requirement were an FCM to conduct 

transactions with a participant of a U.S. Treasury 

securities CCA. If such transactions are with a 

participant of a U.S. Treasury securities CCA and 

otherwise meet the definition of an eligible 

secondary market transaction, then they would be 

subject to the requirement. 

counterparties are limited to a bank 

. . . , securities broker-dealer, or 

government securities dealer registered 

with the [Commission],’’ and a clearing 

agency is not a permitted 

counterparty.211

The commenter stated that, absent 

relief, conflict between the CFTC rules 

and the proposal would effectively 

prohibit FCMs from entering into U.S. 

Treasury security transactions pursuant 

to CFTC Rule 1.25.212 The commenter 

explained that a U.S. Treasury securities 

CCA interposes itself between the 

counterparties to a securities transaction 

through novation, acting functionally as 

the buyer to every seller and seller to 

every buyer.213 Therefore, according to 

the commenter, if an FCM were to 

conduct a cleared transaction, the CCA 

would become the FCM’s counterparty. 

Since a CCA is not a permitted FCM 

counterparty under the CFTC rules, the 

commenter states that FCMs are 

prohibited from conducting such 

cleared transactions.214 The commenter 

contended that if the Commission 

adopts the requirement to clear eligible 

secondary transactions as proposed, an 

FCM would lose its current ability to 

conduct transactions in U.S. Treasury 

securities with a direct participant of a 

U.S. Treasury securities CCA in 

compliance with CFTC rules.215

The Commission recognizes that if the 

FCM were to access a U.S. Treasury 

securities CCA through a model like 

FICC’s Sponsored Service, the CCA 

would novate the transaction and 

become the counterparty to the FCM, 

which, as the commenter has described 

it, would not be consistent with Rule 

1.25(d)(2) with respect to permitted 

counterparties. However, the 

requirement to clear eligible secondary 

market transactions does not require 

that the FCM use a particular type of 

model that would make the FCM a 

counterparty to a CCA. The FCM could 

access central clearing through an agent 

clearing model like FICC’s Prime Broker 

or Correspondent Clearing models, in 

which it would essentially ‘‘give up’’ its 

transaction to a direct participant for 

submission without becoming a 

counterparty to the CCA, which should 

be consistent with the FCM’s obligations 

under Rule 1.25(d)(2). Therefore, this 

requirement to clear eligible secondary 

market transactions does not obligate 

the FCM to use a model that would 

necessarily result in a transaction with 

a clearing agency as the counterparty to 

the FCM. 

The Commission recognizes this 

apparent tension between the 

application of Rule 1.25(d)(2), as 

described by the commenter, and the 

requirement to clear repos as part of the 

definition of eligible secondary market 

transactions.216 However, as discussed 

in the Proposing Release, when 

Congress added section 17A to the 

Exchange Act as part of the Securities 

Acts Amendments of 1975, it directed 

the Commission to facilitate the 

establishment of (i) a national system for 

the prompt and accurate clearance and 

settlement of securities transactions 

(other than exempt securities) and (ii) 

linked or coordinated facilities for 

clearance and settlement of securities 

transactions, and the Government 

Securities Act of 1986 specifically 

included government securities within 

the scope of section 17A.217 The 

Commission therefore has the ability to 

make rules governing central clearing in 

the U.S. Treasury market, which may 

affect a diverse group of market 

participants, including FCMs. The 

Commission encourages interested 

parties to work with the CCA to identify 

any modifications to its client clearing 

models to better allow FCMs to access 

central clearing in the U.S. Treasury 

market. In addition, FCMs could enter 

into repos with market participants that 

are not direct participants of a U.S. 

Treasury securities CCA.218

The commenter also notes that CFTC 

rules require that securities transferred 

to an FCM’s customer segregated 

custodial account must be ‘‘made on a 

delivery versus payment [(DVP)] basis 

in immediately available funds.’’ 219

Even if a U.S. Treasury securities CCA 

would be a permitted FCM counterparty 

under the CFTC rules, the commenter 

expressed concern that upon the sale or 

resale of securities in a repo transaction, 

the FCM’s customer segregated cash 

account may not receive same-day funds 

credited simultaneously with the 

delivery or transfer of securities.220 The 

Commission does not believe that such 

concerns are warranted. FICC clears all 

transactions DVP meaning that payment 

of cash is made at the same time as 

delivery of securities. 

Finally, the commenter also explained 

that CFTC rules require that the 

agreement between an FCM and a repo 

counterparty must ‘‘make[ ] clear that, in 

the event of the [FCM’s] . . . 

bankruptcy, any securities purchased 

with customer funds that are subject to 

an agreement may be immediately 

transferred. The agreement [must] also 

make[ ] clear that, in the event of an 

[FCM’s] . . . bankruptcy, the 

counterparty has no right to compel 

liquidation of securities subject to an 

agreement or to make a priority claim 

for the difference between current 

market value of the securities and the 

price agreed upon for resale of the 

securities to the counterparty, if the 

former exceeds the latter.’’ 221 The 

commenter also expressed concern that 

there is no assurance that a U.S. 

Treasury securities CCA would agree to 

the bankruptcy provisions in the CFTC 

rules applicable to FCMs described 

above.222 However, as stated in the 

discussion above, the requirement to 

clear eligible secondary market 

transactions does not require that the 

FCM enter into a repo agreement with 

the CCA. 

For the reasons discussed above, the 

Commission does not believe that an 

exclusion for FCMs is necessary to 

accommodate the relevant provisions of 

the CFTC Rules. Moreover, an exclusion 

for FCMs would be inconsistent with 

the purpose of the rule which is to help 

reduce contagion risk to the CCA and 

bring the benefits of central clearing to 

more transactions involving U.S. 

Treasury securities, particularly in light 

of their significance to the Treasury 

market. 


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223SIFMA/IIB Letter, supra note 37, at 22. 

224 Id. (citing 17 CFR 240.18a–3(b)(2), and 23.151; 

12 CFR 45.2). 

225AIMA Letter II, supra note 115, at 3. 

226See Morgan Stanley Letter, supra note 85, at 

2. 

227Association of Finance Professionals, 2023 

AFP Liquidity Survey, available at https://

www.afponline.org/publications-data-tools/reports/ 

survey-research-economic-data/Details/liquiditysurvey. 

228Federal Reserve, Financial Accounts of the 

United States, L.103 Nonfinancial Corporate 

Business (the broad measure of liquid assets 

includes cash held in banks’ accounts and deposits, 

and cash invested in various liquid financial 

assets), available at https://www.federalreserve.gov/ 

releases/z1/20230908/html/l103.htm. 

229Association of Finance Professionals, 2023 

AFP Liquidity Survey, available at https://

www.afponline.org/publications-data-tools/reports/ 

survey-research-economic-data/Details/liquiditysurvey. 

230Commodity Exchange Act section 2(h)(7); 

Exchange Act section 3C(g). 

231 17 CFR 50.50(a)(1)(ii) and (c)(2)(i). 

232 17 CFR 50.50(b). 

v. Repos Involving ‘‘End Users’’ 

One commenter argued that 

transactions by commercial entities 

participating in the Treasury repo 

market solely for investing their extra 

cash balances should be excluded from 

the definition of an eligible secondary 

market transaction. The commenter 

stated that corporations are often 

required under their credit agreements 

to invest cash in specified cash 

equivalents, which typically include 

Treasury repos, and that these 

transactions are likely to be quite 

limited in size.223 The commenter 

suggested that the Commission could 

leverage the definition of commercial 

end user in the uncleared security-based 

swap margin rules or non-financial end 

user in the uncleared swap margin rules 

(which both similarly contain 

exemptions for such entities).224

Another commenter requested a 

similar exclusion, stating that 

commercial entities that enter into cash 

or repo transactions do so for various, 

legitimate purposes, but that these 

entities’ trading is rarely large in size 

and the costs of these transactions being 

cleared would ultimately outweigh the 

benefits. The commenter also stated that 

such an exclusion would be consistent 

with the exemption in the Commission’s 

uncleared swap margin rules.225 An 

additional commenter requested the 

same exclusion for non-financial 

commercial end users, such as 

corporations and municipalities. The 

commenter stated that these types of 

entities typically transact in U.S. 

Treasury repos for funding and liquidity 

management purposes, and that the 

increased costs of centrally clearing 

such transactions may outweigh the 

willingness of these types of entities to 

continue to use U.S. Treasury securities 

for funding and liquidity management 

purposes, thus eliminating an effective 

corporate management tool without 

advancing the Commission’s stated 

policy objectives.226

The Commission understands that in 

addition to cash assets obtained through 

credit agreements, other sources of 

corporate cash exist that do not 

typically have accompanying 

investment limitations, such as equity 

capital, retained earnings, sales of 

assets, and legal settlements, among 

others. Investments of the combined 

surplus cash by corporate treasurers are 

typically aligned with the firm’s 

projected cash needs and may include a 

range of investment options in addition 

to Treasury repos.227 As of June 30, 

2023, balances of liquid assets held by 

nonfinancial corporations are estimated 

at approximately $6.9 trillion.228 While 

the commenter stated that such an 

exclusion may be warranted because the 

Treasury repo investments are likely to 

be limited in size, commercial end-users 

could change the size of their Treasury 

repo investments, including by entering 

into large Treasury repo investments, or 

by using alternative options for the 

short-term investment of cash that share 

a similar risk profile, such as a money 

market fund, depending on many firmspecific and market factors. For 

example, commercial end-users may 

increase allocations to U.S. Treasury 

repos for credit diversification, 

particularly at times of market stress. 

U.S. Treasury repos may offer higher 

yields, particularly at times when 

issuance of Treasury securities increases 

and dealers seek financing to complete 

settlement by borrowing more cash in 

the repo market. The high liquidity of 

Treasury repos could also be attractive 

to commercial end-users, especially if a 

significant amount of liquidity needs to 

be accumulated to complete a corporate 

transaction such as a merger or an 

acquisition. 

An exemption for end users could 

permit commercial entities to enter into 

Treasury repo investments without the 

risk-reducing benefits of central 

clearing. In addition, due to the variety 

of sources of cash available to 

commercial entities besides those 

obtained through credit agreements and 

the size of corporate liquid assets held 

by commercial entities, excluding 

commercial entities from the scope of 

the definition of an eligible secondary 

market transaction would not be 

consistent with the intent to reduce risk 

and enhance efficiency of the U.S. 

Treasury market.229 The Commission 

also disagrees with the contention that 

the increased costs arising from the 

clearing mandate would impede the 

willingness of commercial entities to 

continue to use the Treasury repo 

market for funding and liquidity 

management purposes. As discussed in 

part I supra, central clearing allows 

market participants to reduce costs and 

increase operational efficiency, among 

other benefits, which would, in turn, 

lead to lower funding costs in the repo 

market and greater availability of 

liquidity for all market participants, 

including commercial end-users. 

Moreover, the Commission disagrees 

with the commenter’s suggestion that it 

could leverage the definitions used in 

exempting certain end users from swap 

clearing requirements. The commercial 

end user in the uncleared security-based 

swap margin rules is defined as a 

counterparty to the swap that is (i) is not 

a financial entity; (ii) is using swaps to 

hedge or mitigate commercial risk; and 

(iii) meets certain reporting obligations 

associated with entering into noncleared swaps.230 The exemption is 

intended to ensure that certain types of 

commercial entities are able to continue 

to use swaps to manage their specific 

commercial risks and are not unduly 

burdened by the need to post margin. 

The end-user exemption from clearing 

for swaps may not be available to all 

commercial entities entering swaps. 

When implementing the exemption, the 

CFTC specifically required, among other 

things, that the end user must be using 

the swap to hedge or mitigate 

commercial risk, and that the swap that 

is hedging or mitigating commercial risk 

cannot be used for a purpose that is in 

the nature of speculation, investing, or 

trading.231 In addition, the counterparty 

that elected the end-user exception must 

provide reports relating to its ability to 

meet financial obligations associated 

with entering into non-cleared swaps.232

In contrast, the commercial end user 

activity in the U.S. Treasury repo 

market is unrelated to the commercial 

activity of these users. Investment of 

surplus cash is an activity similar to that 

of institutional asset managers such as 

registered funds or other managed 

investments. As discussed above, 

investing is a type of activity that would 

not qualify the end-user exemption in 

the swap market. For the reasons here 

and above, the Commission does not 

believe that an exception for 

commercial end users is appropriate in 

the Treasury repo market. 

vi. Interaffiliate Repos 

One commenter recommended that 

the Commission exempt transactions in 


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233SIFMA/IIB Letter, supra note 37, at 21–22. 

234SIFMA/IIB Letter, supra note 37, at 21–22. 

235See id. at 22 n. 66 (citing generally 17 CFR 

50.52). 

236See Morgan Stanley Letter, supra note 85, at 

1–2. 

237AIMA Letter II, supra note 115, at 3. 

238A liquidity buffer generally refers to liquid 

assets that a banking organization manages to 

enable it to meet expected and unexpected cash 

flows and collateral needs without adversely 

affecting the banking organization’s daily 

operations. See generally FRB, FDIC, & OCC, Q&As 

on Statement Regarding the Use of Capital and 

Liquidity Buffers (Mar. 17, 2020), available at 

https://www.fdic.gov/news/financial-institutionletters/2020/fil20020a.pdf. 

239See, e.g., Clearing Exemption for Swaps 

Between Certain Affiliated Entities, 77 FR 50425, 

50427 (Mar. 2012) (discussing the internalization of 

counterparty risk on inter-affiliate swap 

transactions as wholly owned members of the same 

corporate group, but also discussing that similar 

benefits may not accrue for other inter-affiliate 

swaps when the counterparties are not members of 

the same group). 

240Although the commenter referred generally to 

inter-affiliate transactions, without specifying cash 

versus repo, the Commission is limiting the 

exclusion to repo transactions only for two reasons. 

First, inter-affiliate cash transactions would only be 

included in the definition of an eligible secondary 

market transaction if they met the definition of such 

transaction, as discussed further in part II.A.2.b. 

Second, as discussed in this section and in part 

IV.B.3.b.v, the Commission understands that the 

inter-affiliate transactions referenced by the 

commenter typically take the form of repo or 

reverse repo transactions. 

U.S. Treasury securities between 

affiliates from any central clearing 

requirement. The commenter stated that 

inter-affiliate transactions are important 

to corporate groups, which may use 

them to achieve efficient risk and 

capital allocation and obtain flexibility 

for addressing customer demands.233

The commenter further stated that 

requiring inter-affiliate transactions to 

be centrally cleared would impose 

additional costs with limited benefits, 

for two reasons. First, if an inter-affiliate 

transaction is part of a ‘‘back-to-back 

arrangement,’’ meaning that the related 

external transaction between the 

affiliated counterparty and a nonaffiliated counterparty is not centrally 

cleared, then subjecting the interaffiliate transaction to a central clearing 

requirement does nothing to reduce the 

contagion risk presented by the nonaffiliated counterparty. The commenter 

further asserted that if that external 

transaction is already centrally cleared, 

the contagion risk would already be 

addressed and requiring the interaffiliate transaction to be cleared would 

not create additional benefits. Second, a 

direct participant’s affiliate’s credit risk 

is already part of the group-wide 

financial risks to which the Treasury 

CCP is exposed, and central clearing of 

inter-affiliate transactions is unlikely to 

meaningfully impact the risk profile.234

The commenter stated that, for similar 

reasons, the CFTC has exempted interaffiliate swaps from the swap mandatory 

clearing rules.235

Additional commenters made similar 

arguments. For example, one 

commenter stated that the definition of 

an eligible secondary market transaction 

should not apply to transactions 

between a direct participant of a U.S. 

Treasury securities CCA and its 

affiliates. The commenter explained that 

a CCA’s direct participants provide a 

range of risk management, collateral 

management, asset-liability 

management, and funding and liquidity 

services to their affiliates, including 

affiliated U.S. broker-dealers, and that 

imposing the definition of those direct 

participants’ transactions with affiliates 

would be potentially disruptive and 

unnecessary to advance the 

Commission’s stated policy 

objectives.236 Another commenter stated 

that a requirement to clear transactions 

between affiliates would create new, 

unnecessary costs without any 

benefits.237

As discussed in more detail in part 

IV.B, the Commission understands that 

inter-affiliate transactions represent an 

important tool to transfer liquidity and 

risk within an affiliated group. These 

transactions may serve different 

purposes, including, but not limited to, 

providing U.S. Treasury securities for 

delivery when an affiliate has taken a 

long or short position in U.S. Treasury 

securities as a hedge against other 

exposures, allowing the movement of 

U.S. Treasury securities to allow them 

to be posted as margin on an affiliate’s 

transaction, ensuring that U.S. Treasury 

securities can serve as a liquidity buffer 

for an affiliated bank,238 or to meet 

liquidity composition targets. To get the 

U.S. Treasury securities to the 

appropriate entity within an affiliated 

group, the affiliate often enters into 

repos or reverse repos with a direct 

participant of a U.S. Treasury securities 

CCA. 

In certain circumstances, the 

counterparty credit risk posed by interaffiliate transactions may be less than 

other transactions.239 However, 

affiliated entities are separate legal 

entities and, generally, are not legally 

responsible for each other’s contractual 

obligations. In the event that one or 

more affiliated entities becomes 

insolvent, the affiliates, as separate legal 

entities, would be managed as separate 

estates in a bankruptcy, with the trustee 

having a duty to the creditors of the 

affiliate, not the affiliated family. Thus, 

the Commission does not agree that a 

U.S. Treasury securities CCA is exposed 

to the group-wide financial risks of a 

direct participant’s affiliated group. 

In response to the comments received, 

the Commission is modifying the 

definition of an eligible secondary 

market transaction in Rule 17ad–22(a) to 

conditionally exclude inter-affiliate 

repurchase and reverse repurchase 

transactions. Specifically, the 

Commission is excluding from that 

definition any repurchase or reverse 

repurchase agreement collateralized by 

U.S. Treasury securities entered into 

between a direct participant and an 

affiliated counterparty, provided that 

the affiliated counterparty submits for 

clearance and settlement all other 

repurchase or reverse repurchase 

agreements collateralized by U.S. 

Treasury securities to which the 

affiliated counterparty is a party. By 

referring to all other repos or reverse 

repos, the exemption clarifies that the 

requirement does not encompass 

transactions between the direct 

participant and the affiliate, i.e., the 

transactions that are excluded, and also 

does not encompass the affiliate’s 

transactions that would otherwise be 

excluded under sections (iii), (iv), or (v) 

of the definition of an eligible secondary 

market transaction. This exclusion is 

appropriate to ensure that affiliated 

groups can continue to use inter-affiliate 

repo transactions to transfer liquidity or 

risk, while also conditioning that ability 

on the affiliated counterparty’s 

submission of its eligible secondary 

market repo transactions for clearance 

and settlement.240

Regarding the conditional nature of 

the exclusion, the Commission agreed 

with the commenter that if the external 

transaction of a ‘‘back-to-back’’ 

arrangement in which the related 

external transaction between the 

affiliated counterparty and a nonaffiliated counterparty is centrally 

cleared, the contagion risk would 

already be addressed and requiring the 

inter-affiliate transaction to be cleared 

would not create additional benefits. To 

ensure that this is the case, the 

Commission is conditioning the 

availability of the exclusion for interaffiliate transactions on an obligation for 

the affiliated counterparty to submit its 

repo transactions, other than those with 

its direct participant counterparty, for 

clearance and settlement. This 

condition should also help ensure that 

a direct participant cannot rely upon an 

inter-affiliate transaction to avoid the 

requirement to clear eligible secondary 

market transactions. If there were no 

such condition, a direct participant 


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241The Commission acknowledges that the 

affiliated counterparty’s transactions may 

encompass transactions to which the requirement to 

clear eligible secondary market transactions already 

applies, either because the affiliated counterparty is 

transacting with another direct participant of a U.S. 

Treasury securities CCA or because the affiliated 

counterparty is itself a direct participant of a U.S. 

Treasury securities CCA. The condition for the 

affiliate to clear its repo or reverse repo transactions 

would also apply, however, even if the affiliate is 

not a direct participant of a U.S. Treasury securities 

CCA. 

242See, e.g., Final Rule, Clearing Exemption for 

Swaps Between Certain Affiliated Entities, 78 FR 

21750, 21761–62 (Apr. 11, 2013). 

243Moreover, the condition is consistent with the 

commenters’ views noting that in the event that the 

external transaction is centrally cleared, the benefits 

of central clearing would be realized. See AIMA 

Letter II, supra note 115, at 3. 

244See 17 CFR 50.52(a)(4)(i)(E). 

245Rule 17ad–22(a) currently contains a 

definition of a ‘‘participant family’’ for purposes of 

Rule 17ad–22(b)(3), (d)(14), (e)(4), and (e)(7). 17 

CFR 240.17ad–22(a)(12). This term is defined to 

mean that if a participant directly, or indirectly 

through one or more intermediaries, controls, is 

controlled by, or is under common control with, 

another participant then the affiliated participants 

shall be collectively deemed to be a single 

participant family for purposes of the specified 

portions of Rule 17ad–22. The Commission believes 

that a more specific and granular definition of an 

affiliated counterparty would be helpful for the 

purposes of the inter-affiliate exclusion because it 

would address any potential uncertainty about 

whether an entity controls, is controlled by, or is 

under common control with, another entity. 

246See notes 680 and 681 infra and 

accompanying text regarding these models. 

247SIFMA AMG Letter, supra note 35, at 14; 

Federated Letter, supra note 81, at 7; IDTA Letter, 

supra note 66, at 10. 

248 Id. 

could simply use inter-affiliate 

transactions to move securities and 

funds to affiliates, and the affiliated 

counterparty could then enter into 

external transactions with 

counterparties which, if entered into as 

a direct participant of a U.S. Treasury 

securities CCA, would be eligible 

secondary market transactions.241 The 

Commission did not limit this condition 

to only the ‘‘back-to-back’’ transactions 

because such transactions may not serve 

as the only potential means by which 

inter-affiliate transactions can be used to 

evade the requirement to clear eligible 

secondary market transactions, and for 

that matter, may not serve as the only 

potential means by which such 

transactions can transfer risk.242 This 

condition should lessen the potential for 

any impacts arising from the default of 

an inter-affiliate transaction to spread 

throughout an affiliated group because it 

would ensure that the external facing 

transactions of an affiliated counterparty 

would be centrally cleared, if the direct 

participant wanted to exclude its interaffiliate transactions.243

This approach to an inter-affiliate 

exclusion for repos is consistent with 

the CFTC’s treatment of this issue in the 

swaps market, as the commenter 

suggested. As part of its inter-affiliate 

swap exemption, the CFTC also 

included a requirement that that the 

swaps entered into by the affiliated 

counterparties with unaffiliated 

counterparties must be cleared.244 This 

approach to an inter-affiliate exclusion 

for repos is also similar to the existing 

rules with respect to inter-affiliate 

transactions in place at FICC, as the 

only U.S. Treasury securities CCA. 

FICC’s rules require that its direct 

participants submit the transactions of 

particular affiliated counterparties 

(referred to as a Covered Affiliate), i.e., 

those that are not also direct 

participants, that are not foreign 

entities, and that are either brokerdealers, banks, trust companies, and/or 

FCMs, if that transaction is with another 

direct participant or another direct 

participant’s Covered Affiliate. 

To accommodate this exclusion, the 

Commission is also adopting in Rule 

17ad–22(a) a definition of an affiliated 

counterparty for purposes of the 

definition of an eligible secondary 

market transaction. Specifically, an 

affiliated counterparty would be defined 

as any counterparty which meets the 

following criteria: (i) the counterparty is 

either a bank (as defined in 15 U.S.C. 

78c(6)), broker (as defined in 15 U.S.C. 

78c(4)), dealer (as defined in 15 U.S.C. 

78c(5)), or futures commission merchant 

(as defined in 7 U.S.C. 1a(28)), or any 

entity regulated as a bank, broker, 

dealer, or futures commission merchant 

in its home jurisdiction; (ii) the 

counterparty holds, directly or 

indirectly, a majority ownership interest 

in the direct participant, or the direct 

participant, directly or indirectly, holds 

a majority ownership interest in the 

counterparty, or a third party, directly 

or indirectly, holds a majority 

ownership interest in both the direct 

participant and the counterparty; and 

(iii) the counterparty, direct participant, 

or third party referenced in (ii) as 

holding the majority ownership interest 

would be required to report its financial 

statements on a consolidated basis 

under U.S. Generally Accepted 

Accounting Principles or International 

Financial Reporting Standards, and 

such consolidated financial statements 

include the financial results of the 

majority-owned party or of both 

majority-owned parties. With respect to 

the types of entities that can be 

considered an affiliated counterparty, 

this definition is consistent with how 

the current U.S. Treasury securities CCA 

defines the terms for purposes of its rule 

regarding its participants’ obligation to 

clear transactions with certain affiliates, 

and this consistency should be helpful 

to direct participants when considering 

compliance with this conditional 

exemption. The reference to entities that 

are regulated as banks, brokers, dealers, 

or futures commission merchants in 

their home jurisdictions encompasses 

foreign affiliates of direct participants of 

a U.S. Treasury securities CCA. This 

aspect of the definition of an affiliated 

counterparty is meant to ensure that, to 

take advantage of the conditional interaffiliate exemption, a direct participant 

of a U.S. Treasury securities CCA would 

have to ensure that the transactions of 

both domestic and foreign affiliates are 

submitted for clearing. Similarly, with 

respect to what constitutes affiliated, 

that is, the specific identification of 

ownership interest to describe the 

requisite custody or control to be 

considered affiliated, this definition is 

consistent with the definition used by 

the CFTC for purposes of the interaffiliate swap exemption. This 

consistency, and additional specificity 

about the requisite custody or control, 

should be helpful to the direct 

participants of a U.S. Treasury securities 

CCA when determining compliance 

with this conditional exemption.245

This exemption is conditional, and a 

direct participant of a U.S. Treasury 

securities CCA may choose not to use 

the exemption, meaning that its 

affiliated counterparty would not be 

required to submit its repo transactions, 

other than those with its direct 

participant counterparty, for clearance 

and settlement. If a direct participant 

chooses to use the exemption, its 

affiliated counterparty could submit its 

transactions in several ways, including 

through an indirect clearing model (e.g., 

at FICC, the affiliated counterparty 

could be a Sponsored Member or use 

the Prime Broker or Correspondent 

Clearing models to submit its 

transactions for clearance and 

settlement) or by becoming a direct 

participant of the CCA.246

vii. Repos by State and Local 

Governments 

Several commenters argued that 

regulatory and practical constraints on 

the state and local government level 

could limit their ability to centrally 

clear their Treasury repo and reverse 

repo transactions.247 The commenters 

stated that authorizing statutes and local 

ordinances in several states only permit 

repo transactions with a bank or a 

government securities dealer 

counterparty.248 As such, a centrally 

cleared repo, which is novated to a CCA 

may not comply with these statutes or 

ordinances, because the CCA would be 


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249 IDTA Letter, supra note 66, at 10. 

250SIFMA AMG Letter, supra note 35, at 14; 

Federated Letter, supra note 81, at 7; IDTA Letter, 

supra note 66, at 10; see also Letter from James 

Tabacchi, Chairman, Independent Dealer and 

Trader Association and attached whitepaper at 5 

(Sept. 1, 2023) (discussing the fact that most states 

and municipalities use Master Repo Agreements 

based on local law and would by statute be unable 

to sign a New York law-based agreement to clear 

through a U.S. Treasury securities CCA). 

251United States Census Bureau, ‘‘2017 Census of 

Governments—Organization,’’ Table 2: Local 

Governments by Type and States and Table 9: 

Public School System by Types of Organization and 

State, available at https://www.census.gov/data/ 

tables/2017/econ/gus/2017-governments.html. 

252See, e.g., California Government Code section 

20190 (providing that Board of Advisors of Public 

Employee Retirement System may, in its discretion, 

invest the assets of the fund through the purchase, 

holding, or sale thereof of any investment, financial 

instrument, or financial transaction when the 

investment, financial instrument, or financial 

transaction is prudent in the Board’s informed 

opinion); N.Y. Retire. & Soc. Sec. Law 177 

(identifying eligible investments of NY state public 

pension funds, without limiting the counterparties 

to a repo); Wis. Stat. 325.17 (identifying eligible 

investments for Wisconsin state public pension 

funds to various instruments, without limiting the 

counterparties to a repo). 

253 DTCC, FICC–GSD Member Directories, 

Sponsored Member Listings, available at https://

www.dtcc.com/client-center/ficc-gov-directories 

(showing five state and local pension plans as 

Sponsored Members). 

254See, e.g., California Public Employees’ 

Retirement System Total Fund Investment Policy, 

available at https://www.calpers.ca.gov/docs/totalfund-investment-policy.pdf; State of Wisconsin 

Investment Board, Investment Strategy, available at 

https://www.swib.state.wi.us/investmentstrategy; 

Teachers Retirement System of Texas, Investment 

Strategy, available at https://www.trs.texas.gov/ 

Pages/investment_strategy.aspx. 

255Federal Reserve, Financial Accounts of the 

United States, L.120 State and Local Government 

Employee Retirement Funds (total funded assets are 

considered), available at https://

www.federalreserve.gov/releases/z1/20230608/ 

html/l120.htm. This data set consists of retirement 

systems that are administered by a recognized unit 

of a state or local government as defined by the 

Bureau of the Census and whose members are 

public employees compensated with public funds. 

It includes the defined benefit (DB) and defined 

contribution (DC) retirement funds of both state 

governments and local government entities such as 

counties, municipalities, townships, school 

districts, and special districts. 

256National Association of State Retirement 

Administrators, Investments, available at https://

www.nasra.org/investment. 

257 ‘‘State’’ is defined in Exchange Act section 

3(a)(16) as any State of the United States, the 

District of Columbia, Puerto Rico, the Virgin 

Islands, or any other possession of the United 

States. 

258 DTCC/FICC Letter, supra note 33, at 11–12 

(citing the FICC definition of a Repo Transaction, 

which covers ‘‘(1) an agreement of a party to 

transfer Eligible Securities to another party in 

exchange for the receipt of cash, and the 

simultaneous agreement of the former party to later 

take back the same Eligible Securities (or any 

subsequently substituted Eligible Securities) from 

the latter party in exchange for the payment of cash, 

or (2) an agreement of a party to take in Eligible 

Securities from another party in exchange for the 

Continued 

the counterparty. One commenter also 

highlighted specific collateralization 

requirements (e.g., 102%) by several 

states to their repo counterparties and 

raised concerns that varying levels of 

margining in central clearing of such 

trades could create a conflict with state 

laws.249 The commenters argued that 

amending state and local governments’ 

authorizing statutes through the 

legislative actions of an applicable body 

would take a substantial amount of time 

and would disrupt investments of 

public funds in the Treasury repo 

market with a negative effect on market 

liquidity.250 Considering these 

challenges, the commentors suggested 

exempting state and local governments 

from the scope of the definition of an 

eligible secondary market transaction. 

The Commission agrees with the 

commenters that it would be 

appropriate to adopt an exclusion for 

any repurchase or reverse repurchase 

transaction collateralized by U.S. 

Treasury securities between a direct 

participant and a state or local 

government, in light of both the 

potential conflicts with state and local 

government authorities related to their 

investments and because of the nature 

and size of U.S. Treasury market activity 

by such entities. 

According to the United States Census 

Bureau’s 2017 Census of Governments 

data, there were over 90,000 local 

governments in the United States, 

including county, city, municipality, 

township, and special purpose 

governments as well as nearly 13,000 

independent school district 

governments.251 Many of these local 

governments operate only small budgets 

and access the Treasury repo market 

infrequently and on a small scale for 

secured investment of their surplus cash 

balances. While comprehensive data 

about investment activity of state and 

local governments are lacking, the costs 

of building legal and operational 

infrastructure to access central clearing 

by most of these governments may 

prevent them from accessing the 

Treasury repo market. 

The Commission does not believe that 

such an exclusion should apply to any 

pension or retirement plan established 

or maintained by a state, any of its 

political subdivisions, or any agency or 

instrumentality of a state or any of its 

political subdivisions, for the benefit of 

its employees (or any beneficiaries of its 

employees). Such state pension and 

retirement plans generally do not face 

the same statutory restrictions as state 

and local governments regarding their 

investments,252 and indeed, several 

such plans are currently Sponsored 

Members of FICC.253

Moreover, state pension and 

retirement plans manage a substantial 

amount of assets and are important 

participants in the Treasury repo 

market. In contrast to surplus cash 

balances of state and local governments 

that are expected to be managed with 

the principal preservation objective, 

public pension and retirement plans 

typically have more sizable assets under 

management and pursue a long-term 

return objective employing a variety of 

return-enhancing strategies, including 

the use of leverage.254 As of March 31, 

2023, total funded assets under 

management of these plans were 

approximately $5.3 trillion.255 A survey 

conducted by the National Association 

of State Retirement Administrators 

found that the average public pension 

fund allocates around 2.5% of its assets 

to cash investments, which would 

include investments in the Treasury 

repo market.256 Given the total asset size 

of the state pension and retirement 

plans and the variety of investment 

strategies that they can pursue as well 

as their ability to participate in central 

clearing under their governing statutes, 

excluding these plans from the scope of 

the definition of an eligible secondary 

market transaction would be 

inconsistent with the intent to reduce 

risk and enhance efficiency of the U.S. 

Treasury market. 

The Commission is therefore 

excluding from the definition of an 

eligible secondary market transaction 

any repurchase or reverse repurchase 

agreement collateralized by U.S. 

Treasury securities in which one 

counterparty is a state or local 

government. In addition, the 

Commission would add a definition of 

state and local government to Rule 

17ad–22(a) to mean a state or any 

political subdivision thereof, or an 

agency or instrumentality of a State or 

any political subdivision thereof, but 

not to include any pension or retirement 

plan established or maintained by a 

state, any of its political subdivisions, or 

any agency or instrumentality of a state 

or any of its political subdivisions, for 

the benefit of its employees (or any 

beneficiaries of its employees).257

viii. Other Repo Comments 

One commenter suggested that the 

Commission should provide further 

specificity around the definition of a 

repurchase or reverse repurchase 

agreement, suggesting that it may be 

advisable for the Commission to adopt 

the definition used by the current U.S. 

Treasury securities CCA.258 The 


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payment of cash, and the simultaneous agreement 

of the former party to later transfer back the same 

Eligible Securities (or any subsequently substituted 

Eligible Securities) to the latter party in exchange 

for the receipt of cash’’). 

259 DTCC/FICC Letter, supra note 33, at 11–12. 

260 DTCC/FICC Letter, supra note 33, at 12–13. 

261See BNY Mellon Letter, supra note 33, at 2 

(suggesting additional analysis before requiring the 

central clearing of securities lending transactions, 

as well as consideration of a non-cash model for 

central clearing such transactions); Federated 

Hermes Letter, supra note 85, at 7–8 (stating that 

securities lending transactions should not be 

included in a clearing mandate because they are 

subject to different market infrastructure than 

repurchase agreements, which has not been adapted 

to facilitate cleared securities lending transactions); 

Letter from Fran Garritt, Director, Securities 

Lending & Market Risk and Mark Whipple, 

Chairman, Committee on Securities Lending Risk 

Management Association (Dec. 23, 2022) (arguing 

generally that the scope of an eligible secondary 

market transaction not be expanded to include 

securities lending transactions because of the 

negative impact on beneficial owners, the increased 

costs, and lack of infrastructure); SIFMA/IIB Letter, 

supra note 37, at 22; ICI Letter, supra note 85, at 

12 n.35. 

262CME Letter, supra note 81, at 7–8. 

263SIFMA/IIB Letter, supra note 37, at 19–20. 

264SIFMA/IIB Letter, supra note 37, at 21 (citing 

CFTC Rules 50.1 and 50.2). 

265AIMA Letter II, supra note 115, at 2–3. 

266See FICC Rules, Schedule of Timeframes, 

supra note 19. 

commenter suggested that this 

definition is indifferent to the method of 

documentation, making it clear that 

inclusion in the definition does not 

depend on the particular documentation 

the parties elect to use, such as a Master 

Securities Lending Agreement or Master 

Securities Loan Agreement.259 The 

Commission does not believe that 

further revision of the definition is 

necessary. 

The definition of an eligible 

secondary market transaction, both as 

proposed and as adopted, applies to all 

types of transactions that are of a type 

currently accepted for clearing at a U.S. 

Treasury securities CCA. It does not 

impose a requirement on a U.S. 

Treasury securities CCA to offer 

additional products for clearing. One 

commenter specifically agreed that the 

proposal should apply to the types of 

transactions that are eligible for clearing 

at a U.S. Treasury securities CCA, as 

those eligibility criteria evolve over 

time. The commenter stated that such 

an approach would ensure that the 

requirement would not inadvertently 

give rise to risk or undue costs by 

forcing into central clearing transaction 

types that have not gone through a 

methodical risk analysis or for which 

the costs may outweigh the benefits, 

while at the same time, it would allow 

the requirement to evolve as U.S. 

Treasury securities CCAs, their direct 

participants, and regulators identify 

transaction types that would benefit 

from central clearing.260 The 

Commission agrees that the definition 

being adopted will allow for this type of 

approach to the clearing requirement. 

Several commenters discussed 

whether securities lending should be 

included within the scope of this 

definition.261 Securities lending 

transactions do not fall within the scope 

of the definition of an eligible secondary 

market transaction and are not currently 

available for central clearing. 

One commenter requested 

clarification that the definition of an 

eligible secondary market transaction 

does not apply to final settlement under 

physical-delivery futures contracts on 

U.S. Treasury bonds or notes (‘‘Treasury 

futures’’). The commenter noted that 

such Treasury futures are already 

subject to a central clearing requirement 

and described how the physical delivery 

process works, that is, if a Treasury 

future goes to delivery, then the 

commenter, which centrally clears 

Treasury futures, would inform long 

clearing members of the U.S. Treasury 

securities that will be delivered by the 

short position holders to whom they 

have been matched and the invoice 

amounts that the short clearing 

members must receive in payment.262

The Commission agrees with the 

commenter that the physical settlement 

of Treasury futures does not fall within 

the definition of an eligible secondary 

market transaction because it does not 

fit within the specific categories set 

forth in the rule. In addition, the 

Treasury futures are already subject to 

central clearing, thereby ensuring that 

the benefits of central clearing are 

already present in this aspect of the 

market. 

Another commenter did not support a 

requirement to clear repos, but stated 

that if such a requirement were adopted, 

it should be limited to repos by 

interdealer brokers (‘‘IDBs’’) and brokerdealers because (1) the counterparties to 

such transactions are the most active 

participants in the Treasury repo 

markets, thereby allowing the 

Commission to meaningfully increase 

central clearing without applying a 

more categorical requirement, and (2) 

such transactions are more 

interconnected with the rest of the 

market and have a higher possibility to 

transfer risk to outside parties 

(including potentially a U.S. Treasury 

securities CCA).263 The Commission 

disagrees that the definition of an 

eligible secondary market transaction 

should be limited in this manner. As 

discussed in part II.A.2.a supra, there 

are substantive benefits that will arise 

from the broad scope of the repo market, 

including with respect to balance sheet 

netting and greater capacity of dealers to 

intermediate repos. Further, the 

Commission disagrees that these 

transactions are ‘‘more interconnected 

with the rest of the market,’’ because it 

generally is not possible to quantify 

interconnectedness in this manner. 

Even if a repo is between a dealer and 

its customer neither of which is an IDB 

or a broker-dealer, the failure of that 

transaction could have an impact on its 

counterparties and transmit that risk to 

the broader market. 

In addition, several commenters 

requested exemptions for transactions 

entered into outside of the operating 

hours of a U.S. Treasury securities CCA 

that would settle on or before the next 

day on which the CCA is open for 

business. For example, one commenter 

stated that firms routinely enter into 

U.S. Treasury securities transactions 

after the close of business at FICC, for 

legitimate business or operational 

reasons, including for treasury 

management purposes, and that firms 

will need the ability to enter into 

transactions at times that a CCA is not 

open to accept transactions for novation. 

The commenter compared the situation 

to the derivatives context in which a 

swap subject to mandatory clearing is 

executed after 4 p.m. or not on a 

business day, it must then be submitted 

by the next business day when a 

derivatives clearing organization is 

open.264 Another commenter stated that 

market participants may enter into a 

transaction after the close of a CCA’s 

operating/business hours, making it 

unable to accept the transaction for 

clearing and novation. The commenter 

stated that the Commission should 

therefore exempt these transactions 

from a final rule, unless and until the 

existing U.S. Treasury securities CCA 

can change its operating hours to 

account for such transactions or another 

CCA becomes available with 24/7 

clearing capabilities.265

Such an exemption is not necessary. 

The existing U.S. Treasury securities 

CCA accepts all bilateral DVP trades for 

novation from 7 a.m. until 8 p.m. 

eastern time.266 This window is 

available for submission and novation of 

bilateral repo transactions, which would 

be novated in real-time upon 

submission. The Commission 

understands that market participants 

may enter Treasury repo transactions 

outside the normal U.S. business hours 

when trades are accepted by U.S. 

Treasury CCA for novation. A review of 

repo trading data shows that the largest 


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267Clark et al., Intraday Timing of General 

Collateral Repo Markets, Federal Reserve Bank of 

New York Liberty Street Economics (July 14, 2021), 

available at https://

libertystreeteconomics.newyorkfed.org/2021/07/ 

intraday-timing-of-general-collateral-repo-markets. 268See Fedwire Funds Services, available at 

https://www.federalreserve.gov/paymentsystems/ 

fedfunds_about.htm#:∼:text=

The%20Fedwire%20Funds%20

Service%20business,p.m.%20

on%20the%20preceding%20Sunday. 269See FICC Rules, Schedule of Sponsored GC 

Trade Timeframes, supra note 19. 

270See Morgan Stanley Letter, supra note 85, at 

2–3. 

271Proposing Release, supra note 14, 87 FR at 

64622. 

272 Id. (citing 2021 IAWG Report, supra note 4, at 

30; TMPG White Paper, supra note 13, at 12). 273Proposing Release, supra note 14, 87 FR at 

64622 (citing TMPG, supra note 13, at 12). These 

estimates use FR2004 data, which are reports 

provided to the Federal Reserve Bank of New York 

regarding primary dealer market activity in U.S. 

Government securities, covering the first half of 

2017 and are based on various assumptions 

specified in the TMPG White Paper. See also 

FR2004, Government Securities Dealer Reports, 

available at https://www.federalreserve.gov/apps/ 

reportforms/reportdetail.aspx?sOoYJ+

5BzDZq2f74T6b1cw. 

274See, e.g., Proposing Release, supra note 14, 87 

FR at 64622 (citing TMPG White Paper, supra note 

13, at 22 (noting that in a hybrid clearing 

arrangement, an IDB’s rights and obligations to the 

CCP are not offset and the IDB is not in a net zero 

settlement position with respect to the CCP at 

settlement date)). 

share of repo trading activity is 

conducted during the first 1.5 hours of 

a trading day from 7 a.m. to 8:30 a.m. 

eastern time.267 This early morning 

activity may include repo trades that 

were arranged prior to the U.S. Treasury 

market opening at 7:00 a.m. The 

Commission does not anticipate the 

final rule affecting this established 

market practice. With respect to triparty 

repo, any U.S. Treasury securities CCA 

must interact with the timelines for 

triparty repo more generally, which rely 

upon the Fedwire Funds Service to 

transfer funds, and Fedwire has a 

deadline for initiating transfers for the 

benefit of a third party is 6 p.m. eastern 

time.268 The existing U.S. Treasury 

securities CCA accepts triparty 

submissions from 7 a.m. until 5 p.m. 

and novates the activity upon settlement 

of the start leg of the triparty repos, 

provided that settlement occurs by 5:30 

p.m.269 The existing timeline 

accommodates completion of the 

activity at the CCA before the Fedwire 

deadline. 

Finally, one commenter requested 

clarification that the definition of an 

eligible secondary market transactions 

would not include instances in which 

market participants post U.S. Treasury 

securities as collateral to secure 

transactions in a wide range of asset 

classes, including cleared and uncleared 

swaps and listed futures.270 This type of 

transaction does not meet the definition 

of a repurchase or reverse repurchase 

agreement adopted in Rule 17ad–22(a); 

therefore, it would not be within the 

scope of an eligible secondary market 

transaction. 

ix. Final Rule 

For the reasons set forth in part 

II.A.2.a, the Commission is adopting the 

definition of an eligible secondary 

market transaction in Rule 17ad–22(a), 

specifically as it relates to repurchase 

and reverse repurchase agreements, as 

proposed, except that it is adopting 

exclusions from the scope of that 

definition for repos by other clearing 

organizations, repos by state and local 

governments, and inter-affiliate repos. 

b. Purchases and Sales of U.S. Treasury 

Securities 

With respect to cash transactions (i.e., 

purchases and sales of U.S. Treasury 

securities), the proposal defined an 

eligible secondary market transaction as 

including: 

• Any purchases and sales entered 

into by a direct participant and any 

counterparty if the direct participant (A) 

brings together multiple buyers and 

sellers using a trading facility (such as 

a limit order book) and (B) is a 

counterparty to both the buyer and 

seller in two separate transactions (‘‘IDB 

transactions’’); and 

• Any purchases and sales of U.S. 

Treasury securities between a direct 

participant and a counterparty that is 

either (i) a registered broker-dealer, 

government securities dealer, or 

government securities broker (‘‘brokerdealer transactions’’), (ii) a hedge fund, 

that is any private fund (other than a 

securitized asset fund): (a) with respect 

to which one or more investment 

advisers (or related persons of 

investment advisers) may be paid a 

performance fee or allocation calculated 

by taking into account unrealized gains 

(other than a fee or allocation the 

calculation of which may take into 

account unrealized gains solely for the 

purpose of reducing such fee or 

allocation to reflect net unrealized 

losses); (b) that may borrow an amount 

in excess of one-half of its net asset 

value (including any committed capital) 

or may have gross notional exposure in 

excess of twice its net asset value 

(including any committed capital); or (c) 

that may sell securities or other assets 

short or enter into similar transactions 

(other than for the purpose of hedging 

currency exposure or managing 

duration) (‘‘hedge fund transactions’’), 

or (iii) an account at a registered brokerdealer, government securities dealer, or 

government securities broker where 

such account may borrow an amount in 

excess of one-half of the value of the 

account or may have gross notional 

exposure of the transactions in the 

account that is more than twice the 

value of the account (‘‘leveraged 

account transactions’’). 

When describing the categories 

included within the definition, the 

Commission stated its belief that 

including this set of transactions in the 

eligible secondary market definition and 

therefore subjecting these transactions 

to the proposal represents an 

incremental first step to address 

potential risks arising to a U.S. Treasury 

securities CCA.271 The Commission 

referenced recent data indicating that an 

estimated 68 percent of the overall 

dollar value of cash market transactions 

in U.S. Treasury securities are not 

centrally cleared, and an estimated 19 

percent of the overall dollar value of 

such transactions are subject to socalled hybrid clearing (as described 

above).272

Regarding IDB transactions, in the 

Proposing Release, the Commission 

stated its belief that including these 

transactions in the definition of an 

eligible secondary market transaction 

would specifically address the potential 

for contagion risk associated with 

hybrid clearing that a number of 

commentators have highlighted. Hybrid 

clearing refers to transactions that are 

executed on an IDB platform in which 

one counterparty is a member of a CCA 

and submits its transaction with the IDB 

for central clearing, while the other 

counterparty is not a member of a CCA 

and bilaterally clears its transaction 

with the IDB.273 As the Commission 

explained in the Proposing Release, the 

configuration of counterparty risk 

presented by hybrid clearing allows the 

U.S. Treasury securities CCA to manage 

the risks arising from the IDB–CCA 

direct participant transaction, but the 

U.S. Treasury securities CCA cannot 

manage the risks arising from the IDB’s 

offsetting transaction with its nonmember counterparty and the potential 

counterparty credit risk and settlement 

risk posed to the IDB from that trade.274

Thus, under the current hybrid clearing 

model, the U.S. Treasury securities CCA 

is indirectly exposed to the IDB’s noncentrally cleared transaction, but it lacks 

the ability to risk manage its indirect 

exposure to this non-centrally cleared 

leg of the transaction. Specifically, it 

does not know who the ultimate 

counterparty of the transaction is and 

cannot collect margin on that 

transaction. This, in turn, results in 

margin collection at the CCP which is 

based upon only one transaction and 


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275See 2021 IAWG Report, supra note 4, at 31; 

Depository Trust and Clearing Corporation, More 

Clearing, Less Risk: Increasing Centrally Cleared 

Activity in the U.S. Treasury Cash Market, at 5 (May 

2021), available at https://www.dtcc.com/-/media/ 

Files/PDFs/DTCC-US-Treasury-Whitepaper.pdf 

(‘‘DTCC May 2021 White Paper’’). 

276TMPG White Paper, supra note 13, at 32; see 

part IV.B.3.a.i infra. 

277Proposing Release, supra note 14, 87 FR at 

64623. 278 Id. (citing TMPG White Paper, supra note 13, 

at 21; 2021 IAWG Report, supra note 4, at 30). 279Proposing Release, Reporting by Investment 

Advisers to Private Funds and Certain Commodity 

Pool Operators and Commodity Trading Advisors 

on Form PF, Release No. IA–3145 (Jan. 26, 2011), 

76 FR 8068, 8073 (Feb. 12, 2011) (‘‘Form PF 

Proposing Release’’). The Commission adopted the 

hedge fund definition with some amendments 

thereafter. Final Rule, Reporting by Investment 

Advisers to Private Funds and Certain Commodity 

Pool Operators and Commodity Trading Advisors 

on Form PF, Release No. IA–3308 (Oct. 31, 2011), 

76 FR 71127 (Nov. 16, 2011). 

280Proposing Release, supra note 14, 87 FR at 

64624 (citing Private Funds Statistics for Q4 2021, 

Table 46 (July 22, 2022), available at https://

www.sec.gov/divisions/investment/private-fundsstatistics/private-funds-statistics-2021-q4.pdf; 

Ayelen Banegas, Sizing Hedge Funds’ Treasury 

Market Activities and Holdings (Oct. 6, 2021), 

available at https://www.federalreserve.gov/ 

econres/notes/feds-notes/sizing-hedge-fundstreasury-market-activities-and-holdings20211006.htm; see also Daniel Barth & R. Jay Kahn, 

Hedge Funds and the Treasury Cash-Futures 

Disconnect (Apr. 1, 2021), available at https://

www.financialresearch.gov/working-papers/2021/ 

04/01/hedge-funds-and-the-treasury-cash-futuresdisconnect/; Hedge Fund Treasury Trading and 

Funding Fragility: Evidence from the COVID–19 

Crisis, available at https://www.federalreserve.gov/ 

econres/feds/files/2021038pap.pdf; 2021 IAWG 

Report, supra note 4, at 34; SEC Staff Report on U.S. 

Credit Markets Interconnectedness and the Effects 

of the COVID–19 Economic Shock (Oct. 2020), 

available at https://www.sec.gov/files/US-CreditMarkets_COVID-19_Report.pdf). 

281 17 CFR 279.9 (Form PF Glossary of Terms). 

has been calculated to cover this 

seemingly directional position, as well 

as an inability to net these offsetting 

transactions and provide the benefits of 

central clearing. In particular, if the 

IDB’s non-CCP member counterparty 

fails to settle a transaction that is subject 

to hybrid clearing, such IDB may not be 

able to settle the corresponding 

transaction that has been cleared with 

the U.S. Treasury securities CCA due to 

a lack of financial resources at the IDB, 

which could lead the IDB to default.275

As part of its existing default 

management procedures, the U.S. 

Treasury securities CCA could seek to 

mutualize its losses from the IDB’s 

default, which could in turn transmit 

stress to the market as a whole. 

In the Proposing Release, the 

Commission reiterated its belief that 

membership requirements help to guard 

against defaults of any CCP member, as 

well as to protect the CCP and the 

financial system as a whole from the 

risk that one member’s default could 

cause others to default, potentially 

including the CCP itself. Further, 

contagion stemming from a CCP 

member default could undermine 

confidence in the financial system as a 

whole, even if the health of the CCP is 

not implicated, causing others to back 

away from participating in the market. 

This risk of decreased participation 

could be particularly problematic if the 

defaulting participant was an IDB, 

whose withdrawal from the market 

could impact other market participants’ 

ability to access the market for on-therun U.S. Treasury securities, 

approximately 49.7% of which trade on 

IDBs.276 Including such transactions as 

eligible secondary market transactions 

would therefore help protect against this 

risk by requiring that a U.S. Treasury 

securities CCA ensure that direct 

participants who are IDBs centrally 

clear both sides of their transactions, 

thereby eliminating the various aspects 

of potential contagion risk posed by socalled hybrid clearing. 

Regarding broker-dealer transactions, 

in the Proposing Release, the 

Commission explained that the 

enumerated types of market participants 

(i.e., a registered broker-dealer, 

government securities broker, or 

government securities dealer) are market 

intermediaries that are engaged in the 

business of effecting transactions in 

securities for the account of others (in 

the case of brokers) or for their own 

accounts (in the case of dealers).277 The 

Commission relied upon data indicating 

that a majority of trades in the 

secondary cash Treasury market now 

clear bilaterally and estimated that the 

trading volume of non-FICC members 

exceeds that of FICC members.278 The 

Commission stated its belief that their 

collective trading activity likely is 

responsible for a not insignificant 

portion of the volume of transactions 

involving Treasury securities and could 

present contagion risk to a U.S. Treasury 

securities CCA. 

Regarding hedge fund transactions, 

the Commission in the Proposing 

Release described its intent in including 

transactions with hedge funds in the 

definition of an eligible market 

transaction as two-fold. First, hedge 

funds generally can engage in trading 

strategies that may pose heightened 

risks of potential financial distress to 

their counterparties, including those 

who are direct participants of a U.S. 

Treasury securities CCA. There are 

several characteristics of hedge fund 

strategies that could raise such issues, 

including using financial institutions 

that may have systemic importance to 

obtain leverage, employing investment 

strategies that may use leverage, 

derivatives, complex structured 

products, and short selling in an effort 

to generate returns, and relying upon 

strategies involving high volumes of 

trading and concentrated 

investments.279 The Commission stated 

its belief that significant hedge fund 

failures, resulting from their investment 

positions or use of leverage or both, 

could result in material losses at the 

financial institutions that lend to them 

if collateral securing this lending is 

inadequate, and that these losses could 

have systemic implications if they 

require these financial institutions to 

scale back their lending efforts or other 

financing activities generally. For these 

reasons, the Commission stated its belief 

that that if any of a hedge fund’s 

activities, even those that are not related 

to the U.S. Treasury market, cause 

financial stress to a counterparty that is 

a direct participant of a U.S. Treasury 

securities CCA, the inclusion of a hedge 

fund’s U.S. Treasury securities cash 

transactions with a direct participant in 

the definition of an eligible secondary 

market transaction should help ensure 

that such financial stress would not 

transmit to the U.S. Treasury securities 

CCA and through to the U.S. Treasury 

market. 

Second, the Commission relied upon 

the role of hedge funds in the overall 

U.S. Treasury market to support its 

proposal to include hedge fund 

transactions in the definition of an 

eligible secondary market 

transaction.280 The Commission stated 

its belief that hedge funds transacting in 

the U.S. Treasury market present a 

potential contagion risk to a U.S. 

Treasury securities CCA because, 

similar to the risks posed to a U.S. 

Treasury securities CCA by noncentrally cleared trades entered into by 

an IDB, non-centrally cleared 

transactions entered into between hedge 

funds and direct participants of the CCA 

could cause risks to the CCA in the 

event that the hedge fund is not able to 

meet its obligations to the direct 

participant, which could, in turn, create 

stress to the direct participant and 

through to the CCA. Therefore, the 

Commission stated that including the 

direct participant’s purchase and sale 

transactions with hedge funds within 

the definition of an eligible secondary 

market transaction should reduce the 

potential for financial distress arising 

from the transactions that could affect 

the direct participant and the U.S. 

Treasury securities CCA. 

The proposed definition of a hedge 

fund was described as consistent with 

the Commission’s definition of a hedge 

fund in Form PF.281 The Commission 


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282Final Rule, Reporting by Investment Advisers 

to Private Funds and Certain Commodity Pool 

Operators and Commodity Trading Advisors on 

Form PF, Release No. IA–3308 (Oct. 31, 2011), 76 

FR 71127 (Nov. 16, 2011). The reporting 

requirements for Form PF vary based on the amount 

of private fund assets under management for an 

investment adviser registered with the Commission. 

For example, if an investment adviser’s private fund 

assets under management, including with respect to 

hedge funds, are less than $150 million on the last 

day of the most recent fiscal year, then the 

investment adviser is not required to file Form PF. 

Separately, additional reporting requirements apply 

to large hedge fund advisers with at least $1.5 

billion in hedge fund assets under management. See 

Form PF, Instructions 1 and 3. However, the 

Commission believes that including all hedge funds 

within paragraph (ii)(C) of the definition of an 

‘‘eligible secondary market transaction’’ in 

Proposed Rule 17ad-22(a) would be consistent with 

its overall policy goals for central clearing in the 

U.S. Treasury market and ensuring that hedge fund 

transactions with direct participants in a U.S. 

Treasury securities CCA do not adversely impact 

the direct participant and, potentially, the CCA. 

283AFREF Letter, supra note 33, at 2; Better 

Markets Letter, supra note 33, at 2, 6–8. 

284SIFMA AMG Letter, supra note 35, at 3. 

285 Id. at 3; see also MFA Letter II, supra note 125, 

at 5 (regarding increased costs associated with 

clearing cash transactions). 

286SIFMA AMG Letter, supra note 35, at 7. 

287SIFMA AMG Letter, supra note 35, at 3. 

288Federated Letter, supra note 85, at 2. 

289The commenter also references increased 

default fund contributions. However, the only U.S. 

Treasury securities CCA serving the U.S. Treasury 

market does not currently maintain a default fund; 

therefore, the Commission disagrees that some 

increase in such contributions would result from 

the proposal. 

stated its belief that defining a hedge 

fund in a manner consistent with Form 

PF is reasonable, because such 

definition should encompass those 

funds that use strategies that the 

Commission has determined merit 

additional reporting to allow a better 

picture of the potential systemic risks 

posed by such activities.282 Including 

transactions with such funds within the 

definition of an eligible secondary 

market transaction should help to limit 

the potential contagion risk that could 

arise from any financial distress 

experienced at such a fund that could, 

in turn, be transmitted to a direct 

participant of a U.S. Treasury securities 

CCA (and to the CCA) via any noncentrally cleared transactions. The 

Commission further states its belief that 

using a definition consistent with that of 

Form PF to identify transactions with a 

U.S. Treasury securities CCA’s direct 

participant as part of the definition of an 

eligible secondary market transaction 

should capture transactions with 

entities whose default would be most 

likely to cause potential contagion risk 

to the Treasury securities CCA. For 

example, hedge funds’ use of leverage 

can make them more vulnerable to 

liquidity shocks, which could, in turn, 

make them unable to deliver in a 

transaction with a direct participant of 

a U.S. Treasury securities CCA. 

Regarding leveraged account 

transactions, in the Proposing Release, 

the Commission stated its belief that the 

inclusion of transactions with such 

accounts, i.e., those that can take on 

significant amounts of leverage, within 

the definition of an eligible secondary 

market transaction should encompass 

transactions between direct participants 

of a U.S. Treasury securities CCA and a 

prime brokerage account, which, based 

on the Commission’s supervisory 

knowledge, may hold assets of entities, 

such as, for example, private funds or 

separately managed accounts, and may 

use leverage that poses a risk to U.S. 

Treasury securities CCA and the broader 

financial system. The Commission 

further stated that by including the 

account, and not the entity using the 

account, this aspect of the proposal is 

targeted to the activity that could bring 

the most potential risk to a U.S. 

Treasury securities CCA and the 

financial system more generally. 

The Commission addresses each of 

these particular types of transactions in 

parts II.B.2.b.ii through iv infra, after 

addressing more general comments with 

respect to cash transactions. 

i. Comments Regarding Cash Clearing 

Generally 

Several commenters supported the 

Commission’s proposal overall, 

including the cash clearing 

requirement.283 By contrast, other 

commenters opposed cash clearing 

generally. One commenter did not 

support a clearing requirement or 

otherwise see the current imperative for 

incentivizing the central clearing of cash 

transactions. The commenter stated that 

any requirement to clear cash 

transactions will serve to increase costs, 

generate operational complexities, and 

reduce liquidity without producing 

meaningful benefits to address 

perceived issues with respect to the 

cash market.284 The commenter 

explained that the increased costs 

would be substantial and would 

include, among other things, increased 

margin, default fund contributions, and 

clearing fees, as well as the costs 

incurred to put in place the operations, 

infrastructure, and standard 

documentation required to support 

central clearing.285 The commenter also 

explained that intra-day margin calls 

will ‘‘simply create operational burdens 

and costs’’ with no obvious benefit 

given that many margin calls will be 

met late in the day only to be returned 

to the posting party the next day. The 

commenter stated that to the extent that 

dealers are required to post collateral to 

a covered clearing agency without 

compensation or to incur other costs 

associated with client clearing, those 

costs will have to be absorbed either by 

clients or dealers, which may reduce 

their capacity and further constrain 

liquidity.286 The commenter also stated 

that additional netting benefits for 

dealers are unclear as accounting rules 

already allow dealers to net unsettled 

cash transactions across all 

counterparties on their balance 

sheets.287 Another commenter also 

opposed the requirement to clear cash 

transactions, but supported the 

exclusion of money market funds from 

the scope of included cash transactions 

within the definition of an eligible 

secondary market transaction.288

In response to the commenters 

opposed to the inclusion of any cash 

transactions in the definition of an 

eligible secondary market transaction, 

the Commission disagrees. As discussed 

in the Proposing Release, currently, the 

majority of cash market transactions are 

not centrally cleared, which is in 

contrast to the market conditions in the 

mid-2000s when most cash transactions 

were centrally cleared. The fact that 

more than half of market activity occurs 

outside central clearing could represent 

a contagion risk to any U.S. Treasury 

securities CCA serving the market. 

Therefore, the Commission identified a 

set of cash transactions to include in the 

definition of an eligible secondary 

market transaction that would represent 

an incremental first step in the cash 

market, to address risks to the CCA, and 

identified a specific rationale with 

respect to each set of categories, as 

discussed in part II.A.2.b supra. 

Addressing these risks is a meaningful 

benefit in that it would ensure that a 

U.S. Treasury securities CCA is well 

positioned to understand and manage 

the risks posed by its participants’ 

transactions. 

Further, as discussed in more detail in 

part IV.C, although, as the commenter 

states, additional clearing likely would 

result in increased margin contributions 

and clearing fees, simply to account for 

the increased clearing volume, as well 

as the one-time costs regarding the 

institution of new contractual 

arrangements to access central 

clearing,289 the benefits of central 

clearing, as discussed in part II.A.1 

supra, justify these costs. 

The commenter’s discussion 

regarding the operational issues of 

intraday margin calls does not specify 

the particular operational complexities 

that would arise, and it does not take 

into account the risk management 


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290Proposing Release, supra note 14, 87 FR at 

64614. 

291 Id. 

292Citadel Letter, supra note 81, at 5. 

293ARB et al. Letter, supra note 81, at 4 (stating 

that the netting benefits associated with 

transitioning only proprietary trading firm (‘‘PTF’’) 

transactions into central clearing are much smaller, 

given the substantial netting that already occurs 

directly with IDBs; the trading-related benefits of 

central clearing will only accrue to market 

participants if their transactions are covered by the 

proposed mandate; and that clearing agency 

resiliency will be negatively impacted if only one 

segment of the market is cleared). 

294MFA Letter, supra note 81, at 2. 

295AIMA Letter, supra note 81, at 7. 

296 GTS Letter, supra note 81, at 3–5. 

297Proposing Release, supra note 14, 87 FR at 

64622–25. 

benefit arising from such calls, that is, 

ensuring that a covered clearing agency 

can address the risks presented by 

significant intraday changes to market 

volatility or a member’s portfolio of net 

unsettled positions. Without such an 

ability, a covered clearing agency would 

face potential exposure in the event of 

the default of a clearing member; 

therefore, the additional risk 

management that a clearing agency can 

accomplish using intraday margin calls 

must be considered. 

Moreover, the Commission disagrees 

with the commenter’s implication that 

this proposal needs to address the 

entirety of the ‘‘perceived issues’’ with 

respect to the cash market. The 

Commission stated in the Proposing 

Release that the requirement to clear 

eligible secondary market transactions 

will not, by itself, necessarily prevent 

future market disruptions, but that it 

could improve the functioning of the 

U.S. Treasury market.290 Although it 

may have other effects beyond the 

immediate requirement for U.S. 

Treasury securities CCAs, the 

requirement being adopted in this 

release is designed to improve the 

resilience of such CCAs by expanding 

their ability to manage the risks arising 

from direct participants who currently 

engage in non-centrally cleared 

transactions away from the CCA 291 and 

need not solve all the issues that 

commentators have identified regarding 

the U.S. Treasury market. 

By contrast, several commenters 

suggested that the scope of eligible 

secondary market transactions in the 

cash market be broadened. One 

commenter stated that the Commission 

should align the scope of the definition 

with respect to cash transactions with 

the proposed scope for repos, subject to 

certain limited exceptions for investors 

that trade de minimis volumes. The 

commenter argued that the 

Commission’s approach with respect to 

cash transactions will increase costs for 

a specific subset of market participants 

(i.e., hedge funds, leveraged accounts, 

and those using IDBs), thereby putting 

them at a competitive disadvantage, 

while failing to deliver the envisaged 

market-wide benefits associated with 

central clearing (i.e., it would materially 

reduce the associated multilateral 

netting benefits, impair the risk 

management practices of clearing 

agencies, and hinder the evolution in 

trading protocols that can be expected 

from a market-wide clearing 

requirement).292 For similar reasons, 

another commenter also stated that the 

benefits of central clearing detailed will 

only materialize if ‘‘a market-wide 

mandate is implemented’’ and 

supported defining the scope of eligible 

secondary market transactions for cash 

transactions as broadly as that proposed 

for repos.293 Another commenter stated 

that limiting the scope of the cash 

clearing mandate would result in 

unwarranted competitive disadvantages 

and related market distortions for some 

types of investors, such as hedge funds, 

or some types of trading platforms, such 

as anonymous trading facilities.294 An 

additional commenter stated that the 

proposed definition leaves out other 

important market participants’ cash 

Treasury transactions that also make up 

a large segment of Treasury market 

liquidity, and that the Commission 

should require other market 

participants’ cash Treasury transactions 

in which a direct participant is involved 

to be cleared, so that the benefits of 

central clearing that the Commission 

cites will accrue throughout the broader 

cash Treasury market.295 In addition, 

another commenter acknowledged the 

benefits of a comprehensive clearing 

requirement, but acknowledged the 

need for a pragmatic approach and 

supported the Commission’s proposed 

requirements as a reasonable foundation 

to begin mandatory central clearing in 

this market.296

In response to the comments that the 

scope of the cash transactions that are 

included in the definition of an eligible 

secondary market transaction should be 

broadened, the scope is not being 

broadened and, in fact, is being further 

narrowed, as discussed further in part 

II.A.2.b.iii regarding hedge fund and 

leveraged account cash transactions 

(unless captured by another portion of 

the rule, e.g., as an IDB transaction). As 

stated in the Proposing Release and 

discussed in part II.2.b supra, the 

Commission proposed a deliberate and 

targeted approach to clearing in the cash 

market in the Proposing Release, 

limiting the clearing requirement to 

specific types of entities transacting 

with members of a U.S. Treasury 

securities CCA that pose heightened 

risks when clearing cash market 

treasury transactions bilaterally. 

Specifically, the Commission proposed 

eligible secondary market transaction to 

be defined as, with reference to cash 

market transactions, a purchase or sale 

between a direct participant of a 

covered clearing agency and (A) any 

participant if the direct participant is an 

IDB; (B) a registered broker-dealer, 

government securities broker, or 

government securities dealer that is not 

a member of a covered clearing agency; 

(C) a hedge fund; or (D) a leveraged 

account. In each case, the Commission 

explained the reasoning for why such 

counterparties were to be included in 

the scope of the proposal.297

In response to the comments that the 

benefits of central clearing would only 

materialize with a market-wide mandate 

and that the targeted cash scope would 

fail to deliver the market-wide benefits 

associated with central clearing, the 

Commission disagrees because the 

increased clearing of cash transactions, 

targeted to address the differing risk 

profiles of each market segment, would 

still bring the benefits of central clearing 

to some portion of the market, even if 

not as widely as the scope for repo 

transactions, while also addressing the 

risks inherent in these particular market 

segments. The Commission does not 

believe that the benefits of central 

clearing exist only if the entire market 

is centrally cleared. The increased costs 

for certain market participants, that is, 

those whose transactions with direct 

participants of a U.S. Treasury securities 

CCA are included in the definition of an 

eligible secondary market transaction, 

are justified by the benefit of addressing 

the risks inherent in those particular 

transactions, and the Commission 

addresses each of these categories 

separately in parts II.A.2.b.ii through iii 

infra. Moreover, other types of cash 

transactions do not present the same 

types of risk to the CCA in terms of 

potential contagion risk. 

ii. IDB Transactions 

The proposed definition of an eligible 

secondary market transaction would 

include, among other things, any 

purchase or sale between a direct 

participant of a U.S. Treasury securities 

CCA and any counterparty, if the direct 

participant of the covered clearing 

agency (A) brings together multiple 

buyers and sellers using a trading 

facility (such as a limit order book) and 


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298See CME Letter, supra note 81, at 5. 

299See id. 

300See CME Letter, supra note 81, at 5–6 (stating 

the commenter’s belief that the proposal appears to 

have been carefully drafted to avoid encouraging 

market participants to trade away from IDBs). 

301See ICI Letter, supra note 85, at 3, 11; MFA 

Letter, supra note 81, at 20; Tradeweb Letter, supra 

note 81, at 3–4. 

302See ICI Letter, supra note 85, at 3, 11; MFA 

Letter, supra note 81, at 20–21; Tradeweb Letter, 

supra note 81, at 3–4. 

303See id. 

304See MFA Letter, supra note 81, at 20. 

305The term ‘‘IDB’’ typically refers only to IDBs 

that are also ATSs. See note 643 infra. 

306See, e.g., Proposing Release, supra note 14, 87 

FR at 64622 (citing TMPG White Paper, supra note 

13, at 22 (noting that in a hybrid clearing 

arrangement, an IDB’s rights and obligations to the 

CCP are not offset and the IDB is not in a net zero 

settlement position with respect to the CCP at 

settlement date)). Thus, the IDB is not able to net 

all of its positions for clearing at a U.S. Treasury 

securities CCA, and the IDB’s positions appear to 

the CCA to be directional, which impacts the 

amount of margin that the CCA collects for the 

transaction. 

307See 2021 IAWG Report, supra note 4, at 31; 

Depository Trust and Clearing Corporation, More 

Clearing, Less Risk: Increasing Centrally Cleared 

Activity in the U.S. Treasury Cash Market, at 5 (May 

2021), available at https://www.dtcc.com/-/media/ 

Files/PDFs/DTCC-US-Treasury-Whitepaper.pdf 

(‘‘DTCC May 2021 White Paper’’). 

308See Proposing Release, supra note 14, 87 FR 

at 64623. 309TMPG White Paper, supra note 13, at 32; 

section IV.B.4 (Table 1) infra. 

(B) is a counterparty to both the buyer 

and seller in two separate transactions. 

One commenter anticipated that 

certain other commenters would 

advocate for a definition of eligible 

secondary market transaction that 

would include IDB transactions and 

would exclude dealer-to-client over-thecounter trades, which is not what the 

Commission proposed.298 The 

commenter cautioned against such an 

‘‘uneven’’ approach because it would 

incentivize market participants to trade 

bilaterally instead of using an IDB to 

avoid central clearing.299

Thus, the commenter supports the 

scope of the definition of an eligible 

secondary market transaction as 

proposed, that is, including both IDB 

transactions and the other categories of 

transactions set forth in the 

definition.300 The Commission agrees 

with the commenter that the definition, 

as proposed, would not incentivize 

market participants to trade away from 

IDBs to avoid central clearing because 

the definition of what constitutes an 

eligible secondary market transaction is 

broader than simply IDB transactions, 

such that avoiding IDBs alone would 

not be sufficient to avoid the 

requirement to submit eligible 

secondary market transactions for 

clearing. 

In addition, commenters expressed 

concerns that including IDB 

transactions in the definition of an 

eligible secondary market transaction 

could draw trading activity away from 

IDBs, thereby reducing market liquidity 

and market stability.301 The commenters 

also noted that IDBs are anonymous 

platforms that currently support all-toall trading, and that the Commission has 

recognized that all-to-all trading would 

improve market structure and 

stability.302 The commenters argued that 

including IDB transactions in the 

definition of an eligible secondary 

market transaction could, therefore, 

hinder all-to-all trading.303 One of these 

commenters further argued that by 

discouraging market participants from 

trading on IDBs, the definition of an 

eligible secondary market transaction 

could limit the choices of market 

participants with respect to trading 

venues.304 The inclusion of IDB 

transactions, along with other types of 

transactions, would not necessarily lead 

to decreased liquidity and market 

stability or negatively impact all-to-all 

trading in the U.S. Treasury market. The 

market function provided by IDBs, that 

is, bringing together buyers and sellers 

anonymously, will continue to be 

desirable, even if such transactions are 

eligible secondary market transactions, 

meaning that market participants likely 

still would use IDBs to transact in the 

U.S. Treasury market. Because market 

participants likely would continue to 

transact on IDBs, the commenters’ 

concerns regarding decreased liquidity 

and market stability would not 

materialize. 

Moreover, even if some of these 

concerns materialize from the inclusion 

of IDB transactions, including them is 

justified as it would allow the U.S. 

Treasury securities CCA to better risk 

manage ‘‘hybrid’’ transactions that are 

currently not being submitted for central 

clearing.305 Specifically, including IDB 

transactions in the definition of an 

eligible secondary market transaction 

would address the potential for 

contagion risk associated with hybrid 

clearing. As explained in the Proposing 

Release, the configuration of 

counterparty risk presented by hybrid 

clearing allows the U.S. Treasury 

securities CCA to manage the risks 

arising from the IDB–CCA direct 

participant transaction, on the one 

hand, but the U.S. Treasury securities 

CCA cannot manage the risks arising 

from the IDB’s offsetting transaction 

with its non-member counterparty and 

the potential counterparty credit risk 

and settlement risk arising to the IDB 

from that trade.306 Thus, under the 

current hybrid clearing model, the U.S. 

Treasury securities CCA is indirectly 

exposed to the IDB’s non-centrally 

cleared transaction, but it lacks the 

ability to risk manage its indirect 

exposure to this non-centrally cleared 

leg of the transaction. Specifically, it 

does not know who the ultimate 

counterparty of the transaction is and 

cannot collect margin on that 

transaction. This, in turn, results in 

margin collection at the CCP which is 

based upon only one transaction and 

has been calculated to cover this 

seemingly directional position, as well 

as an inability to net these offsetting 

transactions and provide the benefits of 

central clearing. In particular, if the 

IDB’s non-CCP member counterparty 

fails to settle a transaction that is subject 

to hybrid clearing, such IDB may not be 

able to settle the corresponding 

transaction that has been cleared with 

the U.S. Treasury securities CCA due to 

a lack of financial resources at the IDB, 

which could lead the IDB to default.307

As part of its existing default 

management procedures, the U.S. 

Treasury securities CCA could seek to 

mutualize its losses from the IDB’s 

default, which could in turn transmit 

stress to the market as a whole. 

The Commission has previously 

stated that membership requirements 

help to guard against defaults of any 

CCP member, as well as to protect the 

CCP and the financial system as a whole 

from the risk that one member’s default 

could cause others to default, 

potentially including the CCP itself.308

Further, contagion stemming from a 

CCP member default could undermine 

confidence in the financial system as a 

whole, even if the health of the CCP is 

not implicated. This is because the 

default could cause others to back away 

from participating in the market. This 

risk of decreased participation could be 

particularly problematic if the 

defaulting participant was an IDB, 

whose withdrawal from the market 

could impact other market participants’ 

ability to access the market for on-therun U.S. Treasury securities, 

approximately 49.7% of which trade on 

IDBs.309 Including such transactions 

within the definition of an eligible 

secondary market transaction would 

therefore help protect against this risk 

by requiring that a U.S. Treasury 

securities CCA ensure that direct 

participants who are IDBs centrally 

clear both sides of their transactions, 

thereby eliminating the various aspects 

of potential contagion risk posed by socalled hybrid clearing. 

One commenter urged the 

Commission to consider adopting the 

proposal in increments based on further 


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310See SIFMA/IIB Letter, supra note 37, at 2–3, 

16–18 (limiting the proposal to IDB transactions in 

the cash market would address the most salient 

risks that could be addressed through central 

clearing). 

311See CME Letter, supra note 81, at 5–6. 

312AIMA Letter, supra note 81, at 7; SIFMA/IIB 

Letter, supra note 37, at 16–18. 

313SIFMA AMG Letter, supra note 35, at 11. 

314See ICI Letter, supra note 85, at 11. 

315See Federated Letter, supra note 85, at 2. 

316See generally TMPG, Automated Trading in 

Treasury Markets (White Paper, June 2015), 

available at https://www.newyorkfed.org/TMPG/ 

medialibrary/microsites/tmpg/files/TPMG-June2015-Automated-Trading-White-Paper.pdf (‘‘TMPG 

Automated Trading White Paper’’). 

317Proposing Release, supra note 14, 87 FR at 

64623. 

318See DTCC/FICC Letter, supra note 33, at 12; 

Better Markets Letter, supra note 33, generally; 

AFREF Letter, supra note 33, at 2–3. 

319Commenters generally addressed the inclusion 

of leveraged account transactions in the definition 

of an eligible secondary market transaction as part 

of a broader discussion including both hedge fund 

transactions and leveraged account transactions. 

Therefore, the Commission is considering both 

types of transactions together for purposes of 

discussing the comments. 

320AIMA Letter, supra note 81, at 7. 

study, with IDB transactions as the first 

market segment to be included in the 

definition due to the distinct settlement 

risks associated with the IDBs’ hybrid 

clearing model.310 In contrast, another 

commenter supported adopting the 

proposal as drafted, arguing that to 

include only IDB transactions would be 

an uneven approach that would 

incentivize market participants to 

execute their transactions bilaterally, 

damaging liquidity on IDB platforms.311

Commenters identified the inclusion of 

IDB transactions as a targeted option to 

include in the definition of an eligible 

secondary market transaction to address 

contagion risk.312 One commenter stated 

that, if the Commission’s concern is the 

hybrid clearing at IDBs, it would be 

more effective to focus on the regulation 

of the platforms.313

The Commission agrees with all of the 

commenters regarding the 

appropriateness of Commission action 

to mitigate the risks associated with 

IDBs’ hybrid clearing model. The 

Commission included IDB transactions 

in the definition of an eligible secondary 

market transaction in order to eliminate 

the potential contagion risk posed by 

hybrid clearing. However, the 

Commission disagrees with the 

commenters arguing in favor of limiting 

the scope of the definition to include 

IDB transactions only or taking an 

entirely different approach that would 

simply regulate IDB platforms. As 

discussed above, to single out IDBs 

(whether in the definition of eligible 

secondary market transaction or through 

another regulatory approach), without 

including the other cash transactions 

included in the definition of an eligible 

secondary market transaction, could 

incentivize market participants to trade 

away from IDBs, creating the potential 

for negative effects on market liquidity, 

market stability, all-to-all trading, and 

participant choice of trading venue. 

Accordingly, the Commission is 

adopting the definition as proposed. 

Two commenters argued that 

transactions by registered funds that 

take place on an IDB should be 

excluded from the definition of an 

eligible secondary market transaction. 

Specifically, one commenter urged the 

Commission to expressly exclude 

registered funds (e.g., mutual funds, 

exchange-traded funds, closed-end 

funds, and unit investment trusts) from 

the effects of including IDB transactions 

in the Membership Proposal.314

Similarly, another commenter 

supported an exclusion for registered 

money market funds.315

The Commission does not agree with 

these commenters and is not including 

any exclusion for registered funds 

transacting on an IDB. If a fund chooses 

to transact on an IDB, the same potential 

hybrid contagion risk to the U.S. 

Treasury securities CCA arises as when 

other market participants transact on an 

IDB. Therefore, the Commission does 

not believe that such an exclusion is 

appropriate. 

iii. Other Cash Transactions 

The Commission also proposed to 

include certain additional categories of 

cash transactions of U.S. Treasury 

securities by the direct participants of a 

U.S. Treasury securities CCA in the 

definition of an eligible secondary 

market transaction subject to the 

Membership Proposal. 

First, the Commission proposed that 

the definition of an eligible secondary 

market transaction include those cash 

purchase and sale transactions in which 

the counterparty of the direct 

participant is a registered broker-dealer, 

government securities broker, or 

government securities dealer. Each of 

these entities is a type of market 

intermediary that is engaged in the 

business of effecting transactions in 

securities for the account of others (in 

the case of brokers) or for their own 

accounts (in the case of dealers).316

Commenters did not address this 

aspect of the definition of an eligible 

secondary market transaction. For the 

reasons stated in the Proposing Release 

and as discussed in part II.A.2.b supra, 

the Commission continues to believe 

that these portions of the definition are 

appropriate.317 The Commission is 

therefore adopting this aspect of the 

exclusions as proposed. 

Second, the Commission proposed to 

include within the definition of an 

eligible secondary market transaction 

any purchase and sale transaction 

between a direct participant of a U.S. 

Treasury securities CCA and a hedge 

fund, that is any private fund (other 

than a securitized asset fund): (a) with 

respect to which one or more 

investment advisers (or related persons 

of investment advisers) may be paid a 

performance fee or allocation calculated 

by taking into account unrealized gains 

(other than a fee or allocation the 

calculation of which may take into 

account unrealized gains solely for the 

purpose of reducing such fee or 

allocation to reflect net unrealized 

losses); (b) that may borrow an amount 

in excess of one-half of its net asset 

value (including any committed capital) 

or may have gross notional exposure in 

excess of twice its net asset value 

(including any committed capital); or (c) 

that may sell securities or other assets 

short or enter into similar transactions 

(other than for the purpose of hedging 

currency exposure or managing 

duration). Third, the Commission 

proposed to include within the 

definition of an eligible secondary 

market transaction any purchase and 

sale transaction between a direct 

participant of a U.S. Treasury securities 

CCA and an account at a registered 

broker-dealer, government securities 

dealer, or government securities broker 

that either may borrow an amount in 

excess of one-half of the net value of the 

account or may have gross notional 

exposure of the transactions in the 

account that is more than twice the net 

value of the account. This would apply 

to accounts that can take on significant 

leverage, that is, by borrowing an 

amount that is more than one half of its 

net value or take on exposures worth 

more than twice the account’s net value 

(referred to herein as ‘‘leveraged 

accounts’’). 

Some commenters supported the 

proposed inclusion of transactions with 

hedge funds within the definition of an 

eligible secondary market 

transaction.318 However, other 

commenters asserted that transactions 

with a hedge fund or a leveraged 

account 319 should not be within the 

definition of an eligible secondary 

market transaction. 

One commenter stated that the 

inclusion of hedge funds within the 

counterparties to an eligible secondary 

market transaction would arbitrarily 

single out hedge funds’ cash Treasury 

transactions.320 Another commenter 


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321SIFMA AMG Letter, supra note 35, at 11; see 

also MFA Letter II, supra note 125, at 7 (regarding 

decreased liquidity and potentially shifting 

transactions away from the requirement to clear 

eligible secondary market transactions). 

322MFA Letter II, supra note 125, at 7. 

323MFA Letter, supra note 81, at 18–20; AIMA 

Letter, supra note 81, at 6; SIFMA AMG Letter, 

supra note 35, at 11. 

324See note 723 infra. 

325See, e.g., Ayelen Banegas and Phillip Monin, 

Hedge Fund Treasury Exposures, Repo, and 

Margining (Sept. 8, 2023), available at https://

www.federalreserve.gov/econres/notes/feds-notes/ 

hedge-fund-treasury-exposures-repo-andmargining-20230908.html. 

326 ICI Letter, supra note 85, at 10. 

327 ICI Letter, supra note 85, at 10. 

328Federated Letter, supra note 85, at 5. 

329 Id. 

stated that there is no data to support 

imposing a clearing requirement that 

targets hedge funds and leveraged 

accounts and expressed concern that a 

partial mandate may result in some 

dealers choosing to offer liquidity only 

in a cleared environment thereby 

reducing the liquidity available today to 

accounts in the uncleared cash 

market.321 Another commenter stated 

that the inclusion of hedge funds within 

the counterparties to an eligible 

secondary market transaction would 

create an uneven playing field that will 

subject hedge funds to much higher 

costs than other market participants.322

In addition, certain commenters also 

raised concerns with the definition of a 

hedge fund in the Proposing Release, 

stating that because of the nature of the 

definition, eligible secondary market 

transactions would include those with 

firms that may (but in practice might not 

actually) exceed the quantitative 

thresholds without regard to the risks 

that these firms actually take on, or their 

investment models and strategies.323

The Commission is not adopting 

proposed sections (ii)(C) and (D) of the 

definition of an eligible secondary 

market transaction with respect to hedge 

funds and leveraged accounts in light of 

questions raised by commenters 

regarding the inclusion of a hedge fund 

and a leveraged account as proposed 

that merit further consideration, and the 

Commission will continue to evaluate 

the issues raised to determine if any 

further action is appropriate with 

respect to transactions in the cash 

market. This change from the proposal 

allows for a more incremental approach 

to requiring central clearing of 

transactions in the cash market. 

However, the requirement to clear 

eligible secondary market transactions 

that are repos encompasses repos 

between a direct participant of a U.S. 

Treasury securities CCA and a hedge 

fund or leveraged account, as discussed 

in part II.A.2.a supra. This requirement 

should ensure that many of the risks 

posed by hedge funds, including the 

repo portion of a basis trade,324 would 

be addressed by the proposal. 

Moreover, repo transactions between 

a direct participant of a U.S. Treasury 

securities CCA and a hedge fund or 

leveraged account would be within the 

scope of the definition of an eligible 

secondary market transaction discussed 

in part II.A.2.a supra. This inclusion is 

important because it addresses the risks 

posed by hedge fund and leveraged 

account repo activity in the U.S. 

Treasury market, which is often highly 

leveraged and subject to low or zero 

haircut.325

iv. Comments Regarding Cash 

Transactions for Registered Funds 

As discussed in part II.A.2.b supra, 

the definition of eligible secondary 

market transactions does not include 

transactions between direct participants 

of a U.S. Treasury securities CCA and 

registered funds. However, if a 

registered fund were transacting on an 

IDB, that transaction would be an 

eligible secondary market transaction 

because it otherwise meets the 

definition of such a transaction (i.e., it 

is an IDB transaction) and not because 

it is a registered fund. 

Certain commenters addressed cash 

market transactions specifically with 

respect to registered funds. One 

commenter supported an exclusion from 

the definition of an eligible secondary 

market transaction for registered 

funds.326 The commenter stated that 

applying a cash Treasury clearing 

mandate to funds would not promote 

risk reduction or enhancements to 

market liquidity to a degree that would 

justify the considerable costs and 

burdens to funds, which would have to 

build out an entire new clearing 

infrastructure, with such costs borne 

indirectly by fund investors. The 

commenter stated that the 

characteristics of typical fund cash 

Treasury transactions are 

distinguishable from the types of 

transactions that the Commission is 

seeking to capture under the mandate 

for risk reduction purposes, i.e., those 

using significant leverage and/or giving 

rise to potential contagion risk. 

According to the commenter, registered 

funds, by contrast, invest in cash 

Treasury securities for purposes such as 

obtaining desired exposure, hedging 

risks associated with investments in 

other markets, diversifying their 

portfolios, and protecting capital, among 

other reasons. The commenter stated 

that these transactions are generally not 

linked to other leveraged strategies, and 

observed that funds are limited in their 

ability to incur leverage, both by statute 

(i.e., Section 18 of the 1940 Act) and by 

SEC rules (e.g., Rule 18f–4 under the 

1940 Act). The commenter further 

asserted that as a matter of investment 

strategy as well, buy-side market 

participants such as bond funds 

generally do not acquire significant 

leverage, including when investing in 

Treasury securities. For these reasons, 

the commenter asserted that including 

registered fund transactions in the 

definition of an eligible secondary 

market transaction would not yield 

additional risk reduction benefits.327

An additional commenter stated that 

applying this mandate to money market 

funds would yield minimal benefits 

while potentially imposing significant 

costs on such funds.328 The commenter 

stated that its money market funds do 

not normally utilize leverage in the cash 

purchase of Treasury securities, but 

instead are generally investing in 

Treasury securities on a long-term basis 

or are using them to hedge risks, for 

capital protection or for diversifying the 

risk in their investment portfolios. The 

commenter stated that these strategies 

are generally not linked to other 

leveraged strategies and therefore there 

is minimal contagion risk evident in 

these transactions. The commenter 

further stated that the costs of such a 

mandate would be significant as the 

commenter currently does not clear cash 

Treasury transactions and therefore 

would need to establish the 

technological, operational and legal 

frameworks that are necessary to 

support such a clearing mandate, 

meaning that any anticipated benefits of 

money market funds, as well as other 

registered funds, clearing their cash 

Treasury purchases would be vastly 

outweighed by the costs and burdens 

associated with such a mandate. The 

commenter also supported a broader 

exclusion for transactions with 

registered funds from the definition of 

an eligible secondary market 

transaction.329

As stated in the Proposing Release, 

the Commission identified certain 

categories of purchases and sales of U.S. 

Treasury securities that should be part 

of the definition of an eligible secondary 

market transaction, and these categories 

represented an incremental first step to 

address potential risks arising to a U.S. 

Treasury securities CCA. The Proposing 

Release did not include transactions 

with registered funds as a counterparty 

within the definition of an eligible 

secondary market transaction, and the 

Commission does not believe that a 


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330SIFMA/IIB Letter, supra note 37, at 20; CME 

Letter, supra note 81, at 6. 

331Proposing Release, supra note 14, 87 FR at 

64625–26. 

332See AIMA Letter II, supra note 115, at 4. 

333SIFMA/IIB Letter, supra note 37, at 21. 

334See DTCC/FICC Letter, supra note 33, at 21– 

22. 

specific exclusion for registered funds is 

necessary. Although a transaction with 

a registered fund may constitute an 

eligible secondary market transaction if 

the transaction otherwise meets the 

definition, it would not be because of 

the fact of the registered fund as a 

counterparty, but, rather, because the 

transaction met some other criteria of 

the definition. 

The Commission understands 

generally that, consistent with the 

commenters’ statements, registered 

funds, including money market funds, 

typically do not use cash transactions in 

U.S. Treasury securities to take on 

leverage, both as a matter of strategy and 

because of applicable regulatory 

requirements, and that they instead use 

cash transactions to obtain desired 

exposure, hedge risks associated with 

investments in other markets, diversify 

portfolios, or protect capital. 

However, in response to the 

commenters that argued that registered 

funds’ lack of leverage means that they 

pose no counterparty risk, the 

Commission believes that, to the extent 

that a registered fund chooses to 

transact on an inter-dealer broker, such 

transactions would pose the same type 

of contagion risk as other transactions 

executed on an inter-dealer broker. For 

the reasons discussed in part II.A.2.b.ii 

supra, in such cases, it is appropriate 

that registered funds’ cash transactions, 

if on an IDB, would be encompassed 

within the definition of an eligible 

secondary market transaction because of 

the risks such transactions present as an 

IDB transaction and the potential for a 

default at the IDB to have a knock-on 

effect at the CCA. 

v. Final Rule 

For the reasons set forth in part 

II.A.2.b, the Commission is adopting the 

definition of an eligible secondary 

market transaction in Rule 17ad–22(a), 

as set forth in sections (ii)(A) and (B) of 

that definition with respect to IDB 

transactions and transactions with a 

registered broker-dealer, but it is not 

adopting the definition of an eligible 

secondary market transaction as set 

forth in sections (ii)(C) and (D) of that 

definition with respect to hedge fund 

and leveraged account transactions. 

3. Other Exclusions From the Definition 

of an Eligible Secondary Market 

Transaction 

Proposed Rule 17ad–22(a) would 

exclude transactions between direct 

participants of a U.S. Treasury securities 

CCA and certain counterparties from the 

definition of an eligible secondary 

market transaction in U.S. Treasury 

securities. These exclusions would 

apply to any purchase or sale 

transaction in U.S. Treasury securities 

or repurchase or reverse repurchase 

agreement collateralized by U.S. 

Treasury securities between a direct 

participant and a central bank, a 

sovereign entity, or an international 

financial institution. A central bank 

would, in turn, be defined as a reserve 

bank or monetary authority of a central 

government (including the Board of 

Governors or any of the Federal Reserve 

Banks) and the Bank of International 

Settlements. A sovereign entity would 

be defined as a central government 

(including the U.S. Government), or an 

agency, department, or ministry of a 

central government. An international 

financial institution would be defined 

by specifying the entities, i.e., (1) 

African Development Bank; (2) African 

Development Fund; (3) Asian 

Development Bank; (4) Banco 

Centroamericano de Integracio ́n 

Econo ́mica; (5) Bank for Economic 

Cooperation and Development in the 

Middle East and North Africa; (6) 

Caribbean Development Bank; (7) 

Corporacio ́n Andina de Fomento; (8) 

Council of Europe Development Bank; 

(9) European Bank for Reconstruction 

and Development; (10) European 

Investment Bank; (11) European 

Investment Fund; (12) European 

Stability Mechanism; (13) InterAmerican Development Bank; (14) InterAmerican Investment Corporation; (15) 

International Bank for Reconstruction 

and Development; (16) International 

Development Association; (17) 

International Finance Corporation; (18) 

International Monetary Fund; (19) 

Islamic Development Bank; (20) 

Multilateral Investment Guarantee 

Agency; (21) Nordic Investment Bank; 

(22) North American Development 

Bank, and providing that the term 

would also include any other entity that 

provides financing for national or 

regional development in which the 

United States government is a 

shareholder or contributing member. 

In addition, Proposed Rule 17ad–22(a) 

would also exclude transactions in U.S. 

Treasury securities between a direct 

participant of a U.S. Treasury securities 

CCA and a natural person. 

Commenters expressed support for 

these exclusions.330 For the reasons 

stated in the Proposing Release, the 

Commission believes that these 

exclusions are appropriate.331 The 

Commission is therefore adopting the 

exclusions as proposed. 

In addition, several commenters 

requested an exclusion for market 

participants that engage in cash or repo 

transactions but are unable to access a 

U.S. Treasury securities CCA. For 

example, one commenter stated that this 

inability to access a CCA could be 

because of the CCA’s existing rules or 

otherwise.332 Another commenter stated 

that this inability could result from 

being ineligible under the CCA’s 

existing rules, regulatory burdens, or 

other material impediments that prevent 

such access. The commenter further 

stated that that not all market 

participants will be able to work with a 

U.S. Treasury securities CCA to 

determine if there are serious obstacles 

to access during the proposal’s comment 

period and that it may take more time 

for any possible issues to surface.333 It 

is difficult to determine what entities 

will be ‘‘unable’’ to access central 

clearing and for what reasons, given 

that, for example, the existing rules of 

a CCA may change during the 

implementation period, see part III 

infra, and that different market 

participants may face different 

regulatory or other requirements that 

could have an effect on its access to 

central clearing. Therefore, such an 

exclusion would be overly broad and 

would undermine the policy goals of the 

requirement to clear eligible secondary 

market transactions. The Commission 

has identified a number of exclusions in 

this release and would consider any 

additional specific requests for 

exclusions in the future as market 

participants work to finalize 

arrangements to implement the 

requirements of this release. 

4. Policies and Procedures Regarding 

U.S. Treasury Securities CCA’s 

Monitoring of Its Direct Participants’ 

Transactions 

The proposed amendments to Rule 

17ad–22(e)(18)(iv)(B) would require that 

a U.S. Treasury securities CCA 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to, as applicable, 

identify and monitor its direct 

participants’ required submission of 

transactions for clearing, including, at a 

minimum, addressing a direct 

participant’s failure to submit 

transactions. 

One commenter supported this aspect 

of the proposal.334 The commenter 


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335See DTCC/FICC Letter, supra note 33, at 21. 336See id. 337See id. 338See id. 339See id. 340See DTCC/FICC Letter, supra note 33, at 21– 

22. 341See DTCC/FICC Letter, supra note 33, at 22. 342See id. 343See id. 

344SIFMA AMG Letter, supra note 35, at 8; 

SIFMA/IIB Letter, supra note 37, at 12; MFA Letter, 

supra note 81, at 3, 10. 

345MFA Letter, supra note 81, at 10. 

346SIFMA AMG Letter, supra note 35, at 8. 

347SIFMA/IIB Letter, supra note 37, at 12. 

noted that this aspect of the proposal 

uses the phrase ‘‘identify and monitor,’’ 

which is an understood phrase used 

elsewhere in the Covered Clearing 

Agency Standards.335 Accordingly, the 

commenter anticipated that 

implementation of this aspect of the 

proposal would be similar to 

implementation of other Covered 

Clearing Agency Standards provisions 

that use that phrase.336 For example, the 

commenter stated that it expects a U.S. 

Treasury securities CCA would require 

its direct participants to submit 

information regarding their U.S. 

Treasury transactions as well as 

attestations from senior officials that the 

participant is in compliance with its 

obligations.337 The commenter stated 

that it further expects that a U.S. 

Treasury securities CCA would review 

publicly available information (e.g., 

information collected through FINRA’s 

Trade Reporting and Compliance Engine 

(‘‘TRACE’’) reporting) as well as 

information made available to it by 

regulatory and self-regulatory 

organizations.338 Additionally, the 

commenter stated that it expects a U.S. 

Treasury securities CCA would seek to 

identify opportunities to coordinate 

with market participants and selfregulatory organizations to examine 

collected data and identify possible 

instances of non-compliance.339 The 

commenter cautioned, however, that the 

ability of a U.S. Treasury securities CCA 

to effectively identify and monitor its 

direct participants’ required submission 

of transactions for clearing would 

depend on the quality and 

comprehensiveness of available data, 

and the commenter asked that the 

Commission continually review and 

improve the quality of available data.340

The commenter stated that it expects a 

U.S. Treasury securities CCA would 

take steps to remediate non-compliance 

on the part of its direct participants in 

a manner consistent with the Covered 

Clearing Agency Standards and 

breaches of the CCA’s own rules.341 The 

commenter cautioned, however, that a 

U.S. Treasury securities CCA’s capacity 

to monitor participant non-compliance 

is limited because a CCA does not have 

authority over non-participants that may 

seek to evade the requirement to clear 

eligible secondary market 

transactions.342 Therefore, the 

commenter asked that the Commission 

utilize its supervisory authority to help 

support any requirement to clear 

eligible secondary market 

transactions.343

Consistent with the commenter, the 

Commission continues to believe that 

such a requirement should ensure that 

a U.S. Treasury securities CCA has a 

framework in place for oversight of 

participants’ compliance with the 

policies that would be adopted as part 

of the requirement to submit eligible 

secondary market transactions for 

clearing. Without such policies and 

procedures, it would be difficult for the 

CCA to assess if the direct participants 

are complying with the amendments to 

Rule 17ad–22(e)(18)(iv)(A) that would 

require the submission of eligible 

secondary market transactions for 

clearing. 

The Commission continues to believe 

that there are a number of possible 

methods that a U.S. Treasury securities 

CCA could establish to assess its direct 

participants’ compliance with the 

policies and procedures adopted 

pursuant to the Membership Proposal. 

For example, the Commission agrees 

with the commenter that a U.S. Treasury 

securities CCA could require direct 

participants to submit to the CCA 

information regarding their U.S. 

Treasury securities transactions or to 

require attestations from senior officials 

of the CCA’s direct participants as to 

their submission of the required 

transactions and compliance with their 

obligations to submit such transactions. 

The Commission further agrees that a 

U.S. Treasury securities CCA also could 

review publicly available information 

and information made available to it by 

regulatory and self-regulatory 

organizations as part of its assessment of 

its direct participants’ compliance. 

The Commission continues to believe 

that requiring a U.S. Treasury securities 

CCA to adopt policies and procedures 

that address a failure of a direct 

participant to submit transactions that 

are required to be submitted is 

consistent with section 17A(b)(3)(G) of 

the Exchange Act. That section requires 

that the rules of a registered clearing 

agency provide that its participants 

shall be appropriately disciplined for 

violation of any provision of the rules of 

the clearing agency by expulsion, 

suspension, limitation of activities, 

functions, and operations, fine, censure, 

or any other fitting sanction. The 

Commission continues to believe that 

policies and procedures consistent with 

this aspect of the proposal should 

specify how a U.S. Treasury securities 

CCA would penalize its participants 

who do not submit the required 

transactions, whether by a particular 

fine or other action. 

For these reasons, the Commission is 

adopting the requirement in Rule 17ad– 

22(e)(18)(iv)(B) as proposed. 

5. Alternative Approaches Proposed by 

Commenters 

As discussed in part II.A.1.a supra, 

commenters identified several methods 

by which the Commission could or 

should incentivize additional central 

clearing without adopting a requirement 

to clear eligible secondary market 

transactions. The Commission discusses 

its views on each of these in turn, 

including whether it has the authority to 

adopt certain initiatives. However, as a 

general matter, the Commission is not 

persuaded that incentivizing central 

clearing would be sufficient at this 

point, as those types of changes would 

not ensure that the current risks to U.S. 

Treasury securities CCAs are addressed. 

Therefore, the requirement to clear 

eligible secondary market transactions is 

necessary. 

First, commenters identified the 

proposed amendments to Rule 15c3–3 

discussed in part II.C infra as a method 

to incentivize additional central 

clearing.344 One commenter stated that 

the practical effect of this change would 

be to allow broker-dealers to use margin 

collected from customers to satisfy 

margin requirements associated with 

such customers’ transactions, rather 

than using proprietary funds to finance 

customer margin as is the case today, 

and expressed its support for this 

amendment because it will free up 

broker-dealer resources by reducing the 

amount of proprietary funds needed to 

finance customer margin and therefore 

lower the cost of clearing, while 

continuing to protect customer funds.345

Another commenter stated that the 

proposed change to allow a debit under 

the Rule 15c3–3a customer reserve 

formula should incentivize central 

clearing of U.S. Treasury securities 

transactions by reducing costs.346 One 

commenter stated that this change 

would reduce the costs of centrally 

clearing U.S. Treasury securities 

transactions and thus incentivize more 

central clearing of such transactions.347

Second, commenters identified the 

proposed amendments to require U.S. 

Treasury securities CCAs to segregate 

customer positions and margin 


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348SIFMA AMG Letter, supra note 35, at 8; 

SIFMA/IIB Letter, supra note 37, at 12; MFA Letter, 

supra note 81, at 3. 

349SIFMA/IIB Letter, supra note 37, at 12, 25. 

350SIFMA AMG Letter, supra note 35, at 8. 

351SIFMA/IIB Letter, supra note 37, at 13; SIFMA 

AMG Letter, supra note 35, at 8; MFA Letter, supra 

note 81, at 3, 6–10. 

352SIFMA/IIB Letter, supra note 37, at 3. 

353 ICI Letter, supra note 85, at 14. 

354MFA Letter II, supra note 125, at 4. 

355Banking regulations may result in different 

treatment for collateral posted as margin to a CCP 

if that collateral is potentially subject to loss 

mutualization versus collateral that is not subject to 

loss mutualization. Specifically, a bank has to treat 

potentially mutualized collateral, like clearing fund 

posted to FICC or, more generally, the guaranty 

fund posted to derivatives CCPs, differently from 

collateral that would be used only in the event of 

the specific bank member’s default to the CCP. Such 

banking regulations are outside the scope of this 

rulemaking or the Commission’s authority in 

general. 

356CCA Standards Adopting Release, supra note 

10, 81 FR at 70813. 

357MFA Letter, supra note 81, at 11; SIFMA/IIB 

Letter, supra note 37, at 13; SIFMA AMG Letter, 

supra note 35, at 8. 

358SIFMA/IIB Letter, supra note 37, at 13. 

discussed in part II.C.1 infra as a 

method to incentivize additional central 

clearing.348 One commenter stated that 

this change would ensure that a direct 

participant’s proprietary positions 

would be available to net against other 

proprietary positions, which would 

incentivize additional central 

clearing.349 An additional commenter 

stated that the segregation of customer 

positions should allow for a dealer’s 

proprietary positions to be netted 

against that dealer’s proprietary 

positions vis-a`-vis other dealers, 

allowing more central clearing of U.S. 

Treasury securities transactions.350

Third, commenters identified 

requiring CCAs to review their access 

models and/or adopt particular access 

models or features thereof as a method 

to incentivize clearing, as discussed in 

part II.B.2 infra.351

The Commission agrees that the 

methods identified by the commenters 

could incentivize and facilitate 

additional central clearing. The 

Commission therefore is adopting the 

amendments to Rule 15c3–3, the 

requirement to segregate house and 

customer margin, and the requirement 

to ensure access to central clearing, as 

discussed in parts II.C, II.B.1, and II.B.2 

infra respectively. However, the 

Commission disagrees with these 

commenters that these changes alone, 

without also requiring that U.S. 

Treasury securities CCAs obligate their 

direct participants to submit eligible 

secondary market transactions for 

clearing, are enough. Merely 

incentivizing and facilitating greater 

central clearing is not sufficient, as 

those types of changes would not ensure 

that the current risks to U.S. Treasury 

securities CCAs are addressed. 

Therefore, for the reasons discussed in 

part II.2.a and b, the requirement to 

clear is also necessary. 

Fourth, one commenter argued that 

another way the Commission could 

incentivize greater central clearing 

without requiring it was to require FICC 

to consider amending its clearing fund 

structure to separate initial margin from 

default fund requirements that can be 

subject to loss mutualization, which 

would result in capital efficiencies for 

bank or bank-affiliated dealers and also 

may allow for increased participation 

from counterparty types that are 

restricted from participating in loss 

mutualization arrangements (e.g., 

money market funds).352 Another 

commenter also stated that changing the 

sponsored member clearing fund 

contribution to a pool of margin that is 

used in the event of a default of the 

underlying sponsored member would 

more closely align a sponsored 

member’s exposure to potential losses in 

a default scenario with its own 

creditworthiness (i.e., the defaulter pays 

first) and be more cost effective for 

sponsoring members.353 Another 

commenter stated that FICC must be 

required to separate initial margin from 

default fund requirements that can be 

subject to loss mutualization, prior to 

the imposition of a clearing 

requirement.354

The Commission recognizes that the 

particular clearing fund structure used 

by FICC may bring some level of capital 

inefficiency to banks who choose to join 

a CCA.355 However, the Commission 

previously has declined a commenter’s 

suggestion to impose such a 

requirement.356 As it stated when 

considering a similar comment when 

adopting the Covered Clearing Agency 

Standards, the Commission 

acknowledges that loss mutualization 

and other pooling-of-resources 

arrangements involve tradeoffs that a 

CCA generally should carefully assess 

and balance. A CCA may be better able 

to manage multiple defaults in extreme 

conditions more efficiently using pooled 

resources because the pooled resources 

would be greater than the resources of 

any single defaulting participant. 

Further, because the arrangements are 

prefunded, participants can model and 

manage the risks they face from the 

clearing agency while being able to take 

into account the amount of resources 

that they have provided to the clearing 

agency. The pooling of resources, 

however, can increase 

interdependencies among, and therefore 

the potential risks to, participants of the 

CCA. The use of loss mutualization and 

other pooling-of-resources arrangements 

generally should, to minimize systemic 

risk, balance the safety and soundness 

of the CCA against the potential for 

increased exposures among participants 

that may arise from the manner the CCA 

holds financial resources. For all these 

reasons, the Commission continues to 

believe that it should not impose such 

a requirement on CCAs, 

notwithstanding the potential capital 

efficiencies arising from a different 

clearing fund structure at a CCA. 

Pursuant to Rule 17ad–22(e)(23), a 

covered clearing agency must establish, 

implement, maintain and enforce 

written policies reasonably designed to 

disclose, among other things, key 

aspects of its default rules and 

procedures and the risks, fees, and other 

material costs participants incur by 

participating in the covered clearing 

agency. The availability of these policies 

and procedures should allow 

participants to understand in advance a 

covered clearing agency’s reliance on 

such resources and to consider their 

own ability to meet the CCA’s 

membership obligations, including with 

respect to financial resources, prior to 

becoming members of the covered 

clearing agency. 

Fifth, several commenters discussed 

facilitating cross-margining of indirect 

participants’ transactions in U.S. 

Treasury securities with those in U.S. 

Treasury futures as a method to 

incentivize additional clearing.357 One 

commenter stated that the Commission 

should take steps to allow crossmargining of customer transactions 

between Treasury securities and U.S. 

Treasury futures, because the reduced 

margin requirements obtained through 

cross-margining serves an important 

function in increasing market liquidity 

through balance sheet savings and 

incentivizing risk reduction through 

hedging. The commenter also referred to 

the work of the G–30, which observed 

that wider use of cross-margining would 

reduce the risk that increases in initial 

margin requirements on the futures leg 

of cash-futures basis trades result in 

forced sales of Treasury securities, 

which may have contributed to selling 

pressures in the market in March 

2020.358 Another commenter stated that 

cross-margining would lower costs for 

market participants by allowing them to 

apply margin across positions submitted 

for clearing through various 

clearinghouses. The commenter stated 

that this would ensure that a market 

participant can post margin adequate to 

support its positions without having to 


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359MFA Letter, supra note 81, at 11. The 

commenter further stated that the Commission 

should ensure indirect participants also can take 

into account offsetting positions when calculating 

margin requirements. MFA Letter II, supra note 125, 

at 4. 

360SIFMA/AMG Letter, supra note 35, at 8; ARB 

et al. Letter, supra note 81, at 9. 

361Self-Regulatory Organizations; the Fixed 

Income Clearing Corporation; Order Granting 

Approval of Proposed Rule Change To Amend and 

Restate the Cross-Margining Agreement Between 

FICC and CME, Exchange Act Release No. 98327 

(Sept. 8, 2023), 88 FR 63185, 63187 (Sept. 14, 2023); 

see also Exchange Act Release No. 90464 (Nov. 19, 

2020), 85 FR 75384, 75386 (Nov. 25, 2020) 

(approving a second amended and restated crossmargining agreement between the Options Clearing 

Corp. and CME); Exchange Act Release No. 38584 

(May 8, 1997), 62 FR 26602, 26604–05 (May 14, 

1997) (establishing a cross-margining agreement 

with the Options Clearing Corp., CME, and the 

Commodity Clearing Corporation). 

362 Id. 

363SIFMA/IIB Letter, supra note 37, at 13. 

364SIFMA/IIB Letter. supra note 37, at 13–14. 

365SIFMA/IIB Letter, supra note 37, at 14. 

366SIFMA AMG Letter, supra note 35, at 8. 

367See 12 CFR part 252 subpart H (regulations 

regarding SCCL); 12 CFR 217.10(c) (SLR regulation) 

and part 217 generally regarding bank capital 

requirements); see also Final Rule, SingleCounterparty Credit Limits for Bank Holding 

Companies and Foreign Banking Organizations, 83 

FR 38460 (Aug. 6, 2018). 

368SIFMA AMG Letter, supra note 35, at 8. 

369See FRBNY, Statement Regarding Aggregation 

of Agency Mortgage-Backed Securities Holdings 

(Oct. 6, 2022), available at https://

www.newyorkfed.org/markets/opolicy/operating_

policy_221006; 31 CFR part 375, Marketable 

Treasury Securities Redemption Operations 

(establishing the terms and conditions by which the 

U.S. Department of the Treasury may redeem 

outstanding, unmatured marketable Treasury 

securities). 

post margin in excess of regulatory 

requirements due to an inability to 

apply margin across platforms.359

Another commenter stated that the 

Commission should explore developing 

a framework that would allow cross 

margining of futures and securities 

transactions, and an additional 

commenter added that this type of 

framework would ensure a level playing 

field between direct and indirect 

members and noting that, unlike direct 

participants, clients are not permitted to 

cross-margin positions cleared at FICC 

with futures positions cleared at CME 

Group under FICC’s current crossmargining framework, which 

significantly increases clearing costs for 

clients (depending on the trading 

strategies involved), discouraging 

clearing and creating an unlevel playing 

field between direct members and 

clients at FICC.360

The current cross-margining 

agreement between FICC and CME is 

part of FICC’s rulebook, any changes to 

which have to be filed with the 

Commission pursuant to Section 19(b) 

of the Exchange Act. The Commission 

historically has supported and approved 

cross-margining at clearing agencies and 

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 agency risk by centralizing 

asset management, and harmonizing 

liquidation procedures.361 The 

Commission has stated that crossmargining arrangements may be 

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

the Exchange Act 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.362 For these 

reasons, the Commission continues to 

believe that market participants can 

benefit from cross-margining 

arrangements and encourages U.S. 

Treasury securities CCAs to consider the 

potential of such benefits. 

Sixth, commenters identified a 

number of regulations that purportedly 

could be changed to further incentivize 

central clearing that are outside the 

Commission’s jurisdiction. For example, 

one commenter stated that requiring 

counterparties to post margin for noncentrally cleared bilateral repos through 

internationally agreed upon standards 

could level the playing field for margin 

requirements in Treasury repos, 

whether or not centrally cleared, and 

therefore incentivize market 

participants to centrally clear repos.363

The Commission alone cannot prescribe 

standards applicable to all market 

participants with respect to uncleared 

repo, and imposing requirements solely 

upon entities regulated by the 

Commission could lead to potential 

regulatory arbitrage. In addition, the 

commenter stated that FICC should have 

the ability to access a Federal Reserve 

standing repurchase facility for FICC as 

a systemically important financial 

market utility, which would (i) reduce 

the need for a participant-funded 

liquidity resources at a CCA, thereby 

reducing costs and incentivizing further 

central clearing, and (ii) mitigate the 

increased concentration risk of 

substantially increasing the Treasury 

transactions cleared at FICC.364

However, the Commission does not 

have the authority to provide that 

access. 

In addition, the commenter stated that 

exempting a clearing member’s 

exposure to FICC’s CCLF from the 

Single Counterparty Credit Limits 

(‘‘SCCL’’) or increasing the SCCL with 

respect to exposures to FICC, due to the 

larger possible CCLF exposure that bank 

holding companies may end up 

incurring, would allow market 

participants to clear additional 

transactions at FICC without risking 

exceeding SCCL limits.365 Another 

commenter suggested that the 

Commission work with other regulators 

to advocate for improvements to 

prudential rules which would have the 

effect of enhancing liquidity in the U.S. 

Treasury market (i.e., the 

Supplementary Leverage Ratio and 

other capital requirements).366 The 

SCCL and the Supplementary Leverage 

Ratio, as well as other bank capital 

requirements, arise from regulations of 

the Board of Governors.367 Therefore, 

any changes to the SCCL and banking 

capital regulations are outside the 

Commission’s jurisdiction. 

One commenter suggested promoting 

alternatives to central clearing that 

could improve liquidity and strengthen 

the U.S. Treasury market. The 

commenter stated that CUSIP 

aggregation has been applied 

successfully in the past to agency 

mortgage-backed securities and may 

improve liquidity by increasing the size 

of certain off-the-run U.S. Treasury 

issuances. The commenter further stated 

that the U.S. Treasury could also 

continue to consider engaging in 

buybacks of existing U.S. Treasury 

securities as a way of improving 

liquidity. The commenter also stated 

that the Commission could further 

engage with the industry in discussions 

on how to expand all-to-all trading in 

secondary market cash transactions as a 

way to promote liquidity. Finally, the 

commenter stated that other recent rule 

proposals and enhancements to the 

TRACE reporting obligations for U.S. 

Treasury securities will in time give the 

Commission greater visibility into this 

market.368

In response to the comments 

regarding CUSIP aggregation and 

buyback of U.S. Treasury securities, 

those actions would be undertaken by 

either the Federal Reserve Bank of New 

York (or other market participants) or 

the U.S. Department of the Treasury, 

respectively.369 The Commission does 

not have the authority to conduct such 

actions, and these actions would not 

impact the overall level of central 

clearing in the market. In response to 

the comments regarding all-to-all 

liquidity, the Commission agrees that 

increased all-to-all trading could 

improve liquidity in the U.S. Treasury 

market and, as stated in the Proposing 


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370Proposing Release, supra note 14, 87 FR at 

64628; see also FRBNY Staff Report No. 1036, Allto-All Trading in the U.S. Treasury Market at 12– 

13 (Oct. 2022), available at https://

www.newyorkfed.org/medialibrary/media/research/ 

staff_reports/sr1036.pdf?sc_lang=en (discussing 

how central clearing could make all-to-all trading 

more likely to expand in the Treasury market, while 

also potentially increasing the costs). 

371MFA Letter, supra note 81, at 11–12; see also 

MFA Letter II, supra note 125, at 5. 

372SIA Partners Comment, supra note 52, at 18; 

see also id. at 74–75. 

373 17 CFR 240.17ad–22(e)(13). 

374CCA Standards Adopting Release, supra note 

10, 81 FR at 70829. 

375 17 CFR 240.17ad–22(e)(6). 

376 17 CFR 240.19b–4(a)(6)(i). 

377Regarding default management, see, e.g., FICC 

Rule 4, sections 6, 7, 7a, and 7b (addressing 

application of clearing fund deposits and other 

Amounts to defaulting members’ obligations, loss 

allocation waterfall, corporate contribution, and 

withdrawal from membership in the event of a loss 

allocation); FICC Rule 3A, sections 12, 15, and 16 

(addressing loss allocation in the Sponsored Service 

and the insolvency of either a sponsoring or 

sponsored member), supra note 19; Self-Regulatory 

Organizations; Fixed Income Clearing Corporation; 

Order Approving a Proposed Rule Change, as 

Modified by Amendment No. 1, to Amend the Loss 

Allocation Rules and Make Other Changes, 

Exchange Act Release No. 83970 (Aug. 28, 2018). 

Regarding margin methodologies, see e.g., FICC 

Rule 4, section 1b (setting forth the GSD unadjusted 

margin portfolio amount) and section 2a (describing 

the intraday supplemental required fund deposit), 

in conjunction with Rule 1 (defining the various 

components of the margin methodology, including, 

among other things, the VaR Charge, the Backtesting 

Charge, and the Margin Liquidation Adjustment 

Charge), supra note 19; see also Self-Regulatory 

Organizations; Fixed Income Clearing Corporation; 

Notice of Filing of Amendment No. 1 and Order 

Granting Accelerated Approval of a Proposed Rule 

Change, as Modified by Amendment No. 1, To 

Implement Changes to the Required Fund Deposit 

Calculation in the Government Securities Division 

Rulebook, Exchange Act Release No. 83362 (June 1, 

2018), 83 FR 26514 (June 7, 2018). 

378 17 CFR 240.17ad–22(e)(23)(i) and (ii). 

Release, believes that increased central 

clearing could, in fact, increase all-to-all 

trading.370 However, all-to-all trading 

does not, on its own, address the risks 

to CCAs that the proposal was designed 

to address. The Commission therefore 

believes that imposing requirements on 

CCAs to have their members centrally 

clear eligible secondary market 

transactions should proceed, regardless 

of the current status of all-to-all trading, 

to address these issues. Similarly, in 

response to the comments regarding 

TRACE reporting, the Commission does 

not believe that the increased reporting 

would address the risks to CCAs arising 

from current clearing practices in the 

U.S. Treasury market. Therefore, relying 

on reporting alone would not be 

sufficient. 

Eighth, one commenter stated that the 

Commission should require enhanced 

transparency regarding FICC’s 

margining calculations and default 

management procedures. The 

commenter states that the proposal does 

not set default management standards or 

require disclosure of such standards. 

The commenter asserts that while FICC 

has disclosed ‘‘key aspects’’ of its 

default rules and procedures, greater 

transparency into these procedures, 

including, in particular, with respect to 

how FICC manages the default risk of 

indirect participants, would be 

beneficial. The commenter also stated 

that the proposal does not set margin 

requirements or require transparency 

into how margin requirements are set. 

The commenter states that with respect 

to both default management and margin 

calculations, enhanced transparency 

would enhance confidence in, and the 

resilience of, FICC, which will, in turn 

increase market participants’ confidence 

in submitting additional transactions for 

clearing.371 Another commenter also 

referenced the ‘‘broad opacity’’ of FICC 

margin models and the challenges that 

posed for participants, stating that the 

participants’ inability to replicate FICC’s 

margin models left the direct and 

indirect participants as not being able to 

accurately predict the daily (or more) 

margin calls to a reasonable degree.372

The Commission’s existing rules 

address these issues and require 

transparency into default management, 

and margin methodology. On default 

management, Rule 17ad–22(e)(13) 

requires that a covered clearing agency 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure the 

covered clearing agency has the 

authority and operational capacity to 

take timely action to contain losses and 

liquidity demands and continue to meet 

its obligations by, at a minimum, 

requiring the covered clearing agency’s 

participants and, when practicable, 

other stakeholders to participate in the 

testing and review of its default 

procedures, including any close-out 

procedures, at least annually and 

following material changes thereto.373

When adopting the Covered Clearing 

Agency Standards, the Commission 

declined to prohibit or adopt specific 

loss allocation or default management 

tools suggested by commenters, relying 

upon the Commission’s belief that, 

when determining the content of its 

policies and procedures with respect to 

default management, each CCA must 

have the ability to enhance its policies 

and procedures to meet the evolving 

challenges and risks in the securities 

market that the CCA serves.374 For these 

reasons, the Commission continues to 

believe that it should not set particular 

default management procedures for 

CCAs. 

In addition, Rule 17ad–22(e)(6) 

requires that a CCA establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to cover, if the 

covered clearing agency provides 

central counterparty services, its credit 

exposures to its participants by 

establishing a risk-based margin 

system.375 Thus, CCAs are required to 

develop policies governing how they 

calculate margin. In addition, under the 

amendments to Rule 17ad–22(e)(6) 

being adopted in this release, CCAs will 

be obligated to have policies and 

procedures to calculate house margin 

separately from customer margin. 

Further, both default management and 

margin calculation generally constitute 

material aspects of the operations of a 

CCA, meaning that they should be 

considered stated policies, practices, or 

interpretations under Exchange Act 

Rule 19b–4.376 As such, they are subject 

to the filing obligations applicable to 

SROs under Section 19(b) of the 

Exchange Act. This means that the 

default management processes and 

margin methodologies are described in 

SRO rule filings upon which market 

participants may comment and that the 

Commission must review and approve. 

CCAs have adopted rules on these 

topics pursuant to the SRO rule filing 

process.377 The filing obligations under 

Section 19(b) of the Exchange Act 

provide transparency into the covered 

clearing agencies’ default management 

processes and margin methodologies. 

Second, in addition to the 

aforementioned obligations under the 

Covered Clearing Agency Standards 

specific to default management and 

margin, Rule 17ad–22(e)(23) also 

imposes a set of requirements related to 

transparency and disclosure. 

Specifically, a CCA is obligated to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for 

publicly disclosing all relevant rules 

and material procedures, including key 

aspects of its default rules and 

procedures, and providing sufficient 

information to enable participants to 

identify and evaluate the risks, fees, and 

other material costs they incur by 

participating in the CCA.378 In addition, 

a CCA must produce a comprehensive 

public disclosure that describes its 

material rules, policies, and procedures 

regarding its legal, governance, risk 

management, and operating framework, 

accurate in all material respects at the 

time of publication, that includes, 

among other things, a standard-bystandard summary narrative for each 

applicable standard set forth in 


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379 17 CFR 240.17ad–22(e)(23)(iii). 

380See, e.g., FICC Disclosure Framework, 

available at https://www.dtcc.com/-/media/Files/ 

Downloads/legal/policy-and-compliance/FICC_

Disclosure_Framework.pdf. 

381See, e.g., FICC Government Securities 

Division, Overview of the Clearing Fund 

Methodology (Oct. 2023), available at https://

www.dtcc.com/-/media/Files/Downloads/legal/ 

policy-and-compliance/GSD-Clearing-FundMethodology-Overview-October-2023.pdf; Comment 

Letter from FICC re: SR–FICC–2020–017 and SR– 

FICC–2020–804, available at https://www.sec.gov/ 

comments/sr-ficc-2020-017/srficc2020017-8451684- 

229787.pdf (describing the different capabilities 

provided at FICC to enable direct participants to 

determine their margin requirements, including, but 

not limited to a calculator that provides 

functionality to direct participants to enter ‘‘what 

if’’ position data and recalculate their VaR Charge 

to determine margin impact pre-trade execution and 

to see the impact to VaR if specific transactions are 

executed or to anticipate the impact of an increase 

or decrease to a current clearing position). 

382MFA Letter, supra note 81, at 11. 

383Proposing Release, supra note 14, 87 FR at 

64633. 

384Proposing Release, supra note 14, 87 FR at 

64634. 

385Currently, the covered clearing agency that 

clears and settles listed options transactions holds 

margin for customer trades separately from the 

proprietary trades of the submitting participant in 

an omnibus account. See Options Clearing Corp. 

Rules 601(c) and (d), available at https://

www.theocc.com/getmedia/9d3854cd-b782-450fbcf7-33169b0576ce/occ_rules.pdf (‘‘OCC Rules’’). 

This approach is also similar to the approach used 

for futures customers. See 17 CFR 1.22 and 

Advanced Notice of Proposed Rulemaking, 

Protection of Cleared Swaps Customers Before and 

After Commodity Broker Bankruptcies, 75 FR 

75162, 75163 (Dec. 2, 2010) (describing the futures 

model). 

386See Proposing Release, supra note 14, 87 FR 

at 64634 (discussing CCA Standards Proposing 

Release, supra note 8, 79 FR at 29547; CCA 

Standards Adopting Release, supra note 10, 81 FR 

at 70832–33). 

paragraph (e)(1) through (23) of the 

Covered Clearing Agency Standards 

section with sufficient detail and 

context to enable a reader to understand 

the CCA’s approach to controlling the 

risks and addressing the requirements in 

each standard.379 Thus, each CCA issues 

a public document designed to address 

each standard, including those with 

respect to fees, default management, and 

margin.380 In addition, CCAs provide a 

variety of additional tools to assist their 

participants in understanding their 

margin obligations, such as descriptions 

of the components, including their 

calculations, and margin calculators that 

can be used to estimate margin 

requirements based on potential 

changes to a participant’s portfolio.381

Accordingly, because of the existing 

framework applicable to transparency, 

the Commission disagrees that 

enhanced transparency into margining 

calculations and default management 

procedures is necessary or that it would 

meaningfully incentivize greater 

clearing. However, the Commission 

encourages market participants and 

CCAs to engage regarding the existing 

tools and potential additional resources 

that could be provided to better assist 

market participants at understanding 

potential margin obligations. 

Finally, one commenter encouraged 

the Commission to consider whether 

proposal should specifically require 

FICC to establish rules ensuring that 

fees charged by direct participants are 

transparent and reasonable.382 Section 

17A(b)(3)(E) of the Exchange Act 

requires that the rules of a clearing 

agency do not impose any schedule of 

prices, or fix rates or other fees, for 

services rendered by its participants. In 

light of this statutory provision, a rule 

such as that suggested by the 

commenter would not be appropriate. 

For all these reasons, the Commission 

disagrees with commenters that would 

support not requiring the clearance of 

eligible secondary market transactions. 

The Commission believes that requiring 

direct participants of U.S. Treasury 

securities CCAs to clear their eligible 

secondary market transactions is 

essential to improving risk management 

at U.S. Treasury securities CCAs 

(including contagion risk) and to 

obtaining the benefits of central clearing 

in the U.S. Treasury market, as 

discussed in part II.A.1.a supra. As 

discussed in more detail in parts III and 

IV infra, the Commission does not 

believe that further study is necessary, 

but believes that, as discussed in more 

detail in part III, a phased 

implementation schedule for the 

requirements discussed in part II, 

beginning with some of the items 

identified as incentives to central 

clearing, should address commenters’ 

concerns that the necessary market 

infrastructure is not in place to support 

the requirement to clear eligible 

secondary market transactions. 

B. Additional Changes to Covered 

Clearing Agency Standards 

The Commission also proposed 

additional changes to the Covered 

Clearing Agency Standards, designed to 

address the likely increase in the 

volume of U.S. Treasury securities 

transactions submitted for central 

clearing resulting from the proposed 

requirement that direct participants of a 

U.S. Treasury securities CCA submit 

eligible secondary market transactions 

for clearance and settlement. The 

Commission is adopting these 

additional changes, for the reasons 

discussed in more detail below. 

1. Netting and Margin Practices for 

House and Customer Accounts 

The proposed amendments to Rule 

17ad–22(e)(6)(i) would require a U.S. 

Treasury securities CCA to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, as applicable, 

calculate, collect, and hold margin 

amounts from a direct participant for its 

proprietary U.S. Treasury securities 

positions separately and independently 

from margin calculated and collected 

from that direct participant in 

connection with U.S. Treasury 

securities transactions by an indirect 

participant that relies on the services 

provided by the direct participant to 

access the covered clearing agency’s 

payment, clearing, or settlement 

facilities. This rule would prohibit a 

U.S. Treasury securities CCA from 

netting customer and proprietary 

positions. 

In the Proposing Release, the 

Commission stated it believed that the 

separation of house and customer 

positions could reduce the potential risk 

to the U.S. Treasury securities CCA 

arising from such transactions. Such 

changes should allow a U.S. Treasury 

securities CCA to better understand the 

source of potential risk arising from the 

U.S. Treasury securities transactions it 

clears and potentially further 

incentivize central clearing.383

Importantly, the amendment to Rule 

17ad–22(e)(6)(i) would not require that 

a CCA’s direct participant collect a 

specified amount of margin from its 

customers or determine customer 

margin in a particular manner, such as 

on a gross basis; the calculation and 

collection of margin between a CCA 

direct participant and its customers 

would be left to other applicable 

regulations and, to the extent 

applicable, bilateral negotiation between 

the member and its customer. As the 

Commission stated in the Proposing 

Release,384 the amendments to Rule 

17ad–22(e)(6)(i) would, in this way, 

require policies and procedures that 

closely resemble the calculation, 

collection, and holding of margin for 

listed options.385 When considering and 

adopting the Covered Clearing Agency 

Standards, the Commission noted that 

customer segregation can be achieved 

through such an omnibus account 

structure, where all collateral belonging 

to all customers of a particular member 

is commingled and held in a single 

account segregated from that of the 

member,386 which is consistent with the 

practice at the clearing agency for listed 

options and this amendment to Rule 

17ad–22(e)(6)(i). 


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387 ICE Letter, supra note 33, at 3; DTCC/FICC 

Letter, supra note 33, at 25; ICI Letter, supra note 

85, at 25–26; SIFMA/IIB Letter, supra note 37, at 

25–26; Tradeweb Letter, supra note 81, at 3; AIMA 

Letter, supra note 81, at 8; AFREF Letter, supra note 

33, at 5; SIFMA AMG Letter, supra note 35, at 8. 

388AIMA Letter, supra note 81, at 8. 

389SIFMA/IIB Letter, supra note 37, at 25. 

390SIFMA/IIB Letter, supra note 37, at 26–27; ICI 

Letter, supra note 85, at 19 (supporting strong 

protections for funds in whatever models FICC 

chooses to adopt, including LSOC protections, and 

stating that customer funds must be identified as 

fund assets and have the benefit of customer 

treatment); AIMA Letter, supra note 81, at 8 (stating 

that the Commission should specify that client 

initial margin should not be included as part of a 

clearing agency’s default waterfall and subject to 

loss mutualization); ARB et al. Letter, supra note 

81, at 8 (‘‘in no event should margin posted for 

client positions be available for use as part of a 

clearing agency’s default waterfall’’); MFA Letter, 

supra note 81, at 7 (‘‘it is crucial that indirect 

participants are able to post margin on a segregated 

basis such that their clients are not subject to the 

credit risk of others (and, likewise, that their funds 

are not subject to loss mutualization’’); see also 

SIFMA AMG Letter, supra note 35, at 12–13 (‘‘it 

will be difficult to support expanding cleared 

trading in U.S. Treasury securities until we have a 

framework which ensures customers can access 

clearing solutions where their margin and collateral 

will be adequately protected, including from loss 

mutualization by the clearing agency’’). 

391Letter from Ann Battle, Senior Counsel, 

Market Transitions, International Swaps and 

Derivatives Association, Inc., at 2 (Dec. 27, 2022) 

(‘‘ISDA Letter’’). 

392Proposing Release, supra note 14, 87 FR at 

64634 (discussing 17 CFR 22.15). 

393See, e.g., Protection of Cleared Swaps 

Customer Contracts and Collateral; Conforming 

Amendments to the Commodity Broker Bankruptcy 

Provisions, 77 FR 6336, 6339 (Feb. 7, 2012) 

(describing the LSOC approach and adopting final 

rules for this approach). 

394See Proposing Release, supra note 14, 87 FR 

at 64634 (discussing CCA Standards Adopting 

Release, supra note 10, 81 FR at 70832). 

395 Id. 

396SIFMA/IIB Letter, supra note 37, at 26 

(analogizing to the CFTC requirement that DCOs 

collect at least 100% of margin to cover customer 

positions, see 17 CFR 39.13(g)(8)). 

397 IDTA Letter, supra note 66, at 4. 

Commenters generally supported the 

proposed amendment to Rule 17ad– 

22(e)(6)(i).387 One commenter agreed 

that this amendment would further the 

risk management benefits associated 

with central clearing and help avoid a 

direct participant’s disorderly default 

because FICC would have a more 

holistic view of the market than 

currently available, and that because a 

direct participant’s margin would be 

calculated, collected and held 

separately and independently than that 

of its customers, the direct participant’s 

trades with its customers can be netted 

against the direct participant’s trades 

with other direct participants.388 One 

commenter stated that the proposed 

changes with respect to risk 

management requirements would 

facilitate the proposal’s goals of 

increased central clearing, and that it 

would also appropriately assign the risk 

of centrally cleared customer U.S. 

Treasury securities transactions to the 

customer.389

However, commenters also raised 

several additional issues with respect to 

the separation of house and customer 

margin that the Commission will 

address below. 

First, several commenters argued that 

this rule should also prohibit the use of 

separate customer margin for any other 

purpose, including loss mutualization 

(i.e., when a clearing agency uses nondefaulting customers’ funds in the event 

of a default, thereby ‘‘mutualizing’’ the 

loss).390 Another commenter stated that 

prohibiting the use of customer margin 

for loss mutualization would mitigate 

higher risk-weighted assets under 

certain bank capital rules and may also 

facilitate clearing for market 

participants that are subject to 

restrictions regarding exposure to loss 

mutualization.391

What the commenters seek is akin to 

the requirements applicable to 

derivatives clearing organizations 

clearing swaps, that is, the ‘‘legally 

segregated, operationally commingled’’ 

(‘‘LSOC’’) model, which, as the 

Commission stated in the Proposing 

Release, differs from the requirements 

proposed in Rule 17ad–22(e)(6)(i).392

Under such an approach, customer 

collateral may be held in one combined 

account and commingled, but in the 

event of a customer default, the 

collateral of non-defaulting customers 

would not be available to cover any 

losses attributable to the defaulting 

customer (i.e., they would be legally 

separated from the collateral of the 

defaulting customer and not available 

for loss mutualization).393 As discussed 

in the Proposing Release, the 

Commission previously has declined to 

require such an approach for covered 

clearing agencies, preferring to allow 

each covered clearing agency to 

determine the method that works best 

for the products it clears and markets it 

serves.394 When discussing that 

conclusion, the Commission also noted 

that this type of segregation does not 

occur at the CCP level under the current 

market structure for cash securities and 

listed options, and that customer 

positions and funds in the cash 

securities and listed options markets are 

eligible for protection under SIPA, 

which is not the case for futures and 

cleared swaps.395

The Commission continues to believe 

that it would not be appropriate to 

require an LSOC model for U.S. 

Treasury security CCAs, because 

customer positions and funds in the 

market for cash securities and listed 

options would be eligible for protection 

under SIPA, unlike in other markets 

which use an LSOC model. However, a 

U.S. Treasury securities CCA may 

choose to offer such a model, based 

upon what works best for both direct 

and indirect participants or to satisfy 

other regulatory obligations. In practice, 

U.S. Treasury securities CCAs seeking to 

provide services that would allow 

broker-dealers to rehypothecate 

customer margin to the CCA, as 

discussed further in part II.C.2 infra, 

would, consistent with that flexibility, 

choose to adopt practices that would 

ensure that customer funds can be used 

only for a loss arising from customer 

activity and could not be used for loss 

mutualization. Thus, adopting the 

changes described in section II.C.2 

below should also result in U.S. 

Treasury securities CCAs incorporating 

access models that provide for the type 

of segregation requested by the 

commenters. 

Another commenter argued that the 

Commission should consider additional 

changes that would compel FICC to 

require that all margin requirements 

related to customer positions be 

satisfied by those customers, to 

appropriately allocate risk to those 

customers and lower barriers to 

participation in central clearing for 

customers by direct participants who 

otherwise may not be able to submit 

margin on behalf of their customers.396

The requirement to collect, calculate, 

and hold customer margin separate from 

proprietary margin should ensure that, 

at the CCA level, the risks arising from 

customer clearing are sufficiently 

margined to protect the CCA from the 

exposure arising from customer 

clearing. In the event that a direct 

participant of the CCA is not able to 

submit margin on behalf of its 

customers, such participants could elect 

to take advantage of the amendments to 

Rule 15c3–3, as discussed in part II.C.2 

infra, regarding Rule 15c3–3, which 

would require the participant to collect 

100% customer margin in order to be 

able to onward post the margin. 

An additional commenter described 

the proposed rule as requiring 

customers to be margined individually 

and requiring FICC to collect margin 

even where a member’s overall 

customer position is netted, which 

would ‘‘exponentially’’ increase the 

margin requirement on all those 

involved in the U.S. Treasury market.397

The Commission disagrees that the 

proposed amendments to Rule 17ad– 

22(e)(6)(i) would require customers to 


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398Proposing Release, supra note 14, 87 FR at 

64634. 

399 Id. 

400 IDTA Letter, supra note 66, at 4; see also FICC 

Rule 4, section 14, supra note 19. 

401 IDTA Letter, supra note 66, at 5. 

402 IDTA Letter, supra note 66, at 5. 

403 IDTA Letter, supra note 66, at 6. 

404See DTCC 2023 White Paper, supra note 107, 

at 6 (discussing that the proposal would allow the 

option to calculate and collect margin associated 

with customer activity on a gross or net basis 

depending on the client clearing model selected by 

the member and stating that FICC would offer 

options via different access models that would 

allow those parties to balance the benefits of netting 

and segregation in different ways). 

405 15 U.S.C. 78s(b); see also 15 U.S.C. 78s(c). 

406AIMA Letter, supra note 81, at 8. 

407Adopting Release, Clearing Agency 

Governance and Conflicts of Interest, Exchange Act 

Release No. 98959 (Nov. 16, 2023), 88 FR 84454 

(Dec. 5, 2023) (adopting Rule 17ad–25(j)). 

408Proposing Release, supra note 14, 87 FR at 

64635. 

409 Id. 

410MFA Letter, supra note 81, at 5. 

411 DTCC/FICC Letter, supra note 33, at 14, 18. 

412 ICE Letter, supra note 33, at 3. 

be margined individually or that FICC 

would be required to collect margin 

even where a participant’s overall 

position is netted. As discussed in the 

Proposing Release, the proposed 

changes would require that a U.S. 

Treasury securities CCA calculate, 

collect, and hold margin for positions in 

U.S. Treasury securities transactions of 

a direct participant in a U.S. Treasury 

securities CCA separately from those of 

customers or other indirect participants 

that rely on the direct participant to 

access the covered clearing agency’s 

payment, clearing, or settlement 

facilities, but this does not mandate the 

calculation of margin for individual 

customers, that is, on a gross basis for 

each customer.398 A U.S. Treasury 

securities CCA would have the 

discretion to collect a single netted 

amount for each clearing member’s 

customer account as a whole, that is, 

netting each customer’s margin against 

that of other customers within the 

overall customer account.399

The commenter also discusses the 

impact of this purported gross 

margining on small and mid-size brokerdealers who are disproportionately 

affected by FICC’s Excess Capital 

Premium (‘‘ECP’’) charge, which is a 

margin add-on that collects a premium 

when a member’s VaR charge exceeds 

the member’s Net Capital, net assets or 

equity capital (as applicable to that 

member based on its type of 

regulation).400 The commenter 

explained the potential impact of the 

ECP charge in conjunction with FICC’s 

Sponsored Service, stating that ‘‘the 

combination of gross margining and ECP 

currently in use under the Sponsored 

Model, and what is prescribed in the 

Proposed Rule, effectively prevents 

smaller and middle market broker 

dealers from materially participating in 

the Treasury market.’’ 401 The 

commenter states that the potential 

effect of the ECP charge would be 

exacerbated when customer/ 

institutional counterparty margin is 

included in the calculation, and the 

surcharge prevents smaller independent 

broker-dealers from sponsoring 

institutional counterparties/ 

customers.402 The commenter states that 

the proposal must be changed to ensure 

that the combined effect of gross 

margining and the ECP does not 

excessively burden smaller, middlemarket broker dealers and their 

institutional investor customers.403 The 

commenter’s concerns regarding the 

interplay between purported required 

gross margining and the ECP charge 

rests on the assumption that gross 

margin is required under the proposal, 

which, as discussed in the prior 

paragraph, is not the case. In addition, 

FICC recently has indicated that it 

intends to make available client clearing 

models that do not require gross margin, 

consistent with its current offerings.404

Therefore, the Commission does not 

believe that the proposal needs to be 

changed to address this issue. With 

respect to the ECP charge on its own, 

the Commission is not taking any action 

with respect to the ECP charge as part 

of adopting these new requirements. 

The ECP charge is part of FICC’s 

existing rulebook, and any change to 

that rulebook would be made pursuant 

to the proposed SRO rule change 

process under Section 19(b).405

Another commenter stated that the 

Commission should encourage FICC to 

hear and consider input from indirect 

participants regarding potential changes 

to fee and governance models.406 The 

Commission has adopted a requirement 

that registered clearing agencies must 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to solicit, consider, 

and document its consideration of the 

views of participants and other relevant 

stakeholders of the registered clearing 

agency regarding material developments 

in its governance and operations on a 

recurring basis.407 Requiring these 

policies and procedures should ensure 

that FICC considers input from indirect 

participants regarding potential changes 

to fee and governance models. 

For the reasons discussed above, the 

Commission is therefore adopting the 

amendments to Rule 17ad–22(e)(6)(i) as 

proposed. 

2. Facilitating Access to U.S. Treasury 

Securities CCAs 

Proposed Rule 17ad–22(e)(18)(iv)(C) 

would require that a U.S. Treasury 

securities CCA establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to, 

as applicable, ensure that it has 

appropriate means to facilitate access to 

clearance and settlement services of all 

eligible secondary market transactions 

in U.S. Treasury securities, including 

those of indirect participants, which 

policies and procedures the U.S. 

Treasury securities CCA’s board of 

directors reviews annually. In the 

Proposing Release, the Commission 

explained that this provision does not 

prescribe specific methods for market 

participants to obtain indirect access to 

a U.S. Treasury securities CCA.408

In the Proposing Release, the 

Commission stated its understanding 

that indirect participants may have 

significantly different preferences with 

respect to how they access and obtain 

clearing services from direct 

participants of U.S. Treasury securities 

CCAs. The Commission explained that 

this proposed requirement is intended 

to help ensure that all U.S. Treasury 

security CCAs review their indirect 

access models and ensure that they 

facilitate access to clearance and 

settlement services in a manner suited 

to the needs and regulatory 

requirements of market participants 

throughout the U.S. Treasury securities 

market, including indirect 

participants.409

a. Comments Supporting the 

Commission’s Proposed Rule 

Commenters generally supported the 

Commission’s attention to the need for 

appropriate access to the U.S. Treasury 

securities CCA,410 and several 

commenters specifically agreed that the 

Commission should not prescribe any 

particular model. One commenter 

cautioned that dictating a single model 

of clearing would close off clearing to 

many market participants, force indirect 

participants to bear additional clearing 

costs, increase concentration, reduce 

competition, and negatively impact 

market liquidity.411 In addition, another 

commenter stated that clearing agencies 

should have flexibility to innovate in 

this area.412 Another commenter stated 

that it supported the proposal’s 

approach of allowing clearing agencies 

to engage on potential reforms directly 

with affected market participants via the 

clearing agencies’ existing rulemaking 

processes, particularly given the many 


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413 ISDA Letter, supra note 391, at 3. 

414SIFMA/IIB Letter, supra note 37, at 23. 

415See, e.g., ARB et al. Letter, supra note 81, at 

7; MFA Letter II, supra note 125, at 3–4; see also 

Citadel Letter, supra note 81, at 7. 

416ARB et al. Letter, supra note 81, at 7; see also 

Citadel Letter, supra note 81, at 7. 

417See Citadel Letter, supra note 81, at 7; ARB 

et al. Letter, supra note 81, at 6. 

418AIMA Letter, supra note 81, at 6. 

risks involved and given that various 

models may be appropriate for different 

firms and different situations.413

Another commenter asked the 

Commission to retain optionality in 

access models for U.S. Treasury 

securities CCAs, because all access 

models have costs and benefits and 

different access models may be 

appropriate for different market 

participants or commercial 

arrangements. The commenter agreed 

with the Commission that neither the 

Commission nor the rulebook of a U.S. 

Treasury securities CCA should 

mandate a single approach to access or 

require that direct participants that clear 

for indirect participants offer all 

possible access models. The commenter 

stated that a U.S. Treasury securities 

CCA should provide the flexibility 

necessary to allow market participants 

to match access models with optimal 

use cases, which would encourage 

maximum market participation from a 

diverse group.414

The Commission agrees with these 

commenters regarding the need for 

flexibility in a U.S. Treasury securities 

CCA’s access models. These CCAs 

should be able to develop models that 

meet the needs of different market 

participants, and they should not 

mandate a single approach to access or 

require that direct participants that clear 

for indirect participants offer all 

possible access models. When 

considering whether its models meet the 

needs of different market participants, a 

U.S. Treasury securities CCA generally 

should consider certain topics related to 

its access models, such as their 

sustainability, the need for additional 

models or revisions, and potential 

applicability of models used in other 

markets, as part of the CCA’s 

consideration of its compliance with 

this proposed rule. Many commenters 

also expressed that the Commission 

should impose additional requirements 

regarding access to a U.S. Treasury 

securities CCA. These comments are 

discussed in the following parts II.B.2.b 

and c. 

b. Comments Regarding the 

Commission’s Authority To Require a 

CCA To Accept Done Away 

Transactions 

Several commenters stated that the 

Commission should require that a U.S. 

Treasury securities CCA obligate its 

members to accept done-away 

transactions and/or that the Commission 

should prohibit anticompetitive 

practices at CCPs, including prohibiting 

clearing members from requiring clients 

to bundle execution and clearing.415

The commenters argued that the 

Commission had the statutory authority 

to implement such a requirement. First, 

the commenters stated that ‘‘since a 

clearing requirement cannot be 

implemented in the Treasury market 

unless the Commission ensures that 

both direct and indirect participant have 

a way to access a clearing agency, the 

two topics are inseparable and the 

Commission can rely on the statutory 

authority underlying the clearing 

requirement in order to address related 

access issues, including promoting the 

prompt and accurate clearance and 

settlement of Treasury securities.’’ 416

Second, the commenters stated that 

Section 17A of the Exchange Act grants 

the Commission broad authority to 

improve access and competitive 

practices at a clearing agency. The 

commenters identified the 

Commission’s authority to adopt rules 

for clearing agencies that are necessary 

or appropriate in the public interest or 

otherwise in furtherance of the purposes 

of this chapter, noting that the purposes 

of Section 17A include maintaining fair 

competition among brokers and dealers 

and scrutinizing clearing agency rules to 

ensure they do not permit unfair 

discrimination among participants in 

the use of the clearing agency and do 

not impose any burden on competition 

not necessary or appropriate.417 Another 

commenter stated that the Commission 

has the authority in Section 17A to 

prohibit anticompetitive practices at all 

CCAs.418

Similarly, one commenter asserted 

that requiring a direct participant that 

offers clearing services to indirect 

participants to accept those indirect 

participants’ done away transactions 

would be consistent with Exchange Act 

Section 17A, including, in particular, 

requirements relating to addressing 

unnecessary costs, maintaining fair 

competition, removing impediments to 

a national market system, and 

promoting the public interest and 

protection of investors. The commenter 

also suggested, at a minimum, that the 

Commission should require that if a 

clearing agency permits its direct 

participants to condition an indirect 

participant’s access to clearing on the 

indirect participant also executing 

transactions with the direct participant 

or its affiliate, the clearing agency must 

specify in its rules when such 

conditional access is permitted, which 

should be limited to circumstances 

where the clearing agency can show 

such conditional access is consistent 

with the Exchange Act. 

The commenters cited several 

provisions of Section 17A in support of 

their views. First, several commenters 

referenced language in Section 

17A(a)(1), which sets forth the 

Congressional findings underpinning 

Section 17A. Specifically, Congress 

found that, inefficient procedures for 

clearance and settlement impose 

unnecessary costs on investors and 

persons facilitating transactions by and 

acting on behalf of investors, and that 

the linking of all clearance and 

settlement facilities and the 

development of uniform standards and 

procedures for clearance and settlement 

will reduce unnecessary costs and 

increase the protection of investors and 

persons facilitating transactions by and 

acting on behalf of investors. These 

findings, including the reference to 

‘‘unnecessary costs,’’ do not provide the 

Commission with authority to adopt 

rules requiring CCAs to impose 

particular requirements on their direct 

participants regarding the direct 

participants’ business models. Instead, 

they represent Congress’ findings about 

the consequences of the situation at the 

time Section 17A was adopted in 1975. 

Second, the commenters relied upon 

language in Section 17A(a)(2) setting 

forth the Congressional direction to the 

Commission regarding a national system 

for clearance and settlement. This 

direction instructs the Commission to 

take into account, among other things, 

the maintenance of fair competition 

among brokers and dealers when 

facilitating the establishing of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions. 

Third, commenters relied upon 

language in Section 17A(b)(3)(F) and (I). 

These provisions set forth certain 

requirements for a clearing agency’s 

rules that must be met in order for the 

Commission to register the clearing 

agency. In the portions cited by 

commenters, Section 17A(b)(3)(F) states 

that the clearing agency’s rules should 

be, among other things, designed to 

remove impediments to and perfect the 

mechanism of a national system for the 

prompt and accurate clearance and 

settlement of securities transactions, 

and, in general, to protect investors and 

the public interest, and that they should 

not be designed to permit unfair 

discrimination among participants in 

the use of the clearing agency. Section 


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419Specifically, the definition of an eligible 

secondary market transaction would simply 

identify various types of transactions but would not 

favor or require one over another. 420Proposing Release, supra note 14, 88 FR at 

64635. 

421 In addition, the Commission notes that any 

additional model would have to be consistent with 

Section 17A(b)(3)(E), which requires that the rules 

of a registered clearing agency not impose any 

schedule of prices, or fix rates or other fees, for 

services rendered by its participants. 

422MFA Letter, supra note 81, at 9. 

423SIFMA AMG Letter, supra note 35, at 9–10. 

424MFA Letter, supra note 81, at 5; MFA Letter 

II, supra note 125, at 3–4. 

425MFA Letter, supra note 81, at 7; MFA Letter 

II, supra note 125, at 3–4. 

17A(b)(3)(I) states that the clearing 

agency’s rules should not impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of this chapter. 

The type of requirement sought by 

commenters differs from the 

requirement to clear eligible secondary 

market transactions, in that the 

requirement to clear eligible secondary 

market transactions relates to 

transactions that the direct participant 

already has determined to enter into, 

based on its own business model.419 It 

is not requiring the direct participant to 

engage in particular transactions or to 

offer particular business models. By 

contrast, the commenters’ support for a 

prohibition on anti-competitive 

practices or a requirement to accept 

done-away transactions would require 

clearing agencies to, in turn, require 

their direct participants to transact with 

their customers in specific ways and 

limit their ability to offer certain types 

of pricing services. As discussed in the 

Proposing Release, the current client 

clearing models in place at FICC allow 

for the submission of done-away 

transactions and allows non-FICC 

entities to access the CCA through 

multiple direct participants, but do not 

require any direct participant to submit 

done-away transactions on behalf of 

other market participants.420 Therefore, 

the Commission disagrees that the 

failure to require the submission of 

done-away transactions necessarily 

constitutes ‘‘unfair discrimination,’’ as 

discussed in Section 17A(b)(3)(F). 

Moreover, in order to encourage market 

participants to provide services to 

enable indirect access to central 

clearing, the Commission believes it is 

best not to remove the ability of a direct 

participant of a U.S. Treasury securities 

CCA to determine what risk it will take 

with respect to guaranteeing 

transactions to the CCA. In addition, the 

Commission would not agree with the 

commenter that, at this time, the current 

access models offered by the existing 

U.S. Treasury securities CCA constitute 

a burden on competition that is not 

necessary or appropriate, as discussed 

in Section 17A(b)(3)(I). 

More generally, the Commission 

disagrees that it should impose a 

particular access model at this time. The 

Commission is adopting a number of 

changes with regard to the method by 

which CCAs will provide services to the 

U.S. Treasury market, including the 

segregation of house and customer 

margin and the potential ability to use 

Rule 15c3–3 to rehypothecate customer 

margin to the CCA to meet margin 

requirements, and regarding the CCA’s 

obligations with respect to ensuring 

access. These changes will present both 

new obligations, but also potentially 

new business opportunities, for existing 

direct participants of the U.S. Treasury 

securities CCA. It is appropriate to allow 

the U.S. Treasury market to take these 

new requirements into account, before 

determining that additional access 

models are needed. Currently, FICC’s 

models do allow for done-away 

transactions, and the Commission 

therefore disagrees that an additional 

model is a prerequisite to the 

requirement to clear eligible secondary 

market transactions.421

Finally, a commenter also stated that 

in order to satisfy the proposal’s 

principles-based access requirement, a 

clearing agency should have to 

demonstrate that, for each clearing 

model it considers necessary to offer to 

satisfy that access standard, the clearing 

agency is clearing a material volume of 

transactions through that model (i.e., if 

permitting done away clearing is 

necessary for the clearing agency to 

satisfy the proposal, then the clearing 

agency must demonstrate that material 

volume of done away clearing is 

actually taking place).422 The 

Commission agrees with the commenter 

that the CCA generally should consider 

the volumes and proportion of the 

market that are being centrally cleared 

through different access models as part 

of the CCA’s consideration of whether 

its access models are meeting the needs 

of the market. 

c. Other Comments Regarding Access 

Other commenters supported 

additional Commission requirements 

regarding customer clearing models, 

particularly with respect to done-away 

transactions. One commenter stated that 

the Commission needs to be more 

prescriptive in directing covered 

clearing agencies on how they design 

their access models, disagreeing with 

the amount of discretion left to the 

clearing agency and its board. The 

commenter stated that a successful 

clearing model must also facilitate and 

incentivize the clearing of ‘‘done away’’ 

transactions, which will require changes 

to incentives so that clearing brokers are 

compensated for facilitating this 

activity. The commenter identified ‘‘the 

only viable path’’ to a clearing 

requirement as the Commission’s 

issuing a detailed rulemaking 

establishing a common clearing model 

and standards which must be met by 

any U.S. Treasury securities CCA, 

including FICC.423

The Commission addressed similar 

comments in the discussion in part 

II.B.2.b supra. As discussed there, the 

Commission is not prescribing 

particular access models. The 

Commission agrees with commenters 

that a workable done-away model will 

be critical to this market, to 

accommodate the increased central 

clearing that would result from 

implementation of this rule, and 

encourages FICC and other market 

participants to consider how to offer 

and price the currently available models 

to ensure that indirect participants can 

access central clearing. 

One commenter stated that the 

Commission should adopt more robust 

and direct measures to ensure fair and 

open access, specifically to make sure 

that market participants have sufficient 

access to clearing.424 This commenter 

identified three overarching principles 

or concerns with respect to FICC’s 

current clearing access models ‘‘that 

must be addressed in any final rule.’’ 

First, the commenter stated that FICC’s 

rules must ensure that an indirect 

participant can consolidate the clearing 

of its portfolio in one or a small number 

of direct participants by requiring a 

direct participant offering customer 

clearing to accept transactions executed 

by the customer with third-party 

executing firms (that is, to accept ‘‘doneaway’’ transactions). The commenter 

stated that under the current FICC rules, 

indirect participants may be prevented 

by their clearing firms from clearing 

these ‘‘done-away’’ transactions, which 

means that the indirect participant often 

needs to establish a clearing 

relationship with each executing 

counterparty, which divides portfolios, 

increases margin costs and operational 

complexity, and potentially reduces 

netting efficiencies.425 In response to 

this comment, for the reasons explained 

above, the Commission is not 

prescribing particular access models. 

Second, the commenter stated that 

indirect participants should be able to 

access central clearing models providing 

for FICC to guarantee settlement of their 


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426MFA Letter, supra note 81, at 7; see also MFA 

Letter II, supra note 125, at 4. 

427See, e.g., ICE Clear Credit Rule 20A–02(a) 

(describing what happens in the event that FICC 

determines to effect the closing-out Process for 

client-related positions of a defaulting participant); 

CME Group Exchange Rule 802.G(1) (describing the 

DCO’s ability to terminate transactions in a 

customer futures account). 

428MFA Letter, supra note 81, at 7. 

429SIFMA/IIB Letter, supra note 37, at 24. 

430MFA Letter II, supra note 125, at 5. 

431SIFMA/IIB Letter, supra note 37, at 23. 

432SIFMA/IIB Letter, supra note 37, at 24. 

433 Id. at 25. 

434Proposing Release, supra note 14, 87 FR at 

64623. 

transactions, which the commenter 

asserts is not the case with certain 

models today including FICC’s 

correspondent and prime broker 

models. The commenter states that these 

models do not afford indirect 

participants the benefits of central 

clearing because settlement of the 

transactions they clear through those 

models remains dependent upon the 

direct participant because the indirect 

participant does not face FICC directly. 

The commenter states that because a 

clearing mandate would, in practice, 

force many market participants to 

contract with FICC direct participants to 

access clearing (and would disallow 

various bilateral settlement models), it 

is critical that the Commission ensure 

that settlement of such market 

participants’ transactions is not 

contingent upon circumstances outside 

the indirect participants’ control, 

including, for example, the solvency of 

a direct participant.426

The Commission recognizes that 

certain access models offered by FICC 

may not result in a contractual 

relationship or direct obligation 

between FICC and the indirect 

participant, meaning that FICC itself 

cannot guarantee settlement of such 

transactions. The Commission observes 

that this generally would be the case in 

any agent clearing relationship in which 

an indirect participant relies upon a 

direct participant to submit transactions 

for clearing on its behalf. For example, 

customers who access DCOs through an 

FCM that is a direct participant in the 

DCO may face exposure if the FCM fails. 

DCO rules generally require that it take 

steps to port the customer transactions 

(i.e., to transfer the customer positions 

to a new direct participant if the 

customer’s original direct participant 

defaults), but ultimately retain the 

ability to close out the transactions if 

needed, leaving the customer to seek 

redress from its direct participant.427

However, this structure still provides 

the benefits of central clearing to the 

market as a whole, as described in part 

II.A.1 supra, despite the fact that an 

indirect participant may face continued 

exposure to its agent direct participant. 

Third, the commenter states that an 

indirect participant should have the 

ability (although not the obligation) to 

fund the margin obligations of the direct 

participant clearing on its behalf which 

are attributable to the indirect 

participant. The commenter states that 

given that many indirect participants 

have fiduciary obligations to their own 

clients, it is crucial that indirect 

participants are able to post margin on 

a segregated basis such that their clients 

are not subject to the credit risk of 

others (and, likewise, that their funds 

are not subject to loss mutualization), 

which would promote systemic risk 

mitigation by facilitating a defaulterpays model for clearing by indirect 

participants.428 The Commission 

addressed this issue in its discussion of 

a similar comment in part II.A.2.a.ii 

supra. 

One commenter stated that the 

Commission should undertake a study 

of possible models to access U.S. 

Treasury securities CCAs, including 

models used in other markets. The 

commenter stated that current access 

models may not be suited for all 

participants or commercial 

arrangements, for various reasons 

including FICC membership 

requirements, operational constraints, 

and resource costs associated with legal 

documentation. The commenter stated 

that implementing a central clearing 

requirement without a comprehensive 

analysis regarding the suitability of 

current models to access U.S. Treasury 

securities CCAs and whether there is a 

need for additional models or revisions 

to current models could drive market 

participants away from transacting with 

direct participants or from the Treasury 

market entirely, if such participants do 

not believe there is a reasonable means 

of accessing a CCA. The commenter 

stated that such study should take place 

prior to the adoption of any rule 

requiring additional central clearing.429

Another commenter suggested that the 

Commission conduct a holistic review 

of FICC rules to ensure fair access for all 

market participants (both direct 

participants and indirect participants), 

prior to imposing any requirements.430

The Commission does not agree that 

a formal study or holistic review of 

access models must occur before 

adoption of the proposal. As discussed 

in part II.C.2 supra, a U.S. Treasury 

securities CCA generally should 

consider these topics, such as the 

sustainability of current models and the 

need for additional models or revisions, 

as well as the potential applicability of 

models used in other markets, as part of 

the CCA’s consideration of its 

compliance with this proposed rule. 

The Commission will have the 

opportunity to consider these issues as 

well, in its review of any changes to 

access models filed pursuant to Section 

19(b) of the Exchange Act. 

Finally, one commenter stated that 

the Commission’s goal of ensuring 

access for indirect participants to U.S. 

Treasury securities CCAs should be 

balanced against sufficiently robust 

membership criteria to ensure risk is 

appropriately managed.431 The 

commenter cautioned that any 

expansion of access to U.S. Treasury 

securities CCA services should not relax 

membership requirements essential for 

appropriate risk management.432 The 

commenter stated that less stringent 

membership requirements in the name 

of increasing access to central clearing 

would increase the risk of a participant 

default, increasing risk to FICC.433 The 

Commission agrees with the commenter 

that membership requirements are 

essential to a covered clearing agency’s 

risk management. As the Commission 

stated in the Proposing Release, 

membership requirements help to guard 

against defaults of any CCP member, as 

well as to protect the CCP and the 

financial system as a whole from the 

risk that one member’s default could 

cause others.434 Membership 

requirements will remain essential even 

with the requirement to clear eligible 

secondary market transactions, and U.S. 

Treasury securities CCAs generally 

should not relax membership 

requirements to accommodate such a 

requirement. A U.S. Treasury securities 

CCA is subject to Rule 17ad–22(e)(18)(i), 

(ii), and (iii), which requires that a CCA 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to establish 

objective, risk-based, and publicly 

disclosed criteria for participation, 

which permit fair and open access by 

direct and, where relevant, indirect 

participants and other financial market 

utilities, require participants to have 

sufficient financial resources and robust 

operational capacity to meet obligations 

arising from participation in the clearing 

agency, and monitor compliance with 

such participation requirements on an 

ongoing basis. These requirements 

should help ensure that CCAs are not 

able to use less stringent membership 

requirements to comply with the 

requirement to clear eligible secondary 

market transactions. Moreover, any 

changes to FICC’s membership 


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435 ICI Letter, supra note 85, at 26–28. 

436See FICC Rule 11, section 2, supra note 19; 

FICC Buyside FAQ, supra note 169, at 2–3. 

437 ICI Letter, supra note 85, at 27. 

438See note 427 supra. 439 ICI Letter, supra note 85, at 27–28. 

440See FICC Rule 3A, section 14(c) (stating that 

FICC would rely upon Rule 22, section 3 to close 

out Sponsored Member transactions and to 

determine the amount owed to or due from a 

Sponsoring Member), supra note 19. 

requirements would necessarily 

encompass a change to FICC’s Rules, 

which would be subject to Commission 

review and consideration pursuant to 

Section 19(b) of the Exchange Act. 

One commenter stated that the 

Commission must address other aspects 

of the Sponsored Service to better 

promote the objectives of central 

clearing, with such issues including the 

treatment of the start leg of the 

transaction, FICC’s obligations to 

complete settlement of a Sponsored 

Member’s positions in the event of a 

Sponsoring Member’s default, and a 

Sponsored Member’s ability to engage 

with FICC to address issues arising from 

repo transactions that have been 

submitted through sponsored 

clearing.435

With respect to the start leg of the 

transaction, the commenter stated that, 

within the Sponsored Service, FICC 

does not novate the settlement of the 

start leg of a repo transaction that is 

submitted for clearing between a 

Sponsoring Member and a Sponsored 

Member, although it does novate the 

end leg of the transaction, meaning that 

the counterparties continue to be 

responsible for settlement outside of 

FICC and bear the risk of a settlement 

fail vis a` vis one another. The 

commenter also states that the lack of 

central clearing for the start leg of repo 

transactions in the Sponsored Service 

means that a requirement to clear 

eligible secondary market transactions 

may not eliminate counterparty credit 

risk issues to the extent the Commission 

anticipates, which, in turn, means that 

the proposal may not increase 

competition or reduce spreads as the 

Commission predicted in the Proposing 

Release. 

A U.S. Treasury repo transaction 

generally encompasses both the start leg 

and the end leg of a U.S. Treasury repo. 

The Commission understands that, 

currently, the only U.S. Treasury 

securities CCA novates the start legs of 

many types of repo transactions cleared 

by the CCA, but does not provide 

central clearing for the start legs of repo 

transactions cleared through a particular 

client clearing access model. 

The Commission understands that, 

contrary to transactions cleared at FICC 

outside the Sponsored Service, FICC 

currently does not novate the start legs 

of same-day settling Sponsored DVP 

Repos where the Sponsored Member’s 

pre-novation counterparty is its 

Sponsoring Member (i.e., ‘‘done-with’’ 

Sponsored DVP Repo) or of Repos. The 

Commission acknowledges that this 

transaction occurring outside central 

clearing could somewhat reduce the 

benefits of central clearing in this 

limited instance, but the counterparty 

credit risk arising from the start legs of 

such transactions are largely addressed 

by the fact that they usually settle on a 

delivery-versus-payment basis between 

the counterparties, meaning that the 

securities and funds are exchanged 

simultaneously and resulting in less 

counterparty credit risk to address. The 

Commission does not believe that the 

lack of clearing for the start leg 

undermines the overall benefits of the 

requirement to clear eligible secondary 

market transactions. However, the 

Commission further understands that 

FICC has stated that it is able to clear 

the start leg of any repo transaction and 

currently does clear the start leg of all 

repos between two direct participants, 

the start leg of any Sponsored DVP repo 

where the Sponsored Member’s prenovation counterparty is a third-party 

member of FICC (i.e., ‘‘done-away’’ from 

the Sponsoring Member), and any 

Sponsored DVP Repo where the start leg 

of such repo is scheduled to settle on 

some business day in the future (i.e., 

forward-settling repos).436 The 

Commission would consider any 

proposal to provide additional clearing 

of repo start legs in particular access 

models in due course, consistent with 

its obligations under Section 19(b) of the 

Exchange Act. 

With respect to the completion of 

settlement of a Sponsored Member’s 

transactions if the Sponsoring Member 

defaults, the commenter states that 

neither the Sponsored Bilateral DVP 

Service nor the Sponsored GC Repo 

Service compel FICC to complete the 

settlement of a sponsored member’s 

transactions in the event of a sponsoring 

member’s default, and that this 

approach is not consistent with the 

Commission’s assumption that central 

clearing increases the likelihood of 

settlement.437 The Commission agrees 

that in most cases of a Sponsoring 

Member’s default, the ability for the 

CCA to settle its sponsored transactions 

likely would tend to minimize market 

disruption. However, the Commission 

understands that the current structure of 

the Sponsored Service, as set forth in 

FICC’s rules, would allow FICC the 

ability to, potentially, terminate the 

Sponsored Member’s transaction in 

such circumstances, and that this 

structure arises from the fact that, by 

design, the Sponsoring Member serves 

as the processing agent for all movement 

of funds and securities for its Sponsored 

Members. FICC is not able to guarantee 

that an insolvent Sponsoring Member, 

which may be subject to the control of 

another legal entity, such as a 

bankruptcy trustee, would be able to 

continue processing such transactions, 

thereby allowing settlement to occur. 

This aspect of FICC’s rules is consistent 

with how other central counterparties 

have addressed the potential 

termination of customer transactions in 

the event of their agent’s default.438 The 

Commission does not believe that the 

potential for FICC to terminate these 

transactions, in the unlikely event of a 

Sponsoring Member default in which it 

is unable to work with the controlling 

legal entity, means that the benefits in 

the Proposing Release would not be, to 

a great extent, realized. Based on its 

supervisory knowledge, the Commission 

is not aware of any instance in which 

FICC was unable to work with the 

controlling legal entity for a defaulting 

member (i.e., a member for which FICC 

has ceased to act). Therefore, this is an 

extremely infrequent event and would 

depend on the facts and circumstances 

of a particular insolvency. 

With respect to the overall structure 

of the Sponsored Service, one 

commenter stated that market 

participants have raised concerns about 

the ability, as sponsored members, to 

engage with FICC to address issues 

arising from repo transactions that have 

been submitted through sponsored 

clearing, which, if not addressed, may 

prove to be a further impediment to the 

expansion of sponsored repo clearing. 

The commenter also states that market 

participants have cited challenges with 

seeking recourse from FICC in cases 

where the sponsoring member is in 

default.439 As discussed in the prior 

paragraph, the Commission understands 

that this is inherent to the design of the 

Sponsored Service, in that the 

Sponsoring Member serves as a 

processing agent for all the Sponsored 

Member’s cleared transactions. FICC’s 

rules address how it would proceed in 

the event of a Sponsoring Member 

default, including in the event that it 

closes out a Sponsored Member’s 

transactions.440 In the event that FICC 

chooses to revisit this structure to 

provide some additional ability for the 

Sponsored Member to directly access 

FICC, without relying on its Sponsoring 

Member, the Commission would 

consider such a proposal in due course, 


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441See 15 U.S.C. 78s(b); 17 CFR 240.19b–4; 12 

U.S.C. 5465(e). 

442See Proposing Release, supra note 14, 87 FR 

at 63637. 

443Proposing Release, supra note 14, 87 FR at 

64637. 

444Proposing Release, supra note 14, 87 FR at 

64637. 

445Proposing Release, supra note 14, 87 FR at 

64637. 

446See AIMA Letter, supra note 81, at 8; CME 

Letter, supra note 81, at 4; DTCC/FICC Letter, supra 

note 33, at 28–29; ICE Letter, supra note 33, at 3; 

MFA Letter, supra note 81, at 10; ISDA Letter, supra 

note 391, at 2; SIFMA AMG Letter, supra note 35, 

at 8. 

447See AIMA Letter, supra note 81, at 8; MFA 

Letter, supra note 81, at 10; SIFMA/IIB Letter, supra 

note 37, at 27–28. 

448See CME Letter, supra note 81, at 4; SIFMA 

AMG Letter, supra note 35, at 8. 

consistent with its obligations under 

Section 19(b) of the Exchange Act. 

d. Final Rule 

For the reasons discussed in parts 

II.B.2.a through c, the Commission is 

adopting Rule 17ad–22(e)(18)(iv)(C) as 

proposed. To facilitate compliance with 

this requirement, a U.S. Treasury 

securities CCA generally should 

conduct and document an initial review 

of its access models and related policies 

and procedures. As it conducts this 

review, in view of the critical services 

it provides, the U.S. Treasury securities 

CCA generally should seek to provide 

access in as flexible a means as possible, 

consistent with its responsibility to 

provide sound risk management and 

comply with other provisions of the 

Exchange Act, the Covered Clearing 

Agency Standards, and other applicable 

regulatory requirements. A U.S. 

Treasury securities CCA generally 

should consider a wide variety of 

appropriate means to facilitate access to 

clearance and settlement services of all 

eligible secondary market transactions 

in U.S. Treasury securities, including 

those of indirect participants. To ensure 

that it considers a sufficiently broad set 

of perspectives, the U.S. Treasury 

securities CCA generally should consult 

with a wide-range of stakeholders, 

including indirect participants, as it 

seeks to comply with proposed rule 

17ad–22(e)(18)(iv)(C). 

A U.S. Treasury securities CCA 

generally should review and document 

any instance in which its policies and 

procedures treat transactions differently 

based on the identity of the participant 

submitting the transaction, the fact that 

an indirect participant is a party to the 

transaction, or the method of execution, 

or in any other way, and confirm that 

any variation in the treatment of such 

transactions is necessary and 

appropriate to meet the minimum 

standards regarding, among other 

things, operations, governance, and risk 

management identified in the Covered 

Clearing Agency Standards. The review 

by a U.S. Treasury securities CCA’s 

board of directors under proposed Rule 

17ad–22(e)(18)(iv)(C) generally should 

include consideration of whether to 

establish policies and procedures that 

enable direct members to submit to the 

U.S. Treasury securities CCA eligible 

transactions for clearance and 

settlement that have been executed by 

two indirect participants of the U.S. 

Treasury securities CCA, which could 

potentially help address some of the 

concerns potential participants raised 

about the inability to present ‘‘done 

away’’ trades for clearance and 

settlement described above. Finally, as 

part of its consideration, a U.S. Treasury 

securities CCA generally should 

consider the volumes and proportion of 

the market that are being centrally 

cleared through different access models 

as part of the CCA’s consideration of 

whether its access models are meeting 

the needs of the market. To the extent 

that a U.S. Treasury securities CCA’s 

initial (or any subsequent) review 

occasions a change to its rules, such 

U.S. Treasury securities CCA would 

need to file such changes for 

Commission review and approval, as 

appropriate, under section 19(b) of the 

Exchange Act and Title VIII of the 

Dodd-Frank Act.441 The review by a 

U.S. Treasury securities CCA’s board of 

directors under proposed Rule 17ad– 

22(e)(18)(iv)(C) generally should include 

consideration whether the U.S. Treasury 

securities CCA’s written policies and 

procedures are reasonably designed to 

ensure appropriate means to facilitate 

access to clearance and settlement 

services of all eligible secondary market 

transactions in U.S. Treasury securities, 

including those of indirect participants. 

C. Amendments to Rule 15c3–3a 

1. Introduction 

The rules adopted above could cause 

a substantial increase in the margin 

broker-dealers must post to a U.S. 

Treasury securities CCA resulting from 

their customers’ cleared U.S. Treasury 

positions.442 Currently, Rules 15c3–3 

and 15c3–3a do not permit brokerdealers to include a debit in the 

customer reserve formula equal to the 

amount of margin required and on 

deposit at a U.S. Treasury securities 

CCA. This is because no U.S. Treasury 

securities CCA has implemented rules 

and practices designed to segregate the 

margin and limit it to being used solely 

to cover obligations of the brokerdealer’s customers. Therefore, increases 

in the amount of margin required to be 

deposited at a U.S. Treasury securities 

CCA as a result of the adoption of the 

Membership Proposal would result in 

corresponding increases in the need to 

use broker-dealers’ cash and securities 

to meet these new requirements.443

To facilitate implementation of the 

Membership Proposal, the Commission 

proposed to amend Rule 15c3–3a to 

permit margin required and on deposit 

at a U.S. Treasury securities CCA to be 

included as a debit item in the customer 

reserve formula, subject to the 

conditions discussed below. This new 

debit item would offset credit items in 

the Rule 15c3–3a formula and, thereby, 

free up resources that could be used to 

meet the margin requirements of a U.S. 

Treasury securities CCA. The debit item 

would be reported on a newly created 

Item 15 of the Rule 15c3–3a reserve 

formula. The proposed amendments 

also set forth a number of conditions 

that would need to be met to include the 

debit in the reserve formula. As 

discussed below, these proposed 

conditions were designed to permit the 

inclusion of the debit under conditions 

that would provide maximum 

protection to the broker-dealer’s 

customers. The goal of the proposed 

amendments was to facilitate 

implementation of the Membership 

Proposal in a way that does not 

diminish the customer-protection 

objective of Rules 15c3–3 and 15c3– 

3a.444

The proposed conditions would be set 

forth in a new Note H to the reserve 

formula similar to how the conditions 

for including a debit in the reserve 

formula with respect to margin required 

and on deposit at a securities futures 

clearing agency or DCO are set forth in 

Note G. The proposed amendments 

were based, in part, on the conditions in 

Note G and the requirements in Rules 

15c3–3 and 15c3–3b for including a 

debit with respect to margin required 

and on deposit at security-based swap 

clearing agency. The Note G conditions 

and requirements of Rules 15c3–3 and 

15c3–3b similarly were designed to 

permit the debit under circumstances 

that provide protection to customers.445

Overall, commenters supported the 

proposal to permit this debit item.446

Commenters stated that the proposed 

amendments would make clearing more 

efficient and free up resources that 

could be used to meet the CCA’s margin 

requirements, while continuing to 

protect customer funds.447 Commenters 

also stated that the proposal would 

incentivize central clearing.448 A 

commenter stated that the proposal 

would extend to margin held at a U.S. 

Treasury securities CCA the same 


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449See DTCC/FICC Letter, supra note 33, at 28. 

450See SIFMA AMG Letter, supra note 35, at 8. 

451See ISDA Letter, supra note 391, at 2. 

452See Items 2 and 3 to Rule 15c3–3a. 

453See Proposing Release, supra note 14, 87 FR 

at 64638, n. 232. 

454See Note B to Item 2 of Rule 15c3–3a, as 

adopted. The phrase ‘‘customers’ U.S. Treasury 

securities’’ in the note—as proposed—has been 

replaced with the more generic phrase ‘‘customers’ 

securities’’ in the note, as adopted. Id. This 

modification conforms the note to modifications 

discussed below that expand the type of customer 

collateral that can be posted to the U.S. Treasury 

securities CCA. As proposed, the broker-dealer was 

limited to posting customer cash or U.S. Treasury 

securities. See Proposing Release, supra note 14, 87 

FR at 64638. This provision is being modified to 

include any securities accepted as margin by the 

U.S. Treasury securities CCA, subject to certain 

conditions. See Note H(a)(1) to Item 15, as adopted. 

455Current Item 15 is where the broker-dealer 

reflects the amount, if any, that total credits exceed 

total debits. 

456See Proposing Release, supra note 14, 87 FR 

at 64637. 

457See Item 15 of the Rule 15c3–3a formula, as 

adopted. 

458Proposing Release, supra note 14, 87 FR at 

64638–40. 

459See Note H to Rule 15c3–3a, as adopted. 

460Proposing Release, supra note 14, 87 FR at 

64638. 

461See, e.g., 17 CFR 240.15c3–3(e) (limiting the 

assets that can be deposited into the customer 

reserve account to cash and qualified securities); 17 

CFR 240.15c3–3(a)(6) (defining the term ‘‘qualified 

security’’ to mean a security issued by the United 

Continued 

treatment as margin posted to other 

clearing organizations.449 As a result, 

this commenter stated that the proposal 

would facilitate greater access to 

clearing and eliminate an undue burden 

on competition. Another commenter— 

in supporting this aspect of the 

proposal—stated that it does not make 

sense that margin cannot be freely 

rehypothecated from a customer 

through a broker-dealer to a U.S. 

Treasury securities CCA without the 

broker-dealer receiving a beneficial 

adjustment as part of its customer 

reserve formula calculation.450 For 

greater and more efficient client 

clearing, another commenter 

encouraged the Commission to adopt 

this proposal irrespective of whether the 

Membership Proposal is adopted.451

Commenters did suggest certain 

modifications to the proposal. The 

Commission’s responses to comments, 

modifications to the proposed rule text 

made in response to comments, and the 

final amendments are discussed below. 

2. Credit Items 

Cash delivered by a customer to the 

broker-dealer to be posted by the brokerdealer to a U.S. Treasury securities CCA 

would be a free credit balance or other 

credit balance in the customer’s 

securities account. Thus, this cash will 

need to be included in Item 1 to the 

Rule 15c3–3a formula. Further, when a 

broker-dealer uses customer margin 

securities to borrow funds or execute a 

securities loan transaction, the firm 

must put a credit in the formula.452 The 

credit items are designed to require the 

broker-dealer to reserve sufficient funds 

to be able to retrieve securities that 

collateralize the borrowed funds or have 

been loaned. There is not a specific Item 

in the Rule 15c3–3a formula to include 

the credit arising from the brokerdealer’s use of customers’ securities to 

meet a margin requirement imposed on 

the broker-dealer by a U.S. Treasury 

securities CCA. Consequently, the 

Commission proposed to amend Note B 

to Item 2 of the Rule 15c3–3a formula 

to instruct broker-dealers to include as 

a credit in Item 2 the market value of 

customers’ U.S. Treasury securities on 

deposit at a U.S. Treasury securities 

CCA that meets the definition of a 

‘‘qualified clearing agency’’ in Note 

H.453 The Commission did not receive 

any comments on this aspect of the 

proposal and is adopting it substantially 

as proposed.454

3. New Debit Item 

On the debit side of the formula, the 

Commission proposed renumbering 

current Item 15 of the Rule 15c3–3a 

formula as Item 16.455 As proposed, new 

Item 15 would identify as a debit in the 

Rule 15c3–3a formula margin required 

and on deposit with a clearing agency 

registered with the Commission under 

section 17A of the Exchange Act 

resulting from the following types of 

transactions in U.S. Treasury securities 

in customer accounts that have been 

cleared, settled, and novated by the 

clearing agency: (1) purchases and sales 

of U.S. Treasury securities; and (2) U.S. 

Treasury securities repurchase and 

reverse repurchase agreements (together 

‘‘customer position margin’’).456 As 

proposed, this debit item was limited to 

customer position margin required and 

on deposit at a clearing agency that 

clears, settles, and novates transactions 

in U.S. Treasury securities. Except for 

the debits identified in current Items 13 

and 14 of the Rule 15c3–3a formula, 

margin required and on deposit at other 

types of clearing agencies or for other 

types of securities transactions would 

not qualify as a debit item under the 

proposal. Further, this debit item would 

be limited to customer position margin 

required and on deposit at the U.S. 

Treasury securities CCA resulting from 

U.S. Treasury positions in customer 

accounts. Margin required and on 

deposit at the U.S. Treasury securities 

CCA as result of the broker-dealer’s 

proprietary U.S. Treasury positions 

could not be included in this debit item. 

This proposed limitation would 

effectuate a fundamental aspect of Rule 

15c3–3: that customer cash and 

securities not be used by the brokerdealer to finance its proprietary 

business activities. 

Finally, the debit would be limited to 

customer position margin required and 

on deposit at the U.S. Treasury 

securities CCA. This would mean that 

the broker-dealer could not include in 

this debit item amounts on deposit at 

the U.S. Treasury securities CCA that 

exceed the broker-dealer’s margin 

requirement resulting from its 

customers’ cleared U.S. Treasury 

securities positions. This limitation is 

designed to prevent the broker-dealer 

from artificially increasing the amount 

of the debit item by depositing cash and 

securities at the U.S. Treasury securities 

CCA that are not needed to meet a 

margin requirement resulting from its 

customers’ U.S. Treasury securities 

positions. The Commission did not 

receive any comments on these aspects 

of the proposal and is adopting them as 

proposed.457

4. Note to New Debit Item 

As proposed, Item 15 of the Rule 

15c3–3a formula would have a Note H 

(‘‘Note H’’) that sets forth conditions 

that would need to be met to include the 

amount of customer position margin 

required and on deposit at the U.S. 

Treasury securities CCA as a debit.458

Each of the conditions in Note H to Item 

15 would need to be met for a brokerdealer to include a debit equal to the 

amount of customer position margin 

required and on deposit at the U.S. 

Treasury securities CCA. As discussed 

below, the Commission is adopting the 

conditions largely as proposed, with 

some modifications in response to 

comments.459

a. First Condition—Permitted Collateral 

The first condition—set forth in 

paragraph (a) of Note H—provided that 

the debit item could be included in the 

Rule 15c3–3a formula to the extent that 

the customer position margin is in the 

form of cash or U.S. Treasury securities 

and is being used to margin U.S. 

Treasury securities positions of the 

customers of the broker-dealer that are 

cleared, settled, and novated at the U.S. 

Treasury securities CCA.460 The 

objective was to limit the assets 

underlying the debit item to the safest 

and most liquid instruments, given that 

the debit item would offset credit items 

(cash owed to customers).461 As 


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States or a security in respect of which the principal 

and interest are guaranteed by the United States). 

462See ISDA Letter, supra note 391; SIFMA/IIB 

Letter, supra note 37, at 29. 

463See SIFMA/IIB Letter, supra note 37, at 29. 

464See SIFMA/IIB Letter, supra note 37, at 29. 

465See SIFMA/IIB Letter, supra note 37, at 29 

(citing Self-Regulatory Organizations; Fixed Income 

Clearing Corporation; Order Approving Proposed 

Rule Change to Modify its Rules to Diversify and 

Standardize Clearing Fund Collateral Requirements 

Across the Divisions to Improve Liquidity and 

Minimize Risk for its Members, Exchange Act 

Release No. 54969 (Dec. 26, 2006), 71 FR 77837, 

77838 (Dec. 27, 2006)). 

466See Rule 15c3–3a, Note H(a)(1), as adopted. To 

implement this modification, paragraph (a) of Note 

H is being divided into subparagraphs (a)(1) and (2). 

Subparagraph (a)(1) identifies the types of collateral 

that can be used to meet the customer position 

margin requirement (i.e., cash, U.S. Treasury 

securities, and qualified customer securities), and 

subparagraph (a)(2) contains the text that provides 

that the collateral must be used to margin U.S. 

Treasury securities positions of the customers of the 

broker-dealer that are cleared, settled, and novated 

by the qualified clearing agency, as was proposed. 

See Rule 15c3–3a, Note H(a)(1) and (2), as adopted. 

467See Rule 15c3–3a, Note H(c), as adopted. 

468See Note H(b)(1) through (3) of Rule 15c3–3a, 

as proposed. 

469Proposing Release, supra note 14, 87 FR at 

64638. 

470Proposing Release, supra note 14, 87 FR at 

64638. 

471See Proposing Release, supra note 14, 87 FR 

at 64639–40 (discussing these additional 

conditions). As discussed below, the Commission is 

adopting these additional conditions, substantially 

as proposed. 

472Proposing Release, supra note 14, 87 FR at 

64638. 

discussed above, the liquidity of the 

debit items protects the customers 

whose cash or securities are used to 

finance or facilitate customer 

transactions. 

In response to the proposed first 

condition, commenters stated that the 

Commission should expand the types of 

securities that could be used to meet the 

customer position margin 

requirement.462 Specifically, one 

commenter stated that the use of the 

debit should not be limited to margin in 

the form of cash or Treasury 

securities.463 This commenter stated 

that FICC accepts additional securities 

for clearing fund deposits, including 

eligible obligations of U.S. agencies or 

government sponsored entities and 

eligible mortgage-backed securities.464

The commenter also stated that the 

Commission found—in the context of 

approving a FICC rule change—that the 

expanded scope of acceptable forms of 

clearing fund collateral deposits would 

‘‘better enable FICC to assure the 

safeguarding of securities and funds in 

its custody or control or for which it is 

responsible,’’ and therefore was 

consistent with the requirements of the 

Exchange Act and other governing 

regulations.465

In response to comments, the 

Commission is modifying paragraph (a) 

of Note H to permit ‘‘qualified customer 

securities’’ to be used to meet the 

customer position margin requirement 

in addition to cash and U.S. Treasury 

securities.466 The term ‘‘qualified 

customer securities’’ is defined to mean 

securities of a customer of the brokerdealer (other than U.S. Treasury 

securities) that are held in custody by 

the broker-dealer for the customer and 

that under the rules of the U.S. Treasury 

securities CCA are eligible to be used to 

margin U.S. Treasury securities 

positions of the customer that are 

cleared, settled, and novated by the 

CCA.467 Therefore, a broker-dealer may 

post cash, U.S. Treasury securities, and 

qualified customer securities (i.e., 

securities other than U.S. Treasury 

securities that are accepted by the U.S. 

Treasury securities CCA) to meet a 

customer position margin requirement. 

As proposed, paragraph (b) of Note H 

set forth the second, third, and fourth 

conditions that would need to be met to 

include the amount of customer 

position margin required and on deposit 

at the U.S. Treasury securities CCA as 

a debit item.468

b. Second Condition—Customer 

Position Margin 

The second condition—set forth in 

paragraph (b)(1) of Note H—provided 

that the customer position margin must 

consist of cash owed to the customer of 

the broker-dealer or U.S. Treasury 

securities held in custody by the brokerdealer for the customer that was 

delivered by the broker-dealer to meet to 

meet a margin requirement resulting 

from that customer’s U.S. Treasury 

securities positions cleared, settled, and 

novated at the U.S. Treasury securities 

CCA and not for any other customer’s or 

the broker-dealer’s U.S. Treasury 

securities positions cleared, settled, and 

novated at the U.S. Treasury securities 

CCA.469 In sum, to meet this condition, 

the broker-dealer would need to: (1) use 

customer assets exclusively to meet the 

customer position margin requirement; 

(2) use a particular customer’s assets 

exclusively to meet the amount of the 

customer position margin requirement 

resulting from that customer’s cleared 

U.S. Treasury securities positions; and 

(3) have delivered the customer’s assets 

to the U.S. Treasury securities CCA. 

The objective of the first component 

of the second condition—the need to 

use customer assets exclusively—was to 

segregate the customer assets being used 

to meet the customer position margin 

requirement from the broker-dealer’s 

proprietary assets.470 Additional 

conditions—under the proposal— 

provided that the U.S. Treasury 

securities CCA must hold the assets 

being used to meet the customer 

position margin requirement in an 

account of the broker-dealer that is 

segregated from any other account of the 

broker-dealer and is identified as being 

held for the exclusive benefit of the 

broker-dealer’s customers.471 The first 

prong of the condition was designed to 

ensure that only customer assets are 

held in the account. 

The objective of the second 

component of the second condition— 

the need to use a particular customer’s 

assets exclusively to meet the amount of 

the customer position margin 

requirement resulting from that 

customer’s cleared U.S. Treasury 

securities positions—was to avoid the 

use of one customer’s assets to meet 

another customer’s margin 

requirement.472 For example, FICC’s 

Sponsored Member program allows its 

members to sponsor a person’s (i.e., a 

Sponsored Member’s) U.S. Treasury 

securities transactions for clearance and 

settlement. FICC interacts solely with 

the sponsoring member as processing 

agent for purposes of the day-to-day 

satisfaction of the Sponsored Member’s 

obligation to or from FICC, including 

the Sponsored Member’s cash and 

securities settlement obligations. 

However, FICC calculates a separate 

margin requirement for each Sponsored 

Member’s trading activity and the sum 

of each sponsored member’s margin 

calculation is the aggregate margin 

requirement that must be met by the 

sponsoring member. Further, this 

margin is held in an omnibus account 

that is separate from the account that 

holds the Sponsoring Member’s net 

margin obligation for non-sponsored 

securities transactions. In this scenario, 

the U.S. Treasury securities CCA’s 

margin calculations and resulting 

requirements can be traced to a specific 

customer’s cleared U.S. Treasury 

securities positions. Consequently, the 

broker-dealer would be able to allocate 

the amount of the U.S. Treasury 

securities CCA’s daily customer position 

margin requirement attributable to a 

specific customer. Under this 

component of the second condition, the 

broker-dealer would need to deliver 

cash or U.S. Treasury securities 

belonging to that specific customer to 

meet the amount of the U.S. Treasury 

securities CCA’s customer position 

margin requirement resulting from that 

customer’s cleared U.S. Treasury 

securities positions. This would 

mitigate the risk to all the brokerdealer’s customers by limiting when 

their assets can be used to meet the U.S. 


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473Proposing Release, supra note 14, 87 FR at 

64638–39. 

474See DTCC/FICC Letter, supra note 33, at 32; 

SIFMA/IIB Letter, supra note 37, at 30. 

475See SIFMA/IIB Letter, supra note 37, at 30. 

476See DTCC/FICC Letter, supra note 33, at 32. 

477See SIFMA/IIB Letter, supra note 37, at 30. 

478See DTCC/FICC Letter, supra note 33, at 32. 

479See Note H(b)(1)(iii) of Rule 15c3–3a, as 

adopted. To implement this modification, 

paragraph (b)(1) is being divided into 

subparagraphs (b)(1)(i) through (iii). Subparagraphs 

(b)(1)(i) and (ii) contain the proposed components 

of the second condition that the broker-dealer can 

use cash owed to a customer or U.S. Treasury 

securities held in custody by the broker-dealer for 

the customer to meet a margin requirement of the 

U.S. Treasury securities CCA resulting from that 

customer’s U.S. Treasury securities transactions 

cleared at the CCA, with the modifications that cash 

and securities are now addressed in a separate 

subparagraphs (subparagraphs (b)(1)(i) and (ii), 

respectively) and qualified customer securities held 

in custody by the broker-dealer for the customer 

also can be used for this purpose. See Note 

H(b)(1)(i) and (ii) of Rule 15c3–3a, as adopted. 

Subparagraph (b)(1)(iii) contains the new 

provision—discussed below—permitting the use of 

the broker-dealer’s proprietary securities, subject to 

certain conditions. See Note H(b)(1)(iii) of Rule 

15c3–3a, as adopted. 

480See prefatory text of Note H(b)(1)(iii) of Rule 

15c3–3a, as adopted. 

481See supra note 461; see also Section I. 

Introduction (describing the critical and unique role 

that U.S. Treasury securities play a critical in the 

U.S. and global economy) and Section IV.B. 

Economic Analysis—Baseline (describing U.S. 

Treasury securities and repos, and clearance and 

settlement of these positions); see also 17 CFR 

240.15c3–1(c)(2)(vi)(A)(1) (prescribing haircuts 

under the broker-dealer net capital rule for a 

security issued or guaranteed as to principal or 

interest by the United States or any agency thereof 

ranging from 0 to 6%). 

482See Note H(b)(1)(iii)(A) of Rule 15c3–3a, as 

adopted. 

483See Note H(b)(1)(iii)(B) and (C) of Rule 15c3– 

3a, as adopted. 

Treasury securities CCA’s customer 

position margin requirement. 

The objective of the third component 

of the second condition—that the 

broker-dealer had delivered the 

customer’s assets to the U.S. Treasury 

securities CCA—was to address the 

potential that a customer may use more 

than one broker-dealer to engage in U.S. 

Treasury securities transactions.473 In 

this case, two or more broker-dealers 

may be subject to customer position 

margin requirements of the U.S. 

Treasury securities CCA resulting from 

the customer’s cleared U.S. Treasury 

securities positions. The intent was to 

prevent a broker-dealer from including 

as a debit the amount of customer 

position margin that another brokerdealer delivered to the U.S. Treasury 

securities CCA with respect to U.S. 

Treasury securities positions of a 

customer of both the broker-dealers. The 

amount that a given broker-dealer’s 

debit items can offset its credit items 

should be limited to the amount of 

customer position margin it delivered to 

the U.S. Treasury securities CCA. 

Otherwise, the customers of the brokerdealer would be put at risk for 

transactions effected by another brokerdealer. 

Two commenters stated that brokerdealers should not be limited to posting 

the same assets received from its 

customer to a U.S. Treasury securities 

CCA.474 One stated that in many 

instances, broker-dealers post 

proprietary assets to a clearing agency 

on behalf of a customer given timing 

and operational constraints.475 The 

other commenter stated that FICC 

collects clearing fund margin on a faster 

timeline than broker-dealers are able to 

collect margin from their customers.476

More specifically, this commenter stated 

that FICC collects margin from direct 

participants on an overnight and 

intraday basis, while most brokerdealers generally provide their 

customers with a full business day to 

post margin. As a result, this commenter 

stated that most broker-dealers generally 

post clearing fund margin to FICC and 

then subsequently collect that clearing 

fund margin from their customers. One 

of these commenters stated that posting 

proprietary collateral is permissible in 

the context of margin posted to the other 

clearing agencies and should also be 

permissible with respect to margin 

posted to a U.S. Treasury Securities 

CCA.477 Finally, one of these 

commenters stated that not allowing the 

use of proprietary assets would 

significantly undercut the benefits to the 

Rule 15c3–3a proposal.478

In response to comments, the 

Commission is modifying Note H under 

the final rule to permit broker-dealers to 

elect to deliver proprietary U.S. 

Treasury securities to meet a margin 

requirement of a customer resulting 

from that customer’s U.S. Treasury 

securities positions cleared, settled, and 

novated at the qualified clearing 

agency.479 This will address the concern 

raised by commenters that the U.S. 

Treasury securities CCA may call for 

margin from a broker-dealer arising from 

a customer’s cleared U.S. Treasury 

security transaction before the customer 

is able to deliver the requisite margin to 

the broker-dealer. However, the final 

rule places strict limits on this 

requirement. First, the broker-dealer 

must use proprietary U.S. Treasury 

securities for this purpose and, 

therefore, it cannot use other types of 

securities collateral acceptable to the 

U.S. Treasury securities CCA.480 For 

example, as discussed above, a brokerdealer can post qualified customer 

securities (which are securities other 

than U.S. Treasury securities acceptable 

to the U.S. Treasury securities CCA), 

provided the customer has delivered 

them to the broker-dealer. However, the 

broker-dealer could not post these types 

of securities if they belong to the brokerdealer. This is designed to ensure that 

the safest most liquid securities of the 

broker-dealer are commingled with the 

customer cash and securities in the 

account.481 It also will prevent the 

broker-dealer from using customer cash 

deposited with the broker-dealer to 

purchase less liquid securities and post 

them to the U.S. Treasury securities 

CCA to meet a customer position margin 

requirement. 

Second, the broker-dealer’s ability to 

post proprietary U.S. Treasury securities 

is limited to circumstances where the 

broker-dealer did not owe the customer 

or hold in custody for the customer 

sufficient cash, U.S. Treasury securities, 

and/or qualified customer securities to 

meet a margin requirement resulting 

from that customer’s U.S. Treasury 

securities positions cleared, settled, and 

novated at the qualified clearing agency 

at the time the margin requirement 

arose.482 Thus, the broker-dealer is 

limited to using proprietary U.S. 

Treasury securities to address the 

specific concern raised by commenters: 

a timing mismatch between when 

margin must be delivered to the U.S. 

Treasury securities CCA and when the 

broker-dealer receives the margin from 

the customer. 

Third, the broker-dealer must call for 

the customer to deliver a sufficient 

amount of cash, U.S. Treasury 

securities, and/or qualified customer 

securities to meet the margin 

requirement on the day the margin 

requirement arose and must receive a 

sufficient amount of cash, U.S. Treasury 

securities, and/or qualified customer 

securities to meet the margin 

requirement by the close of the next 

business day after the margin 

requirement arose.483 Thus, the brokerdealer can deliver proprietary U.S. 

Treasury securities to meet a margin call 

related to its customers’ transactions as 

an interim step before receiving the 

associated margin from its customer no 

later than the close of the next business 

day. The objective is to narrowly 

confine the ability to use proprietary 

U.S. Treasury securities and thereby 

promote the final rule’s objective of 

using a specific customer’s collateral to 

meet a customer position margin 

requirement generated by that 

customer’s cleared U.S. Treasury 

securities transactions. 


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484Proposing Release, supra note 14, 87 FR at 

64639. 

485Proposing Release, supra note 14, 87 FR at 

64639–40. 

486Proposing Release, supra note 14, 87 FR at 

64639. 

487Proposing Release, supra note 14, 87 FR at 

64638–39. 

488See DTCC/FICC Letter, supra note 33, at 31. 

489See Note H(b)(2)(i) of Rule 15c3–3a, as 

adopted. 

490See, e.g., FINRA Rule 4210(f)(2); Cboe Rules 

10.1 et seq.; see also 12 CFR 220.12(f). Generally, 

buyers of options (i.e., long options) that expire in 

nine months or less must pay for these positions in 

full. Margin requirements for option writers (i.e., 

short options) are complex and are not the same for 

every type of underlying security or component 

value. SRO rules generally require an option writer 

to post 100% of the options proceeds to the margin 

account, plus a specific percentage of the market 

value of the underlying securities or component 

value as options margin (e.g., 20% for an option on 

a single equity security). SRO rules also recognize 

certain spread positions. Finally, equity-based 

options also are eligible positions under SRO 

securities portfolio margin rules. See, e.g., FINRA 

Rule 4210(f)(2) and (g); Cboe Rules 10.3 and 10.4. 

491See 17 CFR 240.15c3–3. 

492See 17 CFR 240.15c3–3a, Item 1. 

493See 17 CFR 240.15c3–3(e)(2) (providing, in 

pertinent part, that a broker-dealer must not accept 

or use any of the amounts under items comprising 

Total Credits under the Rule 15c3–3a reserve 

formula except for the specified purposes indicated 

under items comprising Total Debits under the 

formula); 17 CFR 240.15c3–3a, Items 10, 11, and 13. 

494See 17 CFR 240.15c3–3(a)(3), (4), and (5) 

(defining, respectively, the terms ‘‘fully paid 

securities,’’ ‘‘margin securities,’’ and ‘‘excess 

margin securities’’); 17 CFR 240.15c3–3(b)(1) 

(providing, in pertinent part, that a broker-dealer 

shall promptly obtain and shall thereafter maintain 

the physical possession or control of all fully-paid 

securities and excess margin securities carried by a 

broker-dealer for the account of customers but not 

applying this requirement to margin securities). 

495See 17 CFR 240.15c3–3a, Items 2 and 3 

(requiring, respectively, credits to be added to the 

Rule 15c3–3a reserve formula for: (1) monies 

borrowed collateralized by securities carried for the 

accounts of customers; and (2) monies payable 

against customers’ securities loaned); 17 CFR 

240.15c3–3a, Items 10, 11, and 13 (requiring, 

respectively, debits to be added to the reserve 

formula for: (1) debit balances in customers’ cash 

and margin accounts; (2) securities borrowed to 

effectuate short sales by customers; and (3) margin 

required and on deposit with the Options Clearing 

Corporation for all option contracts written or 

purchased in customer account). 

c. Third Condition—Rules of U.S. 

Treasury Securities CCA 

The third condition for including 

customer position margin as a debit in 

the Rule 15c3–3a formula was set forth 

in proposed paragraph (b)(2) of Note 

H.484 Under this condition, the 

customer position margin needed to be 

treated in accordance with rules of the 

U.S. Treasury securities CCA designed 

to protect and segregate the customer 

position margin, and the U.S. Treasury 

securities CCA and broker-dealer would 

need to be in compliance with those 

rules (as applicable). As proposed, 

paragraph (b)(2) of Note H identified 

five sets of rules that would need to be 

implemented by the U.S. Treasury 

securities CCA.485

The first rule set—identified in 

paragraph (b)(2)(i) of Note H—provided 

that the customer position margin must 

be treated in accordance with rules 

requiring the qualified U.S. Treasury 

securities CCA to calculate a separate 

margin amount for each customer of the 

broker-dealer and the broker-dealer to 

deliver that amount of margin for each 

customer on a gross basis.486 As 

discussed above, a component of the 

second condition—set forth in 

paragraph (b)(1) of Note H, as 

proposed—was that the broker-dealer 

use a particular customer’s assets 

exclusively to meet the amount of the 

customer position margin requirement 

resulting from that customer’s cleared 

U.S. Treasury securities positions.487

The proposal that the U.S. Treasury 

securities CCA implement these margin 

calculation rules was designed to 

facilitate that condition. This would 

allow the broker-dealer to allocate the 

amount of the customer position margin 

requirement attributable to each of its 

customers. In addition, the rules needed 

to require the broker-dealer to deliver 

the margin amount calculated for each 

customer on a gross basis. This would 

mean that the risk of one customer’s 

positions could not be offset by the risk 

of another customer’s positions in 

determining the amount of customer 

position margin the broker-dealer would 

need to have on deposit at the U.S. 

Treasury securities CCA. As a result, the 

broker-dealer would not be able to 

deliver assets belonging to one customer 

to meet the margin requirement of 

another customer. 

In response to this aspect of the 

proposal, a commenter suggested that 

the Commission modify the requirement 

to be consistent with the requirements 

of Item 13 and Note F to the reserve 

formula which covers margin required 

and on deposit with the Options 

Clearing Corporation (‘‘OCC’’) for all 

option contracts written or purchased in 

customer accounts.488 In particular, the 

permitted debit under Item 13 and Note 

F is based on a margin amount posted 

to OCC that is calculated on a net basis 

across all the broker-dealer’s customers 

with listed options positions. This is 

different than the proposal to permit a 

debit with respect to margin posted to 

a U.S. Treasury securities CCA in that 

the margin amount needed to be 

calculated for each customer on a gross 

basis and that gross amount to be 

delivered to the CCA. For the reasons 

discussed below, the Commission is 

retaining the requirement that the U.S. 

Treasury securities CCA implement 

rules requiring that the margin be 

calculated and delivered on a gross 

basis for each customer.489

Listed options cleared at the OCC are 

subject to customer margin 

requirements of the broker-dealer 

SROs.490 Under Rule 15c3–3, a brokerdealer can use customer cash or 

securities that are serving as margin for 

listed options positions under SRO 

margin rules, subject to certain 

limitations.491 If the margin is in the 

form of cash, the broker-dealer needs to 

treat it as an ‘‘other credit balance’’ in 

the customer’s securities account and 

include it in Item 1 in the Rule 15c3– 

3a reserve formula.492 The broker-dealer 

can use this cash to finance a margin 

loan to another customer, to borrow 

securities to effect a short sale of 

another customer, or to deliver it to the 

OCC to meet a margin requirement for 

other customers’ listed options positions 

cleared at the OCC.493 In each case, the 

‘‘other credit balance’’ on the credit side 

of the Rule 15c3–3a reserve formula is 

offset by a corresponding debit balance 

on the debit side of the formula. If the 

margin is in the form of securities, the 

broker-dealer can rehypothecate them to 

obtain a bank loan, to deliver on a 

securities loan, or to meet a margin 

requirement of the OCC.494 The brokerdealer’s use of the customer’s margin 

securities generates a credit in the Rule 

15c3–3a reserve formula that generally 

is offset by debits in the formula 

stemming from the broker-dealer’s 

financing of the customer’s margin loan, 

facilitating the customer’s short sale, or 

delivering margin to the OCC to meet 

margin requirements arising from 

customer options positions.495

SRO options margin requirements 

help to protect the broker-dealer from 

the consequences of a customer default, 

because the required equity in a 

customer’s account (because of the SRO 

option margin requirements) serves to 

over-collateralize an option customer’s 

obligations to the broker-dealer. This 

buffer also protects the customers whose 

cash was used to facilitate the brokerdealer’s financing of securities 

transactions of other customers (i.e., 

margin loans, short sales, or to meet a 

margin requirement for other customers’ 

listed options positions cleared at the 

OCC). For example, if the broker-dealer 

fails, the customer debits, because they 

generally are over-collateralized, should 

be attractive assets for another brokerdealer to purchase or, if not purchased 

by another broker-dealer, they should be 

able to be liquidated to a net positive 


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Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2765 

496The attractiveness of the over-collateralized 

debits facilitates the bulk transfer of customer 

accounts from a failing or failed broker-dealer to 

another broker-dealer. 

497See Net Capital Requirements for BrokerDealers; Amended Rules, Exchange Act Release No. 

18417 (Jan. 13, 1982), 47 FR 3512, 3513 (Jan. 25, 

1982) (‘‘The alternative approach is founded on the 

concept that, if the debit items in the Reserve 

Formula can be liquidated at or near their contract 

value, these assets along with any cash required to 

be on deposit under the [customer protection] rule, 

will be sufficient to satisfy all liabilities to 

customers (which are represented as credit items in 

the Reserve Formula).’’). 

498SRO rules provide for the collection of margin 

for cash U.S. Treasury transactions. See, e.g., FINRA 

Rule 4210(e)(2)(A) (setting forth margin 

requirements for U.S. Treasury securities and 

certain other bonds). However, these rules do not 

necessarily apply to exempt accounts. See FINRA 

Rule 4210(e)(2)(F) (permitting FINRA-member 

broker-dealers to not collect margin for certain good 

faith securities held in exempt accounts and 

providing for a capital charge for any uncollected 

mark-to-market loss); FINRA Rule 4210(a)(13) 

(defining exempt account). Although SRO rules also 

require a broker-dealer to establish procedures to 

review limits and types of credit extended to all 

customers, formulate their own ‘‘house’’’ margin 

requirements, and review the need for instituting 

higher margin requirements than are required for 

individual securities or customer accounts, based 

on the Commission’s supervisory experience, the 

resulting customer margin collection is often less 

than that required pursuant to FICC’s margin 

model. See Proposing Release, supra note 14, 87 FR 

at 64627 n.171. 

499As discussed above, under the final rule, the 

broker-dealer can use proprietary U.S. Treasury 

securities in limited circumstances and under strict 

conditions to meet a margin requirement of the U.S. 

Treasury securities CCA resulting from a particular 

customer’s cleared U.S. Treasury securities 

transactions. See Note H(b)(1)(iii) of Rule 15c3–3a. 

500See Note H(b)(2)(i) of Rule 15c3–3a, as 

adopted. 

501See Proposing Release, supra note 14, 87 FR 

at 64639. 

502See Note H(b)(2)(ii) of Rule 15c3–3a, as 

adopted. 

503Letter from Brian Steele, Managing Director, 

President of DTCC Clearing Agency Services, Head 

of Global Business Operations, and Laura Klimpel, 

General Manager of FICC, Head of SIFMU Business 

Development, at 1–2 (Nov. 10, 2023) (‘‘DTCC/FICC 

Letter II’’). 

504 Id. at 2. The commenter stated that a U.S. 

Treasury securities CCA could enter into a 

repurchase transaction with a broker-dealer, as 

agent for its customers, pursuant to which the 

broker-dealer purchases U.S. Treasury securities 

using customer cash margin and holds such 

securities in a segregated account of the brokerdealer. Id. 

505 Id. at 5. 

equity.496 The proceeds of the debits 

sale or liquidation can be used to repay 

the customer cash used to finance the 

customer obligations. This cash plus the 

funds and/or U.S. government securities 

held in the customer reserve account 

should equal or exceed the total amount 

of customer credit items (i.e., the total 

amount owed by the broker-dealer to its 

customers).497

In contrast, although SRO margin 

rules require the collection of margin for 

certain transactions in U.S. Treasury 

securities, transactions between dealers 

and institutional customers generally 

are subject to a variable ‘‘good-faith’’ 

margin standard, which the Commission 

understands—based on its supervisory 

experience—can often result in a brokerdealer collecting less (or no) margin 

collateral from a customer with respect 

to transactions in U.S. Treasury 

securities.498 Consequently, the SRO 

margin requirements for U.S. Treasury 

securities transactions do not result in 

the same levels of over-collateralization 

that the SRO margin requirements for 

listed options impose and, therefore, 

would not provide the same level 

protection to the broker-dealer’s 

customers. Accordingly, modifying the 

proposal to align it with how margin 

posted to the OCC is treated would 

diminish an important protection that 

the proposal is designed to achieve in 

terms of protecting the broker-dealer’s 

customers: preventing one customer’s 

cash or securities to be used to meet a 

margin requirement of the U.S. Treasury 

securities CCA resulting from another 

customer’s cleared U.S. Treasury 

securities transactions. This protection 

is achieved through the proposed 

requirements that the U.S. Treasury 

securities CCA calculate a gross margin 

amount for each of the broker-dealer’s 

customers and that the broker-dealer 

must meet that gross margin amount 

with cash or securities owned by the 

customer whose U.S. Treasury securities 

transactions generated the margin 

requirement.499

Moreover, cash delivered by a 

customer to the broker-dealer to be 

posted by the broker-dealer to a U.S. 

Treasury securities CCA generally 

would be a free credit balance, given the 

minimal margin requirements of the 

SROs with respect to the types of U.S. 

Treasury securities transactions that 

would be cleared (i.e., the cash would 

not have the same status as cash serving 

as margin for a listed options position 

under the SRO margin rules). For the 

same reason, securities delivered by a 

customer to the broker-dealer to be 

posted by the broker-dealer to a U.S. 

Treasury securities CCA generally 

would be fully paid securities (i.e., they 

would not have the same status as 

margin securities serving as margin for 

listed options under the SRO margin 

rules). The proposal—consequently—set 

forth strict limitations on the brokerdealer’s ability to use the cash or 

securities to meet a margin requirement 

the U.S. Treasury securities CCA 

imposed on the broker-dealer. These 

limitations were designed to restrict the 

broker-dealer’s ability to use the 

customer cash and securities—and 

thereby protect them—given that these 

customer assets generally otherwise 

would need to be treated as a free credit 

balance or fully paid securities in the 

customer’s securities account. 

For these reasons, the Commission is 

retaining the requirement that the U.S. 

Treasury securities CCA implement 

rules requiring that the margin be 

calculated and delivered on a gross 

basis for each customer.500 Therefore, 

the Commission is adopting the gross 

margining requirement, as proposed. 

The second rule set—identified in 

paragraph (b)(2)(ii) of Note H—provided 

that the customer position margin be 

treated in accordance with rules 

requiring that the U.S. Treasury 

securities CCA be limited to investing it 

in U.S. Treasury securities with a 

maturity of one year or less.501 The 

objective was to limit the assets 

underlying the debit item to the safest 

and most liquid instruments. The 

Commission did not receive comments 

on this aspect of the proposal and is 

adopting it as proposed.502

However, one commenter sought 

clarification that the conditions of Rule 

15c3–3 would not preclude a U.S. 

Treasury securities CCA from entering 

into a repurchase transaction using 

customer cash margin, so long as the 

purchased securities under such 

repurchase transaction consist of U.S. 

Treasury securities held in a segregated 

account for the benefit of customers and 

satisfy certain other requirements.503

The commenter stated that the proposal 

was not clear whether the conditions 

related to Rule 15c3–3 would preclude 

a U.S. Treasury securities CCA from 

using customer margin for liquidity 

purposes, and that there are ways to use 

customer margin for liquidity purposes 

that ensure that cash or Treasury 

securities having a value equal to or 

exceeding the posted customer margin 

remain in a segregated account for the 

benefit of customers.504 The commenter 

further explained that if a U.S. Treasury 

securities CCA could not use customer 

margin as a qualifying liquid resource, 

for purposes of its obligations under 

Rule 17ad–22(e)(7), it might need to 

obtain liquidity resources from other 

sources, which could mean increasing 

certain requirements applicable to direct 

participants or increasing the cash 

margin requirements applicable to 

direct participants and/or other indirect 

participants.505 Finally, the commenter 

suggested adding language to Note H 

that a CCA’s use of cash margin for 

liquidity purposes would not cause item 

15 to cease to apply, so long as (i) the 

CCA only uses the cash margin after it 

determines that it does not have the 


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2766 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

506 Id. at 7–8. 

507Proposing Release, supra note 14, 87 FR at 

64639. 

508See 17 CFR 240.15c3–3(p)(1)(iii) (defining the 

term ‘‘qualified clearing agency account’’); 17 CFR 

240.15c3–3b, Item 15 (permitting a broker-dealer to 

include a debit in the security-based swap reserve 

formula equal to the margin required and on 

deposit in a qualified clearing agency account at a 

clearing agency). 

509Proposing Release, supra note 14, 87 FR at 

64639. 

510See Note H(b)(2)(iii) of Rule 15c3–3a, as 

adopted. The rule text of this paragraph has been 

modified to add the phrase ‘‘and qualified customer 

securities’’ after the phrase ‘‘U.S. Treasury 

securities’’ wherever the latter appears in the 

paragraph to conform the rule text to the 

modification discussed above relating to the brokerdealer’s ability to post qualified customer securities. 

511Proposing Release, supra note 14, 87 FR at 

64640. 

ability to obtain liquidity from other 

resources in order to satisfy the cash 

payment obligations that were originally 

due to be paid by a defaulting member, 

(ii) in connection with such usage, the 

CCA deposits into and maintains an 

account of the broker-dealer that 

generally satisfies the requirements for a 

special reserve account U.S. Treasury 

securities or cash that at all relevant 

times have a value of no less than the 

value amount of used cash, and (iii) the 

CCA replenishes the cash margin 

promptly after the liquidity need is 

satisfied.506

The objective of the conditions for 

including the debit in the customer 

reserve formula is to provide maximum 

protection to the cash or securities 

delivered to the U.S. Treasury securities 

CCA. The commenter provides a 

summary of potential protections that 

could be put in place to ensure that— 

if a U.S. Treasury securities CCA uses 

cash in the broker-dealer’s segregated 

account for liquidity purposes—the cash 

will be protected through collateral 

comprising U.S. Treasury securities 

deposited into the account and other 

measures. The Commission would need 

to review a more detailed plan for how 

the cash will be used and customers 

protected before taking any action on 

any formal request. In this regard, were 

FICC to file proposed rule changes that 

provide specific details regarding the 

protections and how cash will be used, 

the Commission will consider those 

proposed rule changes at that time 

consistent with the statutory standard 

for approval under Section 19(b). 

The third rule set—identified in 

paragraph (b)(2)(iii) of Note H— 

provided that the customer position 

margin be treated in accordance with 

rules designed to address the 

segregation of the broker-dealer’s 

account at the U.S. Treasury securities 

CCA that holds the customer position 

margin and set strict limitations on the 

U.S. Treasury securities CCA’s ability to 

use the margin.507 The required rules 

were modeled on the requirements for a 

broker-dealer to include a debit with 

respect to margin delivered to a 

security-based swap clearing agency.508

In particular, the note provided that the 

customer position margin needed to be 

treated in accordance with rules 

requiring that it must be held in an 

account of the broker-dealer at the U.S. 

Treasury securities CCA that is 

segregated from any other account of the 

broker-dealer at the U.S. Treasury 

securities CCA and that is: 

• Used exclusively to clear, settle, 

novate, and margin U.S. Treasury 

securities transactions of the customers 

of the broker-dealer; 

• Designated ‘‘Special Clearing 

Account for the Exclusive Benefit of the 

Customers of [name of broker-dealer]’’; 

• Subject to a written notice of the 

U.S. Treasury securities CCA provided 

to and retained by the broker-dealer that 

the cash and U.S. Treasury securities in 

the account are being held by the U.S. 

Treasury securities CCA for the 

exclusive benefit of the customers of the 

broker-dealer in accordance with the 

regulations of the Commission and are 

being kept separate from any other 

accounts maintained by the brokerdealer or any other clearing member at 

the U.S. Treasury securities CCA; and 

• Subject to a written contract 

between the broker-dealer and the U.S. 

Treasury securities CCA which provides 

that the cash and U.S. Treasury 

securities in the account are not 

available to cover claims arising from 

the broker-dealer or any other clearing 

member defaulting on an obligation to 

the U.S. Treasury securities CCA or 

subject to any other right, charge, 

security interest, lien, or claim of any 

kind in favor of the U.S. Treasury 

securities CCA or any person claiming 

through the U.S. Treasury securities 

CCA, except a right, charge, security 

interest, lien, or claim resulting from a 

cleared U.S. Treasury transaction of a 

customer of the broker-dealer effected in 

the account. 

The objective was to protect the 

customer position margin that the 

broker-dealer deposits with the U.S. 

Treasury securities CCA to margin its 

customers’ U.S. Treasury security 

positions by isolating it from any other 

assets of the broker-dealer at the U.S. 

Treasury securities CCA and to prevent 

it from being used to cover any 

obligation other than an obligation of 

the broker-dealer’s customer resulting 

from a U.S. Treasury transaction 

cleared, settled, and novated in the 

account.509 Further, the account 

designation and written notice 

requirements were designed to alert 

creditors of the broker-dealer and U.S. 

Treasury securities CCA that the assets 

in this account are not available to 

satisfy any claims they may have against 

the broker-dealer or the U.S. Treasury 

securities CCA. The written contract 

requirement was designed to limit the 

U.S. Treasury securities CCA’s rights to 

use the customer position margin for 

any purpose other than an obligation of 

the broker-dealer’s customers. For 

example, the assets in the account could 

not be used to cover an obligation of the 

broker-dealer to the U.S. Treasury 

securities CCA if the broker-dealer 

defaults on the obligation. Similarly, the 

assets in the account could not be used 

to mutualize the loss across the U.S. 

Treasury securities CCA’s members if a 

member defaulted and its clearing funds 

were insufficient to cover the loss. The 

Commission did not receive comments 

on this aspect of the proposal and is 

adopting it substantially as proposed.510

The fourth rule set—identified in 

paragraph (b)(2)(iv) of Note H— 

provided that the customer position 

margin be treated in accordance with 

rules designed to address how the U.S. 

Treasury securities CCA holds the 

customer position margin.511 The 

objective was to isolate the customer 

position margin and prevent it from 

being used to satisfy the claims any 

creditors may have against the U.S. 

Treasury securities CCA. In particular, 

the note provided that the customer 

position margin needed to be treated in 

accordance with rules of the U.S. 

Treasury securities CCA requiring that 

the U.S. Treasury securities CCA hold 

the customer position margin itself or at 

either a U.S. Federal Reserve Bank or a 

‘‘bank’’ (as defined in section 3(a)(6) of 

the Exchange Act (15 U.S.C. 78c(a)(6)) 

that is insured by the Federal Deposit 

Insurance Corporation. The objective 

was to have the U.S. Treasury securities 

CCA hold the customer position margin 

at a safe financial institution. In 

addition, the rules would need to 

provide that the U.S. Treasury securities 

CCA’s account at the U.S. Federal 

Reserve Bank or bank be: 

• Segregated from any other account 

of the U.S. Treasury securities CCA or 

any other person at the U.S. Federal 

Reserve Bank or bank and used 

exclusively to hold cash and U.S. 

Treasury securities to meet current 

margin requirements of the U.S. 

Treasury securities CCA resulting from 

positions in U.S. Treasury securities of 

the customers of the broker-dealer 


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512See Note H(b)(2)(iv) of Rule 15c3–3a, as 

adopted. The rule text of this paragraph has been 

modified to add the phrase ‘‘and qualified customer 

securities’’ after the phrase ‘‘U.S. Treasury 

securities’’ wherever the latter appears in the 

paragraph to conform the rule text to the 

modification discussed above relating to the brokerdealer’s ability to post qualified customer securities. 

513Proposing Release, supra note 14, 87 FR at 

64640. 

514See, e.g., DTCC/FICC Letter, supra note 33, at 

31–32; ICE Letter, supra note 33, at 3; SIFMA/IIB 

Letter, supra note 37, at 30. 

515See DTCC/FICC Letter, supra note 33, at 31. 

516See ICE Letter, supra note 33, at 3–4. 

517See SIFMA/IIB Letter, supra note 37, at 30. 

518See Item 15 of the Rule 15c3–3a formula, as 

adopted (requiring that the debit in Item 15 of the 

Rule 15c3–3a formula equal the margin required 

and on deposit with a clearing agency registered 

with the Commission under section 17A of the 

Exchange Act resulting from the following types of 

transactions in U.S. Treasury securities in customer 

accounts that have been cleared, settled, and 

novated by the clearing agency: (1) purchases and 

sales of U.S. Treasury securities; and (2) U.S. 

Treasury securities repurchase and reverse 

repurchase agreements); see also Item 13 of the Rule 

15c3–3a formula (requiring that the debit in Item 13 

of the 15c3–3a reserve formula equal the margin 

required and on deposit with the OCC for all option 

contracts written or purchased in customer 

accounts). 

519See Note H(b)(2)(v) to Rule 15c3–3a, as 

adopted. To implement the modification discussed 

above, the phrase ‘‘no later than the close of the 

next business day after the day the cash and U.S. 

Treasury securities are no longer needed for this 

purpose’’ was deleted from the rule text. In 

addition, the rule text of this paragraph has been 

modified to add the phrase ‘‘and qualified customer 

securities’’ after the phrase ‘‘U.S. Treasury 

securities’’ to conform the rule text to the 

modification discussed above relating to the brokerdealer’s ability to post qualified customer securities. 

520Proposing Release, supra note 14, 87 FR at 

64640. 

members of the qualified U.S. Treasury 

securities CCA; 

• Subject to a written notice of the 

U.S. Federal Reserve Bank or bank 

provided to and retained by the U.S. 

Treasury securities CCA that the cash 

and U.S. Treasury securities in the 

account are being held by the U.S. 

Federal Reserve Bank or bank pursuant 

to Rule 15c3–3 and are being kept 

separate from any other accounts 

maintained by the U.S. Treasury 

securities CCA or any other person at 

the U.S. Federal Reserve Bank or bank; 

and 

• Subject to a written contract 

between the U.S. Treasury securities 

CCA and the U.S. Federal Reserve Bank 

or bank which provides that the cash 

and U.S. Treasury securities in the 

account are subject to no right, charge, 

security interest, lien, or claim of any 

kind in favor of the U.S. Federal Reserve 

Bank or bank or any person claiming 

through the U.S. Federal Reserve Bank 

or bank. 

These conditions with respect to the 

account designation, written notice, and 

written contract would be designed to 

achieve the same objectives as the 

analogous conditions discussed above 

with respect to the broker-dealer’s 

account at the U.S. Treasury securities 

CCA. The Commission did not receive 

comments on this aspect of the proposal 

and is adopting it substantially as 

proposed.512

The fifth rule set—identified in 

paragraph (b)(2)(v) of Note H—provided 

that the customer position margin be 

treated in accordance with rules of the 

clearing agency requiring systems, 

controls, policies, and procedures to 

return customer position margin to the 

broker-dealer that is no longer needed to 

meet a current margin requirement 

resulting from positions in U.S. 

Treasury securities of the customers of 

the broker-dealer no later than the close 

of the next business day after the day 

the customer position margin is no 

longer needed for this purpose.513 As 

discussed above, the debit would be 

limited to customer position margin 

required and on deposit at the U.S. 

Treasury securities CCA. This would 

mean that the broker-dealer could not 

include in this debit item the amount of 

customer position margin on deposit at 

the U.S. Treasury securities CCA that 

exceeds the broker-dealer’s margin 

requirement resulting from its 

customers’ cleared U.S. Treasury 

securities positions. The objective of 

this condition was to effectuate the 

prompt return of customer position 

margin to the broker-dealer. 

Several commenters opposed the 

proposed requirement to return excess 

collateral within one business day.514 A 

commenter stated that this requirement 

does not apply to margin posted to other 

clearing agencies or DCOs and does not 

seem to serve any customer protection 

benefit.515 The commenter stated further 

that FICC does not have a mechanism to 

push excess margin to direct 

participants and direct participants do 

not have the capability of accepting 

unsolicited excess margin. Rather, 

similar to other clearing organizations, 

this commenter stated that FICC 

regularly notifies direct participants of 

excess margin every time margin is 

calculated and then allows such direct 

participants to demand a return of such 

margin. Furthermore, this commenter 

stated that some direct participants 

prefer to leave excess margin with FICC 

to serve as a buffer for future margin 

calls. Another commenter stated that the 

proposed requirement was inconsistent 

with other cleared products and 

unnecessary for customer protection.516

Finally, a commenter stated that a 

required automatic return would add 

significant operational burdens, as 

broker-dealer participants would need 

to update their systems to accept an 

automatic return of excess margin 

without a request and ensure that any 

such amounts are appropriately treated 

as customer assets.517

The Commission agrees with 

commenters that the proposed 

requirement may add significant 

operational burdens to broker-dealers if 

a U.S. Treasury securities CCA is 

required to return excess collateral to a 

broker-dealer no later than the close of 

the next business day after the day the 

collateral is no longer needed to meet a 

current margin requirement resulting 

from positions in U.S. Treasury 

securities of the customers of the brokerdealer. Moreover, because the debit is 

limited to margin required and on 

deposit at the U.S. Treasury securities 

CCA, the broker-dealer has an incentive 

to obtain the prompt return of excess 

margin collateral held by the CCA that 

is in the form of securities. Specifically, 

the amount of the excess margin would 

remain a credit in the Rule 15c3–3a 

formula with no offsetting debit because 

the excess margin amount is no longer 

required by the U.S. Treasury securities 

CCA. Consequently, maintaining the 

excess margin collateral at the U.S. 

Treasury CCA could increase the 

amount that the broker-dealer must 

deposit into the customer reserve 

account.518

For these reasons, the Commission is 

removing this aspect of the requirement 

from the final rule. However, the final 

rule retains the provision that the 

customer position margin is treated in 

accordance with rules of the clearing 

agency requiring systems, controls, 

policies, and procedures to return 

customer position margin to the brokerdealer that is no longer needed to meet 

a current margin requirement resulting 

from positions in U.S. Treasury 

securities of the customers of the brokerdealer.519 Thus, it retains the overall 

objective of the proposal to effectuate 

the prompt return of customer position 

margin to the broker-dealer that is no 

longer needed to meet a margin 

requirement but leaves it to the brokerdealer and the U.S. Treasury securities 

CCA arrange when that amount will be 

returned. 

d. Fourth Condition—Commission 

Approval of Rules of U.S. Treasury 

Securities CCA 

The fourth condition for including 

customer position margin as a debit in 

the Rule 15c3–3a formula was set forth 

in paragraph (b)(3) of Note H.520 Under 


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521See 15 U.S.C. 78s. 

522See Note H(b)(3) to Rule 15c3–3a, as adopted. 

The rule text of this paragraph has been modified 

to add the phrase ‘‘and qualified customer 

securities’’ after the phrase ‘‘U.S. Treasury 

securities’’ to conform the rule text to the 

modification discussed above relating to the brokerdealer’s ability to post qualified customer securities. 

523See 17 CFR 240.15c3–3(a)(16) (defining the 

term ‘‘PAB account’’ to mean a proprietary 

securities account of a broker-dealer (which 

includes a foreign broker-dealer, or a foreign bank 

acting as a broker-dealer) other than a deliveryversus-payment account or a receipt-versuspayment account); 17 CFR 240.15c3–3(e) (requiring 

separate reserve accounts and reserve account 

computations for PAB accounts). 

524See 17 CFR 240.15c3–3a, Notes 1 through 10 

Regarding the PAB Reserve Bank Account 

Computation. 

525Proposing Release, supra note 14, 87 FR at 

64640. 

526See Rule 15c3–3a, Note 9 Regarding the PAB 

Reserve Bank Account Computation. 

527Proposing Release, supra note 14, 87 FR at 

64641. 

528FICC/DTCC Letter, supra note 33, at v. The 

commenter elaborated that it will take market 

participants substantial time to scope the 

transactions subject to the requirement, execute the 

documentation necessary to submit such 

transactions for central clearing, implement internal 

procedures and systems to monitor and ensure 

compliance, and establish the relevant accounts and 

operational integrations with a Treasury CCA. It 

also stated that, concurrently, the commenter will 

need to develop and test the systems, operations, 

and documentation needed to accommodate a far 

greater volume of transactions, create a strategy and 

framework to identify and monitor compliance, and 

establish margin segregation arrangements. Id. at 

27–28. 

529FICC/DTCC Letter, supra note 33, at v, 28. 

530MFA Letter, supra note 81, at 21. 

531 Id. at 21; MFA Letter II, supra note 125, at 8. 

532MFA Letter, supra note 81, at 21; see also 

MFA Letter II, supra note 125, at 5. 

this condition, the Commission would 

need to have approved rules of the U.S. 

Treasury securities CCA that meet the 

conditions of proposed Note H and the 

Commission would had to have 

published (and not subsequently 

withdrawn) a notice that brokers-dealers 

may include a debit in the customer 

reserve formula when depositing 

customer position margin to meet a 

margin requirement of the U.S. Treasury 

securities CCA resulting from positions 

in U.S. Treasury securities of the 

customers of the broker-dealer. The 

Commission staff would analyze the 

U.S. Treasury securities CCA’s approved 

rules and practices regarding the 

treatment of customer position margin 

and make a recommendation as to 

whether they adequately implement the 

customer protection objectives of the 

conditions set forth in proposed Note H. 

If satisfied with the staff’s 

recommendation, the Commission 

would publish a positive notice. The 

objective was to permit the debit only 

after the Commission has approved the 

U.S. Treasury securities CCA’s rules 

pursuant to section 19(b) of the 

Exchange and published the notice.521

Any changes to those rules and 

practices that would undermine these 

customer protection objectives could 

result in the Commission withdrawing 

the notice, at which point the 

Commission would no longer permit the 

debit. The Commission did not receive 

comments on this aspect of the proposal 

and is adopting it substantially as 

proposed.522

5. PAB Reserve Computation 

Finally, broker-dealers are required to 

perform a separate reserve computation 

for PAB accounts and maintain a 

separate reserve account with respect to 

that computation.523 The Rule 15c3–3a 

computation provides that this separate 

PAB reserve computation must be 

performed in accordance with the Rule 

15c3–3a computation for the brokerdealer’s non-PAB customers, except as 

provided in Notes to the PAB 

Computation.524 Therefore, the 

amendments discussed above adding a 

new debit in Item 15 would apply to the 

PAB reserve computation. Further, the 

Commission proposed to amend Note 9 

Regarding the PAB Reserve Bank 

Account Computation—which permits a 

debit in the PAB reserve computation 

for clearing deposits required to be 

maintained at registered clearing 

agencies—to clarify that the conditions 

set forth in new Note H with respect to 

including a debit in the non-PAB 

customer reserve computation would 

apply to the PAB reserve computation 

as well.525 The Commission did not 

receive comments on this aspect of the 

proposal and is adopting it as 

proposed.526

III. Compliance Dates 

In the Proposing Release, the 

Commission sought input from 

commenters on the appropriate 

compliance date or implementation 

schedule for the proposed 

amendments.527

Commenters generally supported a 

staged approach to implementation and 

compliance. Specifically, commenters 

stated that as a first step, the proposed 

requirements related to the segregation 

of house and customer margin 

(discussed in part II.B.1), access to 

central clearing (discussed in part 

II.B.2), and Rule 15c3–3 (discussed in 

part II.C) should become effective, and 

that as a second step, the proposed 

requirements related to clearing eligible 

secondary market transactions 

(discussed in part II.A) should become 

effective thereafter. Commenters also 

generally supported a lengthy or 

substantial timeframe for 

implementation. These comments are 

discussed in detail in this part. 

For example, one commenter which 

currently is a U.S. Treasury securities 

CCA stated that it would take the 

commenter and the U.S. securities 

industry as a whole substantial time to 

make the documentation, operational, 

organizational, and systems changes 

needed to comply with the proposal, 

and that the commenter would need to 

amend its rules, which amendments the 

Commission would need to approve.528

The commenter stated that it would be 

advisable to adopt a phased 

implementation schedule, under which 

different requirements of the proposal 

become effective, beginning with the 

customer segregation requirement. The 

commenter stated that, depending on 

when any final rule is adopted, FICC 

and market participants may be able to 

implement the segregation requirement 

by 2025, giving market participants a 

full year after the expected 

implementation of T+1 to focus on these 

changes.529

Another commenter stated that a 

phased approach to implementation is 

necessary to ensure that the market can 

support a clearing mandate without 

undue costs to market participants and 

market liquidity or stability.530 The 

commenter stated that the Commission 

should first adopt rules to ensure that 

market participants have sufficient 

access to clearing, including changes to 

the access models, the segregation of 

house and customer margin, and 

changes to Rule 15c3–3. The commenter 

then recommended that subsequent to 

the Commission’s adoption of such 

rules and FICC’s implementation of the 

necessary corresponding changes to its 

access models, which would require at 

a minimum two years, the Commission 

should provide 18 months for the 

implementation of a tailored clearing 

mandate that applies to bilateral repo 

transactions.531 The commenter stated 

that the Commission and market 

participants could then observe the 

effects of the clearing mandate in the 

bilateral repo market and consider 

whether and how to apply the mandate 

to triparty repo transactions.532

Another commenter stated, in 

considering an appropriate compliance 

timeframe, the Commission must build 

in the time necessary for: (i) FICC to 

work with the Commission to identify 

changes to its rules necessary to address 

the issues we have identified above with 

respect to the Sponsored Program; (ii) 

FICC to propose and adopt additional 

rules or amendments, subject to public 

notice and comment, that may be 


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533 ICI Letter, supra note 85, at 31. 

534 ICI Letter, supra note 85, at 31. 

535SIFMA/IIB Letter, supra note 37, at 33. 

536 ICI Letter, supra note 85, at 33. 

537SIFMA AMG Letter, supra note 35, at 15. 

538SIFMA AMG Letter, supra note 35, at 15. 

539SIFMA AMG Letter, supra note 35, at 15. For 

direct participants, these efforts would include 

obtaining information to classify their 

counterparties to determine who qualifies as an 

IDM, a hedge fund, or a leveraged account and 

negotiating clearing agreements with each hedge 

fund and leveraged account. For asset managers, 

these efforts would include implementation of 

documentation such as clearing agreements, give-up 

agreements, and related infrastructure. For managed 

funds, these efforts would include revisiting 

existing formation and distribution documentation, 

such as investment management agreements and 

investment guidelines, as they do not permit 

clearing activity or contemplate the clearing of U.S. 

Treasury securities. Buy-side firms will have to 

undertake a significant operational build to be able 

to settle and margin cleared transactions. The 

commenter, a trade association, stated that many of 

its members trade in blocks on behalf of multiple 

underlying accounts, and that the industry will 

have to consider and address how a mandatory 

requirement to clear would impact an asset 

manager’s transaction allocation process where 

some accounts are required to clear and others are 

not. Id. at 15–16. 

540SIFMA AMG Letter, supra note 35, at 16. 

541AIMA Letter, supra note 81, at 9. 

542AIMA Letter, supra note 81, at 9. 

543CME Letter, supra note 81, at 8. 

544BNY Mellon Letter, supra note 33, at 3. 

545Proposing Release, supra note 14, 87 FR at 

64632, 64637. 

needed to address these issues; (iii) the 

Commission to propose and adopt 

amendments to its rules, subject to 

public notice and comment, and 

provide regulatory relief as needed to 

address the issues for funds that we 

have highlighted above; and (iv) FICC 

and industry participants to implement 

the extensive changes to policies and 

procedures, documentation, and 

operations (as detailed above for funds) 

that will be needed to comply with final 

rules.533 The commenter stated that 

these steps will require a significant 

amount of time and recommended that 

the Commission propose a multi-year, 

staged, compliance schedule, including, 

at a minimum, that a requirement to 

comply with a clearing requirement 

should go into effect no earlier than 

three years after the Commission and 

FICC have adopted final rules and 

amendments, as described in (ii) and 

(iii).534

Another commenter stated that the 

Commission should implement any 

central clearing requirement in stages 

and at a measured pace commensurate 

with the size, scope and scale of the 

implementation program required.535

The commenter stated that the 

Commission should work to determine 

an implementation that will be the least 

disruptive to the market and that 

accounts for the practical challenges 

that different industry participants may 

face as they prepare for a central 

clearing requirement, which may not be 

clear until participants are able to 

review any proposals from FICC 

regarding implementation. The 

commenter stated that staging 

implementation would allow the 

Commission to appropriately calibrate 

the costs and benefits of any 

requirement to clear eligible secondary 

market transactions and referenced that 

similarly significant changes to market 

structure (i.e., triparty market reform 

and swaps clearing) were successfully 

phased-in over five or more years to 

allow adequate time for market 

readiness while mitigating the potential 

for disruption.536

Another commenter stated that, if 

adopting a clearing requirement, a 

measured approach to implementation 

is required. The commenter specified 

that any new requirement to clear 

should be introduced only after 

enhancements to the clearing 

infrastructure are achieved, FICC’s 

readiness is assured, and at least one 

other covered clearing agency registered 

with the Commission is ready to 

support the market in clearing eligible 

secondary market transactions.537 The 

commenter further stated that industry 

participants should have at least 18 

months to engage with each CCA on the 

design of an appropriate clearing model 

thar provides the minimum level of 

protection it described in its comment 

letter. The commenter also stated a 

timetable for clearing requirements 

should only be set only once sufficient 

consensus has emerged around the 

appropriate clearing model and 

appropriate regulatory requirements are 

developed. The commenter 

recommended that the clearing 

requirement should be phased in over 

several years based on the volume of 

U.S. Treasury securities transaction 

activity in which a market participant 

engages (like the phase-in approach 

which was followed for regulatory 

initial margin requirements for 

uncleared OTC derivatives which took 

more than five years following the 

publication of final rules to be fully 

implemented). The commenter stressed 

the importance of phasing in the new 

requirements in a manner that avoids 

too many market participants looking to 

finalize documentation and go-live with 

clearing all on the same day.538

The commenter also stated that a long 

phase-in period is essential, as there 

will be a significant implementation 

effort needed to comply with any new 

requirements.539 The commenter stated 

that it is difficult to estimate the 

potential scope of this work and the 

effort involved until the access models 

are more developed. The commenter 

stated that given the breadth of 

participation in the U.S. Treasury 

markets, the potential scale of the effort 

and time required to complete this 

work, implementation will take many 

years to complete after a final rule.540

An additional trade association 

commenter stated that its members 

would incur incredible costs as they 

establish numerous costly clearing 

relationships to ensure that all its 

transactions can be cleared as required, 

which will take a significant amount of 

time.541 The commenter therefore 

recommended a compliance date of at 

least 30 months after the publication of 

any final rule in the Federal Register.542

An additional commenter recognized 

that clearing requirements can have 

unintended and disruptive 

consequences and therefore 

recommended that the Commission 

implement the changes with respect to 

the segregation of house and customer 

margin, access models, and Rule 15c3– 

3 before moving forward with any 

expanded clearing requirements.543

Finally, an additional commenter 

supported an extensive implementation 

timeframe that is appropriately 

prioritized and sequenced due to the 

breadth of the proposal, the time and 

resources necessary for a covered 

clearing agency to revise its policies and 

procedures, and the changes necessary 

for market participants’ compliance. 

The commenter referred to tri-party 

market reform as a successful example 

of the time and sequencing involved in 

such a significant change.544

The Commission agrees with 

commenters that a phased approach to 

implementation and compliance would 

be appropriate for these amendments. 

As discussed in the Proposing Release, 

the Commission understands that the 

amendments to Rule 17ad– 

22(e)(18)(iv)(A) will likely result in a 

significant increase in the volume of 

U.S. Treasury securities transactions 

submitted for central clearing, including 

transactions of market participants that 

currently may not submit such 

transactions for central clearing.545 The 

Commission therefore stated its belief 

that additional changes with respect to 

the segregation of house and customer 

margin and access, as proposed in Rule 

17ad–22(e)(6)(i) and (e)(18)(iv)(C), 

respectively, may be warranted. These 

changes were designed to improve risk 

management by and access to the U.S. 

Treasury securities CCA and would also 

serve to help manage the risks and 


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546 Id. at 64632–33. 

547 Id. at 64637. 

548See AIMA Letter, supra note 81, at 9 (seeking 

30 months after publication of any final rule in the 

Federal Register). 

549See MFA Letter, supra note 81, at 21; ICI 

Letter, supra note 85, at 33. 

550See SIFMA/IIB Letter, supra note 37, at 33; 

BNY Mellon Letter, supra note 33, at 3; SIFMA 

AMG Letter, supra note 35, at 16. 

551 In addition, with respect to the compliance 

date, several commenters requested the 

Commission to consider interactions between the 

proposed rule and other recent Commission rules. 

In determining compliance dates, the Commission 

considers the benefits of the rules as well as the 

costs of delayed compliance dates and potential 

overlapping compliance dates. For the reasons 

discussed throughout the release, to the extent that 

there are costs from overlapping compliance dates, 

the benefits of the rule justify such costs. See infra 

parts IV.A and IV.C.2.e for a discussion of the 

interactions of the final rule with certain other 

Commission rules. 

552FICC/DTCC Letter, supra note 33, at v. 

facilitate access that would likely result 

from the requirement to clear eligible 

secondary market transactions.546 In 

addition, the Commission proposed 

changes to Rule 15c3–3 to facilitate 

implementation of the requirement to 

clear eligible secondary market 

transactions, by reducing the amount of 

broker-dealers cash and securities that 

would be needed to meet the 

requirements of Rule 15c3–3.547

The Commission continues to believe 

that the changes with respect to the 

segregation of house and customer 

margin, ensuring access to central 

clearing, and Rule 15c3–3 would help 

facilitate the central clearing of 

additional U.S. Treasury securities 

transactions, as will likely result when 

a requirement to clear eligible secondary 

market transactions goes into place. The 

Commission also agrees with the 

commenters, that it would be 

appropriate to implement those changes 

prior to the imposition of any clearing 

requirement. This would allow for the 

development of additional 

infrastructure that would support the 

eventual increased amount of central 

clearing that would occur upon the 

applicability of a requirement to clear 

eligible secondary market transactions. 

To do so, the Commission is adopting 

a different compliance date for the 

amendments to Rule 17ad–22(e)(6)(i) 

(regarding separation of house and 

customer margin), 17ad–22(e)(18)(iv)(C) 

(regarding access), and 15c3–3 

(regarding the broker-dealer customer 

protection rule), from the compliance 

date for the amendments to Rule 17ad– 

22(e)(18)(iv)(A) and (B) (regarding the 

requirements to clear eligible secondary 

market transactions and monitoring of 

the submission of such transactions). 

This staging would allow market 

participants, including U.S. Treasury 

securities CCAs, the opportunity to 

incorporate changes to their rules, 

systems, practices, contractual 

arrangements, and other documentation, 

prior to the applicability of a clearing 

requirement. It also would provide time 

between the implementation of 

structural changes to accommodate the 

separation of house and customer 

margin, the potential ability to 

rehypothecate margin pursuant to Rule 

15c3–3, as amended, and additional 

access by new types of market 

participants, on the one hand, and the 

requirement for a U.S. Treasury 

securities CCA to require its direct 

participants to clear eligible secondary 

market transactions, on the other hand. 

On the latter point, the Commission is 

incorporating two stages of compliance 

for the requirement to clear eligible 

secondary market transactions: the first 

would apply to the cash market 

transactions described in section (i) of 

the definition of an eligible secondary 

market transaction, and the second 

would apply to the repo market 

transactions described in section (ii) of 

the definition of an eligible secondary 

market transaction. Providing additional 

time for repo transactions to be centrally 

cleared should allow time for many 

market participants who are active in 

the repo market but do not centrally 

clear this volume of their transactions to 

plan for and implement necessary 

contractual arrangements and processes 

to manage the increase in volume of 

central clearing. 

With respect to the changes to Rule 

17ad–22(e)(6)(i) (regarding separation of 

house and customer margin), 17ad– 

22(e)(18)(iv)(C) (regarding access), and 

15c3–3 (regarding the broker-dealer 

customer protection rule), (1) each 

covered clearing agency will be required 

to file with the Commission any 

proposed rule changes regarding those 

amendments required under Section 

19(b) and/or advance notices required 

under Title VIII of the Dodd-Frank Act 

no later than 60 days following January 

16, 2024, and (2) the proposed rule 

changes must be effective by March 31, 

2025. With respect to the proposed 

changes to Rule 17ad–22(e)(18)(iv)(A) 

and (B) (regarding the requirements to 

clear eligible secondary market 

transactions and monitoring of the 

submission of such transactions), (1) 

each covered clearing agency will be 

required to file with the Commission 

any proposed rule changes regarding 

those amendments required under 

Section 19(b) and/or advance notices 

required under Title VIII of the DoddFrank Act no later than 150 days 

following January 16, 2024, and (2) the 

proposed rule changes must be effective 

by December 31, 2025, for cash market 

transactions encompassed by section (ii) 

of the definition of an eligible secondary 

market transaction, and by June 30, 

2026, for repo transactions encompassed 

by section (i) of the definition of an 

eligible secondary market transactions. 

Compliance by the direct participants of 

a U.S. Treasury securities CCA with the 

requirement to clear eligible secondary 

market transactions would not be 

required until December 31, 2025, and 

June 30, 2026, respectively, for cash and 

repo transactions. 

This staged implementation 

timeframe will encompass two and a 

half years from the time of the action set 

forth in this release. This amount of 

time is consistent with commenters who 

sought a staged, multi-year approach to 

implementation for this proposal, 

which, as adopted, is less extensive than 

what was proposed.548 It is also 

consistent with the comment of the 

existing U.S. Treasury securities CCA 

that stated that it and market 

participants would need until at least 

2025 to implement any final rule, as it 

allows for that timeframe. Although 

some commenters referred to potentially 

longer timeframes for implementation, 

whether expressly (e.g., by referring to 

some particular length of time, such as 

18 months or three years after the U.S. 

Treasury securities CCA has updated its 

rules 549) or more generally (e.g., by 

referring to the need for a lengthy 

timeline or several years to impose 

clearing requirements 550), the 

Commission believes that this 

timeframe would allow the benefits of 

greater central clearing to be achieved 

sooner and therefore is adopting the 

staged implementation timeframe 

discussed in this part.551

In addition, one commenter also 

stated its belief that, given the 

complexity and extent of changes that 

will be necessary to implement the 

proposal, it would be advisable to 

engage in a consultative process 

regarding the implementation timeline, 

with that process occurring after any 

adoption of the proposal because it is 

difficult for market participants to 

assess how long it will take to 

implement a requirement when they do 

not yet know with clarity the scope of 

the final requirement.552 The 

commenter specifically stated that, after 

any adoption of the proposal, the 

Commission should require U.S. 

Treasury CCAs to submit to the 

Commission a proposed rule change, 

pursuant to Section 19 of the Exchange 

Act, containing an implementation 

schedule by no later than 180 days after 


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553FICC/DTCC Letter, supra note 33, at v. 

554See 15 U.S.C. 78c(f). 

555See 15 U.S.C. 78w(a)(2). 

556See part II supra. 

557See part II.A.1 and part II.A.2 supra for a 

description of the requirement to clear eligible 

secondary market transactions including the 

definition of ‘‘eligible secondary market 

transaction.’’ 

558See part II.A.4 supra. 

559See part IV.A infra. 

560See part II.C supra. 

561See part II.B.2 supra. 

562See part II.C supra. 

563Samuel J. Hempel, R. Jay Kahn, Vy Nguyen, 

and Sharon Y. Ross, Non-Centrally Cleared Bilateral 

Repo, The OFR Blog (Aug. 24, 2022) (‘‘Hempel et 

al. (2022)’’), available at https://

www.financialresearch.gov/the-ofr-blog/2022/08/ 

24/non-centrally-cleared-bilateral-repo/. 

564See part IV.B.3.b.ii infra. See also Samuel J. 

Hempel, R. Jay Kahn, Robert Mann, and Mark 

Paddrik, Why Is So Much Repo Not Centrally 

Cleared?, OFR Brief (May 12, 2023) (‘‘Hempel et al. 

(2023)’’), available at https://

www.financialresearch.gov/briefs/2023/05/12/whyContinued 

the publication of the final rule in the 

Federal Register. The commenter stated 

that this would provide market 

participants with the ability to comment 

on the timing and requirements set forth 

in the proposed rule change with the 

benefit of knowing the requirements’ 

scope, and that the Commission and the 

commenter could then consider those 

comments in adopting a final 

implementation schedule. The 

commenter stated that this kind of 

deliberative and consultative approach 

would facilitate the adoption of a 

realistic timeline and thereby avoid the 

need for successive extensions and the 

attendant uncertainty and disruption 

such shifting timelines present.553

However, the Commission’s phased 

compliance timeline allows for the type 

of deliberation and consultation that the 

commenter recommends. A U.S. 

Treasury securities CCA will be 

required to submit proposed rule 

changes to comply with the 

requirements being adopted in this 

release, and there will be opportunity 

for comment on those proposals by 

market participants, thereby allowing 

for consultation about the potential 

impact of any such proposed rule 

changes. 

IV. Economic Analysis 

The Commission is mindful of the 

economic effects that may result from 

these amendments, including the 

benefits, costs, and the effects on 

efficiency, competition, and capital 

formation. Exchange Act section 3(f) 

requires the Commission, when it is 

engaged in rulemaking pursuant to the 

Exchange Act and is required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation.554

In addition, Exchange Act section 

23(a)(2) requires the Commission, when 

making rules pursuant to the Exchange 

Act, to consider among other matters the 

impact that any such rule would have 

on competition and not to adopt any 

rule that would impose a burden on 

competition that is not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act.555

The Commission is adopting 

amendments to its rules that impose 

additional requirements for any U.S. 

Treasury securities CCA.556 First, the 

amendments require that U.S. Treasury 

securities CCAs establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to, 

as applicable, establish objective, riskbased, and publicly disclosed criteria 

for participation, which require that the 

direct participants of such covered 

clearing agency submit for clearance 

and settlement all of the eligible 

secondary market transactions to which 

they are a counterparty.557 In addition, 

the amendments require that such CCAs 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to, as applicable, 

identify and monitor its direct 

participants’ required submission of 

transactions for clearing, including, at a 

minimum, policies and procedures that 

address any failures to submit 

transactions.558 Strengthening the 

membership standards will help reduce 

contagion risk to U.S. Treasury 

securities CCAs and bring the benefits of 

central clearing to more transactions 

involving U.S. Treasury securities, 

thereby lowering the risk of disruptions 

to the U.S. Treasury securities 

market.559

Second, the Commission is adopting 

additional requirements on how U.S. 

Treasury securities CCAs calculate, 

collect, and hold margin posted on 

behalf of indirect participants (i.e., 

customers) who rely on the services of 

a direct participant (i.e., the member of 

the U.S. Treasury securities CCA) to 

access the CCA’s services.560 As 

discussed in more detail below, such 

requirements also will improve the risk 

management practices at U.S. Treasury 

securities CCAs and incentivize and 

facilitate additional central clearing in 

the U.S. Treasury securities market. 

Third, the Commission is adopting 

amendments that will require that a U.S. 

Treasury securities CCA establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, as applicable, 

ensure that it has appropriate means to 

facilitate access to clearance and 

settlement services of all eligible 

secondary market transactions in U.S. 

Treasury securities, including those of 

indirect participants, and that its board 

of directors reviews these policies and 

procedures annually.561 Although these 

requirements do not prescribe specific 

methods for market participants to 

obtain indirect access to a U.S. Treasury 

securities CCA, they are intended to 

help ensure that all U.S. Treasury 

security CCAs review their indirect 

access models and ensure that they 

facilitate access to clearance and 

settlement services in a manner suited 

to the needs and regulatory 

requirements of market participants 

throughout the U.S. Treasury securities 

market, including indirect participants. 

Lastly, the Commission is amending 

its rules to permit margin required and 

on deposit at a U.S. Treasury securities 

CCA to be included as a debit item in 

the customer reserve formula, subject to 

certain conditions.562 As discussed 

further below, these amendments to its 

rules, in conjunction with the 

amendments requiring the separation of 

house and customer margin, should 

incentivize and facilitate additional 

central clearing in the U.S. Treasury 

securities market. 

The discussion of the economic 

effects of the rule amendments begins 

with a discussion of the risks inherent 

in the clearance and settlement process 

and how the use of a CCP can mitigate 

those risks. This is followed by a 

baseline of current U.S. Treasury 

securities market practices. The 

economic analysis then discusses the 

likely economic effects of the rule 

amendments, as well as their effects on 

efficiency, competition, and capital 

formation. The Commission has, where 

practicable, attempted to quantify the 

economic effects expected to result from 

these rule amendments. In some cases, 

however, data needed to quantify these 

economic effects is not currently 

available. For example, prior to the 

proposal the reporting of data for 

bilaterally cleared repo transactions was 

not a regulatory requirement, so 

counterparty-specific statistics were not 

available and any aggregate statistics on 

this market segment may not have been 

comprehensive.563 In the intervening 

period, and as discussed further below, 

the Department of the Treasury’s Office 

of Financial Research (OFR) has 

reported the results of a pilot data 

collection of non-centrally cleared 

bilateral repo.564 Likewise, the reporting 


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is-so-much-repo-not-centrally-cleared/. The OFR 

has also proposed rulemaking mandating the 

collection of daily transaction level data from 

certain financial companies on their non-centrally 

cleared bilateral repurchase agreement trades. See 

Office of Financial Research, Office of Financial 

Research Releases Proposal to Collect Data on 

Certain Repo Transactions (Jan. 5, 2023), available 

at https://www.financialresearch.gov/pressreleases/2023/01/05/office-of-financial-researchreleases-proposal-to-collect-data-on-certain-repotransactions/. 

565Reporting of additional cash transactions to 

TRACE, by certain U.S. and foreign banks, began on 

Sept. 1, 2022, but the recent nature of that change 

makes it difficult to draw conclusions from the 

limited data available. See generally Federal 

Reserve System, Agency Information Collection 

Activities: Announcement of Board Approval Under 

Delegated Authority and Submission to OMB, 86 FR 

59716 (Oct. 28, 2021); see also Bd. Governors Fed. 

Rsrv. Sys., Supporting Statement for the Treasury 

Securities and Agency Debt and Mortgage-Backed 

Securities Reporting Requirements, 

Federalreserve.gov, available at https://

www.federalreserve.gov/reportforms/formsreview/ 

FR%202956%20OMB%20SS.pdf (last visited Dec. 

11, 2023). 

566See part IV.C.2 infra. 

567An alternative method of reducing 

counterparty credit risk is delivery versus payment 

(‘‘DVP’’). Under DVP, counterparties aim to deliver 

securities and payment simultaneously, so that the 

transfer of securities happens if and only if payment 

has also been made. 

568For example, if the fulfillment of a contract 

depends on a counterparty exerting unobservable 

and costly effort, collateral can be used as a 

commitment device by putting more of the 

counterparty’s resources at stake in the case of 

nonfulfillment. See Bengt Holmstrom & Jean Tirole, 

Financial Intermediation, Loanable Funds, and the 

Real Sector, 112 Q. J. Econ. 663 (Aug. 1997); Albert 

J. Menkveld & Guillaume Vuillemey, The 

Economics of Central Clearing, 13 Ann. Rev. Fin. 

Econ. 153, 158 (2021). 

569 Darrell Duffie & Haoxiang Zhu, Does a Central 

Clearing Counterparty Reduce Counterparty Risk? 1 

Rev. Asset Pricing Stud. 74 (2011), available at 

https://academic.oup.com/raps/article-abstract/1/ 

1/74/1528254. The authors note that this benefit 

scales with the square root of the number of 

participants when the trading positions are 

statistically independent and identically 

distributed. The authors also note certain 

conditions that can impact netting efficiencies, e.g., 

when cross asset netting is allowed in non-centrally 

cleared markets, asset specific CCPs can negatively 

impact netting efficiency. We also note, as 

discussed below, that certain aspects of client 

clearing models can impact netting efficiency. 

570This example is from Duffie, supra note 27. 

571See Gary Gorton & George Pennacchi, 

Financial Intermediaries and Liquidity Creation, 45 

J. Fin. 49 (1990); see also Francesca Carapella & 

David Mills, Information Insensitive Securities: the 

Benefits of Central Counterparties (N.Y. Fed, 

working paper Oct. 17, 2012), available at https:// 

www.newyorkfed.org/medialibrary/media/research/ 

conference/2012/MP_Workshop/Carapella_Mills_

information_insensitive_securities.pdf. 

572See Ben Bernanke, Clearing and Settlement 

During the Crash, 3 Rev. Fin. Stud. 133 (1990). 

of U.S. Treasury securities transactions 

to TRACE has been until recently 565

limited to cash transactions in which at 

least one of the counterparties is a 

FINRA member, so analyses based on 

that data will necessarily be incomplete. 

In many cases, and as noted below, 

the Commission is unable to quantify 

the economic effects of the rule 

amendments and in the proposal 

solicited comment, including estimates 

and data from interested parties, to help 

inform the estimates of the economic 

effects of the proposal. As discussed 

further below, several commenters 

stated the importance of further research 

and to better understand the potential 

intended and unintended impacts of the 

rule. Although many of the commenters 

calling for additional research did not 

provide additional data or propose how 

any remaining uncertainty might be 

resolved, as discussed below, some 

commenters did provide limited data on 

quantifiable costs.566

Costs and benefits will depend in part 

on how market participants access 

central clearing in order to clear eligible 

secondary market transactions. As some 

commenters have highlighted, the 

current clearing framework may need to 

be changed and extended to support the 

requirement to clear eligible secondary 

market transactions. The Commission 

agrees that changes to the current 

clearing framework are necessary and 

therefore is adopting as proposed Rule 

17ad–22(e)(18)(iv)(C) that requires that a 

U.S. Treasury securities CCA establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, as applicable, 

ensure that it has appropriate means to 

facilitate access to clearance and 

settlement services of all eligible 

secondary market transactions in U.S. 

Treasury securities, including those of 

indirect participants, which policies 

and procedures the U.S. Treasury 

securities CCA’s board of directors 

reviews annually. 

A. Broad Economic Considerations 

Clearance and settlement risk is the 

risk that a counterparty fails to deliver 

a security or cash as agreed upon at the 

time when the security was traded. One 

method of reducing such risk is to 

require one or both counterparties to the 

trade to post collateral.567 The purpose 

of posting collateral in financial 

transactions is to alleviate frictions 

caused by adverse selection and moral 

hazard.568 The amount of collateral 

needed to support a set of unsettled 

trades, however, can depend on whether 

trades are cleared bilaterally or through 

a CCP. In cases where market 

participants have several outstanding 

buy and sell orders, central clearing 

reduces the total collateral required to 

support a given set of trades due to 

multilateral netting.569 A simple 

example illustrates the effect. Suppose 

there are 3 firms trying to complete 

three bilateral trades among themselves. 

Firm A is buying $90 million in U.S. 

Treasury securities from Firm B, Firm B 

is buying $80 million in the same U.S. 

Treasury securities from Firm C, and 

Firm C is buying $100 million in the 

same U.S. Treasury securities from Firm 

A. This means that over the settlement 

cycle, the firms in this example would 

need to post collateral to cover a total 

of $270 million in gross obligations to 

complete these three trades. If these 

trades were centrally cleared, however, 

then the net obligations would be 

substantially smaller. In this example, 

the collateral required would no longer 

be that required to support $270 million 

in outstanding obligations, but instead 

would reduce to $40 million: $20 

million for Firm C, and $10 million each 

for Firms A and B.570 Central clearing 

can, in part, replace a trading network 

made up of a web of bilateral 

relationships with a simpler hub and 

spoke model. As each connection is a 

potential source of failure, a simpler 

system can imply less risk. 

Clearance and settlement through a 

CCP can also make trades less 

‘‘informationally sensitive’’ in the sense 

that the value of the trade does not 

depend on information about the 

creditworthiness of the counterparties, 

thereby reducing adverse selection.571

This occurs when the trade is novated 

to the CCP, and the CCP becomes the 

buyer to every seller and the seller to 

every buyer. This reduces the need for 

investors to acquire private information 

about the credit risk of their 

counterparty. By mitigating adverse 

selection through the substitution of the 

CCP’s counterparty credit risk 

evaluation for a market participant’s 

own, central clearing through a CCP 

lowers the cost of trading by market 

participants and should increase their 

willingness to trade, thereby improving 

market liquidity. Reducing the 

information sensitivity of trades also 

increases the uniformity of the asset that 

is traded. In the absence of novation, the 

U.S. Treasury security is essentially 

bundled together with counterparty risk. 

That is, when buying or selling a 

security, if there is counterparty risk, 

the pricing depends not only on the 

security itself but also on the reliability 

of the counterparty to the trade. It is as 

if, from an economic perspective, one is 

‘‘buying’’ both the security and the 

characteristics of the counterparty. 

Besides the reduction in adverse 

selection, reducing counterparty credit 

risk makes the security a more standard 

product. Standardization itself increases 

liquidity.572

Financial networks that incorporate a 

CCP can further improve the resilience 


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573 Dietrich Domanski, Leonardo Gambacorta, and 

Cristina Picillo, Central clearing: trends and current 

issues, BIS Q. Rev. (Dec. 2015), available at https:// 

www.bis.org/publ/qtrpdf/r_qt1512g.pdf. 

574 John Chi-Fong Kuong, Self-Fulfilling Fire 

Sales: Fragility of Collateralized Short-Term Debt 

Markets, 34 Rev. Fin. Stud. 2910 (2021), available 

at https://academic.oup.com/rfs/article/34/6/2910/ 

5918033?login=true. 

575 G–30 Report, supra note 5, at 13. 

576See TMPG White Paper, supra note 13 

(‘‘[b]ilateral clearing involves varying risk 

management practices that are less uniform and less 

transparent to the broader market . . .’’). In 

addition, FICC has been designated by FSOC as a 

systemically important financial market utility, 

which brings heightened risk management 

requirements and additional regulatory supervision 

by both its primary regulator and the Board of 

Governors. See also U.S. Dept. of the Treasury, Fin. 

Stability Oversight Council, 2012 Annual Report, 

App. A, available at https://home.treasury.gov/ 

system/files/261/2012-Annual-Report.pdf (‘‘FSOC 

2012 Annual Report’’). 

577See e.g., Markus K. Brunnermeier & Yuliy 

Sannikov, A Macroeconomic Model with a 

Financial Sector, 104 a.m. Econ. Rev. 379 (Feb. 

2014); see also Zhiguo He & Arvind Krishnamurthy, 

Intermediary Asset Pricing, 103 a.m. Eco. Rev. 732 

(Apr. 2013). Balance sheet constraints and the 

impact of losses on risk aversion both affect the 

ability and willingness of market participants to 

provide liquidity. A CCP is not similarly affected 

as it does not supply liquidity. 

578See, e.g., John Y. Campbell & John H. 

Cochrane, By Force of Habit: A Consumption-Based 

Explanation of Aggregate Stock Market Behavior, 

107 J. Pol. Econ. 205 (Apr. 1999). 

579 G–30 Report, supra note 5, at 13. See also 

Duffie, supra note 27, at 4 (‘‘Further, given broad 

access to a CCP, some Treasury transactions could 

flow directly from ultimate sellers to ultimate 

buyers without necessarily impinging on dealer 

balance sheet space.’’). 

580The market responded to the stress of 2020 

through some increase in all-to-all trading. See 

MarketAxess, FIMSAC Slides, at 6 (Oct. 5, 2020), 

available at https://www.sec.gov/spotlight/fixedincome-advisory-committee/mcvey-fimsac-slides100120.pdf Additional central clearing may have 

enabled a greater increase. 

581AIMA Letter, supra note 81, at 2. 

582Citadel Letter, supra note 81, at 1. 583See AIMA Letter, supra note 81, at 2; CME 

Group, supra note 81, at 2; DTCC/FICC Letter, supra 

note 33, at 1; GTS Letter, supra note 81, at 3; ISDA 

Letter, supra note 391, at 2; LSEG Letter, supra note 

33, at 2; MFA Letter, supra note 81, at 2; ARB 

Trading et al. Letter, supra note 81, at 1; SIFMA/ 

IIB Letter, supra note 37, at 1; Sunthay Letter, supra 

note 33, at 4; Tradeweb Letter, supra note 81, at 2; 

Better Markets Letter, supra note 33, at 8; ICE Letter, 

supra note 33, at 1. 

584SIFMA/IIB Letter, supra note 37, at 2. 

585SIFMA/IIB Letter, supra note 37, at 2 (citing 

working papers by Duffie, supra note 27, and Liang 

and Parkinson, supra note 28). 

586 Id. at 2. 

587 Duffie, supra note 27, at 1. 

588Liang and Parkinson, supra note 28. 

of financial markets. The Bank for 

International Settlements stated in 2015 

that the shift to central clearing had 

helped to mitigate the risks that 

emerged in non-centrally cleared 

markets before and during the 2007– 

2009 financial crisis. Further, it had 

reduced financial institutions’ exposure 

to counterparty credit risk shocks 

through netting, margining and 

collateralization.573

Another potential benefit of central 

clearing is it should reduce the 

magnitude of, or even prevent, fire sales 

of assets. This mitigation of fire sale risk 

is achieved when a member defaults 

and the CCP manages the liquidation of 

assets. Central management of asset 

liquidation may mitigate suboptimal 

outcomes in the face of capital or 

margin constraints. For example, if 

investors believe the counterparty will 

sell in the case of a missed margin call, 

other investors may join the selloff, 

leading to further declines in asset 

prices. If market participants can pledge 

to not sell, then a more efficient 

equilibrium in which there is no fire 

sale could be achieved. In this way, the 

CCP acts as a way to select into the more 

efficient equilibrium by allowing 

members to credibly pre-commit to the 

coordinated liquidation of assets in the 

case of a missed margin call.574

Finally, broadening central clearing 

could lead to a wider group of liquidity 

providers, which likely would increase 

the reliability of access to funding 

during periods of market stress.575 The 

reason is that novation of the trade to a 

central counterparty reduces one of the 

major reasons for not doing business 

with a particular counterparty: the risk 

that that counterparty may fail to deliver 

on its obligations. It also reduces one of 

the reasons for failing to provide 

liquidity, namely concerns over the 

credit risk of counterparties. Therefore, 

as a result of increased levels of central 

clearing and the resulting increased 

centralization of counterparty credit risk 

evaluation by a CCP and the CCP’s 

application of consistent and 

transparent risk management,576 more 

counterparties—who would also be 

potential liquidity providers—would be 

willing to compete to provide liquidity 

to buy-side investors and to each other. 

In addition, several academic studies 

following the 2008 financial crisis 

emphasize the role of intermediary 

balance sheet constraints as a cause of 

financial crises.577 Moreover, losses 

experienced by market participants can 

lead to an increase in risk aversion 

leading those market participants to 

exit, creating a need for new market 

participants to replace them in order to 

provide liquidity.578 Therefore, either 

because of increased risk aversion or 

because some friction implies that the 

liquidity providers who find themselves 

warehousing the asset can no longer do 

so due to trading losses, outside 

liquidity providers may play an 

important role in stabilizing the market. 

In addition, central clearing facilitates 

anonymized all-to-all trading that would 

enable the provision of market liquidity 

by investors.579 580

Several commenters were generally 

supportive of benefits of central 

clearing. One commenter stated that it, 

‘‘ . . . supports central clearing because, 

when calibrated appropriately, it has 

increased resiliency, liquidity and 

transparency in financial markets.’’ 581

Another commenter stated that ‘‘[i]f 

implemented thoughtfully, increased 

central clearing of Treasury cash and 

repurchase (‘‘repo’’) transactions will 

reduce systemic risk and meaningfully 

improve counterparty risk management, 

market liquidity, and resiliency.’’ 582

Several additional commenters made 

similar statements.583

Several commenters, including some 

who were generally supportive of the 

benefits of central clearing, referenced 

the need to do additional study before 

imposing any requirement on U.S. 

Treasury securities CCAs for their 

participants to clear and settle eligible 

secondary market transactions. One 

commenter stated that the Commission 

should conduct detailed analysis on the 

costs and benefits of central clearing 

across market segments and participant 

types, as well as analyze the overall 

impact on Treasury market liquidity. 

The commenter stated that it is widely 

recognized within existing literature on 

Treasury market structure reform that 

further detailed study is needed in this 

area. The commenter also stated that 

increased central clearing resulting from 

incentives to centrally clear U.S. 

Treasury securities transactions would 

provide additional data for this 

analysis.584

In support of its claim that it is widely 

recognized within existing literature on 

Treasury market structure reform that 

further study is needed, the commenter 

cites two working papers.585 The first 

citation includes a quote stating that it 

would be difficult to estimate the 

amount of liquidity savings associated 

with central clearing without further 

study.586 However, the cited work is 

generally supportive of central clearing, 

stating that ‘‘Without a broad central 

clearing mandate, the size of the 

Treasury market will outstrip the 

capacity of dealers to safely 

intermediate the market on their own 

balance sheets, raising doubts over the 

safe-haven status of U.S. Treasuries and 

concerns over the cost to taxpayers of 

financing growing federal deficits.’’ 587

The second citation provided by the 

commenter also focuses on the potential 

benefit of improved liquidity.588 The 

working paper states that a potential 

mandate for wider use of central 


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589 Id. 

590 Id. at 3. 

591SIFMA AMG Letter, supra note 37, at 2–3. 

592SIA Partners Comment, supra note 52, at 8. 

593See, e.g., Duffie, supra note 27; Duffie and 

Zhu, supra note 569; Duffie, infra note 718; Duffie 

et al., infra note 718; G–30 Report, supra note 5; 

TMPG White Paper, supra note 13; TMPG Repo 

White Paper, supra note 75; Hempel et al. (2022), 

supra note 563; Hempel et al. (2023), supra note 

564; Kahn & Olson, supra note 628; 2017 OFR 

Report, infra note 797; 2021 IAWG Report, supra 

note 4; Staffs of the U.S. Department of the 

Treasury, Board of Governors of the Federal Reserve 

System, Federal Reserve Bank of New York, U.S. 

Securities and Exchange Commission, and U.S. 

Commodity Futures Trading Commission, 

Enhancing the Resilience of the U.S. Treasury 

Market: 2022 Staff Progress Report (Nov. (2023), 

supra note 564; Kahn & Olson, supra note 628; 2017 

OFR Report, infra note 797; 2021 IAWG Report, 

supra note 4; Staffs of the U.S. Department of the 

Treasury, Board of Governors of the Federal Reserve 

System, Federal Reserve Bank of New York, U.S. 

Securities and Exchange Commission, and U.S. 

Commodity Futures Trading Commission, 

Enhancing the Resilience of the U.S. Treasury 

Market: 2022 Staff Progress Report (Nov. 2022), 

available at https://home.treasury.gov/system/files/ 

136/2022-IAWG-Treasury-Report.pdf (‘‘2022 IAWG 

Report’’); Staffs of the U.S. Department of the 

Treasury, Board of Governors of the Federal Reserve 

System, Federal Reserve Bank of New York, U.S. 

Securities and Exchange Commission, and U.S. 

Commodity Futures Trading Commission, 

Enhancing the Resilience of the U.S. Treasury 

Market: 2023 Staff Progress Report (Nov. 2023), 

available at https://home.treasury.gov/system/files/ 

136/20231106_IAWG_report.pdf (‘‘2023 IAWG 

Report’’); 2017 Treasury Report, infra note 736; 

Joint Staff Report, supra note 4. 

594See, e.g., part IV.B.5 infra. 

595See part IV.C.2.a.ii infra. 

596See part IV.B.6 infra, for a discussion of the 

Mar. 2020, Sept. 2019, and Oct. 2014 market 

disruptions. See SEC Staff Report on U.S. Credit 

Markets Interconnectedness and the Effects of the 

COVID–19 Economic Shock (Oct. 2020), supra note 

280, for discussion of the interconnectedness of 

financial crisis and market disruptions. 

597Barnichon et al., estimate that ‘‘the 2007–08 

financial crisis persistently lowered output by 

roughly 7 percentage points. This is a large number: 

In dollar terms, it represents a lifetime income loss 

in present-discounted value terms of about $70,000 

for every American.’’ Regis Barnichon, Christian 

Matthes, and Alexander Ziegenbein, The Financial 

Crisis at 10: Will We Ever Recover?, FRBSF Econ. 

Letter 2018–19 (Aug. 13, 2018), available at https:// 

www.frbsf.org/economic-research/publications/ 

economic-letter/2018/august/financial-crisis-at-10- 

years-will-we-ever-recover/?utm_source=frbsfhome-economic-letter-title&utm_

medium=frbsf&utm_campaign=economic-letter. 

Romer and Romer (2017) study a panel of countries 

in the Organization for Economic Co-operation and 

Development and find that gross domestic product 

is typically about 9 percentage points lower five 

years after an extreme financial crisis. Christina 

Romer and David Romer, New Evidence on the 

Aftermath of Financial Crises in Advanced 

Countries, 107 a.m. Econ. Rev. 3,072 (Oct. 2017). 

598See Exchange Act section 19(b) and Rule 19b– 

4. 

clearing for Treasury securities is the 

second of four complementary measures 

for enhancing the liquidity of U.S. 

Treasury markets when under stress.589

The cited work also does not address 

the potential benefits of increased 

central clearing other than the potential 

for improved liquidity. Immediately 

following the authors’ statement in favor 

of further study, they state that ‘‘If such 

a study were to conclude that expanded 

clearing is not appropriate for Treasury 

securities, it should explain what 

distinguishes Treasury markets from the 

many other markets, such as equities 

and Treasury futures, for which there is 

a clearing mandate.’’ 590

Another commenter stated that the 

Commission should substantiate the 

benefits and potential costs of clearing 

through additional studies and data. 

The commenter stated that the 

Commission’s proposal should be 

considered after the Commission has 

had an opportunity to gather additional 

data and further assess whether 

increased clearing is the best way to 

mitigate the risks confronting the U.S. 

Treasury market, including a more indepth understanding of how these 

changes will affect the costs of 

transactions for institutional investors 

who depend on access to these markets 

for active portfolio management and, as 

a result, represent a significant source of 

market liquidity.591 In addition, one 

commenter, which surveyed market 

participants as the basis of its comment, 

conveyed a ‘‘strong belief that 

insufficient review and examination has 

been given to the proposal by the 

official sector and that such work needs 

to be detailed and focused to properly 

vet a mixture of economic, operational, 

legal and market challenges before the 

proposal is enacted.’’ 592

The Commission has reviewed the 

academic literature on central clearing 

as well as the reports published by the 

G–30, the TMPG, the OFR, and 

others 593 and does not agree with 

commenters that suggest that additional 

study should precede adoption of a 

requirement for U.S. Treasury securities 

CCAs to obligate direct participants to 

clear eligible secondary market 

transactions. Although the Commission 

recognizes that some of the benefits of 

additional central clearing of eligible 

secondary market transactions may be 

mitigated for certain transactions,594 the 

Commission has consulted with other 

regulators regarding this proposal and 

believes it has performed sufficient 

analysis in both the Proposing Release 

and in this release to consider the costs 

and benefits arising from its proposal. 

As discussed in more detail 

throughout this release, and especially 

in part IV.C infra, the Commission 

understands that the costs associated 

with the requirement to clear eligible 

secondary market transactions will vary 

depending on how a market participant 

is able to and/or chooses to access 

central clearing. The degree to which 

market participants have increased costs 

will depend largely on whether and 

how they currently access central 

clearing, and therefore, costs likely will 

vary greatly across different types of 

market participants. For example, for 

certain indirect participants whose 

transactions with direct participants of 

a U.S. Treasury securities CCA are not 

submitted for central clearing currently, 

the costs of establishing some indirect 

participant relationship, whether 

through FICC’s Sponsored Service or 

some other client clearing model, may 

be high. In addition, following the 

initial costs, the ongoing costs of 

submitting transactions for central 

clearing, such as posting margin and 

paying fees to a direct participant which 

facilitates access, may also be high.595

However, benefits will accrue from 

the requirement to submit for clearing 

and settlement eligible secondary 

market transactions. As discussed 

earlier in this section and in part IV.C.1 

supra, one of the several cited benefits 

of additional central clearing is the 

increased resiliency of centrally cleared 

markets. The economic costs of market 

disruptions can be high so market 

changes that decrease the probability of 

such events by even a small amount can 

result in a large expected economic 

benefit. Discussion of disruptions in the 

U.S. Treasury Securities Market over the 

last decade typically discuss the size of 

the market and interconnectedness of 

the U.S. Treasuries markets with other 

financial markets as evidence of their 

importance; estimates of the cost to the 

U.S. economy as a result of these 

disruptions are less common.596

However, there is evidence that the 

costs of extreme financial crises can be 

high.597

In addition, the requirement for direct 

participants to clear such transactions 

will reduce risk to the U.S. Treasury 

securities CCA, by reducing 

counterparty risk and enabling 

additional multilateral netting and 

centralized default management, as 

discussed in part II.A.1 supra. Further, 

to the extent that implementation costs 

arise from changes to the CCA’s rules, 

the CCA’s implementation of the 

requirement will provide further 

opportunity to consider the costs and 

benefits of particular methods of 

implementation. Because CCAs are selfregulatory organizations, any rule 

changes to implement the requirement 

will need to be reviewed by the 

Commission,598 and commenters will be 

able to comment on the particular 


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Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2775 

599See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111– 

15 (D.C. Cir. 2022). This approach also follows SEC 

staff guidance on economic analysis for rulemaking. 

See SEC Staff, Current Guidance on Economic 

Analysis in SEC Rulemaking (Mar. 16, 2012), 

available at https://www.sec.gov/divisions/riskfin/ 

rsfi_guidance_econ_analy_secrulemaking.pdf (‘‘The 

economic consequences of proposed rules 

(potential costs and benefits including effects on 

efficiency, competition, and capital formation) 

should be measured against a baseline, which is the 

best assessment of how the world would look in the 

absence of the proposed action.’’); id. at 7 (‘‘The 

baseline includes both the economic attributes of 

the relevant market and the existing regulatory 

structure.’’). The best assessment of how the world 

would look in the absence of the proposed or final 

action typically does not include recently proposed 

actions, because that would improperly assume the 

adoption of those proposed actions. 

600Letter from Eric Pan, Pres. & CEO, and Susan 

Olsen, General Counsel, Investment Company 

Institute at 1 (Aug. 17, 2023) (‘‘ICI Letter 2’’) (‘‘The 

Commission has issued a wide range of 

interconnected rule proposals . . . [that] in the 

aggregate warrant further analysis by the 

Commission.’’); Letter from Jennifer W. Han, 

Executive Vice President, Chief Counsel & Head of 

Global Regulatory Affairs, Managed Funds 

Association at 6 (July 21, 2023) (‘‘MFA Letter 2’’) 

(‘‘the Commission should holistically examine all of 

the pending Proposals, consider the potential 

overlap between them, and . . . evaluat[e] the costs 

and benefits of the Proposals in light of one 

another.’’); see also ARB et al. Letter, supra note 81, 

at 9 (‘‘the Commission has simultaneously put 

forward multiple proposals designed to achieve [ ] 

objectives without considering how these various 

proposals interact with each other.’’); cf. AIMA 

Letter II, supra note 115, at 4 (‘‘Together, the 

Treasury Clearing Proposal and ATS Proposal 

render the [then-proposed amendments to the 

definition of dealer] unnecessary.’’). 

601Those six proposals are: Amendments to Form 

PF to Require Current Reporting and Amend 

Reporting Requirements for Large Private Equity 

Advisers and large Liquidity Fund Advisers, Release 

No. IA–5950 (Jan. 26, 2022) 87 FR 9106 (Feb 17, 

2022) (see MFA Letter 2, supra note 600, at 10–12); 

Modernization of Beneficial Ownership Reporting, 

Release Nos. 33–11030, 34–94211 (Feb. 10, 2022), 

87 FR 13846 (Mar. 10, 2022) (see MFA Letter 2, 

supra note 600, at 14–15); Short Position and Short 

Activity Reporting by Institutional Investment 

Managers, Release No. 34–94313 (Feb. 25, 2022), 87 

FR 14950 (Mar. 16, 2022) (see MFA Letter 2, supra 

note 600, at 15–16); Private Fund Advisers; 

Documentation of Registered Investment Adviser 

Compliance Reviews, Release No. IA–5955 (Feb. 9, 

2022), 87 FR 16886 (Mar. 24, 2022) (see MFA Letter 

2, supra note 600, passim); Prohibition Against 

Conflicts of Interest in Certain Securitizations, 

Release No. 33–11151 (Jan. 25, 2023), 88 FR 9678 

(Feb. 14, 2023) (see MFA Letter 2, supra note 600, 

at 21–22); Outsourcing by Investment Advisers, 

Release No. IA–6176 (Oct. 26, 2022), 87 FR 68816 

(Nov. 16, 2022) (see MFA Letter 2, supra note 600, 

at 17–18). 

602 Form PF; Event Reporting for Large Hedge 

Fund Advisers and Private Equity Fund Advisers; 

Requirements for Large Private Equity Fund Adviser 

Reporting, Release No. IA–6297 (May 3, 2023) 88 

FR 38146 (June 12, 2023) (‘‘May 2023 SEC Form PF 

Amending Release’’). The Form PF amendments 

require large hedge fund advisers and all private 

equity fund advisers to file reports upon the 

occurrence of certain reporting events. The 

compliance dates are Dec. 11, 2023, for the event 

reports in Form PF sections 5 and 6, and June 11, 

2024, for the remainder of the Form PF 

amendments. 

603Private Fund Advisers; Documentation of 

Registered Investment Adviser Compliance Reviews, 

Release No. IA–6383 (Aug. 23, 2023), 88 FR 63206 

(Sept. 14, 2023) (‘‘Private Fund Advisers Adopting 

Release’’). The Private Fund Advisers Adopting 

Release includes new rules designed to protect 

investors who directly or indirectly invest in 

private funds by increasing visibility into certain 

practices and restricting other practices, along with 

amendments to the Advisers Act books and records 

rule and compliance rule. The amended Advisers 

Act compliance provision for registered investment 

advisers has a Nov. 13, 2023, compliance date. The 

compliance date is Mar. 14, 2025, for the rule’s 

quarterly statement and audit requirements for 

registered investment advisers with private fund 

clients. For the rule’s adviser-led secondaries, 

restricted activity, and preferential treatment 

requirements, the compliance date is Sept. 14, 2024, 

for larger advisers and Mar. 14, 2025, for smaller 

advisers. See Private Fund Advisers Adopting 

Release, sections IV, VI.C.1. 

604 Modernization of Beneficial Ownership 

Reporting, Release No. 33–11253 (Oct. 10, 2023), 88 

FR 76896 (Nov. 7, 2023) (‘‘Beneficial Ownership 

Amending Release’’). Among other things, the 

amendments shorten the filing deadlines for 

beneficial ownership reports filed on Schedule 13D 

and Schedule 13G. The compliance dates are 90 

days after publication in the Federal Register, for 

Schedule 13D amended filing deadlines; Sept. 30, 

2024, for the Schedule 13G amended filing 

deadlines; and Dec. 18, 2024, for the structured data 

requirement. 

605Reporting of Securities Loans, Release No. 34– 

98737 (Oct. 13, 2023), 88 FR 75644 (Nov. 3, 2023) 

(‘‘Rule 10c–1a Adopting Release’’). The securities 

loan reporting rule requires any person who loans 

a security on behalf of itself or another person to 

report information about securities loans to a 

registered national securities association (namely, 

FINRA) and requires FINRA to make certain 

information it receives available to the public. The 

covered persons will include market intermediaries, 

securities lenders, broker-dealers, and reporting 

agents. The final rule’s compliance dates require 

that FINRA propose its rules within four months of 

the effective date of final Rule 10c–1a, or 

approximately May 2024, and finalize them no later 

than 12 months after the effective date of final Rule 

10c–1a, or approximately Jan. 2025; that FINRA 

implement data retention and availability 

requirements for reporting 24 months after the 

effective date of final Rule 10c–1a, or approximately 

Jan. 2026; that covered persons report Rule 10c–1a 

information to FINRA starting on the first business 

day thereafter; and that FINRA publicly report Rule 

10c–1a information within 90 calendar days 

thereafter, or approximately Apr. 2026. See Rule 

10c–1a Adopting Release, section VIII, at 75691. 

606Short Position and Short Activity Reporting by 

Institutional Investment Managers, Release No. 34– 

98738 (Oct. 13, 2023), 88 FR 75100 (Nov. 1, 2023) 

(‘‘Short Position Reporting Adopting Release’’). The 

new rule and related form are designed to provide 

greater transparency through the publication of 

short sale-related data to investors and other market 

participants. Under the new rule, institutional 

investment managers that meet or exceed certain 

specified reporting thresholds are required to 

report, on a monthly basis using the related form, 

specified short position data and short activity data 

for equity securities. The compliance date for the 

rule is 12 months after the effective date of the 

release, which will be approximately Jan. 2025. In 

addition, the Short Position Reporting Adopting 

Release amends the national market system plan 

governing CAT to require the reporting of reliance 

on the bona fide market making exception in the 

Commission’s short sale rules. The compliance date 

for the CAT amendments is 18 months after the 

effective date, or approximately July 2025. 

607Prohibition Against Conflicts of Interest in 

Certain Securitizations, Release No. 33–11254 (Nov. 

27, 2023), 88 FR 85396 (Dec. 7, 2023) 

(‘‘Securitizations Conflicts Adopting Release’’). The 

new rule prohibits an underwriter, placement agent, 

initial purchaser, or sponsor of an asset-backed 

security (ABS) (including a synthetic ABS), or 

certain affiliates or subsidiaries of any such entity, 

from engaging in any transaction that would 

involve or result in certain material conflicts of 

interest. The compliance date is 18 months after 

publication in the Federal Register, or June 9, 2025. 

608 In addition, commenters indicated there could 

also be overlapping compliance costs between the 

final amendments and proposals that have not been 

adopted. See, e.g., ICI Letter 2, supra note 600, at 

8 n.13. To the extent those proposals are adopted, 

the baseline in those subsequent rulemakings will 

reflect the existing regulatory requirements at that 

time. 

changes and issues raised by such 

changes, including costs and benefits. 

B. Baseline 

The baseline against which the costs, 

benefits, and the effects on efficiency, 

competition, and capital formation of 

the final rule are measured consists of 

the current state of the market for U.S. 

Treasury securities, including the repo 

market, current practice as it relates to 

the purchase and sale of U.S. Treasury 

securities, and the current regulatory 

framework. The economic analysis 

considers existing regulatory 

requirements, including recently 

adopted rules, as part of its economic 

baseline against which the costs and 

benefits of the final rule are 

measured.599

Certain commenters requested the 

Commission to consider interactions 

between the economic effects of the 

proposed rule and other recent 

Commission proposals.600 The 

Commission recently adopted six of the 

proposed rules mentioned by 

commenters as potentially impacting 

the economic effects of the final rule,601

namely the May 2023 SEC Form PF 

Amending Release,602 Private Fund 

Advisers Adopting Release,603

Beneficial Ownership Amending 

Release,604 the Rule 10c–1a Adopting 

Release,605 the Short Position Reporting 

Adopting Release,606 and the 

Securitizations Conflicts Adopting 

Release.607 These rules were not 

included as part of the baseline in the 

Proposing Release because they had not 

been adopted at that time. In response 

to commenters, this economic analysis 

considers potential economic effects 

arising from any overlap between the 

compliance period for the final 

amendments and these recently adopted 

rules.608

1. U.S. Treasury Securities 

U.S. Treasury securities are direct 

obligations of the U.S. Government 

issued by the U.S. Department of the 

Treasury. After issuance in the primary 

market U.S. Treasury securities trade in 


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2776 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

609There is also an active market for U.S. 

Treasury securities that trade on a ‘‘when-issued’’ 

(WI) basis. ‘‘Based on Treasury TRACE transactions 

data, WI trading volume averaged $80 billion per 

day between July 1, 2019, and June 30, 2020, 

accounting for 12% of the $651 billion traded daily 

across all Treasury securities.’’ See Michael 

Fleming, Or Shachar, and Peter Van Tassel, 

Treasury Market When-Issued Trading Activity, 

Liberty Street Economics Blog (Nov. 30, 2020), 

available at https://

libertystreeteconomics.newyorkfed.org/2020/11/ 

treasury-market-when-issued-trading-activity/. As 

discussed in the Proposing Release, supra note 14, 

87 FR at 64615, for purposes of this rulemaking 

only the WI market after the auction but before 

issuance (WI on-the-run issues) is considered part 

of the secondary market for U.S. Treasury 

securities. Most of the WI trading in the Fleming, 

Shachar, and Van Tassel analysis occurred in onthe-run issues. (‘‘WI trading that occurs up to and 

including the auction day (account[s] for about onethird of WI trading) and WI trading that occurs after 

the auction day (account[s] for about two-thirds of 

WI trading’’).) For a discussion of how WI trading 

functions in the context of central clearing, see 

Kenneth D. Garbade & Jeffrey F. Ingber, The 

Treasury Auction Process: Objectives, Structure, 

and Recent Adaptations, 11 Current Issues Econ. & 

Fin. 1 (2005), available at https://

www.newyorkfed.org/medialibrary/media/research/ 

current_issues/ci11-2.html. 

610On-the-run U.S. Treasury securities are the 

most recently auctioned nominal coupon securities. 

These securities are referred to as ‘‘on-the-run’’ 

starting the day after they are auctioned. Nominal 

coupon securities pay a fixed semi-annual coupon 

and are currently issued at original maturities of 2, 

3, 5, 7, 10, 20, and 30 years. These standard 

maturities are commonly referred to as 

‘‘benchmark’’ securities because the yields for these 

securities are used as references to price a number 

of private market transactions. 

611See SIFMA US Treasury Securities Statistics, 

available at https://www.sifma.org/resources/ 

research/us-treasury-securities-statistics/. 

612U.S. Treasury, Debt Position and Activity 

Report (July 31, 2023), available at https://

www.treasurydirect.gov/government/public-debtreports/debt-position-and-activity-report/. 

an active secondary market.609 A 

number of types of market participants 

intermediate between investors in U.S. 

Treasury securities. These investors 

hold U.S. Treasury securities as a 

relatively riskless way of saving, as a 

way of placing a directional bet on 

interest rates, or as a means of hedging 

against deflation. U.S. Treasury 

securities can also function directly as 

a medium of exchange in some 

instances, and, as described in more 

detail below, as collateral for loans. 

Market participants refer to the most 

recently issued U.S. Treasury securities 

as ‘‘on-the-run,’’ with earlier issues 

referred to as ‘‘off-the-run’’.610 Figure 1 

shows the outstanding value of on-therun (Panel A) and off-the-run (Panel B) 

U.S. Treasury securities. On-the-run 

U.S. Treasury securities have 

consistently made up approximately 3% 

of the total value of all marketable U.S. 

Treasury securities during the 2012– 

2022 period, but, as Figure 3 shows, 

account for a disproportionate share of 

trading volume. Thus, an on-the-run 

security is generally far more liquid 

than a similar off-the-run security. 

As of November 2023, the total market 

value outstanding of marketable U.S. 

Treasury securities held by the public 

was $26.3 trillion.611 As shown in 

Figure 2, the value of marketable U.S. 

Treasury securities outstanding has 

increased by approximately $19 trillion 

since 2000. The total amount of 

marketable U.S. Treasury securities 

issued during 2022 was $17.4 trillion.612


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0.6 

o.s 

lo.4 

1: 

o.i 

0.0 

Figure 1: On-the-run and off-the-run U.S. Treasury securities (trillions? 

Panel A-. On-the-run ll'easury Securities Panel 8: Off-the-run ll'easury Securities 

!l!GIII l year or less I , .. l year or less I 1- 2-lOyears l 1- 2-lOyears I - <lOyears I 20 1- <lOyears I 

15 

i 10 

5 

0 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2012 2013 2014 2015 2016 2017 2018 2019 2020 20212022 

a Source: Calculated from U.S. Treasury Monthly Statement of the Public Debt (MSPD). See Dep't of the 

Treas., MSPD (2023), available at https://fiscaldata.treasury.gov/datasets/monthly-statement-publicdebt/detail-of-marketable-treasury-securities-outstanding. 
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2777 

613TMPG White Paper, supra note 13, at 6. The 

Federal Reserve Bank of New York serves as fiscal 

agent for the U.S. Treasury in conducting auctions 

of marketable U.S. Treasury debt. See 12 U.S.C. 391. 614See Federal Reserve Bank of New York, 

Administration of Relationships with Primary 

Dealers, available at https://www.newyorkfed.org/ 

markets/primarydealers.html. Specifically, primary 

dealers are required to be either (1) a registered 

broker-dealer or government securities brokerdealer, which is approved as a member of the 

Financial Industry Regulatory Authority, Inc. and 

has net regulatory capital of at least $50 million, or 

(2) a state or federally chartered bank or savings 

association (or a state or federally licensed branch 

or agency of a foreign bank) that is subject to bank 

supervision and maintains at least $1 billion in Tier 

1 capital. Id. Thus, for those primary dealers that 

fall into the former category, they are a subset of 

the broader set of registered broker-dealers or 

government securities broker-dealers. 

615The Treasury Department typically announces 

a new security that it intends to sell several days 

before the auction at which it is first sold to the 

public. These securities begin trading after 

announcement before the auction and through 

issuance, which occurs a few days after the auction. 

Such trading is known generally as ‘‘when-issued’’ 

trading; however, in the timeframe between the 

announcement and the auction, such trading is 

known as when-issued and referred to as such by 

market participants, but after the auction and before 

issuance, the securities are typically referred to 

simply as on-the-run, consistent with market 

practice. See Fleming et. al. supra note 609. 

616Another 26% was Agency MBS, 4% corporate 

debt, with the remainder in municipal, non-agency 

mortgage-backed, Federal agency debt and assetbacked securities. SIFMA, US Fixed Income 

Securities Statistics (last updated Aug. 7, 2023), 

available at https://www.sifma.org/resources/ 

research/us-fixed-income-securities-statistics/. 

617 Id. 

In the primary market, the Treasury 

Department auctions securities (i.e., 

debt) to the public through a 

competitive bidding process and 

subsequently issues awarded securities 

to finance the Federal Government.613

Financial institutions designated by the 

Federal Reserve Bank of New York as 

‘‘primary dealers’’ are expected to 

submit competitive bids on a pro-rata 

basis and participate meaningfully in all 

U.S. Treasury auctions at reasonably 

competitive rates or yields.614 The 

Treasury Department typically issues 

U.S. Treasury securities a few days after 

the auction and trade on the secondary 

market.615 The subsequent trading of 

U.S. Treasury securities is defined as 

the secondary market. Figure 3 reports 

weekly trading values in the secondary 

market for U.S. Treasury securities. 

According to industry reports, 67% of 

the $913.2 billion in average daily 

trading volume of U.S. fixed income 

securities in 2022 was in U.S. Treasury 

securities.616 As shown in Figure 3, 

average weekly trading volume was 

approximately $3 trillion in 2022, with 

notable peaks in March 2020 and early 

2021.617


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Figure 2: Market Value of Marketable U.S. Treasury Securities Outstanding Over Timea 

-"' c:: 

g 15 -t----------------------,"""'------ ·;:: 

t:. 

l:'.! .!!! 10 +-------------,_ ____________ _ o 

0 

0 .... m 9 9 0 .... 0 0 0 0 N N 

Ll'l ..... O'I 

9 9 9 N (Yl <:t 0 0 0 0 0 0 N N N 

.... .... (Yl Ll'l ..... O'I 

'7 9 9 9 9 0 

Ll'l ' ..... 00 O'I 0 .... 0 0 0 0 .... .... 0 0 0 0 0 0 N N N N N N 

.... .... m Ll'l ..... O'I .... .... (Yl Ll'l .... ~ 0 9 9 9 .... 9 9 9 N LI') ' ID ' ..... 00 O'I .... N m .... .... .... .... .... .... .... N N N 0 0 0 0 0 0 0 0 0 0 N N N N N N N N N N 

• Source: Federal Reserve Bank of Dallas, Market Value of Marketable Treasury Debt 

[MVMTD027MNFRBDAL], retrieved from FRED, Federal Reserve Bank of St. Louis, available at 

https://fred.stlouisfed.org/series/MVMTD027MNFRBDAL (retrieved on Aug. 7, 2023). 
2778 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

618See supra note 74. 

619More specifically, general collateral is a set of 

security issues which trade in the repo market at 

the same or a very similar repo rate. These security 

issues can therefore be substituted for one another 

without changing the repo rate. In other words, the 

buyer in a general collateral repo is indifferent to 

which of the general collateral securities she will 

receive. The basket of security issues that form a 

particular general collateral repo market belong to 

the same class (e.g., government bonds) or sub-class 

(e.g., government bonds with no more than five 

years remaining to maturity). See International 

Capital Market Association, [FAQ] 8. What is 

General Collateral (GC)?, ICMA ERCC Publications 

(Jan. 2019), available at https://

www.icmagroup.org/market-practice-andregulatory-policy/repo-and-collateral-markets/ 

icma-ercc-publications/frequently-asked-questionson-repo/8-what-is-general-collateral-gc. 

620See Proposing Release, supra note 14, 87 FR 

at 64616. 

621Overnight repurchase agreements account for 

87.5% of daily transaction volume. See Figure 5 

and the associated discussion for more details. In 

addition to term repo agreements with fixed 

maturity dates, there exist term repurchase 

agreements with embedded options that lead to an 

uncertain maturity date. For example, ‘‘callable’’ 

repos include an option for the lender to call back 

debt (i.e., resell securities) at its discretion. ‘‘Open’’ 

repos have no defined term but rather allow either 

party to close out at the contract at any date after 

initiation of the agreement. 

2. U.S. Treasury Repurchase 

Transactions 

A U.S. Treasury repurchase 

transaction generally refers to a 

transaction in which one market 

participant sells a U.S. Treasury security 

to another market participant and 

commits to repurchase the security at a 

specified price on a specified later 

date.618 Because one side of the 

transaction receives cash, and the other 

side receives securities, to be returned at 

a later date, the transaction is a sale and 

purchase of securities that is 

economically similar to borrowing cash 

against securities as collateral. The 

amount the lender pays for the security 

in the initial leg may be less than the 

market price. The difference between 

the market price and the price paid 

divided by the market price of the 

collateral is known as the ‘‘haircut.’’ A 

positive haircut implies that the loan is 

over-collateralized: the collateral is 

worth more than the cash that is loaned. 

A related term is ‘‘initial margin’’—the 

ratio of the purchase price to the market 

value of the collateral. 

General collateral repurchases are an 

important variation on the above type of 

transaction, where one participant 

purchases from a class, not a specific 

issue, of U.S. Treasury securities.619

U.S. Treasury repo for a specific asset is 

generally a bilaterally settled 

arrangement, whereas general collateral 

repurchases are usually settled with a 

third agent, known as a triparty agent. 

In bilaterally settled repo arrangements 

(bilateral repo), the repo buyer has the 

title to the specific asset in question and 

can sell or re-hypothecate it. In repo that 

is settled through a triparty agent 

(triparty repo), which is discussed 

below, the repo buyer has more limited 

use of the collateral. However, this 

collateral is often re-hypothecated 

within the same triparty system; 

namely, a buyer may use the securities 

purchased from the seller for its own 

reverse repo transaction. 

As described in the Proposing 

Release, repurchase agreements are 

generally classified by the term over 

which they take place, either 

‘‘overnight’’ or ‘‘term.’’ 620 In overnight 

repurchase agreements, the repurchase 

of the security takes place the day after 

the initial purchase, meaning that these 

agreements serve, essentially, as 

overnight loans collateralized by U.S. 

Treasury securities. Term repurchase 

agreements, conversely, take place over 

a longer horizon.621

U.S. Treasury repo has various 

economic uses. First, it is analogous to 

secured borrowing and lending, 

allowing some market participants to, in 

effect, turn their U.S. Treasury securities 


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Figure 3: Weekly trading volume in U.S. Treasury securities cash marketa 

6000 

5000 

~ 4000 

~ 

e 3000 ~ 11:1 

~ 2000 

0 

1000 

■ Bills and FRNs 

■ Off•the-run 

!II! On-the-run 

• Source: TRACE Weekly Aggregate Statistics, available at https://www.finra.org/finra-data/browse-catalog/abouttreasury/weekly-data. Floating Rate Notes ("FRNs") are U.S. Treasury Securities with a maturity of two years at 

issuance, pay interest four times each year and have an interest rate that may change over time. Treasury bills are 

short-dated debt with a maturity of one year or less, sold at a discount to face value, and that pay interest at maturity. 
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2779 

622See Federal Reserve Bank of New York, 

Monetary Policy Implementation, available at 

https://www.newyorkfed.org/markets/domesticmarket-operations/monetary-policyimplementation. 

623See Fernando Avalos, Torsten Ehlers and 

Egemen Eren, September stress in dollar repo 

markets: passing or structural?, BIS Q. Rev. (Dec. 

2019), available at https://www.bis.org/publ/qtrpdf/ 

r_qt1912v.htm. Up to July 28, 2021, interest was 

paid at an IORR (interest on required reserves) rate 

and at an IOER (interest on excess reserves) rate. 

The IORR rate was paid on balances maintained to 

satisfy reserve balance requirements, and the IOER 

rate was paid on excess balances. Effective Mar. 24, 

2020, the Board amended Regulation D to set all 

reserve requirement ratios for transaction accounts 

to 0%, eliminating all reserve requirements. To 

account for those changes, the Board approved a 

final rule amending Regulation D to replace 

references to an IORR rate and to an IOER rate with 

references to a single IORB (interest rate on required 

balance) rate. See Board of Governors of the Federal 

Reserve, Interest on Reserve Balances (IORB) 

Frequently Asked Questions (July 29, 2021), 

available at https://www.federalreserve.gov/ 

monetarypolicy/iorb-faqs.htm. 

624Adam Copeland, R. Jay Kahn, Antoine Martin, 

Matthew McCormick, William Riordan, Kevin 

Clark, and Tim Wessel, How Competitive are U.S. 

Treasury Repo Markets?, Federal Reserve Bank of 

New York Liberty Street Economics (Feb. 18, 2021), 

available at https://libertystreeteconomics

.newyorkfed.org/2021/02/how-competitive-are-ustreasury-repo-markets/#:∼:text=In%20

contrast%2C%20the%20GCF%20

Repo,both%20sides%20of%20the%20market. 

625Among other filters, transactions to which the 

Federal Reserve is a counterparty are excluded. See 

Additional Information about Reference Rates 

Administered by the New York Fed, Federal Reserve 

Bank of New York (Jan. 24, 2022), available at 

https://www.newyorkfed.org/markets/referencerates/additional-information-about-referencerates#treasury_repo_data_exclusions. 

626See supra note 623. The New York Fed makes 

available data on top 3 dealer concentration (see 

Tri-Party/GCF Repo, Federal Reserve Bank of New 

York, available at https://www.newyorkfed.org/ 

data-and-statistics/data-visualization/tri-partyrepo#interactive/concentration (last visited Dec. 12, 

2023)) in the tri-party/GCF repo segment; however, 

the New York Fed’s statistics treat its own 

Overnight Reverse Repo Facility as a dealer. Since 

the use of this facility has grown from zero to $2.2 

trillion since 2021 Q1, the New York Fed’s data on 

the concentration of the top 3 ‘‘dealers’’ is difficult 

to interpret and is not included here. 

627Figure 4 does not include bilateral repo 

transactions—including most inter-affiliate 

transactions—that are not settled on the tri-party 

platform or centrally cleared through FICC for 

which comprehensive data is not currently 

available. Trades resulting from the Federal Reserve 

Bank of New York’s standing repo facility and 

reverse repo facility are cleared and settled on the 

tri-party platform and are included in Figure 4. See 

Federal Reserve Bank of New York, FAQs: Standing 

Repo Facility (July 26, 2023), available at https:// 

www.newyorkfed.org/markets/repo-agreement-opsfaq and Federal Reserve Bank of New York, FAQs: 

Reverse Repurchase Agreement Operations (July 26, 

2023), available at https://www.newyorkfed.org/ 

markets/rrp_faq. 

628See R. Jay Kahn & Luke M. Olson, Who 

Participates in Cleared Repo?, OFR Brief Series 

(July 8, 2021), available at https://

www.financialresearch.gov/briefs/files/OFRBr_21- 

01_Repo.pdf. 

into cash positions, and others to 

temporarily invest cash that is not in 

use in a way that mitigates exposure to, 

for example, the counterparty risk of a 

depository institution. Bilateral repo can 

allow market participants to effectively 

price interest rate expectations into 

bonds, and to arbitrage differences in 

the market prices of closely related U.S. 

Treasury securities, because it provides 

financing for U.S. Treasury security 

purchases and facilitates short sales. 

Repos also play a role in monetary 

policy. The Federal Reserve operates a 

reverse repurchase facility in which it 

receives cash from eligible market 

participants in exchange for collateral 

consisting of U.S. Treasury securities. 

The interest rate on these repurchase 

agreements is the overnight reverse 

repurchase offer rate set by the Federal 

Reserve to aid implementation of 

monetary policy by firming up the floor 

for the effective Federal funds rate.622

There is some evidence of dealer 

concentration in repo markets. In a 

December 2019 report, the BIS reported 

that as repo rates rose above the interest 

rate on excess reserves in mid-2018, the 

four largest U.S. banks appeared to have 

turned into the marginal lender in repo 

markets.623 However, in 2021 the 

Federal Reserve Bank of New York 

economists reported that the secured 

funding portion of the repo market is 

competitive.624 Using data on centrally 

cleared U.S Treasury repo transactions 

and all triparty settled transactions, the 

New York Fed economists filtered the 

data using the same filters used in the 

construction of SOFR in order to 

eliminate transactions likely driven by 

considerations other than secured 

funding and then reported measures of 

dealer concentration.625 The authors 

report that the top 5 (10) dealers 

comprise 44.2 (63.6) percent of repo 

selling (cash-lending) activity and 40.2 

(56.7) percent of repo purchasing (cashborrowing) activity and conclude that 

the centrally cleared and triparty 

portion of the repo market is less 

concentrated than might appear from 

the BIS study.626

The market for repos is dominated by 

large, sophisticated institutions, at least 

as compared to the cash market. The 

institutions that participate in the 

market for repos are also those for 

whom access to central clearing may be 

the least costly economically. Relatedly, 

although difficult to quantify precisely, 

the number of participants is one or 

more orders of magnitude greater in the 

cash market as compared with the repo 

market: e.g., tens of thousands as 

opposed to thousands. As Figure 4 

shows, the U.S. Treasury securities 

repurchase market is large; throughout 

2020 and through May of 2021, daily 

transaction volume of repo that was 

either centrally cleared or settled on the 

triparty platform ranged between $1.4 

and $2.1 trillion per day. Since May 

2021, the daily volume has increased 

considerably—as high as $4.6 trillion 

per day—coinciding with the growth in 

the Federal Reserve’s overnight reverse 

repurchase operations. Figure 4 further 

splits these totals into three categories 

based on 3 of the 4 repo market 

components discussed in part IV.B.3.b 

supra: non-centrally cleared triparty, 

FICC DVP Service, and FICC GCF Repo 

Service.627 Despite steadily increasing 

volumes of centrally cleared repurchase 

transactions, due in part to the 

development of services to enable 

acceptance of more types of repurchase 

transactions at the covered clearing 

agency, the Commission understands 

that the volume of bilateral repurchase 

transactions that are cleared and settled 

directly between the two counterparties 

remains substantial, representing 

approximately half of all bilateral 

repurchase transactions in 2021.628


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2780 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

629See Figure 4. 

630See Figure 5. 

631See Mark E. Paddrik, Carlos A. Ram(rez, & 

Matthew J. McCormick, The Dynamics of the U.S. 

Overnight Triparty Repo Market (FEDS Notes, Aug. 

2, 2021), available at https://

www.federalreserve.gov/econres/notes/feds-notes/ 

the-dynamics-of-the-us-overnight-tripartyrepomarket-20210802.htm. 

The triparty segment of the U.S. 

Treasury securities repurchase 

agreement market is large, with an 

average of approximately $575 billion of 

daily trading volume in 2020, and has 

taken on a substantially larger role since 

the beginning of 2021, peaking at 

approximately $3.1 trillion in 

transaction volume in the March of 

2023.629 Of this, overnight repos is the 

largest segment, making up 92% on 

average of daily transaction volume 

since 2020, as shown in Figure 5. 

Although different types of securities 

are used as collateral in triparty repos, 

over 70% of daily volume of triparty 

repo since 2020 are transactions with 

U.S. Treasury securities as collateral.630

The remainder are agency securities, 

referring to mortgage-backed securities 

issued by U.S government agencies and 

government sponsored enterprises, and 

various other securities including 

corporate bonds, non-U.S. sovereign 

debt, equity, municipal debt, and 

commercial paper.631


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5 

4 

vi" 

C: 3 .2 

~ 

!:::.. 

"' ,._ 

~ 

0 2 

0 

1 

Figure 4: Daily U.S. Treasury Repurchase Transaction Volumea 

Tri-party 

GCF 

fZI DVP 

• Figure 4 includes only transactions that are settled on the triparty platform or bilateral repo that is 

centrally cleared. Source: Office of Financial Research Short-term Funding Monitor - Data Sets, 

U.S. Repo Markets Data Release, refreshed daily, available at 

https:/ /www.financialresearch.gov/short-term-funding-monitor/datasets/repo/. See also IA WG 

Report, supra note 4, at 29. 
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2781 

632See 2021 IAWG Report, supra note 4, at 3. The 

secondary market also includes the market for U.S. 

Treasury futures, which trade electronically on the 

Chicago Board of Trade, a designated contract 

market operated by the Chicago Mercantile 

Exchange (‘‘CME’’) Group, and centrally cleared by 

CME Clearing. U.S. Treasury futures are generally 

regulated by the U.S. Commodity Futures Trading 

Commission. 

633 Joint Staff Report, supra note 4, at 11, 35–36. 

634 2021 IAWG Report, supra note 4, at 21. 

635 Joint Staff Report, supra note 4, at 35. 

636FICC Rule 2A section 7(e) (requirement that 

FICC Netting Members submit to FICC all of its 

eligible trades with other Netting Members); FICC 

Rule 18 section 2 (similar requirement with regard 

to Repo transactions), supra note 19. 

637See TMPG White Paper, supra note 13, at 

Figures 5A and 5B (providing graphical description 

of this type of clearing). 

3. Clearance and Settlement of U.S. 

Treasury Security Transactions 

The secondary market includes the 

‘‘cash market,’’ for outright purchases 

and sales of securities, and the repo 

market, where one participant sells a 

U.S. Treasury security to another 

participant and commits to repurchase 

the security at a specified price on a 

specified later date.632 These rule 

amendments and new rules apply to the 

secondary market for U.S. Treasury 

securities. 

a. Cash Market 

The cash market has two main 

components: the interdealer market and 

the dealer-to-customer market. In the 

interdealer market, dealers primarily 

trade with each other and with principal 

trading firms (‘‘PTFs’’), which trade as 

principals for their own accounts. In the 

dealer-to-customer market, dealers trade 

with their customers. 

i. Interdealer 

The majority of trading in the 

interdealer market in on-the-run U.S. 

Treasury securities occurs on trading 

platforms operated by IDBs, as 

described in part II.A.2.b.ii, supra.633

These IDBs are generally direct 

participants of a U.S. Treasury securities 

CCA and stand as counterparties to both 

sides of each trade on their platforms.634

The majority of trades in the 

interdealer markets are trades in ‘‘onthe-run’’ issues. The majority of 

interdealer trading for off-the-run U.S. 

Treasury securities occurs via bilateral 

transactions through traditional voiceassisted brokers and electronic trading 

platforms offering various protocols to 

bring together buyers and sellers, 

although some interdealer trading in offthe-run U.S. Treasury securities does 

occur on IDBs that anonymously bring 

together buyers and sellers.635

Most IDBs are FICC direct 

participants, and the trades between an 

IDB, which is a FICC direct participant, 

and another FICC direct participant are 

submitted for central clearing to FICC, 

which, as discussed below, is currently 

the only U.S. Treasury securities CCA. 

Direct participants of FICC are generally 

either dealers (both bank-affiliated and 

independent) or banks. FICC’s current 

rules generally require that FICC direct 

participants submit for clearing all 

trades with other FICC direct 

participants.636 However, FICC’s rules 

do not require that a trade between a 

FICC direct participant and a party that 

is not a FICC direct participant be 

submitted for clearing. Therefore, for 

trades on IDBs between a party that is 

not a FICC direct participant (which, on 

an IDB, is generally a PTF) and a dealer 

that is a FICC direct participant—which 

results in two separate transactions, 

between the IDB and the dealer, on the 

one hand, and between the IDB and the 

PTF, on the other hand—the transaction 

between the dealer and the IDB would 

be centrally cleared. But the transaction 

between a PTF which is not a FICC 

member and the IDB, on the other side, 

would not be centrally cleared and 

instead would be settled bilaterally with 

the IDB, often through a clearing agent 

acting on behalf of the non-FICC direct 

participant.637


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a 

II) 4000 C: 

~ 3500 

ii:i 3000 

2500 

2000 

1500 

1000 

500 

0 

Figure 5: Tri party Repurchase Agreement Trading Volume, Splitsa 

Panel A: Overnight vs. Term 

Panel B: Collateral Type 

"' 4000 r;::::====:::;-------------- c: 

~ 3500 

ii:i 3000 

2500 

2000 

II Corporate Debt 1---------- nnl 

- OtherCollateral 1-------~ 

■ Agency Debt 

1500 ---------

1000 

500 

0 

Office of Financial Research Short-term Funding Monitor - Data Sets, U.S. Repo Markets Data Release, 

refreshed daily, available at https://www.fmancialresearch.gov/short-term-funding-monitor/datasets/repo/. 
2782 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

638See 2021 IAWG Report, supra note 4, at 30; 

see also TMPG White Paper, supra note 13, at 12. 

The figures are estimated using FR 2004 data 

covering the first half of 2017 and are based on 

various assumptions: (a) primary dealers account 

for all dealer activity, (b) 5% of dealers’ trading not 

through an IDB is with another dealer, (c) the shares 

of dealer and non-dealer activity in the IDB market 

for coupon securities equal the weighted averages 

of the shares reported in the Oct. 15 report (that is, 

41.5% and 58.5%, respectively), (d) only dealers 

trade bills, FRNs, and TIPS in the IDB market, and 

(e) the likelihood of dealer and non-dealers trading 

with one another in the IDB market solely reflects 

their shares of overall volume. Commission staff 

understands that these assumptions may be less 

appropriate for more recent time periods (e.g., PTFs 

are responsible for a growing share of IDB activity). 

639See G–30 Report, supra note 5; 2021 IAWG 

Report, supra note 4, at 5–6; TMPG White Paper, 

supra note 13, at 6. 

640See Joint Staff Report, supra note 4, at 1, 8, 

32, 35–36, 39. 

641See James Collin Harkrader & Michael Puglia, 

Principal Trading Firm Activity in Treasury Cash 

Markets (FEDS Notes, Aug. 2020) (‘‘Harkrader and 

Puglia FEDS Notes’’), available at https://

www.federalreserve.gov/econres/notes/feds-notes/ 

principal-trading-firm-activity-in-treasury-cashmarkets-20200804.htm. 

642See Federal Reserve Bank of New York, 

Administration of Relationships with Primary 

Dealers, available at https://www.newyorkfed.org/ 

markets/primarydealers.html. 

643The term ‘‘IDB’’ typically refers only to IDBs 

that are also ATSs. The entities referred to as IDBs 

here are encompassed in the ATSs category in the 

tables set forth in this section because of the way 

that such IDBs are categorized in TRACE. 

Specifically, the ‘‘ATS’’ category in TRACE 

encompasses these IDBs. By contrast, the non-ATS 

IDBs category in TRACE encompasses the voicebased or other non-anonymous methods of bringing 

together buyers and sellers, which are also 

sometimes referred to as interdealer brokers by 

market participants. 

644TMPG White Paper, supra note 13, at 12. This 

figure is estimated from 2017H1 data and includes 

approximately 19% hybrid clearing. As reported by 

TMPG, the estimates are based on various 

assumptions: (a) primary dealers account for all 

dealer activity, (b) 5% of dealers’ trading not 

through an IDB is with another dealer, (c) the shares 

of dealer and non-dealer activity in the IDB market 

for coupon securities equal the weighted averages 

of the shares reported in the Oct. 15 report (that is, 

41.5% and 58.5%, respectively), (d) only dealers 

trade bills, FRNs, and TIPS in the IDB market, and 

(e) the likelihood of dealer and non-dealers trading 

with one another in the IDB market solely reflects 

their shares of overall volume. Commission staff 

understands that these assumptions may be less 

appropriate for more recent time periods (e.g., PTFs 

are responsible for a growing share of IDB activity). 

645TMPG White Paper, supra note 13, at 13. 

Estimates from the first half of 2017 

further suggest that only 13 percent of 

the cash transactions in the U.S. 

Treasury securities market are centrally 

cleared. These estimates suggest that 

another 19 percent of transactions in 

this market are subject to so-called 

hybrid clearing in which one leg of a 

transaction facilitated by an IDB 

platform is centrally cleared and the 

other leg of the transaction is cleared 

bilaterally.638

Until the mid-2000s, most inter-dealer 

trading occurred between primary 

dealers who were FICC members and 

thus was centrally cleared.639 Today, 

PTFs actively buy and sell large 

volumes of U.S. Treasury securities on 

an intraday basis using high-speed and 

other algorithmic trading strategies.640

PTFs are not generally FICC members 

and, as such, their trades are often not 

centrally cleared. Moreover, PTFs 

compose a substantial portion of trading 

volume, averaging about 20% of overall 

U.S. Treasury cash market volume and 

accounting for around 50–60% of IDB 

volume in outright purchases and sales 

of U.S. Treasury securities.641 Primary 

dealers, who are FICC members and 

who transact the 40–50% of IDB volume 

not accounted for by PTFs, are required 

by Federal Reserve Bank of New York 

policy to centrally clear their U.S. 

Treasury securities primary market cash 

activity.642

As Tables 1 and 2 below show, during 

the 6-month period ending in June 2023 

trading volume of on-the-run U.S. 

Treasury securities was approximately 

two and half times that of off-the-run 

U.S. Treasury securities. Over half 

(57.9%) of on-the-run U.S. Treasury 

security trading volume and 

approximately one quarter (22.9%) of 

off-the-run U.S. Treasury security 

trading volume occurred on ATSs 

(which are also IDBs) and non-ATS 

IDBs.643 Of the on-the-run U.S. Treasury 

security trading volume that occurred 

on ATS IDBs and non-ATS IDBs, 34.0% 

were dealer trades, 18.4% were PTF 

trades, and the remainder were 

customer trades. For off-the-run trading 

in U.S. Treasury securities, the 

comparable figures are 19.0% dealer 

trades, 1.2% PTF trades, and the 

remainder are customer trades. In 

contrast to trades that take place on an 

ATS or a non-ATS IDB, 42.0% of onthe-run U.S. Treasury security 

transactions and 77.1% of off-the-run 

U.S. Treasury security transactions are 

traded bilaterally. The majority of these 

(78.5% of on-the-run and 84.3% of offthe-run) are dealer-to-customer trades. 

Bilaterally cleared trades make up 

87% of total trading in the secondary 

U.S. Treasury securities market, making 

them the most prevalent trade type in 

the market.644 These trades include at 

least one party that is not a netting 

member of the single U.S. Treasury 

securities CCA. The bilateral clearing 

process comes with risks. After the trade 

is executed, the principals to the trade 

face counterparty credit risk, in the 

event that either party fails to deliver on 

its obligations.645

TABLE 1—ON-THE-RUN U.S. TREASURY SECURITIES TRADING VOLUME

Number of 

venues 

Average weekly 

volume 

($M) 

Volume share 

(%) 

ATSs ........................................................................................................................................ 16 874,284 49.4 

Customer trades ............................................................................................................... 12 38,338 2.2 

Dealer trades .................................................................................................................... 16 510,296 28.8 

PTF trades ........................................................................................................................ 7 325,649 18.4 

Non-ATS Interdealer Brokers .................................................................................................. 24 151,353 8.5 

Customer trades ............................................................................................................... 22 59,639 3.4 

Dealer trades .................................................................................................................... 23 91,714 5.2 

Bilateral dealer-to-dealer trades .............................................................................................. 283 159,760 9.0 

Bilateral dealer-to-customer trades ......................................................................................... 521 584,832 33.0 


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Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2783 

646 G–30 Report, supra note 5, at 1; TMPG White 

Paper, supra note 13, at 1–2. 

647See Exchange Act Release No. 90019 (Sept. 28, 

2020), 85 FR 87106, 87108 (Dec. 30, 2020). 

TABLE 1—ON-THE-RUN U.S. TREASURY SECURITIES TRADING VOLUME—Continued 

Number of 

venues 

Average weekly 

volume 

($M) 

Volume share 

(%) 

Total ........................................................................................................................... ........................ 1,770,229 100.0 

This table reports trading volume and volume share for ATSs,a Non-ATS interdealer brokers, bilateral dealer-to-dealer transactions, bilateral 

dealer-to-customer, and bilateral dealer-to-PTF transactions for on-the-run U.S. Treasury Securities. On-the-run U.S. Treasury Securities are the 

most recently issued nominal coupon securities and Treasury Inflation Protected Securities (TIPS). Nominal coupon securities pay a fixed semiannual coupon and are currently issued at original maturities of 2, 3, 5, 7, 10, 20, and 30 years. Treasury Bills and Floating Rate Notes are excluded. Volume is the average weekly dollar volume in par value (in millions of dollars) over the six-month period, from Jan. 1, 2023, to June 30, 

2023.b Number of Venues is the number of different trading venues in each category and the number of distinct MPIDs for bilateral transactions.c

Volume Share (%) is the measure of the dollar volume as a percent of total dollar volume.d The volumes of ATSs and non-ATS interdealer brokers are broken out by Customer trades, Dealer trades, and PTF trades within each group.e Data is based on the regulatory version of TRACE 

for U.S. Treasury Securities from Jan. 1, 2023, to June 30, 2023. Bilateral trades are a catchall classification that may include trades conducted 

via bilateral negotiation, as well as trades conducted electronically via platforms not registered with FINRA as an ATS. aThis analysis is necessarily limited to transactions reported to TRACE, which may not be all transactions in U.S. Treasury securities. Transactions that take place on non-FINRA member ATSs or between two non-FINRA members are not reported to TRACE. Entities in the ATS 

TRACE category encompass the IDBs described in the preamble of this release. By contrast, the non-ATS IDB category in TRACE encompasses the voice-based or other non-anonymous methods of bringing together buyers and sellers. PTFs that are FINRA members are included 

as dealers while PTFs refer to PTFs that are not FINRA members. See Proposing Release note 43 and referencing text. bFINRA reports volume as par volume, where par volume is the volume measured by the face value of the bond, in dollars. See relevant 

weekly volume files, available at https://www.finra.org/filing-reporting/trace/data/trace-treasury-aggregates. c Dealers are counted using the number of distinct MPIDs. 

dTotal dollar volume (in par value) is calculated as the sum of dollar volume for ATSs, non-ATS interdealer brokers, bilateral dealer-to-dealer 

transactions, and bilateral dealer-to-customer transactions. eWe identify ATS trades and non-ATS interdealer broker trades using MPID. The regulatory version of TRACE for U.S. Treasury securities includes an identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber counterparties in the regulatory version of TRACE for U.S. Treasury securities to identify PTF trades on ATSs. 

TABLE 2—OFF-THE-RUN U.S. TREASURY SECURITIES TRADING VOLUME

Number of 

venues 

Average weekly 

volume 

($M) 

Volume share 

(%) 

ATSs ........................................................................................................................................ 13 126,489 18.0 

Customer trades ............................................................................................................... 9 10,713 1.5 

Dealer trades .................................................................................................................... 13 107,304 15.2 

PTF trades ........................................................................................................................ 5 8,472 1.2 

Non-ATS Interdealer Brokers .................................................................................................. 24 34,796 4.9 

Customer trades ............................................................................................................... 19 7,967 1.1 

Dealer trades .................................................................................................................... 22 26,829 3.8 

Bilateral dealer-to-dealer trades .............................................................................................. 568 85,178 12.1 

Bilateral dealer-to-customer trades ......................................................................................... 732 458,070 65.0 

Total ........................................................................................................................... ........................ 704,533 100.0 

This table reports trading volume and volume share for ATSs,a non-ATS interdealer brokers, bilateral dealer-to-dealer transactions, bilateral 

dealer-to-customer, and bilateral dealer-to-PTF transactions for off-the-run U.S. Treasury Securities. Off-the-run or ‘‘seasoned’’ U.S. Treasury Securities include TIPS, STRIPS, and nominal coupon securities issues that preceded the current on-the-run nominal coupon securities. Number of 

Venues is the number of different trading venues in each category and the number of distinct MPIDs for bilateral transactions. Volume is the average weekly dollar volume in par value (in millions of dollars) over the six-month period, from Jan. 1, 2023, to June 30, 2023. Volume Share (%) 

is the measure of the dollar volume as a percent of the total dollar volume. The volumes of ATSs and non-ATS interdealer brokers are broken 

out by Customer trades, Dealer trades, and PTF trades within each group.b Data is based on the regulatory version of TRACE for U.S. Treasury 

Securities from Jan. 1, 2023, to June 30, 2023. Bilateral trades are a catchall classification that may include trades conducted via bilateral negotiation, as well as trades conducted electronically via platforms not registered with FINRA as an ATS. aThe analysis based on TRACE is necessarily limited to transactions reported to TRACE, which may not be all transactions in government securities. Transactions that take place on non-FINRA member ATSs or between two non-FINRA members are not reported to TRACE. The analysis based on TRACE is necessarily limited to transactions reported to TRACE, which may not be all transactions in government securities. 

Transactions that take place on non-FINRA member ATSs or between two non-FINRA members are not reported to TRACE. Entities in the ATS 

TRACE category encompass the IDBs described in the preamble of this release. By contrast, the non-ATS IDB category in TRACE encompasses the voice-based or other non-anonymous methods of bringing together buyers and sellers. PTFs that are FINRA members are included 

as dealers while PTFs refer to PTFs that are not FINRA members. See Proposing Release note 43 and referencing text. bWe identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE for U.S. Treasury securities. 

The regulatory version of TRACE for U.S. Treasury securities includes an identifier for customer and interdealer trades. Furthermore, we use 

MPID for non-FINRA member subscriber counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on 

ATSs. 

ii. Dealer-to-Customer 

Dealer-to-customer trading generally 

involves ‘‘off-the-run’’ issues more often 

than the interdealer market and 

typically is conducted via voice or 

electronically (i.e., electronic ‘‘request 

for quote’’ systems referred to in Tables 

1 and 2, supra as non-ATS IDBs).646

Trading in the dealer-to-customer cash 

market is generally—and has 

historically been—conducted through 

bilateral transactions. Customers have 

not traditionally traded directly with 

other end users.647 Rather, non-dealers 

primarily trade with dealers, and 

dealers use the interdealer market as a 

source of orders and trading interest to 


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648 G–30 Report, supra note 5, at 1; 2021 IAWG 

Report, supra note 4, at 3; TMPG White Paper, 

supra note 13, at 6. 

649See Hempel et al. (2022), supra note 563. 

650The OFR has a proposed rulemaking that 

mandates the collection of daily transaction level 

data from certain financial companies on their noncentrally cleared bilateral repurchase agreement 

trades. See supra note 564. 

651See Hempel et al. (2023), supra note 564, at 

1. 

652 Id. at 3. 

653See Proposing Release, supra note 14, 87 FR 

at 64616. 

654FICC Rule 11, section 2, supra note 19. 

655See part IV.B.3.b.i, supra. See also note 75, 

supra. 

656See generally Reference Guide to U.S. Repo 

and Securities Lending Markets (Nov. 9, 2015), 

available at https://www.financialresearch.gov/ 

working-papers/files/OFRwp-2015-17_ReferenceGuide-to-U.S.-Repo-and-Securities-LendingMarkets.pdf. 

657Exchange Act Release No. 92808 (Aug. 30, 

2021), 86 FR 49580 (Sept. 3, 2021). Currently, the 

Bank of New York Mellon operates the triparty 

platform that facilitates trades conducted via the 

GCF Repo Service and Sponsored GC Service. 

help facilitate their trading with 

customers in the dealer-to-customer 

market. Generally, trades in the dealerto-customer market are not centrally 

cleared.648

In cash U.S. Treasury security 

transactions that are bilaterally cleared, 

the process generally begins with 

participants initiating the trade by an 

electronic or voice trading platform, and 

both parties booking the details of the 

trade in their internal systems and 

confirming the details of the trade with 

one another. Once the details are 

confirmed, each party then sends 

messages to its clearing or settlement 

agents to initiate the clearing process. 

Different types of institutions use 

different clearing and settlement agents, 

with buy-side firms typically using 

custodial banks, dealers using clearing 

banks, and hedge funds and PTFs using 

prime brokers. 

b. U.S. Treasury Repo Market 

Depending on clearing and settlement 

practices, the U.S. Treasury repo market 

consists of four main components: (1) 

non-centrally cleared, settled bilaterally, 

(2) centrally cleared, settled bilaterally, 

(3) non-centrally cleared, settled on a 

triparty platform, and (4) centrally 

cleared, settled on a triparty platform. 

The Office of Financial Research has 

collected transaction level data for 

centrally cleared repo transactions since 

October 2019, and the New York Fed 

collects data on triparty repo 

transactions through its supervisory 

role. However, as discussed in part 

II.A.2.a supra, the lack of reporting of 

non-centrally cleared bilateral repo 

makes estimating the size of this 

segment of the repo market difficult. 

i. Non-Centrally Cleared Bilateral Repo 

For non-centrally cleared bilateral 

U.S. Treasury repos, the parties agree to 

the terms and settle the trades between 

themselves, without involving a CCP or 

other third-party. As mentioned above, 

FICC’s rules require its direct 

participants to submit for central 

clearing all eligible trades with other 

direct participants. Therefore, noncentrally cleared bilateral U.S. Treasury 

repos may involve at least one party that 

is not a FICC direct participant (e.g., a 

hedge fund or PTF); alternatively, or 

additionally, such repos may also 

involve a transaction type that FICC 

does not accept for clearing. 

In January of 2022, the Federal 

Reserve Bank of New York updated its 

primary dealer statistics to capture the 

segments of the repo market used by 

primary dealers. On average during the 

first three quarters of 2022, the noncentrally cleared bilateral market made 

up $1.19 trillion of primary dealer 

reverse repo (60% of the total) and $0.94 

trillion of primary dealer repo (37% of 

the total).649 At more than $2 trillion in 

total exposure, this would make noncentrally cleared bilateral repo the 

largest segment of the repo market in 

gross exposure by primary dealers. 

The Office of Financial Research 

(OFR) conducted a pilot collection of 

data on non-centrally cleared bilateral 

repurchase agreement trades spanning 

nine dealers over three reporting dates 

in June 2022.650 Using that pilot data 

collection, the OFR finds that with 

regard to rates, counterparty types, and 

collateral, pilot participants’ activity in 

the non-centrally cleared bilateral repo 

segment roughly mirrors their activity in 

the centrally cleared bilateral 

segment.651 However, as discussed in 

part IV.B.5 infra, haircuts in this 

segment differ from those in the 

centrally cleared segments.652

ii. Centrally Cleared Bilateral Repo 

For centrally cleared bilateral U.S. 

Treasury repos, for parties that are FICC 

direct participants, each party submits 

agreed-upon trade details to FICC for 

central clearing, and those trades are 

settled delivery versus payment using 

the members’ clearing banks and/or 

Fedwire Securities Service. Market 

participants that are not direct 

participants of FICC may access central 

clearing through a customer model, 

such as the Sponsored Service or the 

Prime Broker/Correspondent clearing 

models.653 Although a U.S. Treasury 

repo transaction generally encompasses 

both the start leg and the end leg of a 

U.S. Treasury repo, currently the only 

U.S. Treasury securities CCA does not 

provide central clearing for the start leg 

of certain transactions.654 Central 

clearing of U.S. Treasury repo is further 

discussed below. 

Data on the extent of central clearing 

in the U.S. Treasury securities market is 

limited. As discussed previously, the 

Commission believes that 

approximately half of bilateral repo 

trades are centrally cleared.655

iii. Non-Centrally Cleared Repo Settled 

on a Triparty Platform 

For non-centrally cleared triparty U.S. 

Treasury repos, repo buyers (cash 

lenders (e.g., money market funds)) 

provide financing to repo sellers (cash 

borrowers (e.g., dealers)). The parties 

agree to the terms of a trade and arrange 

for a clearing bank to facilitate 

settlement. Like non-centrally cleared 

bilateral repos, at least one party to the 

transaction is not a FICC member. While 

the clearing bank provides a triparty 

platform to help facilitate the movement 

of cash and securities among accounts 

of counterparties to the transaction, it 

does not itself become a counterparty to 

the transactions and does not guarantee 

either counterparty’s performance of its 

obligations. Collateral posted to the 

triparty platform generally cannot be 

repledged outside the platform, thereby 

protecting against settlement fails.656

iv. Centrally Cleared Repo Settled on a 

Triparty Platform 

For centrally cleared U.S. Treasury 

triparty repos, the parties are FICC 

members that submit agreed-upon trade 

details to FICC for central clearing 

through FICC’s General Collateral 

Finance (‘‘GCF’’) Repo Service. Unlike 

centrally cleared bilateral repos, these 

triparty repos are settled on the clearing 

bank’s triparty platform. Like centrally 

cleared bilateral repos, centrally cleared 

triparty repos are novated to FICC, and 

FICC acts as a CCP for these 

transactions, including by collecting 

margin pursuant to its margin 

methodology for such transactions. 

Until recently, centrally cleared triparty 

repos were only conducted through the 

GCF Repo Service between two direct 

members of FICC. However, in 

September 2021, FICC introduced its 

Sponsored General Collateral Service 

(‘‘Sponsored GC Service’’), which 

enables centrally cleared triparty repos 

between a sponsored member and its 

sponsoring member.657 The Sponsored 

GC Service accepts general collateral in 

a number of generic CUSIPs, and though 

U.S. Treasury securities are among the 


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658See generally DTCC Sponsored General 

Collateral Service (‘‘DTCC SGCS’’), available at 

https://www.dtcc.com/-/media/Files/Downloads/ 

Clearing-Services/FICC/GOV/SponsoredGC-FSINTL.pdf (last visited Dec. 11, 2023). 

659 Id. 

660 GSD Rule 11, Section 3 (along with Rule 1 for 

the definition of a Covered Affiliate), supra note 19. 

661A liquidity buffer generally refers to liquid 

assets that a banking organization manages to 

enable it to meet expected and unexpected cash 

flows and collateral needs without adversely 

affecting the banking organization’s daily 

operations. See generally FRB, FDIC, & OCC, Q&As 

on Statement Regarding the Use of Capital and 

Liquidity Buffers (Mar. 17, 2020), available at 

https://www.fdic.gov/news/financial-institutionletters/2020/fil20020a.pdf. 

662See part I, supra. 

663The Commission believes that not all market 

participants likely would satisfy a covered clearing 

agency’s stringent membership criteria. See 17 CFR 

17ad–22(e)(18); FICC Rule 2A, supra note 19. Even 

among those that do, legal operational or other 

considerations may preclude many market 

participants from becoming direct members of a 

CCP that clears and settles government securities 

transactions. 

664See, e.g., FICC Rules, 8, 18, 3A (providing for 

prime brokerage and correspondent clearing, as 

well as sponsored membership), supra note 19. 

665See FICC Member Directories, available at 

https://www.dtcc.com/client-center/ficc-govdirectories (last visited Dec. 12, 2023) (This 

includes all members who make use of Netting, 

Repurchase Netting, and/or GCF services.). 

666 DTCC, CCIT Service, available at https://

www.dtcc.com/clearing-services/ficc-gov/centrallycleared-institutional-triparty. 

667The Commission has not yet approved 

registered investment companies to participate in 

CCIT. See Order Granting Approval of Proposed 

Rule Change to Establish the Centrally Cleared 

Institutional Triparty Service and Make Other 

Changes, Exchange Act Release No. 80574, File No. 

SR–FICC–2017–005, 82 FR 21439, 21440 n.11 (May 

2, 2017). 

668 DTCC, FICC-Gov Member Directory (July 27, 

2023), available at https://www.dtcc.com/clientcenter/-/media/Files/Downloads/client-center/ 

FICC/FICC-GSD-Member-Directory-CCIT.xlsx. 

669See Exchange Act Release No. 51896 (June 21, 

2005), 70 FR 36981 (June 27, 2005); see also FICC 

Rule 3A, supra note 19. For general information and 

statistics regarding the Sponsored Service, see 

DTCC, Sponsored Service, available at https://

www.dtcc.com/clearing-services/ficc-gov/ 

sponsored-membership, as well as part IV.B.7.d.i 

infra. The Sponsored Service also allows the 

submission of cash transactions; however, at this 

Continued 

general collateral types acceptable in the 

Sponsored GC Service, other types of 

collateral including agency and 

mortgage backed securities are 

acceptable for use as collateral as 

well.658 Each type of eligible collateral 

for the Sponsored GC Service is 

assigned its own generic CUSIP number, 

and security types are not mixed.659

v. Inter-Affiliate Repo 

Current FICC rules require the 

submission of transactions of a netting 

member’s ‘‘Covered Affiliate’’ with 

another FICC netting member where a 

Covered Affiliate is defined as an 

affiliate of a netting member that: (1) is 

not itself a netting member; (2) is not a 

foreign person; and (3) is a brokerdealer, bank, trust company, and/or 

FCM, if that transaction is with another 

netting member or a Covered Affiliate of 

another netting member.660 FICC rules 

do not require the submission of 

transactions between (1) a netting 

member and an affiliate or (2) between 

a netting member’s affiliates. 

The Commission understands that 

inter-affiliate repo transactions 

represent an important tool to transfer 

liquidity and risk within an affiliated 

group. These transactions may serve 

different purposes, including, but not 

limited to, providing U.S. Treasury 

securities for delivery when an affiliate 

has taken a long or short position in 

U.S. Treasury securities as a hedge 

against other exposures, allowing the 

movement of U.S. Treasury securities to 

allow them to be posted as margin on an 

affiliate’s transaction, ensuring that U.S. 

Treasury securities can serve as a 

liquidity buffer for an affiliated bank,661

or to meet liquidity composition targets. 

To get the U.S. Treasury securities to the 

appropriate entity with an affiliated 

group, the affiliate often enters into 

repos or reverse repos with a direct 

participant of a U.S. Treasury securities 

CCA. 

Using assets and liabilities data 

reported by the five largest U.S. brokerdealers in their 2022 annual audited 

financial statements, the Commission 

observed that the value of repo and 

reverse repo from inter-affiliate 

transactions ranges from 25–75% of 

total repo and reverse repo reported at 

the end of year. 

4. Central Clearing in the U.S. Treasury 

Securities Market 

Currently, FICC is the sole provider of 

clearance and settlement services for 

U.S. Treasury securities.662 On July 18, 

2012, FSOC designated the FICC as a 

systemically important financial market 

utility under Title VIII of the U.S. DoddFrank Act. FSOC assigned this 

designation on the basis that a failure or 

a disruption to FICC could increase the 

risk of significant liquidity problems 

spreading among financial institutions 

or markets and thereby threaten the 

stability of the financial system in the 

United States. 

Should a trade be centrally cleared, 

the CCP receives a notice of the 

executed trade from both parties, and 

after comparison (i.e., matching of the 

trade details), the CCP guarantees and 

novates the contract, where novation 

refers to the process by which the CCP 

becomes the counterparty to both the 

buyer and seller in the original trade. 

Once the trading day ends and all trades 

have been reported to the CCP (i.e., end 

of T+0), the CCP determines its net 

obligations to each CCP participant for 

each security and communicates the 

resulting settlement obligations to the 

counterparties. The participants then 

have the obligation to settle their 

portion of the trade on T+1. Once this 

information is communicated, the 

participants send instructions to their 

settlement agents. In contrast to the 

bilateral case, central clearing reduces 

the credit risk that both parties are 

exposed to throughout the trade. While 

at execution both CCP members hold 

the usual counterparty credit risk to one 

another, this risk is transformed, 

generally within minutes of trade 

execution, when the trade details are 

sent to the CCP and the CCP guarantees 

and novates the trade. Consequently, 

both parties to the trade now hold 

centrally cleared credit risk, and the 

CCP has counterparty risk to both 

members. 

Direct membership in FICC typically 

consists of banks and registered dealers, 

who must meet specified membership 

criteria.663 In other markets such as U.S. 

equity markets, not all active 

participants are direct members of the 

clearing agency. For this reason, it is 

likely that under the requirement to 

clear eligible secondary market 

transactions, some market participants 

will access clearing indirectly. At FICC, 

the indirect clearing models are its 

Sponsored Program and a prime broker/ 

correspondent clearing program.664 As 

of August 14, 2023, FICC has 208 direct 

members.665

Centrally cleared institutional triparty 

(‘‘CCIT’’) membership is a limited direct 

membership for entities who buy repo 

using FICC’s GCF Repo Service that 

settles using triparty settlement.666 In 

2017, FICC developed the CCIT Service 

to allow repo cash providers to access 

central clearing as limited-purpose 

members without the sponsorship or 

intermediation of a direct participant.667

These entities pledge to FICC the 

purchased securities under their repos 

in order to secure their obligation to 

perform under the transaction. As of 

July 27, 2023, there were 7 CCIT 

members, all of which were affiliated 

with a single investment firm.668

FICC interacts solely with the 

Sponsoring Member/direct participant 

as agent for purposes of the Sponsoring 

Member’s clients/Sponsored Members’ 

obligations to and from FICC. 

Sponsoring Members also guarantee to 

FICC the payment and performance 

obligations of their Sponsored 

Members.669 Sponsoring Members can 


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time, the service is generally used only for U.S. 

Treasury repo transactions. 

670See FICC Rule 3A, section 2(a) and (b), supra 

note 19; DTCC, FICC GSD Member Directory (Oct. 

31, 2023), available at https://www.dtcc.com/-/ 

media/Files/Downloads/client-center/FICC/MemGOV-by-name.xlsx (identifying Sponsoring 

Members as those with Omnibus accounts). 

671See FICC Rule 3A, section 3(a), supra note 19; 

FICC Sponsored Membership Listing, available at 

https://www.dtcc.com/client-center/ficc-govdirectories. 

672See FICC’s GSD Rule 3A, supra note 663. 

Sponsored Members have to be Securities Act Rule 

144A ‘‘qualified institutional buyers,’’ or otherwise 

meet the financial standards necessary to be a 

‘‘qualified institutional buyer.’’ See id., Rule 3A, 

section 3(a). 

673See Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order Approving a 

Proposed Rule Change to Expand Sponsoring 

Member Eligibility in the Government Securities 

Division Rulebook and Make Other Changes, 

Exchange Act Release No. 85470 (Mar. 29, 2019). 

674 In its 2022 annual report, DTCC reported that 

FICC’s sponsored service expanded during the year 

to more than 35 sponsoring members. DTCC 2022 

Annual Report, supra note 737, at 29. See also 

supra note 668. 

675This information was available from DTCC on 

the 1 year version of the FICC Sponsored Activity 

chart as of Aug. 15, 2023. DTCC, Sponsored 

Membership (last updated Dec. 1, 2023), available 

at https://www.dtcc.com/charts/membership. 676For various persons, direct participation in 

FICC may not be an alternative to the Sponsored 

Membership program. For example, ‘‘[a] subset of 

market participants, such as certain money market 

funds, face legal obstacles to joining FICC because 

they are prohibited from mutualizing losses from 

other clearing members in the way that FICC rules 

currently require.’’ Marta Chaffee and SamSchulhofer-Wohl, infra note 678, at 2. 

677FICC Membership Listing, supra note 670. 

678See Marta Chaffee and Sam-Schulhofer-Wohl, 

Is a Treasury Clearing Mandate the Path to 

Increased Central Clearing?, Chicago Fed Insights, 

https://www.chicagofed.org/publications/blogs/ 

chicago-fed-insights/2021/treasury-clearingmandate (June 23, 2021) (explaining that this 

conclusion follows from that fact that ‘‘FICC nets 

members’ trades for their own accounts against 

trades by the members’ customers, so the dealer’s 

and customer’s sides of the trade would cancel out 

in the netting process.’’). 

679 Id. 

680FICC–GSD Rule 3A sections 3 (membership) 

and 7 (novation), supra note 19. 

681FICC Rule 3A, section 10(c), supra note 19. 

See also The Depository Trust and Clearing 

Corporation (DTCC), Making the U.S. Treasury 

Market Safer for All Participants: How FICC’s Open 

Access Model Promotes Central Clearing (white 

paper, Oct. 2021), available at https://

www.dtcc.com/-/media/Files/Downloads/ 

WhitePapers/Making-the-Treasury-Market-Saferfor-all-Participants.pdf (‘‘DTCC October 2021 White 

Paper’’) at 5–6. 

682FICC Rule 8, supra note 19. See DTCC October 

2021 White Paper, supra note 681, at 5, which 

reports that $80 billion plus of activity are observed 

clearing and settling daily through FICC’s 

correspondent clearing and prime broker clearing 

models. 

683FICC Rule 3A, sections 8 and 9, supra note 19. 

684FICC Rule 3, section 14(c), supra note 19. 

685See generally DTCC SGCS, supra note 658. 

be either bank direct participants of 

FICC that meet certain capital and other 

requirements or any other FICC direct 

participant that meets what FICC 

determines to be the appropriate 

financial resource requirements; in 

practice, Sponsoring Members include 

both banks and broker-dealers.670

Sponsored Members have to be 

‘‘qualified institutional buyers’’ as 

defined by Rule 144A under the 

Securities Act of 1933, as amended, or 

otherwise meet the financial standards 

necessary to be a ‘‘qualified institutional 

buyer,’’ and currently, Sponsored 

Members generally consist of hedge 

funds, money market funds, other asset 

managers, and smaller banks.671

The Sponsored Service allows eligible 

direct participants (Sponsoring 

Members) to (i) sponsor their clients 

into a limited form of FICC membership 

(Sponsored Members) and then (ii) 

submit certain eligible client securities 

transactions for central clearing. The 

requirement to clear eligible secondary 

market transactions could affect 

Sponsored Members. FICC interacts 

solely with the Sponsoring Member/ 

direct participant as agent. Sponsoring 

Members guarantee to FICC the payment 

and performance obligations of its 

Sponsored Members.672 Following 

FICC’s expansion in 2021 of its 

Sponsored Service to allow Sponsored 

Members to clear triparty repos through 

the program,673 there are now 

approximately 350 Sponsoring Members 

and approximately 2,200 Sponsored 

Members 674 with access to central 

clearing. During the 12-month period 

ending on August 15, 2023, the total 

dollar value of Sponsored Members’ 

daily repo and reverse repo activity 

ranged from a high of $771.7 billion on 

June 30, 2023, to a low of $265.8 billion 

on September 14, 2022.675

Among the various types of financial 

firms that are Sponsored Members are 

(i) over 1,400 funds, including a number 

of hedge funds, many money market 

funds, other mutual funds, and a 

smaller number of exchange-traded 

funds (‘‘ETFs’’); 676 (ii) banks, including 

a small number of national, regional 

Federal Home Loan Banks, and 

international banks; and (iii) other asset 

managers including a few insurance 

companies.677

From a direct participant’s 

perspective, clearing a U.S. Treasury 

securities transaction at FICC between 

that participant and its non-participant 

counterparty (i.e., a dealer-to-client 

trade) need not result in a separate 

collection of margin for each 

transaction. Transactions between direct 

participants are novated by FICC, and, 

by virtue of multilateral netting, all of a 

member’s positions are netted into a 

single payment obligation—either to or 

from the CCP. In contrast, in a dealerto-client trade, there is no transaction 

between two direct participants that 

FICC membership rules would require 

to be novated to the CCP, and as a 

result, FICC does not provide any 

guaranty of settlement or otherwise risk 

manage this trade.678 In other words, as 

one recent publication explained, ‘‘if a 

dealer were to buy a security from its 

own customer and submit this 

transaction to FICC, there would be no 

effect on the dealer’s net position at, 

obligations to, or guarantees from 

FICC.’’ 679 Indeed, except for its 

sponsored program, because FICC nets 

all trades at a dealer before calculating 

margin, as at present, customer trades 

with their own dealers generate no 

margin requirement and are not 

collateralized at the CCP. 

Sponsored Members participating in 

FICC’s Sponsored Service are indirect 

members of FICC, and upon novation of 

their U.S. Treasury transactions, FICC 

becomes obligated to such Sponsored 

Members.680 FICC requires that its 

Sponsoring Members provide margin on 

a gross basis for its Sponsored Member 

positions.681 In FICC’s correspondent 

clearing and prime brokerage clearing 

models, the client of the netting member 

does not have a legal relationship with 

FICC.682 FICC only has CCP obligation 

to the correspondent clearer or prime 

broker itself, as applicable, who is a 

FICC member. 

Certain aspects of FICC’s Sponsored 

Service are worth noting, as they may 

have an effect on some market 

participants’ willingness to participate 

in the service. For example, once a trade 

is novated, FICC makes delivery of cash 

or securities to the Sponsoring Member 

as agent for the Sponsored Member.683

Therefore, market participants may 

consider the ability of their Sponsoring 

Member to make delivery to them in 

situations in which the Sponsoring 

Member is in default, when determining 

whether to use the Sponsored Service. 

In addition, if a Sponsoring Member 

defaults, FICC continues to guarantee 

any novated sponsored trades and may 

determine whether to close out a 

sponsored trade and/or to permit the 

Sponsored Member to settle the 

trade.684 This may lead a potential 

sponsored member to decline to enter a 

sponsoring relationship unless it was 

willing to trade bilaterally with those 

sponsoring firms. The Commission 

understands that some Sponsoring 

Members also may limit which market 

participant’s trades they are willing to 

sponsor based on firm type. Sponsored 

triparty repo is a relatively recent 

addition.685 Volumes of sponsored repo 


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686 17 CFR 240.17ad–22(e)(4)(iii). 

687FICC Rule 4, sections 6 and 7, supra note 19. 

688Specifically, the Commission’s rules require 

FICC to have policies and procedures reasonably 

designed to maintain sufficient liquid resources at 

the minimum in all relevant currencies to effect 

same-day and, where appropriate, intraday and 

multiday settlement of payment obligations with a 

high degree of confidence under a wide range of 

foreseeable stress scenarios that includes, but is not 

limited to, the default of the participant family that 

would generate the largest aggregate payment 

obligation for the covered clearing agency in 

extreme but plausible market conditions, and to 

hold qualifying liquid resources sufficient to meet 

that requirement. See 17 CFR 240.17ad–22(e)(7)(i) 

and (ii). 

689FICC Rule 4, sections 5 and 6, supra note 19. 

690 Id. 

691FICC Rule 22A, section 2a, supra note 19. 

fluctuate, but they appear to be 

substantial as Figure 6 shows. 

In addition, the Commission 

understands that it is common practice 

for sponsoring members to only offer 

clearing services for transactions in 

which the sponsor is the counterparty to 

the sponsored member. This bundling of 

execution and central clearing sponsor 

services means that should a non-FICC 

member wish to centrally clear a U.S. 

Treasury transaction, it is limited in the 

counterparties with which it can trade 

to those FICC direct members with 

which it has an existing sponsoring 

member relationship. 

In order for a CCP to perform as the 

guarantor of trades that have been 

novated to it, the CCP must have 

resources available to absorb the costs of 

clearing member non-performance. FICC 

is required by Commission rule to have 

policies and procedures reasonably 

designed to maintain financial resources 

at the minimum to enable it to cover a 

wide range of foreseeable stress 

scenarios that include, but are not 

limited to, the default of the participant 

family that would potentially cause the 

largest aggregate credit exposure in 

extreme but plausible market 

conditions.686 A CCP’s plan to deal with 

a clearing member default is referred to 

as its default waterfall. The default 

waterfall provides an identification of 

resources that the CCP will use in 

attempting to recoup losses from 

clearing member defaults. The FICC 

waterfall comprises the defaulting 

clearing member’s contribution (i.e., 

margin, as well as any other resources 

the member has on deposit such as 

excess margin, the proceeds from 

liquidating the member’s portfolio, and 

any amounts available from crossguaranty agreements), the corporate 

contribution to the clearing fund, 

followed by non-defaulting clearing 

members’ margin.687

In addition, with respect to liquidity 

risk, the Commission’s rules require 

FICC to have policies and procedures 

reasonably designed to meet a ‘‘cover-1’’ 

standard and hold qualifying liquid 

resources sufficient to complete its 

settlement obligations in the event of 

the default of the largest member and its 

affiliates.688 For example, if a clearing 

member has a net long position in a 

security that has not yet settled, the CCP 

must have the cash available to 

complete the purchase. The securities 

can be subsequently liquidated and any 

losses that may result would be covered 

by the resources in the default waterfall. 

The first liquidity source that FICC 

would use in the event of a member 

default is the cash portion of the 

clearing fund.689 Second, FICC can 

pledge securities in the clearing fund as 

a source of cash, including securities 

that would have otherwise been 

delivered to the defaulting member.690

Should additional liquid resources be 

required FICC could make use of the 

CCLF.691

The CCLF is a rules-based 

arrangement in which FICC members 

are obligated to participate as a 

condition of their membership. Should 

FICC declare a CCLF event, each 

member would be obligated to enter into 

repurchase agreements with FICC up to 


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V) $800 C 

~ $700 

iii 

$600 

$500 

$400 

$300 

$200 

$100 

$0 

Figure 6: Sponsored Repo Daily Trading Volumea 

Sponsored Repo Daily Trading Volume 

111RBIMraRapo 

Rapo 

DTCC, Sponsored Membership (last updated Dec. 4, 2023), available at 

https:/ /www .dtcc.com/ charts/membership 
2788 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

692These repurchase agreements may continue 

for up to 30 days. See FICC Rule 22A, section 

2a(a)(L), supra note 19. 

693FICC Rule 22A, section 2a(d), supra note 19. 

694See Independent Dealer & Trader Association, 

White Paper on the Repo Market Affecting U.S. 

Treasury and Agency MBS 8 (Dec. 6, 2019), 

available at https://static1.squarespace.com/static/ 

5ad0d0abda02bc52f0ad4922/t/5dea7fb6af08dd4

4e68f48cc/1575649207172/IDTA+- 

+White+Paper+%2812.6.19%29-c2.pdf (‘‘In light of 

the fact that a significant component of a firm’s 

CCLF obligation is based on its overnight liquidity 

exposures at FICC, middle-market dealers 

immediately took to reducing their reliance on 

overnight liquidity. Some middle-market dealers 

reduced the size of their portfolio and extended 

liquidity terms in place of overnight funding, 

adding to both financing and opportunity costs. 

Others have incorporated liquidity plans for which 

commitment and administration fees materially 

added to the cost of doing business.’’). 

695See generally FICC Rule 22A, section 2a(b), 

supra note 19. For details on the process, see Order 

Approving a Proposed Rule Change to Implement 

the Capped Contingency Liquidity Facility in the 

Government Securities Division Rulebook, 

Exchange Act Release No. 82090 (Nov. 15, 2017), 

82 FR 52457 (Nov. 21, 2017). 

696FICC Rule 1 (definitions of Aggregate Total 

Amount and Liquidity Buffer) and 22A, section 2, 

supra note 19. 

697FICC Rule 22A, section 2a(b)(iii), (iv), and (v), 

supra note 663. See also Exchange Act Release No. 

82090, supra note 695, 82 FR at 55429–30. 

698FICC Rule 22A, section 2a(b)(ii), (iii), (iv), and 

(v), supra note 19. 

a member-specific limit.692 The CCLF is 

not prefunded, and it is separate from 

FICC’s margin requirements. Each FICC 

member is required, by FICC’s rules, to 

attest that its CCLF requirement has 

been incorporated into its liquidity 

planning and related operational plans 

at least annually and in the event of any 

changes to such Member’s CCLF 

requirement.693 Thus, the members are 

obligated to have such resources lined 

up, which can be costly.694

The CCLF provides a mechanism for 

FICC to enter into repurchase 

transactions based on the clearing 

activity of the defaulted participant. 

Specifically, in the event that FICC 

declares a CCLF event, FICC’s members 

would be required to hold and fund 

their deliveries to the defaulting 

member, up to a predetermined capped 

dollar amount, by entering into 

repurchase transactions with FICC until 

FICC completes the associated 

closeout.695 The aggregate size of the 

CCLF is the historical cover-1 liquidity 

requirement (i.e., the largest liquidity 

need generated by an Affiliated Family 

during the preceding six-month period) 

plus a liquidity buffer (i.e., the greater 

of 20 percent of the historical cover-1 

liquidity requirement or $15 billion).696

The first $15 billion of the total 

amount of the CCLF is shared, on a 

scaled basis, across all members. Any 

remaining amount is allocated to 

members who present liquidity needs 

greater than $15 billion, using a 

liquidity tier structure based on 

frequency of liquidity created across 

liquidity tiers in $5 billion 

increments.697 The size of the CCLF and 

each member’s share is reset every 6 

months or as appropriate.698 Figure 7 

provides data on the aggregate amount 

of the CCLF from 2018 quarter 4 through 

2023 quarter 1. The aggregate size of the 

CCLF was over $76 billion in 2023 

quarter 1. 


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130,000 

120,000 

110,000 

100,000 :E 

:E 

'IJ'l. 

90,000 

80,000 

70,000 

60,000 

Figure 7: Aggregate CCLF ($MM) at Quarter Enda 

Calculated using data from CPMI-IOSCO Quantitative Disclosure Results [quarterly] (for FICC), Disclosure 

Reference 7 .1.6, available at https:/ /www .dtcc.com/legal/policy-and-compliance. 
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2789 

699TMPG White Paper, supra note 13, at 3. 

700 Id. at 3. Non-centrally cleared cash trades are 

negotiated and settled bilaterally, and the 

Commission has little direct insight into the 

arrangements market participants use to manage 

their counterparty exposure. The TMPG observes in 

the White Paper that non-centrally cleared trades 

are ‘‘. . . not margined in a uniform or transparent 

manner, thereby creating uncertainty about 

counterparties’ exposure to credit and market risk.’’ 

Id. 

701 G–30 Report, supra note 5, at 13. 

702TMPG White Paper, supra note 13, at 3 

(‘‘Margining has not been a common practice for 

regularly settling bilaterally cleared 

transactions. . .’’). 

703See Tri-Party/GCF Repo, Federal Reserve Bank 

of New York, available at https://

www.newyorkfed.org/data-and-statistics/datavisualization/tri-party-repo/index.html#interactive/ 

margins. 

704See Hempel et al. (2023), supra note 564, at 

3 and 7–9. 

705 Id. 

706 Id. at 7. 707See Part IV.B.3.4, supra for a discussion of 

how FICC requires for margining of sponsored 

positions. 708See FICC Rule 4, section 1b, supra note 19. 

FICC’s margin requirements are discussed in more 

detail below. A key component of the margin 

requirement is a Value-at-Risk charge, where the 

calculated margin requirement is based in part on 

the historical volatility of the traded security. 

Securities that are more sensitive to interest rates 

should have higher VaR, all else equal. 

709See CPMI IOSCO Quantitative Disclosure 

Results for 2020Q1 and 2019Q4, items 6.1.1 and 

6.6.1, available at https://www.dtcc.com/legal/ 

policy-and-compliance. 

710FICC Rule 4, section 1b, supra note 19. 

711With respect to registered investment 

company lenders seeking to rely on Rule 5b–3 

under the 1940 Act, the value of the collateral 

received under a repo must be at least equal to the 

resale price, reduced by the transaction costs 

(including loss of interest) that the investment 

company reasonably could expect to incur if the 

cash borrower defaults. See Rule 5b–3(a); (c)(1). 

712Although triparty repo transactions are settled 

through a clearing bank, the terms of the 

transactions are bilaterally negotiated. Although 

haircuts vary by collateral type, the variance of 

haircuts is small for U.S. Treasury repo compared 

to other collateral types. See Paddrik et al., supra 

note 631. 

713For data on the median, 10th, and 90th 

percentiles of overcollateralization in Triparty repo, 

see Tri-Party/GCF Repo, Federal Reserve Bank of 

New York, available at https://

www.newyorkfed.org/data-and-statistics/datavisualization/tri-party-repo. The median level of 

overcollateralization has been 2% for the entire 

period from May 2010 through July 2023. The 10th 

and 90th percentiles are also typically 2%, although 

the 10th percentile has occasionally fallen to as low 

as zero—notably, in the summer of 2011, briefly in 

Sept. 2012, and in the period from Sept. of 2022 

through early Jan. of 2023—while the 90th 

percentile has occasionally spiked to as high as 

5%—specifically in Jan. 2017 and again in Apr. of 

the same year. 

714See Viktoria Baklanova, Isaac Kuznits, Trevor 

Tatum, Primer: Money Market Funds and the Repo 

Market (Feb. 18, 2021), available at https://

www.sec.gov/files/mmfs-and-the-repo-market021721.pdf (‘‘MMF Primer’’). 

5. Margin Practices in U.S. Treasury 

Secondary Markets 

As described above, posting of margin 

is one way to manage the risk of 

settlement in cash trades. Indeed, for 

trades that are centrally cleared, the CCP 

collects margin on an intraday basis, 

typically twice per day.699 Varying 

bespoke arrangements appear to 

characterize current margining practices 

in the bilateral, non-centrally cleared 

cash market.700 A recent publication 

stated that competitive pressures in the 

bilaterally settled market for repo 

transactions has exerted downward 

pressure on haircuts, sometimes to 

zero.701 The Commission understands 

that most non-centrally cleared bilateral 

repo trades go unmargined.702 For noncentrally cleared repo including that 

which is settled using the triparty 

platform, haircuts serve as a 

counterparty credit risk mitigant. The 

median haircut on U.S. Treasury 

collateral for non-centrally cleared 

bilateral repo that is settled on the 

triparty platform has been 2% since at 

least 2010.703

In a study of non-centrally cleared 

bilateral repo trade data collected in its 

June 2022 pilot study, the OFR reports 

that 74% of all volume is transacted at 

zero haircut.704 The report also suggests 

that this finding is in part due to the use 

of netted packages, in which a dealer 

will conduct both a repo and a reverse 

repo with the same counterparty and the 

same tenor but over different pieces of 

Treasury collateral.705 The report also 

provides evidence that haircuts reflect 

not only the riskiness of the collateral 

but also the relative credit risk of the 

counterparties. For example, haircuts on 

Treasury repo where dealers are selling 

repo to hedge fund customers are 

usually zero or negative, while haircuts 

where dealers buying repo from hedge 

funds are usually zero or positive.706

The reduction of haircuts, which 

serve as the primary counterparty credit 

risk mitigant in non-centrally cleared 

and bilaterally settled repos, could 

result in greater exposure to potential 

counterparty default risk in noncentrally cleared repos. Such 

arrangements (in both cash and repo) 

may not take into account the value of 

margin in protecting against systemic 

events, because they are designed to be 

optimal for the counterparties rather 

than the larger financial market. 

For centrally cleared cash U.S. 

Treasury transactions, however, FICC 

rules dictate that margin must be posted 

based on the net positions of all 

members with the clearing agency.707

Positions in securities with longer 

maturities—for example, 20+ year U.S. 

Treasury bonds—require more margin to 

be posted because they are more 

sensitive to interest rate changes. 

Required margin is also larger for short 

positions, and it rises with volatility in 

the U.S. Treasury securities market.708

For example, during the first quarter of 

2020, a period which includes the U.S. 

Treasury securities market disruption of 

March 2020, total initial margin 

required was 9.4% higher than the 

previous quarter and the average total 

variation margin paid was 72% 

higher.709

FICC Rules set forth the various 

components of a member’s margin 

requirements.710 The largest component 

is a Value-at-Risk (VaR) charge, which is 

calculated both intraday and end-of-day 

and reflects potential price volatility of 

unsettled positions. FICC typically 

calculates VaR using ten years of 

historical data; for securities without the 

requisite amount of data, FICC instead 

employs a haircut approach, where the 

required margin is some percentage of 

the traded security’s value. Other 

components of FICC’s margin 

requirements include a liquidity 

adjustment charge, which is levied 

against members who have large, 

concentrated positions in particular 

securities that FICC determines to be 

difficult to liquidate, and special 

charges that can be levied in response 

to changes in aggregate market 

conditions (such as increases in marketwide volatility). 

In the market for bilaterally cleared 

repo, margin typically comes in the 

form of haircuts. For example, if a repo 

buyer is providing $100 of cash in 

return for $102 of securities from the 

repo seller, then the haircut would be 

$2. The difference between the value of 

the securities sold and the initial price 

paid, which is essentially a form of 

initial margin, protects the buyer by 

making it more costly for the seller to 

fail to repurchase the securities as 

agreed at the end of the repo, while also 

protecting the buyer against the risk that 

short-term volatility erodes the value of 

the purchased securities.711 The 

difference between the cash provided 

and the value of the securities is known 

colloquially as a ‘‘haircut.’’ Triparty 

repo also features overcollateralization, 

where the haircut is again negotiated 

bilaterally between the two 

counterparties.712 Data from the Federal 

Reserve Bank of New York show that a 

2% haircut is the norm in the Triparty/ 

GCF repo market, though there are 

occasionally some deviations from the 

norm.713 Money market funds also 

generally require margin of 2%, which 

is generally the case for other 

investment companies as well.714

Outside of money market funds and 


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715See G–30 Report, supra note 5, at 13 (noting 

that minimum margin requirements ‘‘. . . would 

stop competitive pressures from driving haircuts 

down (sometimes to zero), which reportedly has 

been the case in recent years.’’). 

716See 2021 IAWG Report, supra note 4, for 

further discussion of these and other disruptions. 

See also Remarks by Under Secretary for Domestic 

finance Nellie Liang at the 2022 Treasury Market 

Conference, available at https://home.treasury.gov/ 

news/press-releases/jy1110. Under Secretary Liang 

points out that continued liquidity concerns are 

linked to higher volatility since the COVID–19 

shock of Mar. 2020. 

717U.S. Treasury securities are often used as 

substitutes for cash. There is anecdotal evidence 

that during Mar. 2020, some market participants 

refused U.S. Treasury securities collateral in favor 

of cash. 

718See Remarks by Under Secretary for Domestic 

Finance Nellie Liang at the 2022 Treasury Market 

Conference available at https://home.treasury.gov/ 

news/press-releases/jy1110, Enhancing The 

Resilience of the U.S. Treasury Market: 2022 Staff 

Progress Report (Nov 10, 2022), available at https:// 

home.treasury.gov/system/files/136/2022-IAWGTreasury-Report.pdf), and Darrel Duffie, Resilience 

redux in the US Treasury market, Jackson Hole 

Symposium (Sept. 2, 2023), available at https://

www.kansascityfed.org/Jackson%20Hole/ 

documents/9780/JH-2023BW.pdf. See also Darrell 

Duffie, Michael Fleming, Frank Keane, Claire 

Nelson, Or Shachar, and Peter Van Tassel, B.6.aa, 

Internal SEC seminar (July 2023), available at 

https://www.sec.gov/comments/s7-23-22/s72322- 

260739-614102.pdf. 

719See SEC Staff Report on U.S. Credit Markets 

Interconnectedness and the Effects of the COVID– 

19 Economic Shock (Oct. 2020), available at https:// 

www.sec.gov/files/US-Credit-Markets_COVID-19_

Report.pdf. 

720See Ayelen Banegas, Phillip J. Monin, and 

Lubomir Petrasek, Sizing hedge funds’ Treasury 

market activities and holdings (FEDS Notes Oct. 6, 

2021), available at https://www.federalreserve.gov/ 

econres/notes/feds-notes/sizing-hedge-fundstreasury-market-activities-and-holdings20211006.html. 

721See supra note 719, at 4. In addition, a similar 

dynamic was observed in the risk parity trades, 

where hedge funds lever up (through the repo 

markets) lower volatility fixed-income positions 

(e.g., government bonds) to create a risk-equalized 

portfolio across asset classes. See also id. 

722 Duffie, supra note 27. 

723See generally Ayelen Banegas et al., supra 

note 720; see also Daniel Barth & R. Jay Kahn, 

Hedge Funds and the Treasury Cash-Futures 

Disconnect (Apr. 1, 2021), available at https://

www.financialresearch.gov/working-papers/2021/ 

04/01/hedge-funds-and-the-treasury-cash-futuresdisconnect/; Mathias S. Kruttli, Phillip J. Monin, 

Lubomir Petrasek, & Sumudu W. Watugala, Hedge 

Fund Treasury Trading and Funding Fragility: 

Evidence from the COVID–19 Crisis (working paper 

Fin. and Econ. Disc. Series 2021–038), Fed. Res. Bd 

(Apr. 2021), available at https://

www.federalreserve.gov/econres/feds/files/ 

2021038pap.pdf. 

724See Colin R. Weiss, Foreign Demand for U.S. 

Treasury Securities during the Pandemic (FEDS 

Notes, Jan. 28, 2022), available at https://

www.federalreserve.gov/econres/notes/feds-notes/ 

foreign-demand-for-us-treasury-securities-duringthe-pandemic-20220128.htm. 

725 Duffie, supra note 27; Nellie Liang & Pat 

Parkinson, Enhancing Liquidity of the U.S. Treasury 

Market Under Stress (Hutchins Ctr. Working Paper 

No. 72, 2020), available at https://

www.brookings.edu/wp-content/uploads/2020/12/ 

WP72_Liang-Parkinson.pdf (‘‘Liang & Parkinson’’). 

other investment companies, due to the 

lack of reporting requirements for 

bilateral repo, the Commission lacks 

good insight into margin practices of 

participants in the market for bilaterally 

cleared repo. Anecdotally, the 

Commission understands that—as with 

the cash market—some participants may 

not be required to post any margin.715

While positive haircuts protect the 

repo buyer, the bilaterally cleared repo 

market generally does not feature the 

same level of protection for the repo 

seller. Indeed, one of the main benefits 

of the bilateral market to repo buyers is 

that it allows them to resell the 

securities purchased in the start leg of 

the repo. As a result, repo sellers are 

exposed to settlement risk and must 

manage that risk as they see fit. In the 

triparty repo market, securities 

purchased as part of a repo transaction 

remain in the custody of the clearing 

bank and cannot be reused by the repo 

buyer except as collateral in another 

triparty repurchase agreement, reducing 

settlement risk for the repo seller. 

Unlike bilaterally cleared and triparty 

repo the counterparties to a centrally 

cleared repo transaction must post cash 

margin to the CCP twice per day, as they 

do with trades in the cash market. Repo 

sellers may be required to post more 

margin than repo buyers, similar to how 

in the bilaterally cleared market repo 

sellers post margin through haircuts 

while repo buyers do not. 

6. Disruptions in the U.S. Treasury 

Securities Market 

There have been significant 

disruptions in the U.S. Treasury 

securities market in recent years. 

Although different in their scope and 

magnitude, these events all generally 

involved dramatic increases in market 

price volatility and/or sharp decreases 

in available liquidity.716 U.S. Treasury 

securities are generally not information 

sensitive in that their payoff is fixed in 

nominal terms. Moreover, there is little 

evidence that information on inflation 

risk or expectations could have driven 

the volatility observed in these 

episodes, raising the possibility that the 

volatility originated in a buy-sell 

imbalance, as opposed to fundamental 

factors. While a market failure could be 

the origin of price volatility, the 

forward-looking nature of markets can 

compound liquidity-driven price 

movements. The fear of being unable to 

exit a position can lead to a ‘‘rush to the 

exits,’’ leading to yet greater price 

swings. Because U.S. Treasury securities 

are standardized, they generally benefit 

from a deep, ready market for 

transactions. Investors count on the 

ability to move between cash and U.S. 

Treasury securities seamlessly.717 This 

makes events that reduce liquidity in 

these markets especially striking and 

destabilizing to the overall market. 

Moreover, since the Proposal, regulators 

and others have noted the persistence of 

illiquidity and the mitigating effect of 

greater central clearing.718

a. COVID–19 Shock of March 2020 

The market for U.S. Treasury 

securities experienced significant 

disruptions in March 2020, 

characterized by a spike in volume, 

whose origins may have been multiple 

but included high levels of selling by 

foreign banks and by hedge funds.719

For example, hedge funds, one of the 

principal sellers of U.S Treasury futures, 

hedge their short futures position by 

establishing a long position in the cash 

market, creating a ‘‘cash-futures basis 

trade.’’ 720 The cash position of this 

trade is often highly levered, using the 

repo market for financing. In March, as 

the U.S. Treasury securities market 

came under stress and as repo rates 

increased in some segments of the repo 

market, the economics of the cashfutures basis trade worsened and 

various funds found it necessary to 

unwind at least a portion of their 

positions. This unwinding of positions 

resulted in more outright sales of U.S. 

Treasury securities in the cash market, 

adding further stress through a feedback 

loop.721

During this period, bid-ask spreads 

increased by a factor of 5, and market 

depth on inter-dealer brokers decreased 

by a factor of 10. The price of 30-year 

U.S. Treasury securities fell by 10% in 

one two-day period. Arbitrage relations 

appeared to break down throughout the 

market.722 This may, as discussed 

above, have led to the winding down of 

the cash-futures basis trade, for 

example, adding to further stress.723

There also appeared to be large-scale 

selling from foreign investors, including 

official institutions, to address their 

domestic currency and liquidity 

needs.724

Duffie and Liang and Parkinson, 

among others, have tied these patterns 

to underlying U.S. Treasury securities 

market structure, in which 

intermediation capacity may be reduced 

relative to the size of the market and 

ultimate buyers and sellers may have 

difficulty locating each other. These 

authors discuss ways in which central 

clearing could have reduced these 

problems, mitigating the large price 

swings due to illiquidity in the market 

just when it was most needed.725 One 

view of central clearing is that it may 

facilitate all-to-all trading, thus helping 


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Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2791 

726See Duffie, supra note 27. 727See Sriya Anbil, Alyssa Anderson, and Zeynep 

Senyuz, What Happened in Money Markets in 

September 2019? (FEDS Notes, Feb. 27, 2020), 

available at https://www.federalreserve.gov/ 

econres/notes/feds-notes/what-happened-in-moneymarkets-in-september-2019-20200227.htm. 728See generally Joint Staff Report, supra note 4. 

729See Joint Staff Report, supra note 4, at 21. 

730See 2021 IAWG Report, supra note 4, at 18. 

731See id. 

732See id. 

ultimate buyers and sellers find each 

other.726 More buyers and sellers of U.S. 

Treasury securities could potentially act 

as additional sources of liquidity in a 

market with central clearing. 

b. September 2019 Repo Market 

Disruptions 

The repo market experienced a 

substantial disruption starting 

September 16, 2019, when overnight 

repo rates began to rise, and on 

September 17, 2019, when the rise in 

repo rates accelerated dramatically. 

During the episode, the Secured 

Overnight Financing Rate (SOFR)—a 

measure of the average cost of overnight 

repo borrowing (e.g., the implied cost of 

borrowing by selling overnight repo)— 

spiked by 300 basis points to over 5% 

in the course of 2 days. There was also 

a wide dispersion around this average; 

some trades occurred at rates as high as 

9%. On top of this, the spread between 

the 1st and 99th percentile rates 

increased substantially from its average 

earlier in 2019 of approximately 25 

basis points to approximately 675 basis 

points during the disruption. The 

disruption spilled over into the other 

markets, with the Effective Federal 

Funds Rate (EFFR) rising above the 

Federal Reserve target by 5 basis points. 

The disruption occurred amidst two 

events: first, a large withdrawal of 

reserves from the banking system to 

service corporate tax payments due 

September 16; and second, the 

settlement of U.S. Treasury securities 

auctions. Altogether, the tax payments 

led approximately $120 billion to flow 

away from bank reserves, bringing them 

down to their lowest level in 5 years.727

Moreover, the auction settlement raised 

the supply of U.S. Treasury securities 

outstanding, which was accompanied 

by an increased demand for cash to fund 

purchases of these securities. The need 

for cash reserves played a role in what 

appears to be an unwillingness of banks 

to lend to one another at very high rates. 

Less tangibly, market expectations could 

have played a role; it is possible that the 

spike in rates could have been 

interpreted as a signal for a future need 

of cash reserves, leading banks to 

conserve cash regardless of what 

appeared to be strong economic 

incentives to do otherwise. 

While the need for the banking system 

to replace reserves with cash may be 

part of the explanation, in a welloperating market high rates for 

overnight borrowing collateralized by 

U.S. Treasury securities (i.e., the 

implied cost of borrowing by selling 

overnight repo) would have attracted 

other market participants. Ultimately, as 

it did in March 2020, the Federal 

Reserve injected reserves into the 

system—the economic equivalent of 

lending to banks. The overnight repo 

operations totaled $75 billion on 

September 17, 2019. Besides directly 

providing cash, this perhaps signaled 

the Fed’s willingness and ability to lend 

as needed to restore rates to levels that 

would occur in the absence of market 

frictions. In such a setting, a potential 

benefit of enhanced clearing for U.S. 

Treasury repo and cash is its ability to 

reduce those market frictions directly, 

without official sector intervention. 

c. October 2014 Flash Rally 

In March 2020 U.S. Treasury 

securities’ prices fell, whereas in 

September 2019 the rate for lending 

increased. Both events were associated 

with an increase in the cost of 

borrowing (i.e., the implied cost of 

borrowing by selling overnight repo). 

The events of October 15, 2014, were 

different in form: in this instance, yields 

on U.S. Treasury bonds fell quickly and 

dramatically, leading to large increases 

in prices, without any clear explanation. 

The intraday range for the 10-year bond 

was 37 basis points, one of the largest 

on record, and far outside the typical 

historical distribution.728 October 15, 

2014, featured the release of somewhat 

weaker-than-expected U.S. retail sales 

data at 8:30 a.m. ET. While the data 

appeared to prompt the initial decline 

in interest rates, the reaction was far 

larger than would have been expected 

given the modest surprise in the data. 

Suggestive of some connection is that 

the dollar amount of standing quotes in 

the central limit order books on cash 

and futures trading platforms—a 

measure of the quantity of liquidity that 

is commonly referred to as ‘‘market 

depth’’—fell dramatically in the hour 

before the event window. 

A sudden rise in price does not at first 

appear as potentially disruptive as a 

decline. However, it appears that 

levered market participants had taken 

short positions in anticipation of an 

increase in yields. Any further increase 

in price would have forced these 

participants to cover their positions. 

Indeed, hedge funds became net buyers 

of U.S. Treasury securities on the 

morning of October 15, 2014. The 

decline in liquidity may have led to a 

further concern of an inability to exit 

positions. In particular, although the 

share of trading volume attributed to 

PTFs on October 15 does not stand out 

as unusual relative to the prior 

period,729 PTFs significantly reduced 

the dollar amounts of standing quotes in 

central limit order books,730 leading to 

greater pressure on the system. This 

withdrawal of liquidity appears to have 

been motivated by an attempt to manage 

risk. Lastly, though broker-dealers 

increased their trading volume, they 

provided less liquidity to the order 

books by widening their spreads and in 

some cases withdrawing for brief 

periods from the offer side of the 

book.731

This disruption showed that market 

liquidity provision had become more 

short-term in nature, some liquidity 

providers were backed by less capital, 

and liquidity was more vulnerable to 

shocks as a result of the change in the 

composition of liquidity providers. In 

addition, electronic trading permitted 

rapid increases in orders that removed 

liquidity. These vulnerabilities are 

similar to ones observed during the 

March 2020 events.732 As in the 

previously described episodes, the price 

swings illustrate the apparent difficulty 

for outside capital at accessing the 

market. Improved market functioning 

could have allowed economic 

incentives to help stabilize the system: 

end-users of U.S. Treasury securities 

could have reacted to the unusually 

high prices by selling. However, such 

participants would have needed access 

to pricing and to the ability to trade. 

7. Affected Parties 

a. Covered Clearing Agencies for U.S. 

Treasury Securities: FICC 

Although the requirement to clear 

eligible secondary market transactions 

would apply to all U.S. Treasury 

securities CCAs, FICC’s Government 

Securities Division, as noted previously, 

is the sole provider of clearance and 

settlement services for U.S. Treasury 

securities. FICC is a wholly owned 

subsidiary of The Depository Trust & 

Clearing Corporation (DTCC); DTCC is a 

private corporation whose common 

shares are owned by fee-paying 

participants in DTCC’s clearing agency 


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733See generally Notice of No Objection to 

Advance Notices, Exchange Act Rel. No. 74142 (Jan. 

27, 2015), 80 FR 5188 (Jan. 30, 2015) (not objecting 

to a proposal that DTCC’s new common share 

ownership formula will be based solely on fees paid 

to its subsidiary clearing agencies). 

734FICC, Consolidated Financial Statements as of 

and for the Years Ended Dec. 31, 2022 and 2021, 

available at https://www.dtcc.com/-/media/Files/ 

Downloads/legal/financials/2023/DTCC-AnnualFinancial-Statements-2022-and-2021.pdf. 

735 G–30 Report, supra note 5, at 11. 

736See, e.g., 2021 IAWG Report, supra note 4, at 

5–6 (citing TMPG White Paper); U.S. Department of 

the Treasury, A Financial System That Creates 

Economic Opportunities Capital Markets (Oct. 

2017), available at https://home.treasury.gov/ 

system/files/136/A-Financial-System-CapitalMarkets-FINAL-FINAL.pdf (‘‘2017 Treasury 

Report’’), at 81; Joint Staff Report, supra note 4, at 

36–37. 

737Performance Dashboard, DTCC 2022 Annual 

Report, at 44, available at https://www.dtcc.com/ 

about/-/media/Files/Downloads/Annual-Report2022/DTCC2022AR-PRINT.pdf. FICC’s GSD also 

process U.S. Government securities that are not U.S. 

Treasury securities but the dollar amount processed 

of such securities is believed to be nominal by 

comparison to that of U.S. Treasury securities. 

738 DTCC May 2021 White Paper, supra note 307, 

at 3. 

739See 2021 IAWG Report, supra note 4, at 30; 

see also TMPG White Paper, supra note 13, at 12. 740See Sebastian Infante et al., supra note 75 

(‘‘Form FR2004 data only cover activities of primary 

dealers. Therefore, any estimate based on that data 

is likely to underestimate the total size of the repo 

market. Discussions with market participants 

suggest that the nonprimary dealer’s market share 

is smaller than that attributed to the primary 

dealers, but growing.’’). The authors also show that 

all cleared bilateral repo and reverse repo have U.S. 

Treasury securities and TIPS as collateral (the 

authors’ Figure 4); Viktoria Baklanova, Adam 

Copeland, and Rebecca McCaughrin, Reference 

Guide to U.S. Repo and Securities Lending Markets, 

N.Y. Fed. Staff Report No. 740, at 11 (rev. Dec. 

2015), available at https://www.newyorkfed.org/ 

medialibrary/media/research/staff_reports/ 

sr740.pdf. 

741 DTCC, A Guide to Clearance and Settlement, 

Chapter 8: Settling Debt Instruments, available at 

https://www.dtcc.com/clearance-settlement-guide/ 

#/chapterEight (last visited Dec. 12, 2023). 742Finadium, Building Out Industry Data for New 

Industry Needs 9 (2021), available at https://

finadium.com/wp-content/pdfs/finadium-dtccbuilding-out-repo-data.pdf. 743 DTCC 2022 Annual Report, supra note 737, at 

44. 

744 DTCC, FICC GSD Member Directory (Oct. 31, 

2023), available at https://www.dtcc.com/-/media/ 

Files/Downloads/client-center/FICC/Mem-GOV-byname.xlsx (107 Netting Members participated in 

FICC’s GCF service). 

745Primary dealers are counterparties to the N.Y. 

Fed in its implementation of monetary policy and 

expected to participate meaningfully in all U.S. 

Treasury securities auctions for new issuances of 

U.S. Treasury securities. US Dept of the Treasury, 

Primary Dealers, available at https://

home.treasury.gov/policy-issues/financing-thegovernment/quarterly-refunding/primary-dealers. 

For a current list of primary dealers see List of 

Primary Dealers, Federal Reserve Bank of New 

York, available at https://www.newyorkfed.org/ 

markets/primarydealers. 

746SIFMA, 2023 Capital Markets Fact Book, at 56 

(July 2023) available at https://www.sifma.org/wpcontent/uploads/2022/07/2023-SIFMA-CapitalMarkets-Factbook.pdf (SIMFA’s term primary 

dealers refers to N.Y. Fed prime brokers). Id. The 

dollar value of trading in U.S. Treasury securities 

by primary dealers has a combined average annual 

growth rate of 1.7% for the 10-year period ending 

in 2022. 

subsidiaries, including FICC.733 In 2022 

and 2021, FICC’s total clearing revenue 

was approximately $312.8 million and 

$310.0 million, respectively, and its net 

income was approximately $4.6 million 

and $13.4 million, respectively.734

The G–30 Report estimated that 

‘‘roughly 20 percent of commitments to 

settle U.S. Treasury security trades are 

cleared through FICC.’’ 735 Although 

various analyses have noted the 

increased volume of secondary market 

U.S. Treasury transactions that are not 

centrally cleared,736 the dollar value of 

transactions FICC clears remains 

substantial. In 2022, FICC’s GSD 

processed $1.512 quadrillion in DVP 

transactions of U.S. Government 

securities.737 In March 2020, clearing 

dollar volume in U.S. Treasury 

securities at FICC rose ‘‘to over $6 

trillion daily, an almost 43 percent 

increase over the usual daily average of 

$4.2 trillion cleared [at that time].’’ 738

There are differences between the 

degree of central clearing in the cash 

and the repo markets. Based on 2017 

data, the TMPG estimated that 13 

percent of cash U.S. Treasury securities 

transactions are centrally cleared; 68 

percent are bilaterally cleared; and 19 

percent involve hybrid clearing, in 

which only one leg of a transaction on 

an IDB platform is centrally cleared.739

A Federal Reserve staff analysis of 

primary dealer repo and reverse repo 

transactions during the first half of 2022 

found ‘‘that approximately 20 percent of 

all repo and 30 percent of reverse repo 

is centrally cleared via FICC.’’ 740

Measured by dollar volume, repos, 

according to DTCC, are the largest 

component of the government fixedincome market.741 In mid-July 2021, 

according to Finadium and based on 

DTCC data, FICC processed $1.15 

trillion in repo, or roughly 25 percent of 

the $4.4 trillion U.S. repo market at that 

time.742 For all of 2022, DTCC reported 

that FICC processed $235 trillion 

through its GCF Repo Service.743

b. Direct Participants at U.S. Treasury 

Securities CCAs: FICC Netting Members 

The requirement to clear eligible 

secondary market transactions would 

directly affect market participants that 

are direct participants in a U.S. Treasury 

securities CCA, which currently means 

only direct participants at FICC’s GSD. 

FICC direct participants are also referred 

to as FICC Netting Members. As 

previously discussed, FICC Netting 

Members are the only FICC members 

eligible to become a counterparty to 

FICC to a U.S. Treasury securities 

transaction, including repo and reverse 

repo trades. As of August 14, 2023, 

FICC’s GSD had 208 Netting Members of 

which 192 were participants in FICC’s 

repo netting service.744 FICC Netting 

Members generally consist of bankaffiliated dealers and registered brokerdealers. These dealers include all 24 

financial institutions currently 

designated by the Federal Reserve Bank 

of New York (N.Y. Fed) as ‘‘primary 

dealers.’’ 745 In 2022, the average daily 

trading dollar value in U.S. Treasury 

securities by primary dealers was $614.3 

billion.746 The relative significance of 

dealer trading in the cash market for 

U.S. Treasury securities is shown in 

Figure 8. 


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747SIFMA Research, US Repo Markets: A Chart 

Book, at 6, 7, and 8 (Feb. 2022), available at https:// 

www.sifma.org/wp-content/uploads/2022/02/ 

SIFMA-Research-US-Repo-Markets-Chart-Book2022.pdf. Because these are figures for primary 

dealer repo and reverse repo, they need not be 

equal. In the aggregate, however, repo must equal 

reverse repo. 

748The Financial Accounts of the United States, 

L.207, line 1 (Federal Funds and Security 

Repurchase Agreements) available at https://

www.federalreserve.gov/releases/z1/20220310/ 

html/l207.htm. This number includes federal funds 

and security repurchase agreements (for all 

collateral types). Federal funds outstanding on Dec. 

31, 2021, was $49B. Effective Federal Funds Rate, 

Federal Reserve Bank of New York, available at 

https://www.newyorkfed.org/markets/referencerates/effr. The comparable figures for Dec. 31, 2022, 

were $6.6T and $67B. The Financial Accounts of 

the United States, L.207, line 1 (Federal Funds and 

Security Repurchase Agreements), available at 

https://www.federalreserve.gov/releases/z1/ 

20230608/html/l207.htm and Effective Federal 

Funds Rate, Federal Reserve Bank of New York, 

available at https://www.newyorkfed.org/markets/ 

reference-rates/effr. 

749 DTCC 2021 Annual Report, supra note 737, at 

32. 

750Sebastian Infante et al., supra note 75. 

751While the concentration among the top three 

dealers in the U.S. Treasury securities (excluding 

Strips) tri-party repo market ranged between 22% 

and 50% between 2011 and 2020, between Jan. 

2021 and Nov. 2022, the percentage of the volume 

in this market attributable to the top three dealers 

grew from 33.8 percent to 77.6% before falling to 

67.7% by July 2023. NY Fed, Data & Statistics, 

Visualization Tri-Party/GCF Repo, available at 

https://www.newyorkfed.org/data-and-statistics/ 

data-visualization/tri-party-repo/index.htmlinteractive/concentration. 

752 Id. 

As previously discussed, the total 

notional transactions amount in the 

repo market is larger than that of the 

cash U.S. Treasury securities market. In 

2021, average aggregate daily primary 

dealer outstanding total repo positions 

were $4.3 trillion consisting of $2.5 

trillion in repo (75% of which is 

collateralized by U.S. Treasury 

securities) and $1.8 trillion in reverse 

repo (89% of which is collateralized by 

U.S. Treasury securities).747 As of 

December 31, 2021, the repo market as 

a whole was valued at approximately 

$5.8 trillion.748 Although a large portion 

of this activity is cleared by FICC, a 

large portion is also not centrally 

cleared. For 2021, DTCC reported that 

‘‘FICC matches, nets, settles and risk 

manages repo transactions valued at 

more than $3T daily.’’ 749 During the 

first half of 2022, Federal Reserve staff 

estimated that a ‘‘large fraction of 

primary dealers’ repo (38 percent) and 

reverse repo (60 percent) activity is in 

the uncleared bilateral segment.’’ 750 See 

Figure 9. Although these statistics 

include all collateral types, for the 

subset of the repo market that includes 

a primary dealer on one side, the 

Commission has more detailed data. As 

Figures 10 and 11 show, the vast 

majority of uncleared bilateral and 

triparty primary dealer repo and reverse 

repo collateral consists of U.S. Treasury 

securities (including TIPS). The largest 

remaining components of repo 

(approximately 40 percent) and reverse 

repo activity (approximately 8 percent) 

are not centrally cleared but settle on 

the triparty platform.751 This is labeled 

‘‘Tri-Party (excluding GCF)’’ in Figure 9, 

and the degree to which Treasury 

collateral is used in these transactions is 

displayed in Figure 11. The final and by 

far the smallest component of repo and 

reverse repo activity (amounting to 

about 2% of activity) is triparty repo 

using FICC’s Sponsored GC service.752

BILLING CODE 8011–01–P 


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Figure 8 Share of U.S. Treasury Securities Cash Market Activity for All Securities by 

Participant Type 

Source: FINRA TRACE. This figure plots shares of trading volume by participant type for the entire U.S. Treasury 

securities cash market from April 1, 2019, to Dec. 31, 2019. Figure from Harkrader and Puglia FEDS Notes, supra 

note 641. Note: "Buy-side share is assumed to capture institutions such as hedge funds and investment firms but 

ma also include other financial institutions such as banks." Id. 
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Figure 9 Repo Clearing 2021-2022 

Repo 

'ftll&ons 

GCF 

2021 2022 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

Reverse Repo 

Weekly 

2021 

( , r !l 1 , , ) t, ; , ,, , \ I 1 , I ' 

2022 

Tlilllons 3_0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

------------------------------------------

Figure 10 Uncleared Bilateral Repo and Reverse Repo Collateral 2022 

Uncleared Bilateral Repo Uncleared Bilateral Reverse Repo 

Trillions 

Weekly 

1.4 Trillions 1.4 

Gorporalesewrffies 

1.2 1.2 

1.0 1.0 

0.8 0.8 

0.6 0.6 

0.4 0.4 

0.2 0.2 

0.0 0.0 

Jan. Feb. Mar. Apr. May Jun. July Jan. Feb. Mar. Apr. May Jun. July 

2022 2022 

Source: Board of Governors of the Federal Reserve System, Government Securities Dealers Reports (FR 2004) 

Figure 11 Tri-party Repo and Reverse Repo Collateral 2022 

Tri-Party Repo Tri-Party Reverse Repo 

Trillions 

1.4 Weekly 

Trillions 

0.30 

1.2 025 

1.0 

020 

0.8 

0.15 

0.6 

0.10 

0.4 

02 0.05 

0.0 0.00 

Jan. Feb. Mar. Apr. May Jun. July Jan. Feb. Mar. Apr. May Jun. July 

2022 2022 
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 2795 

753As noted previously, IDB is not used to 

encompass platforms that provide voice-based or 

other non-anonymous methods of bringing together 

buyers and sellers of U.S. Treasury securities. IDB 

instead refers to electronic platforms providing 

anonymous methods of bringing together buyers 

and sellers. 

754See generally TMPG White Paper, supra note 

13. The TMPG White Paper assumes throughout 

that IDBs are CCP direct members (e.g., ‘‘More 

specifically, the IDB platforms themselves and a 

number of platform participants continue to clear 

and settle through the CCP.’’ Id. at 2). 

755See supra note 14, 87 FR at 64615. 

756TMPG White Paper, supra note 13, at 2. 

757FICC’s Sponsored Member program also 

allows the submission of cash transactions; 

however, as previously noted, the service is 

generally used only for U.S. Treasury repo 

transactions at this time. 

758Using Form BD data from Sept. 2022, the 

Commission has previously stated that 27% of 

Form BD filers are U.S. Government Securities 

Brokers and 10% are U.S. Government Securities 

Dealers. See Cybersecurity Risk Management Rule 

for Broker-Dealers, Clearing Agencies, Major 

Security-Based Swap Participants, the Municipal 

Securities Rulemaking Board, National Securities 

Associations, National Securities Exchanges, 

Security-Based Swap Data Repositories, SecurityBased Swap Dealers, and Transfer Agents, Exchange 

Act Release No. 97142 (Oct. 25, 2022) 87 FR 64610, 

at 64650–1. 

759See supra note 744. 

BILLING CODE 8011–01–C 

c. Interdealer Brokers 

Interdealer brokers 753 and the trading 

platforms they operate play a significant 

role in the markets for U.S. Treasury 

securities. As previously discussed, an 

IDB will generally provide a trading 

facility for multiple buyers and sellers 

for U.S. Treasury securities to enter 

orders at specified prices and sizes and 

have these orders displayed 

anonymously to all users. When a trade 

is executed, the IDB then books two 

trades, with the IDB functioning as the 

principal to each respective 

counterparty, thereby protecting the 

anonymity of each party, but taking on 

credit risk from each of them. Although 

there is no legal requirement for an IDB 

to be a FICC direct participant/Netting 

Member, most IDBs are FICC Netting 

Members.754 Under FICC’s existing 

rules, if an IDB’s customer in a U.S. 

Treasury security transaction is not a 

FICC member, the IDB’s transaction 

with that customer need not be centrally 

cleared and may be bilaterally cleared. 

As discussed in the Proposing Release 

and in parts II.A.1 and II.A.2.b.ii infra, 

each transaction at an IDB is split into 

two pieces: a leg between the buyer and 

the IDB and a leg between the IDB and 

the seller.755 If the buyer or seller is a 

dealer, the respective leg is centrally 

cleared. Transaction legs involving PTFs 

are generally not cleared and settled 

bilaterally. 

TMPG estimates that ‘‘roughly threequarters of IDB trades clear 

bilaterally.’’ 756 To help visualize the 

significance of the role played by IDBs 

in the centrally cleared market, and 

given existing data limitations, Table 3, 

adapted from a table prepared by the 

TMPG in 2019, presents five clearing 

and settlement case types that cover the 

vast majority of secondary market cash 

trades. The table uses Federal Reserve 

data collected from primary dealers in 

the first half of 2017 to estimate the 

daily volume (dollar and share 

percentage) attributable to each clearing 

and settlement case type. 

TABLE 3—ESTIMATED SECONDARY CASH MARKET PRIMARY DEALER DAILY TRADING DOLLAR (BILLIONS) AND

PERCENTAGE VOLUME BY CLEARING AND SETTLEMENT TYPE

Clearing and settlement type $ Volume 

billions Non-IDB share IDB share Overall percentage 

Bilateral clearing, no IDB ................................................................................. $289 95% ........................ 54.3 

Central clearing, no IDB .................................................................................. 15 5% ........................ 2.9 

Central clearing, with IDB ................................................................................ 52 ........................ 22.9% 9.8 

Bilateral clearing, with IDB .............................................................................. 73 ........................ 31.9% 13.6 

Bilateral/central clearing, with IDB ................................................................... 103 ........................ 45.3% 19.4 

Totals: ....................................................................................................... 531 $304 (57.2%) $228 (42.8%) 100 

Source: TMPG White Paper, supra note 13, adapted from a table at p. 12. 

Table 3 Notes: Figures are estimated using the Federal Reserves’ Form FR2004 data for the first half of 2017 and are based on the following 

assumptions: a) primary dealers account for all dealer activity, b) 5% of dealers’ trading not through an IDB is with another dealer, c) the shares 

of dealer and non-dealer activity in the IDB market for coupon securities equal the weighted averages of the shares reported in the Oct. 15 report (that is, 41.5% and 58.5%, respectively), d) only dealers trade bills, FRNs, and TIPS in the IDB market, and e) the likelihood of dealer and 

non-dealers trading with one another in the IDB market solely reflects their shares of overall volume. The table presents estimates because precise information is not available on the size of the market or on how activity breaks down by the method of clearing and settlement. 

d. Other Market Participants 

As discussed previously, FICC netting 

members are generally registered brokerdealers or banks. Some institutional 

participants that are not FICC Netting 

Members/FICC direct participants are 

able to centrally clear repos through 

FICC’s Sponsored Service.757

In addition to Sponsored Members, 

various types of direct and indirect 

market participants hold significant 

amounts of U.S. Treasury securities and 

repo, and potentially purchase and sell 

U.S. Treasury securities in the 

secondary cash and repo markets. To 

the extent that these persons engage in 

secondary market transactions, we 

expect their trading may be affected by 

increased central clearing resulting from 

the adoption of the requirement to clear 

eligible secondary market transactions. 

Other key market participants, some 

of which are direct participants and 

some of which are sponsored members 

that may be affected by the rule include: 

i. Broker-Dealers That Are Not Direct 

Participants/FICC Netting Members 

Broker-dealers perform a number of 

functions in the U.S. securities markets 

including making markets in securities, 

brokering securities transactions, 

dealing securities, executing securities 

transactions, clearing and settling 

securities transactions, and maintaining 

custody of securities for investors. Some 

broker-dealers may perform multiple 

functions whereas others may perform a 

single function.758

Based on 2022 annual FOCUS filings, 

third quarter 2023 FOCUS filings, and 

FICC list of netting members,759 there 

are 3,215 broker-dealers that are not also 

FICC netting members. Broker-dealers 

that are not FICC netting members are 

typically much smaller than those that 

are. Average assets of all broker-dealers 

is approximately $2.4 billion while the 

average of non-FICC netting member 

broker-dealers is approximately $276 

million. 

ii. Hedge Funds, Family Offices, and 

Separately Managed Accounts 

Hedge funds are active participants in 

the secondary market for U.S. Treasury 


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2796 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

760Ron Alquist & Ram Yamarthy, Hedge Funds 

and Treasury Market Price Impact: Evidence from 

Direct Exposures (OFR working paper 22–05, Aug. 

23, 2022) (‘‘find[ing] economically significant and 

consistent evidence that changes in aggregate hedge 

fund [Treasury] exposures are related to Treasury 

yield changes [and] . . . that particular strategy 

groups and lower-levered hedge funds display a 

larger estimated price impact on Treasuries.’’), 

available at https://www.financialresearch.gov/ 

working-papers/files/OFRwp-22-05-hedge-fundsand-treasury-market-price-impact.pdf. See also note 

720, supra. 

761Qualifying hedge funds refers to those hedge 

funds that have a net asset value (individually or 

in combination with any feeder funds, parallel 

funds and/or dependent parallel managed accounts) 

of at least $500 million as of the last day of any 

month in the fiscal quarter immediately preceding 

its most recently completed fiscal quarter. See Form 

PF (Glossary of Terms). Although the Proposal 

would cover any hedge fund, smaller funds’ 

holdings are not reflected in these statistics because 

of Form PF’s minimum $150 million reporting 

threshold. An adviser must file Form PF if (1) it is 

registered (or required to register) with the 

Commission as an investment adviser, including if 

it also is registered (or required to register) with 

CFTC as a commodity pool operator or commodity 

trading adviser, (2) it manages one or more private 

funds, and (3) the adviser and its related persons, 

collectively had at least $150 million in private 

fund assets under management as of the last day of 

its most recently completed fiscal year. See Form 

PF General Instruction No. 1, available at https:// 

www.sec.gov/files/formpf.pdf. 

762 Division of Investment Management Analytics 

Office, Private Funds Statistics Fourth Calendar 

Quarter 2022, Table 46 at 39 (July 22, 2022), 

available at https://www.sec.gov/files/investment/ 

private-funds-statistics-2022-q4-accessible.pdf. 

763 ‘‘Historically, most family offices have not 

been registered as investment advisers under the 

Advisers Act because of the ‘private adviser 

exemption’ provided under the Advisers Act to 

firms that advice fewer than fifteen clients and meet 

certain other conditions.’’ SEC Staff, Family Office: 

A Small Entity Compliance Guide (Nov. 21, 2011), 

available at https://www.sec.gov/rules/final/2011/ 

ia-3220-secg.htm. 

764Campden Wealth & The Royal Bank of Canada, 

The North America Family Office Report 2021, 

available at https://

www.rbcwealthmanagement.com/_assets/ 

documents/cmp/the-north-america-family-officereport-2021-final-ua.pdf. 

765As of Mar. 2022, investment companies were 

the third largest holder of U.S. Treasury securities 

holding just under $3.6 trillion. Viktoria Baklanova, 

Isaac Kuznits, Trevor Tatum, Money Market Funds 

in the Treasury Market (Sept. 1, 2022), available at 

https://www.sec.gov/files/mmfs-treasury-market090122.pdf (‘‘MMFs in the Treasury Market’’), at 3 

(citing to Financial Accounts of the United States 

as of Mar. 2022). The other large (over 5%) holders 

are: ‘‘other’’ holders (including hedge funds) 30%, 

the Federal Reserve (23 percent), pension funds 

(14%), and U.S. banks and state and local 

governments (each holding 6%). See id. at 2 (figure 

5). 

766Federal Reserve Statistical Release, Z.1 

Financial Accounts of the U.S, Flow of Funds, 

Balance Sheets, and Integrated Macroeconomic 

Accounts, at 119 (L210 Treasury Securities—lines 

42–49) (‘‘Financial Accounts of the U.S.’’), available 

at https://www.federalreserve.gov/releases/z1/ 

20220609/z1.pdf. 

767 Id. at 119 (L210 Treasury Securities—lines 45– 

47 and 49). Filings of Form N–MFP by money 

market funds show that, as of May 31, 2023, these 

funds invested approximately $2.8 trillion in 

Treasury repos. In addition, mutual funds invested 

$27 billion in repurchase agreements, including 

those backed by Treasury securities. See supra note 

118 and referencing text. 

768For example, an analysis of money market 

fund portfolios’ turnover of U.S. Treasury securities 

by the Commission staff indicates only limited 

secondary market trading activity. Estimates based 

on monthly filings of Form N–MFP suggest that, on 

average, money market funds hold around 70% of 

U.S. Treasury securities to the next month with 

around 6% of U.S. Treasury securities holdings 

disposed of before maturity. The remaining 

approximately 23% of holdings mature during the 

month. MMFs in the Treasury Market, supra note 

765, at 3. These estimates suggest that the final 

rule’s effect on money market fund cash market 

transactions in U.S. Treasury securities will be very 

limited relative the final rule’s effects on money 

market funds’ repo activities which could be more 

significant. 

769 Id. at 4. The Commission understands the 

credit rating agencies consider concentration of 

counterparty credit risk as one factor in determining 

their rating of money market funds which may 

drive money market funds to seek diversification of 

counterparties for the repo transactions. 

securities and their trading activities 

may be a cause of price movements in 

the U.S. Treasury securities market.760

Hedge funds can use U.S. Treasury 

securities, for example, in order to 

borrow cash (i.e., sell repo) to take 

leveraged positions in other markets, or 

to execute trading strategies. As of 

December 31, 2022, approximately 21 

percent of Form PF filers 761 that are 

qualifying hedge funds reported U.S. 

Treasury securities holdings totaling 

$1.70 trillion in notional exposure in 

the cash market and $2.13 trillion in 

notional exposure to repos.762

Family offices are entities established 

by families to manage family wealth.763

A recent survey of family offices 764

found that of 385 participating family 

offices around the world, almost half 

(46%) are based in North America. 

Average family office AUM for North 

American families was $1 billion. 

Similarly, Separately Managed 

Accounts (SMAs) are also portfolios of 

assets managed by an investment 

adviser, usually targeted towards 

institutional investors and wealthy 

individual investors. Because of the end 

investor’s risk tolerance, SMAs can also 

pursue high-risk, leveraged strategies. 

iii. Registered Investment Companies 

(RICs) Including Money Market Funds, 

Other Mutual Funds, and ETFs 

RICs, mainly money market funds, 

mutual funds, and ETFs, are large 

holders of U.S. Treasury securities.765

At the end of the first quarter of 2023, 

money market funds held $1.0 trillion of 

U.S. Treasury securities ($185 billion in 

T-Bills and $856 billion in other U.S. 

Treasury securities).766 Mutual funds 

held an additional $1.4 trillion of other 

U.S. Treasury securities ($14 billion of 

T-Bills and $1.4 trillion of other U.S. 

Treasury securities) while exchangetraded funds held an additional $452.4 

billion in U.S. Treasury securities.767

The degree to which these entities 

would be affected depends on the extent 

to which their trading is likely to take 

place in the secondary market.768

RICs are also active participants in the 

repo market with money market funds 

being active cash investors in U.S. 

Treasury repo. According to data filed 

with the Commission, money market 

funds’ investments in U.S. Treasury 

repo, both bilateral and triparty, 

amounted to approximately $2.46 

trillion in June 2023. Moreover, as 

shown in Figure 12, money market fund 

U.S. Treasury repo volume has grown 

from approximately $200 billion 

monthly in 2011 with the vast majority 

of the most recent year’s growth 

attributed to investments in the Federal 

Reserve’s repo facility.769


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770See Shelly Antoniewicz & Sean Collins, 

Setting the Record Straight on Bond Mutual Funds’ 

Sales of Treasuries, ICI Viewpoints (Feb. 24, 2022), 

available at https://www.ici.org/viewpoints/22- 

view-bondfund-survey-2. 

771See Money Market Fund Reforms; Form PF 

Reporting Requirements for Large Liquidity Fund 

Advisers; Technical Amendments to Form N–CSR 

and Form N–1A, Investment Advisors Act Release 

No. 6344 (Aug. 3, 2023), 88 FR 51404 (‘‘Money 

Market Reforms Adopting Release’’). 

772See supra note 771, at 51431. 

773See, e.g., G–30 Report, supra note 5, at 1; Joint 

Staff Report, supra note 4, at 3–4, 36, 55 (‘‘PTFs 

now account for more than half of the trading 

activity in the futures and electronically brokered 

interdealer cash markets.’’); Harkrader and Puglia 

FEDS Notes, supra note 641; Doug Brain, Michiel 

De Pooter, Dobrislav Dobrev, Michael Fleming, Pete 

Johansson, Collin Jones, Frank Keane, Michael 

Puglia, Liza Reiderman, Tony Rodrigues, and Or 

Shachar, Unlocking the Treasury Market Through 

TRACE (FEDS Notes, Sept. 28, 2018), available at 

https://www.federalreserve.gov/econres/notes/fedsnotes/unlocking-the-treasury-market-through-trace20180928.htm. See also Peter Ryan and Robert 

Toomey, Improving Capacity and Resiliency in US 

Treasury Markets: Part III (Nov. 15, 2021), available 

at https://www.sifma.org/resources/news/ 

improving-capacity-and-resiliency-in-us-treasurymarkets-part-3/. (While in the interdealer cash 

market, U.S. Treasury securities are often cleared 

and settled through FICC, ‘‘dealer trades with 

principal trading firms (‘‘PTFs’’)—a very large share 

of this market—are generally cleared bilaterally 

because most PTFs are not members of the FICC.’’). 

See also 2021 IAWG Report, supra note 4, at 21 

(‘‘on February 25, 2021, a large shift in investor 

sentiment triggered very high trading volumes [ ] 

that temporarily overwhelmed the intermediation 

capacity of the Treasury market. Some market 

participants observed that the stresses on February 

25, 2021, were exacerbated by lack of elasticity in 

liquidity supply resulting from activity limits that 

IDB platforms impose on some firms, especially 

PTFs that do not participate in central clearing.’’). 

774Further Definition of ‘‘As a Part of a Regular 

Business’’ in the Definition of Dealer and 

Government Securities Dealer, Exchange Act Rel. 

No. 94524 (Mar. 28, 2022), 87 FR 23054, 23072, and 

23080 (Apr. 18, 2022) (‘‘Because regulatory TRACE 

data pertaining to Treasury securities reported by 

certain ATSs contains the identity of non-FINRA 

member trading parties, we are able to analyze 

PTFs’ importance in the U.S. Treasury market 

during July 2021 and summarize the number and 

type of market participants by monthly trading 

volume . . . .’’). ‘‘Although FNRA membership is 

not synonymous with dealer registration status, the 

Commission believes that many of the market 

participants who are not FINRA members are also 

likely not registered as government securities 

dealers.’’ Id. at 23072 n. 167. 

775 In Aug. 2023, the SEC adopted amendments to 

an exemption from the requirement for certain 

broker-dealers to join a national securities 

association. The amendments will, among other 

effects, enhance the oversight of participants in 

Treasury markets and the transparency of the 

market by requiring certain broker-dealers 

significantly involved in the proprietary trading of 

Treasury securities to become FINRA members and 

report their Treasury transactions to TRACE. See 

Exemption for Certain Exchange Members, 

Exchange Act Release No. 98202 (Sept. 7, 2023), 88 

FR 61850 (‘‘Exemption for Certain Exchange 

Members Release’’). 

For RICs, holdings of U.S. Treasury 

securities play an important role in 

managing liquidity risk stemming from 

potential redemptions. Given their 

highly liquid nature, U.S. Treasury 

securities can be used to raise cash to 

meet redemptions. For example, a 

survey conducted by an industry group 

showed that in the first quarter of 2020 

mutual funds had net sales of $128 

billion in Treasury and agency bonds, 

mainly to meet redemption requests at 

the onset of the Covid-19 pandemic.770

In addition to reliance on Treasury 

securities as sources of liquidity, RICs 

use Treasury securities as another 

source of liquidity by selling repo. Also, 

RICs accept Treasury securities as 

collateral in their securities lending 

programs established as an additional 

source of income for the fund 

shareholders. In July of 2023, the 

Commission adopted amendments to 

certain rules that govern money market 

funds, that among other things, 

increased daily and weekly liquid asset 

minimums.771 As direct obligations of 

the U.S. Government, including U.S. 

Treasury securities, are included in the 

definition of both daily and weekly 

liquid assets,772 to the extent that 

money market funds currently fall 

below the minimums, their holdings of 

U.S. Treasuries may increase. 

iv. Principal Trading Firms (PTFs) 

The role and importance of PTFs 

providing liquidity in the U.S. Treasury 

securities market have been the subject 

of a number of analyses and reports in 

recent years.773 For example, using 

FINRA’s Regulatory TRACE data in 

connection with a recent rulemaking 

proposal, we identified 174 market 

participants who were active in the U.S. 

Treasury securities market in July 2021 

and were not members of FINRA.774 775

We ‘‘found that these participants 

accounted for approximately 19 percent 


ddrumheller on DSK120RN23PROD with RULES2ER16JA24.011</GPH>

Figure 12: Total Monthly Repo Volume by Money Market Funds by 

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-V, 

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0 

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https ://www.fmancialresearch.gov/money-market-funds/us-mmfs-investments-in-the-repo-market/. 
2798 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

776 Id. at 23072. 

777 Id. at 23080. Harkrader and Puglia FEDS 

Notes, supra note 641. See also Doug Brain et al. 

supra note 773. Harkrader and Puglia used FINRA 

TRACE data on the trading volume shares of 

different participant types on IDB platforms for 

nominal coupon securities from April 1, 2019, to 

Dec. 31, 2019. They identified $191 billion of 

average daily dollar volume on electronic/ 

automated IDB platforms during the period. They 

also noted data limitations, which they estimated 

amounted to ‘‘a very small fraction of total 

activity.’’ Id. 

778Harkrader and Puglia FEDS Notes, supra note 

641, at table 1 (61% of $191 billion = $116.51 

billion). 

779 2017 Census of Governments—Organization, 

Table 2: Local Governments by Type and State: 

2017 & Table 9: Public School System by Types of 

Organization and State: 2017, U.S. Census Bureau, 

https://www.census.gov/data/tables/2017/econ/gus/ 

2017-governments.html. 

780Financial Accounts of the U.S., supra note 766 

(Line 19). 

781 Id. (Lines 29, 32, and 35). 

782Paddrik et al., supra note 631(‘‘The Federal 

Reserve Board, through the Federal Reserve Bank of 

New York (FRBNY), supervises triparty custodian 

banks and, on a mandatory basis pursuant to its 

supervisory authority, collects transaction-level 

data at the daily frequency.’’). 

783 J.P. Morgan Chase previously served as a 

custodian in the triparty space but largely exited the 

market in 2019. Id. at 2–3. 

784Exchange Act Release No. 92808 (Aug. 30, 

2021), 86 FR 49580 (Sept. 3, 2021). Currently, the 

Bank of New York Mellon operates the triparty 

platform that facilitates trades conducted via the 

GCF Repo Service and Sponsored GC Service. 

785The Clearing House, The Custody Services of 

Banks (July 2016), available at https://

www.davispolk.com/sites/default/files/20160728_

tch_white_paper_the_custody_services_of_

banks.pdf. 

786See Fedwire Securities Service (‘‘FSS 

brochure’’), FRBservices.org, https://

www.frbservices.org/binaries/content/assets/ 

crsocms/financial-services/securities/securitiesproduct-sheet.pdf. The Federal Reserve Banks offer 

highly competitive transaction, per-issue and 

monthly maintenance prices. Account maintenance 

fees are waived for accounts holding only U.S. 

Treasury securities and for certain accounts used to 

pledge securities to the U.S. Treasury and Federal 

Reserve Banks. Fees for services are set by the 

Federal Reserve Banks. See Fedwire Securities 

Service 2023 Fee Schedules, FRBservices.org, 

https://www.frbservices.org/resources/fees/ 

securities-2023. 

787FSS brochure, supra note 786. 

788See CCA Standards Proposing Release, supra 

note 8, 79 FR at 29587. 

789See, e.g., Liffe Order, supra note 7, 74 FR at 

140. 

of the aggregate U.S. Treasury security 

trading volume, with PTFs representing 

the highest volumes of trading among 

these participants.’’ 776 We explained 

that in our analysis: 

PTFs had by far the highest volumes 

among identified non-FINRA member 

participants in the U.S. Treasury market, and 

the largest PTFs had trading volumes that 

were roughly comparable to the volumes of 

the largest dealers. A Federal Reserve staff 

analysis found that PTFs were particularly 

active in the interdealer segment of the U.S. 

Treasury market in 2019, accounting for 61 

percent of the volume on [electronic] 

interdealer broker platforms....777

Based on this Federal Reserve study and 

assuming that all PTFs are not FICC 

members and that PTF trading on IDB 

electronic platforms during the final 

three quarters 2019 was a reasonable 

proxy for the average daily current 

volume of such trading today by PTFs, 

the requirement to clear eligible 

secondary market transactions would 

subject as much as approximately 

$116.51 billion per day in PTF trades on 

electronic/automated IDBs to central 

clearing.778

v. State and Local Governments 

According to the United States Census 

Bureau’s 2017 Census of Governments 

data, there were over 90,000 local 

governments in the United States, 

including county, city, municipality, 

township, and special purpose 

governments as well as nearly 13,000 

independent school district 

governments.779 These state and local 

governments are significant holders of 

U.S. Treasury securities. As of March 

2023, state and local governments held 

approximately $1.6 trillion in U.S. 

Treasury securities 780 as part of their 

budgetary and short-term investment 

duties. 

vi. Private Pensions Funds and 

Insurance Companies. 

Insurance companies and pension 

funds also have significant positions in 

U.S. Treasury securities. As of March 

2023, private pension funds and 

insurance companies are large holders 

of U.S. Treasury securities, holding 

$479.3 billion and $405.9 billion 

respectively.781

e. Triparty Agent: Bank of New York 

Mellon 782

Although triparty repo transactions 

are bilaterally negotiated, they are 

settled through BNY Mellon, which 

currently plays a central role in the 

triparty repo market as the sole triparty 

agent.783 Besides providing collateral 

valuation, margining, and management 

services, BNY Mellon also provides 

back-office support to both parties by 

settling transactions on its books and 

confirming that the terms of the repo are 

met. Additionally, the clearing bank acts 

as custodian for the securities held as 

collateral and allocates collateral to 

trades at the close of the business day. 

As discussed previously, FICC recently 

introduced the Sponsored GC Service 

that extends FICC’s GCF repo service to 

allow for the clearing of triparty repo.784

An expansion of central clearing 

under the requirement to clear eligible 

secondary market transactions could 

affect BNY Mellon’s triparty business. It 

is, however, unclear whether increased 

central clearing would increase or 

decrease the amount of repo traded that 

makes use of triparty agent’s services 

previously described. 

f. Custodian Banks/Fedwire Securities 

Service (FSS) 

Currently, custodian banks handle 

much of the trading activity for longonly buy-side clients in the U.S. 

Treasury securities cash and repo 

markets. When an asset buyer and seller 

engage bilaterally as principals in a 

collateralized securities transaction, a 

repo for example, a custodian bank will 

often provide various services to 

support the transaction. Custodian 

services include transaction settlement 

verification, verifying the amount of the 

relevant credit exposure, calculating 

required initial and variation margin, 

and making margin calls. In a triparty 

repo transaction that is not centrally 

cleared, a custodian performs a clearing 

function by settling the transaction on 

its own books without a corresponding 

transfer of securities on the books of a 

central securities depository.785

FSS, operated by the Federal Reserve 

Bank system, provides issuance, 

maintenance, transfer and settlement 

services for all marketable U.S. Treasury 

securities to its 3,800 participants.786

For example, FSS offers the ability to 

transfer securities and funds to settle 

secondary-market trades, to facilitate the 

pledging of collateral used to secure 

obligations, and to facilitate repo 

transactions.787

C. Analysis of Benefits, Costs, and 

Impact on Efficiency, Competition, and 

Capital Formation 

1. Benefits 

The amendments being adopted will 

likely yield benefits associated with 

increased levels of central clearing in 

the secondary market for U.S. Treasury 

securities. The Commission previously 

has stated that ‘‘the centralization of 

clearance and settlement activities at 

covered clearing agencies allows market 

participants to reduce costs, increase 

operational efficiency, and manage risks 

more effectively.’’ 788 These benefits 

could be particularly significant in 

times of market stress, as CCPs will 

mitigate the potential for a single market 

participant’s failure to destabilize other 

market participants, destabilize the 

financial system more broadly, and/or 

reduce the effects of misinformation and 

rumors.789 A CCP also will address 

concerns about counterparty risk by 

substituting the creditworthiness and 


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790 Id. 

791 Id. 

792SIFMA/IIB Letter, supra note 37, at 1–2. 

793See part IV.A supra for a discussion of central 

clearing and the mitigation of clearance and 

settlement risks. However, bilateral clearing does 

allow for balance sheet netting under certain 

conditions and for margining of net positions that 

may include multiple asset classes. 

794See 2021 IAWG Report, supra note 4, at 30. 

795See G–30 Report, supra note 5; see also PIFS 

Paper, supra note 76 at 28–31. 

796 Id. See also Michael Fleming & Frank Keane, 

Netting Efficiencies of Marketwide Central Clearing 

(Staff Report No. Staff Report No. 964), Federal 

Reserve Bank Of New York (Apr. 2021) (‘‘Fleming 

& Keane (2021’’), available at https://

www.newyorkfed.org/medialibrary/media/research/ 

staff_reports/sr964.pdf. 

797PIFS Paper, supra note 76, at 29 (citing 

OFFICE OF FINANCIAL RESEARCH, Benefits and 

Risks of Central Clearing in the Repo Market, 5–6 

(Mar. 9, 2017) (‘‘2017 OFR Report’’), available at 

https://www.financialresearch.gov/briefs/files/ 

OFRBr_2017_04_CCP-for-Repos.pdf). 

798 Duffie, supra note 27, at 15. 

799See part IV.A supra for an example of how 

multilateral netting can reduce margin required to 

support a given level of trading activity. 

800See 2021 IAWG Report, supra note 4, at 30; 

Liang & Parkinson, supra note 725, at 9; Duffie, 

supra note 27, at 16–17. It is important to note that 

this netting may offset any potentially higher 

liquidity charges faced by major participants from 

clearing at the CCP. See Duffie, supra note 27, at 

17 (‘‘To the contrary, the netting of most purchases 

against sales at a CCP would lower the overall 

liquidity requirements of dealers, assuming that 

dealers continue to intermediate the market 

effectively.’’). 

801See Menkveld and Vuillemey supra note 568. 

802The positive impact on dealer’s ability to 

increase funding capacity will be offset, in part, by 

the direct and indirect costs of central clearing. See 

id. and part IV.C.2 infra. One commenter, although 

not supporting all aspects of the requirement to 

clear eligible secondary market transaction, agreed 

that a clearing mandate applied to bilateral repo 

transactions would be beneficial, pointing to the 

balance sheet efficiency resulting from repo 

clearing. See MFA Letter, supra note 81, at 13. 

803Finadium LLC, Netting Rules for Repo, 

Securities Lending and Prime Brokerage (Sept. 

2014), available at https://finadium.com/finadiumreport-desc/netting-rules-for-repo-securitieslending-and-prime-brokerage/. Assets are 

considered to be HQLA if they can be easily and 

immediately converted into cash at little or no loss 

of value. The test of whether liquid assets are of 

‘‘high quality’’ is that, by way of sale or repo, their 

liquidity-generating capacity is assumed to remain 

intact even in period of severe idiosyncratic and 

market stress. See Liquidity Coverage Ratio 

Standards LCR30.2, LCR 30.3 (Basel Comm. On 

Banking Supervision 2019), available at https://

www.bis.org/basel_framework/chapter/LCR/ 

30.htm?tldate=20191231&inforce=20191215. 

804See TMPG Repo White Paper, supra note 75. 

805 G–30 Report, supra note 5, at 13; 17 CFR 

240.17ad–22(e)(6). 

liquidity of the CCP for the 

creditworthiness and liquidity of 

counterparties.790 However, the 

Commission has also recognized that 

this centralization of activity at clearing 

agencies makes risk management at 

such entities a critical function.791

Commenter(s) agreed that certain 

benefits of increased central clearing— 

increasing liquidity, resilience, and 

intermediation capacity—exist but 

disagree that these benefits have been 

‘‘sufficiently proven’’ to outweigh the 

potential costs.792 As discussed in part 

IV.A, supra, improvements to market 

resilience imply potentially large 

expected benefits as the cost of financial 

market crises can be high. As discussed 

in part IV.C.2, infra, the Commission 

acknowledges the costs associated with 

the rule but believes that some of the 

costs incurred by market participants 

are commensurate with the risks and 

particular attributes of the market 

participants’ transactions. It further 

believes that the overall benefits of 

increased clearing U.S. Treasury 

Securities transactions discussed below, 

including improvements to market 

resiliency, justify the costs. 

Bilateral clearing arrangements do not 

allow for multilateral netting of 

obligations, which reduce end-of-day 

settlement obligations.793 Larger gross 

settlement obligations, which increase 

with leverage, increase operational risks 

and subsequently the possibility of 

settlement fails. Central clearing of 

transactions nets down gross exposures 

across participants, which reduces 

firms’ exposures while positions are 

open, and typically reduces the 

magnitude of cash and securities flows 

required at settlement.794 These 

reductions, particularly in cash and 

securities flow ‘‘would reduce liquidity 

risks associated with those settlements 

and counterparty credit risks associated 

with failures to deliver on the 

contractual settlement date,’’ not only 

for CCP members but for the CCP 

itself.795

It has been suggested that wider 

central clearing could have lowered 

dealers’ daily settlement obligations in 

the cash market by up to 60 percent in 

the run-up to and aftermath of the 

March 2020 U.S. Treasury securities 

market disruption and reduced 

settlement obligations by up to 70 

percent during the disruption itself.796

The reduction in exposure is not limited 

to the cash market; it has been estimated 

that the introduction of central clearing 

for dealer-to-client repos would have 

reduced dealer exposures from U.S. 

Treasury repos by over 80% (from $66.5 

billion to $12.8 billion) in 2015.797

The benefits of multilateral netting 

flowing from central clearing can 

improve market safety by lowering 

exposure to settlement failures.798

Multilateral netting can also reduce the 

regulatory capital required to support a 

given level of intermediation activity 799

and could also enhance capacity to 

make markets during normal times and 

stress events because existing bank 

capital and leverage requirements 

recognize the risk-reducing effects of 

multilateral netting of trades that CCP 

clearing accomplishes.800 By reducing 

the level of margin required to support 

a given total level of trading activity, 

central clearing may reduce total risk to 

the system. Financial crises are 

sometimes precipitated by margin calls 

following a period of increased 

volatility. If a market participant holds 

offsetting positions, then margin calls 

that might occur could be avoided. 

Because financial markets are forwardlooking, reducing the anticipation of 

margin calls on other market 

participants can avoid costly ‘‘bankrun’’ type dynamics.801

Some benefits associated with capital 

reductions are particularly relevant for 

overnight and term repo. In the case of 

financing activity in U.S. Treasury 

securities market—U.S. Treasury repo— 

the entire notional value of the position 

has to be recorded on a dealer’s balance 

sheet as soon as the start leg of the repo 

settles, and unless the dealer faces the 

same legal counterparty with respect to 

an offsetting financing trade of the same 

tenor, the dealer will not be able to net 

such balance sheet impact against any 

other position. The grossing up of the 

dealer’s balance sheet in this manner 

can have implications with respect to 

the amount of capital the dealer is 

required to reserve against such activity. 

When transactions are cleared through a 

CCP, dealers can offset their centrally 

cleared repo positions of the same tenor, 

and thereby free up their capital to 

increase funding capacity to the 

market.802 According to research that 

Finadium conducted among repo 

dealers, netting can compress High 

Quality Liquid Asset (HQLA) bilateral 

trading books by 60% to 80%.803

Cash and repo trades cleared and 

settled outside of a CCP may not be 

subject to the same level of uniform and 

transparent risk management associated 

with central clearing.804 By contrast, 

FICC is subject to the Commission’s risk 

management requirements addressing 

financial, operational, and legal risk 

management, which include, among 

other things, margin requirements 

commensurate with the risks and 

particular attributes of each relevant 

product, portfolio, and market.805 As the 

Commission believes that the 

amendments being adopted will 

incentivize and facilitate additional 

central clearing in the U.S. Treasury 

securities market, risk management 

should improve. To offset the risks it 

faces as a central counterparty, the CCP 

requires its members to post margin, 


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2800 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

806 ‘‘One of the conditions for a perfectly 

competitive market is that [market participants] are 

happy to [buy or sell] from any of the many [sellers 

or buyers] of the [asset]. No [buyer or seller] of the 

[asset] has any particular advantage . . .’’ David M. 

Kreps, ‘‘A Course in Microeconomic Theory’’ 

Princeton University Press (1990), at 264 

(describing the conditions of a perfectly competitive 

market.) When the transaction is novated to the 

CCP, market participants substitute the default risk 

of the CCP for that of the original counterparty. 

807See TMPG White Paper, supra note 13, at 32. 808 Duffie, supra note 27, at 15; DTCC October 

2021 White Paper, supra note 681, at 1; 2021 IAWG 

Report, supra note 4. 

809See part II.A.1 supra. 

810For the purpose of the proposed rule, a hedge 

fund is defined as any private fund (other than a 

securitized asset fund): (a) with respect to which 

one or more investment advisers (or related persons 

of investment advisers) may be paid a performance 

fee or allocation calculated by taking into account 

unrealized gains (other than a fee or allocation the 

calculation of which may take into account 

unrealized gains solely for the purpose of reducing 

such fee or allocation to reflect net unrealized 

losses); (b) that may borrow an amount in excess of 

one-half of its net asset value (including any 

committed capital) or may have gross notional 

exposure in excess of twice its net asset value 

(including any committed capital); or (c) that may 

sell securities or other assets short or enter into 

similar transactions (other than for the purpose of 

hedging currency exposure or managing duration). 

This definition of a hedge fund is consistent with 

the Commission’s definition of a hedge fund in 

Form PF. See Proposing Release, supra note 14 at 

64623. 

811 Id. 

812See part IV.B.3.b.v supra. 

813See part II.A.2.a supra. 

814See supra note 238. 

815SIFMA/IIB Letter, supra note 37, at 21–22. 

and the CCP actively monitors the 

positions its members hold. Moreover, 

in the event that the posted margin is 

not enough to cover losses from default, 

the CCP has a loss-sharing procedure 

that mutualizes loss among its members. 

By lowering counterparty risk, central 

clearing also allows for the 

‘‘unbundling’’ of counterparty risk from 

other characteristics of the asset that is 

being traded. This unbundling makes 

the financial market for Treasury 

securities more competitive.806

The Commission also believes that 

these amendments will help avoid a 

potential disorderly default by a 

member of any U.S. Treasury securities 

CCA. Defaults in bilaterally settled 

transactions are likely to be 

disorganized and subject to variable 

default management techniques, often 

subject to bilaterally negotiated 

contracts with potentially limited 

uniformity. Independent management of 

bilateral credit risk creates uncertainty 

about the levels of exposure across 

market participants and may make runs 

more likely; any loss stemming from 

closing out the position of a defaulting 

counterparty is a loss to the nondefaulting counterparty and hence a 

reduction in its capital in many 

scenarios.807

Increased use of central clearing 

should enhance regulatory visibility in 

the critically important U.S. Treasury 

securities market. Specifically, central 

clearing increases the transparency of 

settlement risk to regulators and market 

participants and, in particular, allows 

the CCP to identify concentrated 

positions and crowded trades, adjusting 

margin requirements accordingly, which 

should help avoid significant risk to the 

CCP and to the system as a whole.808

As discussed further below, the 

Commission is unable to quantify 

certain economic benefits of these 

amendments. The Commission solicited 

comment, including estimates and data 

from interested parties, that would help 

inform the estimates of the economic 

effects of the amendments but received 

only limited data, discussed further in 

part IV.C.2.a infra, that could be used to 

improve these estimates. 

a. U.S. Treasury Securities CCA 

Membership Requirements 

The Commission is amending Rule 

17ad–22(e)(18) to require any covered 

clearing agency that provides central 

counterparty services for transactions in 

U.S. Treasury securities to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, as applicable, 

require that direct participants of a 

covered clearing agency submit all 

eligible secondary market U.S. Treasury 

securities transactions in which they 

enter for clearing at a covered clearing 

agency.809 As previously explained in 

part II.A.2 supra, as proposed an eligible 

secondary market transaction in U.S. 

Treasury securities was defined to 

include: (1) repurchase agreements and 

reverse repurchase agreements in which 

one of the counterparties is a direct 

participant; (2) any purchases and sales 

entered into by a direct participant that 

is an interdealer broker, meaning if the 

direct participant of the covered 

clearing agency brings together multiple 

buyers and sellers using a trading 

facility (such as a limit order book) and 

is a counterparty to both the buyer and 

seller in two separate transactions; (3) 

any purchases and sales of U.S. 

Treasury securities between a direct 

participant and a counterparty that is 

either a registered broker-dealer, 

government securities dealer, or 

government securities broker; a hedge 

fund; 810 or an account at a registered 

broker-dealer, government securities 

dealer, or government securities broker 

where such account may borrow an 

amount in excess of one-half of the net 

value of the account or may have gross 

notional exposure of the transactions in 

the account that is more than twice the 

net value of the account.811 However, 

any transaction (both cash transactions 

and repos) where the counterparty to 

the direct participant of the CCA is a 

central bank, sovereign entity, 

international financial institution, or a 

natural person would be excluded from 

the definition of an eligible secondary 

market transaction. 

In a change from the proposal, the 

Commission is modifying the definition 

of an eligible secondary market 

transaction in Rule 17ad–22(a) to 

conditionally exclude inter-affiliate 

transactions.812 Specifically, the 

Commission is excluding from that 

definition any repurchase or reverse 

repurchase agreement collateralized by 

U.S. Treasury securities entered into 

between a direct participant and an 

affiliated counterparty, provided that 

the affiliated counterparty submit for 

clearance and settlement all other 

repurchase or reverse repurchase 

agreements collateralized by U.S. 

Treasury securities to which the 

affiliated counterparty is a party.813

As discussed in part II.A.2.a.vi, supra, 

inter-affiliate transactions are used to 

transfer liquidity and risk within an 

affiliated group. These transactions may 

serve different purposes, including, but 

not limited to, providing U.S. Treasury 

securities for delivery when an affiliate 

has taken a long or short position in 

U.S. Treasury securities as a hedge 

against other exposures, allowing the 

movement of U.S. Treasury securities to 

allow them to be posted as margin on an 

affiliate’s transaction, ensuring that U.S. 

Treasury securities can serve as a 

liquidity buffer for an affiliated bank,814

or to meet liquidity composition targets. 

To get the U.S. Treasury securities to the 

appropriate entity with an affiliated 

group, the affiliate often enters into 

repos or reverse repos with a direct 

participant of a U.S. Treasury securities 

CCA. 

As discussed above, one commenter 

stated that requiring inter-affiliate 

transactions to be centrally cleared 

would impose additional costs with 

limited benefits.815 While the costs of 

clearing inter-affiliate transactions may 

be similar to those of other transactions, 

the Commission agrees with the 

commenter that the potential benefits of 

clearing these transactions is likely to be 

less. For example, the commenter noted 

that a direct participant’s affiliate’s 

credit risk is already part of the groupwide financial risks to which the 

Treasury CCP is exposed, and central 

clearing of inter-affiliate transactions is 

unlikely to meaningfully impact the risk 


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816 Id. 

817See supra note 239. 

818See part II.A.2.a supra. 

819See DTCC May 2021 White Paper, supra note 

307, at 5; 2021 IAWG Report, supra note 4, at 6. 

820FICC Rule 2A, section 7(e) (requirement that 

FICC Netting Members submit to FICC all of their 

eligible trades with other Netting Members); FICC 

Rule 18, section 2 (similar requirement with regard 

to Repo transactions); cf. FICC Rule 3, section 8(e) 

(providing clearing requirement for FICC IDB 

Members), supra note 19. 

821With regard to Sponsored GC Repos, as noted 

above, these transactions can be secured with 

generic CUSIPs that include U.S. Treasury 

securities, and with other generic CUSIPs that 

include other securities, such as agency securities 

and mortgage backed securities. Because the 

requirement to clear eligible secondary market 

transactions is limited to eligible secondary market 

transactions in U.S. Treasury securities, it would 

not apply to Sponsored GC Repo generic CUSIPs 

that do not include U.S. Treasury securities. 

822See supra note 14, 87 FR at 64616; 2021 IAWG 

Report, supra note 4, at 30; G–30 Report, supra note 

5. 

823See supra note 369. 

824 DTCC/FICC Letter, supra note 33, at 12–13. 

825TMPG Repo White Paper, supra note 75, at 1. 

826See supra note 81. 

827 2021 IAWG Report, supra note 4, at 29. Some 

of the benefits discussed here may be mitigated if 

central clearing of repo were to occur at multiple 

CCPs (e.g., in there was an additional registered 

clearing agency that accepted repo for clearing and 

in the absence of an agreement between those 

registered clearing agencies, the netting benefits 

may be less than those if there were but a single 

clearing agency accepting repo for clearing). 

828 Id. (‘‘Non-centrally cleared bilateral repo 

represents a significant portion of the Treasury 

market, roughly equal in size to centrally cleared 

repo.’’) (citing a 2015 pilot program by the U.S. 

Treasury Department); see also TMPG Repo White 

Paper, supra note 804, at 1; Katy Burne, FutureProofing the U.S. Treasury Market, BNY Mellon 

Aerial View 7 (2021), available at https://

www.bnymellon.com/content/dam/bnymellon/ 

documents/pdf/aerial-view/future-proofing-the-ustreasury-market.pdf.coredownload.pdf (noting that 

63% of repo transactions remain non-centrally 

cleared according to Office of Financial Research 

data as of Sept. 10, 2021). 

profile.816 As discussed above, in 

certain circumstances, the counterparty 

credit risk posed by inter-affiliate 

transactions may be less than other 

transactions.817 However, affiliated 

entities are separate legal entities and, 

generally, are not legally responsible for 

each other’s contractual obligations 

therefore while there may be a benefit 

of reducing counterparty credit risk by 

centrally clearing such transactions, the 

benefit is likely to be less. 

In additional changes from the 

proposal and for the reasons discussed 

above, the Commission is adding 

additional exclusions to the definition 

of an eligible secondary market 

transaction for any repurchase or 

reverse repurchase agreement 

collateralized by U.S. Treasury 

securities in which one counterparty is 

a state or local government, a covered 

clearing agency providing central 

counterparty services, a derivatives 

clearing organization (see 7 U.S.C. 7a– 

1 and 17 CFR 39.3), or is regulated as 

a central counterparty in its home 

jurisdiction.818 In the absence of the 

exclusion, these types of entities may 

not be able to transact with netting 

members of a CCA, reducing the 

available counterparties with which 

they could transact and likely resulting 

in adverse impacts on the prices that are 

available to them. 

The amendment to Rule 17ad– 

22(e)(18) will increase the fraction of 

secondary market U.S. Treasury 

securities transactions required to be 

submitted for clearing at a covered 

clearing agency. The Commission 

believes that this should result in 

achieving the benefits associated with 

an increased level of central clearing 

discussed in this section. 

i. Scope of the Requirement To Clear 

Eligible Secondary Market Transactions 

A significant share of both cash and 

repo transactions in U.S. Treasury 

securities, including those of direct 

participants in a covered clearing 

agency, are not currently centrally 

cleared.819 The Commission believes 

that covered clearing agency members 

not centrally clearing cash or repo 

transactions in U.S. Treasury securities 

create contagion risk to CCAs clearing 

and settling such transactions, as well as 

to the market as a whole, and that this 

contagion risk can be ameliorated by 

centrally clearing such transactions. 

Currently, FICC, the only U.S. 

Treasury securities CCA, requires its 

direct participants to submit for central 

clearing their cash and repo transactions 

in U.S. Treasury securities with other 

members.820 However, FICC’s rules do 

not require its direct participants, such 

as IDBs, to submit either cash or repo 

transactions 821 with persons who are 

not FICC members for central clearing. 

The expanded scope of the 

requirement to clear eligible secondary 

market transactions should reduce 

instances of ‘‘hybrid’’ clearing, where 

FICC lacks visibility on the bilaterally 

cleared component of a trade. As 

discussed in the Proposing Release, 

trades cleared and settled outside of a 

CCP may not be subject to the same 

level of risk management associated 

with central clearing, which includes 

requirements for margin determined by 

a publicly disclosed method that applies 

objectively and uniformly to all 

members of the CCP, loss mutualization, 

and liquidity risk management.822 The 

requirement to clear eligible secondary 

market transactions should not only 

result in the consistent and transparent 

application of risk management 

requirements to trades that are now 

bilaterally cleared but also increase the 

CCA’s awareness of those trades, which 

it now lacks.823

The definition of an eligible 

secondary market transaction applies to 

all types of transactions that are of a 

type currently accepted for clearing at a 

U.S. Treasury securities CCA; it does 

not impose a requirement on a U.S. 

Treasury securities CCA to offer 

additional products for clearing. One 

commenter specifically agreed that the 

proposal should apply to the types of 

transactions that are eligible for clearing 

at a U.S. Treasury securities CCA, as 

those eligibility criteria evolve over 

time. The commenter stated that such 

an approach would ensure that the 

requirement would not inadvertently 

give rise to risk or undue costs by 

forcing into central clearing transaction 

types that have not gone through a 

methodical risk analysis or for which 

the costs may outweigh the benefits, 

while at the same time, it would allow 

the requirement to evolve as U.S. 

Treasury securities CCAs, their direct 

participants, and regulators identify 

transaction types that would benefit 

from central clearing.824

ii. Application of the Requirement To 

Clear Eligible Repo Transactions 

The requirement to clear eligible 

secondary market transactions requires 

that all direct participants of a U.S. 

Treasury securities CCA submit for 

clearing all eligible secondary market 

transactions that are repurchase 

agreements or reverse repurchase 

agreements. As discussed in part IV.B.5 

supra, risk management practices in the 

bilateral clearance and settlement of 

repos are not uniform across market 

participants and are less transparent 

than analogous practices under central 

clearing.825 Many commenters 

supported the definition of an eligible 

secondary market transaction as it 

relates to repo and reverse repo 

transactions.826 These commenters 

encouraged a broad and comprehensive 

definition to limit market fragmentation 

and avoidance of central clearing. 

The benefits of central clearing— 

including the benefits of netting— 

increase with the fraction of total 

volume of similar transactions 

submitting for clearing at a CCP. 

Significant gaps persist in the current 

coverage of transaction data in U.S. 

Treasury repo.827 The Commission 

understands that, among bilaterally 

settled repo, approximately half was 

centrally cleared as of 2021.828 Centrally 


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829Letter from the Independent Dealer & Trader 

Association, at 10–11 (Sept. 1, 2023) (‘‘IDTA Letter 

2’’). 

830See supra note 84. 

831 Duffie supra note 718, provides empirical 

evidence with supporting theory that the current 

intermediation capacity of the U.S. Treasury market 

impairs its resilience. Among the improvements he 

discusses that could increase the market’s 

intermediation capacity under stress is broader 

central clearing. See Resilience redux in the US 

Treasury market, supra note 718. See also Dealer 

Capacity and US Treasury, presentation to SEC 

Staff (July 2023), supra note 702. 

832See Hempel et al. (2023), supra note 564. 

833 Id. 

834 Id. 

835See supra note 85. 

836See MFA Letter, supra note 81, at 6, 14; 

SIFMA/IIB Letter, supra note 37, at 20; ICI Letter, 

supra note 85, at 11; Federated Letter, supra note 

85, at 5. 837See MFA Letter, supra note 81, at 14; SIFMA/ 

AMG Letter, supra note 35, at 11; ICI Letter, supra 

note 85, at 12, 22; Citadel Letter, supra note 81, at 

6; Federated Letter, supra note 85, at 5. 838See id. 839See ICI Letter, supra note 85, at 22. 840See MFA Letter, supra note 81, at 14. 

841See Federated Letter, supra note 85, at 5. 

842See Federated Letter, supra note 85, at 5. 

843 ICI Letter, supra note 85, at 33. 

cleared triparty repo is a relatively new 

service, and the proportion may be 

smaller. Thus, despite the volume of 

centrally cleared repo transactions as 

seen in Figure 10 above, and the 

development of services to encompass 

more types of repo transactions at FICC, 

the Commission understands the 

volume of repo not currently centrally 

cleared to be substantial. The 

requirement that all U.S. Treasury CCA 

members submit all eligible repurchase 

agreements for central clearing would 

increase the fraction of total volume of 

such transactions submitted for central 

clearing, realizing the benefits described 

above in this section. In addition, 

because repo participants tend to be 

sophisticated market players, the 

requirement for repo transactions will 

cover a set of market participants many 

of whom will have built most of the 

necessary processes and infrastructure 

to comply with the rule. 

One commenter noted an additional 

potential benefit to money market funds 

(‘‘MMFs’’).829 The commenter stated 

that MMFs are only permitted to 

execute repo transactions with 

counterparties that are rated by one of 

the top rating agencies, a benefit 

typically accessible to only larger 

participants due to the prohibitive cost 

of obtaining and maintaining a rating 

from the top tier rating agencies. The 

commenter stated that this limits the 

number of potential counterparties with 

which MMFs can execute repo 

transactions, limiting liquidity and 

pricing options available to the MMFs. 

If MMFs are able to transact as 

sponsored members whose trades are 

centrally cleared and are able to look 

through the initial counterparty to the 

credit worthiness of the CCP itself, 

liquidity and pricing available to MMFs 

is likely to improve. 

Some commenters questioned the 

need for a requirement with respect to 

repo, noting that the balance sheet 

netting efficiencies already exist, 

providing a natural incentive to 

centrally clear such transactions.830 The 

Commission agrees that centrally 

cleared repo already benefits from 

favorable treatment on balance sheet, 

but believes that a requirement to clear 

repo transactions would result in more 

transactions being centrally cleared and, 

accordingly, additional balance sheet 

efficiency and capacity to intermediate 

repo transactions.831 Although FICC 

netting members may wish to increase 

the fraction of their repo business that 

is centrally cleared in order to take 

greater advantage of netting efficiencies, 

they are only able to do so to the extent 

that their counterparties have taken the 

steps necessary to access clearing. 

Requiring most repo transactions with a 

FICC netting member on one side to be 

centrally cleared assures that 

counterparties will have taken such 

steps. Thus, there would still be benefits 

from the requirement, despite the 

currently existing balance sheet 

treatment. 

The OFR published a 2023 report on 

an OFR pilot data collection of noncentrally cleared bilateral repurchase 

agreement (‘‘NCCBR’’) trades spanning 

nine dealers over three reporting dates 

in June 2022.832 Of the four bilateral 

repo segments discussed (centrally 

cleared transactions settled on the 

triparty platform, centrally cleared 

transactions using the FICC DVP 

service, non-centrally cleared 

transactions settled on the triparty 

platform, and NCCBR transactions), the 

NCCBR segment is the largest of the four 

segments of the repo market in terms of 

gross repo exposure by primary 

dealers.833 The OFR’ report uses the 

pilot data collection to answer the 

question of why volume in this segment 

is so high despite the benefits of central 

clearing, including the ability of dealers 

to net their repo positions with one 

counterparty against reverse repo 

positions with another counterparty for 

the purpose of calculating certain 

regulatory ratios, thus reducing the 

balance sheet costs of participating in 

repo. The report’s authors estimate that 

over 60% of all Treasury trades in the 

NCCBR market are naturally netted 

(matching repo and reverse repo with 

the same counterparty and tenor, 

typically as part of a relative value 

trade); however, they also show that 

substantial balance sheet netting 

benefits could still result from the trades 

that are not naturally netted if NCCBR 

trades were moved into central 

clearing.834

Several commenters recommended 

excluding triparty repos from the 

definition of an eligible secondary 

market transaction.835 Four of these 

commenters suggested that the cost of 

including triparty repos would 

outweigh the benefits.836 Several 

commenters argued that including 

triparty repos would not significantly 

reduce the risks that the proposal seeks 

to address because the current triparty 

market infrastructure inherently 

mitigates the associated risks.837

Specifically, these commenters argue 

that credit risk in the triparty market is 

mitigated by the triparty agent’s 

provision of custodial, collateral 

management, and settlement services.838

Moreover, one commenter stated that 

the infrastructure underlying the 

triparty repo market is robust and 

provides credit protections, operational 

safeguards, and strict internal controls 

akin to central clearing.839 One 

commenter added that the triparty 

market is relatively safe from credit risk 

because the triparty agent is subject to 

prudential regulation.840 One 

commenter added that settlement risk in 

the triparty market is nearly eliminated 

because collateral posted to the triparty 

platform cannot generally be repledged 

outside the platform.841 The commenter 

stated, therefore, that the only 

significant source of settlement risk is 

the rare occurrence of a counterparty’s 

nonpayment of the repurchase price, 

which is generally attributable to 

operational risk as opposed to credit 

risk.842

Despite supporting the exclusion of 

triparty repos from the definition of an 

eligible secondary market transaction, 

one commenter acknowledged that the 

triparty agent ‘‘does not fulfill a CCP 

role—it does not guarantee either 

counterparty’s performance through 

novation or otherwise and does not 

assume counterparty risk.’’ 843 The 

Commission recognizes that the current 

triparty market infrastructure 

incorporates credit protections, 

operational safeguards, and strict 

internal controls. However, as discussed 

above, the triparty agent does not fulfill 

a CCP role, and therefore, the 

Commission disagrees with the 

contention that the current market 

infrastructure incorporates controls akin 

to those available through central 


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844See supra part II.A.2.a supra. 

845 Id. 

846See 2013 Annual Report of the Financial 

Stability Oversight Council, at 4, 12–13, 133–134, 

available at https://home.treasury.gov/system/files/ 

261/FSOC-2013-Annual-Report.pdf; Begalle et al., 

supra note 98 (discussing concern that stress caused 

by a potential default of a triparty repo counterparty 

can lead to either pre-default fire sales of assets by 

the counterparty or post-default fire sales of 

collateral by the triparty repo investor and the 

related financial stability concerns). 

847See SEC Division of Investment Management 

Guidance Update: Counterparty Risk Management 

Practices with Respect to Tri-Party Repurchase 

Agreements (July 2013), available at https://

www.sec.gov/divisions/investment/guidance/imguidance-2013-03.pdf. 

848See e.g., Adam Copeland, Antoine Martin, 

Michael Walker, Repo Runs: Evidence from the TriParty Repo Market, N.Y. Fed Staff Report No. 506, 

at 26–30, available at https://www.newyorkfed.org/ 

medialibrary/media/research/staff_reports/ 

sr506.pdf; Tobias Adrian, Christopher R. Burke, and 

James J. McAndrews, The Federal Reserve’s Primary 

Dealer Credit Facility, 15 Fed. Res. Bank N.Y. 

Current Issues in Econ. and Fin. 4, available at 

https://www.newyorkfed.org/medialibrary/media/ 

research/current_issues/ci15-4.pdf; see also 

Michael Fleming & Kenneth Garbade, Explaining 

Settlement Fails, 11 Fed. Res. Bank N.Y. Current 

Issues in Econ. and Fin. 1 (Sept. 2005), available 

at https://www.newyorkfed.org/medialibrary/ 

media/research/current_issues/ci11-9.pdf. 

849See Treasury Market Practice Group, U.S. 

Treasury Securities Fails Charge Trading Practice 

(July 27, 2018), available at https://

www.newyorkfed.org/medialibrary/microsites/ 

tmpg/files/TMPG-UST-fails-charge-trading-practiceFINAL-07-27-18.pdf. 

850 ICI Letter, supra note 85, at 26–28. 

851See Part II.C.2.c, supra. 

852See FICC Rule 11, section 2, supra note 19; 

FICC Buyside FAQ, supra note 169, at 2–3. 

853 ICI Letter, supra note 85, at 27. 

854See supra note 438 and referencing paragraph. 

855Proposing Release, supra note 14, at 64613. 

clearing.844 Therefore, the benefits 

accruing to additional central clearing 

using a U.S. Treasury securities CCA 

apply in varying degree to triparty 

transactions as well.845

In response to the commenter who 

stated that most risks are eliminated 

because collateral cannot be posted 

outside the triparty platform, the 

Commission disagrees. For example, 

significant risks exist if concerns emerge 

regarding the financial condition of 

borrowers in the triparty market.846 In 

such scenarios, even though collateral 

stays within the triparty platform, the 

repo buyer could still face the sudden 

default of a triparty repo 

counterparty.847 Moreover, the 

Commission understands that 

settlement failures occur regularly and 

tend to spike during market stress 

events.848 Even though not considered a 

default, settlement failures create credit 

exposure to the failing counterparty and 

market risk exposure with respect to the 

relevant Treasuries.849 Furthermore, 

settlement failures may prevent or make 

more costly the non-failing party’s 

delivery of the relevant Treasuries in 

respect of other transactions. 

One commenter stated that the 

Commission must address other aspects 

of the Sponsored Service to better 

promote the objectives of central 

clearing, with such issues including the 

treatment of the start leg of the 

transaction, FICC’s obligations to 

complete settlement of a Sponsored 

Member’s positions in the event of a 

Sponsoring Member’s default, and a 

Sponsored Member’s ability to engage 

with FICC to address issues arising from 

repo transactions that have been 

submitted through sponsored 

clearing.850 The commenter stated that, 

within the Sponsored Service, FICC 

does not novate the settlement of the 

start leg of a repo transaction that is 

submitted for clearing between a 

sponsoring Member and a sponsored 

Member, although it does novate the 

end leg of the transaction, meaning that 

the counterparties continue to be 

responsible for settlement outside of 

FICC and bear the risk of a settlement 

fail vis a vis one another. The 

commenter also states that the lack of 

central clearing for the start leg of repo 

transactions in the Sponsored Service 

means that a requirement to clear 

eligible secondary market transactions 

may not eliminate counterparty credit 

risk issues to the extent the Commission 

anticipates, which, in turn, means that 

the proposal may not increase 

competition or reduce spreads as the 

Commission predicted in the Proposing 

Release. 

The Commission understands that, 

contrary to transactions cleared at FICC 

outside the Sponsored Service, FICC 

currently does not novate the start legs 

of same-day settling Sponsored DVP 

Repos where the Sponsored Member’s 

pre-novation counterparty is its 

Sponsoring Member (i.e., ‘‘done-with’’ 

Sponsored DVP Repo) or of Sponsored 

GC Repos. However, the Commission 

does not believe that this failure to 

novate is inconsistent with the 

definition of an eligible secondary 

market transaction being adopted in this 

release.851 The Commission 

acknowledges that settlement of the 

start leg occurring outside central 

clearing could somewhat reduce the 

benefits of central clearing in this 

limited instance, but the counterparty 

credit risk arising from the start legs of 

such transactions are largely addressed 

by the fact that they usually settle on a 

delivery-versus-payment basis between 

the counterparties, meaning that the 

securities and funds are exchanged 

simultaneously and resulting in less 

counterparty credit risk to address. 

However, the Commission further 

understands that FICC has stated that it 

is able to clear the start leg of any repo 

and currently does clear the start leg of 

all repos between two direct 

participants, the start leg of any 

Sponsored DVP repo where the 

Sponsored Member’s pre-novation 

counterparty is a third-party member of 

FICC (i.e., ‘‘done-away’’ from the 

Sponsoring Member), and any 

Sponsored DVP Repo where the start leg 

of such repo is scheduled to settle on 

some business day in the future (i.e., 

forward-settling repos).852

One commenter stated that neither the 

Sponsored Bilateral DVP Service nor the 

Sponsored GC Repo Service compel 

FICC to complete the settlement of a 

sponsored member’s transactions in the 

event of a sponsoring member’s default, 

and that this approach is not consistent 

with the Commission’s assumption that 

central clearing increases the likelihood 

of settlement.853 The Commission 

understands that this ability to, 

potentially, terminate the Sponsored 

Member’s transaction in such 

circumstances arises from the fact that, 

within the Sponsored Service, by 

design, the Sponsoring Member serves 

as the processing agent for all movement 

of funds and securities for its Sponsored 

Members, and FICC is not able to 

guarantee that an insolvent Sponsoring 

Member, which may be subject to the 

control of another legal entity, such as 

a bankruptcy trustee, would be able to 

continue processing such transactions. 

This aspect of FICC’s rules is consistent 

with how other central counterparties 

have addressed the potential 

termination of customer transactions in 

the event of their agent’s default.854 As 

discussed in Part II.B.2.c supra, the 

Commission does not believe that the 

potential for FICC to terminate these 

transactions, in the unlikely event of a 

Sponsoring Member default in which it 

is unable to work with the controlling 

legal entity, means that the benefits in 

the Proposing Release would not be, to 

a great extent, realized. 

iii. Application of the Requirement To 

Clear Eligible Secondary Market 

Transactions to Purchases and Sales of 

U.S. Treasury Securities 

As discussed above, 68 percent of 

cash market transactions in U.S. 

Treasury securities are not centrally 

cleared, and another 19 percent of such 

transactions are subject to so-called 

hybrid clearing.855 The Commission has 

identified certain categories of 

purchases and sales of U.S. Treasury 

securities that it believes should be part 

of the requirement to clear eligible 


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856The G–30 report recommends an approach to 

clearing all of repo, and some cash trades. See 

generally G–30 Report, supra note 5. 857Citadel Letter, supra note 81, at 5. 858ARB et al. Letter, supra note 81, at 4 (stating 

that the netting benefits associated with 

transitioning only proprietary trading firm (‘‘PTF’’) 

transactions into central clearing are much smaller, 

given the substantial netting that already occurs 

directly with inter-dealer brokers (‘‘IDBs’’); the 

trading-related benefits of central clearing will only 

accrue to market participants if their transactions 

are covered by the proposed mandate; and that 

clearing agency resiliency will be negatively 

impacted if only one segment of the market is 

cleared). 

859MFA Letter, supra note 81, at 2. 

860See part II.A.2.b supra for discussion of the 

justification for the scope as proposed. 

861Proposing Release, supra note 14 at 64623–4. 

862See part II.A.2.b.i supra. 

863See Proposing Release, supra note 14, at 64616 

for further discussion of IDBs and their role in the 

cash market for U.S. Treasury securities. 

secondary market transactions, i.e., for 

which U.S. Treasury securities CCAs are 

obligated to impose membership rules 

to require clearing of such transactions. 

The benefits of including these 

categories are described below. 

As with repurchase transactions, the 

general benefits of central clearing 

discussed in part IV.A supra become 

greater as the fraction of total 

transaction volume that is centrally 

cleared increases. In other words, there 

are positive externalities associated with 

broader central clearing. However, 

unlike in the repo market, the 

Commission is not requiring that all 

cash market transactions completed 

with a FICC member be centrally 

cleared.856

Several commenters suggested that 

the scope of eligible secondary market 

transactions in the cash market be 

broadened. One commenter stated that 

the Commission should align the scope 

of the definition with respect to cash 

transactions with the proposed scope for 

repos, subject to certain limited 

exceptions for investors that trade de 

minimis volumes. The commenter 

argued that the Commission’s approach 

with respect to cash transactions will 

increase costs for a specific subset of 

market participants, thereby putting 

them at a competitive disadvantage, 

while failing to deliver the envisaged 

market-wide benefits associated with 

central clearing (i.e., it would materially 

reduce the associated multilateral 

netting benefits, impair the risk 

management practices of clearing 

agencies, and hinder the evolution in 

trading protocols that can be expected 

from a market-wide clearing 

requirement).857 For similar reasons, 

another commenter also stated that the 

benefits of central clearing detailed 

‘‘will only materialize if a market-wide 

mandate is implemented’’ and 

supported defining the scope of eligible 

secondary market transactions for cash 

transactions as broadly as that proposed 

for repos.858 Another commenter stated 

that limiting the scope of the cash 

clearing mandate would result in 

unwarranted competitive disadvantages 

and related market distortions for some 

types of investors, such as hedge funds, 

or some types of trading platforms, such 

as anonymous trading facilities.859

The Commission proposed a targeted 

approach to clearing in the cash market 

in the Proposing Release, limiting the 

clearing requirement to specific types of 

entities transacting with members of a 

U.S. Treasury securities CCA that pose 

certain risks when clearing cash market 

treasury transactions bilaterally.860 As 

discussed in the Proposing Release and 

discussed in part II.2.b supra, the 

Commission believed that including 

within the scope of eligible transactions 

the cash transactions of levered funds 

and hedge funds is more important than 

those of other market participants that 

were not included in part because the 

strategies employed by hedge funds 

‘‘can increase the likelihood that the 

fund will experience stress or fail, and 

amplify the effects on financial 

markets.’’ 861 The Commission is not 

including purchases and sales of U.S. 

Treasury securities between a direct 

participant and either a hedge fund or 

a levered account within the definition 

of an eligible secondary market 

transaction in light of questions raised 

by commenters regarding the inclusion 

of a hedge fund and a leveraged account 

as proposed that merit further 

consideration, and the Commission will 

continue to evaluate the issues raised to 

determine if any further action is 

appropriate.862

In response to the comment that 

characterized a market-wide mandate as 

a ‘‘necessary condition’’ for adoption of 

any mandate, the Commission does not 

believe that all benefits of central 

clearing exist only if the entire market 

is centrally cleared. The increased 

clearing of cash transactions, targeted to 

address the differing risk profiles of 

each market segment, would still bring 

the benefits of central clearing to an 

important part of the cash market. As 

explained below, cash and repo markets 

differ in important ways that suggest a 

broader definition of eligible secondary 

market transactions for repo and a less 

broad definition for cash transactions. 

Though there are linkages across 

markets, segments of the Treasury 

market are distinct, and for this reason, 

the Commission addresses the risks in 

each of these categories separately in 

parts II.A.2.b.ii through iii supra. 

The Commission understands the set 

of participants in U.S. Treasury 

securities cash markets to be far broader 

and more heterogeneous than in the 

repo markets. The cash market has 

many participants that trade in 

relatively small amounts, whereas the 

market for repo is dominated by larger, 

more sophisticated institutions. 

Although difficult to quantify precisely, 

the number of participants is one or 

more orders of magnitude greater in the 

cash market as compared with the repo 

market. Because the benefits increase 

with the number and size of 

transactions, whereas the costs have a 

large fixed component, extending the 

clearing mandate to institutions that are 

market participants in repo markets and 

a subset of the institutions that are 

participants in cash markets should 

capture a large fraction of market 

activity, while also capturing the most 

active market participants who may 

already have some ability to connect 

with the clearing agency and experience 

with central clearing. 

a. IDB Transactions 

The amendments being adopted 

require that all purchases and sales of 

U.S. Treasury securities entered into by 

a direct participant of a U.S. Treasury 

securities CCA and any counterparty, if 

the direct participant of the CCA brings 

together multiple buyers and sellers 

using a trading facility (such as a limit 

order book) and serves as a counterparty 

to both the purchaser and seller in two 

separate transactions executed on its 

platform, be subject to the requirement 

to centrally clear eligible secondary 

market transactions. This requirement 

encompasses the transactions of those 

entities serving as IDBs in the U.S. 

Treasury securities market, in that it 

covers entities that are standing in the 

middle of transactions between two 

counterparties that execute a trade on 

the IDB’s platform.863

The amendments being adopted will 

result in more central clearing of IDB 

trades. FICC Member IDBs do not take 

directional positions on the securities 

that trade on the IDB’s platform. 

Consequently, a requirement that FICC 

member IDBs centrally clear all of their 

trades will give FICC better insight into 

the risk position of its clearing members 

though the elimination of the hybrid 

clearing transactions mentioned above. 

In contrast to other FICC members, 

FICC members that are also IDBs will be 

required to centrally clear all of their 

cash trades (and repo, as described 

above). As described in the TMPG 

White Paper and in the recent G–30 


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864See generally G–30 Report, supra note 5. 

865See, e.g., TMPG White Paper, supra note 13, 

at 22 (noting that in a hybrid clearing arrangement, 

an ‘‘IDB’s rights and obligations towards the CCP 

are not offset and therefore the IDB is not in a net 

zero settlement position with respect to the CCP at 

settlement date.’’). 

866See DTCC May 2021 White Paper, supra note 

307, at 5. 

867See CCA Standards Proposing Release, supra 

note 8. 

868TMPG White Paper, supra note 13, at 32. 

869See id. 

870See AIMA Letter, supra note 81, at 7. 

871See SIFMA/IIB Letter, supra note 37, at 19–20. 

872See ICI Letter, supra note 85, at 3, 11; MFA 

Letter, supra note 81, at 19–21; see also Tradeweb 

Letter, supra note 81, at 3–4. 

873See ICI Letter, supra note 85, at 3, 11; MFA 

Letter, supra note 81, at 20; Tradeweb Letter, supra 

note 81, at 3–4. 

874See id. 

875See id. 

876See MFA Letter, supra note 81, at 20. 

report,864 IDBs act as central nodes in 

the system, in effect serving as clearing 

agencies without the regulatory 

structure of clearing agency. 

Furthermore, the netting benefits to 

IDBs, as described in this section are 

likely to be particularly high, because 

each transaction on an IDB is matched 

by a transaction on the other side. IDBs 

are sophisticated institutions that have 

experience managing the central 

clearing of trades as they already 

centrally clear all trades with other FICC 

members. 

The configuration of counterparty risk 

presented by hybrid clearing allows 

FICC to manage the risks arising from 

the IDB–FICC member trade, but FICC 

cannot manage the risks arising from the 

IDB’s offsetting trade with its non-FICC 

member counterparty and the potential 

counterparty credit risk and settlement 

risk arising to the IDB from that trade.865

Thus, the IDB is not able to net all of 

its positions for clearing at FICC, and 

the IDB’s positions appear to FICC to be 

directional, which impacts the amount 

of margin that FICC collects for the 

visible leg of the ‘‘hybrid’’ transaction. 

This lack of visibility can increase risk 

during stress events, when margin 

requirements usually increase. Thus, 

FICC is indirectly exposed to the IDB’s 

non-centrally cleared leg of the hybrid 

clearing transaction, but it lacks the 

information to understand and manage 

its indirect exposure to this transaction. 

As a result, in the event that the nonFICC counterparty were to default to the 

IDB, causing stress to the IDB, that stress 

to the IDB could be transmitted to the 

CCP and potentially to the system as a 

whole.866 In particular, if the IDB’s nonFICC counterparty fails to settle a 

transaction that is subject to hybrid 

clearing, such an IDB may not be able 

to settle the corresponding transaction 

that has been cleared with FICC, which 

could lead the IDB to default. As part of 

its existing default management 

procedures, FICC could seek to 

mutualize its losses from the IDB’s 

default, which could in turn transmit 

stress to the market as a whole. 

The Commission has previously 

stated that membership requirements 

help to guard against defaults of any 

CCP member, as well to protect the CCP 

and the financial system as a whole 

from the risk that one member’s default 

could cause others to default, 

potentially including the CCP itself.867

Further, contagion stemming from a 

CCP member default could be 

problematic for the system as a whole, 

even if the health of the CCP is not 

implicated. This is so because the 

default could cause others to back away 

from participating in the market. This 

risk of decreased market participation 

could be particularly acute if the 

defaulting participant were an IDB, 

whose withdrawal from the market 

could jeopardize other market 

participants’ ability to access the market 

for on-the-run U.S. Treasury 

securities.868 And because IDBs 

facilitate a significant proportion of 

trading in on-the-run U.S. Treasury 

securities (that is, they form central 

nodes), such a withdrawal could have 

significant consequences for the market 

as a whole.869 The requirement to clear 

eligible secondary market transactions 

should therefore help mitigate this risk 

by mandating that a U.S. Treasury 

securities CCA ensure its IDB members 

clear both sides of their transactions, 

thereby eliminating the various facets of 

potential contagion risk posed by socalled hybrid clearing. 

Commenters generally supported the 

inclusion of IDB transactions in the 

definition of an eligible secondary 

market transaction.870 Another 

commenter, although not supporting a 

requirement to clear repos, stated that if 

such a requirement was adopted it 

should be limited to IDBs and brokerdealers because (1) the counterparties to 

such transactions are the most active 

participants in the Treasury repo 

markets, thereby allowing the 

Commission to meaningfully increase 

central clearing without applying a 

more categorical requirement, and (2) 

because such transactions are more 

interconnected with the rest of the 

market and have a higher possibility to 

transfer risk to outside parties 

(including potentially a U.S. Treasury 

securities CCA).871

However, certain commenters 

asserted that this aspect of the definition 

would inappropriately disadvantage 

IDBs, with uncertain benefits and 

potentially significant negative 

consequences that would result if 

market participants shifted their trading 

activity away from IDBs.872 Three 

commenters expressed concerns that 

including IDB transactions in the 

definition of an eligible secondary 

market transaction could draw trading 

activity away from IDBs, thereby 

reducing market liquidity and market 

stability.873 The commenters also noted 

that IDBs are anonymous platforms that 

currently support all-to-all trading, 

which the Commission has recognized 

would improve market structure and 

stability.874 The commenters argued that 

including IDB transactions in the 

definition of an eligible secondary 

market transaction could, therefore, 

hinder all-to-all trading.875 One of these 

commenters further argued that by 

discouraging market participants from 

trading on IDBs, the requirement to 

clear eligible secondary market 

transactions, as drafted, could limit the 

choices of market participants with 

respect to trading venues.876

The Commission disagrees with these 

commenters. The inclusion of IDB 

transactions, along with other types of 

transactions, would not necessarily lead 

to decreased liquidity and market 

stability or negatively impact all-to-all 

trading in the U.S. Treasury market. The 

benefits to market participants from 

trading on an IDBs, that is the ability 

find counterparties and to trade 

anonymously are significant and will 

continue even if such transactions are 

eligible secondary market transactions, 

meaning that such transactions would 

incur the costs associated with central 

clearing and described below. 

Moreover, even in the event that some 

of these concerns materialize from the 

inclusion of IDB transactions, the 

inclusion of IDB transactions is justified 

as it would allow the U.S. Treasury 

securities CCA to better risk manage 

‘‘hybrid’’ transactions that are currently 

not being submitted for central clearing. 

Specifically, including IDB transactions 

in the definition of an eligible secondary 

market transaction would address the 

potential for contagion risk associated 

with hybrid clearing. As explained in 

the Proposing Release, the configuration 

of counterparty risk presented by hybrid 

clearing allows the U.S. Treasury 

securities CCA to manage the risks 

arising from the IDB–CCA direct 

participant transaction, on the one 

hand, but the U.S. Treasury securities 

CCA cannot manage the risks arising 

from the IDB’s offsetting transaction 

with its non-member counterparty and 


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877See, e.g., TMPG White Paper, supra note 13, 

at 22 (noting that in a hybrid clearing arrangement, 

an IDB’s rights and obligations to the CCP are not 

offset and the IDB is not in a net zero settlement 

position with respect to the CCP at settlement date). 

Thus, the IDB is not able to net all of its positions 

for clearing at a U.S. Treasury securities CCA, and 

the IDB’s positions appear to the CCA to be 

directional, which impacts the amount of margin 

that the CCA collects for the transaction. 

878See 2021 IAWG Report, supra note 4, at 31; 

See also DTCC May 2021 White Paper, supra note 

307. 

879See supra note 308. 

880TMPG White Paper, supra note 13, at 32; part 

IV.B.3 (Table 1) supra. 

881 15 U.S.C. 78o(a) and 78o–5(a) (requirement to 

register) and 78c(4), (5), (43), and (44) (definitions). 

882See, e.g., FICC Rules 3A, 8, 18, supra note 663 

(providing for prime brokerage and correspondent 

clearing and sponsored membership); see also 

October 2021 White Paper, supra note 681, at 5–7. 

883See part II.A.2.b supra. 

884See DTCC/FICC Letter, supra note 33; Better 

Markets Letter, supra note 33; AFREF Letter, supra 

note 33. 

885See MFA Letter, supra note 81 at 19–20. 

886See SIFMA AMG Letter, supra note 35, at 11. 

the potential counterparty credit risk 

and settlement risk arising to the IDB 

from that trade.877 Thus, under the 

current hybrid clearing model, the U.S. 

Treasury securities CCA is indirectly 

exposed to the IDB’s non-centrally 

cleared transaction, but it lacks the 

ability to risk manage its indirect 

exposure to this non-centrally cleared 

leg of the transaction. Specifically, it 

does not know who the ultimate 

counterparty of the transaction is and 

cannot collect margin on that 

transaction. This, in turn, results in 

margin collection at the CCP which is 

based upon only one transaction and 

has been calculated to cover this 

seemingly directional position, as well 

as an inability to net these offsetting 

transactions and provide the benefits of 

central clearing. In particular, if the 

IDB’s non-CCP member counterparty 

fails to settle a transaction that is subject 

to hybrid clearing, such IDB may not be 

able to settle the corresponding 

transaction that has been cleared with 

the U.S. Treasury securities CCA due to 

a lack of financial resources at the IDB, 

which could lead the IDB to default.878

As part of its existing default 

management procedures, the U.S. 

Treasury securities CCA could seek to 

mutualize its losses from the IDB’s 

default, which could in turn transmit 

stress to the market as a whole. 

As noted above, the Commission has 

previously stated that membership 

requirements help to guard against 

defaults of any CCP member, as well as 

to protect the CCP and the financial 

system as a whole from the risk that one 

member’s default could cause others to 

default, potentially including the CCP 

itself.879 Further, contagion stemming 

from a CCP member default could 

undermine confidence in the financial 

system as a whole, even if the health of 

the CCP is not implicated. This is 

because the default could cause others 

to back away from participating in the 

market. This risk of decreased 

participation could be particularly 

problematic if the defaulting participant 

was an IDB, whose withdrawal from the 

market could impact other market 

participants’ ability to access the market 

for on-the-run U.S. Treasury securities, 

approximately 49.7% of which trade on 

IDBs.880 Including such transactions as 

eligible secondary market transactions 

would therefore help protect against this 

risk by requiring that a U.S. Treasury 

securities CCA ensure that direct 

participants who are IDBs centrally 

clear both sides of their transactions, 

thereby eliminating the various aspects 

of potential contagion risk posed by socalled hybrid clearing. 

b. Other Cash Transactions 

The Commission has identified 

additional categories of cash 

transactions of U.S. Treasury securities 

to include in the membership 

requirements for a U.S Treasury 

securities CCA that it believes will 

provide the benefits of increased central 

clearing of U.S. Treasury securities 

transactions described above. 

The Commission is defining an 

eligible secondary market transaction to 

include those cash purchase and sale 

transactions in which the counterparty 

of the direct participant is a registered 

broker-dealer, government securities 

broker, or dealer.881 These entities, by 

definition, are engaged in the business 

of effecting transactions in securities for 

the account of others (for brokers) or for 

their own accounts (for dealers). Thus, 

these entities already are participating 

in securities markets and have 

identified mechanisms to clear and 

settle their transactions.882 More 

generally, many registered brokers and 

dealers are familiar with transacting 

through introducing brokers who pass 

their transactions to clearing brokers for 

clearing and settlement. 

In the Proposing Release, the 

Commission proposed to include in the 

definition of eligible secondary market 

transaction any purchases and sales of 

U.S. Treasury securities between a 

direct participant and a counterparty 

that is: (i) a hedge fund, that is any 

private fund (other than a securitized 

asset fund): (a) with respect to which 

one or more investment advisers (or 

related persons of investment advisers) 

may be paid a performance fee or 

allocation calculated by taking into 

account unrealized gains (other than a 

fee or allocation the calculation of 

which may take into account unrealized 

gains solely for the purpose of reducing 

such fee or allocation to reflect net 

unrealized losses); (b) that may borrow 

an amount in excess of one-half of its 

net asset value (including any 

committed capital) or may have gross 

notional exposure in excess of twice its 

net asset value (including any 

committed capital); or (c) that may sell 

securities or other assets short or enter 

into similar transactions (other than for 

the purpose of hedging currency 

exposure or managing duration) (‘‘hedge 

fund transactions’’), or (ii) an account at 

a registered broker-dealer, government 

securities dealer, or government 

securities broker where such account 

may borrow an amount in excess of onehalf of the value of the account or may 

have gross notional exposure of the 

transactions in the account that is more 

than twice the value of the account 

(‘‘leveraged account transactions’’).883

Some commenters supported the 

proposed inclusion of transactions with 

hedge funds within the definition of an 

eligible secondary market 

transaction.884 However, other 

commenters asserted that transactions 

with a hedge fund should not be within 

the definition of an eligible secondary 

market transaction. Specifically, one 

commenter stated that because of the 

nature of the definition, eligible 

secondary market transactions would 

include those with firms that may (but 

in practice might not actually) exceed 

the quantitative thresholds without 

regard to the risks that these firms 

actually take on, or their investment 

models and strategies. Further, the 

commenter stated that the definition 

would not reflect any effort to assess 

whether any particular fund or account 

actually imposes systemic risk, and 

would instead treat the mere ability to 

obtain leverage as a source of risk.885

Another commenter stated that there is 

no data to support imposing a clearing 

requirement that targets just hedge 

funds and leveraged accounts and 

expressed concern that a partial 

mandate may result in some dealers 

choosing to offer liquidity only in a 

cleared environment thereby reducing 

the liquidity available today to accounts 

in the uncleared cash market.886

Another commenter stated that the 

inclusion of hedge funds within the 

counterparties to an eligible secondary 

market transaction would arbitrarily 

single out hedge funds’ cash Treasury 

transactions and would leave out other 

important market participants’ cash 


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887See AIMA Letter, supra note 81, at 7. 888See Form PF Proposing Release, supra note 

279, 76 FR at 8073 (citing President’s Working 

Group on Financial Markets, Hedge Funds, 

Leverage, and the Lessons of Long Term Capital 

Management (Apr. 1999), at 23). 889 Id. (also noting that the simultaneous failure 

of several similarly positioned hedge funds could 

create contagion through the financial markets if the 

failing funds had to liquidate their investment 

positions at fire sale prices). 

890 Id. 

891See Proposing Release, supra note 14, at 64625 

for a discussion of the proposed definition of a 

central bank for the purposes of the rule. 

892See id. for a discussion of the proposed 

definition of sovereign entity and international 

financial institution. 

893See part II.A.2.a.vii supra and part II.A.2.a.iii 

supra. 

894SIFMA/IIB Letter, supra note 37, at 21–22. 

895 Id. 

896See part II.A.2.a, supra. The Commission is 

conditioning the availability of the exclusion for 

inter-affiliate transactions on an obligation for the 

affiliated counterparty to submit its eligible repo 

transactions for clearance and settlement. This 

condition should help ensure that a direct 

participant cannot rely upon an inter-affiliate 

transaction to avoid the requirement to clear 

eligible secondary market transactions. If there were 

no such condition, a direct participant could simply 

use inter-affiliate transactions to move securities 

and funds to affiliates, and the affiliate could then 

enter into external transactions with counterparties 

which, if entered into with the direct participant, 

would be eligible secondary market transactions. 

897See, e.g., Clearing Exemption for Swaps 

Between Certain Affiliated Entities, 77 FR 50425, 

50427 (Mar. 2012) (discussing the internalization of 

counterparty risk on inter-affiliate swap 

transactions as wholly owned members of the same 

corporate group, but also discussing that similar 

benefits may not accrue for other inter-affiliate 

swaps when the counterparties are not members of 

the same group). 

Treasury transactions that also comprise 

a large segment of Treasury market 

liquidity.887

As the Commission stated in the 

Proposing Release, hedge funds 

generally can engage in trading 

strategies that may pose heightened 

risks of potential financial distress to 

their counterparties, including those 

who are direct participants of a U.S. 

Treasury securities CCA. The 

Commission previously has recognized 

that the strategies employed by hedge 

funds ‘‘can increase the likelihood that 

the fund will experience stress or fail, 

and amplify the effects on financial 

markets.’’ 888 The Commission also has 

stated that significant hedge fund 

failures, resulting from their investment 

positions or use of leverage or both, 

could result in material losses at the 

financial institutions that lend to them 

if collateral securing this lending is 

inadequate, and that these losses could 

have systemic implications if they 

require these financial institutions to 

scale back their lending efforts or other 

financing activities generally.889

Similar to the risks posed to a U.S. 

Treasury securities CCA by noncentrally cleared trades entered into by 

an IDB, non-centrally cleared 

transactions entered into between hedge 

funds and direct participants of the CCA 

could cause risks to the CCA in the 

event that the hedge fund is not able to 

meet its obligations to the direct 

participant, which could, in turn, create 

stress to the direct participant and 

through to the CCA. Therefore, 

including the direct participant’s 

purchase and sale transactions with 

hedge funds within the definition of an 

eligible secondary market transaction 

would have reduced the potential for 

financial distress arising from the 

transactions that could affect the direct 

participant and the U.S. Treasury 

securities CCA. This aspect of the 

proposal would also have resulted in 

consistent and transparent risk 

management being applied to such 

transactions, as discussed further in part 

II.A.2.a supra. 

However, in response to comments 

received and as discussed in part 

II.A.2.b supra, the Commission is not 

adopting a definition of eligible 

secondary market transaction in Rule 

17ad–22(a) that includes these 

transactions.890

iv. Exclusions From the Requirement To 

Clear Eligible Secondary Market 

Transactions 

The Commission is excluding certain 

otherwise eligible secondary market 

transactions in U.S. Treasury securities 

from the requirement to clear eligible 

secondary market transactions. 

Recognizing the importance of U.S. 

Treasury securities not only to the 

financing of the United States 

government, but also their central role 

in the formulation and execution of 

monetary policy and other 

governmental functions, the 

Commission is excluding from the 

requirement to clear eligible secondary 

market transactions any otherwise 

eligible secondary market transaction in 

U.S. Treasury securities between a 

direct participant of a U.S. Treasury 

securities CCA and a central bank.891

For similar reasons, the Commission is 

also excluding from the requirement to 

clear eligible secondary market 

transactions otherwise eligible 

secondary market transactions in U.S. 

Treasury securities between a direct 

participant of a U.S. Treasury securities 

CCA and a sovereign entity or an 

international financial institution.892 In 

a change from the proposal, and for the 

reasons given above, the Commission is 

excluding from the requirement to clear 

eligible secondary market transactions 

otherwise eligible secondary market 

transactions in U.S. Treasury securities 

between a direct participant of a U.S. 

Treasury securities CCA and either a 

state and local government or a covered 

clearing agency providing central 

counterparty services, a derivatives 

clearing organization (see 7 U.S.C. 7a– 

1 and 17 CFR 39.3), or is regulated as 

a central counterparty in its home 

jurisdiction.893

One commenter recommended that 

the Commission exempt transactions in 

U.S. Treasury securities between 

affiliates from any central clearing 

requirement. The commenter stated that 

inter-affiliate transactions are important 

to corporate groups, which may use 

them to achieve efficient risk and 

capital allocation and obtain flexibility 

for addressing customer demands.894

The commenter further stated that 

requiring inter-affiliate transactions to 

be centrally cleared would impose 

additional costs with limited benefits, 

for two reasons. First, if an inter-affiliate 

transaction is part of a ‘‘back-to-back 

arrangement,’’ meaning that the related 

external transaction between the 

affiliated counterparty and a nonaffiliated counterparty is not centrally 

cleared, then subjecting the interaffiliate transaction to a central clearing 

requirement does nothing to reduce the 

contagion risk presented by the nonaffiliated counterparty. The commenter 

further asserted that if that external 

transaction is already centrally cleared, 

the contagion risk would already be 

addressed and requiring the interaffiliate transaction to be cleared would 

not create additional benefits. Second, a 

direct participant’s affiliate’s credit risk 

is already part of the group-wide 

financial risks to which the Treasury 

CCP is exposed, and central clearing of 

inter-affiliate transactions is unlikely to 

meaningfully impact the risk profile.895

The Commission agrees and in a 

change from the proposing release, the 

Commission is conditionally excluding 

inter-affiliate repo.896 The Commission 

believes that, in certain circumstances, 

the counterparty credit risk posed by 

inter-affiliate transactions may be less 

than other transactions.897 However, the 

credit risk is not eliminated because 

affiliated entities are separate legal 

entities and, generally, are not legally 

responsible for each other’s contractual 

obligations. In the event that one or 

more affiliated entities becomes 

insolvent, the affiliates, as separate legal 

entities, would be managed as separate 

estates in a bankruptcy, with the trustee 

having a duty to the creditors of the 

affiliate, not the affiliated family. Other 

benefits of increased central clearing 


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898See Proposing Release, supra note 14, for a 

discussion of the activities of Federal Reserve Bank 

of New York’s open market operations conducted 

at the direction of the Federal Open Market 

Committee. 

899See id., for a discussion of the Commission’s 

belief in the principles of international comity. 

900SIFMA/IIB Letter, supra note 37, at 20; CME 

Letter, supra note 81. 

901See supra note 200. See also part II.A.2.a.iv, 

supra, for discussion of FCMs and the regulatory 

framework governing them. 

902One commenter states that the majority of 

FCMs are dually registered as FCMs and brokerdealers. See FIA Letter, supra note 200, at 2. 

903See part II.A.2.a.iv, supra. 

904See FICC/DTCC Letter, supra note 33, at 21– 

22. See also part II.A.4 supra for additional 

discussion. 

905 Id. 

906 Id. 

907See DTCC October 2021 White Paper, supra 

note 681. 

such as consistent risk management and 

centralized default management are 

likely to be less important for 

transactions within an affiliated family. 

Therefore, the Commission believes the 

benefits of clearing such transactions are 

likely less than those from similar 

transactions with non-affiliates while 

the costs of doing so are likely similar. 

Although the Commission believes 

that the benefits of central clearing are 

generally increasing in the fraction of 

total volume that is centrally cleared, it 

also believes that the Federal Reserve 

System should be free to choose the 

clearance and settlement mechanisms 

that are most appropriate to effectuating 

its policy objectives.898 Further, the 

Commission believes that the exclusion 

should extend to foreign central banks, 

sovereign entities and international 

financial institutions for reasons of 

international comity.899 In light of 

ongoing expectations that Federal 

Reserve Banks and agencies of the 

Federal Government will not be subject 

to foreign regulatory requirements in 

their transactions in the sovereign debt 

of other nations, the Commission 

believes principles of international 

comity counsel in favor of exempting 

foreign central banks, sovereign 

authorities, and international 

institutions. 

The Commission is also excluding 

transactions between U.S. Treasury CCA 

members and natural persons from the 

requirement to clear eligible secondary 

market transactions. The Commission 

believes that natural persons generally 

transact in small volumes and should 

not present much, if any, contagion risk 

to a U.S. Treasury securities CCA and 

therefore, the benefits discussed above 

are unlikely to be important for these 

transactions. Commenters expressed 

support for these exclusions.900

Two commenters asked the 

Commission to adopt an exemption that 

would allow FCMs to continue to 

engage in eligible secondary market 

transactions in U.S. Treasury securities 

outside of central clearing, and another 

commenter acknowledged the potential 

interaction between the proposal and 

the regulatory framework governing 

FCMs.901 FCMs can also be registered 

with the Commission as brokerdealers.902 Commenters expressed 

concern as to whether the account 

structure provided by FICC would be 

consistent with the regulatory 

framework governing FCMs.903 The 

Commission recognizes the apparent 

tension between the rule amendments 

being adopted and the application of 

Rule 1.25(d)(2), as described in part 

II.A.2.a.iv, supra. 

For the reasons discussed above in 

part II.A.2.a.iv, the Commission does 

not believe that an exclusion for FCMs 

is necessary to accommodate the 

relevant provisions of the CFTC Rules. 

Moreover, an exclusion for FCMs would 

be inconsistent with the purpose of the 

rule which is to help reduce contagion 

risk to the CCA and bring the benefits 

of central clearing to more transactions 

involving U.S. Treasury securities, 

particularly in light of their significance 

to the Treasury market. 

b. Other Changes to Covered Clearing 

Agency Standards 

The Commission believes that certain 

additional changes to its Covered 

Clearing Agency Standards that apply 

only to U.S. Treasury securities CCAs 

are warranted to facilitate additional 

clearing. Such changes should help 

ensure that the U.S. Treasury securities 

CCA can continue to manage the risks 

arising from more transactions from 

additional indirect participants and to 

facilitate the increased use of central 

clearing and the accompanying benefits. 

These changes, by making central 

clearing more efficient for market 

participants, also create incentives for 

greater use of central clearing. 

i. Policies and Procedures Regarding 

Direct Participants’ Transactions 

The Commission is adopting Rule 

17ad–22(e)(18)(iv)(B) that requires a 

U.S. Treasury securities CCA establish, 

implement, maintain and enforce 

written policies and procedures to 

identify and monitor its direct 

participants’ required submission of 

transactions for clearing, including, at a 

minimum, addressing a direct 

participant’s failure to submit 

transactions. The Commission believes 

that such a requirement should help 

ensure that a U.S. Treasury securities 

CCA adopts policies and procedures 

directed at understanding whether and 

how its participants comply with the 

policies that will be adopted as part of 

the requirement to clear eligible 

secondary market transactions requiring 

the submission of specified eligible 

secondary market transactions for 

clearing. Without such policies and 

procedures, it would be difficult for the 

CCA to assess if the direct participants 

are complying with the requirement to 

clear eligible secondary market 

transactions. 

One commenter supported this aspect 

of the proposal.904 This commenter 

anticipated that implementation of this 

aspect of the proposal would be similar 

to implementation of other Covered 

Clearing Agency Standards provisions 

that use that phrase.905 The commenter 

stated that it expects a U.S. Treasury 

securities CCA would take steps to 

remediate non-compliance on the part 

of its direct participants in a manner 

consistent with the Covered Clearing 

Agency Standards and breaches of the 

CCA’s own rules.906

ii. Netting and Margin Practices for 

House and Customer Accounts 

The Commission is amending Rule 

17ad–22(e)(6)(i) to require a U.S. 

Treasury securities CCA to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, as applicable, 

calculate, collect, and hold margin 

amounts from a direct participant for its 

proprietary U.S. Treasury securities 

positions, separately and independently 

from margin calculated and collected 

from that direct participant in 

connection with U.S. Treasury 

securities transactions by an indirect 

participant that relies on the services 

provided by the direct participant to 

access the covered clearing agency’s 

payment, clearing, or settlement 

facilities. As described further below, 

such changes should allow a U.S. 

Treasury securities CCA to better 

understand the source of potential risk 

arising from the U.S. Treasury securities 

transactions it clears and potentially 

further incentivize central clearing. 

In practice, at FICC, clearing a U.S. 

Treasury securities transaction between 

a direct participant and its customer, 

i.e., a dealer to client trade, would not 

result in separate collection of margin 

for the customer transaction. Except for 

transactions submitted under the FICC 

sponsored member program,907 FICC 

margins the transactions in the direct 

participant’s (i.e., the dealer’s) account 

on a net basis, allowing any of the trades 

for the participant’s own accounts to net 


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908 Id. at 5–6. 

909See Marta Chaffee and Sam Schulhofer-Wohl, 

supra note 678, at 3. 

910See Sam Schulhofer-Wohl, Externalities in 

Securities Clearing and Settlement: Should 

Securities CCPs Clear Trades for Everyone? (Fed. 

Res. Bank Chi. Working Paper No. 2021–02, 2021). 

911See note 33 supra. 

912See part IV.C.3.b infra. 

913 IDTA Letter, supra note 66, at 4; IDTA Letter 

2, supra note 829, at 7; see also FICC Rule 4, section 

14, supra note 19. 

914See DTCC 2023 White Paper, supra note 107, 

at 6 (discussing that the proposal would allow the 

option to calculate and collect margin associated 

with customer activity on a gross or net basis 

depending on the client clearing model selected by 

the member and stating that FICC would offer 

options via different access models that would 

allow those parties to balance the benefits of netting 

and segregation in different ways). 

915See supra note 125. 

916See part II.A.2.a.ii supra. 

917 ICI Letter, supra note 85. 

against trades by the participant’s 

customers.908

Under the amendments to Rule 17ad– 

22(e)(6)(i), a U.S. Treasury securities 

CCA is required to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to, 

as applicable, calculate margin amounts 

for all transactions that a direct 

participant submits to the CCP on behalf 

of others, separately from the margin 

that is calculated for transactions that 

the direct participant submits on its 

own behalf. Such policies and 

procedures must also provide that 

margin collateralizing customer 

positions be collected separately from 

margin collateralizing a direct 

participant’s proprietary positions. 

Finally, the CCP will also be required to 

have policies and procedures reasonably 

designed to, as applicable, ensure that 

any margin held for customers or other 

indirect participants of a member is 

held in an account separate from those 

of the direct participant. 

Because the amendments to Rule 

17ad–22(e)(6)(i) require separating 

positions in U.S. Treasury securities 

transactions of a direct participant in a 

U.S. Treasury securities CCA from those 

of customers or other indirect 

participants, the indirect participants’ 

positions, including those submitted 

outside of the sponsored member 

program, will no longer be netted 

against the direct participant’s 

positions. The indirect participants’ 

positions will be subject to the covered 

clearing agency’s risk management 

procedures, including collection of 

margin specific to those transactions. 

These changes should allow a U.S. 

Treasury securities CCA to better 

understand the source of potential risk 

arising from the U.S. Treasury securities 

transactions it clears. In addition, these 

changes should help avoid the risk of a 

disorderly default in the event of a 

direct participant default, in that FICC 

will be responsible for the central 

liquidation of the defaulting 

participant’s trades without directly 

impacting the trades of the participant’s 

customers or the margin posted for 

those trades. 

Moreover, the amendments to Rule 

17ad–22(e)(6)(i) should result in dealerto-customer trades gaining more benefits 

from central clearing. Because margin 

for a direct participant’s (i.e., a dealer’s) 

trades will be calculated, collected, and 

held separately and independently from 

those of an indirect participant, such as 

a customer, the direct participant’s 

trades with the indirect participant can 

be netted against the direct participant’s 

position vis-a`-vis other dealers.909

Holding margin amounts from a direct 

participant of a U.S Treasury securities 

CCA separately and independently from 

those of an indirect participant may 

reduce incentives for indirect 

participants to trade excessively in 

times of high volatility.910 Such 

incentives exist because the customers 

of a broker-dealer do not always bear the 

full cost of settlement risk for their 

trades. Broker-dealers incur costs in 

managing settlement risk with CCPs. 

Broker-dealers can recover the average 

cost of risk management from their 

customers. However, if a particular 

trade has above-average settlement risk, 

such as when market prices are 

unusually volatile, it is difficult for 

broker-dealers to pass along these higher 

costs to their customers because fees 

typically depend on factors other than 

those such as market volatility that 

impact settlement risk. Holding margin 

of indirect participants separately from 

direct participants should reduce any 

such incentives to trade more than they 

otherwise would if they bore the full 

cost of settlement risk for their trades. 

Commenters generally supported the 

proposed amendment to Rule 17ad– 

22(e)(6)(i).911 However, commenters 

also raised several additional issues 

with respect to the separation of house 

and customer margin that are addressed 

in part II.B.1 supra. As discussed 

below,912 an additional commenter 

stated that the proposed separation of 

house and customer margin would 

negatively impact small and mid-size 

broker-dealers who are 

disproportionately affected by FICC’s 

Excess Capital Premium (‘‘ECP’’) charge, 

which is a margin add-on that collects 

a premium when a member’s VaR 

charge exceeds the member’s Net 

Capital, net assets or equity capital (as 

applicable to that member based on its 

type of regulation).913 As discussed in 

part II.B1 supra, the commenter’s 

concerns regarding the interplay 

between purported required gross 

margining and the ECP charge rests on 

the assumption that gross margin is 

required under the proposal, which, as 

discussed in the prior paragraph, is not 

the case. In addition, FICC recently has 

indicated that it intends to make 

available client clearing models that do 

not require gross margin, consistent 

with its current offerings.914

A commenter requested that the SEC 

encourage FICC to establish a feature 

allowing (but not requiring) registered 

fund sponsored members to support 

their obligations by having margin 

posted with FICC (‘‘FICC registered fund 

margin framework’’) rather than by 

paying fees to the sponsoring 

member.915 While the commenter noted 

that the Sponsored Service under 

current FICC rules does not raise 

custody issues for registered funds 

under the 1940 Act because registered 

funds are not required to post margin to 

FICC, if a fund’s margin were permitted 

to be posted with FICC, that could raise 

custody issues for funds unless such 

funds had relief from certain provisions 

of the 1940 Act.916 The commenter 

stated that permitting registered funds’ 

margin to be posted with FICC could 

reduce costs for registered funds and 

facilitate their use of cleared reverse 

repos and term repos.917 The 

Commission understands that FICC’s 

current rules for the Sponsored Service 

do not require sponsored and 

sponsoring member margin to be 

calculated or held separately implying 

that the sponsoring member is satisfying 

all FICC margin requirements. Thus, 

current practice bundles trade execution 

and clearing, including the posting of 

margin. As such, registered funds in 

effect pay the costs associated with the 

posting of margin either through fees or 

through inferior pricing. Enabling 

registered fund margin to be posted at 

FICC creates the potential for 

unbundling these activities, and for 

greater competition. 

The Commission agrees that 

facilitating the ability for a registered 

fund’s margin to be posted at FICC as an 

alternative to the sponsoring member 

satisfying all FICC margin requirements 

and passing the cost of doing so through 

to the registered fund may lower the 

cost of trading for the fund, and the 

Commission’s five year position 

discussed in part II.A.2.a.ii supra, will 

help facilitate the posting of registered 

fund margin to satisfy a U.S. Treasury 

securities CCA’s margin deposit 


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918See Futures Industry Association Principal 

Traders Group, Clearing a Path to a More Resilient 

Treasury Market, at 10 (July 2021), available at 

https://www.fia.org/sites/default/files/2021-07/FIAPTG_Paper_Resilient%20Treasury%20Market_

FINAL.pdf (‘‘FIA–PTG Whitepaper’’). 

919See id. at 7. 

920See part IV.B.3 supra. 

921 ICI Letter, supra note 85. 

922See supra note 446. 

923See MFA Letter, supra note 81, at 10. 

924See SIFMA/IIB Letter, supra note 37, at 12. 

requirements. The ability to separate the 

trade execution and clearing services of 

sponsoring a registered fund’s 

transactions with the CCA from the 

posting margin may facilitate done-away 

trading and enhance the ability of 

smaller CCA netting members to become 

sponsoring members or expand the 

capacity of sponsoring members in the 

Sponsored Service. 

iii. Facilitating Access to U.S. Treasury 

Securities CCAs 

The various access models currently 

available to access central clearing in 

the U.S. Treasury securities market may 

not meet the needs of the many different 

types of market participants who 

transact in U.S. Treasury securities with 

the direct members of a U.S. Treasury 

Securities CCA. The additional 

provision to Rule 17ad–22(e)(18)(iv)(C) 

requires a U.S. Treasury securities CCA 

to establish, implement, maintain and 

enforce certain written policies and 

procedures regarding access to clearance 

and settlement services, which, while 

not prescribing specific methods of 

access, is intended to ensure that all 

U.S. Treasury security CCAs have 

appropriate means to facilitate access to 

clearance and settlement services in a 

manner suited to the needs of market 

participants, including indirect 

participants. 

Some market participants have 

commented on the current practice of 

tying clearing services to trading under 

the sponsored clearing model.918 Under 

this model, the decision to clear the 

trades of an indirect participant appears 

to be contingent on that indirect 

participant trading with the direct 

participant sponsoring the indirect 

member.919 If the indirect participant is 

a competitor of the sponsoring direct 

participant and the direct participant 

has discretion on which trades to clear, 

the indirect participant may have 

difficulty accessing clearing. The rule 

requires the U.S. Treasury securities 

CCA to ensure appropriate means to 

facilitate access; for some current 

indirect participants this may imply 

direct membership (with a potential 

change in membership criteria); 

alternatively, requiring something 

similar to a ‘‘done-away’’ clearing model 

may be another means of facilitating 

clearing. 

Other considerations relate to the 

services available through the sponsored 

clearing model. For example, buy-side 

participants, currently engage in both 

triparty and bilateral repo, across 

multiple tenors (both overnight and long 

term), and on either side (selling or 

buying) of the transaction. At present, it 

appears that FICC direct members may 

be able to decline to submit a trade with 

counterparties who are not FICC direct 

members for central clearing at their 

discretion.920 Thus some indirect 

participants who are unable to enter 

into a similar transaction using a 

different FICC direct member who is 

willing to submit the trade for central 

clearing would not be able to access 

central clearing under the current 

practice. The rule requires FICC to 

create new policies and procedures to 

facilitate access to clearing for these 

participants. 

One commenter opposed the 

inclusion of registered funds because 

the current clearing framework is not 

sufficiently developed to support such a 

central clearing requirement.921 The 

commenter identified several issues to 

be addressed prior to adopting such a 

requirement, including improvements to 

the Sponsored Service and develop a 

‘‘done away’’ model (see part II.B.2 

supra for additional discussion of the 

issues raised by this commenter). 

In addition, the Rule 17ad– 

22(e)(18)(iv)(C) requires the CCA’s 

written policies and procedures be 

annually reviewed by the CCA’s board 

of directors to ensure that the CCA has 

appropriate means to facilitate access to 

clearance and settlement services of all 

eligible secondary market transactions 

in U.S. Treasury securities, including 

those of indirect participants. This 

review should help ensure that such 

policies regarding access to clearance 

and settlement services, including for 

indirect participants, are reviewed 

annually by the U.S. Treasury securities 

CCA’s board of directors. The annual 

review ensures that such policies and 

procedures be reviewed periodically 

and potentially updated to address any 

changes in market conditions. 

c. Amendments to Rules 15c3–3 and 

15c3–3a 

The rules and rule amendments being 

adopted and that are discussed above 

could cause a substantial increase in the 

margin broker-dealers must post to a 

U.S. Treasury securities CCA resulting 

from their customers’ cleared U.S. 

Treasury securities positions. Currently, 

Rules 15c3–3 and 15c3–3a do not 

permit broker-dealers to include a debit 

in the customer reserve formula equal to 

the amount of margin required and on 

deposit at a U.S. Treasury securities 

CCA. This is because no U.S. Treasury 

securities CCA has implemented rules 

and practices designed to segregate 

customer margin and limit it to being 

used solely to cover obligations of the 

broker-dealer’s customers. Therefore, 

increases in the amount of margin 

required to be deposited at a U.S. 

Treasury securities CCA as a result of 

the requirement to clear eligible 

secondary market transactions would 

result in corresponding increases in the 

need to use broker-dealers’ cash and 

securities to meet these requirements. 

The amendment to Rule 15c3–3a 

permits, under certain conditions, 

margin required and on deposit at a U.S. 

Treasury securities CCA to be included 

as a debit item in the customer reserve 

formula. This new debit item will offset 

credit items in the Rule 15c3–3a 

formula and, thereby, free up resources 

that could be used to meet the margin 

requirements of a U.S. Treasury 

securities CCA. The amendment allows 

a customer’s broker to use customer 

funds to meet margin requirements at 

the CCP generated by the customer’s 

trades, lowering the cost of providing 

clearing services. 

As discussed further below, we expect 

these changes to allow more efficient 

use of margin for cleared trades relative 

to the baseline. This change, alone, 

could create incentives for greater use of 

central clearing, and thus could promote 

the benefits described in previous 

sections. 

Overall, commenters supported the 

proposal to permit this debit item.922

One commenter stated that the practical 

effect of this change would be to allow 

broker-dealers to use margin collected 

from customers to satisfy margin 

requirements associated with such 

customers’ transactions, rather than 

using proprietary funds to finance 

customer margin as is the case today, 

and expressed its support for this 

amendment because it will free up 

broker-dealer resources by reducing the 

amount of proprietary funds needed to 

finance customer margin and therefore 

lower the cost of clearing, while 

continuing to protect customer funds.923

Another commenter stated that this 

change would reduce the costs of 

centrally clearing U.S. Treasury 

securities transactions and thus 

incentivize more central clearing of 

such transactions.924


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925See SIFMA/IIB Letter, supra note 37. 

926See SIFMA/IIB Letter, supra note 37, at 8. 

927See part IV.C.1 supra. 

928See SIFMA/IIB Letter, supra note 37, at 10. 

929SIFMA/AMG Letter, supra note 37, at 9. 

930See CCA Standards Proposing Release, supra 

note 8, 79 FR at 29587. 

931See Proposing Release, supra note 14 at 64612. 

See also part II.A.1.b supra. 

932See supra note 369. 

933 Id. at 119. The Commission previously stated 

that Congress has recognized in the Clearing 

Supervision Act that the operation of multilateral 

payment, clearing or settlement activities may 

reduce risks for clearing participants and the 

broader financial system, while also creating new 

risks that require multilateral payment, clearing or 

settlement activities to be well-designed and 

operated in a safe and sound manner. The Clearing 

Supervision Act is designed, in part, to create a 

regulatory framework to help deal with such risk 

management issues, which is generally consistent 

with the Exchange Act requirement that clearing 

agencies organize themselves in a manner to 

facilitate prompt and accurate clearance and 

settlement, safeguard securities and funds and 

protect investors. See CCA Standards Proposing 

Release, supra note 8, 76 FR at 14474; see also 12 

U.S.C. 5462(9), 5463(a)(2). 

2. Costs 

The Commission has, where 

practicable, attempted to quantify the 

economic effects it expects may result 

from the amendments and new rules 

that it is adopting. In some cases, 

however, data needed to quantify these 

economic effects is not currently 

available or depends on the particular 

changes made to the U.S. Treasury 

securities CCA policies and procedures. 

As noted below, in the Proposing 

Release the Commission was unable to 

quantify certain economic effects and 

solicited comment, including estimates 

and data from interested parties, which 

could help inform the estimates of the 

economic effects of the new rules and 

amendments. 

Significant costs of central clearing for 

market participants may include: (i) 

initial margin requirements (which in 

practice are held as ‘‘clearing fund’’ at 

FICC and subject to loss mutualization 

and the attendant adverse capital 

implications); (ii) clearing fees; (iii) 

obligations with respect to FICC’s 

capped contingency liquidity facility 

(‘‘CCLF’’); (iv) the operational build 

necessary to access central clearing 

(either as a direct participant or as an 

indirect participant); and (v) legal costs 

and time associated with onboarding 

customers for indirect central clearing, 

including, e.g., the need for Sponsoring 

Members to file UCC financing 

statements with respect to Sponsored 

Members under the Sponsored Member 

program. These costs are discussed in 

more detail below. Not all costs are 

expected to be borne by all participants 

and may depend on rules of the clearing 

agency. 

One commenter stated that the 

increased costs of centrally clearing U.S. 

Treasury security transactions may 

reduce liquidity and diversity in the 

Treasury market if firms reduce activity, 

leave the market, or if barriers to entry 

are too high, given the significant costs 

of clearing for market participants.925

The commenter identified several types 

of costs, including initial margin 

requirements, clearing fees, obligations 

with respect to FICC’s CCLF, the 

operational build necessary to access 

central clearing either as a direct or 

indirect participant, and legal costs and 

time associated with onboarding 

customers for indirect central clearing, 

including, e.g., the need for Sponsoring 

Members to file UCC financing 

statements with respect to Sponsored 

Members under the Sponsored Member 

program. The commenter stated that the 

impact of these costs would be 

disproportionately felt by small and 

mid-sized participants in the U.S. 

Treasury market, and that they would 

reduce diversity in the market and 

further increase concentration among 

market participants (which may 

increase systemic risk) if such 

participants leave the market.926

Increased transaction costs will, all 

else equal, reduce the expected return of 

a particular investment. If this were the 

only effect then the risk/return tradeoff 

would worsen and transaction volume 

could fall and liquidity deteriorate. 

However, central clearing also provides 

numerous benefits described above, 

including a possible decrease in 

transaction costs.927 Many of these 

benefits could be expected to 

particularly benefit small and mid-sized 

participants, for example the reduction 

in counterparty credit risk that can 

result from central clearing may 

particularly benefit smaller market 

participants. 

Commenters mentioned the potential 

concentration risk that would arise 

because of the requirement to clear 

eligible secondary market transactions, 

specifically because only one covered 

clearing agency currently provides such 

services. One commenter stated that 

concentrating such significant levels of 

settlement, operational, liquidity and 

credit risk in one institution means that 

were there operational or liquidity stress 

at FICC, widespread dysfunction in the 

Treasury markets could result.928 One 

commenter agreed that the existence of 

one covered clearing agency serving the 

U.S. Treasury market is highly 

problematic as it creates enormous 

concentration risk for market 

participants, and highlighted that, given 

the importance of the U.S. Treasury 

market to the overall global economy, 

there needs to be a compelling reason 

for increasing the concentration of 

cleared trading activity in a single 

clearing house particularly when there 

is no alternative or fallback venue 

should the clearing house experience a 

disruption to its operations or more 

significantly were to fail.929

The Commission also recognizes the 

risks associated with increased 

centralization of clearance and 

settlement activities. In particular, the 

Commission has previously noted that 

‘‘[w]hile providing benefits to market 

participants, the concentration of these 

activities at a covered clearing agency 

implicitly exposes market participants 

to the risks faced by covered clearing 

agencies themselves, making risk 

management at covered clearing 

agencies a key element of systemic risk 

mitigation.’’ 930

As discussed previously, currently 

only FICC provides CCP services for 

U.S. Treasury securities transactions, 

including outright cash transactions and 

repos.931 Were FICC unable to provide 

its CCP services for any reason then this 

could have a broad and severe impact 

on the overall U.S. economy. The FSOC 

recognized this when it designated FICC 

as a systemically important financial 

market utility in 2012,932 which subjects 

it to heightened risk management 

requirements and additional regulatory 

supervision, by both its primary 

regulator and the Board of Governors.933

In addition, FICC is subject to the 

Covered Clearing Agency Standards, 

which address the various types of risk 

that FICC faces as a CCP, including 

settlement, operational, liquidity, and 

credit risk. FICC also must meet its 

obligations under both Section 19(b) of 

the Exchange Act, as a self-regulatory 

organization, and Title VIII of the DoddFrank Act. The Commission believes 

that this overall supervisory framework, 

including the Covered Clearing Agency 

Standards, should help ensure that FICC 

continues to be subject to robust 

supervision and oversight and to be able 

to manage the risks presented to it, even 

those arising from increased Treasury 

clearing. 

a. Costs to FICC and Its Members of the 

Requirement To Clear Eligible 

Secondary Market Transactions 

The Commission believes that many 

of the direct costs of the rules and 

amendments it is adopting to the U.S. 

Treasury securities CCA are a result of 

new policies and procedures 

requirements, the costs of which are 

likely to be modest. This is because all 


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934See part II.C.2.c supra. 

935See DTCC/FICC Letter, supra note 33, at v. 

Although DTCC/FICC acknowledged there would 

be required system and other changes, it did not 

provide any estimate of the costs of such changes. 

936See part II.A.4 supra for a discussion of the 

requirement that a U.S. Treasury securities CCA 

establish, implement, maintain and enforce written 

policies and procedures reasonably designed to, as 

applicable, identify and monitor its direct 

participants’ required submission of transactions for 

clearing, including, at a minimum, addressing a 

direct participant’s failure to submit transactions. 

See part II.B.2 supra for a discussion of the 

requirement that U.S. Treasury securities CCA 

establish, implement, maintain and enforce written 

policies and procedures reasonably designed to, as 

applicable, ensure that it has appropriate means to 

facilitate access to clearance and settlement services 

of all eligible secondary market transactions in U.S. 

Treasury securities, including those of indirect 

participants, which policies and procedures the 

U.S. Treasury securities CCA’s board of directors 

reviews annually. 

937See part IV.C.2.c.ii, infra. 938To monetize the internal costs, the 

Commission staff used data from SIFMA 

publications, modified by Commission staff to 

account for an 1800 hour work-year and multiplied 

by 5.35 (professionals) or 2.93 (office) to account for 

bonuses, firm size, employee benefits and overhead. 

See SIFMA, Management and Professional Earnings 

in the Security Industry—2013 (Oct. 7, 2013); 

SIFMA, Office Salaries in the Securities Industry— 

2013 (Oct. 7, 2013). These figures have been 

adjusted for inflation using data published by the 

Bureau of Labor Statistics. 

939This figure was calculated as follows: 

Assistant General Counsel for 40 hours (at $518 per 

hour) + Compliance Attorney for 80 hours (at $406 

per hour) + Computer Operations Manager for 20 

hours (at $490 per hour) + Senior Risk Management 

Specialist for 40 hours (at $397 per hour) + 

Business Risk Analyst for 80 hours (at $305 per 

hour) = $103,280 × 2 respondent clearing agencies 

= $206,560. See part V.A infra. 

940This figure was calculated as follows: 

Compliance Attorney for 25 hours (at $406 per 

hour) + Business Risk Analyst for 40 hours (at $305 

per hour) + Senior Risk Management Specialist for 

20 hours (at $397 per hour) = $30,290 × 2 

respondent clearing agencies = $60,580. See part 

V.A infra. 

941 G–30 Report, supra note 5, at 14. 

942Participant family means that if a participant 

directly, or indirectly through one or more 

intermediaries, controls, is controlled by, or is 

under common control with, another participant 

then the affiliated participants shall be collectively 

deemed to be a single participant family. See Rule 

17ad–22(a). 

943See part IV.B.3 supra. 

944FICC Disclosure Framework 2021 at 88, 

available at https://www.dtcc.com/-/media/Files/ 

Downloads/legal/policy-and-compliance/FICC_

Disclosure_Framework.pdf. 

945See part IV.B.3 supra. 

946LCR is calculated as the ratio of High-Quality 

Liquid Assets (HQLA) divided by estimated total 

net cash outflow during a 30-day stress period. 

Because commitments by bank-affiliated dealers to 

the CCLF would increase the denominator of the 

ratio, a bank-affiliated dealer would have to 

increase HQLA to reach a required level of LCR. 

947See DTCC 2023 White Paper, supra note 107, 

at 3, 19. 

948 IDTA Letter, supra note 66, at 8–9. 

but one of these amendments and rules 

require the CCA to make certain changes 

to its policies and procedures. The other 

amends Rule 15c3–3a to permit margin 

required and on deposit at a U.S. 

Treasury securities CCA to be included 

as a debit item in the customer reserve 

formula for broker-dealers, subject to the 

conditions discussed above. As 

discussed above, the amendments to 

Rule 15c3–3a require several conditions 

to be met, including that the U.S. 

Treasury securities CCA calculate a 

separate margin amount for each 

customer on a gross basis.934 Comments 

submitted by the single current U.S. 

Treasury securities CCA acknowledged 

that it would need to make 

documentation, operational, 

organizational, and systems changes in 

order to comply with the proposal.935

Rule 17ad–22(e)(18)(iv) requires a 

U.S. Treasury securities CCA to 

establish, implement, maintain and 

enforce written policies and procedures, 

as discussed above.936 Because policies 

and procedures regarding the clearing of 

all eligible secondary market 

transactions entered into by a direct 

participant in a U.S. Treasury securities 

CCA are not currently required under 

existing Rule 17ad–22, the Commission 

believes that Rule 17ad–22(e)(18)(iv) 

may require a covered clearing agency 

to make substantial changes to its 

policies and procedures. The rule 

amendment contains similar provisions 

to existing FICC rules but will also 

impose additional requirements that do 

not appear in existing Rule 17ad–22. As 

a result, the Commission believes that a 

U.S. Treasury securities CCA will incur 

burdens of reviewing and updating 

existing policies and procedures in 

order to comply with the provisions of 

Rule 17ad–22(e)(18)(iv) and, in some 

cases, may need to create new policies 

and procedures.937

The Commission estimates that U.S. 

Treasury securities CCAs will incur an 

aggregate one-time direct cost of 

approximately $207,000 to create new 

policies and procedures.938 939 The rule 

also requires ongoing monitoring and 

compliance activities with respect to the 

written policies and procedures created 

in response to the rule. The Commission 

estimates that the ongoing activities 

required by Rule 17ad–22(e)(18)(iv) 

impose an aggregate ongoing cost on 

covered clearing agencies of 

approximately $61,000 per year.940

i. Costs Attendant to an Increase in 

CCLF 

The new rules and amendments being 

adopted will likely result in a 

significant increase in the volume of 

U.S. Treasury securities transactions 

submitted to clearing. The G–30 has 

reported that FICC differs qualitatively 

from other CCPs in that counterparty 

credit risks are relatively small but 

liquidity risks in the event of member 

defaults could be extraordinarily 

large.941 This is because net long 

positions generate liquidity obligations 

for FICC since, in the event of a member 

default, FICC would have to deliver 

cash in order to complete settlement of 

such positions with non-defaulting 

parties. Increased clearing volume of 

cash and repo transactions as a result of 

the rule could increase FICC’s credit 

and liquidity exposure to its largest 

participant family, including those 

participants acting as sponsors of nonmembers.942 FICC is obligated by 

Commission rule to maintain liquidity 

resources to settle all obligations of its 

largest participant family, in the event 

of default.943 These resources include 

the CCLF in which Members will be 

required to hold and fund their 

deliveries to an insolvent clearing 

member up to a predetermined cap by 

entering into repo transactions with 

FICC until it completes the associated 

close-out. This facility allows clearing 

members to effectively manage their 

potential financing requirements with 

predetermined caps.944

As reported in the CPMI–IOSCO 

disclosure by FICC for Q2 of 2023, the 

combined liquidity commitment by 

clearing members to the FICC’s CCLF 

was $86.3 billion for all repos and cash 

trades of U.S. Treasury and Agency 

securities. Since the inception of the 

CCLF in 2018, the CCLF has ranged in 

size from $82.5B to $108B.945

Commitments by bank-affiliated dealers 

to the CCLF count against regulatory 

liquidity requirements, including the 

Liquidity Coverage Ratio (LCR).946

Dealers affiliated with banks may satisfy 

their CCLF obligations using a guarantee 

from that affiliated bank but dealers not 

affiliated with banks may incur costs to 

obtain commitments to meet CCLF 

liquidity requirements. FICC states that 

when examining the impact of the rule 

amendments being adopted, its findings 

are inconclusive about the potential 

impact of the incremental indirect 

participant Treasury volume on FICC’s 

liquidity needs or its CCLF.947

The size and cost of a firm’s liquidity 

plan is tied not only to its own exposure 

at FICC, but also to the maximum 

exposure of the largest systemically 

important financial institution (‘‘SIFI’’) 

banks. One commenter stated that its 

members have reduced their portfolios 

as part of their CCLF liquidity plans.948

At the same time, SIFIs have increased 

the size of their portfolios, and 


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949 Id. 

950See supra note 27. 

951See part IV.C.1 supra for a discussion of the 

benefits of multilateral netting expected to result 

from higher volumes of centrally cleared 

transactions. 

952See DTCC 2023 White Paper, supra note 107, 

at 3, 16. FICC estimates that, in aggregate, there will 

be an incremental $500 billion of indirect 

participant Treasury repo activity, $520 billion of 

indirect participant Treasury reverse repo activity 

and $605 billion of indirect participant Treasury 

cash activity that could be submitted to FICC under 

the Proposing Release if it were adopted. The 

increase in margin is based on this estimate of 

increased central clearing activity. The estimates 

assume that all incremental indirect participant 

volume clears through one of FICC’s client clearing 

models that calculate margin on a gross basis. The 

estimates could decrease if the activity were cleared 

through one of FICC’s client clearing models that 

calculate margin on a net basis. See also note 377, 

supra, regarding margin methodologies. BNY 

Mellon estimates as much as $370 billion in 

additional Treasury cash activity and $2.8 trillion 

in additional Treasury repo and reverse repo 

activity that could be submitted to FICC although 

they note that exemptions could reduce these 

amounts. See BNY Mellon, Reassembly Required: 

Central Clearing could Reshape the U.S. Treasury 

Market (November 2023), available at https://

www.bnymellon.com/us/en/insights/all-insights/ 

central-clearing-us-treasury-market.html. 

953There is uncertainty among market 

participants about how much additional margin 

would have to be collected by FICC. For example, 

in an article in the Financial Times’ Alphaville, an 

analyst at Barclays is quoted as estimating the 

additional margin could be $45 billion. Bryce Elder, 

Repo reform is a $2tn mystery wrapped in an 

enigma of dodgy data, FT Alphaville (Oct.13, 2023), 

available at https://www.ft.com/content/518cbd3bb1ed-4c3e-bd5e-9ac5bee99d9f. The discussion 

concluding that the cost to netting members of the 

additional required fund deposits estimated by 

FICC applies to this alternative estimate as well. 

954See DTCC, F.A.Q. FICC—Risk Management, 

available at https://www.dtcc.com/USTclearing/-/ 

media/Files/Downloads/Microsites/TreasuryClearing/FICC-Risk-Management-FAQ.pdf (last 

visited Dec. 11, 2023). 

955 IDTA Letter, supra note 66, at 4. 

956MFA Letter at 11; SIFMA/IIB Letter, supra 

note 37, at 13; SIFMA AMG Letter at 8. 

957MFA Letter at 11. 

958See part II.A.1.0 supra. 

959 Id. 

960SIFMA/IIB Letter, supra note 37, at 9. 

correspondingly, the very risk that the 

CCLF was designed to reduce.949

ii. Costs of the Requirement To Clear 

Eligible Secondary Market Transactions 

in Terms of Increased Margining for 

Existing FICC Members 

As discussed above, the Commission 

recognizes that these amendments could 

cause an increase in the margin clearing 

members must post to a U.S. Treasury 

securities CCA resulting from the 

additional transactions that will be 

submitted for clearing as a result of 

these amendments. Although various 

SRO margin rules provide for the 

collection of margin for certain 

transactions in U.S. Treasury securities, 

the Commission understands that 

transactions between dealers and 

institutional customers are subject to a 

variable ‘‘good-faith’’ margin standard, 

which the Commission understands— 

based on its supervisory experience— 

can often result in fewer financial 

resources collected for margin 

exposures than those that would be 

collected if a CCP margin model, like 

the one used at FICC, were used.950

Mitigating the potential for higher 

margin requirements for transactions 

submitted for clearing at a U.S. Treasury 

securities CCA is the benefit of netting 

that results from additional centrally 

cleared transactions.951 As described in 

part IV.C.1 supra, this mitigant is likely 

to be especially significant in the case 

of IDB members. Also, potentially 

substantially mitigating the costs for 

clearing members is the ability for 

broker-dealers to include a debit in the 

customer reserve formula equal to the 

amount of margin required and on 

deposit at a U.S. Treasury securities 

CCA, as described in part II.C supra. 

Based on a survey of its members, 

FICC estimates that incremental indirect 

participant Treasury volume could 

result in a corresponding increase in 

Value at Risk (VaR) margin of 

approximately $26.6 billion across the 

FICC/GSD membership.952 953 Netting 

members’ required fund deposits to the 

clearing fund are primarily driven by a 

VaR charge; however, other margin 

charges may be collected when 

applicable.954 The cost to the netting 

members of the additional required fund 

deposits estimated by FICC is likely be 

less than this for three reasons. First, the 

definition of an eligible secondary 

market transaction with respect to cash 

transactions that is being adopted is 

narrower than that which was proposed 

and on which FICC’s estimates were 

based. Second, some fraction of the 

additional secondary market 

transactions that will be centrally 

cleared due to the new rules that would 

otherwise have been cleared bilaterally 

would also have been subject to margin 

requirements. Finally, since margin is 

only posted pending settlement, the cost 

to the posting entity is the opportunity 

cost of the funds. 

One commenter, on behalf of its 

broker-dealer members, stated that there 

is a transaction cost difference between 

current bilateral trades that are cleared 

using the triparty platform and an 

identical transaction that must be 

centrally cleared.955 The commenter 

further noted that this cost across a 

volume of trades is borne by clients of 

broker-dealers. The commenter stated 

that while the actual costs may vary 

across its membership, its members are 

currently paying about $3.00 per 

transaction settled on the triparty 

platform and bilaterally cleared over 

$7.00 for a similar tri-party transaction 

that was centrally cleared through FICC. 

The commenter stated that this is 

because FICC imposes intraday and endof-day position management charges, 

among other charges, making it 

materially cost prohibitive to transact 

with FICC and thereby increasing the 

cost of trading to the end customer. 

Besides the direct impact of these costs, 

which could limit trading, costs of 

central clearing may incentivize nondirect participants of a Treasury CCP to 

look for ways to trade away from direct 

participants in order to not have to 

centrally clear Treasury transactions, 

negatively affecting both liquidity and 

competition. 

Several commenters discussed 

facilitating cross-margining of indirect 

participants’ transactions in U.S. 

Treasury securities with those in U.S. 

Treasury futures as a method to lower 

costs of trading and thereby incentivize 

additional clearing.956 One commenter 

stated that cross-margining would lower 

costs for market participants by 

allowing them to apply margin across 

positions submitted for clearing through 

various clearinghouses. The commenter 

stated that this would ensure that a 

market participant can post margin 

adequate to support its positions 

without having to post margin in excess 

of regulatory requirements due to an 

inability to apply margin across 

platforms.957 As discussed above, other 

commenters made additional 

suggestions lowering costs by creating 

additional cross margining 

opportunities.958 The current crossmargining agreement between FICC and 

CME is part of the GSD rulebook, and 

any changes to it have to be filed with 

the Commission pursuant to Section 

19(b) of the Exchange Act. The 

Commission agrees that cross-margining 

can be beneficial to market 

participants.959 Rules requiring 

segregation of client margin should 

facilitate cross-margining. If such crossmargining were adopted, some costs of 

clearing would be mitigated. 

One commenter stated that central 

clearing can have procyclical effects in 

times of market stress due to the margin 

requirements of clearing agencies, 

further reducing liquidity when it is 

most needed.960 The commenter stated 

that, depending on the applicable 

margin models, clearing can be 

procyclical in times of market turmoil, 

as increased margin requirements 

(including intraday and ad hoc calls) 

drive demand for liquid assets, which, 


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961 Id. 

962 17 CFR 240.17ad–22(e)(6)(ii). 

963See, e.g., Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order Approving a 

Proposed Rule Change to Modify the Calculation of 

the MBSD VaR Floor to Incorporate a Minimum 

Margin Amount, Exchange Act Release No. 92303, 

at 32 (June 30, 2021) (discussing commenter’s 

concern regarding potential procyclical nature of a 

margin methodology change); Self-Regulatory 

Organizations; The Options Clearing Corporation; 

Order Granting Approval of Proposed Rule Change 

Concerning The Options Clearing Corporation’s 

Margin Methodology for Incorporating Variations in 

Implied Volatility, Exchange Act Release No. 95319, 

at 3 (July 19, 2022) (referencing the impact of a 

change to margin methodology on procyclicality of 

margin). 

964See, e.g., Self-Regulatory Organizations; 

National Securities Clearing Corporation; Order 

Approving a Proposed Rule Change to Enhance 

National Securities Clearing Corporation’s HaircutBased Volatility Charge Applicable to Illiquid 

Securities and UITs and Make Certain Other 

Changes to Procedure XV, Exchange Act Release 

No. 34–90502, at 56–59 (Nov. 24, 2020) (discussing 

commenter’s concerns regarding transparency of 

change to margin methodology). 

965See Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Notice of Filing of 

Proposed Rule Changes to the Required Fund 

Deposit Calculation in the Government Securities 

Division Rulebook, Exchange Act Release No. 82588 

(Jan. 26, 2018) (identifying the following specific 

parameter breaks: (i) a dollar threshold that 

evaluates whether a Netting Member’s Intraday VaR 

Charge equals or exceeds a set dollar amount (then 

set at $1,000,000) when compared to the VaR 

Charge that was included in the most recently 

collected Required Fund Deposit including, any 

subsequently collected Intraday Supplemental 

Fund Deposit; (ii) a percentage threshold, that 

evaluates whether the Intraday VaR Charge equals 

or exceeds a percentage increase (then set at 100%) 

of the VaR Charge that was included in the most 

recently collected Required Fund Deposit 

including, if applicable, any subsequently collected 

Intraday Supplemental Fund Deposit; (iii) the 

coverage target, that evaluates whether a Netting 

Member is experiencing backtesting results below 

the 99% confidence level). FICC has updated this 

information via Important Notices to its 

participants. See, e.g., Important Notice GOV1244– 

22, GSD Intraday Supplemental Fund Deposit 

Parameter Change (Apr. 11, 2022), available at 

https://www.dtcc.com/-/media/Files/pdf/2022/4/ 

11/GOV1244-22.pdf (raising the coverage target). 

966See also Proposed Rule, Covered Clearing 

Agency Resilience and Recovery and Wind-Down 

Plans, Exchange Act Release No. 97516 (May 17, 

2023), 88 FR 34708 (May 30, 2023) (proposing 

additional requirements with respect to intraday 

margin that CCAs require intraday monitoring of 

their exposures and specifying particular 

circumstances in which the CCA should make 

intraday margin calls). 

967 ICI Letter, supra note 85, at 30–31. 

968 IDTA Letter, supra note 66, at 5. This 

commenter’s stated concern regards the interplay 

between the ECP and gross margining and rests on 

the assumption that gross margining is required by 

the rule which is not the case. See supra part II.B.1. 

However, the ECP in its current form may impact 

the willingness of small and middle market broker 

dealers from sponsoring additional market 

participants. 

969 DTCC Letter, supra note 33, at 18–21. 

970 Id. at 20. 

in turn, increases the scarcity of those 

assets and further drives market stress. 

The commenter described FICC’s rules 

as allowing FICC to demand, at any time 

in its discretion, additional margin from 

its members in times of market 

volatility, including through intraday 

calls, to safeguard the clearing 

infrastructure.961

The Commission acknowledges that, 

in times of market stress, margin calls 

may increase to address the ongoing 

market volatility. This is by design, as 

margin models are built to be responsive 

to current market conditions. The 

Commission has specifically required 

that CCAs have the authority and 

operational capacity to make intraday 

margin calls in defined 

circumstances.962 This ability is 

important to the CCA’s ability to 

manage the risk and cover the credit 

exposures that its participants may 

bring to the CCA. When considering a 

CCA’s authority with respect to intraday 

margin, the Commission may consider 

its potential procyclicality.963 In 

addition, the Commission may consider 

the transparency of the margin model, 

such that market participants can 

understand when the CCA may make 

margin calls.964 In addition to the FICC 

rules cited by the commenter, FICC has 

provided additional transparency 

regarding how it determines the need 

for intraday margin calls, including the 

specific criteria that it uses to assess the 

need.965 FICC is also subject to Rule 

17ad–22(e)(23), which requires certain 

levels of public disclosure regarding 

FICC’s margin methodology and the 

costs of participating in FICC, as 

discussed further in part II.B.2 supra. 

The Commission’s ongoing 

consideration of the role and function of 

intraday margin calls, as well as market 

participants’ ability to understand such 

calls, obviates the need for separate 

study in connection with this 

proposal.966

iii. Other Costs 

Several commenters raised additional 

issues related to costs or limitations on 

benefits of the new rules and 

amendments. One commenter explained 

that registered funds’ access to the 

Treasury repo market could be restricted 

by the number or willingness of the 

FICC netting members to provide 

sponsoring services, with attending 

negative effect on the market 

liquidity.967

Commenters have raised concerns 

that increases in demand for the 

Sponsored Service may put pressure on 

existing sponsoring members and 

reduce their ability or willingness to 

onboard additional clients. Such 

outcomes may result in these market 

participants not being able to trade with 

some of the largest banks and broker 

dealers who are direct members of FICC 

unless they are able to access clearing 

using an alternative clearing model, 

reducing the number of potential 

counterparties, possibly raising trading 

costs. Demand for sponsored access to 

clearing could also drive up the price of 

providing such services and provide an 

incentive for new competitors to enter 

the market for providing sponsored 

clearing services. Alternatively, it is 

possible that as part of review of its 

access models and related policies and 

procedures required by Rule 17ad– 

22(e)(18)(iv)(C), that FICC may modify 

its access models in a way that results 

in improved access for market 

participants who otherwise be so 

affected. Another commenter explained 

the impact of the ECP charge in 

conjunction with FICC’s Sponsored 

Service, stating that ‘‘the combination of 

gross margining and ECP currently in 

use under the Sponsored Model, and 

what is prescribed in the Proposed Rule, 

effectively prevents smaller and middle 

market broker dealers from materially 

participating in the Treasury market.968

However, another commenter 

explained that, in addition to the 

Sponsored Service, the U.S. Treasury 

securities CCA offers a variety of way to 

access central clearing for indirect 

participants.969 For example, FICC’s 

Prime Brokerage Clearing and 

Correspondent Clearing models 

currently support clearing of 

transactions between indirect 

participants although, at present, these 

models are rarely used.970 As stated in 

the Proposing Release, the Commission 

continues to believe that the U.S. 

Treasury securities CCA generally 

should consider a wide variety of 

appropriate means to facilitate access to 

clearance and settlement services of all 

eligible secondary market transactions 

in U.S. Treasury securities, including 

those of indirect participants. In view of 

the critical services it provides, the U.S. 

Treasury securities CCA generally 

should seek to provide access in as 

flexible a means as possible, consistent 

with its responsibility to provide sound 

risk management and comply with other 

provisions of the Exchange Act, the 

Covered Clearing Agency Standards, 

and other applicable regulatory 

requirements. 

b. Costs to Non-Members of a U.S 

Treasury Securities CCA as a Result of 

the Requirement To Clear Eligible 

Secondary Market Transactions 

The requirement to clear eligible 

secondary market transactions requires 

that all repo transactions with a direct 

participant be centrally cleared and that 


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971The fee structure for FICC is described in its 

rulebook. See FICC Rules, supra note 19, at 307. 

972See FIA–PTG Whitepaper, supra note 918 (for 

a description of different client clearing models). 

973See MFA Letter at 17. 

974See id. 

certain cash transactions with a direct 

participant to be centrally cleared. The 

costs incurred by non-members of a U.S. 

Treasury securities CCA to comply with 

this requirement will depend on the 

policies and procedures developed by 

the CCA, as discussed in parts IV.C.2.a 

supra and IV.C.2.d infra. 

As stated above, the Commission 

believes that these amendments will 

increase central clearing in the U.S 

Treasury securities market. Transactions 

that are not currently submitted for 

central clearing but would be under the 

amendments being adopted will be 

subject to certain transaction, position, 

and other fees as determined by the U.S. 

Treasury securities CCA.971

Market participants who enter into 

eligible secondary market transactions 

with members of U.S. Treasury 

securities CCAs who do not have access 

to clearing may incur costs related to 

establishing the required relationships 

with a clearing member in order to 

submit the eligible transactions for 

clearing. These market participants may 

also incur additional costs related to the 

submission and management of margin. 

It is possible that such market 

participants may seek alternative 

counterparties that are not U.S. Treasury 

securities CCA members in order to 

avoid incurring these costs. 

As discussed in the baseline, the 

majority of repo and cash transactions 

in the dealer-to-customer segment are 

not centrally cleared. This differentiates 

the U.S. Treasury securities market from 

the markets for swaps and for futures. 

There is currently some clearing of 

customer repo; the majority of this 

clearing is ‘‘done-with’’—the clearing 

broker and the counterparty are one and 

the same. However, in the swaps and 

futures markets, and in the equities 

market, clearing is ‘‘done-away’’— 

meaning that the clearing broker may be 

other than the trading counterparty. 

Market participants have identified 

costs with the done-with model. Market 

participants in the secondary market for 

U.S Treasury securities that will be 

required to be centrally cleared could 

incur direct costs for arranging clearingrelated legal agreements with every 

potential counterparty. Depending on 

the customer there may be a large 

number of such arrangements. 

There are indirect costs arising when 

a trading counterparty is a competitor. 

For example, the pricing and offering of 

clearing services may be determined by 

forces other than the costs and benefits 

of the clearing relationship itself, such 

as the degree of competition between 

the counterparties. Other economic 

arrangements facilitating customer 

clearing are possible and may develop, 

as in other markets.972 One such 

arrangement is direct CCA membership. 

However, for smaller entities, CCA 

membership may not be economically 

viable, and for some entities, legal 

requirements may prevent direct 

membership. Another possibility is 

seeking out counterparties other than 

CCA members. The ‘‘done away’’ 

structure of clearing has worked 

effectively in other markets, and, if it 

were to develop so that all market 

participants with demand could trade 

using the ‘‘done-away’’ structure, would 

significantly mitigate these costs. 

Some participants may not currently 

post margin for cash clearing and may 

be now required to do so, depending on 

the form the clearing relationship takes. 

There may be costs associated with the 

transfer of margin. An institutional 

investor self-managing its account 

would instruct its custodian to post 

margin with the CCA on the execution 

date, and post a transaction in its 

internal accounting system showing the 

movement of margin. The day after 

trade execution, the investor would 

oversee the return of margin from FICC, 

with an attendant mark of a transaction 

on the investor’s internal accounting 

system. Similar steps would occur for 

an institutional investor trading through 

an investment adviser, though in this 

case the adviser might instruct the 

custodian and mark the transaction, 

depending on whether the adviser has 

custody. The institutional investor 

might also pay a wire fee associated 

with the transfer of margin. 

Besides the costs of developing new 

contracts with counterparties to support 

central clearing, there will also be a cost 

to non-CCA members associated with 

margin, to the extent that more margin 

is required than in a bilateral agreement. 

This cost of margining is analogous to 

that borne by CCA members and is 

discussed further above. 

As a result of the rule, a potential cost 

to money market fund participants that 

face FICC as a counterparty is that the 

funds’ credit ratings could be affected if 

FICC becomes a substantially large 

counterparty of these participants, 

which could be interpreted by credit 

models and ratings methodologies as a 

heightened concentration risk factor. As 

concentration risk in a CCP is typically 

not viewed in the same way as 

concentration risk with a bilateral 

trading party, credit rating agencies may 

quickly adapt their methods to 

distinguish the CCA from a 

conventional counterparty. In the 

absence of such changes at credit rating 

agencies, money market fund 

participants may find it necessary to 

either alter their investment strategies to 

substitute purchases of Treasury 

securities for repo or to enter into repo 

transactions with entities that are not 

direct members of a Treasury securities 

CCA. 

As discussed above, increased 

demand for the Sponsored Service and 

the existence of compliance and capital 

costs for sponsoring members may limit 

the ability of some market participants 

to access clearing through the 

Sponsored Service. Unless these market 

participants are able to access clearing 

through alternative clearing models, 

they may be unable to trade repo with 

some of the largest banks and broker 

dealers who are direct members of FICC, 

reducing the number of potential 

counterparties, and possibly resulting in 

inferior pricing for such market 

participants. Alternatively, it is possible 

that as part of review of its access 

models and related policies and 

procedures required by Rule 17ad– 

22(e)(18)(iv)(C), that FICC may modify 

its access models in a way that results 

in improved access for market 

participants who otherwise be so 

affected. 

One commenter argued that including 

triparty repos in the definition of an 

eligible secondary market transaction 

would likely impair the cash and 

collateral management processes of 

hedge funds and alternative asset 

managers.973 Specifically, the 

commenter suggested that such firms 

currently conduct same-day bilateral 

transactions that they would not be able 

to conduct with a direct participant of 

a U.S. Treasury securities CCA required 

to centrally clear its repo 

transactions.974

The Commission disagrees with this 

commenter. In its supervisory capacity, 

the Commission is aware that registered 

funds, hedge funds, and alternative 

asset managers currently conduct 

centrally cleared triparty repo 

transactions. For example, the 

Commission is aware that numerous 

hedge funds conduct such same-day 

transactions as sponsored members of 

FICC. Therefore, the existing operational 

infrastructure supports centrally cleared 

triparty repo transactions. 

As discussed above, two commenters 

asked the Commission to adopt an 

exemption that would allow FCMs to 

continue to engage in eligible secondary 


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975See supra note 901 and referencing text. 

976FIA Letter, supra note 200, at 4–5 (discussing 

17 CFR 1.25(b)). 

977FIA Letter, supra note 200, at 4–5 (discussing 

17 CFR 1.25(a)). 

978FIA Letter, supra note 200, at 5 (discussing 17 

CFR 1.25(d)(2))). 

979See part II.B.1 supra. 

980For general information and statistics 

regarding the Sponsored Service, see DTCC, 

Sponsored Service, supra note 669. The Sponsored 

Service also allows the submission of cash 

transactions; however, at this time, the service is 

generally used only for U.S. Treasury repo 

transactions. 

981This figure was calculated as follows: 

Assistant General Counsel for 20 hours (at $518 per 

hour) + Compliance Attorney for 40 hours (at $406 

per hour) + Computer Operations Manager for 12 

hours (at $490 per hour) + Senior Programmer for 

20 hours (at $368 per hour) + Senior Risk 

Management Specialist for 25 hours (at $397 per 

hour) + Senior Business Analyst for 12 hours (at 

$305 per hour) = $53,425 × 2 respondent clearing 

agencies = $106,850. See part V.B infra. 

982This figure was calculated as follows: 

Compliance Attorney for 25 hours (at $406 per 

hour) + Business Risk Analyst for 40 hours (at $305 

per hour) + Senior Risk Management Specialist for 

20 hours (at $397 per hour) = $30,290 × 2 

respondent clearing agencies = $60,580. See part 

V.B infra. 

983FICC/DTCC Letter, supra note 33, at 18. 

984 ICE Letter, supra note 85, at 3. 

market transactions in U.S. Treasury 

securities outside of central clearing.975

For the reasons discussed above in part 

II.A.2.a.iv supra, the Commission is not 

excluding repo transactions between 

FICC netting members and FCMs from 

the definition of eligible secondary 

market transactions. However, the 

Commission recognizes that the tension 

between the rules governing FCMs and 

the rule amendments being adopted 

may raise costs for FCMs if it restricts 

the choice of models that can be used 

to access central clearing or reduces the 

number of potential counterparties. For 

example, one of the commenters 

explained that FCMs are permitted to 

invest customer funds in certain 

securities determined by the CFTC to be 

‘‘consistent with the objectives of 

preserving capital and maintaining 

liquidity.’’ 976 The commenter stated 

that permitted investments include, 

among other things, U.S. Treasury 

securities, and investments with U.S. 

Treasury securities may be made by 

either direct purchase or sale or by 

entering into repo transactions.977 The 

commenter further explained that, for 

repo transactions, an FCM’s ‘‘permitted 

counterparties are limited to a bank 

. . . , securities broker-dealer, or 

government securities dealer registered 

with the [Commission],’’ and a clearing 

agency is not a permitted 

counterparty.978 If an FCM is unable to 

clear repo transactions then it would not 

be able to trade with FICC netting 

members, reducing the number of 

potential counterparties available to it. 

c. Other Changes to Covered Clearing 

Agency Standards 

i. Netting and Margin Practices for 

House and Customer Accounts 

The amendments to Rule 17ad– 

22(e)(6)(i) require a U.S. Treasury 

securities CCA to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to, 

as applicable, calculate, collect, and 

hold margin amounts from a direct 

participant for its proprietary U.S. 

Treasury securities positions, separately 

and independently from margin 

calculated and collected from that direct 

participant in connection with U.S. 

Treasury securities transactions by an 

indirect participant that relies on the 

services provided by the direct 

participant to access the covered 

clearing agency’s payment, clearing, or 

settlement facilities.979 The 

amendments to Rule 17ad–22(e)(6)(i) 

contain similar provisions to existing 

FICC rules, specifically with respect to 

its Sponsored Member program, but also 

impose additional requirements that do 

not appear in existing Rule 17ad–22. As 

a result, the Commission believes that a 

U.S. Treasury securities CCA will incur 

burdens of reviewing and updating 

existing policies and procedures in 

order to comply with the amendments 

to Rule 17ad–22(e)(6) and, in some 

cases, may need to create new policies 

and procedures.980

The Commission estimates that U.S. 

Treasury securities CCAs will incur an 

aggregate one-time cost of 

approximately $106,850 to create new 

policies and procedures.981 The 

amendments to the rule also require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the rule. The Commission 

estimates that the ongoing activities 

required by the amendments to Rule 

17ad–22(e)(6) will impose an aggregate 

ongoing cost on covered clearing 

agencies of approximately $60,580 per 

year.982

ii. Facilitating Access to U.S. Treasury 

Securities CCAs 

Rule 17ad–22(e)(18)(iv)(C) requires a 

U.S. Treasury securities CCA to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to, as applicable, 

ensure that it has appropriate means to 

facilitate access to clearance and 

settlement services of all eligible 

secondary market transactions in U.S. 

Treasury securities, including those of 

indirect participants, which policies 

and procedures the U.S. Treasury 

securities CCA’s board of directors 

reviews annually. 

The rule requires a U.S. Treasury 

securities CCA to establish, implement, 

maintain and enforce written policies 

and procedures. The Commission 

believes that a respondent U.S. Treasury 

securities CCA will incur burdens of 

reviewing and updating existing 

policies and procedures and will need 

to create new policies and procedures in 

order to comply with the provisions of 

Rule 17ad–22(e)(18)(iv)(C). These costs 

are included in the costs of creating new 

policies and procedures associated with 

Rule 17ad–22(e) discussed above. 

Commenters generally supported the 

Commission’s attention to the need for 

appropriate access to the U.S. Treasury 

securities CCA, and several commenters 

specifically agreed that the Commission 

should not prescribe any particular 

model. One commenter stated that the 

commenter ‘‘fully agree[s] with the 

Commission that flexibility and an 

open-access approach are critical to 

facilitating access to clearing. [ ], 

dictating a single model of clearing 

would close off clearing to many market 

participants, force indirect participants 

to bear additional clearing costs, 

increase concentration, reduce 

competition, and negatively impact 

market liquidity.’’ 983 In addition, 

another commenter supported the 

proposal to rely on the clearing agencies 

to develop the model and infrastructure 

and that clearing agencies should have 

flexibility to innovate in this area. This 

commenter also noted many market 

stakeholders may prefer an agency 

model or some form of limited 

membership with a clearing agency.984

Another commenter stated that the 

Commission should encourage FICC to 

improve the existing Sponsored Service 

in several ways: (1) to further develop 

a ‘‘give up’’ structure to facilitate best 

execution (and accommodate ‘‘doneaway’’ trades), noting that FICC’s prime 

broker/correspondent clearing 

infrastructure could be leveraged to 

develop a give up model outside of 

prime brokerage (which would need to 

provide for standardized documentation 

that facilitates additions and deletions 

of approved brokers, agreed-upon terms 

for rejection of trades by a sponsoring 

member and centralized storage of 

delegations); and (2) to add a feature 

permitting (but not requiring) sponsored 

members to directly support their 

obligations to FICC through margin 

posting rather than by paying fees to the 

sponsoring member reflecting the cost of 


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985 ICI Letter, supra note 85. 

986See AIMA Letter, supra note 81; CME Letter, 

supra note 81; DTCC/FICC Letter, supra note 33; 

ICE Letter, supra note 33; MFA Letter, supra note 

81; ISDA Letter, supra note 391; SIFMA AMG 

Letter, supra note 35. 

987See AIMA Letter, supra note 81; MFA Letter, 

supra note 81; SIFMA/IIB Letter supra note 37. 

988See CME Letter, supra note 81; SIFMA AMG 

Letter, supra note 35. 

989See DTCC/FICC Letter, supra note 33. 

990See SIFMA AMG Letter, supra note 35. 

991See ISDA Letter, supra note 391. 

992 DTCC/FICC Letter II, supra note 503. See also 

part II.C.4.iii, supra for additional discussion of the 

issue raised by this comment letter. 

993 Id. 

994One such source is FICC’s CCLF. See part 

IV.B.4, supra and part IV.C.2.a.i, supra. See also 

supra note 688, and referencing text regarding the 

Commission’s requiring FICC to hold qualifying 

liquid resources sufficient to meet a cover-1 

standard. 

995MFA Letter 2, supra note 600, at 3; see ICI 

Letter 2, supra note 600, at 3 (stating that the 

Commission should consider ‘‘practical realities 

such as the implementation timelines as well as 

operational and compliance requirements’’). 

996See supra note 600. As stated above, 

commenters also specifically suggested the 

Commission consider potential overlapping 

compliance costs between the final rule and certain 

proposing releases. See supra note 608. These 

proposals have not been adopted and thus have not 

been considered as part of the baseline here. To the 

extent those proposals are adopted in the future, the 

baseline in those subsequent rulemakings will 

reflect the regulatory landscape that is current at 

that time. 

997See supra notes 602 to 607 (summarizing 

compliance dates). 

998The Rule 10c–1a Adopting Release will 

require only persons who agree to a covered 

securities loan to report that activity. The Short 

Position Reporting Adopting Release will require 

only institutional investment managers that meet or 

exceed certain reporting thresholds to report short 

position and short activity data for equity securities. 

Continued 

its clearing fund contributions.985 As 

stated in the Proposing Release, the 

Commission believes that U.S. Treasury 

securities CCAs should continue to 

develop access models that would best 

serve the needs of market participants, 

and the Commission encourages such 

CCAs to take all appropriate steps to 

accommodate ‘‘done-away’’ trades. The 

Commission would consider any 

proposals in this regard consistent with 

its obligations under Section 19 of the 

Exchange Act. 

d. Amendments to Rules 15c3–3 and 

15c3–3a 

The amendment to Rule 15c3–3a 

permits, under certain conditions, 

margin required and on deposit at a U.S. 

Treasury securities CCA to be included 

as a debit item in the customer reserve 

formula. This new debit item offset 

credit items in the Rule 15c3–3a 

formula and, thereby, free up resources 

that could be used to meet the margin 

requirements of a U.S. Treasury 

securities CCA. The amendment allows 

a customer’s broker to use customer 

funds to meet margin requirements at 

the CCP generated by the customer’s 

trades, lowering the cost of providing 

clearing services. Broker-dealers may 

incur costs from updating procedures 

and systems to be able to use customer 

funds to meet customer margin 

requirements. However, the amended 

rule does not require that the brokerdealer does so. 

Overall, commenters supported the 

proposal to permit this debit item.986

Commenters stated that the proposed 

amendments would make clearing more 

efficient and free up resources that 

could be used to meet the CCA’s margin 

requirements, while continuing to 

protect customer funds.987 Commenters 

also stated that the proposal would 

incentivize central clearing.988 A 

commenter stated that the proposal 

would extend to margin held at a U.S. 

Treasury securities CCA the same 

treatment as margin posted to other 

clearing organizations.989 As a result, 

this commenter stated that the proposal 

would facilitate greater access to 

clearing and eliminate an undue burden 

on competition. Another commenter— 

in supporting the proposal—stated that 

it does not make sense that margin 

cannot be freely rehypothecated from a 

customer through a broker-dealer to a 

U.S. Treasury securities CCA without 

the broker-dealer receiving a beneficial 

adjustment as part of its customer 

reserve formula calculation.990 For 

greater and more efficient client 

clearing, another commenter 

encouraged the Commission to adopt 

this proposal irrespective of whether the 

requirement to clear eligible secondary 

market transactions is adopted.991

One commenter sought clarification 

that the conditions of Rule 15c3–3 

would not preclude a U.S. Treasury 

securities CCA from entering into a 

repurchase transaction involving 

customer cash margin, so long as the 

purchased securities under such 

repurchase transaction consist of U.S. 

Treasury securities held in a segregated 

account for the benefit of customers and 

satisfy certain other requirements.992

The commenter provided a summary of 

potential protections that could be put 

in place to ensure that—if a U.S. 

Treasury securities CCA uses cash in the 

broker-dealer’s segregated account for 

liquidity purposes—the cash would be 

protected through collateral comprising 

U.S. Treasury securities deposited into 

the account and other measures.993 As 

discussed in part II.C.4.iii, supra the 

Commission would need to review a 

more detailed plan for how the cash will 

be used and customers protected before 

taking any action on the commenter’s 

request. The Commission acknowledges 

that the degree to which costs that are 

incurred in order to maintain sufficient 

qualifying liquid resources are directly 

born by various participants depends in 

part on the use of customer margin as 

a qualifying liquid resource.994

e. Other Costs 

One commenter stated that the 

Commission should consider that ‘‘the 

sheer number and complexity of the 

Proposals, when considered in their 

totality, if adopted, would impose 

staggering aggregate costs, as well as 

unprecedented operational and other 

practical challenges.’’ 995 But, consistent 

with its long-standing practice, the 

Commission’s economic analysis in 

each adopting release considers the 

incremental benefits and costs for the 

specific rule—that is the benefits and 

costs stemming from that rule compared 

to the baseline. In doing so, the 

Commission acknowledges that in some 

cases resource limitations can lead to 

higher compliance costs when the 

compliance period of the rule being 

considered overlaps with the 

compliance period of other rules. In 

determining compliance periods, the 

Commission considers the benefits of 

the rules as well as the costs of delayed 

compliance periods and potential 

overlapping compliance periods. 

In this regard, some commenters 

mentioned the proposals which 

culminated in the recent adoptions of 

the May 2023 SEC Form PF Amending 

Release, the Beneficial Ownership 

Amending Release, the Private Fund 

Advisers Adopting Release, the Rule 

10c–1a Adopting Release, the Short 

Position Reporting Adopting Release, 

and the Securitizations Conflicts 

Adopting Release.996 The Commission 

acknowledges that there are compliance 

periods for certain requirements of these 

rules that overlap in time with the final 

rule, which may impose costs on 

resource constrained entities affected by 

multiple rules.997

However, the Commission does not 

think these increased costs from 

overlapping compliance periods will be 

significant for several reasons. First, the 

number of market participants who 

directly or indirectly engage in eligible 

secondary market transactions in 

Treasury securities that will be subject 

to the final rule and who will be subject 

to one or more of the other recently 

adopted rules could be limited based on 

whether those participants’ activities 

fall within the scope of the other 

rules.998 Second, for the reasons 


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2818 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

And the Securitizations Conflicts Adopting Release 

will affect only certain entities—and their affiliates 

and subsidiaries—that participate in securitization 

transactions. See supra notes 605 to 607. In 

addition, FICC will not be affected by any of the six 

rules identified by commenters. 

999See part III supra. 

1000See supra notes 602 to 607. 

1001The final rule mitigates costs relative to the 

proposal in the following ways. First, the scope of 

the definition of eligible secondary market 

transaction in Rule 17ad–22(a) has been revised to 

exclude repos by other clearing organizations, repos 

by state and local governments, and inter-affiliate 

repos. Second, the scope of the definition of eligible 

secondary market transaction has been modified to 

no longer include cash transactions by hedge funds 

and leveraged accounts. Third, the Commission is 

modifying paragraph (a) of Note H to Rule 15c3– 

3a to permit ‘‘qualified customer securities’’ to be 

used to meet the customer position margin 

requirement in addition to cash and U.S. Treasury 

securities. Finally, to reduce operational burdens on 

broker-dealers, the Commission is removing the 

proposed requirement to return excess collateral 

within one business day that was part of fifth rule 

set—identified in paragraph (b)(2)(v) of proposed 

Note H. 

1002Maureen O’Hara and Mao Ye, Is Market 

Fragmentation Harming Market Quality?, 100 J. Fin. 

Econ. 459 (2011). 

1003FIA–PTG Whitepaper, supra note 918. 

1004See supra note 31. 

1005See G–30 Report, supra note 5, at 13. 

1006 Id. 

1007See Y.C. Loon & Z.K. Zhong, The Impact of 

Central Clearing on Counterparty Risk, Liquidity, 

and Trading: Evidence From the Credit Default 

Swap Market, 112 J. Fin. Econ. 91 (2014). 

1008See 2021 IAWG Report, supra note 4, at 30; 

Duffie, supra note 27, at 16; G–30 Report, supra 

note 5, at 13. 

1009Letter from Evan Gerhard, President and CEO 

of ASL Capital Markets (Dec. 23, 2022) and letter 

from SIA Partners (Aug. 31, 2023) at 22 (‘‘SIA 

Partners 2’’). 

1010 IDTA Letter, supra note 66, at 4; see also 

FICC Rule 4, section 14, supra note 19. 

1011 IDTA Letter, supra note 66, at 5. 

1012 IDTA Letter, supra note 66, at 5. 

1013The rule does require that a proprietary 

position not be netted against a customer position. 

This could enhance competition because dealers 

with customers are no longer advantaged relative to 

those without. It enhances the unbundling of 

discussed above, we have adopted a 

phased approach to implementation and 

compliance based on input from 

commenters.999 Further, all of the other 

rules have long compliance periods, 

which is expected to facilitate planning, 

preparation and investment and thereby 

limit the cost of overlapping compliance 

periods.1000 Third, commenters’ 

concerns about the costs of overlapping 

compliance periods were raised in 

response to the proposal and as 

discussed above, we have taken steps to 

reduce costs of the final rule.1001

3. Effect on Efficiency, Competition, and 

Capital Formation 

a. Efficiency 

i. Price Transparency 

As mentioned in part IV.B supra, the 

majority of trading in on-the-run U.S. 

Treasury securities in the interdealer 

market occurs on electronic platforms 

operated by IDBs that bring together 

buyers and sellers anonymously using 

order books or other trading facilities 

supported by advanced electronic 

trading technology. These platforms are 

usually run independently in the sense 

that there is no centralized market for 

price discovery or even a ‘‘single virtual 

market with multiple points of 

entry’’.1002 As a result, pre-trade 

transparency is suboptimal: quotations 

and prices coming from and going to an 

IDB may be distributed unevenly to 

market participants who have a 

relationship with that IDB. Efficiency, 

which measures the degree to which 

prices can quickly respond to relevant 

information, is impaired because of this 

market fragmentation; some areas of the 

market may not reflect information 

passed on by prices in other sectors. 

Central clearing can promote price 

discovery in several ways: first, the 

clearing agency itself becomes a source 

of data; 1003 and second, the 

accessibility of central clearing could 

promote all-to-all trading as previously 

mentioned in part II.A.1 supra, which 

should reduce the obstacles to 

information flow that come from 

fragmentation.1004

ii. Operational and Balance Sheet 

Efficiency 

Greater use of central clearing could 

also increase the operational efficiency 

of trading U.S. Treasury securities. 

Central clearing replaces a complex web 

of bilateral clearing relationships with a 

single relationship to the CCP. In that 

sense, the complex network of 

relationships that a market participant 

may have for bilaterally clearing U.S. 

Treasury securities would shrink, with 

attendant reductions in paperwork, 

administrative costs, and operational 

risk. 

Central clearing also enhances 

balance sheet efficiency, allowing firms 

to put capital to more productive uses. 

The amendments to Rule 15c3–3a 

permit, under certain conditions, 

margin required and on deposit at a U.S. 

Treasury securities CCA to be included 

as a debit item in the customer reserve 

formula. This new debit item offset 

credit items in the Rule 15c3–3a 

formula and, thereby, free up resources 

that could be used to meet the margin 

requirements of a U.S. Treasury 

securities CCA. The amendment allows 

a customer’s broker to use customer 

funds to meet margin requirements at 

the CCP generated by the customer’s 

trades, lowering the cost of providing 

clearing services. Though these lower 

costs may or may not be fully passed on 

to customers, in a competitive 

environment the Commission expects 

that at least some of these savings will 

pass through to customers. 

b. Competition 

With respect to the market for 

execution of U.S. Treasury securities by 

broker-dealers, increased central 

clearing can enhance the ability of 

smaller participants to compete with 

incumbent dealers.1005 Similarly, 

decreased counterparty credit risk—and 

potentially lower costs for 

intermediation—could result in 

narrower spreads, thereby enhancing 

market quality.1006 While estimating 

this quantitatively is difficult, research 

has demonstrated lower costs associated 

with central clearing in other 

settings.1007 Moreover, increased 

accessibility of central clearing in U.S. 

Treasury securities markets could 

support all-to-all trading, which should 

further improve competitive pricing, 

market structure and resiliency.1008

Commenters suggest that costs of 

clearing may be disproportionately felt 

by small and mid-size participants in 

the Treasury market.1009 An additional 

commenter stated that the proposed 

separation of house and customer 

margin would negatively impact small 

and mid-size broker-dealers who are 

disproportionately affected by FICC’s 

Excess Capital Premium (‘‘ECP’’) charge, 

which is a margin add-on that collects 

a premium when a member’s VaR 

charge exceeds the member’s Net 

Capital, net assets or equity capital (as 

applicable to that member based on its 

type of regulation).1010 The commenter 

explained the impact of the ECP charge 

in conjunction with FICC’s Sponsored 

Service, stating that ‘‘the combination of 

gross margining and ECP currently in 

use under the Sponsored Model, and 

what is prescribed in the Proposed Rule, 

effectively prevents smaller and middle 

market broker dealers from materially 

participating in the Treasury market.1011

The commenter states that the ultimate 

effect of the ECP charge is exacerbated 

when customer/institutional 

counterparty margin is included in the 

calculation, and the surcharge prevents 

smaller independent broker-dealers 

from sponsoring institutional 

counterparties/customers.1012 The 

commenter’s concerns regarding the 

interplay between purported required 

gross margining and the ECP charge 

rests on the assumption that gross 

margin is required under the proposal, 

which, as discussed in part II.B.1 supra, 

is not the case.1013 With respect to the 


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clearing and trading services described in part 

IV.C.1 supra. 

1014Exchange Act Section 19(b); see also Section 

19(c). 

1015See IDTA Letter, supra note 66, at 7. 

1016See DTCC 2023 White Paper, supra note 107, 

at 6 (discussing that the proposal would allow the 

option to calculate and collect margin associated 

with customer activity on a gross or net basis 

depending on the client clearing model selected by 

the member and stating that FICC would offer 

options via different access models that would 

allow those parties to balance the benefits of netting 

and segregation in different ways). 

1017 IDTA Letter 2, supra note 829, at 2. 

1018See Comm. on Payment and Settlement Sys. 

and Tech. Comm. Int’l Org. Sec. Comms, Principles 

for Financial Market Infrastructures (Apr. 16, 2012), 

available at https://www.bis.org/cpmi/publ/ 

d101a.pdf. 

1019See generally Nadia Linciano et al., The 

Clearing and Settlement Industry: Structure 

Competition and Regulatory Issues (Italian Secs. & 

Exch. Comm’n Research Paper 58, May 2005), 

available at https://www.ssrn.com/abstract=777508 

(concluding in part that the core services offered by 

the clearance and settlement industry tend toward 

natural monopolies because the industry can be 

characterized as a network industry, where 

consumers buy systems rather than single goods, 

consumption externalities exist, costs lock-in 

consumers once they choose a system, and 

production improves with economies of scale). 

1020See CCA Standards Proposing Release, supra 

note 8. See also ICE Letter, supra note 31, at 2. 

1021For a discussion of cost pass-through, 

including when there lacks competition, see for 

example, RBB Econ., Cost pass-through: theory, 

measurement and policy implications, A Report 

prepared for the Office of Fair Trading (2014), 

available at https://www.gov.uk/government/ 

publications/cost-pass-through-theorymeasurement-and-policy-implications. 

1022See parts IV.B, supra. 

1023See supra note 1003. 

1024See supra notes 604 to 607. 

ECP charge on its own, the Commission 

is not taking any action with respect to 

the ECP charge as part of adopting these 

new requirements. The ECP charge is 

part of FICC’s existing rulebook, which 

is an SRO rule, and any change to that 

rulebook would be made pursuant to the 

proposed rule change process under 

Section 19(b).1014

While the rule does not require gross 

margining of customers, the rule does 

require members to clear additional 

transactions relative to the baseline. 

Because the dominant clearing model is 

the sponsored model, and because the 

sponsored model does use gross 

margining, which implicates the ECP, 

the Commission acknowledges the 

commenter’s concerns regarding 

possible competitive effects on the 

Treasury market. Specifically, the 

existence of the ECP links the costs of 

sponsorship with the capital of the 

entity, and hence sponsorship is more 

economical for some than for others. 

Because current market practice is to 

bundle execution with clearing, some 

entities may face additional hurdles in 

trade execution in that it may be 

uneconomical for them to serve as 

sponsoring members for a large dollar 

value of trades. 

There are two factors that mitigate any 

potential impact of the ECP on 

competitiveness. First, there are 

alternatives to the sponsored clearing 

model that do not require gross 

margining. The commenter cites one 

such model, and notes ambiguity as to 

whether this model can indeed be used 

by independent dealers.1015 The 

Commission acknowledges the 

commenter’s concern but notes that 

FICC recently has indicated that it 

intends to make available client clearing 

models that do not require gross margin, 

consistent with its current offerings.1016

Second, the amendments to Rule 15c3– 

3a, which permit margin required and 

on deposit at a U.S. Treasury securities 

CCA to be included as a debit item in 

the customer reserve formula makes it 

economical for dealers to post margin 

on behalf of their customers. This may 

encourage the development of clearing 

models that are based on counterparty 

risk, rather than the capital of the 

trading entity. In a second letter, the 

same commenter advocates for a 

common margining regime for FICC, 

where members participating in the 

MBSD, GSD, or the CME are accounted 

for properly in terms of offsetting 

positions 1017 and while that subject is 

not within the scope of this release, 

permitting rehypothecation of margin 

may have directionally similar effects. 

With respect to the market for U.S. 

Treasury securities clearing services, 

currently there is a single provider of 

central clearing. The amendments will 

likely engender indirect costs associated 

with increased levels of central clearing 

in the secondary market for U.S. 

Treasury securities. Generally, the 

economic characteristics of a financial 

market infrastructure (‘‘FMI’’), including 

clearing agencies, include 

specialization, economies of scale, 

barriers to entry, and a limited number 

of competitors.1018 1019 The Commission 

noted in its proposal of rules applicable 

to covered clearing agencies that such 

characteristics, coupled with the 

particulars of an FMI’s legal mandate, 

could result in market power, leading to 

lower levels of service, higher prices, 

and under-investment in risk 

management systems.1020 Market power 

may also affect the allocation of benefits 

and costs flowing from these new rules 

and amendments that are being adopted, 

namely the extent to which these 

benefits and costs are passed through by 

FICC to participants.1021 The 

centralization of clearing activities for a 

particular class of transaction in a single 

clearing agency may also result in a 

reduction in its incentives to innovate 

and to invest in the development of 

appropriate risk management practices 

on an ongoing basis. 

Finally, the scope of the rule does not 

preclude members of FICC from 

strategically renouncing membership if 

they assess that the benefits of 

maintaining their ability to trade 

without centrally clearing their trades 

exceed their costs of surrendering their 

membership with the CCA. If this 

scenario materializes for a number of 

FICC members, then there will be costs 

to the overall market. Those costs could 

be the product of a smaller number of 

clearing members competing in the 

market for clearing services. Costs could 

also manifest themselves as increased 

risk from non-centrally cleared 

transactions and a reduction in the 

margin, operational and capital 

efficiencies related to central clearing. 

Further, if the number of clearing 

members falls, then the exposure of 

FICC to its largest clearing member 

could increase resulting in additional 

increases in the required size of the 

CCLF. 

In addition, as stated above, some 

commenters requested the Commission 

consider interactions between the 

economic effects of the proposed rule 

and other recent Commission rules, as 

well as practical realities such as 

implementation timelines.1022 As 

discussed above, the Commission 

acknowledges that overlapping 

compliance periods may in some cases 

increase costs. This may be particularly 

true for smaller entities with more 

limited compliance resources. This 

effect can negatively impact competition 

because these entities may be less able 

to absorb or pass on these additional 

costs, making it more difficult for them 

to remain in business or compete. 

However, we have mitigated the overall 

costs of the final rules relative to the 

proposal.1023 Moreover, all of the other 

rules have long compliance periods to 

facilitate planning, preparation and 

investment, thereby mitigating the cost 

to smaller entities of overlapping 

compliance periods.1024 We therefore do 

not expect the risk of negative 

competitive effects from increased 

compliance costs from simultaneous 

compliance periods to be significant. 

c. Capital Formation 

The new rule and amendments may 

encourage private-sector capital 

formation. U.S. Treasury securities form 

a benchmark for fixed income and even 

equity rates of return, and the new rule 

could lower the cost of capital for 


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2820 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

1025Standard textbook treatments of finance use 

the U.S. Treasury rate of return as a benchmark in 

computing the cost of capital for private companies. 

The link between interest rates of government debt 

and corporate debt is a long-standing feature of the 

financial landscape. See, e.g., Benjamin Friedman, 

Implications of Government Deficits for Interest 

Rates, Equity Returns, and Corporate Financing, 

Fin. Corp. Cap. Form. (1986). See also Philippon, 

The Bond Market’s Q, Q. J. Econ. (Aug. 2009) 

(noting a link between the level of interest rates and 

investment). 

1026See Arvind Krishnamurthy & Annette 

Vissing-Jorgensen, The Aggregate Demand for 

Treasury Debt, 120 J. Pol. Econ. (Apr. 2012). 

1027See Proposing Release. Such direct 

participants are referred to in this section and the 

alternatives below as ‘‘IDBs’’. 

1028See Proposing Release, supra note 14, 88 FR 

at 64663; see also id. at 64622 for a discussion of 

cash transactions included in the definition of 

eligible transactions. 

1029AFREF Letter, supra note 33, at 2; Better 

Markets Letter, supra note 33, at 2, 6–8. 

1030See part II.A.2.b supra for a discussion of 

comments received regarding cash clearing. 

1031 Id. 

1032See TMPG White Paper, supra note 13 at 22 

(noting that in a hybrid clearing arrangement, an 

‘‘IDB’s rights and obligations vis-a-vis the CCP are 

not offset and therefore the IDB is not in a net zero 

settlement position with respect to the CCP at 

settlement date.’’). 

1033See TMPG White Paper, supra note 13, at 27. 

1034See TMPG White Paper, supra note 13, at 32. 

1035 Id. 

1036See Proposing Release, supra note 14, and 

part IV.A, supra of this release for a discussion of 

the benefits associated with increased central 

clearing. 

1037See Proposing Release, supra note 14, at 

64665 for a discussion of the familiarity of many 

registered brokers with methods of central clearing 

of U.S. Treasury securities transactions. See also Id 

at 64669 for a discussion of the costs to non-FICC 

members, including the entities included within 

this alternative, of the requirement to clear eligible 

secondary market transactions. 

private-sector issuers.1025 If the yield 

required by investors to hold U.S. 

Treasury securities reflects, in part, the 

risks associated with the buying and 

selling of U.S. Treasury securities, and 

increased central clearing of these 

transactions lowers those risks, then the 

new rule may put downward pressure 

on required yields. 

Research has shown that investors 

value both the safety and liquidity of 

U.S. Treasury securities. Because prices 

in the primary market both reflect and 

are driven by prices in the secondary 

market, liquidity could be one of the 

factors translating into lower rates of 

borrowing costs for U.S. taxpayers.1026

D. Reasonable Alternatives 

1. Require U.S. Treasury Securities 

CCAs To Have Policies and Procedures 

Requiring Only IDB Clearing Members 

To Submit U.S. Treasury Securities 

Cash Trades With Non-Members for 

Central Clearing 

In the Proposing Release, the 

Commission considered the alternative 

of narrowing the scope of the 

requirement to clear eligible secondary 

market transactions as it pertains to cash 

transactions in the secondary market for 

U.S. Treasury securities. The narrower 

definition of eligible secondary market 

transaction contemplated in this 

alternative included (1) a repurchase or 

reverse repurchase agreement 

collateralized by U.S. Treasury 

securities, in which one of the 

counterparties is a direct participant; or 

(2) a purchase or sale between a direct 

participant and any counterparty, if the 

direct participant of the covered 

clearing agency (A) brings together 

multiple buyers and sellers using a 

trading facility (such as a limit order 

book) and (B) is a counterparty to both 

the buyer and seller in two separate 

transactions.1027 This alternative differs 

from the proposal by omitting from the 

definition of eligible transactions those 

cash transactions between a direct 

participant and a registered brokerdealer, government securities broker, 

government securities dealer, hedge 

fund, or account at a registered brokerdealer, government securities dealer, or 

government securities broker where 

such account may borrow an amount in 

excess of one-half of its net assets or 

may have gross notional exposure in 

excess of twice its net assets.1028

Several commenters supported the 

Commission’s proposal overall, 

including the cash clearing 

requirement.1029 By contrast, other 

commenters opposed cash clearing 

generally.1030 Other commenters 

suggested that the scope of eligible 

secondary market transactions in the 

cash market be broadened.1031

As discussed in the proposing release, 

the benefits arising from cash clearing 

for IDB members are particularly high. 

Hybrid clearing creates unique issues 

for FICC because FICC is able to manage 

the risks arising from the IDB–FICC 

member trade, but it lacks any 

knowledge of the IDB’s offsetting trade 

with its other counterparty and the 

potential exposure arising to the IDB 

from that trade, leaving the IDB, from 

FICC’s perspective, as apparently having 

a directional exposure despite the noncentrally cleared trade that would leave 

the IDB flat.1032 This lack of knowledge 

could prevent FICC from ‘‘accurately 

identifying, measuring and managing its 

direct and indirect counterparty risk 

exposure and can affect its decisionmaking,’’ 1033 which in turn potentially 

increases the likelihood that a default of 

an IDB member could in turn harm the 

CCP or the system as a whole. As stated 

in the Proposing Release, the 

Commission has previously stated that 

membership requirements help to guard 

against defaults of any CCP member, as 

well to protect the CCP and the financial 

system as a whole from the risk that one 

member’s default could cause others to 

default, potentially including the CCP 

itself. Further, contagion stemming from 

a CCP member default could be 

problematic for the system as a whole, 

even if the health of the CCP is not 

implicated. The default could cause 

others to back away from participating 

in the market, particularly if the 

defaulting participant was an IDB, 

whose withdrawal from the market 

could jeopardize other market 

participants’ ability to access the market 

for U.S. Treasury securities.1034

This alternative would, with a more 

limited scope, move a large portion of 

secondary market transactions in U.S. 

Treasury securities that are not 

currently centrally cleared into central 

clearing.1035 The degree of central 

clearing would still allow for a partial 

picture of concentrated positions to the 

clearing agency. That said, there would 

be a limited benefit in terms of 

operational and balance sheet 

efficiency, and the benefits other than 

those specifically related to the IDB 

would be greatly reduced. Specifically, 

the reduced scope of this alternative 

would not capture types of participants 

that are usually leveraged such as hedge 

funds. 

As discussed in part II.A.2.b supra, 

the Commission is not including 

transactions with hedge funds and 

leveraged accounts in the definition of 

eligible transactions. The definition of 

eligible secondary market transaction in 

Rule 17ad–22(a) is being adopted as 

proposed with respect to IDB 

transactions and transactions that 

involve a purchase or sale between a 

direct participant and a registered 

broker-dealer, government securities 

broker, or government securities dealer. 

Including these transactions within the 

scope of eligible transactions increases 

the benefits discussed above associated 

with an increased proportion of 

transactions being centrally cleared.1036

However, as discussed above, the costs 

associated with including these 

transactions within the scope of eligible 

transactions may be less than those 

transactions not included by this 

alternative.1037


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1038See Proposing Release, supra note 14. 

1039AFREF Letter, supra note 33, at 2; Better 

Markets Letter, supra note 33, at 2, 6–8. 

1040See part II.A.2.b supra for a discussion of 

comments received regarding cash clearing. 

1041See 2021 IAWG Report, supra note 4; Liang 

& Parkinson, supra note 725, at 9; Duffie, supra note 

27, at 16–17. 

1042See Proposing Release, supra note 14. 

1043See part II.A.2.b supra for a discussion of 

comments received regarding cash clearing. 

1044Fleming & Keane (2021), supra note 796. 

1045Citadel Letter, supra note 81, at 5. 

1046ARB et al. Letter, supra note 81, at 4 (stating 

that the netting benefits associated with 

transitioning only proprietary trading firm (‘‘PTF’’) 

transactions into central clearing are much smaller, 

given the substantial netting that already occurs 

directly with inter-dealer brokers (‘‘IDBs’’); the 

trading-related benefits of central clearing will only 

accrue to market participants if their transactions 

are covered by the proposed mandate; and that 

clearing agency resiliency will be negatively 

impacted if only one segment of the market is 

cleared). 

1047MFA Letter, supra note 81, at 2. 

1048AIMA Letter, supra note 81, at 7. 

2. Require U.S. Treasury Securities 

CCAs To Have Policies and Procedures 

Requiring the Submission of All 

Repurchase Agreements Without 

Requirements for the Submission of 

Cash Transactions 

In the Proposing Release, the 

Commission considered excluding the 

cash U.S. Treasury securities market 

from the proposed rule, and instead 

only requiring that covered clearing 

agencies have policies and procedures 

reasonably designed to require that 

direct participants of the covered 

clearing agency submit for central 

clearing all transactions in U.S. 

Treasury repo transactions into which it 

enters.1038

Several commenters supported the 

Commission’s proposal overall, 

including the cash clearing 

requirement.1039 By contrast, other 

commenters opposed cash clearing 

generally.1040

The Commission understands that 

there is a likely benefit of additional 

balance sheet capacity that flows from 

clearing repo transactions in U.S. 

Treasury securities that might not occur 

with the clearing of cash transactions. 

Multilateral netting can reduce the 

amount of balance sheet capacity 

required for intermediation of repo and 

could enhance dealer capacity to make 

markets during normal times and stress 

events, because existing bank capital 

and leverage requirements recognize the 

risk-reducing effects of multilateral 

netting of trades that CCP clearing 

accomplishes.1041

The upfront costs of adjusting to the 

rule would be lower under this 

alternative than under the current 

proposal, as a result of a smaller number 

of participants and activities in scope 

and also the current level of 

interconnectedness among those 

participants. As previously mentioned, 

the number of participants in the U.S. 

Treasury repo market is significantly 

smaller than the number of participants 

in the cash market and is composed of 

sophisticated investors who have 

already incurred the costs of building 

the ability to novate transactions to the 

CCP. Infrastructure for Sponsored 

Clearing already exists, so processing 

changes should be less than in other 

more comprehensive alternatives and 

costs would be concentrated on the 

implementation of similar agreements at 

a larger scale. 

Nevertheless, excluding the cash U.S. 

Treasury securities market from the rule 

would omit the largest sector of the U.S. 

Treasury market, both in terms of 

activity and number of participants. 

This alternative would yield smaller 

benefits in the areas of financial 

stability, risk visibility, margin offset 

efficiencies, and capital requirement 

reductions. The Commission believes 

that, given the scale-intensive nature of 

clearing, there are economies of scale 

that can only be realized when a larger 

number of financial market participants 

clear their U.S. Treasury securities cash 

trades. 

3. Include All Cash Transactions Within 

the Scope of Eligible Secondary Market 

Transactions With Exceptions for 

Central Banks, Sovereign Entities, 

International Financial Institutions, and 

Natural Persons 

In the Proposing Release, the 

Commission considered requiring 

covered clearing agencies to have 

policies and procedures reasonably 

designed to require that direct 

participants of the covered clearing 

agency submit for central clearing all 

cash and repo transactions in U.S. 

Treasury securities into which they 

enter, except for natural persons, central 

banks, sovereign entities and 

international finance institutions. This 

policy option would include cash 

transactions between direct participants 

of a U.S. Treasury securities CCA and 

any counterparty except for those that 

fall within one of the aforementioned 

exceptions.1042 Several commenters 

opposed cash clearing generally.1043

This alternative would capture more 

of the potential benefits and positive 

externalities that result from increased 

central clearing, more closely 

resembling the assumptions and 

estimated benefits of Fleming and 

Keane’s calculations on clearing 

benefits.1044 By virtue of requiring all 

repo and most cash transactions to be 

centrally cleared, the alternative goes 

the furthest in solving the underlying 

collective action problem whereby some 

participants may find it optimal to not 

participate in central clearing, reducing 

the benefits that may accrue to the 

market as a whole. 

Several commenters suggested that 

the scope of eligible secondary market 

transactions in the cash market be 

broadened. One commenter stated that 

the Commission should align the scope 

of the definition with respect to cash 

transactions with the proposed scope for 

repos, subject to certain limited 

exceptions for investors that trade de 

minimis volumes. The commenter 

argued that the Commission’s approach 

with respect to cash transactions will 

increase costs for a specific subset of 

market participants, thereby putting 

them at a competitive disadvantage, 

while failing to deliver the envisaged 

market-wide benefits associated with 

central clearing (i.e., it would materially 

reduce the associated multilateral 

netting benefits, impair the risk 

management practices of clearing 

agencies, and hinder the evolution in 

trading protocols that can be expected 

from a market-wide clearing 

requirement).1045 For similar reasons, 

another commenter also stated that the 

benefits of central clearing detailed will 

only materialize if ‘‘a market-wide 

mandate is implemented’’ and 

supported defining the scope of eligible 

secondary market transactions for cash 

transactions as broadly as that proposed 

for repos.1046 Another commenter stated 

that limiting the scope of the cash 

clearing mandate would result in 

unwarranted competitive disadvantages 

and related market distortions for some 

types of investors, such as hedge funds, 

or some types of trading platforms, such 

as anonymous trading facilities.1047 An 

additional commenter stated that the 

proposed definition leaves out other 

important market participants’ cash 

Treasury transactions that also comprise 

a large segment of Treasury market 

liquidity, and that the Commission 

should require other market 

participants’ cash Treasury transactions 

in which a direct participant is involved 

to be cleared, so that the benefits of 

central clearing that the Commission 

cites will accrue throughout the broader 

cash Treasury market.1048 In addition, 

another commenter acknowledged the 

benefits of a comprehensive clearing 

requirement, but acknowledged the 

need for a pragmatic approach and 

supported the Commission’s proposed 

requirements as a reasonable foundation 


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2822 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

1049 GTS Letter, supra note 81, at 3–5. 

1050See Proposing Release, supra note 14. 

1051 Id. 

1052See AIMA Letter, supra note 81, at 8; CME 

Letter, supra note 81, at 4; DTCC/FICC Letter, supra 

note 33, at 28–29; ICE Letter, supra note 33, at 3; 

MFA Letter, supra note 81, at 10; ISDA Letter, supra 

note 391, at 2; SIFMA AMG Letter, supra note 35, 

at 8. See part II.C supra for a discussion of 

comments received. 1053See ISDA Letter, supra note 391, at 2. 

1054See supra note 344. 

1055Proposing Release, supra note 14, 87 FR at 

64675–77. 

1056See 44 U.S.C. 3501 et seq. 

to begin mandatory central clearing in 

this market.1049

As discussed above, the benefits of 

clearing are scale-dependent, so that a 

more comprehensive clearing directive 

would result in larger positive 

externalities (e.g., lower contagion risk, 

less financial network complexity) and 

larger economies of scale (e.g., larger 

margin offsets) for the U.S. Treasury 

securities market. Another benefit of 

this alternative would be an enhanced 

ability of FICC (and, by extension, 

regulatory agencies) to observe the 

dynamics and manage the risks in the 

U.S. Treasury securities markets. 

Nevertheless, there are compelling 

reasons for the exclusions that the 

proposal makes for a specific sample of 

market participants. Buy-side 

participants in the U.S. Treasury 

securities markets that do not take on 

any leverage, or take less than one-half 

their assets in leverage, such as the 

majority of bond mutual funds, typically 

have lower daily turnover. As a result of 

their lower turnover and subsequent 

lower volume, they typically do not 

have the existing infrastructure to 

readily connect to the CCP, making their 

up-front costs significantly higher than 

for other participants. This implies that 

the costs of subjecting these participants 

to the requirement to clear eligible 

secondary market transactions are likely 

higher than those of participants 

included in the proposal and the 

benefits smaller. 

4. Require U.S. Treasury Securities 

CCAs To Change CCA Access Provisions 

and Netting and Margin Practices for 

House and Customer Accounts and Rule 

15c3–3 

In the Proposing Release the 

Commission considered, as an 

alternative to the policy choices it 

proposed, only amending Rules 15c3–3, 

17ad–22(e)(6)(i), and 17ad– 

22(e)(18)(iv)(C).1050 This alternative 

would not include a requirement to 

clear eligible secondary market 

transactions, as set forth in Proposed 

Rule 17ad–22(e)(18)(iv)(A) and (B).1051

Overall, commenters supported the 

proposed amendments to Rule 15c3– 

3a.1052 For increased and more efficient 

client clearing, another commenter 

encouraged the Commission to adopt 

this proposal irrespective of whether the 

Commission adopts the requirement to 

clear eligible secondary market 

transactions, as set forth in Proposed 

Rule 17ad–22(e)(18)(iv)(A) and (B).1053

This alternative would require a U.S. 

Treasury securities CCA to establish, 

implement, maintain and enforce 

certain written policies and procedures 

that would be reasonably designed to, as 

applicable, calculate, collect, and hold 

margin amounts from a direct 

participant for its proprietary U.S. 

Treasury securities positions separately 

and independently from margin that 

would be held for an indirect 

participant. Specifically, the 

requirement to separately and 

independently hold an indirect 

participant’s margin would apply to 

margin calculated by and collected from 

a direct participant in connection with 

its U.S. Treasury securities transactions 

with an indirect participant that relies 

on the direct participant’s services to 

access the covered clearing agency’s 

payment, clearing, or settlement 

facilities. 

The alternative would also include 

changes to 17ad–22(e)(18)(iv)(C), 

directing FICC to, as more fully 

described above, have policies and 

procedures, to be annually reviewed by 

its board of directors, to have 

appropriate means to facilitate access to 

clearing all eligible secondary market 

transactions in U.S. Treasury securities. 

This alternative would also include 

changes to Rule 15c3–3a, to permit 

margin required and on deposit at a U.S. 

Treasury securities CCA to be included 

as a debit item in the customer reserve 

formula, subject to the conditions 

discussed below. This new debit item 

would offset credit items in the Rule 

15c3–3a formula and, thereby, free up 

resources that could be used to meet the 

margin requirements of a U.S. Treasury 

securities CCA. The new debit item 

would be reported on a newly created 

Item 15 of the Rule 15c3–3a reserve 

formula. 

As discussed in part IV.C.2.b supra, 

the proposed amendments to Rule 

17ad–22(e)(6)(i) should produce benefits 

for dealer-to-customer trades. Because 

margin for a direct participant’s (i.e., a 

dealer’s) trades that have been novated 

to the CCP would be calculated, 

collected, and held separately and 

independently from those of an indirect 

participant, such as a customer, the 

direct participant’s trades with the 

indirect participant that have been 

novated to the CCP would be able to be 

netted against the direct participant’s 

position with other dealers. Such 

netting is not currently available. In 

summary, the Commission expects 

changes in the customer reserve formula 

and expanded margin offset possibilities 

to allow more efficient use of margin for 

cleared trades relative to current market 

practice. 

As discussed in part II.A.1.a supra, 

commenters identified several methods 

by which the Commission could or 

should incentivize additional central 

clearing without adopting a requirement 

to clear eligible secondary market 

transactions. One of the methods 

commenters identified was to adopt 

Rule 15c3–3 discussed in part II.C infra 

as a method to incentivize additional 

central clearing.1054 As discussed in 

part II.5 supra the Commission agrees 

that the methods identified by the 

commenters could incentivize and 

facilitate additional central clearing. 

The Commission therefore is adopting 

the amendments to Rule 15c3–3, the 

requirement to segregate house and 

customer margin, and the need to 

ensure access to central clearing, as 

discussed in parts II.C, II.B.1, and II.B.2 

supra respectively. The Commission 

does not believe that these changes 

should be made without also requiring 

that U.S. Treasury securities CCAs 

obligate their direct participants to 

submit eligible secondary market 

transactions for clearing. Merely 

incentivizing and facilitating greater 

central clearing, as opposed to requiring 

central clearing, would not sufficiently 

address the current risks to U.S. 

Treasury securities CCAs. Therefore, for 

the reasons discussed in part II.2.a and 

b, the requirement to clear is also 

necessary. 

V. Paperwork Reduction Act 

A. Proposed Changes to Covered 

Clearing Agency Standards 

As discussed in the Proposing 

Release,1055 the amendments to Rule 

17ad–22(e) contain ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995 (‘‘PRA’’).1056 The 

Commission submitted the proposed 

collections of information to the Office 

of Management and Budget (‘‘OMB’’) for 

review in accordance with the PRA. The 

title of the information collection for 

Rule 17ad–22(e) is ‘‘Clearing Agency 

Standards for Operation and 

Governance’’ (OMB Control No. 3235– 

0695). The amendments to Rule 17ad– 

22(e) add two new information 

collections, titled ‘‘17ad–22(e)(6) 


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1057See, e.g., 5 U.S.C. 552. Exemption 4 of the 

Freedom of Information Act provides an exemption 

for trade secrets and commercial or financial 

information obtained from a person and privileged 

or confidential. See 5 U.S.C. 552(b)(4). Exemption 

8 of the Freedom of Information Act provides an 

exemption for matters that are contained in or 

related to examination, operating, or condition 

reports prepared by, on behalf of, or for the use of 

an agency responsible for the regulation or 

supervision of financial institutions. See 5 U.S.C. 

552(b)(8). 

1058See Proposing Release, supra note 14, 87 FR 

at 64622 (discussing existing FICC rules for 

sponsored member program). 1059See CCA Standards Adopting Release, supra 

note 10, 81 FR at 70895–97 (discussing Rules 17ad– 

22(e)(13), (15), and (18)). Although the rule 

amendment is with respect to Rule 17ad–22(e)(6), 

the Commission believes that these Rules present 

the best overall comparison to the rule amendment, 

in light of the nature of the changes needed to 

implement the rule amendment here and what was 

proposed in the Covered Clearing Agency 

Standards. 1060This figure was calculated as follows: 

(Assistant General Counsel for 20 hours) + 

(Compliance Attorney for 40 hours) + (Computer 

Operations Manager for 12 hours) + (Senior 

Programmer for 20 hours) + (Senior Risk 

Management Specialist for 25 hours) + (Senior 

Business Analyst for 12 hours) = 129 hours × 2 

respondent clearing agencies = 258 hours. 1061See CCA Standards Adopting Release, supra 

note 10, 81 FR at 70893 and 70895–96 (discussing 

Rules 17ad–22(e)(6) and (13)). 

1062This figure was calculated as follows: 

(Compliance Attorney for 25 hours + Business Risk 

Analyst for 40 hours + Senior Risk Management 

Specialist for 20 hours) = 85 hours × 2 respondent 

clearing agencies = 170 ongoing burden hours. (This 

figure is a corrected version from that in the 2022 

Proposing Release, which contained a calculation 

error in the chart that overstated the estimated 

burden by 6 hours per respondent, and another 

calculation error in the accompanying footnote that 

understated the estimated burden by 5 hours per 

respondent. See Proposing Release, supra note 14, 

87 FR at 64675, footnote 505 and accompanying 

text.) 

1063This figure was calculated as follows: 85 

hours × 2 respondent clearing agencies = 170 hours. 

(Treasury Clearing)’’ and ‘‘17ad– 

22(e)(18) (Treasury Clearing),’’ 

respectively, to OMB Control No. 3235– 

0695. An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a currently valid OMB 

control number. 

Respondents under this rule are 

Treasury securities CCAs, of which 

there is currently one. The Commission 

anticipates that one additional entity 

may seek to register as a clearing agency 

to provide CCP services for Treasury 

securities in the next three years, and so 

for purposes of this rulemaking the 

Commission has assumed two 

respondents. 

As described above in parts II.A and 

B supra, the Commission is adopting the 

amendments to Rules 17ad–22(e)(6) and 

(e)(18) as proposed, and the 

Commission has received no comments 

on the burden estimates provided in the 

Proposing Release. Accordingly, the 

Commission is not adjusting the burden 

estimates from the Proposing Release, 

except with respect to minor changes to 

correct mathematical errors, as 

described more fully below. 

1. Amendment to Rule 17ad–22(e)(6) 

The purpose of this collection of 

information is to enable a covered 

clearing agency for Treasury securities 

to better understand and manage the 

risks presented by transactions that a 

direct participant may submit on behalf 

of its customer, i.e., an indirect 

participant which relies upon the direct 

participant to access the covered 

clearing agency. The collection is 

mandatory. To the extent that the 

Commission receives confidential 

information pursuant to this collection 

of information, such information would 

be kept confidential subject to the 

provisions of applicable law.1057

The amendment to Rule 17ad–22(e)(6) 

requires a Treasury securities CCA to 

establish, implement, maintain and 

enforce written policies and procedures. 

The amendment contains similar 

provisions to existing FICC rules, 

specifically with respect to its 

Sponsored Member program, but also 

imposes additional requirements that 

did not previously appear in Rule 17ad– 

22. As a result, the Commission believes 

that a respondent Treasury securities 

CCA will incur burdens of reviewing 

and updating existing policies and 

procedures in order to comply with the 

amendment to Rule 17ad–22(e)(6) and, 

in some cases, may need to create new 

policies and procedures.1058 The 

Commission believes that the PRA 

burdens for the amendment to Rule 

17ad–22(e)(6) may require a respondent 

clearing agency to make substantial 

changes to its policies and procedures. 

Based on the similar policies and 

procedures requirements and the 

corresponding burden estimates 

previously made by the Commission for 

several rules in the Covered Clearing 

Agency Standards where the 

Commission anticipated similar 

burdens,1059 the Commission estimates 

that the amendment to Rule 17ad– 

22(e)(6) would impose on each 

respondent Treasury securities CCA an 

initial burden of 129 hours in the first 

year.1060

In addition, the amendment to Rule 

17ad–22(e)(6) imposes ongoing burdens 

on a respondent Treasury securities 

CCA. The amended rule requires 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the amended rule. Based on 

the similar reporting requirements and 

the corresponding burden estimates 

previously made by the Commission for 

several rules in the Covered Clearing 

Agency Standards where the 

Commission anticipated similar 

burdens,1061 the Commission estimates 

that the ongoing activities required by 

the amendment to Rule 17ad–22(e)(6) 

would impose an ongoing burden of 85 

hours per year (including the first 

year).1062 Therefore, the aggregate 

ongoing industry burden associated 

with the amendments to Rule 17ad– 

22(e)(6) for the two respondents is 

approximately 170 hours per year.1063

Name of information collection Type of burden Number of 

respondents 

Initial burden 

per entity 

(hours) 

Aggregate 

initial burden 

(hours) 

Ongoing burden 

per entity 

(hours) 

Aggregate 

ongoing burden 

(hours) 

17ad–22(e)(6) (Treasury Clearing) ....................... Recordkeeping .............. 2 129 258 a 85 b 170 

aSee supra note 963. bSee id. 

2. Amendment to Rule 17ad– 

22(e)(18)(iv) 

The purpose of the collection of 

information under Rule 17ad– 

22(e)(18)(iv) is to enable a U.S. Treasury 

securities CCA to ensure that its direct 

participants submit for clearance and 

settlement, as a requirement of 

membership in the CCA, all eligible 

secondary market transactions in U.S. 

Treasury securities to the U.S. Treasury 

securities CCA to which the direct 

participants are a counterparty. This 

should, in turn, help ensure that the risk 

presented by the eligible secondary 

market transactions of that direct 

participant that are not centrally cleared 

would not be transmitted to the U.S. 

Treasury securities CCA, and to enable 

the CCA to identify and manage the 

risks posed by those transactions that 

are currently not submitted for central 

clearing. In addition, the purpose of this 

rule is to ensure that the U.S. Treasury 


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1064See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of 

the Freedom of Information Act provides an 

exemption for trade secrets and commercial or 

financial information obtained from a person and 

privileged or confidential. See 5 U.S.C. 552(b)(4). 

Exemption 8 of the Freedom of Information Act 

provides an exemption for matters that are 

contained in or related to examination, operating, 

or condition reports prepared by, on behalf of, or 

for the use of an agency responsible for the 

regulation or supervision of financial institutions. 

See 5 U.S.C. 552(b)(8). 

1065See Proposing Release, supra note 14, 87 FR 

n.34 and accompanying text (discussing current 

FICC rules). 

1066See CCA Standards Adopting Release, supra 

note 10, 81 FR at 70895–97 (discussing Rules 17ad– 

22(e)(13), (15), and (18)). The Commission believes 

that these Rules present the best comparison to the 

rule amendment, in light of the nature of the rule 

amendment. Although the rule amendment is with 

respect to Rule 17ad–22(e)(18), the Commission 

believes that considering additional rules in the 

Covered Clearing Agency Standards is reasonable in 

light of the nature of the rule amendment and the 

changes necessary to establish and implement the 

requirements of the rule amendment, as compared 

to the current Commission rules and U.S. Treasury 

securities CCA rules. 

1067This figure was calculated as follows: 

Assistant General Counsel for 40 hours + 

Compliance Attorney for 80 hours + Computer 

Operations Manager for 20 hours + Senior Risk 

Management Specialist for 40 hours + Business Risk 

Analyst for 80 hours = 260 hours × 2 respondent 

clearing agencies = 520 hours. 

1068See supra note above (discussing relevant 

aspects of the Covered Clearing Agency Standards). 

1069This figure was calculated as follows: 

(Compliance Attorney for 25 hours + Business Risk 

Analyst for 40 hours + Senior Risk Management 

Specialist for 20 hours) = 85 ongoing burden hours 

per year. 

1070This figure was calculated as follows: 85 

hours × 2 respondent clearing agencies = 170 hours. 

1071See 5 U.S.C. 601 et seq. 

1072 5 U.S.C. 603(a). 

1073Section 601(b) of the RFA permits agencies to 

formulate their own definitions of ‘‘small entities.’’ 

See 5 U.S.C. 601(b). The Commission has adopted 

definitions for the term ‘‘small entity’’ for the 

purposes of rulemaking in accordance with the 

RFA. These definitions, as relevant to this 

rulemaking, are set forth in 17 CFR 240.0–10. 

1074See 5 U.S.C. 605(b). 

securities CCA adopts policies and 

procedures to identify and monitor its 

direct participants’ submission of 

transactions for clearance and 

settlement, including how the CCA 

would address a failure to submit 

transactions that are required to be 

submitted. Finally, the purpose of the 

rule is to ensure that the CCA has 

appropriate means to facilitate access to 

clearance and settlement services of all 

eligible secondary market transactions 

in U.S. Treasury securities, including 

those of indirect participants, which 

policies and procedures the board of 

directors of such covered clearing 

agency reviews annually. 

This additional collection is 

mandatory. To the extent that the 

Commission receives confidential 

information pursuant to this collection 

of information, such information would 

be kept confidential subject to the 

provisions of applicable law.1064

The amendment to Rule 17ad– 

22(e)(18)(iv) requires a U.S. Treasury 

securities CCA to establish, implement, 

maintain and enforce written policies 

and procedures, as discussed above. 

Because such policies and procedures 

are not currently required under 

existing Rule 17ad–22, the Commission 

believes that the estimated PRA burdens 

for the amendment to Rule 17ad– 

22(e)(18)(iv) would be significant and 

may require a respondent clearing 

agency to make substantial changes to 

its policies and procedures. The 

amendment contains similar provisions 

to existing rules, but also imposes 

additional requirements that did not 

previously appear in Rule 17ad–22.1065

As a result, the Commission believes 

that a respondent U.S. Treasury 

securities CCA would incur burdens of 

reviewing and updating existing 

policies and procedures in order to 

comply with the provisions of amended 

Rule 17ad–22(e)(18)(iv) and, in some 

cases, may need to create new policies 

and procedures. Based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

several rules in the Covered Clearing 

Agency Standards where the 

Commission anticipated similar 

burdens,1066 the Commission estimates 

that the amendment to Rule 17ad– 

22(e)(18)(iv) would impose on each 

respondent Treasury securities CCA an 

initial burden of 260 hours in the first 

year.1067

In addition, the amendment to Rule 

17ad–22(e)(18)(iv) imposes ongoing 

burdens on a respondent Treasury 

securities CCA. The amended rule 

requires ongoing monitoring and 

compliance activities with respect to the 

written policies and procedures created 

in response to the amendment. Based on 

the similar reporting requirements and 

the corresponding burden estimates 

previously made by the Commission for 

several rules in the Covered Clearing 

Agency Standards where the 

Commission anticipated similar 

burdens,1068 the Commission estimates 

that the ongoing activities required by 

the amendment to Rule 17ad– 

22(e)(18)(iv) would impose an ongoing 

burden of 85 hours per year (including 

the first year).1069 Therefore, the 

aggregate ongoing industry burden 

associated with the amendment to Rule 

17ad–22(e)(18)(iv) for the two 

respondents is approximately 170 hours 

per year.1070

Name of information collection Type of burden Number of 

respondents 

Initial burden 

per entity 

(hours) 

Aggregate 

initial burden 

(hours) 

Ongoing burden 

per entity 

(hours) 

Aggregated 

ongoing burden 

(hours) 

17ad–22(e)(18) (Treasury Clearing) ..................... Recordkeeping .............. 2 260 520 a 85 170 

aThis figure is a corrected version from that in the 2022 Proposing Release, which contained an error in the calculation that understated the estimated burden by 5 

hours. See Proposing Release, supra note 13, 87 FR 64675. 

B. Broker-Dealers 

The final rule amendment to Rule 

15c3–3a does not require a new 

collection of information on the part of 

any entities subject to these rules. 

Accordingly, the requirements imposed 

by the PRA are not applicable to this 

rule. 

VI. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires the Commission, in 

promulgating rules, to consider the 

impact of those rules on small 

entities.1071 Section 603(a) of the 

Administrative Procedure Act,1072 as 

amended by the RFA, generally requires 

the Commission to undertake a final 

regulatory flexibility analysis of all 

proposed rules to determine the impact 

of such rulemaking on ‘‘small 

entities.’’ 1073 Section 605(b) of the RFA 

states that this requirement shall not 

apply to any proposed rule which, if 

adopted, would not have a significant 

economic impact on a substantial 

number of small entities.1074 In the 

Proposing Release, the Commission 

certified that the proposed amendments 

to Rules 17ad–22 and 15c3–3a would 

not have a significant economic impact 

on a substantial number of small entities 

for purposes of the RFA. The Proposing 

Release solicited comment on the 

certification. The Commission received 

no comments on this certification. 

A. Clearing Agencies 

The amendments to Rule 17ad–22 

would apply to covered clearing 

agencies, which would include 


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1075 17 CFR 240.17ad–22(a)(5). 

1076See 17 CFR 240.0–10(d). 

1077See 17 CFR 240.0–10(d). The Commission 

based this determination on its review of public 

sources of financial information about registered 

clearing agencies and lifecycle event service 

providers for OTC derivatives. 1078See 17 CFR 240.0–10(c). 1079 5 U.S.C. 801 et seq. 

registered clearing agencies that provide 

the services of a central counterparty or 

central securities depository.1075 For the 

purposes of Commission rulemaking 

and as applicable to the proposed 

amendments to Rule 17ad–22, a small 

entity includes, when used with 

reference to a clearing agency, a clearing 

agency that (i) compared, cleared, and 

settled less than $500 million in 

securities transactions during the 

preceding fiscal year, (ii) had less than 

$200 million of funds and securities in 

its custody or control at all times during 

the preceding fiscal year (or at any time 

that it has been in business, if shorter), 

and (iii) is not affiliated with any person 

(other than a natural person) that is not 

a small business or small 

organization.1076

Based on the Commission’s existing 

information about the clearing agencies 

currently registered with the 

Commission, the Commission believes 

that such entities exceed the thresholds 

defining ‘‘small entities’’ set out above. 

While other clearing agencies may 

emerge and seek to register as clearing 

agencies, the Commission does not 

believe that any such entities would be 

‘‘small entities’’ as defined in Exchange 

Act Rule 0–10.1077 In any case, clearing 

agencies can only become subject to the 

new requirements under Rule 17ad– 

22(e) should they meet the definition of 

a covered clearing agency, as described 

above. Accordingly, the Commission 

believes that any such registered 

clearing agencies will exceed the 

thresholds for ‘‘small entities’’ set forth 

in Exchange Act Rule 0–10. 

B. Broker-Dealers 

For purposes of Commission 

rulemaking in connection with the RFA, 

a small entity includes a broker-dealer 

that: (1) had total capital (net worth plus 

subordinated liabilities) of less than 

$500,000 on the date in the prior fiscal 

year as of which its audited financial 

statements were prepared pursuant to 

Rule 17a–5(d) under the Exchange Act, 

or, if not required to file such 

statements, a broker-dealer with total 

capital (net worth plus subordinated 

liabilities) of less than $500,000 on the 

last day of the preceding fiscal year (or 

in the time that it has been in business, 

if shorter); and (2) is not affiliated with 

any person (other than a natural person) 

that is not a small business or small 

organization.1078 Under the standards 

adopted by the Small Business 

Administration, small entities in the 

finance and insurance industry include 

the following: (1) for entities in credit 

intermediation and related activities, 

firms with $175 million or less in assets; 

(2) for non-depository credit 

intermediation and certain other 

activities, firms with $7 million or less 

in annual receipts; (3) for entities in 

financial investments and related 

activities, firms with $7 million or less 

in annual receipts; (4) for insurance 

carriers and entities in related activities, 

firms with $7 million or less in annual 

receipts; and (5) for funds, trusts, and 

other financial vehicles, firms with $7 

million or less in annual receipts. 

The final rule amendment to Rule 

15c3–3a would permit margin required 

and on deposit with covered clearing 

agencies for U.S. Treasury securities to 

be included by broker-dealers as a debit 

in the reserve formulas for accounts of 

customers and proprietary accounts of 

broker-dealers, subject to certain 

conditions. Only carrying broker-dealers 

will be impacted by the final rule 

amendment. This is because only 

carrying broker-dealers are required to 

maintain a customer or PAB reserve 

account and may collect customer 

margin. 

Based on FOCUS Report data, the 

Commission estimates that as of June 

30, 2023, there were approximately 772 

broker-dealers that were ‘‘small’’ for the 

purposes of Rule 0–10. Of these, the 

Commission estimates that there are less 

than ten broker-dealers that are carrying 

broker-dealers (i.e., can carry customer 

or PAB margin accounts and extend 

credit). However, based on June 30, 

2023, FOCUS Report data, none of these 

small carrying broker-dealers carried 

debit balances. This means that any 

‘‘small’’ carrying firms are not extending 

margin credit to their customers, and 

therefore, the final rule amendment 

likely would not apply to them. 

Therefore, while the Commission 

believes that some small broker-dealers 

could be affected by the final 

amendment, the amendment will not 

have a significant impact on a 

substantial number of small brokerdealers. 

C. Certification 

For the reasons described above, the 

Commission certifies that the final 

amendments to Rules 17ad–22 and 

15c3–3a would not have a significant 

economic impact on a substantial 

number of small entities for purposes of 

the RFA. 

VII. Other Matters 

If any of the provisions of these rules, 

or the application thereof to any person 

or circumstance, is held to be invalid, 

such invalidity shall not affect other 

provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

Pursuant to the Congressional Review 

Act,1079 the Office of Information and 

Regulatory Affairs has designated these 

rules as a ‘‘major rule,’’ as defined by 5 

U.S.C. 804(2). 

Statutory Authority 

The Commission is amending Rule 

17ad–22 under the Commission’s 

rulemaking authority set forth in section 

17A of the Exchange Act, 15 U.S.C. 78q– 

1, and section 805 of the Clearing 

Supervision Act, 15 U.S.C. 5464 

respectively. Pursuant to the Exchange 

Act, 15 U.S.C. 78a et seq., and 

particularly, sections 15 and 23(a) (15 

U.S.C. 78o and 78w(a)), thereof, the 

Commission is amending § 240.15c3–3a 

under the Exchange Act. 

List of Subjects in 17 CFR Part 240 

Reporting and recordkeeping 

requirements, Securities. 

Text of Amendments 

In accordance with the foregoing, title 

17, chapter II of the Code of Federal 

Regulations is amended as follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The general authority citation for 

part 240 continues to read, and the 

sectional authority for § 240.17ad–22 is 

revised to read, as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 

78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 

78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 

78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, 

78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 

3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 

U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 

U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat. 

1376 (2010); and Pub. L. 112–106, sec. 503 

and 602, 126 Stat. 326 (2012), unless 

otherwise noted. 

* * * * * 

Section 240.15c3–3a is also issued under 

Pub. L. 111–203, § 939, 939A, 124. Stat. 1376 

(2010) (15 U.S.C. 78c, 15 U.S.C. 78o–7 note). 

* * * * * 

Section 240.17ad–22 is also issued under 

12 U.S.C. 5461 et seq. 

* * * * * 


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2826 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

■ 2. Revise and republish § 240.15c3–3a 

to read as follows: 

§ 240.15c3–3a Exhibit A—Formula for 

determination of customer and PAB 

account reserve requirements of brokers 

and dealers under § 240.15c3–3. 

Credits Debits 

1. Free credit balances and other credit balances in customers’ security accounts. (See Note A) ...................................... XXX ................

2. Monies borrowed collateralized by securities carried for the accounts of customers (See Note B) .................................. XXX ................

3. Monies payable against customers’ securities loaned (See Note C) ................................................................................. XXX ................

4. Customers’ securities failed to receive (See Note D) ......................................................................................................... XXX 

5. Credit balances in firm accounts which are attributable to principal sales to customers ................................................... XXX ................

6. Market value of stock dividends, stock splits and similar distributions receivable outstanding over 30 calendar days .... XXX ................

7. Market value of short security count differences over 30 calendar days old ..................................................................... XXX ................

8. Market value of short securities and credits (not to be offset by longs or by debits) in all suspense accounts over 30 

calendar days ....................................................................................................................................................................... XXX ................

9. Market value of securities which are in transfer in excess of 40 calendar days and have not been confirmed to be in 

transfer by the transfer agent or the issuer during the 40 days .......................................................................................... XXX ................

10. Debit balances in customers’ cash and margin accounts excluding unsecured accounts and accounts doubtful of collection. (See Note E) ............................................................................................................................................................ ................ XXX 

11. Securities borrowed to effectuate short sales by customers and securities borrowed to make delivery on customers’ 

securities failed to deliver .................................................................................................................................................... ................ XXX 

12. Failed to deliver of customers’ securities not older than 30 calendar days ..................................................................... ................ XXX 

13. Margin required and on deposit with the Options Clearing Corporation for all option contracts written or purchased in 

customer accounts. (See Note F) ........................................................................................................................................ ................ XXX 

14. Margin required and on deposit with a clearing agency registered with the Commission under section 17A of the Act 

(15 U.S.C. 78q–1) or a derivatives clearing organization registered with the Commodity Futures Trading Commission 

under section 5b of the Commodity Exchange Act (7 U.S.C. 7a–1) related to the following types of positions written, 

purchased or sold in customer accounts: (1) security futures products and (2) futures contracts (and options thereon) 

carried in a securities account pursuant to an SRO portfolio margining rule (See Note G) .............................................. ................ XXX 

15. Margin required and on deposit with a clearing agency registered with the Commission under section 17A of the Act 

(15 U.S.C. 78q–1) resulting from the following types of transactions in U.S. Treasury securities in customer accounts 

that have been cleared, settled, and novated by the clearing agency: (1) purchases and sales of U.S. Treasury securities; and (2) U.S. Treasury securities repurchase and reverse repurchase agreements (See Note H) ............................ ................ XXX 

Total credits ...................................................................................................................................................................... ................ ................

Total debits ....................................................................................................................................................................... ................ ................

16. Excess of total credits (sum of items 1–9) over total debits (sum of items 10–15) required to be on deposit in the 

‘‘Reserve Bank Account’’ (§ 240.15c3–3(e)). If the computation is made monthly as permitted by this section, the deposit must be not less than 105 percent of the excess of total credits over total debits ................................................... ................ XXX 

Notes Regarding the Customer Reserve 

Bank Account Computation 

Note A. Item 1 must include all 

outstanding drafts payable to customers 

which have been applied against free credit 

balances or other credit balances and must 

also include checks drawn in excess of bank 

balances per the records of the broker or 

dealer. 

Note B. Item 2 must include the amount of 

options-related or security futures productrelated Letters of Credit obtained by a 

member of a registered clearing agency or a 

derivatives clearing organization which are 

collateralized by customers’ securities, to the 

extent of the member’s margin requirement at 

the registered clearing agency or derivatives 

clearing organization. Item 2 must also 

include the amount of Letters of Credit which 

are collateralized by customers’ securities 

and related to other futures contracts (and 

options thereon) carried in a securities 

account pursuant to an SRO portfolio 

margining rule. Item 2 must include the 

market value of customers’ securities on 

deposit at a ‘‘qualified clearing agency’’ as 

defined in Note H below. 

Note C. Item 3 must include in addition to 

monies payable against customers’ securities 

loaned the amount by which the market 

value of securities loaned exceeds the 

collateral value received from the lending of 

such securities. 

Note D. Item 4 must include in addition to 

customers’ securities failed to receive the 

amount by which the market value of 

securities failed to receive and outstanding 

more than thirty (30) calendar days exceeds 

their contract value. 

Note E. (1) Debit balances in margin 

accounts must be reduced by the amount by 

which a specific security (other than an 

exempted security) which is collateral for 

margin accounts exceeds in aggregate value 

15 percent of the aggregate value of all 

securities which collateralize all margin 

accounts receivable; provided, however, the 

required reduction must not be in excess of 

the amounts of the debit balance required to 

be excluded because of this concentration 

rule. A specified security is deemed to be 

collateral for a margin account only to the 

extent it represents in value not more than 

140 percent of the customer debit balance in 

a margin account. 

(2) Debit balances in special omnibus 

accounts, maintained in compliance with the 

requirements of Section 7(f) of Regulation T 

(12 CFR 220.7(f)) or similar accounts carried 

on behalf of another broker or dealer, must 

be reduced by any deficits in such accounts 

(or if a credit, such credit must be increased) 

less any calls for margin, mark to the market, 

or other required deposits which are 

outstanding five business days or less. 

(3) Debit balances in customers’ cash and 

margin accounts included in the formula 

under Item 10 must be reduced by an amount 

equal to 1 percent of their aggregate value. 

(4) Debit balances in cash and margin 

accounts of household members and other 

persons related to principals of a broker or 

dealer and debit balances in cash and margin 

accounts of affiliated persons of a broker or 

dealer must be excluded from the Reserve 

Formula, unless the broker or dealer can 

demonstrate that such debit balances are 

directly related to credit items in the formula. 

(5) Debit balances in margin accounts 

(other than omnibus accounts) must be 

reduced by the amount by which any single 

customer’s debit balance exceeds 25 percent 

(to the extent such amount is greater than 

$50,000) of the broker-dealer’s tentative net 

capital (i.e., net capital prior to securities 

haircuts) unless the broker or dealer can 

demonstrate that the debit balance is directly 

related to credit items in the Reserve 

Formula. Related accounts (e.g., the separate 

accounts of an individual, accounts under 

common control or subject to cross 

guarantees) will be deemed to be a single 

customer’s accounts for purposes of this 

provision. If the registered national securities 

exchange or the registered national securities 

association having responsibility for 


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examining the broker or dealer (‘‘designated 

examining authority’’) is satisfied, after 

taking into account the circumstances of the 

concentrated account including the quality, 

diversity, and marketability of the collateral 

securing the debit balances or margin 

accounts subject to this provision, that the 

concentration of debit balances is 

appropriate, then such designated examining 

authority may grant a partial or plenary 

exception from this provision. The debit 

balance may be included in the reserve 

formula computation for five business days 

from the day the request is made. 

(6) Debit balances in joint accounts, 

custodian accounts, participation in hedge 

funds or limited partnerships or similar type 

accounts or arrangements that include both 

assets of a person or persons who would be 

excluded from the definition of customer 

(‘‘noncustomer’’) and assets of a person or 

persons who would be included in the 

definition of customer must be included in 

the Reserve Formula in the following 

manner: if the percentage ownership of the 

non-customer is less than 5 percent then the 

entire debit balance shall be included in the 

formula; if such percentage ownership is 

between 5 percent and 50 percent then the 

portion of the debit balance attributable to 

the non-customer must be excluded from the 

formula unless the broker or dealer can 

demonstrate that the debit balance is directly 

related to credit items in the formula; or if 

such percentage ownership is greater than 50 

percent, then the entire debit balance must be 

excluded from the formula unless the broker 

or dealer can demonstrate that the debit 

balance is directly related to credit items in 

the formula. 

Note F. Item 13 must include the amount 

of margin required and on deposit with the 

Options Clearing Corporation to the extent 

such margin is represented by cash, 

proprietary qualified securities and letters of 

credit collateralized by customers’ securities. 

Note G. (a) Item 14 must include the 

amount of margin required and on deposit 

with a clearing agency registered with the 

Commission under section 17A of the Act (15 

U.S.C. 78q–1) or a derivatives clearing 

organization registered with the Commodity 

Futures Trading Commission under section 

5b of the Commodity Exchange Act (7 U.S.C. 

7a–1) for customer accounts to the extent that 

the margin is represented by cash, 

proprietary qualified securities, and letters of 

credit collateralized by customers’ securities. 

(b) Item 14 will apply only if the broker or 

dealer has the margin related to security 

futures products, or futures (and options 

thereon) carried in a securities account 

pursuant to an approved SRO portfolio 

margining program on deposit with: 

(1) A registered clearing agency or 

derivatives clearing organization that: 

(i) Maintains security deposits from 

clearing members in connection with 

regulated options or futures transactions and 

assessment power over member firms that 

equal a combined total of at least $2 billion, 

at least $500 million of which must be in the 

form of security deposits. For the purposes of 

this Note G, the term ‘‘security deposits’’ 

refers to a general fund, other than margin 

deposits or their equivalent, that consists of 

cash or securities held by a registered 

clearing agency or derivative clearing 

organization; or 

(ii) Maintains at least $3 billion in margin 

deposits; or 

(iii) Does not meet the requirements of 

paragraphs (b)(1)(i) through (b)(1)(iii) of this 

Note G, if the Commission has determined, 

upon a written request for exemption by or 

for the benefit of the broker or dealer, that the 

broker or dealer may utilize such a registered 

clearing agency or derivatives clearing 

organization. The Commission may, in its 

sole discretion, grant such an exemption 

subject to such conditions as are appropriate 

under the circumstances, if the Commission 

determines that such conditional or 

unconditional exemption is necessary or 

appropriate in the public interest, and is 

consistent with the protection of investors; 

and 

(2) A registered clearing agency or 

derivatives clearing organization that, if it 

holds funds or securities deposited as margin 

for security futures products or futures in a 

portfolio margin account in a bank, as 

defined in section 3(a)(6) of the Act (15 

U.S.C. 78c(a)(6)), obtains and preserves 

written notification from the bank at which 

it holds such funds and securities or at which 

such funds and securities are held on its 

behalf. The written notification will state that 

all funds and/or securities deposited with the 

bank as margin (including customer security 

futures products and futures in a portfolio 

margin account), or held by the bank and 

pledged to such registered clearing agency or 

derivatives clearing agency as margin, are 

being held by the bank for the exclusive 

benefit of clearing members of the registered 

clearing agency or derivatives clearing 

organization (subject to the interest of such 

registered clearing agency or derivatives 

clearing organization therein), and are being 

kept separate from any other accounts 

maintained by the registered clearing agency 

or derivatives clearing organization with the 

bank. The written notification also will 

provide that such funds and/or securities 

will at no time be used directly or indirectly 

as security for a loan to the registered 

clearing agency or derivatives clearing 

organization by the bank, and will be subject 

to no right, charge, security interest, lien, or 

claim of any kind in favor of the bank or any 

person claiming through the bank. This 

provision, however, will not prohibit a 

registered clearing agency or derivatives 

clearing organization from pledging customer 

funds or securities as collateral to a bank for 

any purpose that the rules of the Commission 

or the registered clearing agency or 

derivatives clearing organization otherwise 

permit; and 

(3) A registered clearing agency or 

derivatives clearing organization establishes, 

documents, and maintains: 

(i) Safeguards in the handling, transfer, and 

delivery of cash and securities; 

(ii) Fidelity bond coverage for its 

employees and agents who handle customer 

funds or securities. In the case of agents of 

a registered clearing agency or derivatives 

clearing organization, the agent may provide 

the fidelity bond coverage; and 

(iii) Provisions for periodic examination by 

independent public accountants; and 

(iv) A derivatives clearing organization 

that, if it is not otherwise registered with the 

Commission, has provided the Commission 

with a written undertaking, in a form 

acceptable to the Commission, executed by a 

duly authorized person at the derivatives 

clearing organization, to the effect that, with 

respect to the clearance and settlement of the 

customer security futures products and 

futures in a portfolio margin account of the 

broker or dealer, the derivatives clearing 

organization will permit the Commission to 

examine the books and records of the 

derivatives clearing organization for 

compliance with the requirements set forth 

in § 240.15c3–3a, Note G (b)(1) through (3). 

(c) Item 14 will apply only if a broker or 

dealer determines, at least annually, that the 

registered clearing agency or derivatives 

clearing organization with which the broker 

or dealer has on deposit margin related to 

securities future products or futures in a 

portfolio margin account meets the 

conditions of this Note G. 

Note H. (a) Item 15 must include the 

amount of margin required and on deposit 

with a clearing agency registered with the 

Commission under section 17A of the Act (15 

U.S.C. 78q–1) that clears, settles, and novates 

transactions in U.S. Treasury securities 

(‘‘qualified clearing agency’’) to the extent 

that the margin is: 

(1) In the form of cash, U.S. Treasury 

securities, or qualified customer securities; 

and 

(2) Being used to margin U.S. Treasury 

securities positions of the customers of the 

broker or dealer that are cleared, settled, and 

novated by the qualified clearing agency. 

(b) Item 15 will apply only if the cash and 

securities required and on deposit at the 

qualified clearing agency: 

(1)(i) Are cash owed by the broker or dealer 

to the customer of the broker or dealer that 

was delivered by the broker or dealer to the 

qualified clearing agency to meet a margin 

requirement resulting from that customer’s 

U.S. Treasury securities positions cleared, 

settled, and novated at the qualified clearing 

agency and not for any other customer’s or 

the broker’s or dealer’s U.S. Treasury 

securities positions cleared, settled, and 

novated at the qualified clearing agency; 

(ii) U.S. Treasury securities or qualified 

customer securities held in custody by the 

broker or dealer for the customer of the 

broker or dealer that were delivered by the 

broker or dealer to the qualified clearing 

agency to meet a margin requirement 

resulting from that customer’s U.S. Treasury 

securities positions cleared, settled, and 

novated at the qualified clearing agency and 

not for any other customer’s or the broker’s 

or dealer’s U.S. Treasury securities positions 

cleared, settled, and novated at the qualified 

clearing agency; or 

(iii) U.S. Treasury securities owned by the 

broker or dealer that were delivered by the 

broker or dealer to the qualified clearing 

agency to meet a margin requirement 

resulting from a customer’s U.S. Treasury 

securities positions cleared, settled, and 

novated at the qualified clearing agency 

under the following conditions: 

(A) The broker or dealer did not owe to the 

customer or hold in custody for the customer 


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2828 Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Rules and Regulations 

sufficient cash, U.S. Treasury securities, and/ 

or qualified customer securities to meet a 

margin requirement resulting from that 

customer’s U.S. Treasury securities positions 

cleared, settled, and novated at the qualified 

clearing agency at the time the margin 

requirement arose; 

(B) The broker or dealer calls for the 

customer to deliver a sufficient amount of 

cash, U.S. Treasury securities, and/or 

qualified customer securities to meet the 

margin requirement on the day the margin 

requirement arose; and 

(C) The broker or dealer receives a 

sufficient amount of cash, U.S. Treasury 

securities, and/or qualified customer 

securities to meet the margin requirement by 

the close of the next business day after the 

margin requirement arose. 

(2) Are treated in accordance with rules of 

the qualified clearing agency that impose the 

following requirements and the qualified 

clearing agency and broker or dealer are in 

compliance with the requirements of the 

rules (as applicable): 

(i) Rules requiring the qualified clearing 

agency to calculate a separate margin amount 

for each customer of the broker or dealer and 

the broker or dealer to deliver that amount 

of margin for each customer on a gross basis; 

(ii) Rules limiting the qualified clearing 

agency from investing cash delivered by the 

broker or dealer to margin U.S. Treasury 

security transactions of the customers of the 

broker or dealer or cash realized through 

using U.S. Treasury securities delivered by 

the broker or dealer for that purpose in any 

asset other than U.S. Treasury securities with 

a maturity of one year or less; 

(iii) Rules requiring that the cash, U.S. 

Treasury securities, and qualified customer 

securities used to margin the U.S. Treasury 

securities positions of the customers of the 

broker or dealer be held in an account of the 

broker or dealer at the qualified clearing 

agency that is segregated from any other 

account of the broker or dealer at the 

qualified clearing agency and that is: 

(A) Used exclusively to clear, settle, 

novate, and margin U.S. Treasury securities 

transactions of the customers of the broker or 

dealer; 

(B) Designated ‘‘Special Clearing Account 

for the Exclusive Benefit of the Customers of 

[name of broker or dealer]’’; 

(C) Subject to a written notice of the 

qualified clearing agency provided to and 

retained by the broker or dealer that the cash, 

U.S. Treasury securities, and qualified 

customer securities in the account are being 

held by the qualified clearing agency for the 

exclusive benefit of the customers of the 

broker or dealer in accordance with the 

regulations of the Commission and are being 

kept separate from any other accounts 

maintained by the broker or dealer or any 

other clearing member at the qualified 

clearing agency; and 

(D) Subject to a written contract between 

the broker or dealer and the qualified 

clearing agency which provides that the cash, 

U.S. Treasury securities, and qualified 

customer securities in the account are not 

available to cover claims arising from the 

broker or dealer or any other clearing 

member defaulting on an obligation to the 

qualified clearing agency or subject to any 

other right, charge, security interest, lien, or 

claim of any kind in favor of the qualified 

clearing agency or any person claiming 

through the qualified clearing agency, except 

a right, charge, security interest, lien, or 

claim resulting from a cleared U.S. Treasury 

securities transaction of a customer of the 

broker or dealer effected in the account; 

(iv) Rules requiring the qualified clearing 

agency to hold the customer cash, U.S. 

Treasury securities, and qualified customer 

securities used to margin the U.S. Treasury 

securities positions of the customers of the 

broker or dealer itself or in an account of the 

clearing agency at a U.S. Federal Reserve 

Bank or a ‘‘bank,’’ as that term is defined in 

section 3(a)(6) of the Act (15 U.S.C. 

78c(a)(6)), that is insured by the Federal 

Deposit Insurance Corporation, and that the 

account at the U.S. Federal Reserve Bank or 

bank must be: 

(A) Segregated from any other account of 

the qualified clearing agency or any other 

person at the U.S. Federal Reserve Bank or 

bank and used exclusively to hold cash, U.S. 

Treasury securities, and qualified customer 

securities to meet current margin 

requirements of the qualified clearing agency 

resulting from positions in U.S. Treasury 

securities of the customers of the broker or 

dealer members of the qualified clearing 

agency; 

(B) Subject to a written notice of the U.S. 

Federal Reserve Bank or bank provided to 

and retained by the qualified clearing agency 

that the cash, U.S. Treasury securities, and 

qualified customer securities in the account 

are being held by the U.S. Federal Reserve 

Bank or bank pursuant to § 240.15c3–3 and 

are being kept separate from any other 

accounts maintained by the qualified clearing 

agency or any other person at the U.S. 

Federal Reserve Bank or bank; and 

(C) Subject to a written contract between 

the qualified clearing agency and the U.S. 

Federal Reserve Bank or bank which 

provides that the cash, U.S. Treasury 

securities, and qualified customer securities 

in the account are subject to no right, charge, 

security interest, lien, or claim of any kind 

in favor of the U.S. Federal Reserve Bank or 

bank or any person claiming through the U.S. 

Federal Reserve Bank or bank; and 

(v) Rules requiring systems, controls, 

policies, and procedures to return cash, U.S. 

Treasury securities, and qualified customer 

securities to the broker or dealer that are no 

longer needed to meet a current margin 

requirement resulting from positions in U.S. 

Treasury securities of the customers of the 

broker or dealer; and 

(3) The Commission has approved rules of 

the qualified clearing agency that meet the 

conditions of this Note H and has published 

(and not subsequently withdrawn) a notice 

that brokers or dealers may include a debit 

in the customer reserve formula when 

depositing cash, U.S. Treasury securities, 

and/or qualified customer securities to meet 

a margin requirement of the qualified 

clearing agency resulting from positions in 

U.S. Treasury securities of the customers of 

the broker or dealer. 

(c) As used in this Note H, the term 

‘‘qualified customer securities’’ means the 

securities of a customer of the broker or 

dealer (other than U.S. Treasury securities) 

that are held in custody by the broker or 

dealer for the customer and that under the 

rules of the qualified clearing agency are 

eligible to be used to margin U.S. Treasury 

securities positions of the customer that are 

cleared, settled, and novated by the qualified 

clearing agency. 

Notes Regarding the PAB Reserve Bank 

Account Computation 

Note 1. Broker-dealers should use the 

formula in Exhibit A for the purposes of 

computing the PAB reserve requirement, 

except that references to ‘‘accounts,’’ 

‘‘customer accounts, or ‘‘customers’’ will be 

treated as references to PAB accounts. 

Note 2. Any credit (including a credit 

applied to reduce a debit) that is included in 

the computation required by § 240.15c3–3 

with respect to customer accounts (the 

‘‘customer reserve computation’’) may not be 

included as a credit in the computation 

required by § 240.15c3–3 with respect to PAB 

accounts (the ‘‘PAB reserve computation’’). 

Note 3. Note E(1) to § 240.15c3–3a does not 

apply to the PAB reserve computation. 

Note 4. Note E(3) to § 240.15c3–3a which 

reduces debit balances by 1 percent does not 

apply to the PAB reserve computation. 

Note 5. Interest receivable, floor brokerage, 

and commissions receivable of another 

broker or dealer from the broker or dealer 

(excluding clearing deposits) that are 

otherwise allowable assets under § 240.15c3– 

1 need not be included in the PAB reserve 

computation, provided the amounts have 

been clearly identified as payables on the 

books of the broker or dealer. Commissions 

receivable and other receivables of another 

broker or dealer from the broker or dealer 

that are otherwise non-allowable assets under 

§ 240.15c3–1 and clearing deposits of another 

broker or dealer may be included as ‘‘credit 

balances’’ for purposes of the PAB reserve 

computation, provided the commissions 

receivable and other receivables are subject 

to immediate cash payment to the other 

broker or dealer and the clearing deposit is 

subject to payment within 30 days. 

Note 6. Credits included in the PAB 

reserve computation that result from the use 

of securities held for a PAB account (‘‘PAB 

securities’’) that are pledged to meet intraday margin calls in a cross-margin account 

established between the Options Clearing 

Corporation and any regulated derivatives 

clearing organization may be reduced to the 

extent that the excess margin held by the 

other clearing corporation in the crossmargin relationship is used the following 

business day to replace the PAB securities 

that were previously pledged. In addition, 

balances resulting from a portfolio margin 

account that are segregated pursuant to 

Commodity Futures Trading Commission 

regulations need not be included in the PAB 

Reserve Bank Account computation. 

Note 7. Deposits received prior to a 

transaction pending settlement which are $5 

million or greater for any single transaction 

or $10 million in aggregate may be excluded 

as credits from the PAB reserve computation 

if such balances are placed and maintained 

in a separate PAB Reserve Bank Account by 


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12 p.m. Eastern Time on the following 

business day. Thereafter, the money 

representing any such deposits may be 

withdrawn to complete the related 

transactions without performing a new PAB 

reserve computation. 

Note 8. A credit balance resulting from a 

PAB reserve computation may be reduced by 

the amount that items representing such 

credits are swept into money market funds or 

mutual funds of an investment company 

registered under the Investment Company 

Act of 1940 on or prior to 10 a.m. Eastern 

Time on the deposit date provided that the 

credits swept into any such fund are not 

subject to any right, charge, security interest, 

lien, or claim of any kind in favor of the 

investment company or the broker or dealer. 

Any credits that have been swept into money 

market funds or mutual funds must be 

maintained in the name of a particular broker 

or for the benefit of another broker. 

Note 9. Clearing deposits required to be 

maintained at registered clearing agencies 

may be included as debits in the PAB reserve 

computation to the extent the percentage of 

the deposit, which is based upon the clearing 

agency’s aggregate deposit requirements (e.g., 

dollar trading volume), that relates to the 

proprietary business of other brokers and 

dealers can be identified. However, Note H 

to Item 15 of § 240.15c3–3a applies with 

respect to margin delivered to a U.S. 

Treasury securities clearing agency. 

Note 10. A broker or dealer that clears PAB 

accounts through an affiliate or third party 

clearing broker must include these PAB 

account balances and the omnibus PAB 

account balance in its PAB reserve 

computation. 

■ 3. Redesignate § 240.17Ad–22 as 

§ 240.17ad–22 and amend newly 

redesignated § 240.17ad–22 by: 

■ a. In paragraph (a): 

■ i. Removing the designations for 

paragraphs (a)(1) through (19) and 

placing the paragraphs alphabetical 

order, and 

■ ii. Adding in alphabetical order 

definitions for ‘‘Affiliated 

counterparty’’, ‘‘Central bank’’, ‘‘Eligible 

secondary market transaction’’, 

‘‘International financial institution’’, 

‘‘State or local government’’, ‘‘Sovereign 

entity’’, and ‘‘U.S. Treasury security’’. 

■ b. Revising paragraphs (e)(6)(i) and 

(18). 

The revisions and additions read as 

follows: 

§ 240.17ad–22 Standards for clearing 

agencies. 

(a) * * * 

Affiliated counterparty means any 

counterparty which meets the following 

criteria: 

(i) The counterparty is either a bank 

(as defined in 15 U.S.C. 78c(6)), broker 

(as defined in 15 U.S.C. 78c(4)), dealer 

(as defined in 15 U.S.C. 78c(5)), or 

futures commission merchant (as 

defined in 7 U.S.C. 1a(28)), or any entity 

regulated as a bank, broker, dealer, or 

futures commission merchant in its 

home jurisdiction; 

(ii) The counterparty holds, directly 

or indirectly, a majority ownership 

interest in the direct participant, or the 

direct participant, directly or indirectly, 

holds a majority ownership interest in 

the counterparty, or a third party, 

directly or indirectly, holds a majority 

ownership interest in both the direct 

participant and the counterparty; and 

(iii) The counterparty, direct 

participant, or third party referenced in 

paragraph (ii) of this definition as 

holding the majority ownership interest 

would be required to report its financial 

statements on a consolidated basis 

under U.S. Generally Accepted 

Accounting Principles or International 

Financial Reporting Standards, and 

such consolidated financial statements 

include the financial results of the 

majority-owned party or of both 

majority-owned parties. 

* * * * * 

Central bank means a reserve bank or 

monetary authority of a central 

government (including the Board of 

Governors of the Federal Reserve 

System or any of the Federal Reserve 

Banks) and the Bank for International 

Settlements. 

* * * * * 

Eligible secondary market transaction 

refers to a secondary market transaction 

in U.S. Treasury securities of a type 

accepted for clearing by a registered 

covered clearing agency that is: 

(i) A repurchase or reverse repurchase 

agreement collateralized by U.S. 

Treasury securities, in which one of the 

counterparties is a direct participant; or 

(ii) A purchase or sale, between a 

direct participant and: 

(A) Any counterparty, if the direct 

participant of the covered clearing 

agency brings together multiple buyers 

and sellers using a trading facility (such 

as a limit order book) and is a 

counterparty to both the buyer and 

seller in two separate transactions; or 

(B) Registered broker-dealer, 

government securities broker, or 

government securities dealer; except 

that: 

(iii) Any purchase or sale transaction 

in U.S. Treasury securities or 

repurchase or reverse repurchase 

agreement collateralized by U.S. 

Treasury securities in which one 

counterparty is a central bank, a 

sovereign entity, an international 

financial institution, or a natural person 

shall be excluded from the definition set 

forth in this section of an eligible 

secondary market transaction; 

(iv) Any repurchase or reverse 

repurchase agreement collateralized by 

U.S. Treasury securities in which one 

counterparty is a covered clearing 

agency providing central counterparty 

services or a derivatives clearing 

organization (see 7 U.S.C. 7a–1 and 17 

CFR 39.3), or is regulated as a central 

counterparty in its home jurisdiction, 

shall be excluded from the definition set 

forth in this section of an eligible 

secondary market transaction; 

(v) Any repurchase or reverse 

repurchase agreement collateralized by 

U.S. Treasury securities in which one 

counterparty is a state or local 

government shall be excluded from the 

definition set forth in this section of an 

eligible secondary market transaction; 

(vi) Any repurchase or reverse 

repurchase agreement collateralized by 

U.S. Treasury securities entered into 

between a direct participant and an 

affiliated counterparty shall be excluded 

from the definition set forth in this 

section of an eligible secondary market 

transaction, provided that the affiliated 

counterparty submit for clearance and 

settlement all other repurchase or 

reverse repurchase agreements 

collateralized by U.S. Treasury 

securities to which the affiliate is a 

party. 

* * * * * 

International financial institution 

means the African Development Bank; 

African Development Fund; Asian 

Development Bank; Banco 

Centroamericano de Integracio ́n 

Econo ́mica; Bank for Economic 

Cooperation and Development in the 

Middle East and North Africa; 

Caribbean Development Bank; 

Corporacio ́n Andina de Fomento; 

Council of Europe Development Bank; 

European Bank for Reconstruction and 

Development; European Investment 

Bank; European Investment Fund; 

European Stability Mechanism; InterAmerican Development Bank; InterAmerican Investment Corporation; 

International Bank for Reconstruction 

and Development; International 

Development Association; International 

Finance Corporation; International 

Monetary Fund; Islamic Development 

Bank; Multilateral Investment Guarantee 

Agency; Nordic Investment Bank; North 

American Development Bank; and any 

other entity that provides financing for 

national or regional development in 

which the U.S. Government is a 

shareholder or contributing member. 

* * * * * 

Sovereign entity means a central 

government (including the U.S. 

Government), or an agency, department, 

or ministry of a central government. 

* * * * * 


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State or local government means a 

state or any political subdivision 

thereof, or an agency or instrumentality 

of a State or any political subdivision 

thereof, but shall not include any 

pension or retirement plan established 

and maintained by a State, its political 

subdivisions, or any agency or 

instrumentality of a State or its political 

subdivisions, for the benefit of its 

employees. 

* * * * * 

U.S. Treasury security means any 

security issued by the U.S. Department 

of the Treasury. 

* * * * * 

(e) * * * 

(6) * * * 

(i) Considers, and produces margin 

levels commensurate with, the risks and 

particular attributes of each relevant 

product, portfolio, and market, and, if 

the covered clearing agency provides 

central counterparty services for U.S. 

Treasury securities, calculates, collects, 

and holds margin amounts from a direct 

participant for its proprietary positions 

in Treasury securities separately and 

independently from margin calculated 

and collected from that direct 

participant in connection with U.S. 

Treasury securities transactions by an 

indirect participant that relies on the 

services provided by the direct 

participant to access the covered 

clearing agency’s payment, clearing, or 

settlement facilities; 

* * * * * 

(18) Establish objective, risk-based, 

and publicly disclosed criteria for 

participation, which: 

(i) Permit fair and open access by 

direct and, where relevant, indirect 

participants and other financial market 

utilities; 

(ii) Require participants to have 

sufficient financial resources and robust 

operational capacity to meet obligations 

arising from participation in the clearing 

agency; 

(iii) Monitor compliance with such 

participation requirements on an 

ongoing basis; and 

(iv) When the covered clearing agency 

provides central counterparty services 

for transactions in U.S. Treasury 

securities, 

(A) Require that any direct participant 

of such covered clearing agency submit 

for clearance and settlement all of the 

eligible secondary market transactions 

to which such direct participant is a 

counterparty; 

(B) Identify and monitor its direct 

participants’ submission of transactions 

for clearing as required in paragraph 

(e)(18)(iv)(A) of this section, including 

how the covered clearing agency would 

address a failure to submit transactions 

in accordance with paragraph 

(e)(18)(iv)(A) of this section; and 

(C) Ensure that it has appropriate 

means to facilitate access to clearance 

and settlement services of all eligible 

secondary market transactions in U.S. 

Treasury securities, including those of 

indirect participants, which policies 

and procedures the board of directors of 

such covered clearing agency reviews 

annually. 

* * * * * 

By the Commission. 

Dated: December 13, 2023. 

J. Matthew DeLesDernier, 

Deputy Secretary. 

[FR Doc. 2023–27860 Filed 1–12–24; 8:45 am] 

BILLING CODE 8011–01–P 


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