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[Federal Register Volume 89, Number 229 (Wednesday, November 27, 2024)]
[Notices]
[Pages 93763-93780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27763]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101695; File No. SR-FICC-2024-007]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change, as Modified by Partial Amendment 
No. 1, To Modify the GSD Rules (i) Regarding the Separate Calculation, 
Collection and Holding of Margin for Proprietary Transactions and That 
for Indirect Participant Transactions, and (ii) To Address the 
Conditions of Note H to Rule 15c3-3a

November 21, 2024.
    On March 14, 2024, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-FICC-2024-007 pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
\2\ thereunder to modify FICC's Government Securities Division 
(``GSD'') Rulebook (``GSD Rules'') to calculate, collect, and hold 
margin for transactions that a direct GSD participant enters into for 
its own benefit (``proprietary transactions'') separately from margin a 
direct participant submits to FICC on behalf of indirect participants 
and to address conditions of Note H to Rule 15c3-3a under the Exchange 
Act (the ``Proposed Rule Change'').\3\ The Proposed Rule Change was 
published for public comment in the Federal Register on March 28, 
2024.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 99149 (Dec. 13, 
2023), 89 FR 2714 (Jan. 16, 2024) (S7-23-22) (``Adopting Release,'' 
and the rules adopted therein as ``Treasury Clearing Rules''). See 
also 17 CFR 240.15c3-3a.
    \4\ Securities Exchange Act Release No. 99844 (March 22, 2024), 
89 FR 21603 (Mar. 28, 2024) (File No. SR-FICC-2024-007) (``Notice of 
Filing''). FICC also filed a related Advance Notice with the 
Commission pursuant to Section 806(e)(1) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, entitled the 
Payment, Clearing, and Settlement Supervision Act of 2010 and Rule 
19b-4(n)(1)(i) under the Exchange Act. 12 U.S.C. 5465(e)(1). 15 
U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. The Advance 
Notice was published in the Federal Register on March 28, 2024. 
Securities Exchange Act Release No. 99845 (Mar. 22, 2024), 89 FR 
21586 (Mar. 28, 2024) (File No. SR-FICC-2024-802). Upon publication 
of notice of filing of the Advance Notice, the Commission extended 
the review period of the advance notice for an additional 60 days 
because the Commission determined that the advance notice raised 
novel and complex issues. On April 24, 2024, the Commission 
requested additional information from FICC pursuant to Section 
806(e)(1)(D) of the Clearing Supervision Act, which tolled the 
Commission's period of review of the Advance Notice until 120 days 
from the date the information requested by the Commission was 
received by the Commission. See 12 U.S.C. 5465(e)(1)(D). A memo 
regarding the Request for Additional Information and the tolled 
period of review is available at https://www.sec.gov/comments/sr-ficc-2024-802/srficc2024802-462751-1210414.pdf. On September 24, 
2024, the Commission requested additional information from FICC 
pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act, 
which tolled the Commission's period of review of the Advance Notice 
until 120 days from the date the information requested by the 
Commission was received by the Commission. On October 21, 2024, the 
Commission received FICC's response to the Commission's September 
24, 2024 request for additional information. See 12 U.S.C. 
5465(e)(1)(E)(ii) and (G)(ii). A memo regarding receipt of FICC's 
response to the Request for Additional Information is available at 
https://www.sec.gov/comments/sr-ficc-2024-802/srficc2024802-539295-1544222.pdf.

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[[Page 93764]]

    On April 24, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\5\ the Commission designated a longer period within which to 
approve, disapprove, or institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\6\ On June 21, 2024, 
pursuant to Section 19(b)(2)(B) of the Exchange Act,\7\ the Commission 
instituted proceedings to determine whether to approve or disapprove 
the Proposed Rule Change.\8\ On September 18, 2024, the Commission 
extended the time period for Commission action on the proceedings to 
determine whether to disapprove the Proposed Rule Change.\9\ On October 
25, 2024, FICC filed Partial Amendment No. 1 to the Proposed Rule 
Change.\10\ The Proposed Rule Change, as modified by Partial Amendment 
No. 1, is referred to herein as the ``Proposed Rule Change.''
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 100022 (Apr. 24, 2024), 
89 FR 34289 (Apr. 30, 2024) (File No. SR-FICC-2024-007).
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ Securities Exchange Act Release No. 100401 (Jun. 21, 2024), 
89 FR 53690 (Jun. 27, 2024) (File No. SR-FICC-2024-007).
    \9\ Securities Exchange Act Release No. 101082 (Sep. 18, 2024), 
89 FR 77949 (Sep. 24, 2024) (File No. SR-FICC-2024-007).
    \10\ Securities Exchange Act Release No. 101454 (Oct. 28, 2024), 
89 FR 87441 (Nov. 1, 2024) (File No. SR-FICC-2024-007) (``Notice of 
Partial Amendment'').
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    The Commission has received comments regarding the substance of the 
Proposed Rule Change.\11\ The Commission also received a letter from 
FICC responding to the comments.\12\
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    \11\ Comments on the Proposed Rule Change are available at 
https://www.sec.gov/comments/sr-ficc-2024-007/srficc2024007.htm. 
Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-ficc-2024-802/srficc2024802.htm. Because the proposals 
contained in the Proposed Rule Change and the Advance Notice are the 
same, the Commission considers all comments received on the 
proposal, regardless of whether the comments are submitted with 
respect to the Advance Notice or the Proposed Rule Change. The 
comment letters to the Proposed Rule Change and Advance Notice also 
contained comments on the substance of another FICC proposed rule 
change, FICC-2024-005. The Commission will only be addressing 
comments relevant to this proposal and will address the comments on 
the other proposed rule change in a separate order.
    \12\ See Letter from Laura Klimpel, Managing Director, Head of 
Fixed Income and Financing Solutions, Depository Trust & Clearing 
Corporation, (Aug. 1, 2024) (``FICC Letter'').
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    For the reasons discussed below, the Commission is approving the 
Proposed Rule Change.

I. Description of the Proposed Rule Change

A. Background and Terminology

    FICC, through its GSD, is a central counterparty and provider of 
clearance and settlement services for the U.S. government securities 
markets. As a central counterparty in the U.S. government securities 
markets, FICC novates transactions between two counterparties, 
effectively becoming the buyer to every seller and the seller to every 
buyer, and guarantees the settlement of the novated transactions. This 
means that FICC is exposed to a number of risks arising from such 
transactions, including counterparty credit risk. FICC seeks to 
maintain sufficient resources (i.e., margin) to cover its credit 
exposures to its participants fully with a high degree of confidence 
and mitigate potential losses from a default of a direct GSD 
participant, which is generally referred to as a Netting Member under 
the GSD Rules \13\ (and in this Order).
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    \13\ The GSD Rules are available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/ficc_gov_rules.pdf. Terms not 
otherwise defined herein are defined in the GSD Rules.
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    On December 13, 2023, the Commission adopted amendments to the 
standards applicable to covered clearing agencies that clear 
transactions in U.S. Treasury securities (``Treasury CCAs''), such as 
FICC.\14\ These amendments require Treasury CCAs to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to, among other things, calculate, collect, and 
hold margin for direct participants' proprietary positions separately 
and independently from margin calculated, collected, and held for 
indirect participants that rely on the services provided by the direct 
participant to access the Treasury CCA's payment, clearing, or 
settlement facilities.\15\ The Commission also amended its broker-
dealer customer protection rule (``Rule 15c3-3'') \16\ and the customer 
and proprietary accounts of broker-dealer (``PAB'' reserve formulas 
thereunder (``Rule 15c3-3a'') \17\ to permit margin required and on 
deposit with Treasury CCAs to be included under certain conditions as a 
debit in the reserve formulas.\18\
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    \14\ See supra note 3.
    \15\ 17 CFR 240.17ad-22(e)(6)(i).
    \16\ 17 CFR 240.15c3-3.
    \17\ 17 CFR 240.15c3-3a.
    \18\ See supra note 3.
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    The GSD Rules describe how FICC provides clearance and settlement 
services to both direct participants and indirect participants, the 
latter of which rely on the services provided by direct participants to 
access FICC's clearance and settlement facilities. Currently, the GSD 
Rules allow indirect participants to access GSD's clearing services 
through a Netting Member (that is, a direct participant) via two 
models: the correspondent clearing/prime broker services \19\ and the 
Sponsored Service.\20\ The primary difference between the two models is 
that an indirect participant who becomes a Sponsored Member via the 
Sponsored Service model must establish an indirect, limited purpose 
FICC membership, whereas the correspondent clearing/prime broker 
services do not require an indirect member to establish any 
relationship with FICC.\21\
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    \19\ See GSD Rule 8, supra note 13.
    \20\ See generally GSD Rule 3A, supra note 13.
    \21\ See Securities Exchange Act Release No. 99817 (Mar. 21, 
2024), 89 FR 21362, at 21364 (Mar. 27, 2024) (File No. SR-FICC-2024-
005).
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    The correspondent clearing/prime broker services allow a Netting 
Member to submit eligible transactions to FICC on behalf of an indirect 
participant (referred to as the ``Executing Firm''), record these 
transactions in the same account as the proprietary transactions that 
the Netting Member (referred to as a ``Submitting Member'') enters into 
for its own benefit, and net the indirect participants' transactions 
against the Netting Member's proprietary transactions for purposes of 
calculating the Netting Member's margin requirements. Unlike the 
Sponsored Service, FICC has no relationship with the Executing Firm, 
and all obligations (i.e., margin and settlement) under the GSD Rules 
remain with the Submitting Member.\22\
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    \22\ Id. at 21365; see also GSD Rule 8, supra note 13.

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[[Page 93765]]

    Under a proposed rule change being approved concurrently, FICC is 
renaming the prime broker/correspondent clearing model to be known as 
the Agent Clearing Service and providing further specificity around the 
operation of that service.\23\ In that service, the Netting Member 
which serves as the direct participant to FICC would be referred to as 
the Agent Clearing Member, and the indirect participant would be 
referred to as an Executing Firm Customer. An Executing Firm Customer 
would have no direct relationship to FICC. This separate change would 
require that a Netting Member using the Agent Clearing Service submit 
transactions for Executing Firm Customers through an Agent Clearing 
Member Omnibus Account, to be recorded separately from its other 
clearing activity, including its proprietary activity. It would also 
add a definition for transactions eligible to be submitted by an Agent 
Clearing Member on behalf of its Executing Firm Customers (``Agent 
Clearing Transactions'').
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    \23\ See Order, FICC-2024-005, available at https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking/ficc.
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    In addition, in the Sponsored Service, both currently and in a 
concurrently approved proposed rule change,\24\ Netting Members that 
are approved to be Sponsoring Members are able to sponsor certain 
indirect participants, referred to as Sponsored Members, into GSD 
membership and submit transactions on behalf of those Sponsored 
Members. A Sponsored Member is the legal counterparty to FICC for any 
submitted transactions.\25\ However, the Sponsoring Member 
unconditionally guarantees to FICC the Sponsored Member's performance 
under a Sponsoring Member Guaranty, which guarantees to FICC the 
payment and performance of a Sponsored Member's obligations to 
FICC.\26\ Therefore, reliance upon the Sponsoring Member Guaranty 
necessarily involves FICC's reliance upon the financial resources of 
the Sponsoring Member.
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    \24\ See id.
    \25\ See GSD Rule 3A, section 7 (describing novation of 
Sponsored Member Trades) and 2 (identifying membership types), supra 
note 13.
    \26\ See GSD Rules 3A (describing the operation of the 
Sponsoring Member Guaranty) and 1 (defining the Sponsoring Member 
Guaranty), supra note 13.
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    Unlike the correspondent clearing/prime broker services, 
transactions by the Sponsoring Member's Sponsored Members (``Sponsored 
Member Trades'') are not netted, for margining purposes, against 
transactions of the Sponsoring Member or another Sponsored Member. 
Instead, FICC records Sponsored Member Trades in a Sponsored Member 
Omnibus Account, and calculates margin requirements for each Sponsored 
Member individually on a gross basis (i.e., without netting their 
transactions against transactions of the Sponsoring Member or another 
Sponsored Member).\27\
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    \27\ See GSD Rule 3A, Section 10(c), supra note 13.
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B. Proposed Changes

    In the Proposed Rule Change, FICC seeks to address the Commission's 
new margin and account separation requirements and the conditions for 
including margin in the broker-dealer reserve formulas discussed in 
part I.A above.\28\ As described in greater detail below, the Proposed 
Rule Change would (1) provide for the separate and independent 
calculation, collection, and holding of margin for proprietary 
transactions of a Netting Member from margin submitted to FICC by a 
Netting Member to support the transactions of an indirect participant 
(i.e., either an Executing Firm Customer or a Sponsored Member); (2) 
establish segregated accounts for direct and indirect participants, 
including establishing a minimum $1 million cash margin requirement for 
each Segregated Indirect Participant; (3) consolidate the methodology 
for calculating the margin requirements, including definitions of 
relevant terms and components for calculating margin requirements from 
various sections of the current GSD Rules into a single margin 
component schedule (``Margin Component Schedule''), specify how the 
various components relate to different types of margin, and make 
certain changes to the margin methodology, including revising the 
Margin Liquidity Adjustment (``MLA Charge'') \29\ definition, providing 
a method for allocating net unsettled positions to individual indirect 
participants for calculating margin requirements, and revising and 
clarifying the calculation of the Excess Capital Premium (``ECP'') 
component \30\ of the Clearing Fund; and (4) modify the terms relating 
to transactions submitted by Inter-Dealer Broker Netting Members \31\ 
to FICC for clearance and settlement (``Brokered Transactions'').
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    \28\ See supra note 3.
    \29\ The MLA Charge is a margin component designed to address 
the market impact costs of liquidating a defaulted Netting Member's 
portfolio that may increase when that portfolio includes large net 
unsettled positions in a particular group of securities with a 
similar risk profile or in a particular asset type, thereby causing 
those costs to be higher than the amount collected for the Netting 
Member's volatility charge, which is designed to capture the market 
price risk associated with liquidating each Netting Member's 
portfolio at a 99th percentile level of confidence. See GSD Rule 1 
(defining Margin Liquidity Adjustment Charge), supra note 13; see 
also Securities Exchange Act Release No. 89560 (Aug. 14, 2020), 85 
FR 51503 (Aug. 20, 2020) (File No. SR-FICC-2020-09) (approving the 
MLA charge as a new component of the margin methodology); Securities 
Exchange Act Release No. 98558 (Sep. 27, 2023), 88 FR 68179 (Oct. 3, 
2023) (File No. SR-FICC-2023-012) (approving revisions to ECP 
charge).
    \30\ The ECP is a margin component that allows FICC to collect 
additional margin if a member's exposure to FICC, based on its 
clearing activity, is out of proportion to its capital levels. It is 
designed to mitigate the heightened default risk a member could pose 
to FICC if it operates with lower capital levels relative to its 
margin requirements. See Margin Component Schedule (defining Excess 
Capital Premium), supra note 13; see also Securities Exchange Act 
Release No. 54457 (Sep. 15, 2006), 71 FR 55239 (Sep. 21, 2006) (File 
Nos. SR-FICC-2006-03 and SR-NSCC-2006-03) (approving the ECP charge 
as a new component of the margin methodology); Securities Exchange 
Act Release No. 96786 (Feb. 7, 2023), 88 FR 8013 (Feb. 7, 2023) 
(File No. SR-NSCC-2022-005) (approving revisions to ECP charge).
    \31\ An Inter-Dealer Broker is defined as a Person which is in 
the business of buying and selling securities as agent on behalf of 
dealers and is registered under Section 15 or Section 15C of the 
Exchange Act. GSD Rule 1 (defining Inter-Dealer Broker), supra note 
13. An Inter-Dealer Broker Netting Member must meet that definition 
and certain applicable membership requirements. See id. and Rule 2A 
(setting forth membership requirements).
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1. Separate Calculation, Collection, and Holding of Margin
    The Proposed Rule Change would provide for the separate and 
independent calculation, collection, and holding of (i) margin 
deposited by a Netting Member to support its proprietary transactions, 
and (ii) margin deposited by a Netting Member to support the 
transactions of an indirect participant, that is, either an Executing 
Firm Customer or a Sponsored Member. To facilitate the separate and 
independent calculation, collection, and holding proprietary and 
indirect participant margin, FICC would establish proprietary accounts 
to record the proprietary transactions that the Netting Member enters 
into for its own benefit and separate indirect participant accounts to 
record transactions that the Netting Member submits on behalf of an 
indirect participant, which could be either a Sponsored Member or an 
Executing Firm Customer.
    For proprietary transactions, the accounts would include Dealer 
Accounts, which would be available for all Netting Members, and Cash 
Broker Accounts and Repo Broker Accounts, which would only be available 
for Inter-Dealer Broker Netting Members.\32\ Cash

[[Page 93766]]

Broker Accounts would be available for recording an Inter-Dealer Broker 
Netting Member's Brokered Transactions (other than Brokered Repo 
Transactions), and Repo Broker Accounts would be for purposes of 
recording an Inter-Dealer Broker Netting Member's Brokered Repo 
Transactions.
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    \32\ Under the proposed changes, ``Cash Broker Account'' would 
be a proprietary account maintained by FICC for an Inter-Dealer 
Broker Netting Member to record Brokered Transactions, other than 
Brokered Repo Transactions, submitted to the Corporation by the 
Inter-Dealer Broker Netting Member. ``Repo Broker Account'' would be 
a proprietary account maintained by the FICC for an Inter-Dealer 
Broker Netting Member in its capacity as a Repo Broker to record 
Brokered Repo Transactions submitted to the Corporation by the 
Inter-Dealer Broker Netting Member.
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    For indirect participant transactions, FICC would establish 
Indirect Participants Accounts to record transactions that a Netting 
Member submits to FICC on behalf of Sponsored Members and Executing 
Firm Customers. These Indirect Participants Accounts would include 
Sponsoring Member Omnibus Accounts for recording Sponsored Member 
Trades and Agent Clearing Member Omnibus Accounts for recording Agent 
Clearing Transactions submitted on behalf of Executing Firm Customers. 
In addition, the proposal would permit a Sponsoring Member or Agent 
Clearing Member to designate any of its Indirect Participants Accounts 
as a segregated customer account (a ``Segregated Indirect Participants 
Account''). Such designation, as further described in part I.B.2 below, 
would give Netting Members a mechanism to direct FICC to calculate and 
segregate margin deposited in connection with the relevant Segregated 
Indirect Participants Account in accordance with the conditions 
described in Note H to Rule 15c3-3a.\33\
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    \33\ 17 CFR 240.15c3-3a.
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    The proposal would require each Netting Member to deposit two forms 
of margin: the Required Fund Deposit and the Segregated Customer Margin 
Requirement. The Required Fund Deposit, which would be deposited to the 
Clearing Fund, would be the sum of each Netting Member's proprietary 
accounts (e.g., Dealer Accounts and Broker Accounts) and indirect 
participant accounts (e.g., Agent Clearing Omnibus Accounts and 
Sponsoring Member Omnibus Accounts) not designated as Segregated 
Indirect Participants Accounts. The Segregated Customer Margin 
Requirement, which would be excluded from the Clearing Fund, would be 
the sum of the Netting Member's Sponsoring Member Omnibus Accounts 
designated as Segregated Indirect Participants Accounts and Agent 
Clearing Member Omnibus Accounts designated as Segregated Indirect 
Participants Accounts.
    FICC's proposal would also provide that a Netting Member's Margin 
Portfolio, which is utilized to determine a Netting Member's margin 
requirement, cannot include both proprietary and indirect participant 
accounts. As a result, the transactions a Netting Member submits to 
FICC on behalf of an indirect participant either as a Sponsoring Member 
or an Agent Clearing Member would no longer be netted against a Netting 
Member's proprietary transactions for calculating a Netting Member's 
margin requirements.\34\ Since proprietary transactions and 
transactions submitted for indirect participants would not be recorded 
in the same type of account, these changes would result in margin for a 
Netting Member's proprietary transactions being calculated separately 
and independently from margin calculated for the transactions that the 
Netting Member submits on behalf of indirect participants.
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    \34\ The Proposed Rule Change would also specify the types of 
accounts in which Netting Members may record transactions to 
identify the purpose and use of these accounts. FICC's ``Accounts'' 
are not custodial accounts in which FICC holds assets, but rather a 
mechanism for FICC to record and group transactions. These records 
are utilized by FICC in its calculation of a Netting Member's 
margining, settlement, and other obligations. Proprietary Accounts 
would include ``Dealer Accounts,'' which would be available for all 
Netting Members, and ``Cash Broker Accounts'' and ``Repo Broker 
Accounts,'' which would only be available for Inter-Dealer Broker 
Netting Members. Non-Proprietary Accounts would include, in the case 
of a Sponsoring Member, Sponsoring Member Omnibus Accounts for 
purposes of recording Sponsored Member Trades, and, in the case of 
an Agent Clearing Member, Agent Clearing Member Omnibus Accounts for 
purposes of recording Agent Clearing Transactions of its Executing 
Firm Customers.
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    To help ensure that margin for proprietary transactions is 
calculated, collected, and held separately and independently of margin 
for indirect participant transactions, FICC would require each Netting 
Member, at the time it submits a transaction to FICC for clearance and 
settlement, to designate the account in which the particular 
transaction should be recorded using a separate Deposit ID, which is an 
existing operational mechanism used by Netting Members to identify the 
type of account for which a margin deposit is being made. The use of 
these separate Deposit IDs would result in margin for each type of 
account being separately transferred to FICC and recorded on FICC's 
books as separate margin amounts for each account type. The proposal 
would also require FICC to report a Netting Member's Required Fund 
Deposit and Segregated Customer Margin Requirement twice daily and 
specify the amount of margin attributable to each Required Fund Deposit 
Portion or Segregated Indirect Participants Account so that the Netting 
Member can transfer the different margin amounts separately.
    In addition, the proposal would eliminate the concept of a 
Permitted Margin Affiliate, which allows a Netting Member to include 
accounts of an affiliate that is also a Netting Member in the same 
Margin Portfolio as its accounts and net their transactions for margin 
calculation purposes. FICC states that no Netting Member currently has 
a Permitted Margin Affiliate, so keeping this option in the rules in 
conjunction with the proposed changes to establish separate and 
independent calculation, collection, and holding of margin would 
introduce unnecessary complexity in FICC's rules.\35\
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    \35\ See Notice of Filing, supra note 4, at 21608.
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2. Segregation of Customer Margin
    FICC is proposing several changes to allow for the segregation of 
customer margin in a manner that satisfies the conditions for recording 
a debit in the customer reserve formula under Note H to Exchange Act 
Rule 15c3-3a.\36\ First, to satisfy Section (b)(2)(i) of Note H to Rule 
15c3-3a,\37\ FICC would calculate the margin requirements applicable to 
any segregated account on a gross basis (i.e., FICC would treat each 
indirect participant as if it were a separate Netting Member for margin 
calculations and would not net the transactions of one indirect 
participant against the transactions of another indirect participant). 
Second, to satisfy Section (b)(2)(iii) of Note H to Rule 15c3-3a,\38\ 
FICC would establish Segregated Customer Margin Custody Accounts for 
eligible customers on its books and records. These accounts would 
segregate the margin deposited for transactions in that account from 
any margin for a Netting Member's proprietary positions, both on FICC's 
own books and records and at FICC's custodians. FICC would only be able 
to use such segregated margin to secure or satisfy the obligations of 
the customer for whom such margin is held, and it would not be 
considered part of the mutualized Clearing Fund. FICC would not be able 
to apply such margin to the proprietary obligations of the Netting 
Member that deposited it with FICC, to the obligations of any other 
Netting Member or indirect participant, or to any lien or claim against 
FICC.\39\ FICC would

[[Page 93767]]

provide written notice to any Netting Member that is a broker-dealer 
that any Segregated Customer Margin Custody Account is being held for 
the exclusive benefit of the customers and is being kept separate from 
any other accounts maintained by the broker-dealer or any other Netting 
Member at FICC, as required by Section (b)(2)(iii)(C) of Note H.\40\
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    \36\ See id., at 21608 (citing 17 CFR 240.15c3-3a).
    \37\ Id. at 21608-09.
    \38\ Id. at 21609.
    \39\ See FICC Letter at 35 (describing this as ``an express 
prohibition on FICC using Segregated Customer Margin held in respect 
of one Segregated Indirect Participant for the obligations of any 
other person'' and stating that, as a result, the default of one 
Segregated Indirect Participant should not generally cause another 
segregated Indirect participant to lose its margin).
    \40\ Id. at 21610.
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    Further, as amended, the proposal would clarify that any interest 
earned on Segregated Customer Margin consisting of cash must be paid to 
the Netting Member on behalf of, and as agent for, its Segregated 
Indirect Participant.\41\
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    \41\ See Notice of Partial Amendment, supra note 10, at 87443.
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    Moreover, to comply with the custody requirements of (b)(2)(iv) of 
Note H,\42\ FICC would require segregated margin accounts to be held at 
either a bank within the meaning of the Exchange Act that is insured by 
the Federal Deposit Insurance Corporation and is a qualified custodian 
under the 1940 Act, or the Federal Reserve Bank of New York.\43\ FICC 
would require these accounts to be segregated from any other account of 
FICC and used exclusively to hold Segregated Customer Margin, in 
accordance with Section (b)(2)(iv)(A) of Note H. Moreover, each of 
these accounts would be subject to (i) a written notice of the bank or 
Federal Reserve Bank that the account is being held by the bank or 
Federal Reserve Bank pursuant to Rule 15c3-3 and is being kept separate 
from and not commingled with any other accounts maintained by FICC or 
any other person at the bank or Federal Reserve Bank and (ii) a written 
contract between FICC and the bank or Federal Reserve Bank which would 
provide that the Segregated Customer Margin in the account is subject 
to no right, charge, security interest, lien, or claim in favor of the 
bank or Federal Reserve Bank or any person claiming through the bank or 
Federal Reserve Bank, in accordance with Sections (b)(2)(iv)(B) and (C) 
of Note H.\44\ FICC would also only allow Segregated Customer Margin 
consisting of cash to be invested in U.S. Treasury securities with a 
maturity of one year or less, in accordance with Section (b)(2)(ii) of 
Note H.\45\
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    \42\ See Notice of Filing, supra note 4, at 21607.
    \43\ See Notice of Partial Amendment, supra note 10, at 87443.
    \44\ See Notice of Filing, supra note 4, at 21607.
    \45\ Id.
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    Finally, to satisfy Section (b)(2)(v) of Note H,\46\ FICC would 
provide specific procedures to allow Netting Members to request the 
return of excess segregated margin. FICC notes that these changes would 
allow broker-dealer Netting Members to collect margin from customers 
and deposit it with FICC and to provide all customers, including those 
that access FICC through non-broker-dealers, the ability to segregate 
margin they deposit.\47\ FICC would have the ability to retain some or 
all of the excess segregated customer margin if the Netting Member had 
an outstanding payment or margin obligation to FICC for transactions of 
any Segregated Indirect Participant. FICC could not retain the excess 
segregated customer margin for a Segregated Indirect Participant when 
FICC has determined, in its sole discretion, that such outstanding 
payment or margin obligation is unrelated to the transactions of that 
Segregated Indirect Participant.\48\ FICC states that these aspects of 
the Proposed Rule Change would allow for the segregation of certain 
customer margin in a manner that satisfies the conditions for a broker-
dealer to record a debit in the customer reserve formula under Note H 
to Rule 15c3-3a.\49\
---------------------------------------------------------------------------

    \46\ Id.
    \47\ Id. at 21606.
    \48\ See Notice of Partial Amendment, supra note 10, at 87443.
    \49\ See Notice of Filing, supra note 4, at 21606.
---------------------------------------------------------------------------

a. $1 Million Minimum Cash Margin Requirement
    FICC is also proposing a minimum $1 million cash margin requirement 
for each Segregated Indirect Participant Account, similar to the $1 
million minimum cash margin requirement currently applicable to each 
Netting Member.\50\ FICC conducts daily backtesting to evaluate whether 
each Netting Member's margin is sufficient to cover FICC's credit 
exposures to that member based on a simulated liquidation of the 
member's portfolio on that day. FICC's daily backtesting of the 
sufficiency of Clearing Fund deposits has shown a heightened risk of 
backtesting deficiencies (i.e., the projected liquidation losses to 
FICC due to a Netting Member's default would be greater than the 
member's margin) for members with lower deposits.\51\ Because FICC is 
required to calculate the margin requirements for Segregated Indirect 
Participants on a gross basis, as if each Segregated Indirect 
Participant were a separate Margin Portfolio, and Segregated Customer 
Margin would not be available to address losses from other direct or 
indirect participants, FICC believes it is also appropriate to apply 
the same minimum cash requirement to each Segregated Indirect 
Participant that it applies to each Margin Portfolio.\52\ Moreover, 
FICC believes that the $1 million cash requirement is the appropriate 
minimum amount to optimize the balance between financial impact of the 
requirement to participants and FICC's ability to continue to meet its 
regulatory obligation to maintain a backtesting performance coverage 
ratio above its 99 percent coverage target.\53\ FICC states that the $1 
million minimum is supported by its prior analyses of the appropriate 
minimum margin requirement for Netting Members.\54\ FICC further 
describes this minimum requirement as critical to ensuring that the 
account segregation does not expose FICC and its participants to undue 
loss. FICC explains that the Segregated Customer Margin posted by an 
individual Segregated Indirect Participant needs to be enough, on its 
own, to address losses arising from the Segregated Indirect 
Participant's positions, and that, otherwise, such losses may be 
mutualized.\55\
---------------------------------------------------------------------------

    \50\ Like the current requirement for Netting Member Required 
Fund Deposits, the proposal would require that a minimum of 40 
percent of the Segregated Customer Margin Requirement be satisfied 
with cash and/or Eligible Clearing Fund Treasury Securities.
    \51\ See Notice of Filing, supra note 4, at 21611.
    \52\ Id.
    \53\ Id.; FICC Letter at 28-29.
    \54\ See FICC Letter at 28-29.
    \55\ Id. at 29.
---------------------------------------------------------------------------

    However, FICC, in its sole discretion, would have the ability to 
adjust the amount of the minimum $1 million margin requirement if FICC 
determines that a different minimum charge would be appropriate and 
consistent with achieving its backtesting coverage target.\56\ FICC 
would notify Netting Members of any such adjustment to the minimum 
margin requirement through an Important Notice.\57\ In discussing this 
proposed ability, FICC states that it will review the $1 million floor 
for Segregated Customer Margin as part of ongoing internal surveillance 
and risk management monitoring procedures.\58\ FICC further states that 
it would be prudent to have the ability to adjust the $1 million floor 
proactively to the extent that FICC identifies as part of these reviews 
that activity levels, margin performance observed through backtesting, 
and other measures indicate that FICC would be able to continue to

[[Page 93768]]

manage the risks presented to it and meet its regulatory risk 
management obligations (including, for example, its 99% backtesting 
coverage target) with a lower minimum Segregated Customer Margin 
Requirement (that is, an amount below $1 million).\59\
---------------------------------------------------------------------------

    \56\ See Notice of Partial Amendment, supra note 10, at 87443.
    \57\ Id.
    \58\ See FICC Letter at 30.
    \59\ Id. at 31.
---------------------------------------------------------------------------

3. Margin Component Schedule
    To improve the clarity and transparency of its margin components 
and Clearing Fund calculation methodology,\60\ FICC would move the 
margin calculation methodology, including the relevant defined terms, 
into a new Margin Component Schedule. Currently, the terms and 
information concerning the margin calculation methodology, as well as 
the relevant definitions, appear in several different locations.\61\ 
FICC states that its methodology and the included components would 
continue to be substantively the same as the methodology under the 
current Rules.\62\
---------------------------------------------------------------------------

    \60\ See Notice of Filing, supra note 4, at 21612.
    \61\ FICC would move the calculation methodology from Rule 4, 
Sections 1b, and 2a, Rule 3, Section 14, and Rule 3A, Section 10 to 
the new Margin Component Schedule. FICC would move the definitions 
from Rule 1 to Section 5 of the Margin Component Schedule.
    \62\ See Notice of Filing, supra note 4, at 21612.
---------------------------------------------------------------------------

    The new Margin Component Schedule would set out the methodology for 
calculating margin amounts. That Margin Component Schedule would 
provide for FICC to perform substantially the same calculation it 
currently performs when determining a Netting Member's Required Fund 
Deposit, except that (i) the calculation would be performed on a 
Segregated Indirect Participant-by-Segregated Indirect Participant 
basis as though each Segregated Indirect Participant represented a 
separate Margin Portfolio and (ii) FICC would not impose an ECP on 
Segregated Indirect Participant Accounts. Specifically, for Required 
Fund Deposit calculations, the margin amount shall equal the VaR 
Charge, plus or minus the Blackout Period Exposure Adjustment (as 
applicable), plus the Portfolio Differential Charge, with the following 
potential additional charges, as applicable: the Backtesting Charge, 
the Holiday Charge, the MLA Charge, the ECP, and the Intraday 
Supplemental Fund Deposit.\63\ For Segregated Customer Margin 
Requirement calculations, the margin amount shall equal the VaR Charge, 
plus or minus the Blackout Period Exposure Adjustment (as applicable), 
plus the Portfolio Differential Charge, with the following potential 
additional charges, as applicable: the Backtesting Charge, the Holiday 
Charge, the MLA Charge, and the Intraday Supplemental Fund Deposit.
---------------------------------------------------------------------------

    \63\ This method does not represent a change from the current 
method of calculating Required Fund Deposits, but merely moves the 
description from current Rule 4 to the new Margin Component 
Schedule.
---------------------------------------------------------------------------

    For both types of calculations, the Margin Component Schedule 
addresses the applicable minimum cash margin requirements ($1 million 
for each Netting Member and Segregated Indirect Participant) \64\ and 
FICC's authority to require increased deposits as appropriate, 
including the use of a special charge. FICC would not add Segregated 
Customer Margin to Section 4 of the Margin Component Schedule, which 
describes FICC's ability to impose increased Required Fund Deposits 
under certain circumstances.\65\ However, when determining whether to 
increase the Required Fund Deposit of a Netting Member under the 
circumstances described in Section 4, FICC would consider the risk 
presented by a Netting Member from the activity it submits to FICC, 
including activity of indirect participants.\66\
---------------------------------------------------------------------------

    \64\ See supra Section I.B.2.a for a description of the proposed 
$1 million minimum cash margin requirement for each Segregated 
Indirect Participant Account.
    \65\ See Notice of Filing, supra note 4, at 21609.
    \66\ Id.
---------------------------------------------------------------------------

a. MLA Charge
    FICC would amend the definition of the MLA Charge to account for 
the use of Segregated Indirect Participant Accounts. Specifically, the 
definition would provide that, if a Segregated Indirect Participant 
clears through multiple Accounts \67\ (including Accounts of different 
Netting Members), then the MLA Charge for transactions in a Segregated 
Indirect Participants Account would be the greater of (i) an amount 
calculated for only the transactions maintained in that Account (i.e., 
excluding the other Accounts where the Segregated Indirect 
Participant's transactions are recorded) and (ii) an amount calculated 
on a consolidated portfolio basis (i.e., taking into account the 
transactions in each of the Accounts). This would be the same 
methodology currently used for Sponsored Members clearing through 
multiple Accounts.\68\
---------------------------------------------------------------------------

    \67\ FICC proposed to amend the definition of Account to be an 
account maintained by FICC for a Member to record transactions 
submitted by the member. FICC states that this change would clarify 
that Accounts are recordkeeping mechanisms for FICC to determine 
which transactions should be netted against each other, but are not 
custodial accounts through which FICC holds assets for a Netting 
Member. See Notice of Filing, supra note 4, at 21608.
    \68\ See GSD Rule 1 (defining MLA Charge, including for 
Sponsored Members sponsored by multiple Sponsoring Members), supra 
note 13; Securities Exchange Act Release No. 98558 (Sep. 27, 2024), 
89 FR 68179 (Oct. 3, 2023) (File No. SR-FICC-2023-012).
---------------------------------------------------------------------------

b. Allocation of Net Unsettled Positions
    The Proposed Rule Change would also provide a method for allocating 
net unsettled positions to individual indirect participants for 
calculating margin requirements. Specifically, as amended, FICC would 
modify the definition of Current Net Settlement Positions in Rule 1 to 
provide that, for calculating margin requirements and not for purposes 
of calculating the Net Settlement Position under GSD Rule 11, positions 
that are not clearly allocable to an individual Sponsored Member or 
Segregated Indirect Participant (other than Sponsored GC Trades), 
because one or more transactions recorded for indirect participants did 
not settle on the original Scheduled Settlement Date, would be 
allocated pro rata to Sponsored Members or Segregated Indirect 
Participants that had positions in the same direction and CUSIP as the 
un-allocable Current Net Unsettled Positions at the end of the 
preceding business day. FICC states that this situation could arise if 
a transaction recorded in a Sponsoring Member Omnibus Account or 
Segregated Indirect Participants Account fails to settle and that such 
failure to settle would not occur with Sponsored GC Trades.\69\ FICC 
believes this methodology facilitates a reasonable and fair allocation 
for purposes of calculating gross margin requirements.\70\
---------------------------------------------------------------------------

    \69\ See Notice of Filing, supra note 4, at 21612-13; Notice of 
Partial Amendment, supra note 10, at 87443.
    \70\ See Notice of Filing, supra note 4, at 21613.
---------------------------------------------------------------------------

c. Calculation of Excess Capital Premium
    In addition, the Proposed Rule Change would amend the terms related 
to the ECP component of the Clearing Fund, which is used to collect 
additional margin if a Netting Member's exposure to FICC through its 
clearing activity is out of proportion to its capital. Currently, the 
ECP applicable to a Netting Member equals the Netting Member's ``Excess 
Capital Ratio'' (i.e., its VaR Charge divided by its Netting Member 
Capital) multiplied by its ``Excess Capital Differential'' (i.e., the 
amount by which a Netting Member's VaR Charge exceeds its Netting 
Member Capital). However, FICC currently reserves the right to collect 
less than

[[Page 93769]]

this amount or to return some or all of this amount.\71\
---------------------------------------------------------------------------

    \71\ See GSD Rule 1 (defining Excess Capital Ratio and Excess 
Capital Differential) and Rule 3, Section 14 (describing the Excess 
Capital Premium), supra note 13.
---------------------------------------------------------------------------

    The changes would seek to make the calculation of the ECP component 
clearer and more predictable by (i) capping the amount of the ECP at 
two times the amount by which a Netting Member's VaR Charge exceeds its 
Netting Capital,\72\ (ii) specifying the Netting Member Capital amounts 
used to calculate the ECP (that is, the Net Capital amount from each 
Netting Member's most recent Form X-17-A-5 (Financial and Operational 
Combined Uniform Single Report (``FOCUS Report'')) or the Equity 
Capital amount on its most recent Consolidated Report of Condition and 
Income (``Call Report'')), (iii) providing that FICC may calculate the 
premium based on updated available information, and (iv) permitting 
FICC, in its discretion, to waive the amount of the ECP and setting 
forth a specific procedure for doing so. Regarding the waiver 
procedure, only a Managing Director in FICC's Group Chief Risk Office 
would be able to grant a waiver of an ECP in certain situations. These 
situations would be limited to exigent circumstances or other 
unexpected events. When deciding whether to grant a waiver, FICC would 
consider the degree to which a Netting Member's capital position and 
trading activity compare or correlate to the exigent circumstances and 
whether FICC can effectively manage the risk exposure from the Netting 
Member without collecting the ECP.\73\ Any waiver would be documented 
in a written report made available to the Netting Member. FICC states 
that these changes are substantially similar to changes recently 
adopted by the National Securities Clearing Corporation (``NSCC'') and 
they would enhance the ability of Netting Members to identify what 
their ECP will be and to ensure such amount is accurately 
calibrated.\74\
---------------------------------------------------------------------------

    \72\ In addition, FICC would amend the definition of Netting 
Member Capital to refer to a Netting Member's Net Capital, Net 
Assets, or Equity Capital to link the calculation to the appropriate 
regulatory framework for each Netting Member and add the term Equity 
Capital to clarify that a Netting Member's most recent Call Report, 
or financial statements or equivalent reporting if a Netting Member 
is not required to file a Call Report, will be used for the 
calculation of the Excess Capital Premium.
    \73\ See Notice of Filing, supra note 4, at 21613.
    \74\ See Securities Exchange Act Release No. 96786 (Feb. 1, 
2023), 88 FR 8013 (Feb. 7, 2023) (SR-NSCC-2022-005).
---------------------------------------------------------------------------

    In addition, the Proposed Rule Change would revise the definitions 
of Excess Capital Ratio and Excess Capital Differential to exclude the 
VaR Charge for Segregated Indirect Participants. FICC is proposing this 
change because each indirect participant would be responsible for 
satisfying its own respective VaR Charge, not the Netting Member, and 
the Excess Margin Charge is designed to address the risk that a Netting 
Member with low capital relative to value-at-risk is not able to 
perform its obligations.\75\ FICC states that including the VaR Charge 
that is calculated for an indirect participant and is satisfied by the 
capital of that indirect participant in the calculation of the Netting 
Member's ECP could result in assessing an ECP for that Netting Member 
that is greater than the amount required to mitigate the risk this 
margin component is designed to address.\76\ FICC also states that this 
change is designed to ensure that the ECP does not result in 
differential treatment of Netting Members that act as intermediaries 
for Segregated Indirect Participants.
---------------------------------------------------------------------------

    \75\ Id.
    \76\ Id.
---------------------------------------------------------------------------

4. Modification of Terms for Brokered Transactions
    The Proposed Rule Change would modify the terms relating to 
Brokered Transactions. FICC's rules currently cap the amount of loss 
allocation that may be applied to Inter-Dealer Broker Netting Members 
and Non-IDB Repo Brokers submitting Brokered Transactions. FICC would 
revise the definition of Brokered Transactions to include only the side 
of the transactions submitted to FICC for novation by an Inter-Dealer 
Broker Netting Member and entered into on the Inter-Dealer Broker 
Netting Member's own trading platform.\77\ As a result, the favorable 
loss allocation treatment for Brokered Transactions would apply only to 
the transactions that present limited risk since an Inter-Dealer Broker 
is standing between two counterparties in those transactions and is 
therefore completely flat (that is, subject to offsetting 
exposures).\78\ Since FICC believes the favorable loss allocation 
treatment is appropriate only for Inter-Dealer Broker Netting Members 
submitting Brokered Transactions, it would delete the term ``Non-IDB 
Repo Broker'' from its rules.\79\ FICC states that these changes would 
improve FICC's risk management and promote access by ensuring that its 
differential treatment of different parties and transactions has a 
sound risk management justification.\80\
---------------------------------------------------------------------------

    \77\ See Notice of Partial Amendment, supra note 10, at 87444.
    \78\ See Notice of Filing, supra note 4, at 21614.
    \79\ Id.
    \80\ See Notice of Filing, supra note 4, 21604.
---------------------------------------------------------------------------

    In addition, the proposed changes would provide that transactions 
entered into on inter-dealer brokers and similar platforms may be 
cleared using the Sponsored Service or the Agent Clearing Service.\81\
---------------------------------------------------------------------------

    \81\ Notice of Partial Amendment, supra note 10, at 87444; see 
also FICC Letter at 22-23.
---------------------------------------------------------------------------

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act \82\ directs the Commission 
to approve a proposed rule change of a self-regulatory organization if 
it finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and rules and regulations thereunder 
applicable to such organization. After carefully considering the 
Proposed Rule Change, the Commission finds that the Proposed Rule 
Change is consistent with the requirements of the Exchange Act and the 
rules and regulations thereunder applicable to FICC. In particular, the 
Commission finds that the Proposed Rule Change is consistent with 
Sections 17A(b)(3)(F) and (b)(3)(I) of the Exchange Act \83\ and Rules 
17ad-22(e)(4)(i), (e)(6)(i), (e)(6)(iii), (e)(18)(ii), (e)(18)(iii), 
(e)(18)(iv)(C), (e)(19), and (e)(23)(ii) thereunder.\84\
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78s(b)(2)(C).
    \83\ 15 U.S.C. 78q-1(b)(3)(F) and 15 U.S.C. 78q-1(b)(3)(I).
    \84\ 17 CFR 240.17ad-22(e)(4)(i), (e)(6)(i), (e)(6)(iii), 
(e)(18)(ii), (e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act \85\ requires the rules of 
a clearing agency to, among other things, promote the prompt and 
accurate clearance and settlement of securities transactions and assure 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, and 
protect investors and promote the public interest.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

1. Separate Calculation and Collection of Margin for Proprietary and 
Customer Accounts
    The proposed changes to require the separate and independent 
calculation and collection of margin for Netting Members' proprietary 
transactions and indirect participants' transactions, as described in 
Section I.B.1., should allow FICC to better identify and measure the 
unique risk profiles of each Netting

[[Page 93770]]

Member and indirect participant. This proposed change would ensure that 
an indirect participant's positions are no longer netted against a 
Netting Member's positions, that margin is collected with respect to 
the indirect participant's positions specific to those transactions, 
and that interest on an indirect participant's cash margin would be 
paid to the Netting Member for the benefit of, and as agent for, the 
indirect participant. As discussed in more detail in Section II.C.1 
below, this should enhance FICC's ability to calculate and collect the 
appropriate margin from each direct and indirect participant and, 
therefore, meet its settlement obligations in the event of a Netting 
Member or indirect participant default. By doing so, the Proposed Rule 
Change should better ensure that, in the event of a default, FICC's 
operation of its critical clearance and settlement services would not 
be disrupted because of insufficient financial resources and, 
therefore, it would be able to continue providing prompt and accurate 
clearance and settlement of securities transactions, consistent with 
Section 17A(b)(3)(F).\86\
---------------------------------------------------------------------------

    \86\ Id.
---------------------------------------------------------------------------

    The separate and independent calculation and collection of margin 
for proprietary and indirect participants' transactions should allow 
FICC to better identify and measure the unique risk profiles of each 
Netting Member and indirect participant, enhancing FICC's ability to 
calculate and collect sufficient margin from each Netting Member and 
indirect participant to cover potential losses from a Netting Member or 
indirect participant default, thereby reducing the likelihood that 
FICC, Netting Members, or indirect participants would incur losses 
resulting from a default. As a result, the proposed changes should 
limit FICC's risk to a Netting Member or indirect participant default 
and thereby enhance its ability to safeguard securities and funds in 
its control and for which it is responsible.
2. $1 Million Minimum Cash Margin Requirement
    For the reasons discussed below in more detail in Section II.C.2., 
the proposed $1 million minimum cash margin requirement for Segregated 
Indirect Participants, which could be adjusted by FICC if it determines 
that a different minimum amount would be appropriate and consistent 
with achieving its backtesting coverage target, should help ensure that 
each indirect participant provides sufficient margin to cover its 
potential obligations to FICC, thereby helping to allow FICC to meet 
its settlement obligations in the event of a default and to protect 
FICC, non-defaulting Netting Members, indirect participants, and the 
market from losses from an indirect participant default. Accordingly, 
the proposed $1 million minimum cash margin requirement should assure 
the safeguarding of securities and funds which are in the custody or 
control of FICC.
    In addition, as indicated by FICC's backtesting results, and 
discussed further in Section II.C.2 below, the $1 million minimum 
margin requirement should enhance FICC's ability to collect the 
appropriate margin from each indirect participant and, therefore, meet 
its settlement obligations in the event of a default. FICC's 
flexibility to adjust the minimum margin amount if it determines that a 
different amount would be appropriate and consistent with achieving its 
backtesting coverage target is also consistent with ensuring that each 
indirect participant provides sufficient margin to cover its 
obligations to FICC. Achieving backtesting coverage targets is 
essential to ensuring that the margin collected would be sufficient for 
FICC to cover its credit exposures to its Netting Members and indirect 
participants fully with a high degree of confidence, as required for a 
covered clearing agency such as FICC.\87\ As defined in the Covered 
Clearing Agency Standards, backtesting is an ex-post comparison of 
actual outcomes with expected outcomes derived from the use of margin 
models,\88\ and it is a key analytical mechanism for a CCP to consider 
the effectiveness of its margin model. FICC's ability to adjust the 
minimum margin amount would apply only where it would be appropriate 
and consistent with achieving its backtesting coverage target. This 
ability would, therefore, be limited to circumstances where its 
backtesting coverage target requirements are not being met or the 
amount of margin being collected exceeds the amount needed to cover the 
indirect participant's exposure to FICC.
---------------------------------------------------------------------------

    \87\ 17 CFR 240.17ad-22(e)(6).
    \88\ 17 CFR 240.17ad-22(a).
---------------------------------------------------------------------------

    Based on FICC's representations, the Commission understands that 
FICC generally intends to use this ability to adjust the minimum margin 
requirement below $1 million if a lower minimum would suffice to reduce 
backtesting deficiencies comparably to the $1 million.\89\ As part of 
its ongoing supervision of FICC, the Commission will continue to 
monitor the performance of the $1 million minimum margin requirement, 
including as its performance compares to backtesting, and will engage 
with FICC regarding any changes to that requirement and the supporting 
analysis for such changes, to help ensure that FICC is appropriately 
exercising that discretion consistent with the requirements imposed 
upon it by the rule (i.e., that it determines that any such adjustments 
would be appropriate and consistent with achieving its backtesting 
coverage target).\90\ For example, not meeting backtesting coverage 
requirements would be an indication that the minimum margin amount is 
insufficient to cover FICC's credit exposure to its Netting Members and 
indirect participants, whereas, on the contrary, higher backtesting 
performance could indicate that the margin collected exceeds the 
exposure to FICC.
---------------------------------------------------------------------------

    \89\ See FICC Letter at 3, 30-31.
    \90\ In addition, the requirements applicable to FICC as a self-
regulatory organization under Section 19(b) of the Exchange Act and 
as a designated financial market utility under Title VIII of the 
Payment, Clearing, and Supervision Act (12 U.S.C. 5465(e)) would 
continue to apply. Thus, for example, if FICC were to amend the $1 
million minimum margin requirement to an amount that would 
materially alter the level or nature of risk presented, FICC would 
be obligated to submit an advance notice of such change with the 
Commission.
---------------------------------------------------------------------------

    Therefore, the $1 million minimum margin requirement should help 
ensure that, in the event of a Segregated Indirect Participant default, 
FICC's operation of its critical clearance and settlement services 
would not be disrupted because of insufficient financial resources and 
it can continue providing prompt and accurate clearance and settlement 
of securities transactions.
3. Margin Component Schedule
    The proposed changes in section I.B.3 regarding the calculation of 
margin for segregated and non-segregated accounts should help ensure 
that FICC collects margin sufficient to cover its exposures with 
respect to both direct and indirect participants. Requiring that the 
margin requirement for a Segregated Indirect Participant Account be 
calculated in generally the same manner as a Netting Member's 
requirement, which the Commission generally has reviewed and approved 
as part of FICC's rules,\91\

[[Page 93771]]

should help ensure that FICC collects margin sufficient to cover its 
exposures with respect to both direct and indirect participants, as 
discussed further in Sections II.C.3 and II.D.3 below. In addition, by 
doing so, these proposed changes should help ensure that, in the event 
of such a default, FICC's operation of its critical clearance and 
settlement services would not be disrupted because of insufficient 
financial resources and, therefore, it could continue providing prompt 
and accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F).\92\ For the same reasons, these 
proposed changes should also help ensure that FICC is able to continue 
to meet its obligation in the event of a default, without accessing 
non-defaulting Netting Members' or indirect participants' margin 
deposits, thereby helping FICC ensure that it can safeguard the funds 
and securities within its custody or control, consistent with Section 
17A(b)(3)(F).\93\
---------------------------------------------------------------------------

    \91\ See, e.g., 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) (approving changes to how FICC calculates the Value at Risk 
component of its margin methodology, addition of the new ``Blackout 
Period Exposure adjustment'' component to the margin methodology, 
eliminating certain existing components, and revising additional 
components).
    \92\ 15 U.S.C. 78q-1(b)(3)(F).
    \93\ Id.
---------------------------------------------------------------------------

    In addition, the proposed changes described in Section I.B.4 to 
consolidate the terms relating to margin calculation into a single 
location and refine the description of FICC's margin methodology should 
help FICC's Netting Members and indirect participants better understand 
and anticipate their margin requirements. This improved understanding 
of the potential margin requirements should, in turn, facilitate prompt 
and accurate clearance and settlement by removing potential ambiguity 
or confusion about market participants' obligations to FICC. Similarly, 
the improved transparency provided by the proposed centralized margin 
component schedule and enhanced descriptions of FICC's margin 
components, such as the MLA Charge, should provide Netting Members, 
indirect participants, and the public with more clarity about the 
calculation and application of FICC's margin components and resolve 
potential ambiguity about when certain components would or would not 
apply, which is consistent with promoting the public interest.
4. Allocation of Net Unsettled Positions
    The proposed changes described in Section I.B.3.b. to adopt a 
method for allocating net unsettled positions to individual indirect 
participants for calculating margin requirements should reduce the 
potential exposure to FICC arising from indirect participant 
transactions that fail to settle by ensuring that FICC has a mechanism 
to collect margin for such transactions. Further, these proposed 
changes should make clear that such obligations are allocated only to 
participants that are outside the Sponsored GC service, since such 
fails to deliver do not occur in that service. By accounting for risks 
arising from net unsettled positions, the proposed changes should 
enhance FICC's risk management and its ability to assure the safe 
return of funds and securities, consistent with Section 
17A(b)(3)(F).\94\
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

5. Calculation of Excess Capital Premium
    The proposed changes to the calculation of the ECP described in 
Section I.B.3.c. above are consistent with promoting robust risk 
management, because the changes should help ensure that FICC continues 
to collect margin sufficient to address the heightened default risk 
presented by a Netting Member operating with lower capital levels 
relative to its margin requirements. Based on its review of the 
Proposed Rule Change, including the detailed impact analysis submitted 
as a confidential exhibit, FICC's margin coverage would not be impacted 
by this change and FICC would continue to collect sufficient margin to 
manage its potential exposure to its Netting Members.
    In addition, the proposed changes to the calculation of the ECP 
should result in a simplified and more straight-forward method for 
calculating the ECP, based on understandable metrics with which FICC's 
Netting Members are familiar. Using a clearly defined source for 
determining Netting Member Capital in the calculation of the ECP would 
result in a more consistent calculation across different types of 
Netting Members. Moreover, capping the Excess Capital Ratio at 2.0 
would provide transparency to Netting Members so they can understand 
how the ECP will be calculated, and it also would align FICC's cap with 
the recently approved changes to the ECP calculation at NSCC.\95\ By 
improving the consistency and predictability of the ECP, the proposed 
enhancements would also improve FICC's ability to collect margin 
amounts that reflect the risks posed by its Netting Members such that, 
in the event of Netting Member default, FICC's operations would not be 
disrupted, and non-defaulting Netting Members and indirect participants 
would not be exposed to losses they cannot anticipate or control. In 
this way, the proposed rule change is designed to promote the prompt 
and accurate clearance and settlement of securities transactions and to 
assure the safeguarding of securities and funds which are in the 
custody or control of NSCC or for which it is responsible, consistent 
with Section 17A(b)(3)(F) of the Exchange Act.\96\
---------------------------------------------------------------------------

    \95\ See Securities Exchange Act Release No. 96786 (Feb. 1, 
2023), 88 FR 8013 (Feb. 7, 2023) (SR-NSCC-2022-005); see also id. 
(discussing the view that capping the ratio at 2.0 strikes an 
appropriate balance between addressing the heightened default risk 
without imposing overly burdensome Excess Capital Premium charges).
    \96\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The proposed changes set forth in section I.B.3.c should improve 
transparency and understanding of the FICC's governance and application 
of the ECP. For example, FICC's proposal would describe the exigent 
circumstances in which FICC may waive the ECP, describe what 
information FICC would consider when determining whether to waive the 
charge, and specify the approval necessary to waive the charge. 
Moreover, using commonly understood inputs as the determinants of the 
ECP (i.e., the FOCUS or Call Report) and capping the Excess Capital 
Ratio at 2.0 should help Netting Members better anticipate and plan for 
a potential ECP. These proposed changes should help FICC's members 
better anticipate their required margin because of the use of 
simplified inputs to the calculation of the ECP and the imposition of a 
cap on the applicable Excess Capital Ratio. This improved understanding 
of the potential margin requirements should, in turn, facilitate prompt 
and accurate clearance and settlement by removing potential ambiguity 
or confusion about a member's obligations to FICC.
    Similarly, the improved transparency provided by this Proposed Rule 
Change both with respect to a Netting Member's margin obligations and 
the process by which FICC would consider waiver of an ECP should 
provide Netting Members and the public with more clarity about the 
nature and application of the ECP and resolve potential ambiguity about 
when the ECP would or would not apply, which is consistent with 
promoting the public interest.
6. Modification of Terms for Brokered Transactions
    The proposed changes described in Section I.B.4. to revise the 
definition of Brokered Transactions to include only the side of the 
transactions submitted to FICC for novation by an Inter-Dealer Broker 
Netting Member and entered into on the Inter-Dealer Broker Netting 
Member's own trading platform should enhance FICC's risk management by 
providing favorable loss allocation

[[Page 93772]]

treatment only to transactions that present limited risk to FICC. As a 
result, these changes should help ensure that FICC has sufficient 
prefunded financial resources to continue meeting its obligations in 
the event of a default, which will facilitate the safeguarding of 
securities and funds which are in the custody or control of FICC, 
consistent with Section 17A(b)(3)(F).\97\
---------------------------------------------------------------------------

    \97\ Id.
---------------------------------------------------------------------------

    For these reasons, the proposed changes are consistent with Section 
17A(b)(3)(F) of the Exchange Act.\98\
---------------------------------------------------------------------------

    \98\ Id.
---------------------------------------------------------------------------

B. Consistency With Section 17A(b)(3)(I) of the Exchange Act

    Section 17A(b)(3)(I) of the Exchange Act requires that the rules of 
a clearing agency, such as FICC, do not impose any burden on 
competition not necessary or appropriate in furtherance of the Exchange 
Act.\99\ Section 17A(b)(3)(I) does not require the Commission to make a 
finding that FICC chose the option that imposes the least possible 
burden on competition. Rather, the Exchange Act requires that the 
Commission find that the Proposed Rule Change does not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act, which involves balancing the 
competitive effects of the proposed rule change against all other 
relevant considerations under the Exchange Act.\100\
---------------------------------------------------------------------------

    \99\ 15 U.S.C. 78q-1(b)(3)(I).
    \100\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105 
(D.C. Cir. 1978).
---------------------------------------------------------------------------

    The Commission received comments regarding the impacts the Proposed 
Rule Change may have on competition. Several commenters state that the 
$1 million minimum Segregated Customer Margin Requirement for each 
Segregated Indirect Participant could discourage small firms from using 
the Segregated Indirect Participant Accounts.\101\ Several commenters 
state that the requirement would increase costs for small firms and 
limit execution counterparties,\102\ and several additional commenters 
state that FICC's proposed $1 million margin requirement is arbitrarily 
too high.\103\
---------------------------------------------------------------------------

    \101\ See Letter from Katherine Darras, General Counsel, 
International Swaps and Derivatives Association (Apr. 17, 2024) 
(``ISDA Letter I'') at 4; Letter from Jennifer W. Han, Executive 
Vice President, Chief Counsel and Head of Global Regulatory Affairs, 
Managed Funds Association (Apr. 17, 2024) (``MFA Letter I'') at 6-7; 
Letter from Jennifer W. Han, Executive Vice President, Chief Counsel 
and Head of Global Regulatory Affairs, Managed Funds Association 
(Nov. 12, 2024) (``MFA Letter II'') at 7; Letter from Jiri Krol, 
Deputy Chief Executive Officer, Global Head of Government Affairs, 
Alternative Investment Management Association (Apr. 23, 2024) 
(``AIMA Letter'') at 6-7; Letter at 10; Letter from William C. Thum, 
Managing Director and Assistant General Counsel, Securities Industry 
and Financial Markets Association, Asset Management Group (May 24, 
2024) (``SIFMA AMG Letter'') at 8; Letter from Joanna Mallers, 
Secretary, Futures Industry of America, Principal Traders Group 
(Oct. 11, 2024) (``FIA PTG Letter II'') at 2-3.
    \102\ See AIMA Letter at 6 (stating that the requirement will 
have myriad negative effects on customers and market liquidity 
generally, and that, for a customer with multiple clearing 
relationships and multiple segregated accounts, the need to maintain 
at $1 million cash in each account will increase costs for customers 
and prevent them from utilizing that capital in more productive 
ways); Letter from Joanna Mallers, Secretary, Futures Industry of 
America, Principal Traders Group (Apr. 17, 2024) (``FIA PTG Letter 
I'') at 7; FIA PTG Letter II at 2-3; SIFMA AMG Letter at 8-9. In 
addition, one commenter stated that, with the proposed deletion of 
the requirement to be a qualified institutional buyer (``QIB'') to 
be a Sponsored Member, these market participants may not be able to 
afford the $1 million cash requirement because QIBs, by definition, 
manage more than $100 million in securities on a discretionary 
basis, so it follows that the $1 million minimum could represent a 
sizable portion of a non-QIB's assets, potentially disincentivizing 
the non-QIB from pursuing indirect access to FICC. AIMA at 6-7.
    \103\ See Letter from Sarah A. Bessin, Deputy General Counsel 
and Nhan Nguyen, Associate General Counsel, Investment Company 
Institute (Jun. 20, 2024) (``ICI Letter'') at 12; MFA Letter I at 6-
7; MFA Letter II at 6-7.
---------------------------------------------------------------------------

    In response to concerns about increased costs to relatively small 
indirect participants, FICC states that the margin segregation regime 
under the proposal is entirely voluntary.\104\ To the extent the $1 
million floor is too costly for certain indirect participants, FICC 
states that they can choose to post margin to a Netting Member in a 
non-segregated account that could require them to post lower margin or 
no margin at all.\105\ Further, FICC amended the Margin Segregation 
Proposal to provide that the minimum margin floor will be set at an 
amount of $1 million but could be adjusted by FICC if it determines 
that a different minimum amount would be appropriate and consistent 
with achieving its backtesting coverage target, and it would require 
that FICC's members would be notified of any such adjustment to the 
applicable minimum charge by an Important Notice.\106\ Specifically, 
FICC states that it would review the $1 million floor for Segregated 
Customer Margin as part of ongoing internal surveillance and risk 
management monitoring procedures.\107\ FICC also stated that it would 
be prudent to have the ability to adjust the $1 million floor 
proactively to the extent that FICC identifies, as part of these 
reviews, that activity levels, margin performance observed through 
backtesting, and other measures indicate that FICC would be able to 
continue to manage the risks presented to it and meet its regulatory 
risk management obligations (including, for example, its 99% 
backtesting coverage target) with a lower minimum Segregated Customer 
Margin Requirement.\108\
---------------------------------------------------------------------------

    \104\ See FICC Letter at 30.
    \105\ Id.
    \106\ See Notice of Partial Amendment, supra note 10, at 87443.
    \107\ See FICC Letter at 30.
    \108\ Id. at 31.
---------------------------------------------------------------------------

    The Commission acknowledges the commenters' concerns that the $1 
minimum margin requirement could result in increased costs for small 
firms that choose to utilize the proposed margin segregation regime, 
which may weaken those firms' competitive positions relative to others. 
In addition, the Commission acknowledges that FICC could, potentially, 
adjust the minimum margin requirement to an amount above $1 million; 
however, under the proposal, FICC would only be able to do so if it 
determines that a different amount would be appropriate and consistent 
with achieving its backtesting coverage target. As part of its ongoing 
supervision of FICC, the Commission will continue to monitor the 
performance of the $1 million minimum margin requirement, including as 
its performance compares to backtesting, and will engage with FICC 
regarding any changes to that requirement and the supporting analysis 
for such changes, to help ensure that FICC is appropriately exercising 
that discretion consistent with the requirements imposed upon it by the 
rule (i.e., that it determines that any such adjustments would be 
appropriate and consistent with achieving its backtesting coverage 
target). In addition, the Commission acknowledges that firms are not 
required to use a segregated account to participate at FICC and may 
choose to access FICC through a different type of account. Although 
some firms who choose to use segregated accounts could experience a 
burden on competition because of these potentially higher costs, the 
Commission concludes that any such burden to these firms is necessary 
and appropriate in furtherance of the Exchange Act \109\ for the 
following reasons.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78q 1(b)(3)(I). Specifically, as discussed in 
greater detail in Section II.C and II.H below, the Proposed Rule 
Change is necessary and appropriate to further the policy goals 
under Rule 17Ad 22(e)(4)(i) and (e)(19). 17 CFR 240.17Ad 22(e)(4)(i) 
and (e)(19).
---------------------------------------------------------------------------

    As discussed in Section I.A above, FICC seeks to maintain 
sufficient resources (i.e., margin) to cover its credit exposures to 
its Netting Members and indirect participants fully with a high degree 
of confidence and uses backtesting to determine when a Netting Member 
or indirect participant's margin

[[Page 93773]]

would have been insufficient to cover FICC's credit exposure to that 
Netting Member or indirect participant. As described in Section II.C.2 
below, the impact studies conducted by FICC prior to and after 
implementation of the $1 million Netting Member minimum margin 
requirement demonstrate that a $1 million margin floor has a material 
impact on reducing the number of backtesting deficiencies experienced 
by FICC's Netting Members, thereby increasing the number of Netting 
Members for which FICC maintained sufficient coverage at a confidence 
level of at least 99 percent. Since FICC would only be able to use 
Segregated Customer Margin posted by an individual Segregated Indirect 
Participant to satisfy that customer's obligations, the Segregated 
Customer Margin posted by each individual Segregated Indirect 
Participant would need to be sufficient on its own to address losses 
arising from the Segregated Indirect Participant's position. Therefore, 
adding the proposed $1 million floor for Segregated Customer Margin 
should enable FICC to better manage its credit exposure to a Segregated 
Indirect Participant by ensuring FICC holds sufficient collateral to 
cover that exposure, reducing the likelihood that FICC or non-
defaulting parties would incur losses resulting from a Segregated 
Indirect Participant default. Moreover, if the $1 million floor is cost 
prohibitive for certain indirect participants, they can continue to 
access FICC's services by submitting activity through a Sponsoring 
Member Omnibus Account or Agent Clearing Member Omnibus Account that is 
not segregated, since the proposed margin segregation regime is 
entirely voluntary.
    Therefore, the Commission concludes that any competitive burden 
imposed by the Proposed Rule Change is necessary and appropriate in 
furtherance of the Exchange Act. Accordingly, the Commission finds that 
the Proposed Rule Change is consistent with the requirements of Section 
17A(b)(3)(I) of the Exchange Act.\110\
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

A. Consistency With Rule 17ad-22(e)(4)(i)

    Rule 17ad-22(e)(4)(i) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes, including by maintaining sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence.\111\
---------------------------------------------------------------------------

    \111\ 17 CFR 240.17ad-22(e)(4)(i).
---------------------------------------------------------------------------

1. Separate Calculation and Collection of Margin for Proprietary and 
Customer Accounts
    The proposed changes to require the separate and independent 
calculation and collection of margin for Netting Members' proprietary 
transactions and indirect participants' transactions, as described in 
Section I.B.1., are consistent with Rule 17ad-22(e)(4)(i).\112\ The 
separate calculation and collection of margin from Netting Members and 
indirect participants should allow FICC to better identify and measure 
the unique risk profile of each participant, enhancing FICC's ability 
to calculate and collect the appropriate margin from each direct and 
indirect participant. As a result, the proposed changes should help 
ensure that FICC has sufficient margin to cover potential losses from a 
Netting Member or indirect participant default, thereby reducing the 
probability that FICC, non-defaulting Netting Members, or non-
defaulting indirect participants would incur losses resulting from a 
default.
---------------------------------------------------------------------------

    \112\ See id.
---------------------------------------------------------------------------

2. $1 Million Minimum Cash Margin Requirement
    The proposed minimum $1 million cash margin requirement for each 
Segregated Indirect Participant Account, as described in Section 
I.B.2.a, is consistent with Rule 17ad-22(e)(4)(i). Several commenters 
state that FICC lacks a sufficient basis or justification for the 
required $1 million minimum margin amount.\113\ Specifically, one 
commenter stated that using the amount applicable to Netting Members is 
not an appropriate basis for establishing a minimum for indirect 
participants, and also stated that the requirement lacks any support or 
analysis as to the level of margin attributable to a typical fund's 
positions in cleared Treasury repo, which is data FICC should have 
readily available.\114\ An additional commenter stated the requirement 
seems arbitrary, and not practical or necessary, especially in the 
current done-with model, to force every segregated customer to be 
subject to the same minimum requirement as a Netting Member.\115\
---------------------------------------------------------------------------

    \113\ See ISDA Letter I at 4; ICI Letter at 12; AIMA Letter at 
6-7; MFA Letter II at 6.
    \114\ ICI Letter at 12.
    \115\ AIMA Letter at 6. See also MFA Letter II at 7.
---------------------------------------------------------------------------

    In addition, commenters state that FICC should adopt a lower 
minimum requirement ($100,000 to $250,000), a dynamic minimum based on 
average exposure subject to a $250,000 cap, or a minimum set by the 
relevant Netting Member.\116\ Commenters also state that FICC should 
determine a minimum deposit based on the individual client and the risk 
that such client presents to FICC and other market participants.\117\
---------------------------------------------------------------------------

    \116\ AIMA Letter at 7; MFA Letter I at 7; SIFMA AMG Letter at 
9.
    \117\ ISDA I at 4; see also MFA Letter II at 7 (stating that the 
requirement should be determined based on a participant's particular 
risk profile, including its planned and historical clearing 
activity).
---------------------------------------------------------------------------

    In response, FICC states that the $1 million floor for Segregated 
Indirect Participants is the same floor FICC already has in place for 
its Netting Members.\118\ FICC states that its impact study, conducted 
in 2022 when adopting the rule applicable to Netting Members, 
demonstrated that a $1 million floor would protect FICC and its 
participants from incurring a loss in the event of a Netting Member 
failure because the study indicated that a $1 million floor would 
provide an adequate buffer for additional repo activity due to 
increases in repo interest rates and would have mitigated 65 out of 396 
backtesting deficiencies (16%) during the period from July 1, 2021 to 
June 30, 2022.\119\ FICC further states that it analyzed alternative 
minimum margin amounts, such as $500,000, and, based on the results of 
its analysis, the $1 million floor provided the appropriate balance of 
improving backtesting performance and margin coverage while minimizing 
the impact on Netting Members.\120\
---------------------------------------------------------------------------

    \118\ See FICC Letter at 28; Securities Exchange Act Release No. 
96136 (Oct. 24, 2022), 87 FR 65268 (Oct. 28, 2022) (SR-FICC-2022-
006) (``FICC-2022-006 Order''). The impact study contains an 
analysis of backtesting results on a member-by-member basis over a 
twelve-month period ending June 30, 2022, and it includes, for both 
the then-current rule and the proposed $1 million minimum rule, the 
number of backtesting deficiencies and the level of coverage 
obtained. It contains the same analysis for a $500,000 minimum as 
well, including the same data points on a member-by-member basis.
    \119\ See FICC Letter at 28.
    \120\ Id.
---------------------------------------------------------------------------

    FICC also states that the backtesting data from the period after 
the $1 million minimum floor was implemented indicated a ``material 
reduction of backtesting deficiencies at FICC.'' \121\ From December 5, 
2022 to June 30, 2024, FICC states that the $1 million floor eliminated 
24 backtesting deficiencies, a 12% reduction.\122\ Further, during a 
period of 12-month period of moderate market volatility from July 1, 
2023 to June 30, 2024, FICC states that the $1 million floor

[[Page 93774]]

eliminated 15 backtesting deficiencies, a 22% reduction.\123\
---------------------------------------------------------------------------

    \121\ See FICC Letter at 29.
    \122\ Id.
    \123\ Id.
---------------------------------------------------------------------------

    FICC further states that the $1 million floor is appropriate 
because the Segregated Customer Margin posted by each individual 
Segregated Indirect Participant needs to be sufficient on its own to 
address losses arising from the Segregated Indirect Participant's 
positions.\124\ This is because Segregated Customer Margin is not 
subject to loss mutualization under the proposal, so FICC can only use 
Segregated Customer Margin posted by an individual Segregated Indirect 
Participant to satisfy that customer's obligations. As a result, each 
Segregated Indirect Participant's portfolio would present a risk to 
FICC that is equivalent to the risk of a proprietary portfolio of an 
individual Netting Member.\125\ If the Segregated Customer Margin is 
insufficient, losses would need to be mutualized, with harm to FICC, 
its non-defaulting Netting Members, and, potentially, the market as a 
whole.\126\
---------------------------------------------------------------------------

    \124\ Id.
    \125\ Id.
    \126\ Id.
---------------------------------------------------------------------------

    In addition, FICC stated that the risk cited by the Commission of 
inconsistent activity giving rise to dramatic changes in risk exposure, 
discussed by the Commission in the FICC-2022-006 Order,\127\ is 
arguably more pronounced for indirect participants than for Netting 
Members.\128\ First, indirect participants may clear through multiple 
Netting Members and shift their activity through different Netting 
Members, which can present risks to FICC since FICC cannot use the 
Segregated Customer Margin posted by the Segregated Indirect 
Participant through one Netting Member to address the Segregated 
Indirect Participant's transactions cleared by another Netting 
Member.\129\ As a result, FICC states that, even if the Segregated 
Indirect Participant's overall activity remains steady, FICC could see 
dramatic shifts in its risk simply because the Segregated Indirect 
Participant shifts the Netting Members it uses as its intermediary at 
FICC.\130\ Second, FICC states that it does not have the same general 
understanding of indirect participants' business that it has for its 
Netting Members, since it does not collect the same information on 
individual customers' business or finances that it does for its Netting 
Members.\131\ As a result, FICC states that it is less likely to know 
when there may be significant swings in indirect participant risk 
exposures as it would for its Netting Members and, since indirect 
participants are likely to have a far more diverse array of business 
models and interest rate considerations than FICC's Netting Members, 
they could engage in inconsistent activity that could increase risk 
exposure to FICC.\132\ According to FICC, the possibility of 
inconsistent activity among indirect participants is potentially 
greater.\133\
---------------------------------------------------------------------------

    \127\ FICC-2022-006 Order, supra note 118, at 65270.
    \128\ See FICC Letter at 30.
    \129\ Id.
    \130\ Id.
    \131\ Id.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

    The Commission disagrees with commenters who stated that using the 
same minimum as Netting Members is not appropriate for Segregated 
Indirect Participants. As stated in Section I.A. above, FICC and non-
defaulting Netting Members and indirect participants may be subject to 
losses should the Segregated Customer Margin of an indirect participant 
be insufficient to satisfy losses caused by the liquidation of that 
indirect participant's portfolio. This potential exposure both to FICC 
and non-defaulting Netting Members and indirect participants makes it 
essential that FICC determine margin amounts for Segregated Indirect 
Participant Accounts that are reasonably designed to ensure that FICC 
has sufficient margin to cover the losses of a defaulting Segregated 
Indirect Participant.
    The analyses conducted by FICC both in connection with the 2022 
change to the required minimum margin amount for Netting Members and 
after the implementation of that requirement, which the Commission has 
reviewed and analyzed, support the use of the $1 million margin 
requirement for Segregated Indirect Participant Accounts. The 
Commission agrees that these studies demonstrate that a $1 million 
margin floor has a material impact on reducing the number of 
backtesting deficiencies experienced by FICC's Netting Members, which 
would likely help FICC better manage its credit exposure to its Netting 
Members and indirect participants and credit exposures arising from its 
payment, clearing, and settlement processes.
    Consideration of the appropriate Netting Member minimum is directly 
relevant to what is appropriate for Segregated Indirect Participant 
Accounts because FICC would treat such accounts the same as Netting 
Member accounts in the event of a default of that individual 
customer.\134\ Even though a Segregated Indirect Participant would be 
the customer of a Sponsoring Member or an Agent Clearing Member, each 
Segregated Indirect Participant Account would need to provide 
sufficient margin to independently cover its losses in the event of a 
default. FICC will determine the appropriate margin for each Segregated 
Indirect Participant Account as if it were a separate Netting Member. 
As discussed above, indirect participants may increase risk by clearing 
through different Netting Members, which would provide FICC with less 
insight into their overall portfolio. Accordingly, it is appropriate 
for the minimum amount to be the same for both Netting Members and 
indirect participants.
---------------------------------------------------------------------------

    \134\ This also makes the 2022 impact study relevant to this 
determination because FICC would calculate margin requirements for 
each Segregated Indirect Participant in the same manner as margin 
requirements for each Netting Member. The Commission reviewed and 
analyzed that impact study when approving the current minimum 
applicable to Netting Members, and the same analysis should apply 
here as well.
---------------------------------------------------------------------------

    In response to commenters who proposed an alternative amount or 
approach, the Commission also has reviewed and analyzed the analysis of 
alternative minimum amounts that FICC conducted, which show that there 
would still be potential for higher amounts of backtesting deficiencies 
using a $500,000 alternative minimum, making the alternatives proposed 
by commenters ($100,000, $250,000 or a dynamic minimum with a $250,000 
cap) not reasonably designed to allow FICC to collect sufficient margin 
to cover its exposures. As discussed above, FICC's backtesting data 
from December 5, 2022 to June 30, 2024 indicates that increasing the 
minimum margin amount from $100,000 to $1 million eliminated 24 Netting 
Member backtesting deficiencies, a 12% reduction.\135\ Further, during 
a 12-month period of moderate market volatility from July 1, 2023 to 
June 30, 2024, the $1 million floor eliminated 15 backtesting 
deficiencies, a 22% reduction.\136\
---------------------------------------------------------------------------

    \135\ See FICC Letter at 29.
    \136\ Id.
---------------------------------------------------------------------------

    Because FICC is not able to predict how many indirect participants 
may elect to submit activity to FICC through a Segregated Indirect 
Participants Account or the size or volume of that activity, margin 
requirements for each Segregated Indirect Participant would be 
calculated in the same manner as for Netting Members.\137\ FICC's 
impact studies of Netting Members provide a reasonable approximation of 
the risks FICC may face if the minimum margin amount is set below $1 
million.

[[Page 93775]]

Therefore, the proposed $1 million floor is appropriate to increase the 
probability that the margin amount collected by FICC is sufficient to 
cover FICC's credit exposure to Segregated Indirect Participants and 
protect non-defaulting parties from experiencing losses. However, as 
described above in Section I.B.2.a., if FICC determines that a 
different minimum charge would be appropriate and consistent with 
achieving its backtesting coverage target, FICC would have the ability 
to adjust the minimum charge of $1 million margin requirement. This 
added flexibility should allow FICC to continue to collect the 
appropriate amount of margin to cover its credit exposure to each 
participant fully with a high degree of confidence, as demonstrated by 
FICC's meeting its backtesting coverage targets, while minimizing the 
burden on indirect participants.
---------------------------------------------------------------------------

    \137\ See Notice of Filing, supra note 4, at 21595.
---------------------------------------------------------------------------

    Moreover, the Commission disagrees that allowing the Netting Member 
to determine a minimum would be appropriate. It is unclear what basis a 
Netting Member would use to determine such a minimum in a way that 
would ensure that the amount is sufficient to meet FICC's regulatory 
obligations and minimize backtesting deficiencies because a Netting 
Member would not be able to replicate FICC's backtesting or calculate 
FICC's regulatory obligations.
    The Commission disagrees that determining a minimum deposit on a 
case-by-case basis would be feasible for every Segregated Indirect 
Participant. FICC has stated that it does not know how many Segregated 
Indirect Participants will participate in FICC. At this time, there are 
over 2500 Sponsored Members at FICC,\138\ and it is likely that 
additional indirect participants will want to access clearing going 
forward in light of the Treasury Clearing rules. Determining a minimum 
for even half the current Sponsored Members on a case-by-case basis 
would be extremely burdensome for FICC and would require the submission 
of detailed financial information by each Sponsored Member to inform 
FICC of its planned business activities, and it is unclear how or on 
what basis such a minimum would be adjusted over time. Establishment of 
a minimum requirement is appropriate to ensure that FICC can meet its 
obligations under Rule 17ad-22(e)(4)(i), and reliance upon the minimum 
for Netting Members is appropriate because, as discussed above, FICC 
has to treat each Segregated Indirect Participant as a stand-alone 
account for risk management purposes to segregate its margin 
appropriately.
---------------------------------------------------------------------------

    \138\ See GSD Member Directories, available at https://www.dtcc.com/client-center/ficc-gov-directories.
---------------------------------------------------------------------------

    For these reasons, the $1 million minimum margin requirement should 
help ensure that FICC has sufficient margin to cover potential losses 
from a Segregated Indirect Participant default, thereby reducing the 
probability that FICC, non-defaulting Netting Members, and non-
defaulting indirect participants would incur losses resulting from a 
default. Moreover, as described above in Section I.B.2.a., FICC would 
have the ability to adjust the amount of the minimum $1 million margin 
requirement if FICC determines that a different minimum charge would be 
appropriate and consistent with achieving its backtesting coverage 
target. The Commission agrees with FICC that it should continue to 
assess the performance of this minimum requirement with respect to 
FICC's backtesting coverage requirements, as it provided in the 
Amendment to this filing, to ensure that FICC is not collecting more 
margin than is necessary to meet its regulatory obligations to cover 
its exposure to its participants.\139\ Although the Commission 
recognizes that FICC could use this ability to increase the $1 million 
minimum to some greater amount, it would only be able to do so if 
determines that a different minimum charge would be appropriate and 
consistent with achieving its backtesting coverage target.
---------------------------------------------------------------------------

    \139\ One commenter states that FICC should not delay 
recalibration of the minimum margin requirement to a later date. MFA 
Letter II at 6-7. However, as the Commission discussed above, the 
minimum margin requirement is appropriate, based on the data 
available at this time. The Commission will continue to monitor 
implementation of this requirement going forward once more data 
regarding the use of segregated accounts is available.
---------------------------------------------------------------------------

3. Margin Component Schedule
    The proposed changes in section I.B.3 regarding the calculation of 
margin for segregated and non-segregated accounts should ensure that 
FICC collects margin sufficient to cover its exposures with respect to 
both direct and indirect participants. Requiring that the margin 
requirement for a Segregated Indirect Participant Account be calculated 
in generally the same manner as a Netting Member's requirement, which 
the Commission has reviewed and approved as part of FICC's rules, 
should help ensure that FICC collects margin sufficient to cover its 
exposures with respect to both direct and indirect participants. By 
doing so, this portion of the Advance Notice should better ensure that, 
in the event of a Netting Member's or indirect participant's default, 
FICC has sufficient margin to cover potential losses from the default, 
thereby reducing the probability that FICC, non-defaulting Netting 
Members, and non-defaulting indirect participants would incur losses 
resulting from a default. Collecting the same margin components for a 
Segregated Indirect Participant Account as those used for a Netting 
Member Account is appropriate because FICC has to risk-manage each 
Segregated Indirect Participant Account individually, and application 
of the existing margin methodology would help ensure that FICC collects 
sufficient margin to cover its exposures to participants for all 
Accounts. FICC has, however, taken into account how the ECP should 
apply differently when determining a Segregated Customer Margin 
Requirement, which is appropriate for the reasons discussed in Section 
II.C.3 below, and the changes related to the ECP Charge would ensure 
that Segregated Indirect Participants are not required to post 
additional margin to account for the capital position of its Netting 
Member.
    Accordingly, for the reasons discussed above, the Proposed Rule 
Change is reasonably designed to enable FICC to effectively identify, 
measure, monitor, and manage its credit exposure to Netting Members and 
indirect participants, consistent with Rule 17ad-22(e)(4)(i).\140\
---------------------------------------------------------------------------

    \140\ See id.
---------------------------------------------------------------------------

B. Consistency With Rule 17ad-22(e)(6)(i)

    Rule 17ad-22(e)(6)(i) requires FICC 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, 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

[[Page 93776]]

payment, clearing, or settlement facilities.\141\
---------------------------------------------------------------------------

    \141\ 17 CFR 240.17ad-22(e)(6)(i).
---------------------------------------------------------------------------

1. Separation of Proprietary and Customer Margin
    The proposed changes to separate proprietary and customer margin 
are consistent with Rule 17ad-22(e)(6)(i). First, to help ensure that 
proprietary transactions and transactions submitted to FICC on behalf 
of indirect participants are margined separately, FICC would require 
that each margin portfolio contain only transactions from the same 
account type and that Netting Members use separate Deposit IDs for 
different transaction types. Second, FICC would calculate each 
Segregated Indirect Participant's margin requirement separately on a 
gross basis as though each Segregated Indirect Participant were a 
separate Netting Member. Finally, FICC would create a separate 
``Segregated Customer Margin Custody Account'' for each Netting Member 
that contains deposits of Segregated Customer Margin for indirect 
participants, with interest earned on cash margin paid to each 
Segregated Indirect Participant's Netting Member for the benefit of, 
and as an agent for, the Segregated Indirect Participant. Collectively, 
these proposed changes should ensure that a Netting Member's 
proprietary transactions are not netted with indirect participant 
transactions for margin calculations and that margin for indirect 
participant transactions is collected and held separately and 
independently from margin for a Netting Member's proprietary 
transactions. Moreover, by calculating each Segregated Indirect 
Participant's margin requirement separately from Netting Members and 
other Segregated Indirect Participants, the proposed changes should 
allow FICC to better isolate the risk profiles of individual indirect 
participants from Netting Members, which should help FICC better 
understand and monitor each individual participant's risk 
exposures.\142\
---------------------------------------------------------------------------

    \142\ Commenters requested clarification that FICC's funds-only 
settlement amounts are settlement payments rather than margin. See 
ISDA Letter at 6; Letter from Katherine Darras, General Counsel, 
International Swaps and Derivatives Association (July 18, 2024) 
(``ISDA Letter II'') at 6; SIFMA Letter at 4; Letter from Walt L. 
Lukken, President and Chief Executive Officer, Futures Industry of 
America (Apr. 18, 2024) (``FIA Letter'') at 11. The Proposed Rule 
Change does not make any amendments to the funds-only settlement 
process at FICC. See GSD Rule 13. This aspect of FICC's rules is, 
therefore, not relevant to this Proposed Rule Change. However, FICC 
clarified that it views such payments as constituting settlements 
that discharge outstanding payment obligations, rather than as 
margin or collateral. FICC Letter at 43. The Commission agrees with 
this clarification, based upon its knowledge of FICC's margin and 
payment flows and the applicable GSD Rules.
---------------------------------------------------------------------------

    One commenter expressed concern that the proposal would not fully 
eliminate fellow customer risk because it would allow for the pro rata 
allocation of Current Net Settlement positions among Segregated 
Indirect Participant positions held in the same Segregated Indirect 
Participants Account.\143\ In response, FICC explained that, due to the 
requirement in the Treasury Clearing Rules that margin for customer 
positions be calculated separately from margin for a Netting Member's 
proprietary positions, FICC would not be able to allocate the margin 
obligations from Current Net Settlement Positions to a Netting Member's 
portfolio.\144\ As a result, such margin must be allocated to customer 
positions and FICC states that, when it is not aware of the allocation 
of Current Net Settlement Positions among customers, it is most 
equitable to allocate such positions pro rata to customers who were 
long or short the relevant securities.\145\ The Commission agrees that 
allocating the positions to the Netting Member's account would be 
inconsistent with Rule 17ad-22(e)(6)(i) because it would impermissibly 
net proprietary transactions against indirect participant transactions. 
The Commission further agrees that the positions must be allocated to 
ensure that FICC is able to appropriately risk-manage those positions 
(that is, to collect appropriate margin). The Commission further agrees 
with FICC's approach of limiting such pro rata allocations only to 
customers engaging in non-Sponsored GC Trades because settlement 
failures do not occur with respect to Sponsored GC Trades. Therefore, 
in the event that the positions are not allocated, a pro rata 
allocation among customers is appropriate.
---------------------------------------------------------------------------

    \143\ See SIFMA AMG Letter at 10.
    \144\ See FICC Letter at 36.
    \145\ Id.
---------------------------------------------------------------------------

    Accordingly, the proposed changes in the Proposed Rule Change would 
be consistent with Rule 17ad-22(e)(6)(i) because they should help 
ensure that FICC calculates, collects, and holds margin for a Netting 
Member's proprietary positions separately from the margin for positions 
the member clears for customers.\146\
---------------------------------------------------------------------------

    \146\ 17 CFR 240.17ad-22(e)(6)(i).
---------------------------------------------------------------------------

5. Margin Component Schedule
    The proposed changes to establish a Margin Component Schedule, 
which would consolidate the terms and information relating to margin 
calculation throughout the Rules into a single schedule, are consistent 
with Rule 17ad-22(e)(6)(i). Under the proposed Margin Component 
Schedule, FICC would perform substantially the same calculation it 
currently performs when determining a Netting Member's Required Fund 
Deposit and include the methodology for calculating a Netting Member's 
Segregated Customer Margin Requirement. By including a methodology to 
calculate each Segregated Indirect Participant's margin requirement 
separately from Netting Members and other Segregated Indirect 
Participants, the proposed changes should help ensure that FICC 
calculates, collects, and holds margin for a Netting Member's 
proprietary positions separately from the margin for positions the 
member clears for customers. Moreover, calculating margin requirements 
for each Segregated Indirect Participant should allow FICC to better 
isolate the risk profiles of individual indirect participants from 
Netting Members, which should help FICC better understand and monitor 
each individual participant's risk exposures and thereby collect margin 
commensurate with the risks of each Netting Member and indirect 
participant portfolio.
    A commenter states that FICC should confirm that segregation of 
margin for indirect participants does not magnify risk for Netting 
Members. Specifically, the commenter states that it is not clear 
whether the Required Fund Deposit to be posted by Netting Members 
incorporates any exposure associated with Segregated Indirect 
Participant Accounts and expresses concern as to whether FICC's rules 
allow FICC to collect additional margin to cover any enhanced risk that 
may arise relating to the Netting Member's obligations to FICC for its 
clients who are indirect participants generally or who choose 
segregation specifically.\147\ However, FICC's proposed rules establish 
that the calculation of a Netting Member's Required Fund Deposit 
excludes the exposure of its Segregated Indirect Participants.\148\ 
FICC's rules do permit FICC to collect increased Required Fund Deposits 
from Netting Members if ``necessary to protect [FICC] and its Members 
from Legal Risk,'' which, FICC states, would include the consideration

[[Page 93777]]

of the Netting Members' indirect participants.\149\
---------------------------------------------------------------------------

    \147\ ISDA Letter I at 7; ISDA Letter II at 6.
    \148\ Compare proposed Margin Component Schedule section 2 
(regarding Required Fund Deposits) with section 3 (regarding 
Segregated Customer Margin).
    \149\ See proposed Margin Component Schedule section 4; see also 
Notice of Filing, supra note 4, at 21593.
---------------------------------------------------------------------------

    This commenter also states the fact that the ability to prefund 
margin for a customer is only temporary puts pressure on the Netting 
Member's own Required Fund Deposits, which ``it seems would still cover 
the obligations of all its clients'' and also on the Netting Member and 
the broader FICC membership, in the event of a failure by any 
Segregated Indirect Participant.\150\ However, the Netting Member's 
Required Fund Deposits would not be calculated based on the obligations 
of its clients, and, in the event of the default of an indirect 
participant, FICC would use the Segregated Customer Margin for only 
that indirect participant. Therefore, the Commission disagrees that the 
inability to permanently prefund the customer's margin requirement puts 
additional pressure on the Netting Member's own Required Fund Deposits.
---------------------------------------------------------------------------

    \150\ See ISDA Letter I at 7.
---------------------------------------------------------------------------

    Another commenter states that FICC should explain why it is 
appropriate to calculate a segregated customer's margin requirement as 
if it were a Netting Member, even though the margin calculation for 
FICC Netting Members covers both initial margin and guaranty fund 
contributions (and customers are not expected to be contributing to the 
guaranty fund).\151\ However, FICC does not maintain a separate 
guaranty fund into which a Netting Member contributes for its 
customers. The Segregated Customer Margin Requirement must be 
sufficient to cover the exposures to FICC arising from that particular 
customer's activity because, under the segregation system proposed by 
the Proposed Rule Change which would allow broker-dealers participating 
in FICC to comply with the conditions of Note H to Rule 15c3-3, FICC 
would not be able to use the margin collected from a Segregated 
Indirect Participant for any reason unrelated to the Segregated 
Indirect Participant. Therefore, calculating each Segregated Customer 
Margin Requirement in this manner is appropriate to ensure that FICC 
has appropriate resources to cover each customer's exposures. 
Therefore, this aspect of the Proposed Rule Change is consistent with 
Rule 17ad-22(e)(6)(i) under the Exchange Act.
---------------------------------------------------------------------------

    \151\ See Letter from Joanna Mallers, Secretary, Futures 
Industry of America, Principal Traders Group (Apr. 17, 2024) (``FIA 
PTG Letter I'') at 8.
---------------------------------------------------------------------------

6. Excess Capital Premium
    The proposed changes to the calculation of the ECP charge are 
consistent with Rule 17ad-22(e)(6)(i). FICC's margin deposits are made 
up of risk-based components (as margin) that are calculated and 
assessed daily to limit FICC's exposures to Netting Members. FICC's 
proposed changes to use clearly defined sources in the calculation of 
the ECP charge would collectively make the calculation clearer and more 
predictable to Netting Members, while continuing to apply an 
appropriate risk-based charge designed to mitigate the risks presented 
to FICC. Similarly, the proposal to cap the Excess Capital Ratio at 2.0 
would allow FICC to appropriately address the risks it faces without 
imposing an overly burdensome ECP and would reduce the circumstances in 
which FICC may waive the charge, resulting in a more transparent 
margining methodology. Finally, the proposed rule change would clarify 
the exigent circumstances under which FICC may determine that it is 
appropriate to waive the ECP charge. Overall, these proposed changes 
would improve the effectiveness of the calculation of the ECP and, 
therefore, allow FICC to more effectively address the increased default 
risks presented by Netting Members that operate with lower capital 
levels relative to their margin requirements.
    In addition, FICC proposes to exclude VaR Charges for Segregated 
Indirect Participants Accounts when determining a Netting Member's 
Excess Capital Differential, in order to take into account the fact 
that each indirect participant would be responsible for satisfying its 
own respective VaR Charge. Not including these Segregated Indirect 
Participants Accounts when determining the Excess Capital Differential, 
and, therefore, the ECP Charge, is consistent with the purpose of the 
Excess Premium Charge. This charge is designed to address the risk that 
a Netting Member with low capital relative to its value-at-risk to FICC 
is not able to perform its obligations. Because the Netting Member's 
capital is not used to meet the indirect participant's obligation to 
FICC, excluding the indirect participant VaR Charges from the 
determination of the ECP should result in FICC collecting margin 
commensurate with the risks and particular attributes of each relevant 
portfolio.
    Taken together, the proposed changes enhance the ability of the ECP 
to produce margin levels commensurate with the risks FICC faces related 
to its Netting Members' operating capital levels. Therefore, this 
aspect of the Proposed Rule Change is consistent with Rule 17ad-
22(e)(6)(i) under the Exchange Act.

C. Consistency With Rule 17ad-22(e)(6)(iii)

    Rule 17ad-22(e)(6)(iii) requires that FICC 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, calculates 
margin sufficient to cover its potential future exposure to members in 
the interval between the last margin collection and the close out of 
positions following a member default.\152\
---------------------------------------------------------------------------

    \152\ 17 CFR 240.17ad-22(e)(6)(iii).
---------------------------------------------------------------------------

    As summarized in Section I.B.3 above, FICC employs daily 
backtesting to determine the adequacy of each Netting Member's Required 
Fund Deposit, paying particular attention to members that have 
backtesting deficiencies below the 99% confidence target. Such 
backtesting deficiencies highlight exposure that could subject FICC to 
potential losses if a Netting Member defaults. As discussed in Section 
II.C.2, FICC's impact study during the period from July 1, 2021 to June 
30, 2022 demonstrated that a $1 million floor would have protected FICC 
and its participants by reducing the possibility of incurring a loss in 
the event of a Netting Member failure by mitigating 16% of backtesting 
deficiencies.\153\ Moreover, after the $1 million floor was implemented 
for Netting Members, FICC states that it eliminated 22% of backtesting 
deficiencies during a 12-month period of moderate market volatility 
from July 1, 2023 to June 30, 2024.\154\
---------------------------------------------------------------------------

    \153\ See FICC Letter at 28.
    \154\ Id.
---------------------------------------------------------------------------

    Therefore, adding the proposed $1 million minimum requirement for 
Segregated Customer Margin, and the ability to adjust the minimum 
million margin requirement to achieve FICC's backtesting coverage 
target, should better ensure that FICC maintains sufficient margin to 
cover its potential future exposure to its indirect participants in the 
interval between the last margin collection and the close out of 
positions following an indirect participant default. This should, 
thereby, reduce the likelihood FICC or non-defaulting Netting Members 
or indirect participants would incur losses as a result. Accordingly, 
FICC's proposed $1 million minimum requirement for Segregated Customer

[[Page 93778]]

Margin would be consistent with Rule 17ad-22(e)(6)(iii).\155\
---------------------------------------------------------------------------

    \155\ 17 CFR 240.17ad-22(e)(6)(iii).
---------------------------------------------------------------------------

D. Consistency With Rule 17ad-22(e)(18)(ii)

    Rule 17ad-22(e)(18)(ii) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to establish objective, risk-based, and publicly disclosed 
criteria for participation, which require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency.\156\ The 
proposed changes to consolidate FICC's margin methodology in a single 
location, identify the particular Required Fund Deposit Portions and 
Segregated Customer Margin Requirements, and clarify the calculation of 
the Excess Capital Premium and circumstances in which FICC would waive 
the application of such premium should enhance FICC's public disclosure 
of the risk-based margin obligations that Netting Members and their 
indirect participants would have as a result of their participation in 
FICC's clearance and settlement services. This improved public 
disclosure should allow Netting Members and their indirect participants 
to better understand how their activity would impact margin 
calculations, which are designed to ensure that participants have 
sufficient financial resources and robust operational capacity to meet 
obligations to FICC. Accordingly, the proposed changes would be 
consistent with Rule 17ad-22(e)(18)(ii).\157\
---------------------------------------------------------------------------

    \156\ 17 CFR 240.17ad-22(e)(4)(18)(ii).
    \157\ Id.
---------------------------------------------------------------------------

E. Consistency With Rule 17ad-22(e)(18)(iii)

    Rule 17ad-22(e)(18)(iii) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to establish objective, risk-based, and publicly disclosed 
criteria for participation, which monitor compliance with its 
participant requirements on an ongoing basis.\158\ The proposed changes 
would require Netting Members to designate the specific account type 
when submitting transactions and to identify any Sponsored Member or 
Executing Firm Customer for whom the transaction is submitted. These 
changes should enhance FICC's ability to monitor which transactions are 
being entered into by which entities and assess the specific risks 
associated with those entities. This enhanced monitoring of participant 
activity should allow FICC to better monitor participants' compliance 
with FICC's Rules. Accordingly, the proposed changes would be 
consistent with Rule 17ad-22(e)(18)(iii) because they should enhance 
FICC's ability to monitor compliance with its participant requirements 
on an ongoing basis.\159\
---------------------------------------------------------------------------

    \158\ 17 CFR 240.17ad-22(e)(18)(iii).
    \159\ 17 CFR 240.17ad-22(e)(18)(iii).
---------------------------------------------------------------------------

F. Consistency With Rule 17ad-22(e)(18)(iv)(C)

    Rule 17ad-22(e)(18)(iv)(C) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to 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.\160\
---------------------------------------------------------------------------

    \160\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

    As discussed above in Section II.B.3, by improving the transparency 
of FICC's account offerings and margin calculation methodology, the 
proposed changes should enhance market participants' understanding of 
how margin is calculated and their options for posting margin, thereby 
facilitating access to FICC's clearance and settlement services. In 
addition, the proposed changes should offer greater optionality to 
Netting Members and indirect participants, which should allow Netting 
Members and indirect participants to adopt a margining arrangement that 
aligns with their business objectives and regulatory, operational, and 
practical constraints. By enhancing transparency of FICC's margin 
framework and account options and offering greater optionality to 
participants concerning the type of account they transact in and how 
their margin is posted, the proposal should facilitate access to FICC's 
clearance and settlement systems.
    Several commenters proposed that FICC should require Netting 
Members to offer account segregation to customers.\161\ One such 
commenter specified that this should include bank Netting Members, who 
would not face the same restrictions on the use of customer margin as 
broker-dealer customers subject to Rule 15c3-3 and therefore may not be 
as incentivized to provide segregated account services.\162\
---------------------------------------------------------------------------

    \161\ Specifically, one commenter stated that for indirect 
participants, having a ``right'' to direct their Netting Member to 
segregate their margin is highly desirable because it would allow an 
indirect participant to have certainty that margin that it posts 
receives the protection afforded by segregation. SIFMA AMG Letter at 
6. Another such commenter stated that, despite what a customer may 
desire with respect to margin and segregation, there could be 
incentives for direct participants to finance the margin for their 
customers' transactions (and thereby earn extra fees for doing so) 
instead of the customer financing or posting that margin, and for 
the direct participant to accept the customer's margin without 
offering the option of segregation (and thereby avoid the additional 
operational and other costs associated with segregation), which 
would still be permissible if FICC were not to require its Netting 
Members to offer account segregation. MFA Letter I at 4.
    \162\ SIFMA AMG Letter at 6.
---------------------------------------------------------------------------

    FICC did not propose a requirement that its Netting Members offer 
segregated accounts to their customers. Therefore, the Commission is 
not addressing any changes related to such a requirement in this 
Proposed Rule Change. Nothing in the Treasury Clearing Rules or Rule 
15c3-3 requires a covered clearing agency, like FICC, to require its 
Netting Members to provide certain services. Moreover, certain Netting 
Members may have regulatory or other reasons not to offer segregation, 
and, if required to offer such services, may choose to cease providing 
customer clearing services, which could, in turn, increase 
concentration in the market and reduce liquidity.\163\ Any such 
requirement could constitute a burden on competition that would not be 
permissible under Section 17A(b)(3)(I) of the Exchange Act.
---------------------------------------------------------------------------

    \163\ FICC Letter at 33.
---------------------------------------------------------------------------

    Additionally, a commenter urged FICC to allow indirect participants 
to post margin directly to FICC without intermediation from a Netting 
Member.\164\ The Treasury Clearing Rules do not require FICC to provide 
this function, and FICC did not propose such a method for direct 
posting of margin.\165\ Accordingly, the Commission is not addressing 
any changes related to such a requirement in this Proposed Rule Change.
---------------------------------------------------------------------------

    \164\ See ICI Letter at 13.
    \165\ See supra note 3 at 2751.
---------------------------------------------------------------------------

    One commenter sought clarification whether Netting Members other 
than broker-dealers can elect segregation for their customers.\166\ 
Based on the Proposed Rule Change, the Commission understands, and FICC 
confirmed,\167\ that any Sponsoring Member or Agent Clearing Member, 
regardless of whether registered as broker-dealers, would be able to 
designate an account as a Segregated Indirect Participants Account.
---------------------------------------------------------------------------

    \166\ FIA-PTG Letter at 7-9.
    \167\ FICC Letter at 39.
---------------------------------------------------------------------------

    The same commenter also sought clarification whether a customer may 
segregate margin obtained through a margin financing arrangement.\168\ 
Based

[[Page 93779]]

on the Proposed Rule Change, the Commission understands, and FICC 
confirmed,\169\ that such segregation would be permissible under FICC's 
rules.
---------------------------------------------------------------------------

    \168\ FIA-PTG Letter at 7-9.
    \169\ FICC Letter at 40.
---------------------------------------------------------------------------

    This commenter also asked why excess margin would only be returned 
on request and states that an indirect participant should not have to 
request a return of its excess margin.\170\ The Treasury Clearing Rules 
do not require FICC to provide this function, and FICC did not propose 
such a function. Accordingly, the Commission is not addressing any 
changes related to such a requirement in this Proposed Rule Change. 
Moreover, when it adopted the amendments to Rule 15c3-3, the Commission 
declined to adopt a requirement to ``push'' excess margin to direct 
participants.\171\
---------------------------------------------------------------------------

    \170\ See FIA PTG Letter I at 7-9.
    \171\ See Treasury Clearing Adopting Release, supra note 3, at 
2767 (removing, in response to commenters, the requirement that the 
covered clearing agency have 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 broker-dealer's customers no later than the close 
of the next business day after the day the customer position margin 
is no longer needed for this purpose because such a requirement may 
add significant operational burdens to covered clearing agencies for 
U.S. Treasury securities and because the debit is limited to margin 
required and on deposit at the covered clearing agency and therefore 
does not include the excess margin).
---------------------------------------------------------------------------

    Another commenter suggested that FICC allow customer margin to be 
segregated, even when customers do not post the full amount of the 
margin needed to cover their positions.\172\ FICC states that allowing 
customer margin to be segregated when customers do not post the full 
amount of margin would lead to disparities that would put broker-dealer 
Netting Members at competitive disadvantage to other Netting 
Members.\173\ The Treasury Clearing Rules do not require FICC to 
provide this function, and FICC did not propose such a function. Any 
changes to FICC's rules to impose such a requirement would have to be 
filed with the Commission pursuant to Section 19(b) \174\ of the 
Exchange Act, as well as, potentially, in an advance notice filed 
pursuant to Section 806(e) of the Clearing Supervision Act.\175\ 
Therefore, the Commission is not addressing any changes related to such 
a requirement in this Proposed Rule Change.
---------------------------------------------------------------------------

    \172\ See MFA Letter I at 6.
    \173\ See FICC Letter at 32. Specifically, FICC stated that the 
Treasury Clearing Rules, in particular the amendments to Exchange 
Act Rule 15c3-3a, provide that a broker-dealer may record a debit in 
the customer and PAB reserve formulas for margin it collects from 
customers and on-posts to FICC, but only if the broker-dealer 
collects from the customer the full amount of margin required for 
the customer's positions. Accordingly, a broker-dealer is 
effectively precluded from collecting from customers only a portion 
of the margin that their positions require and on-posting that 
amount to FICC. Were FICC to allow segregation of customer margin 
even if the customer did not fully fund its margin obligations, such 
segregation would effectively allow non-broker-dealer Netting 
Members to offer what broker-dealers cannot, i.e., permitting their 
customers to post a portion of the margin required by FICC and on-
post that margin to FICC. This ability would place such Netting 
Members at a competitive advantage relative to broker-dealer Netting 
Members.
    \174\ 15 U.S.C. 78s(b)(1).
    \175\ See supra note 3 at 2751.
---------------------------------------------------------------------------

    Finally, one commenter urged FICC to address the cross-border 
implications of the proposal and provide a framework for compliance by 
non-U.S. Netting Members and indirect participants.\176\ Specifically, 
this commenter was concerned that the U.S. Treasury clearing mandate 
will adversely impact foreign customers that are limited in their 
ability, or prohibited entirely, to post margin in connection with 
transactions involving U.S. Treasury securities.\177\ However, nothing 
in the Proposed Rule Change would require a particular market 
participant to post margin in connection with transactions involving 
U.S. Treasury securities. Indirect participants remain able to access 
FICC's central clearing services through access models that do not 
require the direct posting of margin to FICC (e.g., via the non-
segregated versions of FICC's Sponsored and Agent Clearing Services), 
which should allow flexibility for market participants to determine the 
most effective way to access FICC indirectly regardless of potential 
regulatory or other constraints on the ability to post margin directly.
---------------------------------------------------------------------------

    \176\ See SIFMA AMG Letter at 12-13.
    \177\ See id. (citing Article 15(2) of the European Union's 
Money Market Fund Regulation, which it describes as prohibiting 
European Money Market Mutual Funds from pledging any assets received 
under reverse repos and certain restrictions on Undertakings for 
Collective Investments in Transferable Securities and similar 
investment vehicles related to their ability to post margin that 
will be held on deposit at FICC).
---------------------------------------------------------------------------

    Accordingly, the proposed changes would be consistent with Rule 
17ad-22(e)(18)(iv)(C).\178\
---------------------------------------------------------------------------

    \178\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

G. Consistency With Rule 17ad-22(e)(19)

    Rule 17ad-22(e)(19) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to identify, monitor, and manage the material risks to the 
covered clearing agency arising from arrangements in which firms that 
are indirect participants in FICC rely on the services provided by 
direct participants to access FICC's clearance and settlement 
facilities.\179\ The proposed changes described in Section I.B.1 would 
require that each margin portfolio contains only transactions from the 
same account type, Netting Members use separate Deposit IDs for 
different transaction types, each Segregated Indirect Participant's 
margin requirement be calculated separately on a gross basis as though 
each Segregated Indirect Participant were a separate Netting Member, 
and Segregated Customer Margin for each indirect participant be 
deposited into a separate interest-earning Segregated Customer Margin 
Custody Account. These changes should enhance FICC's ability to isolate 
the risk profiles of individual indirect participants from Netting 
Members, which should help FICC better understand and monitor each 
individual participant's risk exposures. In addition, the calculation 
and collection of Segregated Customer Margin on a gross basis, as 
described in Section I.B.1 and 1.B.2, and the establishment of a $1 
million cash floor for Segregated Customer Margin, as described in 
Section I.B.2.a, should help ensure that FICC will have sufficient 
margin to manage the risk to FICC during an indirect participant 
default.
---------------------------------------------------------------------------

    \179\ 17 CFR 240.17ad-22(e)(19).
---------------------------------------------------------------------------

    Accordingly, the proposed changes would be consistent with Rule 
17ad-22(e)(19) because they should enhance FICC's ability to identify, 
monitor, and manage the material risks to FICC associated with indirect 
participants relying on Netting Members to access FICC's clearance and 
settlement services.\180\
---------------------------------------------------------------------------

    \180\ 17 CFR 240.17ad-22(e)(19).
---------------------------------------------------------------------------

H. Consistency With Rule 17ad-22(e)(23)(ii)

    Rule 17ad-22(e)(23)(ii) requires that FICC establish, implement, 
maintain and enforce written policies and procedures providing 
sufficient information to enable participants to identify and evaluate 
the risks, fees, and other material costs they incur by participating 
in FICC.\181\ The proposed changes described in Section I.B.3 to 
consolidate and clarify FICC's margin calculation methodology in the 
proposed Margin Component Schedule, adopt a method for allocating net 
unsettled positions to individual indirect participants for purposes of 
calculating margin requirements and to clarify the calculation of the 
ECP should make it easier for both Netting Members and indirect 
participants to identify and price the potential margining costs

[[Page 93780]]

associated with how each chooses to submit transactions to FICC for 
clearance and settlement.
---------------------------------------------------------------------------

    \181\ 17 CFR 240.17ad-22(e)(23)(ii).
---------------------------------------------------------------------------

    Accordingly, the proposed changes would be consistent with Rule 
17ad-22(e)(23)(ii) because they should enhance the ability of Netting 
Members and indirect participants to identify and evaluate the costs to 
access FICC's clearance and settlement services.\182\
---------------------------------------------------------------------------

    \182\ 17 CFR 240.17ad-22(e)(23)(ii).
---------------------------------------------------------------------------

I. Other Comments Received

    Commenters submitted several comments that were not related to the 
Proposed Rule Change. Commenters stated that FICC should publish a 
roadmap and/or expedite their plans with the Chicago Mercantile 
Exchange (``CME'') for expanding their cross-margining framework.\183\ 
The Proposed Rule Change does not address the cross-margining agreement 
between FICC and CME. The current cross-margining agreement between 
FICC and CME is part of FICC's rulebook, and therefore any changes to 
the agreement would have to be filed with the Commission pursuant to 
Section 19(b) \184\ of the Exchange Act.\185\ Therefore, the Commission 
cannot approve or disapprove any changes related to the cross-margining 
agreement at this time. Cross-margining is not required by the recently 
adopted Treasury Clearing Rules.
---------------------------------------------------------------------------

    \183\ See AIMA Letter at 5; FIA PTG Letter I at 15; MFA Letter I 
at 10; MFA Letter II at 5-6; SIFMA AMG Letter at 10.
    \184\ 15 U.S.C. 78s(b)(1).
    \185\ See supra note 3 at 2751.
---------------------------------------------------------------------------

    However, the Commission historically has supported and approved 
cross-margining at clearing agencies and recognizes 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.\186\ The Commission continues to believe that market 
participants can benefit from cross-margining arrangements and 
encourages U.S. Treasury CCAs to consider the potential of such 
benefits. FICC states, in its response letter regarding the Proposed 
Rule Change, that it is actively pursuing an end-user level cross-
margining arrangement with CME. The Commission would consider any 
proposal arising from such pursuit in due course, if such a proposal 
were to be filed with the Commission.
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    \186\ Treasury Clearing Adopting Release, at 2751 at n. 362 and 
accompanying text.
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    Several commenters requested that FICC provide a legal analysis on 
the enforceability of the proposed changes, including the protection of 
segregated customer margin in the event of a Netting Member 
default.\187\ In response, FICC states that it has prepared an analysis 
on the treatment of Segregated Customer Margin in the event of a FICC 
or Netting Member insolvency and that this analysis confirmed that, as 
long as customers and their Netting Members make clear that their 
relationship is a custodial one, Segregated Customer Margin would be 
reserved for customers and would not form part of FICC's or the Netting 
Member's general estate upon either institution's insolvency.\188\ FICC 
states that it has made this analysis available to indirect 
participants upon request on a non-reliance basis.\189\ This analysis 
addresses the commenters' request, and the Commission does not believe 
that any further action is necessary to respond to the commenters, who 
can use this analysis to inform their consideration whether to utilize 
a segregated account.
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    \187\ See AIMA Letter at 7; MFA Letter I at 8-9; SIFMA AMG 
Letter at 11.
    \188\ FICC Letter at 41.
    \189\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act and in particular with the requirements of Section 17A of 
the Exchange Act \190\ and the rules and regulations promulgated 
thereunder.
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    \190\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act \191\ that proposed rule change SR-FICC-2024-007, be, and 
hereby is, APPROVED.\192\
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    \191\ 15 U.S.C. 78s(b)(2).
    \192\ In approving the Proposed Rule Change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\193\
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    \193\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27763 Filed 11-26-24; 8:45 am]
BILLING CODE 8011-01-P
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