```

[Federal Register Volume 89, Number 229 (Wednesday, November 27, 2024)]
[Notices]
[Pages 93784-93802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27762]

[[Page 93784]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101694; File No. SR-FICC-2024-005]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change, as Modified by Partial 
Amendment No. 1, To Modify the GSD Rules To Facilitate Access to 
Clearance and Settlement of All Eligible Secondary Market Transactions 
in U.S. Treasury Securities

November 21, 2024.
    On March 11, 2024, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-FICC-2024-005 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'') with respect to facilitating access 
to GSD's clearance and settlement services for all eligible secondary 
market transactions in U.S. Treasury securities.\3\ On March 19, 2024, 
FICC filed Partial Amendment No. 1 to make clarifications and 
corrections \4\ to the proposed rule change. The proposed rule change, 
as modified by Partial Amendment No. 1, is referred to herein as the 
``Proposed Rule Change.'' The Proposed Rule Change was published for 
public comment in the Federal Register on March 27, 2024.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing, infra note 5, at 89 FR 21363.
    \4\ Partial Amendment No. 1 makes clarifications and corrections 
to the description of the proposed rule change and Exhibit 5. 
Specifically, as originally filed, the description of the proposed 
rule change made a reference to an incorrect section of the GSD 
Rulebook. Partial Amendment No. 1 corrects that reference. 
Additionally, as originally filed, the description of the proposed 
rule change and Exhibit 5 contained inconsistent references 
regarding whether FICC or its Board would be responsible for 
approving membership applications and related membership matters. 
Partial Amendment No. 1 clarifies and corrects those references.
    \5\ Securities Exchange Act Release No. 99817 (March 21, 2024), 
89 FR 21362 (March 27, 2024) (File No. SR-FICC-2024-005) (``Notice 
of Filing'').
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    On May 1, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\6\ 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.\7\ On June 27, 2024, 
the Commission instituted proceedings to determine whether to approve 
or disapprove the Proposed Rule Change.\8\ On September 24, 2024, 
pursuant to Section 19(b)(2) of the Exchange Act,\9\ the Commission 
extended the period for the conclusion of proceedings to determine 
whether to approve or disapprove the Proposed Rule Change.\10\
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    \6\ 15 U.S.C. 78s(b)(2).
    \7\ Securities Exchange Act Release No. 100031 (Apr. 25, 2024), 
89 FR 35269 (May 1, 2024) (File No. SR-FICC-2023-005).
    \8\ Securities Exchange Act Release No. 100399 (June 21, 2024), 
89 FR 53681 (June 27, 2024) (SR-FICC-2024-005).
    \9\ 15 U.S.C. 78s(b)(2)(B)(ii)(II).
    \10\ Securities Exchange Act Release No. 101081 (Sept. 18, 
2024), 89 FR 77949 (Sept. 24, 2024) (SR-FICC-2024-005).
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    The Commission received several comment letters on the Proposed 
Rule Change.\11\ In addition, the Commission received a letter from 
FICC responding to the public comments.\12\ For the reasons discussed 
below, the Commission is approving the Proposed Rule Change.
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    \11\ Comments on the Proposed Rule Change are available at 
https://www.sec.gov/comments/sr-ficc-2024-005/srficc2024005.htm.
    \12\ See Letter from Laura Klimpel, Head of Fixed Income 
Financing Solutions, Depository Trust & Clearing Corporation, (Aug. 
1, 2024) (``FICC Letter'').
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I. Description of the Proposed Rule Change

A. Background and Current Access Models

    FICC, through GSD, serves as a central counterparty (``CCP'') and 
provides real-time trade matching, clearing, risk management and 
netting for cash purchases and sales of U.S. Treasury securities as 
well as repurchase and reverse repurchase transactions (``repos'') 
involving U.S. Treasury securities. Currently, FICC is the sole 
provider of clearance and settlement services for U.S. Treasury 
securities.
    On December 13, 2023, the Commission adopted amendments to the 
standards applicable to covered clearing agencies, such as FICC,\13\ 
requiring each such clearing agency for U.S. Treasury securities to 
have written policies and procedures reasonably designed to, among 
other things, 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 the 
clearing agency's indirect participants.\14\
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    \13\ A ``covered clearing agency'' is, among other things, a 
registered clearing agency that provides the services of a CCP, and 
a CCP is a clearing agency that interposes itself between the 
counterparties to securities transactions, acting functionally as 
the buyer to every seller and the seller to every buyer. 17 CFR 
240.17ad-22(a); see also 15 U.S.C. 78c(a)(23) (defining a clearing 
agency). FICC is a clearing agency registered with the Commission 
under Section 17A of the Exchange Act (15 U.S.C. 78q-1), and it acts 
as a CCP.
    \14\ 17 CFR 240.17ad-22(e)(18)(iv)(C). See Securities Exchange 
Act Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16, 2024) 
(``Adopting Release,'' and the rules adopted therein referred to 
herein as ``Treasury Clearing Rules'').
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1. Direct Participation at FICC
    GSD's CCP services are currently available directly to entities 
that are approved under the GSD Rules \15\ to be Netting Members.\16\ 
Currently, there are different categories of Netting Member based upon 
the type of legal entity (i.e., Bank Netting Member, Dealer Netting 
Member, Inter-Dealer Broker Netting Member, etc.) and whether an entity 
is incorporated in the United States or not (i.e., a Foreign Netting 
Member). Netting Member applicants must meet both financial and 
operational minimum eligibility requirements \17\ and, once admitted, 
Netting Members must adhere to ongoing minimum membership 
standards.\18\ Furthermore, both the minimum eligibility requirements 
and ongoing standards vary depending on the relevant Netting Membership 
category. However, in general, all Netting Member categories may access 
the services available through GSD's Comparison System \19\ and Netting 
System.\20\
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    \15\ 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.
    \16\ See GSD Rule 2, supra note 15.
    \17\ See GSD Rule 2A, supra note 15.
    \18\ See GSD Rule 3, supra note 15.
    \19\ See GSD Rule 5, supra note 15. The Comparison System 
includes the system of GSD services and operations in connection 
with the reporting, validating, and in some cases, matching of the 
long and short sides of a securities trade. GSD also has a limited 
membership that permits Comparison-Only Members to participate only 
in its Comparison System. FICC does not act as a CCP for activity 
processed through its Comparison System and the services offered 
through its Comparison System are not guaranteed by FICC.
    \20\ See GSD Rule 11, supra note 15. The Netting System includes 
the system of GSD services and operations in connection with 
aggregating and matching offsetting obligations resulting from 
securities trades submitted by or on behalf of Netting Members.
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2. Indirect Participation at FICC
    Market participants may also access GSD's clearing services 
indirectly through a Netting Member. There are currently two indirect 
participation models to facilitate indirect participant access to GSD--
the Sponsored Service \21\ and the correspondent clearing/prime broker 
services.\22\ Each of these indirect participation models gives market 
participants different options to consider in accessing GSD's

[[Page 93785]]

clearance and settlement services. The primary difference between the 
two models is that an indirect participant who becomes a Sponsored 
Member must establish an indirect, limited purpose GSD membership, 
whereas the correspondent clearing/prime broker services do not require 
an indirect member to establish any relationship with GSD.
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    \21\ See GSD Rule 3A, supra note 15.
    \22\ See GSD Rule 8, supra note 15.
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    The Sponsored Service permits Netting Members, approved under the 
GSD Rules as ``Sponsoring Members,'' to sponsor certain institutional 
firms, referred to as ``Sponsored Members,'' into GSD membership. The 
Sponsoring Member is permitted to submit to FICC for comparison, 
novation, and netting certain types of eligible transactions either 
between itself and its Sponsored Members (i.e., ``done-with''), or 
between the Sponsored Members and other third-party Netting Members 
(i.e., ``done-away''). For operational and administrative purposes, a 
Sponsored Member appoints its Sponsoring Member to act as processing 
agent with respect to the Sponsored Member's satisfaction of its 
securities and funds-only settlement obligations.\23\
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    \23\ See GSD Rule 3A, supra note 15. An entity that chooses to 
become a Sponsoring Member retains its status as a Netting Member 
and can continue to submit any non-Sponsored Member activity to FICC 
as such.
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    A Sponsored Member is a GSD Member and the legal counterparty to 
FICC for any submitted transactions.\24\ 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.\25\ Therefore, FICC relies on the financial resources of the 
Sponsoring Member in relying upon the Sponsoring Member Guaranty. If a 
Sponsoring Member fails to perform under the Sponsoring Member 
Guaranty, FICC may cease to act for the Sponsoring Member both as a 
Sponsoring Member as well as a Netting Member.\26\
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    \24\ See GSD Rule 3A, section 7 (describing novation of 
Sponsored Member Trades) and 2 (identifying membership types), supra 
note 15.
    \25\ See GSD Rule 3A (describing the operation of the Sponsoring 
Member Guaranty) and 1 (defining the Sponsoring Member Guaranty), 
supra note 15.
    \26\ See Notice of Filing, supra note 5, at 89 FR 21365; see 
also GSD Rule 3A, Section 14; and GSD Rule 21, Sections 1(a), 1(b), 
4(a) supra note 15.
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    Netting Members may also submit to FICC eligible activity on behalf 
of their customers through the correspondent clearing/prime broker 
services.\27\ Under the current GSD Rules, the Netting Member is 
referred to as the ``Submitting Member'' and the customer is referred 
to as the ``Executing Firm.'' \28\ Unlike the Sponsored Service, FICC 
has no relationship with the Executing Firm,\29\ and all obligations 
(i.e., margin and settlement) under the GSD Rules remain with the 
Submitting Member.\30\ Additionally, Submitting Members have the option 
of either netting Executing Firm activity with other activity they 
submit to FICC (i.e., Submitting Member proprietary activity) or 
segregating Executing Firm activity in separate accounts.\31\ In all 
cases, however, the Submitting Member must identify the relevant 
Executing Firm(s) on the FICC transaction submission file.\32\ The 
current GSD Rule does not address the qualifications of a Submitting 
Member (or how a Netting Member becomes a Submitting Member); does not 
specify the information that each Submitting Member must provide to 
FICC regarding the Executing Firms on whose behalf it submits 
transactions; does not require acknowledgments from Executing Firms; 
and does not set forth any rules regarding the processing of 
transactions through the correspondent clearing/prime broker service or 
how such transactions are treated in the event of a default.
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    \27\ See GSD Rule 8, supra note 15.
    \28\ See id. There are no operational differences between the 
current correspondent clearing service and the prime broker service. 
The primary difference between the two services is that FICC 
provides a report to prime brokers that identifies margin 
calculation for their customers' transactions and does not provide 
such report to Members using the correspondent clearing service.
    \29\ See GSD Rule 1 (defining the term Executing Firm), supra 
note 15.
    \30\ See GSD Rule 8, Section 4, and GSD Rule 15, Section 1, 
supra note 15.
    \31\ See id.
    \32\ See GSD Rule 8, Section 2, supra note 15.
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B. Proposed Changes 33
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    \33\ For a detailed description of each proposed change, please 
refer generally to the Notice of Filing, supra note 5.
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1. Re-Naming the Correspondent Clearing/Prime Broker Services as the 
Agent Clearing Service and Providing Additional Specificity on the 
Agent Clearing Service
    FICC proposes to re-name, consolidate, and adopt additional 
provisions governing GSD's existing correspondent clearing/prime broker 
services. Moving forward, the correspondent clearing/prime broker 
services would be referred to as the ``Agent Clearing Service,'' 
Submitting Members would be referred to as ``Agent Clearing Members,'' 
and Executing Firms would be referred to as ``Executing Firm 
Customers.'' The Agent Clearing Service would continue to allow Netting 
Members to submit, on behalf of their customers, transactions to FICC 
for novation. These proposed changes would primarily amend GSD Rule 
8,\34\ which currently describes the correspondent clearing/prime 
broker services, to describe the Agent Clearing Service with greater 
specificity.
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    \34\ See GSD Rule 8, supra note 15.
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    FICC designed the proposed changes to the Agent Clearing Service to 
highlight the similarities between the Agent Clearing Service and other 
agent clearing models, such as those through which market participants 
in the cleared derivatives markets can execute commodity derivatives 
with third parties and then give them up to a futures commission 
merchant (``FCM'') for clearing.\35\ FICC states that these proposed 
changes would enhance the ability of indirect participants to identify 
the Agent Clearing Service as a workable ``done-away'' model that 
allows indirect participants to access clearing through multiple direct 
participants.\36\
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    \35\ See Notice of Filing, supra note 5, at 89 FR 21365-66.
    \36\ See id. FICC also states that these proposed changes would 
improve the transparency of the GSD Rules regarding the availability 
and operations of this service to both Netting Members and, 
indirectly, their customers. See id.
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    While the proposed changes would re-name certain terms in the GSD 
Rules and otherwise expand upon the description of how the 
correspondent clearing/prime broker access models operate, most of the 
proposed changes would not alter how Netting Members and their 
customers use this model to access GSD's services.\37\ Like the 
correspondent clearing/prime broker models, the Agent Clearing Service 
would continue to facilitate agent-style trading by allowing an Agent 
Clearing Member to act as processing agent and credit intermediary for 
its Executing Firm Customers.
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    \37\ See Notice of Filing, supra note 5, at 89 FR 21366.
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    Specifically, the Proposed Rule Change would address various 
specific topics. First, the Proposed Rule Change would address Agent 
Clearing Member qualifications and the application process to become an 
Agent Clearing Member. A Netting Member, other than an Inter-Dealer 
Broker Netting Member, shall be eligible to become an Agent Clearing 
Member. An applicant to be an Agent Clearing Member would have to 
submit an application and provide additional information that FICC may 
request, and this application would include information about the 
applicant's customers, past and/or projected volumes of applicant 
customer activity, and the applicant's

[[Page 93786]]

controls for monitoring and mitigating risks, including any risks posed 
by its customers.
    Second, the Proposed Rule Change would require certain information 
regarding an Agent Clearing Member's Executing Firm Customer 
Relationships to be provided to FICC. The required information would 
include a Legal Entity Identifier (``LEI'') for each Executing Firm 
Customer,\38\ and each Agent Clearing Member would be required to 
indemnify FICC for any losses, liabilities, expenses and legal actions 
that could arise related to the LEI requirement. Thus, an Agent 
Clearing Member would establish a relationship with one or more 
Executing Firm Customers and provide FICC with notice confirming the 
Executing Firm relationship with each such customer. FICC states that 
this information sharing would better enable FICC to identify and 
manage the risks posed by such indirect participants and would support 
FICC's compliance with the requirements of Rule 17ad-22(e)(18)(iii) 
under the Exchange Act to monitor compliance with its participation 
requirements on an ongoing basis.\39\
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    \38\ In addition to the LEI, this information would include: the 
name and executing firm symbol of the Executing Firm Customer; 
written authorization from the Executing Firm Customer to act on its 
behalf; confirmation that the Executing Firm Customer and the Agent 
Clearing Member have entered into an agreement that binds the 
Executing Firm Customer to the applicable provisions of the GSD 
Rules, as would be required by Section 3, described below; and 
confirmation that the Executing Firm Customer understands, 
acknowledges and agrees to each of the Executing Firm Customer 
Acknowledgments set forth in, and as would be required by the GSD 
Rules.
    \39\ See Notice of Filing, supra note 5, at 89 FR 21365; 17 CFR 
240.17ad-22(e)(18)(iii).
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    In addition, the Proposed Rule Change would require that an 
agreement between the Agent Clearing Member and the Executing Firm 
Customer bind the customer to the applicable provisions of the GSD 
Rules. However, beyond this specific requirement the Proposed Rule 
Change would also acknowledge such an agreement may otherwise be on any 
terms and conditions mutually agreed to by the parties and confirm that 
the GSD Rules do not prohibit any reimbursement or other payments 
sharing arrangements that may be established between those parties, 
away from FICC.
    Third, the Proposed Rule Change would define what transactions are 
eligible to be submitted through the Agent Clearing Service, which 
would remain the same as the transactions eligible for the 
correspondent/prime broker services and would continue to exclude 
Netting Eligible Auction Purchases, Brokered Transactions, GCF Repo 
Transactions, and CCIT Transactions.\40\
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    \40\ FICC states that GCF Repo Transactions and CCIT 
Transactions are currently excluded due to system limitations, and 
Brokered Transactions are necessarily excluded because Inter-Dealer 
Broker Netting Members are not permitted to act as Agent Clearing 
Members, as discussed above. The exclusion of Netting Eligible 
Auction Purchases is driven by the specific processing rules 
applicable to auctions that are external to FICC and established by 
the U.S. Department of the Treasury. See Notice of Filing, supra 
note 5, at 89 FR 21368.
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    Fourth, the Proposed Rule Change would identify the rights and 
obligations of Agent Clearing Members. For example, it would define the 
role of the Agent Clearing Members as processing agents of Executing 
Firm Customers and establish that Agent Clearing Members are liable to 
FICC for all obligations arising in connection with their Agent 
Clearing Transactions in the same manner as if the Agent Clearing 
Member had executed those trades. It would also state that FICC has no 
liability or obligation to any Executing Firm Customer. It would also 
provide that FICC may request information or reports regarding Agent 
Clearing Transactions, which would allow FICC to continue to identify, 
monitor and manage the risks its Agent Clearing Members may present to 
it and the broader GSD membership.\41\
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    \41\ See Notice of Filing, supra note 5, at 89 FR 21368.
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    Fifth, the Proposed Rule Change would include specific Executing 
Firm Customer acknowledgements with respect to their participation in 
the Agent Clearing Service.\42\ Because Executing Firm Customers would 
continue to have no relationship to FICC, the Proposed Rule Change 
would provide that Agent Clearing Members are responsible for affirming 
that their Executing Firm Customers understand, acknowledge and agree 
to the provisions in the relevant section of the GSD Rules.
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    \42\ These acknowledgments would include that the Agent Clearing 
Service is governed by the GSD Rules, including Novation of Agent 
Clearing Transactions; that FICC is not obligated to deal directly 
with the Executing Firm Customer and may deal exclusively with the 
Agent Clearing Member; that FICC shall have no obligations to the 
Executing Firm Customer with respect to any Agent Clearing 
Transactions submitted by an Agent Clearing Member on behalf of the 
Executing Firm Customer, including with respect to any payment or 
delivery obligations; and that the Executing Firm Customer shall 
have no right to receive from FICC, or any right to assert a claim 
against FICC with respect to, nor shall FICC be liable to the 
Executing Firm Customer for, any payment or delivery obligation in 
connection with any Agent Clearing Transactions submitted by an 
Agent Clearing Member on behalf of the Executing Firm Customer, and 
FICC shall make any such payments or redeliveries solely to the 
Agent Clearing Member.
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    Finally, the Proposed Rule Change would set forth rules regarding 
the processing of Agent Clearing Transactions. FICC would require Agent 
Clearing Members to process and record their customers' activity in 
separate ``Agent Clearing Member Omnibus Accounts,'' as opposed to the 
optional segregated submission approach provided for in the current GSD 
Rules, to facilitate FICC's ability to monitor and, ultimately, risk 
manage that activity appropriately.\43\ It would also require that all 
Agent Clearing Transactions include an executing firm symbol that 
identifies the Executing Firm Customer. It would describe that Agent 
Clearing Transactions would continue to be processed in the same way 
that FICC processes other transactions through the GSD netting, 
clearing and settlement systems and would describe how Agent Clearing 
Transactions are processed when the optional field identifying the 
contra-party is either omitted or does not match on the transaction 
file. It would also address how a loss would be allocated within the 
Agent Clearing Service, that is, that the Agent Clearing Member, as 
principal, would be responsible for satisfying the loss allocation 
obligations that are calculated for its Executing Firm Customers.\44\
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    \43\ See Notice of Filing, supra note 5, 89 FR at 21368.
    \44\ The Proposed Rule Change would also provide that the 
Clearing Fund obligations applicable to an Agent Clearing Members' 
Agent Clearing Transactions would be calculated separately from the 
obligations calculated with respect to other activity of the Agent 
Clearing Member. However, FICC would have the right to apply any 
Clearing Fund deposits of an Agent Clearing Member to any 
obligations of that Member (including in their capacity as a Netting 
Member). As a substantive matter, the above two changes do not vary 
from how FICC calculates and applies loss allocation or Clearing 
Fund requirements under the correspondent clearing and prime broker 
services today. See Notice of Filing, supra note 5, 89 FR at 21369.
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2. Changes to the Sponsored Service
Eliminate Separate Categories of Sponsoring Members
    Under the current GSD Rules, there are two categories of Sponsoring 
Members--Category 1 Sponsoring Members are Bank Netting Members that 
meet the eligibility criteria described in Section 2(a) of Rule 3A, and 
Category 2 Sponsoring Members are all other eligible Netting 
Members.\45\ While Bank Netting Members are currently subject to 
certain capitalization requirements as

[[Page 93787]]

Sponsoring Member applicants,\46\ Category 2 Sponsoring Member 
applicants are subject to financial requirements that are greater than 
the financial requirements applicable in their capacity as Netting 
Members.\47\ Thus, the current tiered category structure creates 
differing applicant criteria based on the type of entity seeking 
Sponsoring Member status.
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    \45\ See Securities Exchange Act Release No. 85470 (Mar. 29, 
2019) 84 FR 13328 (Apr. 4, 2019) (SR-FICC-2018-013) (creating two 
categories of Netting Members to be eligible to be Sponsoring 
Members, expanding the eligibility of the service to other types of 
Netting Members in addition to Bank Netting Members). See also GSD 
Rule 3A, Section 2, supra note 15.
    \46\ Under Section 2(a) of GSD Rule 3A, Bank Netting Members 
applying to be a Sponsoring Member must (i) have equity capital of 
at least $5 billion, (ii) be ``Well-Capitalized,'' as such term is 
defined in the GSD Rules, and (iii) have a bank holding company that 
is registered under the Bank Holding Company Act of 1954, as amended 
and that such bank holding company also be ``Well Capitalized.'' 
``Well Capitalized'' is defined in GSD Rule 1 to have the meaning 
given that term in the capital adequacy rules and regulations of the 
Federal Deposit Insurance Corporation. Supra note 15.
    \47\ These increased financial requirements do not solely relate 
to an applicant's capitalization, but instead are based on the 
applicant's anticipated use of the Sponsoring Service in relation to 
their financial condition. See Section 2(b)(ii) of GSD Rule 3A, 
supra note 15.
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    Additionally, the ongoing Sponsoring Member requirements in the GSD 
Rules also apply a differentiated approach for Category 1 and Category 
2 Sponsoring Members. For example, a Category 1 Sponsoring Member may 
be subject to an increase in its Required Fund Deposit if it fails to 
meet the applicable capitalization requirements.\48\ Alternatively, a 
Category 2 Sponsoring Member may be subject to a limit on the activity 
it can submit through the Sponsoring Service if the Sponsoring Member's 
VaR Charges exceed its Netting Member Capital.\49\
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    \48\ See Section 2(h) of GSD Rule 3A, supra note 15.
    \49\ The ``VaR Charge'' is a component of the Required Fund 
Deposit and defined in GSD Rule 1; ``Netting Member Capital'' is 
defined in GSD Rule 1 to mean ``Net Capital, net assets or equity 
capital as applicable, to a Netting Member based on its type of 
regulation.'' Supra note 15.
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    FICC proposes to eliminate the two categories of Sponsoring Members 
and make all Sponsoring Members subject to the same eligibility and 
ongoing requirements that are currently applicable to Category 2 
Sponsoring Members. FICC states that these proposed changes would 
encourage additional Netting Members to become Sponsoring Members thus 
facilitating broader access to clearance and settlement services for 
eligible secondary market transactions in U.S. Treasury securities, 
including those of indirect participants who may seek to use the 
Sponsored Service as Sponsored Members.\50\ The proposed changes would 
affect Bank Netting Members that are--or will apply to be--Sponsoring 
Members by removing the above-mentioned capitalization requirements and 
instead applying the activity limits and financial condition factors 
used under the current GSD Rules for Category 2 Sponsoring Members. The 
proposed changes would create parity among all Sponsoring Members (and 
applicants), which FICC states would encourage additional market 
participants to become Sponsoring Members, which in turn should give 
indirect participants a wider range of Sponsoring Members to consider 
should they choose to access GSD's central clearing services via the 
Sponsored Service.\51\ FICC states that the activity limits and 
financial condition monitoring will allow FICC to continue to manage 
the risks that could be presented by any activity cleared through the 
Sponsored Service.\52\ FICC does not believe the proposed changes would 
increase the risks presented to it by Bank Netting Members' 
participation in the Sponsored Service as Sponsoring Members because 
other existing risk management tools (e.g., FICC's ability to impose 
greater and additional financial requirements,\53\ the Excess Capital 
Premium,\54\ and activity limits \55\) would be available for FICC to 
continue to manage those risks.\56\
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    \50\ See Notice of Filing, supra note 5, at 89 FR 21370.
    \51\ See id.
    \52\ See id.
    \53\ See GSD Rule 3A, Section 2(b)(ii) (describing the factors 
that FICC may consider when determining whether to impose additional 
financial requirements on a Sponsoring Member), supra note 5. For 
the purposes of illustration only, such financial requirements could 
include, without limitation, additional reporting requirements, 
including reporting of parent company financials, or a higher 
minimum deposit to the Clearing Fund.
    \54\ See GSD Rule 3, Section 14 (the Excess Capital Premium is 
an additional Clearing Fund deposit that may be required if a 
Netting Member's capital levels drop below a threshold relative to 
its other margin requirements), supra note 5.
    \55\ The activity limit, which currently only applies to 
Category 2 Sponsoring Members, restricts a Sponsoring Member from 
submitting additional activity into its Sponsoring Member Omnibus 
Account(s) if its capital levels exceed the sum of its VaR Charge 
component of the Clearing Fund. See GSD Rule 3A, Section 2(h), supra 
note 5.
    \56\ See Notice of Filing, supra note 5, at 89 FR 21370.
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Remove the ``Qualified Institutional Buyer'' Requirements for Sponsored 
Members
    FICC proposes to remove the requirement that Sponsored Members 
either be ``qualified institutional buyers,'' as such term is defined 
by Rule 144A under the Securities Act of 1933,\57\ or satisfy the 
financial requirements of such definition (``QIB Requirement''). This 
proposed change would make the Sponsored Service available to 
additional market participants, thereby providing such firms with 
access to GSD's clearing services. FICC states that expanding 
eligibility to become a Sponsored Member supports the goals of the 
Treasury Clearing Rules to facilitate increased central clearing of 
transactions involving U.S. Treasury securities.\58\
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    \57\ 17 CFR 230.144A.
    \58\ See Notice of Filing, supra note 5, at 89 FR 21371; 
Adopting Release supra note 14, at 2716-17 (referring to the 
revisions to Rule 17ad-22(e)(18) as being designed to ``bring the 
benefits of central clearing to more transactions involving U.S. 
Treasury securities, thereby reducing the overall systemic risk in 
the market'').
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    FICC states that this change would not increase the relevant risks 
because FICC risk manages the Sponsored Service primarily at the 
Sponsoring Member level, not the Sponsored Member level.\59\ For 
example, a Sponsoring Member is responsible for posting to FICC the 
Required Fund Deposit for its sponsored activity and, while Sponsored 
Members are principally liable to FICC for their settlement 
obligations, the Sponsoring Member is also required to provide a 
guaranty to FICC for such obligations.\60\ In the event a Sponsored 
Member does not satisfy its settlement obligations, FICC is able to 
invoke the Sponsoring Member Guaranty.\61\ Additionally, Sponsoring 
Members may be required to provide FICC with reports or other 
information that FICC may require, including, for example, responses to 
annual or ad hoc due diligence requests.\62\ FICC utilizes such due 
diligence requests to identify, monitor and manage the risks Sponsoring 
Members and their Sponsored Members may present to it. As discussed 
above, where FICC identifies risks (whether via the due diligence 
process or otherwise), FICC can impose supplemental financial 
requirements on a Sponsoring Member, an Excess Capital Premium charge 
(where applicable), and activity limits.\63\ Therefore, FICC states 
that that its existing risk management practices with respect to the 
Sponsored Service, which do not rely on the QIB Requirement, are 
sufficiently effective.\64\
---------------------------------------------------------------------------

    \59\ See Notice of Filing, supra note 5, at 89 FR 21371.
    \60\ See GSD Rule 3A, supra note 15.
    \61\ See id.
    \62\ See id.
    \63\ See supra notes 53, 54, and 55.
    \64\ See Notice of Filing, supra note 5, 89 FR 21371.
---------------------------------------------------------------------------

3. Clarify Eligibility Criteria for Non-U.S. and Other Applicants
Changes Regarding Non-U.S. Applicants
    Currently, a Foreign Person applying to be a Netting Member must 
meet the eligibility criteria for the distinct

[[Page 93788]]

Netting Member category of ``Foreign Netting Members.'' \65\ In 
contrast with the eligibility criteria for other Netting Member 
categories, the eligibility criteria for Foreign Netting Members in 
Section 3(a)(v) of GSD Rule 2A do not specify or reference eligible 
types of legal entities.\66\ Instead, Section 4(b)(ii)(E) of GSD Rule 
2A provides FICC the authority to set minimum financial requirements 
for Foreign Netting Member applicants.\67\ Additionally, Section 3(b) 
of GSD Rule 2A currently states that an entity can only be one category 
of Netting Member at a time.\68\ Thus, a Foreign Person that is the 
foreign equivalent of, for example a Registered Investment Company, 
which is a legal entity recognized in the GSD Rules for U.S. entities, 
would apply to be a Foreign Netting Member, and would be subject to the 
eligibility criteria, other membership qualifications, and ongoing 
minimum membership standards applicable to Foreign Netting Members.\69\ 
However, the GSD Rules also contain specific eligibility criteria, 
other membership qualifications, and ongoing minimum membership 
standards applicable to, in this example, Registered Investment Company 
Netting Members.\70\ Therefore, in this example, the current GSD Rules 
are unclear as to whether the applicant entity would only be subject to 
the Foreign Netting Member standards or would also be subject to the 
Registered Investment Company Netting Member standards.\71\
---------------------------------------------------------------------------

    \65\ See GSD Rule 2A, supra note 15.
    \66\ See id.
    \67\ See id.
    \68\ See id.
    \69\ See Notice of Filing, supra note 5, 89 FR at 21372.
    \70\ See Notice of Filing, supra note 5, 89 FR at 21372.
    \71\ See id. FICC states that such ambiguity can have meaningful 
implications; for example, a Registered Investment Company Netting 
Member is excluded from certain requirements under the GSD Rules, 
and, therefore, if a Registered Investment Company that is a Foreign 
Person applied, and was approved, to be a Foreign Netting Member, it 
would not be clear if the applicable exclusions should apply to this 
Foreign Netting Member Applicant. See id.
---------------------------------------------------------------------------

    To avoid this ambiguity, FICC proposes to eliminate the category of 
``Foreign Netting Member'' and expand the qualifications for each 
category of Netting Member to include the foreign equivalent of the 
same legal entity types.\72\ Foreign Persons that are eligible to apply 
to be a Netting Member would be subject to both the minimum membership 
standards of the applicable Netting Member category as well as the 
eligibility criteria currently applicable to Foreign Netting Members, 
currently set forth in Section 3(a)(v) of GSD Rule 2A.\73\ In making 
the determination of whether a Foreign Person is an equivalent legal 
entity to the domestic legal entities that qualify for a category of 
Netting Member, FICC would consider, for example, the applicant's 
business model and its regulatory framework and designated examining 
authority. Therefore, the Proposed Rule Change would provide that a 
Foreign Person shall be eligible to become a Netting Member if either 
(1) it qualifies for one of the existing categories of Netting Member, 
or (2) FICC determines that the applicant may apply in the same way as 
an applicant that does not qualify under an existing category of 
Netting Member, as discussed with respect to ``Changes Regarding Other 
Applicants'' below.
---------------------------------------------------------------------------

    \72\ In making the determination of whether a Foreign Person is 
an equivalent legal entity to one of the domestic legal entities 
that qualify for a category of Netting Member, FICC would consider, 
for example, the applicant's business model and its regulatory 
framework and designated examining authority. See Notice of Filing, 
supra note 5, at 89 FR 21372.
    \73\ See GSD Rule 2A, Section 3(a)(v) (providing that a person 
may be eligible to apply to be a Foreign Netting Member if it ``(i) 
has a home country regulator that has entered into a memorandum of 
understanding with the SEC regarding the sharing or exchange of 
information, and (ii) maintains a presence in the United States, 
either directly or through a suitable agent, that both has available 
individuals fluent in English who are knowledgeable in the Foreign 
Person's business and can assist the Corporation's representatives 
as necessary, and ensures that the Foreign Person will be able to 
meet its data submission, settlement, and other obligations to the 
Corporation as a Member in a timely manner.'') and Section 
4(b)(ii)(E) (specifying the minimum financial requirements for an 
applicant to be a Foreign Netting Member), supra note 15.
---------------------------------------------------------------------------

    Foreign Persons that are eligible to apply to be a Netting Member 
would be subject to both the minimum membership standards of the 
applicable Netting Member category and the eligibility criteria 
currently applicable to Foreign Netting Members, currently set forth in 
Section 3(a)(v) of Rule 2A. Where an applicable Netting Member category 
is subject to membership qualifications that are inconsistent with the 
qualifications applicable to a Foreign Person, then the standards 
applicable to a Foreign Person would apply. Although this could lead to 
an approach where a Foreign Person applicant remains subject to home 
jurisdiction requirements that are different than the requirements 
applicable to other Netting Members, FICC states that that this is 
acceptable because, as discussed further below, the GSD Rules would 
still provide that FICC will continue to apply the membership standards 
that were designed specifically to address the risks that may not be 
present when an applicant is not domiciled in the U.S. and whose 
primary regulator is not U.S.-based.\74\
---------------------------------------------------------------------------

    \74\ See Notice of Filing, supra note 5, 89 FR at 21372.
---------------------------------------------------------------------------

Changes Regarding Other Applicants
    Additionally, FICC proposes to clarify the eligibility criteria for 
applicants that do not fit into one of the existing Netting Member 
categories. In light of the adoption of the Treasury Clearing Rules, 
additional market participants will need to access FICC's clearance and 
settlement services, either as direct Netting Members or as indirect 
participants. However, under the current GSD Rules, FICC does not have 
the authority to consider a Netting Member applicant that does not meet 
the eligibility criteria of one of the Netting Member categories 
enumerated in the GSD Rules. Therefore, FICC proposes amendments to the 
GSD Rules that would provide a framework for FICC to consider an 
applicant, including a Foreign Person, to be a Netting Member if that 
applicant does not meet the eligibility criteria of one of the existing 
Netting Member categories.
    Specifically, the Proposed Rule Change would first require that an 
applicant submit an application questionnaire and other initial 
application materials that demonstrate to FICC that the applicant's 
business and capabilities are such that it could reasonably expect 
material benefit from direct access to FICC's services. FICC proposes 
to establish minimum membership standards, including financial and 
other qualifications for membership, as it may determine are reasonable 
and appropriate based on information provided by or concerning such an 
applicant. FICC's determination of the minimum membership standards to 
apply to that applicant would be based on the risk profile of the 
applicant, as determined by FICC, and information related to (i) the 
applicant's business model, (ii) its regulatory framework and 
designated examining authority, (iii) its organizational structure and 
risk management framework, and (iv) its anticipated use of the 
Corporation's services.
    FICC states that it cannot reliably predict which types of legal 
entities will apply for direct membership or predict the risk profiles 
of those entities.\75\ The proposed changes would provide FICC with the 
necessary flexibility to consider any potential applicants, including 
legal entities that do not fit into its current Netting Member

[[Page 93789]]

categories.\76\ FICC states that these proposed changes would 
facilitate access to GSD's clearing services to a broader range of 
market participants.\77\
---------------------------------------------------------------------------

    \75\ See Notice of Filing, supra note 5, at 89 FR 21373.
    \76\ See id.
    \77\ See id.
---------------------------------------------------------------------------

4. Other Proposed Changes
    FICC proposes changes to the GSD Rules generally designed to 
describe the criteria and related requirements regarding direct and 
indirect access to GSD's clearance and settlement services. FICC states 
that these proposed changes should enhance the ability of market 
participants, and in particular indirect participants, to understand 
and evaluate the comparative tradeoffs of using GSD's central clearing 
services depending on the relevant access model.\78\
---------------------------------------------------------------------------

    \78\ See id.
---------------------------------------------------------------------------

    Specifically, FICC proposes to include a ``road map'' in the GSD 
Rules describing the various GSD access models that allow for both 
direct and indirect access to GSD's clearance and settlement services. 
In addition, to simplify the description of eligibility requirements in 
GSD Rule 2A, FICC proposes to move the definitions of the Netting 
Member Categories from GSD Rule 2A to the defined terms in GSD Rule 1. 
FICC further proposes to remove definitions which are only used once in 
the GSD Rules and replace those uses with the defined terms, meaning 
that it would remove stand-alone definitions that are used only once 
and instead fold the one-time definition into broader context within 
the GSD Rules.\79\ FICC proposes to clarify eligibility criteria for 
FCM Netting Members to require membership in the National Futures 
Association. Additionally, FICC proposes to make several grammatical 
and other non-substantive changes to the GSD Rules to streamline, 
clarify, and simplify the GSD access models, related definitions, and 
other relevant provisions.\80\
---------------------------------------------------------------------------

    \79\ For example, the GSD Rules currently contain a definition 
for Inter-Dealer Broker which is used only, in turn, to define an 
Inter-Dealer Broker Netting Member. The revisions would collapse the 
definition of an Inter-Dealer Broker into the description of an 
Inter-Dealer Broker Netting Member.
    \80\ See Notice of Filing, supra note 5, 89 FR at 21374-75.
---------------------------------------------------------------------------

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act \81\ 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,\82\ 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) \83\ and (b)(3)(I) \84\ of the Exchange Act and 
Rules 17ad-22(e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii) 
thereunder.\85\
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78s(b)(2)(C).
    \82\ 17 CFR 240.17ad-22(e)(18)(iii), (e)(18)(iv)(C), (e)(19), 
and (e)(23)(ii).
    \83\ 15 U.S.C. 78q-1(b)(3)(F).
    \84\ 15 U.S.C. 78q-1(b)(3)(I).
    \85\ As part of the Commission's process of analyzing the 
Proposed Rule Change for consistency with the Exchange Act and rules 
and regulations thereunder, the Commission carefully considered the 
public comment letters. Many of the comment letters were submitted 
in response to both the Proposed Rule Change and a related set of 
proposed rule changes (see Securities Exchange Act Release No. 99845 
(Mar. 22, 2024), 89 FR 21603 (Mar. 28, 2024) (File No. SR-FICC-2024-
802) and Securities Exchange Act Release No. 99844 (March 22, 2024), 
89 FR 21586 (Mar. 28, 2024) (File No. SR-FICC-2024-007)). On October 
25, 2024, FICC filed Partial Amendment No. 1 to the related set of 
proposed rule changes (see Securities Exchange Act Release No. 
101455 (Oct. 28, 2024), 89 FR 87449 (Nov. 1, 2024) (File No. SR-
FICC-2024-802) and Securities Exchange Act Release No. 101454 (Oct. 
28, 2024), 89 FR 87441 (Nov. 1, 2024) (File No. SR-FICC-2024-007) 
(together, the ``Account Segregation Proposals'')). The comment 
letters generally did not specify which individual comments relate 
to the Proposed Rule Change as opposed to the Account Segregation 
Proposals. In the instant Order, the Commission addresses the 
comments related to the Proposed Rule Change. In a separate Order, 
the Commission addresses the comments related to the Account 
Segregation Proposals.
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(F) of the Exchange Act \86\ requires that the 
rules of a clearing agency, such as FICC, be designed to, among other 
things, promote the prompt and accurate clearance and settlement of 
securities transactions, and protect investors and the public interest.
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above in Section I.B., FICC proposes changes to the 
GSD Rules that are designed to encourage and facilitate a greater 
number of market participants to utilize GSD's clearance and settlement 
services for transactions in U.S. Treasury securities, including for 
done-with and done-away transactions. Specifically, as described in 
Section I.B.1, FICC's consolidation of the correspondent clearing/prime 
broker services into the Agent Clearing Service and the substantially 
increased level of detail about how this service operates should allow 
for a better understanding of the availability of this model at 
FICC.\87\ By updating and expanding the Agent Clearing Service to more 
closely resemble the nomenclature and functioning of an FCM-style 
model, the Proposed Rule Change should better present the Agent 
Clearing Service as a viable method for market participants to consider 
for clearing transactions in U.S. Treasury securities. The new 
terminology should help to show that the Agent Clearing Service 
operates similarly to agent clearing models in cleared derivatives 
markets, where market participants execute transactions with third 
parties and then give them up to their futures commission merchant for 
clearing.
---------------------------------------------------------------------------

    \87\ See DTCC White Paper, Looking to the Horizon: Assessing a 
Potential Expansion of U.S. Treasury Central Clearing (Sept. 2023) 
(``2023 DTCC White Paper'') at 9, available at https://www.dtcc.com/-/media/Files/Downloads/WhitePapers/Accessing-Potential-Expansion-US-Treasury-Clearing-White-Paper.pdf.
---------------------------------------------------------------------------

    Further, the increased specificity regarding the functioning of the 
Agent Clearing Service should help market participants better evaluate 
its fitness for their individual needs. The current GSD Rules do not 
describe a Submitting Member as an agent for an Executing Firm or as 
submitting given up transactions to FICC for clearing, and the current 
GSD Rules present only limited information about how the service 
functions. By contrast, the expanded rules regarding the Agent Clearing 
Service makes clear how the Agent Clearing Service would function. It 
addresses various topics, including the qualifications of Agent 
Clearing Members and the application process, what an Executing Firm 
Customer is and what information an Agent Clearing Member must provide 
to FICC regarding its Executing Firm Customers (including confirmation 
that there is an agreement binding the Executing Firm Customer to the 
applicable GSD Rules and that the Executing Firm Customer agrees to the 
specified Executing Firm Customer Acknowledgments, what transactions 
may be submitted through the service, the rights and obligations of the 
Agent Clearing Member, and how transactions are addressed in the event 
of a default or non-default loss event. These changes substantially 
expand the description of how this service functions beyond the limited 
and high-level information currently in the GSD Rules. The Commission 
understands that, based on a survey conducted by FICC, a significant 
number (28 percent) of Netting Member survey respondents have already 
indicated that they expect to facilitate clearing transactions in U.S. 
Treasury securities using their existing prime brokerage, agency 
clearing, or

[[Page 93790]]

FCM business units currently used for clearing listed and over-the-
counter derivatives.\88\
---------------------------------------------------------------------------

    \88\ See FICC Letter at 5-6, 11 (citing DTCC White Paper, The 
U.S. Treasury Clearing Mandate: An Industry Pulse Check (July 2024) 
(``2024 DTCC White Paper'') at 6, available at https://www.dtcc.com/-/media/WhitePapers/Treasury-Clearing-Mandate.pdf).
---------------------------------------------------------------------------

    The changes regarding the Agent Clearing Service should help 
facilitate market participants' ability to access central clearing by 
providing more detail about how the service functions and, potentially, 
allowing market participants to leverage existing policies and 
practices used for other agent clearing models to clear other types of 
products. In addition, the changes would provide FICC with increased 
ability to risk manage and monitor the Agent Clearing Transactions 
because it would require additional information on Executing Firm 
Customers and the use of an Agent Clearing Omnibus Account. These 
changes should therefore help promote prompt and accurate clearance and 
settlement and protect investors and the public interest.
    Additionally, FICC's proposals to streamline and clarify certain 
aspects of its membership standards would remove entry barriers and 
make it easier for market participants to utilize the Sponsored 
Service. First, as described above in Section I.B.2., the Proposed Rule 
Change would enable additional market participants to become Sponsoring 
Members by removing capital requirements and eliminating other 
distinctions between the two existing categories of Sponsoring Members. 
Second, the Proposed Rule Change would enable additional market 
participants to become Sponsored Members by removing the QIB 
Requirement. These changes should allow FICC to streamline the 
Sponsored Service and improve its accessibility to potential Sponsoring 
and Sponsored Members, while still allowing FICC to appropriately risk 
manage transactions cleared through the Sponsored Service. Therefore, 
this aspect of the Proposed Rule Change should facilitate greater 
participation in the Sponsored Service and, therefore, in central 
clearing more generally, subject to appropriate risk management at 
FICC, which is consistent with both promoting prompt and accurate 
clearance and settlement and the protection of investors and the public 
interest.
    The Proposed Rule Change, as described in Section I.B.3, would also 
facilitate broader market participation in GSD by streamlining and 
clarifying the Netting Member eligibility criteria applicable to 
Foreign Persons and applicants that do not otherwise fit into one of 
the existing categories of Netting Member and would establish an 
application process for such entities that allows FICC to consider any 
applicant and the potential risk that it could bring to FICC. FICC's 
membership requirements are part of its overall risk management because 
membership requirements help to guard against defaults of any FICC 
member, as well as to protect FICC and the financial system as a whole 
from the risk that one member's default could cause others to default, 
potentially including FICC itself.
    Additionally, FICC's proposals to add new provisions to the GSD 
Rules that more clearly describe the various direct and indirect GSD 
access models, and otherwise clarify the GSD Rule provisions regarding 
the GSD access models, would provide greater transparency on those 
subjects to market participants, and thereby enable market participants 
to more accurately and efficiently evaluate which model best fits their 
business needs.
    Finally, as described above in Section I.B.4., FICC proposes to 
make several grammatical and other non-substantive changes to the GSD 
Rules to streamline, clarify, and simplify the GSD access models, 
related definitions, and other relevant provisions.
    The Proposed Rule Change would encourage and facilitate greater 
participation in central clearing, while still providing sound risk 
management which would promote the prompt and accurate clearance and 
settlement of securities transactions, and would protect investors and 
the public interest. As the Commission explained when adopting the 
Treasury Clearing Rules, U.S. Treasury securities play a critical and 
unique role in the U.S. and global economy, serving as a significant 
investment instrument and hedging vehicle for investors, a risk-free 
benchmark for other financial instruments, and an important mechanism 
for the Federal Reserve's implementation of monetary policy.\89\ 
Consequently, confidence in the U.S. Treasury market, and in its 
ability to function efficiently is critical to the stability of the 
global financial system. In central clearing, through novating 
transactions (i.e., becoming the counterparty to both sides of a 
transaction), a CCP addresses concerns about counterparty risk by 
substituting its own creditworthiness and liquidity for the 
creditworthiness and liquidity of the counterparties.\90\ A CCP thereby 
enables market participants to effectively reduce costs, increase 
operational efficiency, and manage risks.\91\ Moreover, a CCP provides 
a centralized system of default management that can mitigate the 
potential for a single market participant's failure to destabilize 
other market participants or the financial system more broadly.\92\ The 
Commission adopted the Treasury Clearing Rules, in part, to help reduce 
contagion risk to the CCP and bring the benefits of central clearing to 
more transactions involving U.S. Treasury securities, thereby lowering 
overall systemic risk in the market.\93\
---------------------------------------------------------------------------

    \89\ See Adopting Release, supra note 14, 89 FR at 2715-17.
    \90\ See Adopting Release, supra note 14, 89 FR at 2716.
    \91\ See id. (citing Covered Clearing Agency Standards Proposing 
Release, Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR 
29507, 29587 (May 27, 2014) (``CCA Standards Proposing Release'')).
    \92\ See Adopting Release, supra note 14, 89 FR at 2716 (citing 
Order Granting Temporary Exemptions Under the Securities Exchange 
Act of 1934 in Connection with Request of Liffe Administration and 
Management and Lch.Clearnet Ltd. Related to Central Clearing of 
Credit Default Swaps, and Request for Comments, Exchange Act Release 
No. 59164 (Dec. 24, 2008), 74 FR 139, 140 (Jan. 2, 2009) (``Liffe 
Order'')).
    \93\ See Adopting Release, supra note 14, 89 FR at 2716 (citing 
Proposing Release, Standards for Covered Clearing Agencies for U.S. 
Treasury Securities and Application of the Broker-Dealer Customer 
Protection Rule With Respect to U.S. Treasury Securities, Exchange 
Act Release No. 95763 (Sept. 14, 2022), 87 FR 64610, 64614 (Oct. 25, 
2022) (``Proposing Release'')).
---------------------------------------------------------------------------

    CCP rules that are clear and comprehensible, increase operational 
efficiency, and more effectively manage risks, like the Proposed Rule 
Change, should encourage a broader scope of market participants to 
utilize the CCP's services, thereby promoting the prompt and accurate 
clearance and settlement of securities transactions, and protecting 
investors and the public interest, consistent with Section 17A(b)(3)(F) 
of the Exchange Act. The Proposed Rule Change is consistent with those 
objectives because it encourages and supports greater participation in 
GSD's central clearing services for different types of market 
participants and transactions. Accordingly, the Proposed Rule Change 
would promote the prompt and accurate clearance and settlement of 
securities transactions, and protect investors and the public interest, 
because by encouraging greater participation in central clearing, the 
proposals would extend the benefits of operational efficiency and risk 
management to a greater segment of the U.S. Treasury securities market.
    For these reasons, the Proposed Rule Change is consistent with the

[[Page 93791]]

requirements of Section 17A(b)(3)(F) of the Exchange Act.\94\
---------------------------------------------------------------------------

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

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.\95\ 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.\96\
---------------------------------------------------------------------------

    \95\ 15 U.S.C. 78q-1(b)(3)(I).
    \96\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105 
(D.C. Cir. 1978).
---------------------------------------------------------------------------

    Several commenters suggest that the Proposed Rule Change's failure 
to include a requirement that FICC's direct participants offer done-
away clearing services would not sufficiently provide for a workable 
done-away model.\97\ For example, one commenter states that it does not 
expect Netting Members to offer done-away trading via the Agent 
Clearing Model (which would effectively result in clearing members 
surrendering potentially lucrative commissions from trade execution to 
other brokers).\98\ This commenter further states that the Proposed 
Rule Change does not address this or otherwise provide any other 
mechanism to properly align Netting Members' incentives with the goal 
of facilitating done-away trading.\99\ Another commenter states that 
the Proposed Rule Change ``ignores the current reality'' in which the 
commenter is not aware of any clearing member currently offering done-
away clearing to its customers for either cash or repo transactions and 
the Proposed Rule Change fails to explain why done-with and done-away 
transactions continue to be treated differently given that a clearing 
member should be agnostic about with whom a trade is executed, as the 
counterparty of a cleared trade is FICC (i.e., not the executing 
counterparty).\100\ This commenter states that FICC has not explained 
the justification for treating done-with and done-away transactions 
differently and why it has elected to continue to permit its clearing 
members to require all customers to bundle execution and clearing in 
these models.\101\ Another commenter states that there remain serious 
questions whether Netting Members view offering done-away services as 
practicable from a regulatory net capital perspective and whether a 
sufficient number of Netting Members will provide clearing services on 
a standalone basis, as opposed to bundling execution and clearing.\102\
---------------------------------------------------------------------------

    \97\ See 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 5; Letter from Joanna Mallers, Secretary, Futures 
Industry of America, Principal Traders Group (April 17, 2024) 
(``FIA-PTG Letter I'') at 2-3, 6-7; Letter from Sarah A. Bessin, 
Deputy General Counsel and Nhan Nguyen, Associate General Counsel, 
Investment Company Institute (June 20, 2024) (``ICI Letter'') at 2, 
4-5; Letter from Jennifer W. Han, Executive Vice President, Chief 
Counsel and Head of Global Regulatory Affairs, Managed Funds 
Association (April 17, 2024) (``MFA Letter I'') at 4-5, 7-8; 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 3-4; see also Letter from Jiri 
Krol, Deputy Chief Executive Officer, Global Head of Government 
Affairs, Alternative Investment Management Association (April 23, 
2024) (``AIMA Letter'') at 4-5 (stating that not addressing the 
done-away problem leaves a critical gap in access to clearing and 
settlement service and places significant competitive burdens on 
indirect participants).
    \98\ See SIFMA-AMG Letter at 5.
    \99\ See id.
    \100\ See FIA-PTG Letter I at 3.
    \101\ See id.; see also MFA Letter II at 3-4.
    \102\ See ICI Letter at 4-5.
---------------------------------------------------------------------------

    As a solution to the foregoing concerns, the commenters state that 
FICC should require Netting Member intermediaries (i.e., Sponsoring 
Members and Agent Clearing Members) to offer done-away clearing to 
their customers.\103\
---------------------------------------------------------------------------

    \103\ See FIA-PTG Letter I at 3-4; MFA Letter I at 4-5, 7-8; 
AIMA Letter at 4-5; SIFMA-AMG Letter at 2; ICI Letter at 2, 4-5. 
Commenters also state that by not including a requirement on Netting 
Member intermediaries to offer done-away clearing to their 
customers, the Proposed Rule Change does not adequately facilitate 
access for such customers to FICC's clearance and settlement 
services, consistent with Rule 17ad-22(e)(18)(iv)(C). See 17 CFR 
240.17ad-22(e)(18)(iv)(C). The Commission addresses those comments 
below in Section II.D.
---------------------------------------------------------------------------

    In contrast to these commenters, one commenter states that a 
mandate from FICC is not a necessary condition for a viable done-away 
access model.\104\ Instead, the commenter states that a Netting 
Member's decision to provide done-away services--or any services--to 
market participants is, and should remain, a commercial and risk 
decision of each member, and that such commercial arrangements should 
not be mandated by rule or otherwise.\105\ The commenter further states 
that mandating the provision of done-away services could compromise the 
goals of the Treasury Clearing Rules by making the access models less 
attractive from a business perspective to Netting Members and cause 
Netting Members to limit the offerings they do make to customers if 
doing so would mandate other commercial arrangements or transactions 
that they may not wish to engage in.\106\
---------------------------------------------------------------------------

    \104\ See Letter from Robert Toomey, Head of Capital Markets, 
Managing Director/Associate General Counsel, SIFMA, at 3-4 (July 31, 
2024) (``SIFMA Letter II'').
    \105\ See SIFMA Letter II at 2.
    \106\ See id.
---------------------------------------------------------------------------

    In response, FICC states that requiring Netting Member 
intermediaries to offer done-away clearing services to customers could 
expose FICC and its participants to additional risks and other 
challenges that could limit the commercial and risk management choices 
an intermediary could consider in offering clearing services, which in 
turn could reduce the number of market participants willing to provide 
such services.\107\ FICC further states that such a contraction in the 
availability of direct participants providing clearing services would 
result in concentration of risk, increased costs, and reduced liquidity 
in the Treasury market.\108\ Additionally, FICC states that unlike 
done-with clearing, done-away clearing presents unique liquidity risks 
to both FICC and Netting Member intermediaries.\109\ For FICC, if a 
customer's Netting Member intermediary defaults, FICC would be 
obligated to perform the one-sided obligations of the done-away 
transactions of the customer and would need liquidity to do so.\110\ 
For Netting Member intermediaries, done-away transactions would 
increase the maximum liquidity a Netting Member may be required to 
provide to FICC under the Capped Contingency

[[Page 93792]]

Liquidity Facility (``CCLF''), increasing the cost of clearing done-
away transactions.\111\
---------------------------------------------------------------------------

    \107\ See FICC Letter at 11.
    \108\ See id.
    \109\ See FICC Letter at 11-14.
    \110\ See FICC Letter at 11-12. FICC also states that, by 
contrast, in a done-with transaction, the customer enters into the 
transaction with its clearing member, and that, if the clearing 
member then defaults, the clearing agency has the option to close 
out both the obligations to the clearing member and those to the 
customer (i.e., ``both sides of the trade''), with the sole 
resulting payment obligation being the mark-to-market value of the 
positions. See id. at 12. One commenter states that it is 
``inaccurate'' that done-away transactions have greater liquidity 
risks, but the commenter does not disagree with FICC's description 
of these liquidity concerns, and instead states that this 
distinction highlights a deficiency of FICC's current default 
management framework. See Letter from Stephen Berger, Managing 
Director, Global Head of Government & Regulatory Policy, Citadel and 
Citadel Securities, (Oct. 21, 2024) (``Citadel Letter'') at 5; see 
also MFA Letter II at 3-4. The concerns regarding the default 
management framework are discussed in Section II.D.6 infra.
    \111\ See FICC Letter at 12, 14. The CCLF is a member-funded, 
rules-based, committed liquidity resource, designed to enable FICC 
to meet its cash settlement obligations in the event of a default of 
the member (including affiliates) to which FICC has the largest 
exposure in extreme but plausible market conditions. FICC allocates 
$15 billion of the total size of the CCLF among all members. FICC 
allocates the remainder of the total size of the CCLF among members 
depending on the amount and frequency with which they generate 
liquidity needs above $15 billion. See GSD Rule 22A, Section 2a, 
supra note 15.
---------------------------------------------------------------------------

    FICC also states that since done-away transactions are negotiated 
between a customer and its counterparty, the Netting Member 
intermediary must rely on external parties and/or processes to confirm 
that a transaction is consistent with the Netting Member's risk limits 
and regulatory requirements.\112\ Therefore, FICC states that imposing 
a done-away mandate on Netting Members that lack the infrastructure to 
perform such confirmations could discourage market participants from 
providing clearing services to customers.\113\ FICC also states that 
done-away clearing might subject Netting Member intermediaries to 
certain regulatory challenges (e.g., regarding trade reporting and 
confirmations) and/or increased capital requirements (since it may be 
difficult to conclude that they have a well-founded basis on which they 
can exercise close-out netting rights upon a customer default).\114\ 
FICC states that in light of the foregoing risks and challenges, a 
done-away mandate could have the unintended consequence of discouraging 
Netting Member intermediaries from providing clearing services to 
customers, which would concentrate risk, increase costs, and reduce 
liquidity in the Treasury market.\115\ Instead of a done-away mandate, 
FICC states that Netting Member intermediaries should be allowed to 
decide whether and how to provide clearing services to customers after 
evaluating the relevant risks.\116\
---------------------------------------------------------------------------

    \112\ See FICC Letter at 12-13.
    \113\ See id.
    \114\ See FICC Letter at 14.
    \115\ See FICC Letter at 11.
    \116\ See FICC Letter at 5-6, 11. FICC states that for Netting 
Members (both current and prospective) with business units already 
engaged in FCM-style derivatives clearing, the ability to leverage 
their existing systems should enable them to offer done-away 
clearing for transactions in U.S. Treasury securities. See also FICC 
Letter at 7, 9 (citing 2024 DTCC White Paper supra note 88 at 6 
(noting a significant number (28 percent) of Netting Members 
indicated that they expect to facilitate clearing transactions in 
U.S. Treasury securities through business units already engaged in 
done-away clearing of other product types and citing statements from 
Netting Members and other market participants indicating an intent 
to utilize their existing FCM-style systems to offer done-away 
clearing for U.S. Treasury securities and citing statements from 
Netting Members and other market participants indicating an intent 
to utilize their existing FCM-style systems to offer done-away 
clearing for U.S. Treasury securities)).
---------------------------------------------------------------------------

    As proposed, the GSD access models, including the ability to bundle 
execution and clearing, do not constitute a burden on competition that 
is not necessary or appropriate in furtherance of the Exchange Act, 
because the models continue to offer optionality for different types of 
market participants to access central clearing in different ways. After 
proposing the Treasury Clearing Rules,\117\ the Commission received 
similar comments regarding the impact that the absence of a done-away 
mandate would have on competition for GSD's indirect participants.\118\ 
At that time, the Commission disagreed with those comments and declined 
to impose a done-away mandate and did not agree that FICC's current 
access models constituted a burden on competition that is not necessary 
or appropriate in furtherance of the Exchange Act.\119\ Notably, the 
client clearing models that FICC has proposed allow for Netting Members 
to offer done-away services. Although the models have not been widely 
used for done-away services to date, market participants have indicated 
that they will provide such services going forward.\120\ In addition, 
as the Commission stated in the Treasury Clearing Adopting Release, in 
order to encourage Netting Member intermediaries to provide services 
that enable customers to access central clearing, it is best not to 
remove the ability of such intermediaries to determine which risks to 
take with respect to guaranteeing transactions to a CCP.\121\ As FICC 
and one commenter highlighted, providing done-away clearing services 
brings certain risks to the Netting Member, which the Netting Member 
must evaluate and manage. Finally, approving the Proposed Rule Change 
does not preclude further action by FICC to incentivize or facilitate 
done-away clearing services going forward.
---------------------------------------------------------------------------

    \117\ See Covered Clearing Agency Standards Proposing Release, 
Securities Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR 
29507 (May 27, 2014) (``Proposing Release''); Adopting Release at 
2756-57, supra note 14 (regarding comments arguing that the 
Commission should require FICC obligate its members to accept done-
away transactions to avoid an undue burden on competition).
    \118\ See Adopting Release at 2756-57, supra note 14.
    \119\ See id.
    \120\ See FICC Letter at 8 (reporting survey results that 43 
percent of Netting Members would likely clear indirect participant 
transactions through the Agent Clearing Service). See also, e.g., 
Bernard Goyder, ``BNY to Launch `Done Away' UST and Repo Clearing 
Service,'' available at https://www.risk.net/markets/7960175/bny-to-launch-done-away-ust-and-repo-clearing-service (Oct. 21, 2024); 
Bernard Goyder, ``RJ O'Brien Plots Expansion Into US Treasury 
Clearing,'' available at https://www.risk.net/markets/7959638/rj-obrien-plots-expansion-into-us-treasury-clearing (July 1, 2024).
    \121\ See Adopting Release at 2756-57, supra note 14.
---------------------------------------------------------------------------

    In addition, commenters state that the Proposed Rule Change should 
prohibit bundling of clearing and execution services. One commenter 
states that this prohibition need not include a done-away mandate, as 
it would simply prohibit Netting Members from requiring forced 
bundling, and the commenter also disagrees with FICC's legal arguments 
regarding whether FICC may impose such a prohibition.\122\ An 
additional commenter states that there are economic incentives for 
direct participants to bundle their execution and clearing services by 
favoring done-with transactions.\123\ This commenter cites certain 
prohibitions adopted by the Commodity Futures Trading Commission 
(``CFTC'') and states that FICC should adopt the same protections for 
the U.S. Treasury market, as necessary to ensure a robust done-away 
clearing market.\124\
---------------------------------------------------------------------------

    \122\ See Citadel Letter at 8.
    \123\ See MFA Letter I at 5.
    \124\ See id.
---------------------------------------------------------------------------

    In response to such comments, FICC states that such a prohibition 
would effectively mean that a Netting Member could not charge lower 
fees for done-with clearing because that would amount to tying 
executing to clearing, and, as a result, could be viewed as the 
clearing agency dictating pricing terms.\125\ FICC further states that 
such setting of prices is not clearly consistent with Section 
17A(b)(3)(E) of the Exchange Act, which provides that the rules of a 
clearing agency may not impose any schedule of prices, or fix rates or 
other fees, for services rendered by its participants.\126\
---------------------------------------------------------------------------

    \125\ See FICC Letter at 15.
    \126\ See FICC Letter at 15-16. One commenter states that FICC 
also relied upon Section 17A(b)(6) regarding a prohibition on 
bundling and execution. See Citadel Letter at 8. However, FICC's 
reference to that statutory provision relates to a comment that 
would require done-away clearing services to any customer that posts 
margin and not to the bundling of execution and clearing services.
---------------------------------------------------------------------------

    The Commission considered similar comments regarding a prohibition 
of bundling and clearing when it adopted the Treasury Clearing 
Rules.\127\ Specifically, several commenters stated that the Commission 
should require

[[Page 93793]]

U.S. Treasury securities central clearing agencies to obligate their 
members to accept done-away transactions and prohibit their members 
from requiring clients to bundle execution and clearing.\128\ In 
response, the Commission stated that it disagrees that the failure to 
require the submission of done-away transactions necessarily 
constitutes ``unfair discrimination,'' as discussed in Section 
17A(b)(3)(F).\129\ In order to encourage market participants to provide 
services to enable indirect access to central clearing, the Commission 
stated that it believes it is best not to remove the ability of FICC's 
direct participants to determine what risks to take with respect to 
guaranteeing customer transactions. In addition, the Commission also 
did not agree that, at that time, the current access models offered by 
FICC constitute a burden on competition that is not necessary or 
appropriate, as discussed in Section 17A(b)(3)(I).\130\ The 
Commission's analysis remains applicable to the commenters seeking such 
a prohibition from FICC.
---------------------------------------------------------------------------

    \127\ See Treasury Clearing Adopting Release, supra note 14, 89 
FR at 2756-77 (including n. 415 identifying such comments). More 
generally, the statutory authority for the CFTC provisions cited by 
one commenter differs significantly from the statutory authority 
applicable to the Commission for the U.S. Treasury market.
    \128\ See Treasury Clearing Adopting Release, supra note 14, 89 
FR at 2756.
    \129\ See Treasury Clearing Adopting Release, supra note 14, 89 
FR at 2757.
    \130\ See Treasury Clearing Adopting Release, supra note 14, 89 
FR at 2756-77.
---------------------------------------------------------------------------

    For these reasons, after considering the public comments and FICC's 
response, the access models in the Proposed Rule Change, which would 
not prevent a Netting Member from bundling execution and clearing and 
do not require a Netting Member to provide done-away clearing services 
would not impose a burden on competition not necessary or appropriate 
in furtherance of the Exchange Act.\131\
---------------------------------------------------------------------------

    \131\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

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

    Rule 17ad-22(e)(18)(iii) under the Exchange Act requires that a 
covered clearing agency, such as FICC, establish objective, risk-based, 
and publicly disclosed criteria for participation, which monitor 
compliance with such participation requirements on an ongoing 
basis.\132\
---------------------------------------------------------------------------

    \132\ 17 CFR 240.17ad-22(e)(4)(18)(iii).
---------------------------------------------------------------------------

    As described above in Section I.B.1., FICC proposes changes that 
would enable it to monitor activity submitted through the Agent 
Clearing Service. Specifically, FICC would require a Netting Member to 
submit an application to become an Agent Clearing Member and provide 
additional information regarding each Executing Firm Customer beyond 
that which is required for Executing Firms under the current GSD Rules, 
such as a Legal Entity Identifier (``LEI''). FICC would also require an 
Agent Clearing Member to submit activity on behalf of its Executing 
Firm Customer(s) through one or more separate Agent Clearing Member 
Omnibus Accounts, as opposed to the optional segregated submission 
approach provided for in the current GSD Rules. Finally, for both 
initial and ongoing membership purposes, FICC would require an Agent 
Clearing Member to provide FICC with information related to its use of 
the Agent Clearing Service. Adding these provisions to the GSD Rules 
should help FICC monitor the trading activity generated withing the 
Agent Clearing Service because they should allow FICC to better 
understand which transactions are attributable to which Executing Firm 
Customers submitting through an Agent Clearing Member, which should, in 
turn, provide better overall understanding of market participants' 
activity at FICC even across multiple Agent Clearing Members.
    One commenter states that FICC should change its proposal regarding 
the requirement on Agent Clearing Members to indemnify FICC for any 
harm arising out of the Agent Clearing Member's failure to have the 
current LEIs of its Executing Firm Customers on file with FICC.\133\ 
Specifically, the commenter states that FICC's proposal is overly broad 
insofar as it would ostensibly require an Agent Clearing Member to halt 
a customer's trading activity for minor lapses in LEI renewals and 
require the Agent Clearing Member to verify current LEIs on any number 
of LEI service provider websites.\134\ The commenter states that FICC 
should not need to maintain such strict rules governing LEIs when other 
identifying information accompanies each trade.\135\ Therefore, the 
commenter states that FICC should more narrowly tailor the 
indemnification provision to cover only relevant harms arising out of 
an Agent Clearing Member's gross negligence, willful misconduct, or 
fraudulent conduct.\136\
---------------------------------------------------------------------------

    \133\ See Letter from Katherine Darras, General Counsel, 
International Swaps and Derivatives Association (April 17, 2024) 
(``ISDA Letter I'') at 5-6; Letter from Katherine Darras, General 
Counsel, International Swaps and Derivatives Association (July 18, 
2024) (``ISDA Letter II'') at 5.
    \134\ See ISDA Letter II at 5.
    \135\ See id.
    \136\ See id.
---------------------------------------------------------------------------

    In response, FICC states that, although the Agent Clearing Member 
has a contractual relationship with its customers, FICC does not.\137\ 
Therefore, the Agent Clearing Member is able to include contract 
provisions that obligate its customers to maintain current LEI 
information and notify the Agent Clearing Member of any LEI renewals or 
changes.\138\ FICC further states that although it does not generally 
expect the LEI indemnification provision to give rise to significant 
liability, neither FICC nor its other members should bear the costs of 
any such liability.\139\
---------------------------------------------------------------------------

    \137\ See FICC Letter at 41.
    \138\ See id.
    \139\ See id.
---------------------------------------------------------------------------

    The Commission agrees with FICC on this point. The LEI portion of 
the Proposed Rule Change is consistent with FICC's existing rule 
regarding a Sponsoring Member's obligation to provide an LEI for its 
Sponsored Members.\140\ Therefore, Sponsoring Members are already 
subject to such a requirement. An Agent Clearing Member, like a 
Sponsoring Member, should be able to contract with its Executing Firm 
Customers to ensure that it receives updated LEI information to provide 
to FICC. Neither FICC nor its other members should bear any liability 
arising out of an Agent Clearing Member's failure to have the current 
LEIs of its Executing Firm Customers on file with FICC.
---------------------------------------------------------------------------

    \140\ See GSD Rules, Rule 3A, Section 2(d) (``Each Sponsoring 
Member shall submit the Legal Entity Identifier for each of its 
Sponsored Member applicants as part of the application of such 
Sponsored Member applicant. Each Sponsoring Member shall provide the 
Corporation with a Legal Entity Identifier for each of its Sponsored 
Members such that the Corporation shall have a current Legal Entity 
Identifier for each Sponsored Member at all times.'').
---------------------------------------------------------------------------

    Accordingly, the Proposed Rule Change would assist FICC in 
monitoring its participants' ongoing compliance with the Agent Clearing 
Service participation requirements, consistent with Rule 17ad-
22(e)(18)(iii).\141\
---------------------------------------------------------------------------

    \141\ 17 CFR 240.17ad-22(e)(18)(iii).
---------------------------------------------------------------------------

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

    Rule 17ad-22(e)(18)(iv)(C) under the Exchange Act requires that a 
covered clearing agency, such as FICC, when providing CCP services for 
transactions in U.S Treasury securities, establish objective, risk-
based, and publicly disclosed criteria for participation, which 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.\142\
---------------------------------------------------------------------------

    \142\ 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

    FICC states that the Proposed Rule Change is primarily designed to 
ensure that the access models in the GSD Rules comply with Rule 17ad-
22(e)(18)(iv)(C) by constituting criteria for participation

[[Page 93794]]

that facilitate access to GSD's clearance and settlement services, 
including for indirect participants.\143\ Specifically, FICC developed 
the Proposed Rule Change following FICC's review of GSD's existing 
direct and indirect access models.\144\ That review examined whether 
those models provide market participants with access to GSD's clearance 
and settlement services in as flexible a means as possible, consistent 
with FICC's responsibility to provide sound risk management and comply 
with its regulatory risk management obligations under Rule 17ad-22(e) 
and other parts of the Exchange Act.\145\
---------------------------------------------------------------------------

    \143\ See Notice of Filing, supra note 5, at 89 FR 21363.
    \144\ See id.
    \145\ See 17 CFR 240.17ad-22(e); Notice of Filing, supra note 5, 
at 89 FR 21363.
---------------------------------------------------------------------------

1. Changes to the Agent Clearing Service
    As described above in Section I.B.1., FICC proposes to re-name 
GSD's existing correspondent clearing/prime broker services as the 
Agent Clearing Service. FICC also proposes to consolidate and adopt 
additional provisions governing the re-named Agent Clearing Service. 
The proposed changes to re-name, consolidate, and provide additional 
specificity regarding the operation of the Agent Clearing Service 
should improve transparency of the GSD Rules regarding the Agent 
Clearing Service and allow market participants to better evaluate and 
consider how the Agent Clearing Service operates, including how it 
compares to existing cleared derivatives systems and infrastructure. 
The refinement of the proposed Agent Clearing Service should help 
ensure that market participants are able to evaluate and, if they 
choose, use this service to access FICC, including for done-away 
transactions, as discussed above in Section I.A. Therefore, these 
proposed changes are consistent with Rule 17ad-22(e)(18)(iv)(C).
    Several commenters request that FICC clarify that an Agent Clearing 
Member would be permitted to treat its customer transactions as off-
balance sheet for accounting purposes, otherwise the Agent Clearing 
Service may be so capital intensive as to disincentivize use of the 
access model.\146\ In response, FICC states that it is actively working 
with industry groups to determine the balance sheet impact of done-away 
transactions.\147\
---------------------------------------------------------------------------

    \146\ See FIA Letter at 5, 10-11; Letter from Robert Toomey, 
Head of Capital Markets, Managing Director/Associate General 
Counsel, SIFMA, at 3-4 (May 22, 2024) (``SIFMA Letter I'') at 2, 5; 
SIFMA Letter II at 3. One commenter further states that if FICC can 
provide clarity on this matter, it would negate the need for a done-
away clearing mandate in the GSD Rules. See SIFMA Letter I at 5.
    \147\ See FICC Letter at 14.
---------------------------------------------------------------------------

    It is ultimately the responsibility of each Netting Member to 
determine the accounting treatment of its own transactions. FICC need 
not opine on the balance sheet treatment for transactions within the 
Agent Clearing Service in order for the Commission to evaluate the 
Proposed Rule Change's consistency with Rule 17ad-
22(e)(18)(iv)(C).\148\
---------------------------------------------------------------------------

    \148\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

    Another commenter is concerned that the rights of Executing Firm 
Customers are too limited vis-[agrave]-vis FICC within the Agent 
Clearing Service.\149\ For example, the commenter states that under the 
Proposed Rule Change, FICC would have no obligations to Executing Firm 
Customers; rather, FICC's obligations would be solely to the Agent 
Clearing Member.\150\
---------------------------------------------------------------------------

    \149\ See ICI Letter at 4.
    \150\ See id.
---------------------------------------------------------------------------

    In the Notice of Filing, FICC states that within the current 
correspondent clearing/prime broker services, an indirect participant 
does not establish any relationship with FICC.\151\ FICC's proposed 
changes regarding the Agent Clearing Service would not change that 
aspect of the access model. In contrast, within the Sponsored Service, 
a Sponsored Member must establish an indirect, limited purpose 
membership with FICC. FICC states that one of the factors that an 
indirect participant may wish to consider in choosing between GSD 
access models is whether the participant prefers to be in a direct 
contractual relationship with FICC.\152\
---------------------------------------------------------------------------

    \151\ See Notice of Filing, supra note 5, 89 FR at 21364.
    \152\ See FICC Letter at 50-51.
---------------------------------------------------------------------------

    In the Treasury Clearing Rules Adopting Release, the Commission 
also recognized that certain access models offered by FICC may not 
result in a contractual relationship or direct obligation between FICC 
and an indirect participant.\153\ This generally would be the case in 
any agent clearing relationship in which an indirect participant relies 
upon a direct participant to submit transactions for clearing on its 
behalf.\154\ The commenter's concern that within the Agent Clearing 
Service, indirect participants would not have a contractual 
relationship with FICC, does not render the Proposed Rule Change 
inconsistent with Rule 17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

    \153\ See Adopting Release, supra note 14, 89 FR at 2758.
    \154\ See id.
---------------------------------------------------------------------------

2. Comments Regarding Done-Away Clearing
    As discussed in more detail in Section II.B above, several 
commenters suggest that by not including a requirement on Netting 
Member intermediaries to provide done-away clearing services to 
customers, the Proposed Rule Change would fail to implement criteria 
for participation that facilitate access to GSD's clearance and 
settlement services for indirect participants.\155\ Specifically, 
commenters state that if a customer is limited to done-with 
transactions, it would need to establish separate clearing 
relationships with each done-with counterparty with whom it wishes to 
transact, which would increase cost, complexity, operational risk, and 
limit the number of counterparties with whom to transact.\156\ In 
addition, several commenters state that alternatively, these market 
participants may limit their cash and/or repo U.S. Treasury 
transactions, thereby negatively impacting market liquidity.\157\ 
Commenters also state that FICC should prohibit the bundling of 
clearing and execution services to comply with Rule 17ad-
22(e)(18)(iv)(C). As discussed further in Section II.B infra, these 
commenters state that such a prohibition is necessary to ensure that 
market participants will provide done-away clearing services.\158\
---------------------------------------------------------------------------

    \155\ See FIA-PTG Letter I at 3 (stating that the Proposed Rule 
Change ``raises serious questions regarding whether [it] 
appropriately facilitate[s] access to clearing for indirect 
participants as required by'' Rule 17ad-22(e)(18)(iv)(C)); MFA 
Letter I at 3 (stating that the Proposed Rule change ``[does] not go 
far enough to satisfy'' Rule 17ad-22(e)(18)(iv)(C)); AIMA Letter at 
4-5 (stating that the changes in the Proposed Rule Change ``are not 
sufficient to facilitate access to clearing for indirect 
participants''); SIFMA-AMG Letter at 4 (stating that FICC must 
ensure that the Proposed Rule Change facilitates done-away trading 
in a manner that fulfills the requirements of the Treasury Clearing 
Rules); ICI Letter at 4 (stating that ``it is not clear that the 
[Proposed Rule Change] fully implements the requirements of'' Rule 
17ad-22(e)(18)(iv)(C)).
    \156\ See FIA-PTG Letter I at 3; MFA Letter I at 4-5; AIMA 
Letter at 4 (stating that without a done-away model, indirect 
participants will face new and unnecessary costs in having to bundle 
execution and clearing services or establish additional clearing 
relationships so that they can engage with multiple execution 
counterparties).
    \157\ See AIMA Letter at 4; see also SIFMA-AMG-Letter at 4-5 
(arguing that without changes to the GSD access models, many market 
participants may be shut out of the U.S. Treasury market, with 
significant negative effects on liquidity).
    \158\ See Citadel Letter at 7-8; MFA Letter II at 4.
---------------------------------------------------------------------------

    Generally, these commenters state that FICC should impose a mandate 
on Netting Member intermediaries to provide done-away clearing services 
to customers and should prohibit the

[[Page 93795]]

bundling of clearing and execution services to address these 
concerns.\159\
---------------------------------------------------------------------------

    \159\ See FIA-PTG Letter I at 2-3, 6-7; MFA Letter I at 4-5, 7-
8; AIMA Letter at 4-5.
---------------------------------------------------------------------------

    As discussed in more detail in Section II.B above, in response, 
FICC states that the Proposed Rule Change would meaningfully facilitate 
done-away clearing, without imposing a done-away mandate or prohibiting 
the bundling of clearing and execution services.\160\ FICC also states 
that a done-away mandate could expose both FICC and its participants to 
unique risks.\161\ First, as discussed in Section II.B above, done-away 
transactions present liquidity risks that done-with transactions do 
not.\162\ Because done-away transactions are entered into between a 
customer and a counterparty other than the customer's Netting Member 
intermediary, if the intermediary defaults, FICC would need to perform 
the one-sided obligations of the customer.\163\ Second, because done-
away transactions are negotiated between the customer and its 
counterparty, the Netting Member intermediary must depend on outside 
processes or parties to confirm that the transactions do not give rise 
to risk or regulatory issues (e.g., trade reporting and confirmation 
requirements, anti-money laundering and sanctions regulations, 
etc.).\164\ FICC states that its direct participants should 
independently determine whether they can assume the risks associated 
with providing done-away clearing services.\165\ Otherwise, according 
to FICC, the increased risks and costs associated with a done-away 
mandate could stifle the ongoing and positive market developments 
toward done-away clearing by discouraging Netting Member intermediaries 
from providing clearing services altogether.\166\
---------------------------------------------------------------------------

    \160\ See FICC Letter at 8.
    \161\ See FICC Letter at 11-13.
    \162\ See id.
    \163\ See id.
    \164\ See id.
    \165\ See id.
    \166\ See FICC Letter at 13-15.
---------------------------------------------------------------------------

    FICC further states that a done-away mandate could be inconsistent 
with Section 17A(b)(3)(E) and/or Section 17A(b)(6) of the Exchange 
Act.\167\ FICC states that for a done-away mandate to be effective, it 
would likely need to prohibit the bundling of execution and clearing 
(and thereby prevent a Netting Member intermediary from forcing its 
customers into done-with transactions through more favorable 
terms).\168\ FICC states that, as a result, a done-away mandate could 
be viewed as FICC dictating pricing terms, which could violate Section 
17A(b)(3)(E).\169\ Additionally, Section 17A(b)(6) provides that a 
clearing agency may not ``prohibit or limit access by any person to 
services offered by any participant therein.'' \170\ FICC states that a 
requirement on Netting Member intermediaries to provide done-away 
clearing to customers that post margin could violate Section 17A(b)(6) 
because the service offered to customers who do not post margin could 
potentially be limited to done-with clearing.\171\
---------------------------------------------------------------------------

    \167\ See FICC Letter at 15-16; 15 U.S.C. 78q-1(b)(3)(E); 15 
U.S.C. 78q-1(b)(6).
    \168\ See FICC Letter at 15-16.
    \169\ See 15 U.S.C. 78q-1(b)(3)(E).
    \170\ 15 U.S.C. 78q-1(b)(6).
    \171\ See FICC Letter at 16; 15 U.S.C. 78q-1(b)(6).
---------------------------------------------------------------------------

    In addition, as stated above in Section II.B., one commenter also 
states that FICC should not impose a done-away clearing mandate.\172\ 
Rather, the commenter states that any decision to offer done-away 
services should be a commercial/business decision left to clearing 
members, driven by evaluations of risk.\173\ The commenter states that 
FICC can implement an access model, without a done-away clearing 
mandate, that would be reasonably designed to ensure that FICC has 
appropriate means to facilitate access to its clearance and settlement 
services consistent with Rule 17ad-22(e)(18)(iv)(C).\174\
---------------------------------------------------------------------------

    \172\ See SIFMA Letter II at 3-4.
    \173\ See id.
    \174\ See SIFMA Letter II at 4.
---------------------------------------------------------------------------

    The Proposed Rule Change does not include a requirement that FICC's 
participants offer done-away clearing or prohibit the bundling of 
clearing and execution services. The Commission shall approve a 
proposed rule change of a self-regulatory organization if it finds that 
it is consistent with the Exchange Act,\175\ and the Proposed Rule 
Change is consistent with the Exchange Act and the rules thereunder, 
even in the absence of a done-away mandate or a prohibition on the 
bundling of clearing and execution services.
---------------------------------------------------------------------------

    \175\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------

    The Commission disagrees with the commenters arguing that FICC must 
impose a done-away clearing mandate on Netting Member intermediaries or 
prohibit the bundling of clearing and execution services to comply with 
Rule 17ad-22(e)(18)(iv)(C). As discussed in the Adopting Release, Rule 
17ad-22(e)(18)(iv)(C) does not prescribe a particular access model, but 
it instead helps ensure that FICC, and any other covered clearing 
agency serving the U.S. Treasury market, review their indirect access 
models and ensure that they facilitate access to clearance and 
settlement services in a manner suited to the needs and regulatory 
requirements of market participants, including indirect 
participants.\176\ Further, in the Adopting Release, the Commission 
stated that a requirement to accept done-away transactions would 
require a covered clearing agency to, in turn, require their direct 
participants to transact with their customers in specific ways and 
limit their ability to offer certain types of pricing services.\177\
---------------------------------------------------------------------------

    \176\ See Treasury Clearing Adopting Release, supra note 14, 89 
FR at 2755-56.
    \177\ See Treasury Clearing Adopting Release, supra note 14, 89 
FR at 2757.
---------------------------------------------------------------------------

    More generally, and as stated above in Section II.A., both the 
Sponsored Service and the Agent Clearing Service (including the prime 
broker/correspondent clearing service in place currently) allow (and 
are currently used) for done-away clearing.\178\ As stated in the 
Adopting Release, in order to encourage Netting Member intermediaries 
to provide services that enable customers to access central clearing, 
it is best not to remove the ability of such intermediaries to 
determine which risks to take with respect to guaranteeing transactions 
to a CCP such as FICC.\179\ This is also true with respect to providing 
done-away clearing services. The Commission agrees with the rationale 
articulated by both FICC and one commenter arguing that a done-away 
clearing mandate could be counterproductive and ultimately discourage 
Netting Member intermediaries from providing clearing services to 
customers.\180\ Additionally, it is appropriate to allow the U.S. 
Treasury market to adjust to the implementation of the Treasury 
Clearing Rules (e.g., the Account Segregation Proposals) before 
determining that additional access models are needed.\181\ For the 
foregoing reasons, FICC need not impose a done-away clearing mandate on 
Netting Member intermediaries in order to comply with Rule 17ad-
22(e)(18)(iv)(C).\182\
---------------------------------------------------------------------------

    \178\ See FICC Letter at 7, note 14 and accompanying text 
(highlighting that although the bulk of current done-away 
transactions are cash transactions cleared through the correspondent 
clearing/prime broker clearing models, nearly 10 percent of FICC's 
Sponsoring Members currently clear done-away repo transactions 
through the Sponsored Service).
    \179\ See Adopting Release at 2756-57, supra note 14.
    \180\ See FICC Letter at 11-15; SIFMA Letter II at 3-4.
    \181\ See Adopting Release at 2756-57, supra note 14.
    \182\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

    Several commenters state that FICC should explain how its proposal 
to re-brand the Agent Clearing Service would actually facilitate done-
away

[[Page 93796]]

clearing.\183\ Two commenters state the re-branding and making 
conforming, technical amendments to the Agent Clearing Service are non-
substantive and ``superficial'' and would not increase the availability 
of done-away trading.\184\ One commenter states that there is not a 
significant amount of repo activity conducted through the current 
correspondent clearing/prime broker clearing services.\185\ The 
commenter further questions why that would change after the services 
are re-branded as the Agent Clearing Service.\186\ In response, FICC 
states that its survey results demonstrate that prior to publication of 
the Notice of Filing, 77 percent of market participants were not very 
familiar with the correspondent clearing/prime brokerage services, and 
that lack of familiarity is likely the reason for the relatively low 
level of use of those GSD access models.\187\ FICC states that after 
publication of the Notice of Filing, its survey results indicate that 
43 percent of Netting Members would likely clear indirect participant 
transactions through the Agent Clearing Service.\188\ FICC attributes 
the shift among participants towards considering using the Agent 
Clearing Service is a result of the Proposed Rule Change's 
clarifications and consolidations regarding the Agent Clearing 
Service.\189\
---------------------------------------------------------------------------

    \183\ See SIFMA-AMG Letter at 2, 4-5; ICI Letter at 2, 4-5; MFA 
Letter I at 3-4.
    \184\ See SIFMA-AMG Letter at 2, 4-5; ICI Letter at 2, 4-5.
    \185\ See MFA Letter I at 3-4.
    \186\ See id.
    \187\ See FICC Letter at 8.
    \188\ See id.
    \189\ See id.
---------------------------------------------------------------------------

    The Proposed Rule Change sufficiently explains how the Agent 
Clearing Service would work and how it could facilitate done-away 
clearing. Further explanation is unnecessary for purposes of 
considering the Proposed Rule Change, and each market participant has 
to determine which access model to use for its own business purposes. 
However, the Commission observes that FICC has engaged in market 
outreach to assist market participants in evaluating and understanding 
the operations and business case for each access model.\190\
---------------------------------------------------------------------------

    \190\ See FICC Letter at 4; see generally FICC's U.S. Treasury 
Clearing information website, available at https://www.dtcc.com/ustclearing (e.g., the ``Access Central Clearing'' tab, which 
provides resources for direct and indirect participants to 
understand and evaluate each GSD access model, including 
explanations of recommended access models for specific types of 
market participants).
---------------------------------------------------------------------------

    Several commenters raise the concern that even if a Netting Member 
intermediary offers done-away clearing services, customers would be 
required to disclose the identity of their execution counterparties to 
the intermediary.\191\ One commenter states that requiring the 
disclosure of execution counterparties to the Netting Member 
intermediary divulges confidential information regarding the customer's 
trading activities and could lead to limitations placed on those 
execution counterparties, directly undermining a key benefit of central 
clearing.\192\ Another commenter states that in a cleared market, the 
identity of a customer's original execution counterparty should be 
irrelevant to a clearing member because the clearing member is not 
exposed to the creditworthiness of the execution counterparty, meaning 
that a clearing member should not be in a position to limit a 
customer's execution counterparties.\193\ This commenter also states 
that this concern is why the Commodity Futures Trading Commission 
specifically prohibited ``the type of trilateral execution agreement 
described by FICC.'' \194\ Therefore, commenters state, FICC should 
enable customers to avoid disclosing the identity of their execution 
counterparties to their Netting Member intermediaries and prohibit the 
restriction of execution counterparties.\195\
---------------------------------------------------------------------------

    \191\ See FIA-PTG Letter I at 7-8; MFA Letter I at 4-5; FIA-PTG 
II at 3; Citadel Letter at 4-5.
    \192\ See FIA-PTG Letter I at 7-8.
    \193\ See Citadel Letter at 4-5; see also Letter from Joanna 
Mallers, Secretary, Futures Industry of America, Principal Traders 
Group (Oct. 11, 2024) (``FIA-PTG Letter II'') at 3.
    \194\ See Citadel Letter at 5.
    \195\ See FIA-PTG Letter I at 7-8; MFA Letter I at 4-5.
---------------------------------------------------------------------------

    FICC states that it is currently not practically feasible to 
prohibit a direct participant from knowing the execution counterparty's 
identity because there is no mechanism in the U.S. Treasury market 
available for someone other than a direct participant to submit 
transactions and counterparty information to FICC.\196\ Regarding the 
concerns that disclosure of the identity of a customer's execution 
counterparty could result in the Netting Member intermediary placing 
limitations on the execution counterparty, FICC states that Netting 
Member intermediaries may, in certain cases, have legitimate reasons to 
know or limit a customer's execution counterparties.\197\ For example, 
FICC states that a Netting Member may need to confirm that a customer's 
proposed execution counterparty has an execution or similar agreement 
in place with the Netting Member and that the execution counterparty 
has performed any obligations set forth in that agreement.\198\ FICC 
also states that Netting Members may also need to know the identity of 
a customer's execution counterparty to assess certain risks, such as 
potential CCLF requirements.\199\ FICC states that whether and how a 
Netting Member intermediary may restrict execution counterparties are 
matters that should be commercially negotiated between the intermediary 
and its customers, rather than dictated by FICC in the GSD Rules.\200\
---------------------------------------------------------------------------

    \196\ See FICC Letter at 16. FICC states that in other markets 
(e.g., the U.S. markets for equity securities and cleared 
derivatives), there are execution facilities or affirmation 
platforms that provide post-trade settlement market infrastructure 
with counterparty information. However, in the U.S. Treasury market, 
such facilities or platforms are not predominant or do not currently 
offer similar services. See id.
    \197\ See FICC Letter at 17.
    \198\ See id.
    \199\ See id.
    \200\ See id.
---------------------------------------------------------------------------

    The Commission acknowledges that a customer may not wish to 
disclose the identity of its execution counterparty to its Netting 
Member intermediary. Although the commenters state that FICC should 
enable anonymous execution, such anonymous execution is not yet 
possible considering the current market infrastructure. Therefore, FICC 
need not require Netting Member intermediaries to provide for anonymous 
execution in order for the Proposed Rule Change to be consistent with 
Rule 17ad-22(e)(18)(iv)(C).\201\
---------------------------------------------------------------------------

    \201\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

    In addition, regarding the concern that a Netting Member 
intermediary could restrict the execution counterparty, FICC's response 
that a Netting Member intermediary might have legitimate reasons to 
know the identity and restrict execution counterparties supports the 
suggestion that such matters should be negotiated bilaterally between 
customers and their Netting Members intermediaries.\202\ However, 
regarding potential liquidity risk arising from done-away transactions, 
the Commission understands that the existence of exposure arising from 
a done-away transaction, and not necessarily the execution counterparty 
to that exposure, could have an effect on the Netting Member's 
liquidity obligations to FICC in the event of a member default. The 
Commission would not view the

[[Page 93797]]

identity of the execution counterparty as relevant to the potential 
liquidity risk arising from that transaction. Moreover, the Commission 
disagrees that FICC's statements regarding confirming that a proposed 
execution counterparty has an execution or similar agreement in place 
with the Netting Member equates to the types of trilateral agreements 
prohibited by the CFTC.\203\
---------------------------------------------------------------------------

    \202\ In addition, the Commission understands that, to the 
extent that a market participant is transacting on an inter-dealer 
broker or similar platform, the execution counterparty to the 
transaction would be the inter-dealer broker or platform, not the 
other market participant that was brought together on the platform 
and also had a transaction with the inter-dealer broker or platform.
    \203\ Such agreements incorporated optional annexes that make 
the clearing member to one or both of the executing parties a party 
to the agreement. These trilateral agreements contain provisions 
that would permit a customer's FCM, in consultation with the swap 
dealer (``SD'') that is the customer's counterparty, to establish 
specific credit limits for the customer's swap transactions with the 
SD, and that the FCM will only accept for clearing those 
transactions that fall within these specific limits. The limits set 
for trades with the SD or MSP might be less than the overall limits 
set for the customer for all trades cleared through the FCM. CFTC, 
Customer Clearing Documentation, Timing of Acceptance for Clearing, 
and Clearing Member Risk Management, 77 FR 21278, 21279 (Apr. 9, 
2012).
---------------------------------------------------------------------------

    One commenter asked why the Agent Clearing Service cannot be used 
for ``brokered transactions'' or GCF repo transactions.\204\ The 
commenter also states that for Treasury cash transactions executed by 
inter-dealer brokers, there would appear to be no way to comply with 
the Treasury Clearing Rules via customer clearing, as the execution 
counterparty does not offer customer clearing services and therefore 
another clearing member must accept these trades via a done-away 
offering.\205\ In response, FICC states that, with respect to general 
collateral repo transactions, FICC would not be able to clear such 
transactions through the proposed Agent Clearing Service, but it states 
that it is considering developing such capabilities based on feedback 
from market participants.\206\ With respect to brokered transactions, 
FICC states that it would not be appropriate for transactions cleared 
through the proposed Agent Clearing Service to be treated as ``Brokered 
Transactions'' under the GSD Rules because Brokered Transactions are 
designed to capture certain transactions that present lower risk than 
other cleared transactions.\207\ Moreover, the Account Segregation 
Proposals \208\ would modify the GSD Rules regarding Brokered 
Transactions, further clarifying the unique treatment of Brokered 
Transactions due to the limited risk they present to FICC.\209\ The 
current GSD Rules cap the amount of loss allocation that may be applied 
to Inter-Dealer Broker Netting Members and Non-IDB Repo Brokers 
submitting Brokered Transactions.\210\ The Account Segregation 
Proposals would revise the definition of Brokered Transactions to only 
include 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.\211\ As a result, 
the favorable loss allocation treatment for Brokered Transactions would 
only apply to the transactions that present limited risk since an 
Inter-Dealer Broker is standing in between two counterparties in those 
transactions and is therefore completely flat.\212\ Since the favorable 
loss allocation treatment is only appropriate for Inter-Dealer Broker 
Netting Members submitting Brokered Transactions, the Account 
Segregation Proposals would delete the term ``Non IDB Repo Broker'' 
from the GSD Rules.\213\ Additionally, the concurrently approved 
Account Segregation Proposals would provide that transactions entered 
into on an Inter-Dealer Broker Netting Member's trading platform or 
similar platform may be cleared using the Sponsored Service or the 
Agent Clearing Service, which addresses the commenter's concern.\214\
---------------------------------------------------------------------------

    \204\ See FIA-PTG Letter I at 7.
    \205\ See FIA-PTG Letter I at 3; FIA-PTG Letter II at 3.
    \206\ See FICC Letter at 22.
    \207\ See FICC Letter at 22-23.
    \208\ See Account Segregation Proposals, supra note 85.
    \209\ See Account Segregation Proposals, supra note 85, 89 FR at 
87451.
    \210\ See GSD Rule 4, Section 6, supra note 15.
    \211\ See Account Segregation Proposals, supra note 85, 89 FR at 
87451.
    \212\ See Account Segregation Proposals, supra note 85, 89 FR at 
21598.
    \213\ See id.
    \214\ See Account Segregation Proposals, supra note 85, 89 FR at 
87451; see also FICC Letter at 22-23.
---------------------------------------------------------------------------

    In response to the comments regarding transactions executed on an 
inter-dealer broker or similar platform, the Commission agrees that, as 
FICC represented,\215\ such transactions could be submitted through the 
Agent Clearing Service.
---------------------------------------------------------------------------

    \215\ See Account Segregation Proposals, supra note 85; FICC 
Letter at 23.
---------------------------------------------------------------------------

3. Changes to the Sponsored Service
    As described above in Section I.B.2., FICC also proposes to update 
certain membership standards in the GSD Rules regarding the Sponsored 
Service. First, FICC proposes to eliminate the two categories of 
Sponsoring Members, and instead, make all Sponsoring Members subject to 
the same eligibility and ongoing requirements that are currently 
applicable to Category 2 Sponsoring Members. These proposed changes 
would remove the capitalization requirements on Bank Netting Members 
from the current GSD Rules, and instead apply the activity limits and 
financial condition factors used under the current GSD Rules for 
Category 2 Sponsoring Members. These proposed changes would create 
parity among all Sponsoring Members (and applicants), thereby 
encouraging additional market participants to become Sponsoring 
Members, which in turn should give indirect participants a wider range 
of Sponsoring Members to consider should they choose to access GSD's 
central clearing services via the Sponsored Service.\216\ Second, FICC 
proposes to remove the QIB Requirement for Sponsored Members, which 
would make the Sponsored Service available to additional market 
participants (i.e., those unable to meet the QIB Requirement).\217\
---------------------------------------------------------------------------

    \216\ See Notice of Filing, supra note 5, 89 FR at 21370.
    \217\ One commenter expressed support for FICC's proposal to 
eliminate the QIB Requirement. See ICI Letter at 5. No other 
commenter addressed this particular change or any other changes to 
the Sponsored Service.
---------------------------------------------------------------------------

    Therefore, the proposed changes to the GSD Rules to (1) consolidate 
the Sponsoring Member categories, and (2) eliminate the QIB Requirement 
for Sponsored Members, constitute criteria for participation that 
facilitate access to GSD's clearance and settlement services, including 
for indirect participants, are consistent with Rule 17ad-
22(e)(18)(iv)(C), because the proposed changes would expand the 
availability of the Sponsored Service to a broader range of market 
participants.\218\
---------------------------------------------------------------------------

    \218\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

4. Changes to Eligibility Criteria for Non-U.S. and Other Applicants
    As described above in Section I.B.2., FICC proposes to clarify the 
eligibility criteria for non-U.S. Netting Member applicants. Whereas 
the current GSD Rules are unclear as to whether a non-U.S. applicant 
entity would only be subject to the Foreign Netting Member standards or 
would also be subject to the legal entity standards, FICC proposes to 
streamline the relevant membership categories by eliminating the 
category of ``Foreign Netting Member'' and expanding the qualifications 
for each category of Netting Member to include the foreign equivalent 
of the same legal entity types. Additionally, FICC proposes to clarify 
the eligibility criteria for applicants (including non-U.S. entities) 
that do not fit into one of the existing Netting Member categories.
    Following the adoption of the Treasury Clearing Rules, additional 
market participants will need to access FICC's clearance and settlement 
services, either as direct Netting Members or as indirect participants.

[[Page 93798]]

Whereas the current GSD Rules do not provide FICC with the authority to 
consider a Netting Member applicant that does not meet the eligibility 
criteria of one of the Netting Member categories enumerated in the GSD 
Rules, the proposed changes, as described in Section I.B.2, would 
provide a framework for FICC to consider such other applicants. FICC 
designed the proposed changes regarding non-U.S. and other applicants 
to facilitate access to GSD's clearing services to a broader range of 
market participants.\219\
---------------------------------------------------------------------------

    \219\ See Notice of Filing, supra note 5, at 89 FR 21373.
---------------------------------------------------------------------------

    The proposed changes to the GSD Rules to clarify the eligibility 
criteria for non-U.S. Netting Member applicants and applicants that do 
not fit into one of the existing Netting Member categories, are 
consistent with Rule 17ad-22(e)(18)(iv)(C), because the proposed 
changes would expand the availability of GSD's clearing services to a 
broader range of market participants.\220\
---------------------------------------------------------------------------

    \220\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

5. Changes To Clarify the GSD Access Models
    As described above in Section I.B.3., FICC proposes to include a 
``road map'' in the GSD Rules describing the various GSD access models 
that allow for both direct and indirect access to GSD's clearance and 
settlement services. FICC also proposes to simplify the GSD Rule 
definitions regarding the different types of membership and other 
related definitions.\221\ FICC states that these proposed changes would 
enhance the ability of market participants to better understand and 
evaluate the comparative tradeoffs between GSD's different access 
models.\222\
---------------------------------------------------------------------------

    \221\ See Notice of Filing, supra note 5, 89 FR at 21374.
    \222\ See Notice of Filing, supra note 5, 89 FR at 21373-74.
---------------------------------------------------------------------------

    Several commenters request that FICC provide further clarity 
regarding the GSD access models.\223\ Specifically, commenters request 
that FICC explain the expected use cases for each of the GSD access 
models to enable market participants to better evaluate the relative 
benefits of each access model by understanding the substantive 
differences between them.\224\ One commenter states that FICC should 
eliminate any access model that it cannot justify with a use case.\225\ 
One commenter states that although the availability of multiple access 
models may provide flexibility to market participants, it could also 
introduce unnecessary complexity and confusion.\226\
---------------------------------------------------------------------------

    \223\ See FIA-PTG Letter I at 6-8; ISDA Letter I at 8; MFA 
Letter I at 6; AIMA Letter at 5-6; SIFMA-AMG Letter at 3, 11-12; 
ISDA Letter II at 2-3.
    \224\ See id.
    \225\ See MFA Letter I at 7.
    \226\ See MFA Letter I at 6; FIA-PTG Letter I at 4. For example, 
with a greater number of access models, a direct participant's 
service offerings and pricing might not be readily apparent to 
indirect participants. See id.
---------------------------------------------------------------------------

    FICC states that it developed four indirect access models (i.e., 
the Sponsored Service and Agent Clearing Service, each with either 
segregated or non-segregated margin) after engagement with market 
participants to ensure a diverse array of models through which market 
participants can access central clearing.\227\ In response to the 
comments requesting further clarity and challenging the need for each 
of the proposed access models, FICC describes some of the possible use 
cases and advantages of each of the four access models.\228\ 
Specifically, FICC states that market participants might prefer the 
Agent Clearing Service due to its conceptual and operational similarity 
to an FCM-style cleared derivatives model, enabling market participants 
to leverage their existing legal analyses, structures, policies, and 
procedures to clear transactions in U.S. Treasury securities.\229\ 
Additionally, due to the greater intermediation of the Agent Clearing 
Service, a Netting Member intermediary would be able to utilize a 
``financial asset'' election to perfect its security interest in 
cleared transactions without having to file a Uniform Commercial Code 
financing statement, potentially reducing cost, risk, and 
publicity.\230\ Moreover, in comparison to the Sponsored Service, the 
Agent Clearing Service would involve a simpler onboarding process, 
would not require privity of contract between indirect participants and 
FICC, and would not impose the same jurisdictional requirements on 
indirect participants.\231\ On the other hand, FICC highlights 
potential advantages to the Sponsored Service, including being in a 
direct contractual relationship with FICC.\232\ FICC also states that 
Netting Members have existing clearing agreements with many customers 
for the Sponsored Service without segregation and could continue to 
utilize their existing agreements.\233\ Additionally, since the 
Sponsored Service has existed for nearly two decades, FICC states that 
market participants have achieved a certain level of confidence 
regarding the Sponsored Service's treatment for legal, regulatory, 
accounting, and other purposes.\234\
---------------------------------------------------------------------------

    \227\ See FICC Letter at 18, 20.
    \228\ See FICC Letter at 50-51.
    \229\ See FICC Letter at 20, 50-51.
    \230\ See FICC Letter at 19, 50-51.
    \231\ See FICC Letter at 19-20, 50-51.
    \232\ See FICC Letter at 50-51.
    \233\ See id.
    \234\ See FICC Letter at 20, 50-51.
---------------------------------------------------------------------------

    Publication of ``use cases'' or justifications are not required for 
a proposed rule change to be consistent with Rule 17ad-
22(e)(18)(iv)(C), which requires only that a covered clearing agency 
have written policies and procedures reasonably designed to ensure 
appropriate access to its clearing and settlement services, including 
for indirect participants. Further, the decision of which access model 
to use is for each individual market participant to determine, as each 
market participant has different regulatory obligations, business 
strategies, ownership models, etc. Nevertheless, FICC's description of 
the reasons for each of its four access models is sound and clearly 
identifies potential advantages and disadvantages of each model for 
market participants to consider.\235\
---------------------------------------------------------------------------

    \235\ The Commission also understands that FICC has engaged in 
outreach and education efforts to further explain the different 
features of each model. See generally FICC's U.S. Treasury Clearing 
information website, available at https://www.dtcc.com/ustclearing 
(e.g., the ``Access Central Clearing'' tab, which provides resources 
for direct and indirect participants to understand and evaluate each 
GSD access model, including explanations of recommended access 
models for specific types of market participants).
---------------------------------------------------------------------------

    In addition, several commenters questioned the decision to offer 
both segregated and non-segregated accounts in both the Sponsored 
Service and Agent Clearing Service. Specifically, one commenter 
requests that FICC explain the benefits of the access models insofar as 
they allow for omnibus (i.e., non-segregated) margin submission.\236\ 
Another commenter questioned whether both the Sponsored Service and 
Agent Clearing Service should offer segregated models.\237\
---------------------------------------------------------------------------

    \236\ See SIFMA-AMG Letter at 11-12.
    \237\ See FIA-PTG Letter at 4.
---------------------------------------------------------------------------

    In response, FICC explains potential advantages regarding margin 
segregation options (i.e., to explain why the GSD access models allow 
for both segregated and non-segregated, or omnibus, margin 
submission).\238\ Specifically, within the Agent Clearing Service, if 
margin is not segregated, Clearing Fund requirements for customer 
transactions would be calculated on a net basis across all Executing 
Firm Customers whose transactions are recorded within the same account, 
resulting in aggregate margin obligations that are substantially lower 
than under the Sponsored

[[Page 93799]]

Service.\239\ If margin is segregated, Agent Clearing Members would not 
bear the costs of financing margin obligations for customer positions--
a cost saving that could be passed on to customers without exposing 
customers to FICC, fellow customer, or Netting Member risk.\240\ 
Regarding the Sponsored Service, FICC states that many customers have 
clearing agreements in place that already provide for non-segregated 
margin.\241\ By continuing to allow non-segregated margin within the 
Sponsored Service, FICC would enable such customers to maintain their 
existing clearing agreements and associated processes.\242\
---------------------------------------------------------------------------

    \238\ See FICC Letter at 50-51.
    \239\ See id.
    \240\ See id.
    \241\ See id.
    \242\ See id.
---------------------------------------------------------------------------

    FICC's explanation of the potential reasons why a customer may want 
to be able to pursue the various options of segregation within both 
models is sound. Each market participant will have to evaluate the 
advantages and drawbacks of each option and determine what works best 
for its own business. The existence of both segregated and omnibus 
options for both the Agent Clearing and Sponsored Services is 
consistent with Rule 17ad-22(e)(18)(iv)(C), which requires only that a 
covered clearing agency have written policies and procedures reasonably 
designed to ensure appropriate access to its clearing and settlement 
services, including for indirect participants.
    For these reasons, FICC's proposals to include a ``road map'' 
describing the various GSD access models and to simplify the 
definitions regarding GSD membership would, among other things, provide 
clarity in the GSD Rules regarding the models that direct and indirect 
participants may use to access GSD's clearance and settlement services. 
The proposed changes would enable market participants to better 
understand and evaluate the various GSD access models for clearing 
transactions in U.S. Treasury securities. Therefore, the proposed 
changes would constitute criteria for participation that facilitate 
access to GSD's clearance and settlement services, including for 
indirect participants, consistent with Rule 17ad-22(e)(18)(iv)(C).\243\
---------------------------------------------------------------------------

    \243\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

    Additionally, one commenter states that FICC should require Netting 
Member intermediaries to allow their customers to choose whether to 
access clearing through the Sponsored Service or the Agent Clearing 
Service.\244\ The same commenter further states that that margin 
segregation should be automatic for any Sponsored Member that posts its 
own margin.\245\
---------------------------------------------------------------------------

    \244\ See MFA Letter I at 7.
    \245\ See id.
---------------------------------------------------------------------------

    In response, FICC states that the best way to facilitate access to 
clearing is to enable direct and indirect participants to select the 
access method and associated terms that are most consistent with their 
commercial, regulatory, risk, operational, and legal considerations. 
Moreover, FICC states that mandating that Netting Members offer a 
particular service or clearing model could be inconsistent with Section 
17A(b)(3)(E) of the Exchange Act, which prohibits a clearing agency 
from imposing any schedule of prices, or fix rates or other fees for 
its participants' services.\246\ In response to the comment regarding 
automatic margin segregation within the Sponsored Service, FICC states 
that margin segregation should not be automatic for Sponsored Members 
that post their own margin, because there are scenarios in which market 
participants may prefer the flexibility of choosing non-segregated 
margin even when a Sponsored Member posts its own margin.\247\
---------------------------------------------------------------------------

    \246\ See FICC Letter at 32-33; 15 U.S.C. 78q-1(b)(3)(E).
    \247\ See FICC Letter at 21-22.
---------------------------------------------------------------------------

    The Proposed Rule Change does not include a requirement that FICC's 
Netting Members offer their customers a choice of what access model to 
use. The Commission shall approve a proposed rule change of a self-
regulatory organization if it finds that it is consistent with the 
Act,\248\ and the lack of a requirement that each Netting Member give 
its customers the choice of which access model to use is not 
inconsistent with the Act.
---------------------------------------------------------------------------

    \248\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------

    One commenter raises concerns as to whether FICC has the 
operational capability to onboard and account for the large number of 
new accounts that would need to be established to support the increased 
volume of clearing activity that would arise from FICC's implementation 
of its requirements pursuant to the Treasury Clearing Rules.\249\ 
Specifically, the commenter states that that FICC would need to 
establish and maintain a large number of new accounts because each 
Agent Clearing Member would need to set up an individual account at 
FICC for each indirect participant for which the Agent Clearing Member 
would segregate margin.\250\
---------------------------------------------------------------------------

    \249\ See SIFMA-AMG Letter at 12.
    \250\ See id.
---------------------------------------------------------------------------

    In response, FICC states it proposed each access model after 
confirming that FICC has the ability, from a legal, operational, risk, 
regulatory, and commercial perspective, to provide such a model.\251\ 
Regarding individual accounts, FICC states that neither the Sponsored 
Service nor the Agent Clearing Service would necessitate individual 
accounts for each customer.\252\
---------------------------------------------------------------------------

    \251\ See FICC Letter at 22.
    \252\ See id.
---------------------------------------------------------------------------

    The Commission agrees that neither the Proposed Rule Change nor 
FICC's implementation of its other requirements pursuant to the 
Treasury Clearing Rules would require FICC to establish and maintain 
accounts for each indirect participant.\253\ Moreover, in its 
supervisory capacity regarding FICC, the Commission routinely and 
regularly receives data, reports, and other information regarding 
FICC's clearance and settlement activities, including FICC's 
operational capabilities. Based on the Commission's supervisory 
knowledge, FICC has the requisite operational capacity to offer the 
access models that it has proposed.\254\
---------------------------------------------------------------------------

    \253\ See https://www.dtcc.com/-/media/Files/Downloads/Microsites/Treasury-Clearing/FICC-Treasury-Clearing-Client-Impact-Roadmap.pdf.
    \254\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

    One commenter raised concerns regarding the inability of FCMs to 
utilize the GSD access models.\255\ Specifically, the commenter states 
that certain regulatory requirements to which FCMs are subject would 
conflict with FCMs participating in both the Sponsored Service and 
Agent Clearing Service.\256\ The commenter urges FICC

[[Page 93800]]

to allow Netting Members to maintain sub-accounts for futures customer 
funds, cleared swaps customer funds, and foreign futures customer funds 
that comply with CFTC requirements.\257\ Additionally, the commenter 
states that FCMs are currently seeking relief from the CFTC to 
recognize FICC as an acceptable counterparty and otherwise align the 
GSD access models with CFTC requirements.\258\ In the interim, the 
commenter requests that FICC apply to FCMs certain GSD Rules that would 
exempt a Netting Member's Covered Affiliate from submitting trades to 
FICC if the obligation to submit the trade would cause a violation of 
any applicable law, rule, or regulation.\259\ The commenter further 
requests that FICC work with FCMs and the CFTC to develop alternative 
CFTC-compliant access models.\260\
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    \255\ See Letter from Walt L. Lukken, President and Chief 
Executive Officer, Futures Industry of America (April 18, 2024) 
(``FIA Letter'') at 2-12. On July 1, 2024, FICC filed a separate 
proposed rule change that would, among other things, require each 
Netting Member to submit for central clearing all eligible secondary 
market transactions in U.S. Treasury securities to which it is a 
counterparty. See Securities Exchange Act Release No. 100417 (June 
25, 2024), 89 FR 54602 (July 1, 2024) (SR-FICC-2024-009) (``Trade 
Submission Proposal''). The Commission notes that the FIA Letter 
includes a request for relief from the clearing requirement in the 
Trade Submission Proposal. See FIA Letter at 2-3. The commenter 
appropriately submitted a separate comment letter in response to the 
Trade Submission Proposal requesting similar relief, and the 
Commission will address the comment when adjudicating the Trade 
Submission Proposal. However, the commenter's request is outside the 
scope of the instant Proposed Rule Change.
    \256\ See FIA Letter at 4, 7-8 (citing CFTC Regulations 
regarding acceptable FCM counterparties, delivery-versus-payment and 
payment-versus-delivery requirements, posting collateral as margin 
for repos entered into with customer funds, FCM bankruptcy 
management, FCM repos with affiliates, and FCMs holding customer 
assets in customer segregated accounts).
    \257\ See FIA Letter at 8.
    \258\ See FIA Letter at 2-3, 11.
    \259\ See FIA Letter at 4-5; GSD Rule 11, Section 3 and GSD Rule 
18, Section 2, supra note 15.
    \260\ See FIA Letter at 5, 8-10.
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    FICC states that it is open to considering additional access models 
if necessary to address market participants' regulatory or other 
needs.\261\ In response to the commenter's request regarding sub-
accounts, FICC states that the GSD Rules would allow Netting Members to 
instruct FICC to establish separate accounts for certain kinds of 
transactions and to have such accounts constitute separate margin 
portfolios.\262\ Thus, a Netting Member that enters into transactions 
using futures, cleared swaps, or foreign futures customer funds could 
have those transactions recorded in an account that does not net with 
the Netting Member's other accounts for purposes of calculating margin 
or funds-only settlement amounts.\263\
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    \261\ See FICC Letter at 23.
    \262\ See id.
    \263\ See id.
---------------------------------------------------------------------------

    The commenter specifically seeks relief from the CFTC from certain 
CFTC regulations, which are not within the Commission's 
jurisdiction.\264\ The commenter also requests that FICC continue to 
apply certain GSD Rule provisions that would exempt FCMs from the 
requirement to submit trades to FICC if such trade submission would 
cause the FCM to be in violation of any applicable rule, or 
regulation.\265\ The Commission notes that the GSD Rule provisions 
cited by the commenter are currently the subject of the Trade 
Submission Proposal, a separate pending proposed rule change filed by 
FICC.\266\ Because the commenter's request to be excluded from the 
trade submission requirement deals with GSD Rule provisions that are 
subject to change as part of a separate proposed rule change, the 
Commission is not addressing the comment in the instant Order. For the 
same reason, the Commission is not addressing the commenter's request 
to require FICC to apply those GSD Rule provisions that are subject to 
change as part of a separate proposed rule change.\267\
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    \264\ See FIA Letter at 4-5.
    \265\ See id.; GSD Rule 11, Section 3 and GSD Rule 18, Section 
2, supra note 15.
    \266\ See Trade Submission Proposal, supra note 257.
    \267\ See FIA Letter at 11.
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    Finally, the commenter requests that FICC work with FCMs and the 
CFTC to develop access models that are more suitable for FCMs than the 
Agent Clearing Service.\268\ As mentioned above, FICC states that it is 
open to considering additional access models if necessary to address 
market participants' regulatory or other needs.\269\ Additionally, FICC 
states that it continues to actively engage with the FCM community to 
resolve outstanding issues regarding the GSD access models.\270\
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    \268\ See FIA Letter at 4-5.
    \269\ See FICC Letter at 23.
    \270\ See FICC Letter at 23-24.
---------------------------------------------------------------------------

    One commenter requests that FICC confirm that a bank's branches and 
Netting Member's affiliates can establish a separate margin portfolio 
within the Netting Member's account that would be separately netted and 
margined, such that they would not have to establish indirect access to 
FICC.\271\ Because the commenter's request relates directly to GSD Rule 
provisions that are subject to change as part of the Trade Submission 
Proposal, a separate pending proposed rule change filed by FICC,\272\ 
the Commission is not addressing the comment in the instant Order.
---------------------------------------------------------------------------

    \271\ See ISDA Letter I at 6-7; ISDA Letter II at 5.
    \272\ See Trade Submission Proposal, supra note 257, at 89 FR 
54605.
---------------------------------------------------------------------------

6. Comments Regarding Default Within the Client Clearing Models
    Commenters raised several issues related to how FICC should address 
certain aspects of default within the Agent Clearing and Sponsored 
Services.
    One commenter states that FICC should allow indirect participants 
to close out their positions with a defaulting Sponsoring Member or 
Agent Clearing Member.\273\ For example, the commenter states that 
under the current GSD Rules, the process for closing out indirect 
participants' trade positions under the Sponsored Service is driven 
entirely by FICC, with indirect participants having no ``say'' in 
whether their positions are closed out, meaning that the customer may 
need to continue to rely on an insolvent (or near insolvent) Netting 
Member to make or receive payments on its behalf.\274\ This commenter 
also states that FICC should clearly address Executing Firm Customers 
close-out rights in the event of the default of their Agent Clearing 
Member.\275\ Alternatively, the commenter states that in the event of 
such a default, customers should be able to elect to receive payment 
directly from FICC, with FICC using any customer funds held at FICC to 
satisfy such amounts owed.\276\ Similarly, an additional commenter 
states that the GSD Rules should address the situation of a FICC 
default simultaneous with a Sponsoring Member default, suggesting that 
Sponsored Members should have the ability to promptly close out and 
manage its positions.\277\
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    \273\ See SIFMA-AMG Letter at 2, 6, 11.
    \274\ See SIFMA-AMG Letter at 7.
    \275\ See id.
    \276\ See SIFMA-AMG Letter at 2, 6, 11.
    \277\ See ICI Letter at 14.
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    In response, FICC states that it was not aware of any such U.S. CCP 
that provides either for customers to have the ability to direct the 
CCP to terminate trades or to make payments directly to the customer, 
but that, instead, CCPs interface directly with clearing members, as 
agents for their customers consistent with the framework of an 
intermediated clearing arrangement.\278\ FICC further states that, from 
a risk perspective, it important to FICC to interface with Netting 
Members as agents for their customers because Netting Members are 
subject to comprehensive operational requirements and testing that are 
designed to ensure that they have the capability to perform and to 
receive performance from FICC and that such performance will not expose 
FICC to operational risks (e.g., systems failures and viruses).\279\ 
FICC states that because customers are not subject to such 
requirements, FICC cannot establish interoperability without exposing 
itself, its participants, and the broader market to significant 
operational risk.\280\ FICC also states that imposition of operational 
standards to customers would be quite burdensome, if not infeasible, 
for many customers, and that such burdens would likely outweigh any 
benefits of establishing interoperability with customers, because in a 
Netting Member default scenario, FICC would generally

[[Page 93801]]

close out trades or settle through the trustee or receiver of the 
defaulting member and applicable insolvency law would likely prohibit 
FICC from engaging directly with customers.\281\
---------------------------------------------------------------------------

    \278\ FICC Letter at 27.
    \279\ See id.
    \280\ See id.
    \281\ See id.
---------------------------------------------------------------------------

    The Proposed Rule Change does not include these types of close-out 
provisions for indirect participants that the commenter seeks. The 
Commission shall approve a proposed rule change of a self-regulatory 
organization if it finds that it is consistent with the Act,\282\ and 
the lack of such close-out provisions is not inconsistent with the Act.
---------------------------------------------------------------------------

    \282\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------

    One commenter requests that FICC clarify the differences in the GSD 
Rules between the Sponsored Service and Agent Clearing Service 
governing a default of the Sponsoring Member or Agent Clearing 
Member.\283\ The commenter states that the Proposed Rule Change 
suggests that customer positions will always be closed-out under the 
Agent Clearing Service, whereas FICC may elect to continue to settle 
customer positions under the Sponsored Service in the event of a 
Netting Member default.\284\ FICC agrees with the commenter's 
suggestion that FICC should have the opportunity to settle the 
outstanding cleared transactions that a defaulting Agent Clearing 
Member has cleared through the Agent Clearing Service.\285\ FICC states 
that, as a general matter, settlement may in many instances be the most 
effective and customer-protective way to address a member default 
scenario, so long as the receiver or trustee of the defaulting member 
consents.\286\
---------------------------------------------------------------------------

    \283\ See FIA-PTG Letter at 8.
    \284\ See FIA-PTG Letter at 8; FIA-PTG Letter II at 3.
    \285\ See FICC Letter at 25-26.
    \286\ See FICC Letter at 26. FICC further states that it is 
considering amendments to the Proposed Rule Change that would give 
FICC the option to effectuate such settlement, but that it would be 
more efficient to propose such changes after the Commission has 
considered the Proposed Rule Change, but at the very least before 
Dec. 31, 2025. See id.
---------------------------------------------------------------------------

    The Proposed Rule Change does not include the ability for FICC to 
settle the transactions of a defaulting Agent Clearing Member's 
customers that the commenter seeks. The Commission shall approve a 
proposed rule change of a self-regulatory organization if it finds that 
it is consistent with the Act,\287\ and the lack of such close-out 
provisions is not inconsistent with the Act.
---------------------------------------------------------------------------

    \287\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------

    Some commenters question why the proposed Agent Clearing Service 
does not include a close-out mechanism regarding a defaulted customer's 
open positions, which could pose unique risks to an Agent Clearing 
Member by forcing it to keep a defaulted customer's positions open 
until the default is resolved.\288\ One commenter further states that 
FICC may have declined to provide a mechanism for liquidating customer 
trades because, in contrast to the Sponsored Service, Executing Firm 
Customers are not members of FICC and therefore a ``close out amount'' 
cannot be calculated as between the customer and FICC.\289\ However, 
this commenter also states that FICC could amend its rulebook to 
explicitly allow Netting Members to liquidate positions with defaulting 
customers, with such close-out procedure then addressed in account 
documentation between the Agent Clearing Member and its Executing Firm 
Customer.\290\ Several commenters also state that FICC should allow an 
Agent Clearing Member to liquidate the transactions of a defaulted 
customer by transferring the positions to its proprietary account or by 
transferring offsetting positions to its omnibus account.\291\ In 
addition, one commenter states that FICC should include similar trade 
liquidation procedures for done-away transactions cleared through the 
Sponsored Service.\292\
---------------------------------------------------------------------------

    \288\ See SIFMA Letter I at 2-3 (stating that FICC should revise 
the Agent Clearing Service to allow Netting Members to liquidate 
positions of defaulting indirect participants, consistent with what 
is available in the Sponsored Service); see also ISDA Letter I at 2-
3 and ISDA Letter II at 4 (similarly discussing the need to close-
out positions by transferring them to the proprietary/house account 
or by transferring offsetting positions to the omnibus account).
    \289\ See SIFMA Letter I at 3.
    \290\ See id.
    \291\ See ISDA Letter I at 2-3 (stating that FICC should provide 
in the GSD Rules that an Agent Clearing Member may liquidate an 
Executing Firm Customer's positions by transferring the positions to 
its proprietary/house account or by transferring positions into the 
Agent Clearing Member Omnibus Account to flatten open positions of 
the Executing Firm Customer); ISDA Letter II at 4 (same); FIA Letter 
at 5, 10 (stating that FICC should incorporate a rule that 
authorizes an Agent Clearing Member, in connection with liquidating 
an Executing Firm Customer's open positions upon its default, to 
cause the Executing Firm Customer's open positions to be transferred 
from the applicable Agent Clearing Member Omnibus Account and/or 
transfer to the Agent Clearing Member Omnibus Account transactions 
that offset or flatten the Executing Firm Customer's open 
positions); SIFMA Letter I at 2-3 (stating that FICC's proposed 
rules should permit Netting Members to transfer a defaulting 
customer's positions to the Netting Member's Proprietary Account or 
Agent Clearing Member Omnibus Account to flatten open positions of 
the defaulting Executing Firm Customer).
    \292\ See ISDA Letter II at 4.
---------------------------------------------------------------------------

    In response, FICC states that the Agent Clearing Service was 
designed to closely resemble the clearing model used in the futures and 
cleared swap market, and that such clearing models do not, to FICC's 
knowledge, prescribe a close-out mechanism for a clearing member to use 
to close out its customers' trades.\293\ FICC further states that, 
instead, the clearing models generally leave it to the bilateral 
agreement between clearing members and their customers to address how 
such close-out should be effected. FICC also states that it is open to 
considering steps FICC can take to facilitate the ability of Netting 
Members to address a customer default situation and to promote legal 
certainty for both done-away and done-with transactions under the Agent 
Clearing and Sponsored Services.
---------------------------------------------------------------------------

    \293\ See FICC Letter at 26.
---------------------------------------------------------------------------

    The Proposed Rule Change does not include these types of close-out 
provisions that the commenter seeks. However, the Commission shall 
approve a proposed rule change of a self-regulatory organization if it 
finds that it is consistent with the Act,\294\ and the lack of such 
close-out provisions is not inconsistent with the Act.
---------------------------------------------------------------------------

    \294\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------

    Several commenters state that the GSD Rules should provide for a 
porting mechanism to enable a customer to transfer positions to another 
Netting Member intermediary for risk management or business-related 
reasons.\295\ Some commenters highlight that porting mechanisms exist 
in the cleared futures market as an important risk management 
tool.\296\ In addition, one commenter states that in the event of a 
clearing member default, all non-defaulting customers will want the 
option to avoid immediately having their positions closed-out by FICC 
(regardless of whether their original execution counterparty was the 
clearing member or a third party), through either continuing to settle 
open positions or porting them to another clearing member.\297\
---------------------------------------------------------------------------

    \295\ See FIA-PTG Letter I at 8; ISDA Letter I at 5; MFA Letter 
I at 6, 8; FIA Letter at 11; SIFMA Letter I at 2, 4; SIFMA-AMG 
Letter at 2-3; ISDA Letter II at 3-4; FIA-PTG Letter II at 2; MFA 
Letter II at 7.
    \296\ See ISDA Letter I at 5 (stating that many cleared futures 
clients are accustomed to their porting rights and use them as an 
important risk management tool); ISDA Letter II at 3-4 (stating that 
the commenting association's members have already come to rely on 
this type of guardrail in the futures clearing model as an essential 
risk management tool); MFA Letter I at 6 (stating that porting is an 
important risk management tool that provides additional certainty to 
indirect participants, particularly during periods of market 
stress); SIFMA-AMG Letter at 8 (stating that the ability to port 
positions is an important feature of the cleared swaps and futures 
market.).
    \297\ See Citadel Letter at 5.
---------------------------------------------------------------------------

    In response, FICC states that it intends to propose amendments to 
the GSD Rules that would add porting provisions similar to those 
adopted by other U.S.

[[Page 93802]]

CCPs, to make clear that porting is possible for FICC-cleared 
trades.\298\ FICC also states its belief that it will be more efficient 
to wait until the Commission decides whether to approve or disapprove 
the Proposed Rule Change before proposing a specific porting framework, 
and states that it will seek to facilitate porting before December 31, 
2025.\299\ FICC also states that any porting framework would need to 
take into consideration the fact that many FICC-cleared customer 
transactions are overnight, and that porting may not be practical for 
such transactions because they will generally settle before the porting 
can be completed.\300\ FICC further states that the ability to settle 
(which is currently included in the GSD Rules governing the Sponsored 
Service) is therefore substantially more important than the ability to 
port.\301\
---------------------------------------------------------------------------

    \298\ See FICC Letter at 25.
    \299\ See id.
    \300\ See id.
    \301\ See id.
---------------------------------------------------------------------------

    The Proposed Rule Change does not contain any provisions related to 
porting customer transactions at FICC. However, the Commission shall 
approve a proposed rule change of a self-regulatory organization if it 
finds that it is consistent with the Act,\302\ and the lack of porting 
provisions is not inconsistent with the Act.
---------------------------------------------------------------------------

    \302\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------

    Accordingly, for the reasons above, the Proposed Rule Change is 
consistent with Rule 17ad-22(e)(18)(iv)(C).\303\
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    \303\ See 17 CFR 240.17ad-22(e)(18)(iv)(C).
---------------------------------------------------------------------------

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

    Rule 17ad-22(e)(23)(ii) under the Exchange Act requires a covered 
clearing agency, such as FICC, to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to provide 
sufficient information to enable participants to identify and evaluate 
the risks, fees, and other material costs they incur by participating 
in the covered clearing agency.\304\
---------------------------------------------------------------------------

    \304\ 17 CFR 240.17ad-22(e)(23)(ii).
---------------------------------------------------------------------------

    Several commenters state that FICC should regularly publish 
statistics regarding the GSD access models, such as the volumes and 
proportion of transactions cleared through each access model and 
transactions executed on done-with and done-away bases.\305\ The 
commenters suggest that FICC's publication of such data would enable 
market participants to better evaluate which access model best fits 
their business needs.\306\ FICC responds that it intends to collect and 
publish information regarding the GSD access models, including the (1) 
number of Netting Members enabled to use each model, (2) number of 
Sponsoring Members enabled to offer done-away clearing, and (3) volumes 
of trading through each access model, including the number of 
transactions and total notional.\307\ The Commission agrees that FICC's 
regular publication of the foregoing data should provide information 
that would better enable market participants to evaluate the GSD access 
models.
---------------------------------------------------------------------------

    \305\ See FIA-PTG Letter I at 4; MFA Letter I at 8; AIMA Letter 
at 6.
    \306\ See id.
    \307\ See FICC Letter at 20-21.
---------------------------------------------------------------------------

    One commenter states that in addition to regularly publishing the 
data referenced in the immediately preceding paragraph, FICC should 
also regularly publish the number of clearing members who are in fact 
clearing more than de minimis volumes pursuant to each such model, and 
clearly separate out done-with and done-away activity.\308\ The 
Proposed Rule Change does not contain any provisions related to FICC's 
publication of the specific data requested by the commenter. The 
Commission shall approve a proposed rule change of a self-regulatory 
organization if it finds that it is consistent with the Act,\309\ and 
the lack of provisions regarding FICC's regular publication of the data 
requested by the commenter is not inconsistent with the Act.
---------------------------------------------------------------------------

    \308\ See FIA-PTG Letter II at 4.
    \309\ See 15 U.S.C. 78s(b)(2)(C)(i).
---------------------------------------------------------------------------

    For the reasons discussed above, the Proposed Rule Change would 
enable FICC to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide sufficient 
information to enable members to identify and evaluate the risks, fees, 
and other material costs they incur as FICC's members, consistent with 
Rule 17ad-22(e)(23)(ii).\310\
---------------------------------------------------------------------------

    \310\ 17 CFR 240.17ad-22(e)(23)(ii).
---------------------------------------------------------------------------

III. 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 \311\ and the rules and regulations promulgated 
thereunder.
---------------------------------------------------------------------------

    \311\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act \312\ that proposed rule change SR-FICC-2024-005, be, and 
hereby is, Approved.\313\
---------------------------------------------------------------------------

    \312\ 15 U.S.C. 78s(b)(2).
    \313\ In approving the proposed rule change, the Commission 
considered the proposals' 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.\314\
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    \314\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27762 Filed 11-26-24; 8:45 am]
BILLING CODE 8011-01-P
```