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[Release No. 34-104281; File No. 600-44]

CME Securities Clearing, Inc.; Order Granting an Application for Registration as a

Clearing Agency under Section 17A of the Securities Exchange Act of 1934

December 1, 2025.

Introduction

On December 13, 2024, CME Securities Clearing, Inc. (“CMESC”) filed with the

Securities and Exchange Commission (“Commission”) an application on Form CA-1

(“Application”) under Section 17A of the Securities Exchange Act of 1934 (“Exchange Act”)

seeking to register as a clearing agency to provide central counterparty (“CCP”) services for

transactions involving U.S. Treasury securities.1 Notice of the Application was published for

comment in the Federal Register on January 22, 2025.2 On April 18, 2025, the Commission

instituted proceedings pursuant to Section 19(a)(1)(B) of the Exchange Act to determine whether

to grant or deny the Application.3 On July 21, 2025, the Commission designated a longer period

for Commission action on the OIP. 4 On September 30, 2025, CMESC agreed to extend the time

for the Commission’s review of the Application.

15 U.S.C. 78q–1. If CMESC determines in the future to provide other clearing agency services or to

perform the functions of a clearing agency for transactions in other types of securities, CMESC would need

to amend its application on Form CA-1 to so reflect and submit any related proposed rule changes as

required under Section 19(b) of the Exchange Act.

Release No. 34–102200 (Jan. 15, 2025), 90 FR 7713 (Jan. 22, 2025). Non-confidential aspects of the

Application, including any exhibits thereto cited in this order, are available on the Commission’s website

at: https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/cme-form-ca-1.

Release No. 34–102889 (Apr. 18, 2025), 90 FR 17269 (Apr. 24, 2025) (“OIP”).

Release No. 34–103514 (July 21, 2025), 90 FR 34938 (July 24, 2025).

The Commission received comment letters on the notice of the Application and on the

OIP, as well as response letters from CMESC.5 Each comment letter either expressed explicit

support for approval of the Application or generally expressed support for the expansion of

access to the clearing of transactions in U.S. Treasury securities through the approval of new

clearing agencies. Some commenters also recommended that CMESC consider certain changes

to the Application. The comment letters received, and CMESC’s response letters thereto, are

discussed in Part III.

This order grants CMESC’s Application for registration as a clearing agency for the

reasons set forth in Part III below.

II.

Statutory Standard for Registration as a Clearing Agency

Clearing agencies are broadly defined under the Exchange Act and undertake a variety of

functions,6 including providing the services of a CCP.7 Pursuant to Section 17A of the Exchange

Act and Rule 17Ab2-1 thereunder, an entity that meets the definition of a clearing agency must

prior to performing the functions of a clearing agency). 8 In addition to the requirements set forth

The public comment file for the Application is available on the Commission’s website at:

https://www.sec.gov/comments/600-44/600-44.htm. On May 27, 2025, CME Group submitted two letters

in one set, and both letters are included as part of the one entry reflected on the Commission’s website. See

letters from Jonathan Marcus, Senior Managing Director and General Counsel, CME Group, Inc., dated

May 27, 2025 (“CME Response Letter” and “CME Fees Letter”). The CME Response Letter addresses the

comment letters received on the Application, and the CME Fees Letter describes CMESC’s intent with

respect to its fee schedule.

15 U.S.C. 78c(a)(23)(A) (providing the definition of “clearing agency”); see also Release No. 34–78961

(Sept. 28, 2016), 81 FR 70786, 70897 (Oct 13, 2016) (“CCA Standards Adopting Release”) (stating that

clearing agencies are broadly defined in the Exchange Act and undertake a variety of functions).

See 17 CFR 240.17ad–22(a)(2) (defining “central counterparty” as a clearing agency that interposes itself

between counterparties to securities transactions, acting functionally as the buyer to every seller and the

seller to every buyer).

15 U.S.C. 78q–1(b); 17 CFR 240.17ab2–1 (“Rule 17Ab2-1”).

in Rule 17Ab2-1, Section 19(a)(1) of the Exchange Act establishes the standard for Commission

review of an application for registration as a clearing agency. Pursuant thereto, the Commission

shall grant registration of a clearing agency if it finds that the requirements of the Exchange Act

and the rules and regulations thereunder with respect to the applicant are satisfied. 9 The

Commission shall deny such registration if it does not make such finding. 10

The requirements of the Exchange Act applicable to clearing agencies are set forth in

Section 17A of the Exchange Act and the rules and regulations thereunder.11 Accordingly, to

grant CMESC’s application for registration as a clearing agency, the Commission must find that

the Application satisfies the requirements of Section 17A(b) of the Exchange Act and rules and

regulations thereunder, including the determinations set forth in paragraphs (A) through (I) of

Section 17A(b)(3) of the Exchange Act.12

After a clearing agency’s application for registration is granted, the clearing agency must

continue to satisfy the requirements of the Exchange Act and the rules and regulations

thereunder. The Commission has explained that “[a]n approval of clearing agency registration

does not mean that no further modifications of the applicant’s rules, systems, procedures, or

15 U.S.C. 78q–1; 15 U.S.C. 78s(a)(1).

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

Rules for registered clearing agencies include recordkeeping requirements, 17 CFR 240.17a-1; the filing

process for proposed rule changes, 17 CFR 240.19b-4; rules addressing operations and risk management,

governance and conflicts of interest, and plans for recovery and wind-down at, respectively, 17 CFR

240.17ad–22 (“Rule 17Ad-22”), 240.17ad–25 (“Rule 17Ad-25”), and 240.17ad–26 (“Rule 17Ad-26”); and

the requirements set forth in Regulation Systems Compliance and Integrity, 17 CFR 242.1000 et seq.

(“Regulation SCI”). The Commission conducts ongoing monitoring of registered clearing agencies through

its supervisory program for registered clearing agencies. The Commission also assesses compliance with

Commission rules by conducting examinations and investigations. See 15 U.S.C. 78q(b); 15 U.S.C. 78u(a).

15 U.S.C. 78s(a); 15 U.S.C. 78q–1(b)(3)(A)–(I). The determinations are described further below.

practices are needed.”13 Rather, the Commission stated that a registered clearing agency’s

obligation to continue to satisfy the requirements of the Exchange Act and the rules and

regulations thereunder means that “[t]he self-regulatory obligations of [a] fully registered

clearing agenc[y] cannot end” after registration.14 To ensure such compliance, the Commission

stated that it “will continue to use its oversight, inspection, and enforcement authority as

necessary and appropriate to further the purposes of the [Exchange] Act.”15

III.

Review of Application under Statutory Standard for Registration

Consistent with the requirements in Sections 17A and 19(a)(1) of the Exchange Act

described above, the Commission below discusses how the Application satisfies each of the

statutory requirements to be registered as a clearing agency.16

Organization and Capacity

Statutory Standard: Section 17A(b)(3)(A)

Section 17A(b)(3)(A) of the Exchange Act states that a clearing agency shall not be

registered unless the Commission determines that such clearing agency is so organized and has

the capacity to be able to facilitate the prompt and accurate clearance and settlement of securities

transactions and derivative agreements, contracts, and transactions for which it is responsible, to

See Release No. 34–69838 (June 24, 2013), 78 FR 39027, 39029 (June 28, 2013) (“FICC Registration”)

(approving an application by the Fixed Income Clearing Corporation (“FICC”) for permanent registration

as a clearing agency).

See Release No. 34–20221 (Sept. 23, 1983), 48 FR 45167, 45171 (Oct. 3, 1983) (approving nine

applications for permanent registration as a clearing agency).

Id.

See 15 U.S.C. 78q–1(b)(3)(A)–(I) (describing the statutory determinations that the Commission must make

regarding the rules and structure of a clearing agency to grant registration). In 1980, the Commission

published a statement of the views and positions of Commission staff regarding the requirements of Section

17A. See Release No. 34–16900 (June 17, 1980), 45 FR 41920 (June 23, 1980).

safeguard securities and funds in its custody or control or for which it is responsible, to comply

with the provisions of the Exchange Act and the rules and regulations thereunder, to enforce

(subject to any rule or order of the Commission pursuant to Section 17(d) or 19(g)(2) of the

Exchange Act) compliance by its participants with the rules of the clearing agency, and to carry

out the purposes of Section 17A of the Exchange Act.17

Consistent with this standard, the Commission does not assess in this order whether

CMESC’s ultimate implementation of the rules, policies, and procedures set forth in its

Application will comply with each of the Commission’s rules for clearing agencies, as CMESC

is not yet operating as a clearing agency.18 Rather, the Commission assesses whether CMESC is

so organized and has the capacity to comply with the provisions of the Exchange Act and the

rules and regulations thereunder,19 by analyzing CMESC’s organization and governance, as well

as its operational arrangements.20 Under this standard, the registration of a clearing agency

“depends on a prediction about compliance with the law.”21 Section 17A assumes that “an

15 U.S.C. 78q–1(b)(3)(A).

See supra notes 13–14 and accompanying text (explaining that approval of clearing agency registration

does not mean that no further modifications of the applicant’s rules, systems, procedures, or practices are

needed and that the obligations of a fully registered clearing agency cannot end after registration).

With respect to CMESC’s ability to safeguard securities and funds for which it is responsible, the

Commission addresses that topic in Part III.E, in conjunction with discussing Section 17A(b)(3)(F) of the

Exchange Act, which requires, among other things, that the rules of the clearing agency are designed to

assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or

for which it is responsible. With respect to CMESC’s ability to enforce compliance by its participants with

the rules of the clearing agency, the Commission addresses that topic in Part III.F, in conjunction with

discussing Section 17A(b)(3)(G) of the Exchange Act, which requires that the rules of the clearing agency

provide that its participants shall be appropriately disciplined for violation of any provision of the rules of

the clearing agency.

In Part III.E, the Commission further analyzes CMESC’s capacity to conduct risk management consistent

with the statutory requirements for safeguarding securities and funds set forth in Section 17A(b)(3)(F) of

the Exchange Act.

Bd. of Trade of City of Chicago v. S.E.C., 883 F.2d 525, 533 (7th Cir. 1989) (vacating Delta Government

Options Corporation (“Delta”)’s temporary registration as a clearing agency and remanding to the

applicant would produce a business plan that, if faithfully executed, would comply” with the

Exchange Act.22 To make its required statutory determination under Section 17A(b)(3)(A), the

Commission must “find[] that the applicant is able and likely to comply,” and upon registration

and commencement of operations as a registered clearing agency, compliance with Section

17A(b)(3)(A) “is likely to be carried out.”23

In the OIP, the Commission requested public comment on whether CMESC is so

organized and has the capacity to facilitate prompt and accurate clearance and settlement, and in

particular, whether CMESC’s proposed legal, governance, and operational arrangements enable

CMESC to satisfy the requirements of the Exchange Act and Commission rules and regulations

thereunder.24 The comment letters submitted in response to the OIP stated that the Application

meets the Commission’s standards for registration as a clearing agency under the Exchange

Act.25

Commission to decide whether Delta’s proprietary trading system would operate as an unregistered

national securities exchange in violation of Sections 5 and 6 of the Exchange Act).

Id. at 533–34.

Id. at 534 (emphasis in original).

See OIP, supra note 3, 90 FR at 17271. In response to the Notice, some commenters also requested that

CMESC obtain legal opinions relating to certain aspects of CMESC’s margin framework. See letter from

William C. Thum and Robert Toomey, SIFMA and SIFMA Asset Management Group, dated Mar. 10, 2025

(“SIFMA & AMG I”), at 4; letter from Allison Lurton, General Counsel and Chief Legal Officer, FIA,

dated Mar. 10, 2025 (“FIA”), at 4. Legal opinions can help a clearing agency address questions about the

legal foundation for its proposed activities, which can help to ensure a clearing agency is so organized and

has the capacity to facilitate prompt and accurate clearance and settlement. Because the comments were

directed to legal opinions for its margin framework, the Commission has addressed these comments in the

context of safeguarding securities and funds under Section 17A(b)(3)(F), which is discussed in Part III.E.

See letter from William C. Thum and Robert Toomey, SIFMA and SIFMA Asset Management Group, dated

May 15, 2025 (“SIFMA & AMG II”), at 2 (“We believe that CMESC’s application meets the Commission’s

standards for registration as a clearing agency under Section 17A of the Securities Exchange Act of 1934”);

letter from Katherine Darras, General Counsel, International Swaps and Derivatives Association, dated

May 15, 2025 (“ISDA II”), at 1–2 (“Upon review, we further believe that CMESC’s application meets the

Commission’s standards for registration as a clearing agency under Section 17A of the Securities Exchange

Act of 1934”).

Summary of Proposed Operations

The following is an overview of CMESC’s proposed clearing agency operations. In

Exhibit J, CMESC describes that its risk management framework has been designed to identify,

measure, monitor, and manage a range of risks that arise through its clearance and settlement

functions in order to promote prompt clearance and settlement of securities transactions, and the

safeguarding of securities and funds against operational risk losses. For example, CMESC will

have a process to manage trade submissions in real-time, and allow for communication of trade

submissions, settlement confirmation and failures, and transfers.26 Trade processing will be

executed in near real-time, and CMESC’s operations system will allow for ongoing monitoring

of exposures of positions.

Types of Transactions Accepted for Clearing

As described in Exhibit J, CMESC will accept three types of transactions for clearing: triparty Clear to Hold Transactions, Clear to Deliver Transactions, and Cash Treasury

Transactions.27 For tri-party Clear to Hold Transactions, Members and Users will submit

executed transactions to the Securities Settlement Bank system, as is current market practice.

This Securities Settlement Bank will then submit the transaction to CMESC for clearing using a

SWIFT-based transaction submission API. For Clear to Deliver Transactions and Cash Treasury

Transactions, Members and Users may submit executed transactions to CMESC (1) as matched

transactions from an Eligible Platform, (2) as single-sided transactions to be matched in

CMESC’s clearing system, or (3) a Member or User may enter and allege a transaction to

another Member or User to claim or decline using CMESC’s user interface. All transactions

See Exhibit J of the Application, at 9.

Capitalized terms not defined in this order are defined in the Application.

executed from an Eligible Platform will be sent to CMESC using a FIXML-based trade

submission API. Single-sided transactions may be submitted via direct entry into the clearing

system’s user interface or from an external messaging platform with the matching to be

performed by CMESC. Single-sided trades will be matched by CMESC when the required

relevant attributes submitted to CMESC by both parties for each transaction correspond.

Members and Users will hold the option to cancel a single-sided trade submitted prior to

novation and may affirm or decline trades that have been alleged to that Member or User. Prematched transactions (i.e., transactions matched at an Eligible Platform prior to submission to

CMESC) will be received by CMESC as matched trades and cannot be rejected or canceled by

any party other than CMESC. CMESC will send a reject message for any transactions that do not

follow CMESC’s specifications (e.g., messaging specifications or product eligibility). Members

and Users may correct any transaction messages rejected for invalid FIXML specifications and

resubmit the transaction for clearing. Members and Users will be notified with a message

anytime the status of their transaction changes. Any pending, unmatched single-sided

transactions will be rejected by CMESC at the end of the Business Day. Following novation, any

cancellation or amendment of a submitted transaction will require the involvement of CMESC.

Canceled trades between participants, whether Members or Users, may be modified and

resubmitted.28

Novation

According to Exhibit J, upon submission of a pre-matched or a successful full match of a

transaction request, CMESC will validate the transaction, account level details, and Member

See Exhibit J of the Application, at 10.

limits placed on a particular Member or User. 29 Following successful validations, the trade will

be novated and CMESC will become the buyer to each seller and the seller to each buyer (i.e.,

the CCP) for each transaction. CMESC will determine whether to novate a matched transaction

submitted for clearing. As described by CMESC, the novation determination will be the same

irrespective of whether the transaction is matched prior to submission to CMESC or is matched

by CMESC. CMESC will perform a product validation, account validation, and credit control

check on each submitted trade prior to novation. Any transactions not novated by the deadlines

specified by CMESC will be rejected from clearing, and Members and Users may resubmit these

transactions for the next eligible clearing date. 30

Settlement Process

Members and Users will be responsible to CMESC to settle their trade exposures, post

margin and pay Outstanding Exposure Settlement (“OES”) obligations.31 Clear to Deliver

Transaction, Clear to Hold Transaction, and Cash Treasury Transaction settlements will follow

existing market practices. During each clearing cycle, CMESC will mark to market all open

transactions and will compute margin and settlement variation (i.e., a component of the OES)

requirements for Members and Users.32 Regarding margin, CMESC will compare the calculated

margin requirement against margin collateral held by CMESC for the relevant Account and will

issue a margin call for any deficiency that must be met in U.S. Dollar cash. CMESC will also

facilitate the exchange of settlement variation among Members and Users during each clearing

See Exhibit J of the Application, at 11.

See id.

The Commission further discusses CMESC’s risk management practices in Part III.E, in the context of the

statutory standard regarding rules for the safeguarding of funds and securities in Section 17A(b)(3)(F) of

the Exchange Act.

See Exhibit J of the Application, at 12.

cycle and settlement variation requirements will be collected in U.S. Dollar cash. Members and

Users will be able to view the status of a transaction and their settlement obligations through the

clearing system user interface trade blotter or through reports generated by CMESC. Members

and Users may substitute cash held for initial margin with other permissible non-cash collateral

prior to the deadline. Reports provided to all Members and Users will include, but are not limited

to, trade register, coupon report, margin report, and settlement obligation report. 33

In Exhibit J, CMESC describes its ability to settle transactions on trade date, or “T+0.”

As described in Exhibit J, to reduce settlement risk, Repo Transactions that settle on T+0 will be

settled in real-time on a gross basis. Separately, for Members and Users, Cash Treasury

Transactions and Repo Transactions that settle on the day after trade date (or a “T+1” basis) and

have identical CUSIPs will be settled on a net basis. For Clear to Deliver Transactions and Cash

Treasury Transactions, settlement obligations of cash outright and repo transactions at the CUSIP

level with the same settlement date will be netted by CMESC. Net settlement of next day (T+1)

cash outright and repo transactions will occur at CMESC’s end-of-day settlement price. 34 With

respect to Clear to Hold Transactions, netting will only occur against additional Clear to Hold

transactions in the same General Collateral Bucket with the same scheduled settlement date.

Such transactions will not net against either Cash Treasury Transactions or Clear to Deliver

Transactions.35

See id.

See Exhibit J of the Application, at 14–15.

See –id.

Approach to Settlement Fails

Exhibit J describes the steps CMESC will follow in the case of a settlement fail. For

example, with respect both to Clear to Deliver Transactions and Clear to Hold Transactions,

when Members and Users fail to deliver securities on the Start Leg of a transaction, CMESC

will: (i) allocate the fail to one or more Member(s) or User(s) that are entitled to receive the same

Eligible Securities (for Clear to Deliver Transactions) or allocate the fail to one or more

Member(s) or User(s) that are entitled to receive the securities in the same General Collateral

Bucket (for Clear to Hold Transactions) that the failing Member or User was obligated to deliver;

(ii) assess against the failing Member or User the repo rate based on the full delivery obligation;

and (iii) assess against the failing Member or User a fail charge as determined by CMESC for

each day that such Member or User fails to deliver the Eligible Securities. 36 CMESC will pay

any amounts collected pro rata to the Member(s) or User(s) to which CMESC allocates the fail.

If a Member or User partially satisfies its obligation to deliver securities to CMESC on the Start

Leg of a transaction, the Member or User will receive cash equal to the value of the securities it

delivered, subject to the conditions set out in the Rules. 37 In a Clear to Hold Transaction, a failure

to deliver securities may be corrected if: (1) the original parties to the transaction agree to modify

the transaction to reflect the amount of securities delivered; or (2) the Member or User that failed

to deliver the securities will provide cash (instead of securities) as collateral to fully satisfy its

delivery obligation. In a Clear to Deliver Transaction, a failure to deliver securities may be

corrected if the original parties to the transaction agree to modify the transaction to reflect the

amount of securities actually delivered. CMESC may buy-in a Member or User that has failed to

See Exhibit J of the Application, at 12–13.

See CMESC Rules, at Rule 1506(g).

deliver securities on the Start Leg of a transaction. After CMESC purchases the securities, the

fail-to-deliver will be extinguished, and, if the buy-in price is less than the repurchase price,

CMESC will pay the difference to the failing Member or User. Conversely, if the buy-in price

exceeds the repurchase price, the failing Member or User must pay the difference to CMESC.

Additionally, a Member or User to whom a fail has been allocated may submit a buy-in request

to CMESC not earlier than one day after such allocation has been made, and the Member or User

may effect the buy-in with CMESC’s approval. Alternatively, instead of effecting a buy-in, a

Member or User to whom a fail has been allocated may effect a cash settlement with CMESC’s

approval.38

Default Management

When a Member or User fails to deliver securities on the Off Leg of a transaction,

CMESC will allocate the fail to one or more Member(s) or User(s) that are entitled to receive the

same Eligible Securities that the failing Member or User was obligated to deliver, and CMESC

may assess against the failing Member or User a fail charge as determined by CMESC for each

day that such Member or User fails to deliver the Eligible Securities. CMESC will pay the

collected fail charges pro rata to the Member(s) or User(s) to which CMESC allocates the fail. 39

If a Member or User partially satisfies its obligation to deliver securities on the Off Leg of a

transaction, the Member or User will receive cash equal to the value of the securities it delivered,

subject to the conditions set out in the Rules. A Member or User cannot fail to deliver securities

on the Off Leg in Clear to Hold Transactions because the securities will be held by the Securities

Settlement Bank. CMESC may buy in a Member or User that has failed to deliver securities to

See Exhibit J of the Application, at 12–13; see also CMESC Procedures, at Procedure 15-10 (describing the

process for buy-ins).

See Exhibit J of the Application, at 13.

CMESC on the Off Leg of a transaction. After CMESC purchases the securities, the fail-todeliver will be extinguished, and, if the buy-in price is less than the repurchase price, CMESC

will pay the difference to the failing Member or User. Conversely, if the buy-in price exceeds the

repurchase price, the failing Member or User must pay the difference to CMESC. Additionally, a

Member or User to whom a fail has been allocated may submit a buy-in request to CMESC not

earlier than one day after such allocation has been made, and the Member or User may effect the

buy-in with CMESC’s approval. Alternatively, instead of effecting a buy-in, a Member or User to

whom a fail has been allocated may effect a cash settlement with CMESC’s approval.40

As described in Exhibit J, failure to deliver cash in a Clear to Deliver Transaction or

Clear to Hold Transaction may be considered a Default. 41 Where CMESC declares an event of

Default or ceases to act for a Member or User, CMESC may take default management (including

liquidity management) actions permitted under its Rules. Where a Member or User fails to

deliver cash on the Start Leg, CMESC may permit parties to mutually agree to modify the size of

the transaction in order to correct the failure to deliver. 42 With respect to Cash Treasury

Transactions, when a Member or User fails to deliver securities on the settlement day of a

transaction, CMESC will: (i) allocate the fail to one or more Member(s) or User(s) that are

entitled to receive the same Eligible Securities; and (ii) assess against the failing Member or User

a fail charge as determined by CMESC for each day that such Member or User fails to deliver

the Eligible Securities. CMESC will pay any amounts collected to the Member(s) or User(s) to

See id.

See id. The Commission further discusses CMESC’s default management procedures in Part III.E, in the

context of the statutory standard regarding rules for the safeguarding of funds and securities in Section

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

See CMESC Rules, at Rule 1503(d); see also CMESC Procedures, at Procedure 15-8 (describing the

process to modify the transaction).

which CMESC allocates the fail. If a Member or User partially satisfies its obligation to deliver

securities to CMESC, the Member or User will receive cash equal to the value of the securities it

delivered, subject to the conditions set out in the Rules. CMESC may buy in a Member or User

that has failed to deliver securities to CMESC. After CMESC purchases the securities, the fail-todeliver will be extinguished, and, if the buy-in price is less than the repurchase price, CMESC

will pay the difference to the failing Member or User. Conversely, if the buy-in price exceeds the

repurchase price, the failing Member or User must pay the difference to CMESC. Additionally, a

Member or User to whom a fail has been allocated may submit a buy-in request to CMESC not

earlier than one day after such allocation has been made, and the Member or User may effect the

buy-in with CMESC’s approval. Alternatively, instead of effecting a buy-in, a Member or User to

whom a fail has been allocated may effect a cash settlement with CMESC’s approval.43

Business Continuity Practices

In Exhibit K, CMESC describes its business continuity practices. CMESC’s information

technology infrastructure will be made up of SCI Critical Systems that will be hosted in a virtual

private cloud (“VPC”) environment and in physical datacenters. 44 One instance of each of the

physically hosted systems will be deployed to a primary data center. Backups for the physically

hosted systems will be available in another, geographically disparate datacenter. VPC

environment backup systems will also be in geographically disparate locations. Another

geographically disparate location will house disaster recovery infrastructure and servers hosting

backup data from both the VPC environment and the physical datacenter servers. 45

See Exhibit J of the Application, at 13.

See Exhibit K of the Application, at 1.

See Exhibit K of the Application, at 1–2.

In addition, as described in Exhibit M, CMESC has Business Continuity Management

and disaster recovery requirements that are governed by CMESC’s Operational Resilience

Program Policy. CMESC’s infrastructure and systems are built around a multi-layered approach

to resilience and redundancy. If for any reason one of its database server instances becomes

unstable or unavailable, systems are architected to create a new instance. If a datacenter becomes

unavailable for any reason, systems are architected to automatically redirect all instances that

were operating in that datacenter to another available datacenter. These actions are designed to

occur within the production environment and are independent of the disaster recovery instance

infrastructure.46

Organization, Governance, and Analysis

CMESC is a Delaware corporation, which is wholly owned by its parent company, CME

Group, Inc., itself a Delaware corporation. 47 Under this structure, CMESC’s parent company—

which also operates as its primary service provider in the provision of its services as a registered

clearing agency—serves as its sole shareholder. 48 Per Exhibit E-2B, CMESC will be managed by

a Board of Directors (“Board”) consisting of nine directors,49 along with specialized committees

See Exhibit M of the Application.

See Exhibit C-1 of the Application.

See Exhibit A of the Application, at 1 (stating that CME Group Inc. is CMESC’s “direct sole shareholder”);

see also Exhibit C of the Application (stating that CMESC “is a wholly-owned subsidiary of” CME Group,

Inc.).

See Exhibit E-2B of the Application, at 1 (CMESC Board of Directors Charter, Sections I (“Purpose”) and

II (“Board Composition”)).

of the Board, to include an Audit Committee, 50 a Regulatory Oversight Committee, 51 a

Nominating Committee,52 and a Risk Management Committee. 53 Each board committee has a

written charter that lays out the membership structure and responsibilities of that committee. 54

According to CMESC, the person who will act on behalf of its sole shareholder, CME Group,

Inc., will be one of CME Group, Inc.’s authorized officers.

With respect to organization and governance, CMESC’s Application demonstrates that it

is a corporation in good standing in the State of Delaware.55 As described above and in Exhibit A

of the Application, CMESC’s Board of Directors, executives, and sole shareholder are the

persons who will direct the management and policies of CMESC,56 In addition, per Exhibit E2B, the Application sets forth that CMESC has a written board charter establishing the purpose,

composition, chair selection, term, director election, vacancy, removal and resignation, meetings,

committees, succession procedures, confidentiality, and conflicts of interest expectations for the

Board. These charters are extensive, detailed, and provide for delineation of roles and

responsibilities among the Board, executives, and the sole shareholder. Per Exhibits E-2C, E-2D,

See Exhibit E-2E of the Application, at 1, 2–6 (CMESC Audit Committee Charter, Sections I (“Purpose”)

and IV (“Audit Committee Meetings, Tasks and Authority”)).

See Exhibit E-2F of the Application at 1, 2–3 (CMESC Regulatory Oversight Committee Charter, Sections

I (“Purpose”) and IV (“ROC Meetings, Tasks and Authority”)).

See Exhibit E-2D of the Application, at 1, 2–5 (CMESC Nominating Committee Charter, Sections I

(“Purpose”) and IV (“Nominating Committee Meetings, Tasks and Authority”)).

See Exhibit E-2C of the Application at 1, 2–4 (CMESC Risk Management Committee Charter, Sections I

(“Purpose”) and IV (“CSRMC Meetings, Tasks and Authority”)).

See supra notes 50–53.

See supra note 47.

See supra notes 48–53 and accompanying text; Exhibit A of the Application, at 1 (stating that “the

following persons will control or direct the management and policies” of CMESC: (i) its direct sole

shareholder (CME Group, Inc.); (ii) its Board of Directors; (iii) its Audit Committee; (iv) its Risk

Management Committee; (v) its Regulatory Oversight Committee; and (vi) its executives).

E-2E, and E-2F, CMESC also has written charters for each board committee, which include

provisions for each board committee addressed to purpose, membership, meeting schedule, tasks,

authority, responsibilities, reporting structure, confidentiality, and conflicts of interest. Such

delineation of roles and responsibilities of Board committee members is one way the Application

demonstrates that CMESC meets the statutory standard in Section 17A(b)(3)(A).57 Where

appropriate, such charters also establish composition requirements for a majority of independent

directors, consistent with the Commission’s rules for clearing agency governance.58 The Board

committees have distinguishable areas of focus and are designed to operate within the larger

corporate framework, which is another way the Application demonstrates that CMESC meets the

statutory standard in Section 17A(b)(3)(A) and would comply with the Exchange Act and rules

and regulations thereunder.59

Under Exhibit E-2A(2), either the sole shareholder or the CMESC Board of Directors can

amend the corporation’s bylaws and board charters. This presents the Board and the shareholder

with concurrent ability to revise how the corporation operates, even if CMESC’s board and its

sole shareholder—its parent company—are likely to have aligned views. Ultimately, to the extent

CMESC seeks to revise its bylaws and charters to address the potentially overlapping authorities

of the Board and the shareholder (or to revise its bylaws and charters for any other reason), such

revisions are required to be filed with the Commission as proposed rule changes pursuant to

Section 19(b) of the Exchange Act and rules thereunder, including Rule 19b-4, and the

See id.

See, e.g., 17 CFR 240.17ad–25(b), (c), (d), (e).

See supra note 11 (summarizing the Commission rules applicable to registered clearing agencies).

Commission will review any such changes for consistency with the Exchange Act and the rules

and regulations thereunder.60

CMESC’s governance arrangements include a process for classifying certain directors as

independent. In most cases, the Nominating Committee, which consists of a majority of

independent directors, 61 will make the initial and ongoing determination of director

independence; however, some exceptions apply. Per Section II of Exhibit E-2D, an independent

director of the Nominating Committee can be removed prior to the end of the term if a majority

of the Board of Directors determines that such person no longer qualifies as independent, which

could cause the Nominating Committee to be composed of less than a majority of independent

directors.62 Additionally, Section IV of Exhibit E-2D refers to the Board’s ability to reclassify a

non-independent director as independent, and directs the Nominating Committee to confirm the

Board’s decision under Section II of Exhibit E-2B (the Board of Directors Charter). More

specifically, this Section II states that if CMESC identifies a potential impairment of the

categorization of a director as an independent director, or an independent director reports to the

Secretary of the Board a new material relationship or a change, the Secretary shall make an

applicable report to the Nominating Committee, and the Nominating Committee shall be

responsible for determining the classification of the director as an independent director. Section

II of Exhibit E-2B also states that a non-Independent Director may be reclassified as an

Independent Director and requires that the Nominating Committee determine whether such

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

See Exhibit E-2D of the Application, see also 17 CFR 240.17ad–25(c)(2) (setting forth requirements for the

composition of the Nominating Committee).

The Nominating Committee charter also provides that, should the departure of a Director cause the

composition of the Board to no longer comply with applicable requirements under Rule 17Ad-25, the

Nominating Committee shall convene as soon as is practicable to recommend a suitable candidate to the

Board for its approval to fill such vacancy. See Exhibit E-2D of the Application.

reclassification is appropriate. Therefore, in some cases, the Board of Directors makes its own

determination of director independence, and then it directs the Nominating Committee to review

its decision.

With respect to its operational arrangements and capacity to facilitate prompt and

accurate clearance and settlement, as generally described in Part III.A.2 above, CMESC systems

and processes will enable trade submission, matching, novation, netting, settlement and

settlement fails management and will promote business continuity. CMESC’s rules, policies and

procedures demonstrate that CMESC has processes in place to support and oversee these

clearing agency operations via its governance processes. These governance processes further

demonstrate that CMESC is so organized and has the capacity to facilitate prompt and accurate

clearance and settlement and to comply with the Exchange Act and rules and regulations

thereunder. For example, with respect to CMESC’s ability to comply with the provisions of the

Exchange Act and rules and regulations thereunder, Exhibit E-2F states that CMESC’s Chief

Compliance Officer will have a reporting line to the Regulatory Oversight Committee of the

Board of Directors. In addition, the Application describes CMESC’s senior managers and their

reporting relationships, including the staff that provides legal services through CMESC’s parent

company, CME Group, Inc.63 These elements of the Application demonstrate that CMESC will

have multiple layers of personnel dedicated to addressing legal and regulatory requirements,

including, for example, the requirement to file proposed rule changes.

Additionally, per Exhibit E-2C, the Head of Risk will have a direct reporting line to the

Risk Management Committee of the Board of Directors, allowing such officer to raise and

escalate any issues pertaining to risk management. Exhibit E-2C provides that the Risk

See, e.g., Exhibit C of the Application,

Management Committee is authorized to engage outside professional advisors and legal counsel

in order to facilitate its discharge of its duties and responsibilities, including the review and

approval of all risk-related proposed rule changes. Having multiple personnel, layers of review

and reporting, and the ability to access additional resources in order to proactively manage

CMESC’s risks is one way the Application demonstrates that CMESC would be so organized

and have the capacity to comply with the provisions of the Exchange Act and the rules and

regulations thereunder. 64

For the reasons discussed above, the Commission determines that CMESC is so

organized and has the capacity to be able to facilitate the prompt and accurate clearance and

settlement of securities transactions and to comply with the provisions of the Exchange Act and

the rule are regulations thereunder.

Participation Standards

Statutory Standard and Analysis: Section 17A(b)(3)(B)

Section 17A(b)(3)(B) of the Exchange Act states that a clearing agency shall not be

registered unless the Commission determines that the rules of the clearing agency provide that

any (i) registered broker or dealer, (ii) other registered clearing agency, (iii) registered investment

company, (iv) bank, (v) insurance company, or (vi) other person or class of persons as the

Commission, by rule, may from time to time designate as appropriate to the development of a

national system or the prompt and accurate clearance and settlement of securities transactions

may become a participant in such clearing agency.65 Section 3(a)(24) of the Exchange Act

See supra note 11 (summarizing the Commission rules applicable to registered clearing agencies and the

Commission’s tools for the supervision and examination of registered clearing agencies).

Section 17A(b)(3)(B) of the Exchange Act also states that the rules of the clearing agency are subject to the

provisions of Section 17A(b)(4) of the Exchange Act.

defines a “participant” with respect to a clearing agency as any person who uses a clearing

agency to clear or settle securities transactions or to transfer, pledge, lend, or hypothecate

securities, and further states that the term does not include a person whose only use of a clearing

agency is (A) through another person who is a participant or (B) as a pledgee of securities.66

CMESC Rules identify two types of participants: Members and Users.67 Members are

able to clear proprietary Eligible Securities Transactions through CMESC and to authorize Users

with respect to clearing Eligible Securities Transactions through CMESC.68 Users must be

authorized by a Member,69 but they are contractually bound to settle directly with the clearing

agency.70 Specifically, Users can submit transactions for clearing, post margin, and settle their

transactions directly with CMESC. 71 In the event a Member defaults, pursuant to CMESC Rule

412, CMESC can transfer a User’s open positions to a new Member. 72 Users are further

15 U.S.C. 78c(a)(24).

CMESC Rules, at Rule 101 (defining “participant”). For further discussion of the use of the term

“participant,” including the definition of that term set forth in the Exchange Act, see supra note 66, infra

note 81 and accompanying text.

Exhibit E-3 of the Application (Rules of CME Securities Clearing Inc.) (“CMESC Rules”), at Rule 101

(defining Member). CMESC would require only its Members to submit Eligible Secondary Market

Transactions for clearing and settlement. CMESC Rules, at Rule 202(b); see also CMESC Rules, at Rule

202(a) (defining “Eligible Secondary Market Transaction” as that term is defined in Rule 17Ad-22(a) under

the Exchange Act).

See, e.g., Exhibit O of the Application, at 1 (explaining that, among other things, a User is any person that

(i) a Member, based on appropriate due diligence, has nominated to CMESC to become a User, and (ii) has

applied to CMESC for approval as a User, been approved by CMESC as such and has executed a User

Agreement).

CMESC Rules, at Rule 301(b); see letter from Jonathan Marcus, Senior Managing Director and General

Counsel, CME Group Inc., dated Sept. 8, 2025 (“CMESC Participation Letter”) at 1 & n.5; see also

CMESC Rules, at Rules 305(c) and 311(d); and Exhibit J to CMESC’s Form CA-1, at p. 4 (stating that

each Participant – Member, Independent User or Supported User – has direct contractual obligations to

CMESC to settle its novated Eligible Securities Transactions and is directly liable for settlement of its

cleared transactions).

See, e.g., CMESC Rules, at Rules 501, 602, 603.

See CMESC Rules, at Rule 412; CMESC Response Letter at 6.

classified as Independent Users or Supported Users.73 An Independent User is obligated to post

margin and make OES payments to CMESC for its Independent User Account; for a Supported

User, the Supported User’s authorizing Member is obligated to post margin and make OES

payments to CMESC for the Supported User Account.74

CMESC Rules identify the following persons as those that may be approved as either

Members or Users, provided that they satisfy the applicable qualifications for participation: (i)

broker-dealers registered pursuant to Sections 15 or 15C of the Exchange Act; (ii) banks that are

subject to the supervision and regulation of their chartering authority in the U.S. at either federal

(i.e., the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal

Deposit Insurance Corporation) and/or state level (i.e., state banking agencies), or for non-U.S.

banks, the foreign equivalent to such chartering authority (or authorities); (iii) futures

commission merchants registered pursuant to the Commodity Exchange Act; (iv) unregistered

investment pools, which are entities primarily engaged in the business of investing, reinvesting,

or trading securities that hold pools of securities and/or other assets that meet specified criteria;

and (v) proprietary trading firms. 75 CMESC Rules further provide that trust companies,

registered clearing agencies, registered investment companies, and insurance companies are

eligible to become Users,76 provided that they satisfy the applicable qualifications for

participation.

CMESC Rules, at Rule 101 (defining Independent User and Supported User).

CMESC Rules, at Rule 501.

CMESC Rules, at Rule 302(a).

CMESC Rules, at Rule 302(b) (citing Section 17A of the Exchange Act with respect to registered clearing

agencies, Section 8 of the Investment Company Act with respect to registered investment companies, and

Section 2(a)(17) of the Investment Company Act for its definition of insurance companies).

The Commission finds that the Application satisfies the requirements of Section

17A(b)(3)(B) of the Exchange Act. CMESC Rules provide that each type of entity specified in

Section 17A(b)(3)(B) of the Exchange Act may be either a Member or a User of CMESC. The

Commission further agrees that both Members and Users would qualify as “participants” as

defined in Section 3(a)(24) of the Exchange Act. Although Users must be authorized by a

Member to join CMESC as a User,77 Users are contractually bound to settle directly with the

clearing agency and are not reliant on Members to settle their transactions. 78 Specifically,

pursuant to CMESC Rules, Users can submit transactions for clearing, post margin, and settle

their transactions directly with CMESC. 79 In the event that the Member authorizing a User

defaults, CMESC can transfer the User’s open positions to a new Member,80 rather than close out

those positions as part of the defaulting Member’s portfolio.81

Users must be nominated by a Member to be admitted as Users, and before nominating a User, a Member

must conduct reasonable due diligence on such User’s credit and liquidity profile and operational

capabilities regarding the User’s ability to fund its obligations to CMESC and, if applicable, to the Member.

See CMESC Rules, at Rule 303(a)(iii). Such a condition is consistent with Section 17A(b)(4)(B), which

states, as discussed further in Part III.B.2 below, that a registered clearing agency may deny participation,

or condition participation, for persons who do not meet standards of financial responsibility, operational

capability, experience, and competence.

See CMESC Participation Letter at 1 & n.5; see also CMESC Rules, at Rules 305(c) and 311(d); and

Exhibit J to CMESC’s Form CA-1, at p. 4 (stating that each Participant – Member, Independent User or

Supported User – has direct contractual obligations to CMESC to settle its novated Eligible Securities

Transactions and is directly liable for settlement of its cleared transactions).

See, e.g., CMESC Rules, at Rules 501, 602, 603. As noted above, pursuant to Rule 501, Independent Users

are obligated to post margin and make OES payments to CMESC for its Independent User Account. See

supra note 74.

See CMESC Rules, at Rule 412; letter from Jonathan Marcus, Senior Managing Director and General

Counsel, CME Group Inc., dated May 27, 2025 (“CMESC Response Letter”), at 6.

The Commission does not view CMESC’s decision to treat Users as “indirect participants” for purposes of

applying the requirements of Rule 17Ad-22, see Exhibit J of the Application, at 3, as inconsistent with their

status as “participants” under Section 3(a)(24) of the Exchange Act. Consistent with the analysis in Part

III.B.1, in this order the Commission uses “participant” to mean both Members and Users as described in

the Application, as Members and Users both meet the definition of “participant” as defined in Section

3(a)(24) of the Exchange Act. In the Treasury Clearing Adopting Release, the Commission described

“indirect participants” as “generally, [the] customers or clients [of direct participants], which typically

Statutory Standard and Analysis: Section 17A(b)(4)(B)

Section 17A(b)(4)(B) of the Exchange Act states that a registered clearing agency may

deny participation to, or condition the participation of, any person if such person does not meet

such standards of financial responsibility, operational capability, experience, and competence as

are prescribed by the rules of the clearing agency. Section 17A(b)(4)(B) also provides that, a

registered clearing agency may examine and verify the qualifications of an applicant to be a

participant in accordance with procedures established by the rules of the clearing agency.

With respect to the criteria for participation under Section 17A(b)(4)(B) of the Exchange

Act, the Application describes how CMESC’s participant82 structure affects its framework for

managing risk. Specifically, CMESC has established requirements for applicants’ financial

resources, operational capacity, creditworthiness, and business experience. With respect to

financial resources, the financial responsibility standards for Members vary depending upon the

nature of the applicant’s business,83 but CMESC’s minimum financial responsibility standards

include market participants such as money market funds, hedge funds, other asset managers, and smaller

banks or broker-dealers,” which is consistent with how CMESC Rules define “User” and the requirements

required to become a “Member.” See Release No. 34–99149 (Dec. 13, 2023), 89 FR 2714, 2717 (Jan. 16,

2024) (“Treasury Clearing Adopting Release”); see also CMESC Rules, at Rule 202(a), (b) (establishing

rules for the submission of Eligible Secondary Market Transactions, pursuant to Commission Rule 17Ad22); see also CMESC Rules, at Rule 306(b). The Commission explained, at the time, that such indirect

participants are “expressly excluded” from the Exchange Act definition of “participant” because no

registered clearing agency then had organized its rules to enable such market participants to clear and settle

their securities transactions directly with the clearing agency rather than only through a direct participant.

Treasury Clearing Adopting Release, 89 FR at 2717 n.17. That analysis continues to apply to those thenexisting structures for indirect participation.

CMESC Rules, at Rule 101 (defining “participant” as a Member or User).

See CMESC Rules, at Rule 306(b). The rule states that, for example, a broker-dealer applicant shall have at

least twenty million dollars ($20,000,000) in net capital, as defined in Rule 15c3-1 under the Exchange Act,

provided that such amount is greater than its minimum capital requirement thereunder and, in the case of a

broker-dealer dually registered as a futures commission merchant under the Commodity Exchange Act,

greater than the amount of adjusted net capital required under CFTC Regulation 1.17 under the Commodity

Exchange Act. See CMESC Rules, at Rule 306(b)(i).

apply only to Members. 84 A Member that authorizes a User is responsible for determining and

enforcing minimum financial responsibility standards that apply to its authorized Users. 85 In

addition, CMESC’s financial standards require, among other things, that Member applicants

have sufficient resources to make any required clearing fund contributions,86 to pay cash

settlement amounts, 87 to meet any applicable regulatory capital requirements,88 and to satisfy all

obligations to CMESC.89 CMESC’s operational criteria require prospective applicants (whether

Members or Users) to have adequate personnel, books and records, accounting systems, and

internal procedures to process transactions promptly and accurately, to communicate with

CMESC, and to conform to any conditions imposed by CMESC. 90

CMESC has the authority to deny participant status to entities that, among other things,

are subject to statutory disqualification under Section 3(a)(39) of the Exchange Act,91 have

violated the anti-fraud provisions of federal securities laws, or have been convicted of a criminal

offense.92

CMESC will routinely review its Members and Users to ensure each adheres to

CMESC’s participation requirements on an ongoing basis. In this regard, CMESC requires

Members to provide it with interim and annual financial statements and, periodically, certain

CMESC Rules, at Rule 307(c).

Id.

CMESC Rules, at Rule 306(a)(i).

Id.

CMESC Rules, at Rule 306(b)(v).

CMESC Rules, at Rule 306(a)(i).

CMESC Rules, at Rules 306(a)(ii)–(v), 306(c), 307(a), (b).

15 U.S.C. 78c(a)(39).

CMESC Rules, at Rule 308.

regulatory reports (e.g., the FOCUS reports broker-dealers must file with the Financial Industry

Regulatory Authority). 93 CMESC has the authority to conduct due diligence reviews of the

financial responsibility and operational capability of any Member,94 and Members must notify

CMESC of any material changes to its organization, operations, or financial condition. 95

Members or Users must also furnish to CMESC adequate assurances of its financial

responsibility and operational capability.96 In addition, CMESC has the authority to take action

with respect to Members or Users that fail to maintain CMESC’s participation requirements.97 A

Member or User that no longer satisfies CMESC’s participation requirements is subject to

disciplinary sanctions, including limitations on its access to CMESC’s services, and possible loss

of the privileges of participant status.98

To assist the Commission in determining whether the Application establishes

participation requirements consistent with Section 17A(b)(4)(B) of the Exchange Act, the

Commission sought comment as to whether the Application proposes a sufficient level of

surveillance and monitoring by CMESC of the risks posed by its Members and the two

categories of Users, such that the Application has policies and procedures that establish

CMESC Rules, at Rule 309(b)(i); see also CMESC Rules, at Rules 309(b)(ii)–(v) (regarding the financial

reports required to be submitted by other Member types).

CMESC Rules, at Rule 309(c).

CMESC Rules, at Rule 311.

CMESC Rules, at 309(d); see also CMESC Rules, at 309(e) (providing a list of examples of documentation

that would constitute adequate assurances).

CMESC Rules, at Rule 902. With respect to CMESC’s ability to enforce compliance by its participants

with the rules of the clearing agency, the Commission further addresses this topic in Part III.F, in

conjunction with discussing Section 17A(b)(3)(G) of the Exchange Act, which requires that the rules of the

clearing agency provide that its participants shall be appropriately disciplined for violation of any provision

of the rules of the clearing agency. 15 U.S.C. 78q–1(b)(3)(G).

CMESC Rules, at Rules 1001, 1002.

objective, risk-based, and publicly disclosed criteria for participation and that require Members

to have sufficient financial resources. In response, commenters stated that “[t]he minimum

capital requirement for CMESC Members should be higher than proposed to ensure that no

Member poses an unreasonably high risk to the other Members,”99 and that CMESC should

enhance risk management of Members by raising the minimum capital requirement for Members

and should be adjusted based on the Member activity level.100 Further, commenters stated that

“[a]n authorizing Member should not be required to undertake due diligence on its Users beyond

the level it deems necessary for its own risk management purposes,”101 that CMESC should not

require an authorizing Member to undertake specified due diligence on its Users beyond the

Member’s own risk management as CMESC has the primary relationship with such Users, and

that CMESC should clarify that authorizing Members are not responsible for any liability of any

User to CMESC due to any disciplinary action against the User.102 One commenter also stated

that Rule 306(c) is unclear whether Members need to monitor only the risks related to a User’s

clearing activity at CMESC, or risks arising from all aspects of a User’s activity.103

In response, CMESC stated that the minimum capital requirements for Members in Rule

306(b) provide an appropriate baseline for admission and that these minimum capital

requirements are not the only mechanisms CMESC relies upon to ensure that Members will have

sufficient financial resources and robust operational capacity to meet obligations arising from

their clearing activity at CMESC. CMESC also identified that such other mechanisms include,

SIFMA & AMG I at 14–15.

100

FIA at 9.

101

SIFMA & AMG I at 11.

102

FIA at 3.

103

Id. at 11.

but are not limited to, a credit rating process for Members, daily risk monitoring, margin

collection, and OES exchange. In addition, CMESC stated that it may require a Member to meet

a higher capital requirement as CMESC determines appropriate, taking into consideration the

Member’s risk profile, including the number and type of Users it authorizes and the volume, size

and nature of such Users’ cleared transactions.104 Further, CMESC stated that it “recognizes that

a Member retains the risk management expertise to appropriately design their due diligence and

risk monitoring practices for the Users it authorizes with respect to their cleared transactions.

CMESC, in turn, may request to review the Members’ due diligence and risk monitoring policies

and procedures to understand the Members’ relationships with Users and the risk controls and

mitigants that Members utilize to manage their risks with respect to such Users in order to

identify and monitor the risks that Members and their User relationships may pose to

CMESC.”105

Because CMESC Rules would establish participation requirements that include financial

standards for Members and operational competency standards for Members and Users that

clearly denote ongoing compliance obligations and set forth consequences for failing to meet

those obligations, CMESC Rules are sufficient to protect the clearing agency from the risks that

can be associated with Members and Users who would not otherwise meet such competency

standards. In addition, consistent with the requirements in Rules 17Ad-22(e)(18) and (19), which

would apply to CMESC, it is appropriate for CMESC to request from Members their due

diligence and risk monitoring policies and procedures to understand how Members are managing

their relationships with Users and the risk controls and other mitigants Members’ may choose to

104

CME Response Letter at 7.

105

Id. at 8.

apply. Consistent with Rules 17Ad-22(e)(18) and (19), such requests may also extend to Users’

activity beyond CMESC itself to activity at other clearing agencies, such as in cases where those

Users may be relying on cross-margining arrangements.

For the reasons discussed above, the Commission determines that the rules of CMESC

regarding participation in the clearing agency are consistent with the standards set forth in

Section 17A(b)(4)(B) of the Exchange Act.

Fair Representation

Statutory Standard: Section 17A(b)(3)(C)

Section 17A(b)(3)(C) of the Exchange Act states that a clearing agency shall not be

registered unless the Commission determines that the rules of the clearing agency assure a fair

representation of its shareholders (or members) and participants in the selection of its directors

and administration of its affairs. 106

Summary of Application and Analysis

Per Exhibit E-2B, CMESC will have a nine-member Board of Directors, all of whom are

elected by CMESC’s sole shareholder, CME Group, Inc. The shareholder is authorized, per

Article III, Section 6 of Exhibit E-2A(2), to remove any and all members of CMESC’s Board of

Directors, with or without cause, at any time. One board member position will be restricted to a

person who is an officer, director, or employee of a Member of the clearing agency, and one

board member position will be restricted to a person who is an officer, director, or employee of a

User of the clearing agency. In addition, at least five positions of CMESC’s nine-member Board

106

Section 17A(b)(3)(C) of the Exchange Act also states that the Commission may determine that the

representation of participants is fair if they are afforded a reasonable opportunity to acquire voting stock of

the clearing agency, directly or indirectly, in reasonable proportion to their use of such clearing agency.

of Directors will be independent directors. 107 In its Application, CMESC has not included

provisions for apportioning equity interests (for example, voting stock) in CMESC to Members

or Users.

Under Section 17A(b)(3)(C) of the Exchange Act, the Commission considers whether the

Application provides fair representation both to shareholders and to participants. In doing so, the

Commission undertakes an analysis of the documents in the Application that govern or otherwise

affect the selection of directors by the clearing agency and the administration of its affairs. Such

documents include, for example, the constitution, articles of incorporation, bylaws, rules, and

written policies or procedures. Such analysis considers both qualitative and quantitative factors,

including the number of board positions reserved for management or to represent participants, as

well as the existence of provisions in governing documents that may impede participation in the

selection of directors or the administration of affairs. The Commission also considers the overall

organization of the clearing agency, the nature of the products it clears, and the structure of the

market it serves, including the nature of existing clearing and settlement arrangements in the

market served, the existence of other clearing agencies that would compete to offer services, and

the size of the market served by the applicant, to evaluate whether the representation proposed by

the applicant is consistent with the requirements of the Exchange Act.108

After performing this analysis, the Commission finds that the Application provides fair

representation for the reasons set forth below.

107

See Exhibit C-2 of the Application.

108

Accordingly, the level of participant representation needed to ensure fair representation consistent with the

Exchange Act may vary depending on the facts and circumstances, including the market or markets to

which the application is directed.

With respect to the fair representation of the shareholders in the selection of its directors

and administration of its affairs, CMESC’s parent company is the same legal entity as the sole

shareholder of CMESC. The shareholder cannot select as independent directors individuals that

have a material relationship with the parent company, as “material relationship” and “affiliate”

are defined in Rule 17Ad-25.109 The shareholder does have the right to elect all members of the

Board of Directors, though five of the nine board members must not have material relationships

with such shareholder (because the shareholder is also an affiliate of CMESC) to meet the

requirements in Commission rules for independent directors.110 Additionally, the shareholder is

authorized to remove any and all members of CMESC’s Board of Directors, with or without

cause, at any time. Finally, the Board of Directors will be responsible for the operations of the

clearing agency and will have oversight of the executives who are managing CMESC, which

also allows the shareholder to obtain fair representation in the administration of CMESC’s

affairs. Taken as a whole, these provisions assure a fair representation of the shareholders of

CMESC in the selection of its directors and administration of its affairs.

With respect to fair representation of the participants of CMESC in the selection of its

directors and administration of its affairs, the parent company of CMESC is the sole shareholder,

and so the Application includes no provision to make CMESC voting stock available for

purchase to Members or Users. As such, CMESC would operate in a manner that is different

109

See 17 CFR 240.17ad–25(a) (defining “material relationship” to mean a relationship, whether

compensatory or otherwise, that could affect the independent judgment or decision-making of the director

and “affiliate” to mean a person that directly or indirectly controls, is controlled by, or is under common

control with the registered clearing agency); see also Release No. 34–98959 (Nov. 16, 2023), 88 FR,

84454, 84455–56 (Dec. 5, 2023).

110

See 17 CFR 240.17ad–25(a).

from some other registered clearing agencies, which are constituted of owner-members.111 One

position on the Board, however, will be reserved for a representative of a Member and one

position for a representative of a User. The charter for the CMESC Board of Directors provides

that the composition of the Board, taken as a whole, shall represent the views of the owners and

participants of CMESC, including a selection of Directors that reflects the range of different

business strategies, models and sizes across participants, as well as the range of customers and

clients the participants serve. 112 It further provides that “at least a majority of the Directors shall

be Independent Directors.”113 In addition, while one position is reserved each for a representative

of a Member and of a User, representatives from among Members and Users also could be

selected for additional positions on the Board of Directors as CMESC seeks to satisfy

Commission requirements for independent directors under Rule 17Ad-25. For example,

representatives from Members and Users could qualify as independent directors, to the extent

that those representatives do not have material relationships with CMESC under Rule 17Ad25.114 Such directors would have an opportunity to serve on the Nominating Committee, which,

as previously discussed, 115 must make determinations regarding the fitness of nominees and

whether nominees would meet the definition of “independent director” consistent with

111

Securities Acts Amendments of 1975, Report of the Senate Comm. on Banking, Housing and Urban Affairs

to Accompany S. 249, S. Rep. 94-75, 94th Cong., 1st Sess. 123-24 (1975) (“[T]he bill establishes no norm

as to whether clearing agencies should or should not be operated for profit. The bill makes no attempt to set

up particular standards of representation or participation. Rather, it provides that the Commission must

assure itself that the rules of the clearing agency regarding the manner in which decision are made give fair

voice to participants as well as to shareholder . . . .”).

112

See Exhibit E-2B at 1.

113

See id.

114

See supra note 109 and accompanying text (defining “material relationship” under Rule 17Ad-25).

115

See supra note 61 and accompanying text (discussing the responsibilities of the Nominating Committee).

Commission rules. Such ability to influence the nomination of directors is an important

component of participant representation in the selection of directors. In addition, pursuant to the

charter, the Nominating Committee “shall nominate all persons who stand for election as

Director.”116 Taken as a whole, the above-described provisions of the CMESC Application

provide Members and Users with a role in the review and nomination of directors, which

provides fair representation regarding the selection of directors.

In addition, reserving a position on the Board for one Member and one User—and the

absence of provisions that might impede or restrict these positions to carry out their duties when

compared to other board directors or classes of board directors—ensures representation on the

Board and therefore also helps ensure that Members and Users have representation in the

administration of CMESC’s affairs.117 As such CMESC’s approach, in reserving positions on the

Board of Directors for a representative of a Member and a representative of a User, is consistent

with fair representation, helping to provide a voice in CMESC’s governance to a range of views

from among the customers of the clearing agency.118 Taken as a whole, the provisions of the

CMESC Application described above assure a fair representation of the participants of CMESC

in the selection of its directors and administration of its affairs.

For the reasons discussed directly above, the Commission determines that the rules of

CMESC assure fair representation in the selection of its directors and administration of its affairs

consistent with Section 17A(b)(3)(C) of the Exchange Act.

116

See Exhibit E-2B at 4.

117

See 17 CFR 240.17ad–25(j) (“Rule 17Ad-25(j)”); Treasury Clearing Adopting Release, supra note 81, 89

FR at 2755.

118

See supra note 111. Commission rules also require, pursuant to Rule 17Ad-25(j), that registered clearing

agencies provide mechanisms for input from direct and indirect participants, with respect to material

developments in its governance and operations on a recurring basis. 17 CFR 240.17ad–25(j).

Fees

Statutory Standard: Section 17A(b)(3)(D) and (E)

Section 17A(b)(3)(D) of the Exchange Act states that a clearing agency shall not be

registered unless the Commission determines that the rules of the clearing agency provide for the

equitable allocation of reasonable dues, fees, and other charges among its participants.119 Section

17A(b)(3)(E) of the Exchange Act states that a clearing agency shall not be registered unless the

rules of the clearing agency do not impose any schedule of prices, or fix rates or other fees, for

services rendered by its participants. 120

Summary of Application and Analysis

CMESC’s Application does not include a fee schedule or schedule of prices; however,

CMESC’s Application does describe: (i) its authority to determine and equitably allocate fees;121

(ii) its rule and procedures regarding fees;122 and (iii) the status of its proposed fee schedule, 123 as

subsequently updated in the CMESC Fees Letter. Separately, the Application states that CMESC

119

15 U.S.C. 78q–1(b)(3)(D).

120

15 U.S.C. 78q–1(b)(3)(E).

121

See Exhibit E-2A(2) of the Application, Amended and Restated By-Laws of CME Securities Clearing Inc.

(“CMESC By-Laws”), at Article X, Section 4.

122

See CMESC Rules, at Rule 801; Exhibit E-4 of the Application, Procedures of CME Securities Clearing

Inc. (“CMESC Procedures”), at Procedure 8-1.

123

See Exhibit E-5 of the Application (stating that “[CMESC] is developing its fee schedule and intends to

charge both Members and Users. [CMESC] continues to engage the marketplace on its ultimate fee

structure, which [CMESC] plans to finalize as it approaches the launch date for operating the clearing

agency. [CMESC] notes that cleared repo and cleared U.S. Treasuries will operate in a competitive

environment, which in turn is expected to impact fees. The fees for Members and Users will be published

on CMESC’s website when its clearing services are launched after filing a proposed rule change with the

Commission pursuant to [S]ection 19(b)(3)(A) of the Exchange Act”).

“does not fix prices, rates, or fees for services rendered by its participants (i.e., its Members or

Users).”124

Authority to Determine and Equitably Allocate Fees

CMESC’s Exhibit E-2A(2) includes Section 4 of CMESC’s by-laws, explaining its

authority to determine fees (and the limits to this authority).125 This section states that CMESC’s

Board of Directors has the authority to determine “the amount of fees, dues, assessments, and

other charges to be paid by Members and Users and any other persons using any facility or

system that [CMESC] operates or controls.”126 This section also explains that any “fees, dues,

assessments, and other charges shall be equitably allocated among Members and Users and any

other persons using any facility or system that [CMESC] operates or controls.”127

The CMESC Fees Letter identified five factors that CMESC may consider in developing

its fee schedule: (i) market structure and competition; (ii) transaction volumes and liquidity; (iii)

operational costs; (iv) market participant feedback; and (v) regulatory considerations.128

Regarding market structure and competition, CMESC stated it “may consider the structure of the

Treasury market and the competitive landscape, including alternative services offered by

124

See Exhibit Q of the Application (responding to the exhibit’s requirement for an applicant for registration

as a clearing agency to “[a]ttach as Exhibit Q a schedule of any prices, rates or fees fixed by registrant for

services rendered by its participants”). See also 15 U.S.C. 78q–1 (requiring that the “rules of the clearing

agency do not impose any schedule of prices, or fix rates or other fees, for services rendered by

its participants”).

125

See CMESC By-Laws, at Article X, Section 4.

126

See id.

127

See id. (emphasis added).

128

Letter from Jonathan Marcus, Senior Managing Director and General Counsel, CME Group Inc., dated

May 27, 2025 (“CMESC Fees Letter”), at 1–2. CMESC submitted two letters on the same day, May 27,

2025: the CMESC Response Letter and the CMESC Fees Letter. Since they were received on the same

date, both letters appear on the Commission’s website as one entry.

competing clearing agencies, existing transaction costs, incentives for central clearing and the

different categories of Participants (e.g., Members vs. Users; Independent Users vs. Supported

Users).”129 CMESC stated that it also may consider “transaction volumes in both cash market

and repo transactions in Treasury securities, open positions and the overall liquidity of the

Treasury markets.”130 Discussing operation costs, CMESC stated possible considerations include

costs related to clearing systems, legal and compliance functions, risk management requirements,

and the liquidity and capital to support the clearing service. 131 CMESC also stated it could

consider feedback from market participants in developing its fee structure. 132 CMESC stated that

regulatory considerations may include whether its fees, dues, or charges are “appropriately

related to clearing services” or “the administration of the clearing agency.”133 Along with a

consideration of these possible factors, CMESC stated it will design its fee structures to align

with the requirements of the Exchange Act and the rules and regulations thereunder, including

applicable guidance, and establish such fees in accordance with its Rule 801. 134

129

Id. at 2.

130

Id.

131

Id.

132

Id.

133

Id.

134

Id.

CMESC’s Rules and Procedures Regarding Fees

CMESC’s Rule 801 governs fees (“Charges for Services Rendered”)135 and addresses: (i)

its Members and Users’ responsibility to pay fees and charges;136 (ii) the approach to “unusual”

expenses;137 and (iii) billing mechanics. 138

Exhibit E-4 sets forth CMESC Procedures, including “Procedure 8-1. Product-Specific

Fees and Charges,”139 which explains that fees arising from CMESC’s provision of services “will

be set out in a Schedule of Fees specific to each Eligible Securities Transaction.”140 The exhibit

also states that CMESC will publish its “Schedule of Fees” on its website.141

Comments Received

The Commission received no comments on CMESC’s authority, rules, or procedures for

determining fees,142 except that CMESC submitted the CMESC Fees Letter, discussed above,

135

See CMESC Rules, at Rule 801.

136

See CMESC Rules, at Rule 801(a) (stating that it is each Member’s and User’s responsibility to pay fees

“for services rendered by [CMESC] as set forth in the Rules and Procedures and approved by the Board on

a reasonable and non-discriminatory basis).

137

See CMESC Rules, at Rule 801(b) (explaining that CMESC may charge a Member or User “for any

unusual expenses caused directly or indirectly by such Member or User,” and that unusual expenses could

include “the cost of producing records pursuant to court order or other legal process in any litigation or

other legal proceeding, whether or not such Member or User is party to such litigation or proceeding”).

138

See CMESC Rules, at Rule 801(c) (stating that CMESC will bill its Members and Users on a monthly basis

for charges for the preceding month, billing each Member for charges related to the Member and its

Supported Users, and each Independent User for charges related to that Independent User).

139

See CMESC Procedures, at Procedure 8-1.

140

See id. (emphasis added).

141

See id.

142

The Commission received two comment letters addressing CMESC’s disclosure of costs associated with

default management. FIA at 6–7; SIFMA & AMG I at 14. These comments are unrelated to the

Commission’s required analysis of the Application under Section 17A(b)(3)(D) of the Exchange Act, and

so are addressed in the context of Section 17A(b)(3)(F) and discussion of Rule 17Ad-22(e)(23)(ii) in Part

III.E.2.d).

providing an update on the development of its fee schedule.143 CMESC stated that it is “actively

engaging with market participants to inform the design of its final fee structure.”144 CMESC

stated that it expects to finalize its fee structure “as [CMESC] approaches the launch date for

Treasury securities clearing services.”145 CMESC stated that, in finalizing its fee schedule, it will

rely upon the experience of its affiliate (Chicago Mercantile Exchange, Inc.) in setting fees as a

CFTC-regulated derivative clearing organization. 146

Analysis

As noted above, CMESC is not yet operating as a clearing agency,147 and CMESC

“continues to engage the marketplace on its ultimate fee structure, which [CMESC] plans to

finalize as it approaches the launch date for operating the clearing agency.”148 CMESC’s

Application, however, identifies CMESC’s existing authority, rules, and procedures governing

any fees that it will assess on its participants, as described above.149 These existing authority,

rules, and procedures require that CMESC’s fees are “equitably allocated,” “approved on a

reasonable and non-discriminatory basis,” and “specific to each Eligible Securities Transaction,”

which is consistent with the requirement that CMESC’s rules provide for the equitable allocation

143

See CMESC Fees Letter at 1.

144

Id.

145

Id.

146

Id.

147

See supra notes 13–14 and accompanying text (explaining that approval of clearing agency registration

does not mean that no further modifications of the applicant’s rules, systems, procedures, or practices are

needed and that the obligations of a fully registered clearing agency cannot end after registration).

148

See Exhibit E-5 of the Application.

149

See supra III.D.2.a) and b).

of reasonable dues, fees, and other charges. 150 Furthermore, the CMESC Fees Letter specifically

stated that “its final fee schedules will be reasonably designed to satisfy the requirements of […

Section] 17A(b)(3)(D).”151 Separately, any fees, dues or other charges that CMESC intends to

assess must be filed as a proposed rule change pursuant to Section 19(b) of the Exchange Act and

Rule 19b-4 thereunder.152 Clearing agencies fees are subject to the requirements of the Exchange

Act, including Section 17A(b)(3)(D). 153

Accordingly, the Commission determines that the Application is consistent with Section

17A(b)(3)(D) of the Exchange Act. In addition, as noted above, CMESC’s Application states that

CMESC does not “fix prices, rates, or fees for services by its participants (i.e., its Members or

Users).”154 The Commission therefore determines that CMESC’s prohibitions against the fixing

of prices of its Members and Users meet the requirements of Section 17A(b)(3)(E) of the

Exchange Act.155

Rules Designed to Promote Prompt and Accurate Clearance and Settlement and

the Safeguarding of Securities and Funds

150

Id.

151

See CMESC Fee Letter at 1; see also 15 U.S.C. 78q–1(b)(3)(D) (requiring that a clearing agency’s rules

provide for the equitable allocation of reasonable dues, fees, and other charges among its participants).

152

See 15 U.S.C. 78s(b); 17 CFR 240.19b–4; see also Exhibit E-5 of the Application (acknowledging its

obligations under Section 19(b) and Rule 19b–4).

153

15 U.S.C. 78q–1(b)(3)(D); see also 15 U.S.C. 78s(b) (requiring proposed rule changes to be filed by the

Commission, which shall publish notice thereof and give interest persons an opportunity to respond). Some

proposed rule changes regarding dues, fees, or charges take effect upon filing. See 15 U.S.C.

78s(b)(3)(A)(ii); see also 15 U.S.C. 78s(b)(3)(C) (specifying when the Commission may temporarily

suspend the immediate effectiveness of such filings).

154

See supra note 124 and accompanying text.

155

15 U.S.C 78q–1(b)(3)(E).

Statutory Standard: Section 17A(b)(3)(F)

Section 17A(b)(3)(F) of the Exchange Act states that a clearing agency shall not be

registered unless the Commission determines that the rules of the clearing agency are designed to

promote the prompt and accurate clearance and settlement of securities transactions and, to the

extent applicable, derivative agreements, contracts, and transactions, to assure the safeguarding

of securities and funds which are in the custody or control of the clearing agency or for which it

is responsible, to foster cooperation and coordination with persons engaged in the clearance and

settlement of securities transactions, to remove impediments to and perfect the mechanism of a

national system for the prompt and accurate clearance and settlement of securities transactions,

and, in general, to protect investors and the public interest. It also states that a clearing agency

shall not be registered unless the Commission determines that the rules are not designed to

permit unfair discrimination in the admission of participants or among participants in the use of

the clearing agency, or to regulate by virtue of any authority conferred by the Exchange Act

matters not related to the purposes of this section or the administration of the clearing agency.156

156

With respect to the provisions in Section 17A(b)(3)(F) of the Exchange Act requiring that the rules of the

clearing agency are not designed to permit unfair discrimination in the admission of participants or among

participants in the use of the clearing agency and not regulate by virtue of any authority conferred by the

Exchange Act matters not related to the purposes of the Exchange Act or the administration of the clearing

agency, those topics have been addressed in Parts III.B and III.G, concerning the statutory requirements for,

respectively, participant standards of the clearing agency and addressing the clearing agency’s burden on

competition. With respect to the provisions requiring that the rules foster cooperation and coordination with

persons engaged in the clearance and settlement of securities transactions and to remove impediments to

and perfect the mechanism of a national system for the prompt and accurate clearance and settlement of

securities transactions, those topics have been addressed in Part III.G, concerning the statutory

requirements addressing the clearing agency’s burden on competition.

Summary of Application and Analysis

The Commission has adopted multiple rules that are related to Section 17A(b)(3)(F), in

that they establish requirements related to financial risk management, default management and

loss allocation, and recovery and orderly wind-down. Specifically, these Commission rules

implicate the safeguarding of securities and funds and promoting the prompt and accurate

clearance and settlement of securities transactions, including the collection of margin,

composition of the guaranty fund, default management and loss allocation procedures, and other

risks.157 To analyze CMESC’s Application under Section 17A(b)(3)(F), the Commission has

considered CMESC’s Rules concerning its account structures, margin system, guaranty fund,

default management, and loss allocation processes, as set forth in further detail below.

As a threshold matter, the CMESC Application establishes a comprehensive risk

management framework consistent with Commission rules that help ensure CMESC will collect

sufficient margin to cover its exposures, maintain an appropriately sized Guaranty Fund, and will

be able to manage a default and allocate losses appropriately, if or when needed. CMESC’s risk

management framework is designed to address the particular features of CMESC’s proposed

participation structure, i.e., to manage the risks presented by Members and Users who have

different obligations to CMESC and access CMESC. For these reasons and the reasons discussed

below, the Commission determines that CMESC’s rules are consistent with the requirements for

the prompt and accurate clearance and settlement of securities and the safeguarding of funds and

securities as set forth in Section 17A(b)(3)(F) of the Exchange Act and do not regulate by virtue

of any authority conferred by the Exchange Act matters not related to the purposes of Section

17A of the Exchange Act or the administration of the clearing agency.

157

See 17 CFR 240.17ad–22(e)(4), (e)(6), (e)(13), (e)(23)(ii); 240.17ad–26.

Account Structure and Safeguarding of Securities and Funds

In Exhibit L, CMESC explains that, with the exception of initial margin and Guaranty

Fund contributions, it does not maintain custody of or otherwise safeguard Members’ or Users’

securities or cash in clearing transactions, and that only in limited circumstances does CMESC

exercise control of such securities or cash. 158 According to CMESC Rules, initial margin posted

with CMESC will be received by Bank(s) designated by CMESC and deposited into separate

omnibus accounts for Members, Supported Users that are registered broker-dealers, other

Supported Users, and Independent Users.159 Those accounts will also be used for deposits related

to an OES.160 Any cash posted for margin purposes may be partially or wholly invested in U.S.

Treasury securities with a maturity of one year or less, and any investment income or losses from

cash deposited for margin purposes shall accrue to CMESC, unless otherwise set forth in the

Procedures.161 Per CMESC Rules, Qualified Margin Securities posted for margin purposes may

be posted with CMESC by a Member for its Member Account, by a Member on behalf of its

Supported Users for such Supported Users’ Supported User Accounts, and by an Independent

User for its Independent User Account. 162

Pursuant to CMESC Rules, before submitting any Repo Transaction or Cash Treasury

Transaction to CMESC for clearing, a Member or User must establish a settlement account at

158

Exhibit L at 1.

159

CMESC Rules, at Rule 507(a).

160

CMESC Rules, at Rule 507(a).

161

CMESC Rules, at Rule 505(a)(ii).

162

CMESC Rules, at Rule 505(b)(i).

CMESC’s Securities Settlement Bank for the relevant transactions. 163 A Member or User that is a

cash lender must establish a collateral account in its name and for its exclusive benefit at

CMESC’s Securities Settlement Bank. 164 A Securities Settlement Bank must be subject to

supervision under Federal or State banking laws and will be designated by CMESC for the

purpose of facilitating settlement of Eligible Securities Transactions and for holding collateral for

Repo Transactions, as applicable. 165 The account structure at a Securities Settlement Bank will be

used to settle Repo Transactions and Cash Treasury Transactions. 166

One commenter made suggestions regarding risk management procedures related to the

relationship between a Member and its Users, including with respect to: a Member’s

responsibility for porting of User accounts; 167 a Member’s control over aspects of a User’s

margin;168 a User’s done-away transactions;169 and a User default.170 These suggestions pertain to

certain choices CMESC has made in designing its clearing agency but do not bear on whether

CMESC’s Application is consistent with a specific Commission rule, or whether CMESC’s

application more generally meets the standard for registration.

163

CMESC Rules, at Rule 1504(c).

164

CMESC Rules, at Rule 1504(c).

165

CMESC Rules, at Rule 101.

166

CMESC Procedures, at Procedure 5-6.

167

FIA at 7, 11–12 (requesting that CMESC explicitly require all parties to consent prior to porting a User,

including the transferring Member and the receiving Member; and that User positions only be liquidated in

the event of a Member default if porting cannot be effected).

168

Id. at 9 (requesting that CMESC allow Members to obtain a security interest through control rather than a

financing statement).

169

Id. at 7 (requesting that CMESC require Member consent to cancel or modify a transaction).

170

Id. at 4–5, 8 (requesting that CMESC permit a Member to trigger a User default; that CMESC permit a

Member to transfer a User’s transactions to the Member’s account upon a User liquidation; and that

CMESC act on the instruction of a Member regarding return of margin or delivery of a settlement payment

in the context of a User default).

Margin System

Pursuant to CMESC Rules, CMESC will determine initial margin requirements for any

Eligible Securities Transactions it clears. 171 CMESC will calculate initial margin amounts under

the Portfolio Margin Collection method, based on a Member’s or User’s portfolio of Eligible

Securities Transactions in accordance with CMESC’s margin model at least twice daily during

the intraday and end-of-day clearing cycles.172

In Exhibit J, CMESC describes that margin is calculated in accordance with CMESC’s

proprietary risk-based margin model, the SPAN 2 framework, and is designed to cover price

movements over the margin period of risk, which for Eligible Securities Transactions is at least

two business days. 173 The SPAN 2 framework is designed to achieve the desired coverage level

of 99% over the margin period of risk on an ex post basis using parameters based on relevant

historical data.174 Exhibit J further describes that the SPAN 2 methodology generates scenarios

for the risk factors relevant for securities products cleared by CMESC, such as the change in

value of the Treasury securities and repo rate. 175 The SPAN 2 framework also includes a liquidity

and concentration risk component to account for the additional risks that may arise in closing out

a concentrated portfolio of a Defaulting Member or Defaulting User. 176

171

CMESC Rules, at Rule 501.

172

CMESC Rules, at Rule 502(a); see also CMESC Procedures, at Procedure 5-2 (further describing the

Portfolio Margin Collection method).

173

See Exhibit J of the Application, at 8.

174

See id.

175

See id.

176

See id.

Pursuant to CMESC Rules, a Member will post margin for its own account and on behalf

of its authorized Supported Users for their Supported User Accounts. 177 At least once each

business day, each Member with any authorized Supported User will submit a collateral value

report to CMESC with instructions regarding how to allocate margin deposited by the Member

for Supported Users. 178 An Independent User will post margin for its Independent User

Account.179 Members and Users must deposit margin in cash or Qualified Margin Securities

and/or such other non-cash form(s) in amounts, and in the manner, specified by CMESC from

time to time.180 All initial margin calls must be met in cash, unless CMESC otherwise

approves.181 Any cash posted for margin purposes may be partially or wholly invested in U.S.

Treasury securities with a maturity of one year or less, and investment income or losses from

cash deposited for margin purposes shall accrue to CMESC.182 Qualified Margin Securities

posted for margin purposes will be deemed to be deposited when CMESC confirms receipt, and

all interest, dividends, or gain received or accrued on such securities before any sale or

negotiation thereof, and any proceeds from the maturity of the securities received by CMESC

shall belong to the Member or User that posted such securities. 183

177

CMESC Rules, at Rule 501.

178

CMESC Rules, at Rule 502(e).

179

CMESC Rules, at Rule 501.

180

CMESC Rules, at Rule 502(b); see also CMESC Procedures, at Procedures 5-3 and 5-4.

181

CMESC Rules, at Rule 502(b).

182

CMESC Rules, at Rule 505(a).

183

CMESC Rules, at Rule 505(b).

One commenter stated that CMESC should limit its discretion in returning excess

margin.184 Commission rules do not require specific practices with respect to the return of excess

margin, and so this comment does not bear on whether CMESC’s Application is consistent with

a specific Commission rule, or whether CMESC’s application more generally meets the standard

for registration.

Guaranty Fund

CMESC Rules provide that Members shall contribute to the Guaranty Fund. 185 Each

Member’s Required Guaranty Fund Contribution shall be made in cash or U.S. Treasury

securities with remaining maturities of less than ten years, and any Default Assessment shall be

met in cash unless otherwise permitted by CMESC. 186 Cash and securities posted for Guaranty

Fund purposes shall be deposited in an account in the name of CMESC in a depository institution

selected by CMESC.187 Any cash may be partially or wholly invested in U.S. government

obligations or any other interest-bearing investments which provide safety and liquidity of the

principal invested, as determined by CMESC. 188

Members will be required to contribute to the Guaranty Fund, and a Member’s

contribution may be used to cover losses incurred by CMESC as a result of a Member or User

Default.189 The Guaranty Fund shall be maintained in an amount, determined by CMESC using

184

FIA at 6.

185

CMESC Rules, at Rule 401.

186

CMESC Rules, at Rule 403(a).

187

CMESC Rules, at Rule 404.

188

CMESC Rules, at Rule 404(c).

189

CMESC Rules, at Rules 401(a), (b).

its stress test methodology and in accordance with CMESC’s Procedures, at least equal to the

largest theoretical loss to CMESC in excess of initial margin resulting from the default of two

Member Families.190 According to CMESC Rules, a Member’s Required Guaranty Fund

Contribution will be determined based on the Member’s proprietary transactions and transactions

of Users authorized by the Member. 191 Each Member’s Required Guaranty Fund Contribution

shall be made in U.S. Dollar cash or U.S. Treasury securities with remaining maturities of less

than ten years.192 Any cash posted may be partially or wholly invested in U.S. government

obligations or any other interest-bearing investments which provide safety and liquidity of the

principal invested, and, to the extent not so invested, such cash funds shall be deposited in an

account in the name of CMESC in a depository institution or institutions selected by CMESC. 193

Any investment income or losses to principal from cash deposits to the Guaranty Fund shall

accrue to CMESC, and CMESC shall maintain a list of U.S. government obligations or any other

interest-bearing investments in which cash in the Guaranty Fund may be invested, and the

amounts invested at any given time. 194 Securities posted for Guaranty Fund purposes shall be

deposited by the Member, and held by CMESC, in CMESC’s name in a depository institution or

institutions selected by CMESC.195 Such securities will be deemed to be posted when CMESC

confirms receipt, and all interest, dividends, or gain received or accrued on such securities before

190

CMESC Rules, at Rule 402(a). Member Family is defined as a group consisting of a Member and any other

Member that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is

under common control with such Member. See CMESC Rules, at Rule 101.

191

CMESC Rules, at Rule 402(b).

192

CMESC Rules, at Rule 403(a).

193

CMESC Rules, at Rule 404(a).

194

CMESC Rules, at Rule 404(a).

195

CMESC Rules, at Rule 404(b).

any sale or negotiation thereof, and any proceeds from the maturity of the securities received by

CMESC shall belong to the Member that deposited such securities. 196

Regarding Guaranty Fund sizing, Rule 17Ad-22(e)(4)(iii) under the Exchange Act

requires covered clearing agencies to establish, implement, maintain and enforce written policies

and procedures reasonably designed to, among other things, maintain additional financial

resources at a minimum to enable it to cover a wide range of foreseeable stress scenarios that

include, but are not limited to, the default of the participant family that would potentially cause

the largest aggregate credit exposure for the covered clearing agency in extreme but plausible

market conditions. In connection with sizing the Guaranty Fund, CMESC Rules and Procedures

state that it will maintain resources at least equal to the largest theoretical loss to CMESC

resulting from the default of two Member Families in extreme but plausible market conditions,

covering, as applicable, Member Accounts and a predefined number of User Accounts with the

largest credit exposures at each Member. 197 CMESC’s approach is consistent with Commission

rules because, CMESC’s Guaranty Fund sizing methodology may produce a Guaranty Fund size

larger than the one computed to the default of the participant family that would potentially cause

the largest aggregate credit exposure. Therefore, the Guaranty Fund sizing methodology is

reasonably designed to be consistent with Rule 17Ad-22(e)(4)(iii).198

In addition, Rule 17Ad-22(c)(1) under the Exchange Act requires that a registered

clearing agency calculate and maintain a record each fiscal quarter, or any time upon

196

CMESC Rules, at Rule 404(b).

197

See CMESC Rules, at Rule 402(a) and (b); CMESC Procedures, at Procedure 4-1(a) and (c)(i); see also

CMESC Rules, at Rule 101 (defining “cover two standard”).

198

However, CMESC’s methodology does not consider, as part of a Member Family’s exposure, all a

Member’s Users’ positions. See id. (referencing a predetermined number of Users). Under CMESC’s Rules,

the Member is obligated to satisfy the Guaranty Fund contributions of its Users and to perform for the User

in the event of the User’s default. See CMESC Rules, at Rules 402(b), 301(b), 406(b)(iii).

Commission request, of the financial resources necessary to meet the requirements in Rule

17Ad-22(e)(4). Consistent with this requirement, CMESC will produce a record that CMESC

calculates and maintains assuming the default of at least the largest Member Family and

reflecting all of the Member Family’s exposures including Users, and Commission staff will be

able to consider that record through its ongoing monitoring of CMESC as part of the

Commission’s supervisory program, to consider and assess the performance of the existing

Guaranty Fund sizing methodology over time.

Default Management and Loss Allocation

In Exhibit J, CMESC states that it employs a risk management framework intended to

reduce the potential impact of a Participant Default via credit risk standards and ongoing

monitoring and to ensure that it has sufficient financial resources to manage a Default of its

largest Participants. 199 In the event of a Default, CMESC will rely upon established credit and

liquidity “waterfalls” to prevent losses to its Members and Users and minimize the potential for

market disruption. 200

Pursuant to CMESC Rules, upon the occurrence of a Member Default or User Default,

CMESC will notify all Members and, as appropriate, Users.201 CMESC Rules provide that

CMESC may hedge open positions of the defaulter. 202 CMESC will initiate the close-out process.

In the case of a Defaulting User and time permitting, CMESC may provide the authorizing

199

Exhibit J of the Application, at 7. CMESC’s Rules provide for both “Member Default” and “User Default,”

which are defined terms. See, e.g., CMESC Rules, at Rules 901, 902.

200

Exhibit J of the Application, at 8.

201

CMESC Rules, at Rule 1507(b).

202

CMESC Rules, at Rules 406(a)(i), (b)(i).

Member the opportunity to terminate the Defaulting User’s obligations to CMESC by satisfying

them in full.203 With respect to positions of Defaulting Members or any remaining positions of

Defaulting Users and time permitting, potentially impacted non-Defaulting Members and nonDefaulting Users with open positions may submit a close-out request to CMESC.204 CMESC

shall pay such Member or User any reasonable loss or cost incurred in connection with such

close-out, and such Member or User shall pay CMESC any profit or gain made in connection

therewith.205 With respect to any positions that have not been terminated or closed-out CMESC,

in its sole discretion to meet its settlement obligations, may purchase or sell Eligible Securities,

conduct a Competitive Auctions or auctions, and require Mandatory Close-Outs or Mandatory

Buy-ins.206 CMESC may enter into an offsetting repo transaction with a non-Defaulting Member

or non-Defaulting User that has the effect of extending outstanding settlement obligations for

Repo Transactions or Cash Treasury Transactions by one Business Day, unless applicable law

prohibits the non-Defaulting Member or non-Defaulting User from being required to enter into

such an offsetting repo transaction. 207

CMESC Rules also provide that CMESC will apply financial resources to manage a

Participant Default in accordance with its rules and procedures. 208 For a Member Default, the

margin posted for open transactions in the Defaulting Member’s Member Account(s), as well as

203

CMESC Rules, at Rule 1507(b).

204

CMESC Rules, at Rule 1507(c).

205

CMESC Rules, at Rule 1507(c).

206

CMESC Rules, at Rule 1507(e).

207

CMESC Rules, at Rule 1509.

208

CMESC Rules, at Rule 405.

any other assets of the Defaulting Member held by, pledged to, or otherwise available to

CMESC, including the Defaulting Member’s Required Guaranty Fund Contribution but

excluding any assets posted as margin to any User Account of any User authorized by the

Defaulting Member, shall be applied to discharge any losses or liabilities to CMESC from the

Member Default. 209 Next, CMESC would apply its Corporate Contribution of $50 million. 210

Then non-Defaulting Members’ Guaranty Fund contributions would be applied with the possible

imposition of a Default Assessment. 211 The maximum Default Assessment for each Member with

respect to each Cooling Off Period would equal 200% of a Member’s Required Guaranty Fund

Contribution then in effect. 212

Under CMESC Rules, for an Independent User Default, the first resource applied would

be margin posted for open transactions in the Defaulting User’s Independent User Account and

any other assets of the Independent User held by, pledged to, or otherwise available to CMESC

on behalf of that Independent User.213 For a Supported User Default, the first resource applied

would be margin posted for open transactions in the Defaulting User’s Supported User Account,

and if such application doesn’t fully discharge the obligations, CMESC may apply any collateral

in excess of the margin requirement posted to it for the Supported User of the authorizing

Member that such Member has not designated to CMESC as Funded Supported User Margin for

209

CMESC Rules, at Rule 406(a)(ii).

210

CMESC Rules, at Rule 406(a)(iii).

211

CMESC Rules, at Rules 406(a)(iv), (v).

212

CMESC Rules, at Rule 402(c). Should a Member submit a voluntary withdrawal during the Cooling Off

Period, the Member must still satisfy its aggregate maximum contribution in effect at the commencement of

the Cooling Off Period. CMESC Rules, at Rule 413(c). CMESC retains discretion to authorize additional

contributions during the Cooling Off Period. CMESC Rules, at Rule 413(d).

213

CMESC Rules, at Rule 406(b)(ii)(A).

any other Supported User Account or Supported User Margin for any other Supported User

Account.214 Next, in either type of user default, CMESC shall require the authorizing Member to

provide funds to discharge the losses and liabilities arising from its authorized User’s default.215

If the Member fails to do so, CMESC may declare the Member in default and then apply the

resources in the default waterfall: CMESC’s corporate contribution and non-Defaulting

Members’ Guaranty Fund Contribution with a possible Default Assessment. 216

Under CMESC Rules, if CMESC deems it appropriate to obtain financing necessary to

satisfy its settlement obligations, CMESC may enter into repo transactions involving Eligible

Securities intended to be delivered to a Defaulting Member or Defaulting User and those

Qualified Margin Securities of the Defaulting Member or Defaulting User with any market

participant so willing, and no Member or User shall take any action to interfere intentionally with

such repo transactions. 217 CMESC may enter master repurchase agreements with an entity or

multiple entities, including any depository institution, if CMESC deems it necessary or desirable

to obtain and maintain a committed repo financing line. 218 Each Member is required to enter a

“Capped Liquidity Facility” (“CLF”) Master Repurchase Agreement with CMESC on terms

substantially similar to those set out by CMESC. 219 In the event of a Member Default or a User

Default and where CMESC’s standard sources of liquidity are determined by CMESC to be

214

CMESC Rules, at Rule 406(b)(ii)(B).

215

CMESC Rules, at Rule 406(b)(iii).

216

CMESC Rules, at Rule 406(b)(iii).

217

CMESC Rules, at Rule 408.

218

CMESC Rules, at Rule 409.

219

CMESC Rules, at Rule 410.

insufficient or likely to be insufficient to meet CMESC’s liquidity needs, CMESC may declare a

CLF Event, notify its Members, and enter into one or more CLF Event Transactions with

applicable Member(s) of its choosing. 220 CMESC will inform each Member selected to

participate in a CLF Event Transaction of the amount, rate and any additional pertinent

information.221

Regarding default management, commenters stated that CMESC’s corporate contribution

to the default waterfall should be more than $50 million and be sized dynamically. 222 Under

CMESC Rule 406, CMESC would contribute $50 million of its own funds in a default waterfall

before applying the guaranty fund contributions of non-defaulting Members. The commenters

provided several reasons for believing that the corporate contribution should be increased: (i) the

size of the U.S. Treasury market and expected activity of CMESC; (ii) the requirement of a

covered clearing agency (“CCA”) to maintain additional financial resources to cover a wide

range of foreseeable stress scenarios under Rule 17Ad-22(e)(4)(iii); and (iii) the larger size of the

“skin-in-the-game” contributions by other CCAs as well as by CMESC clearing affiliates in

other markets.223 One commenter expressed support for finding a balance between the incentives

relevant to a CCA and its participants, suggesting that “skin-in-the-game” could be useful in

achieving such balance. 224 The commenters further recommended that CMESC’s contribution

220

CMESC Rules, at Rule 409.

221

CMESC Rules, at Rule 410(d).

222

SIFMA & AMG I at 15; FIA at 10. A covered clearing agency’s contribution of its own funds to its default

waterfall is often referred to as “skin in the game.” See CCA Standards Adopting Release, supra note 6, 81

FR at 70805.

223

SIFMA & AMG I at 15–16; FIA at 10.

224

SIFMA & AMG I at 15.

should be dynamic to incorporate a variety of factors and be able to adjust as its service offerings

grow.225 CMESC responded to these commenters stating its belief that the corporate contribution

demonstrates its strong commitment to its offering and risk management practices. 226 CMESC

further stated that it is unnecessary to set a higher amount or utilize a dynamic calculation to

comply with Rule 17Ad-22(e)(4).227

The appropriate amount of a clearing agency’s own contribution to its default

management process varies depending on the structure of the clearing agency, the characteristics

of the assets cleared, and the markets served by the clearing agency, and registered clearing

agencies have taken different approaches to applying their own resources to the default

management process. The Commission does not require that a CCA have “skin-in-the-game” to

address or allocate losses, and Rule 17Ad-22(e)(4)(iii), which was cited by commenters to

support their argument for greater “skin-in-the-game,” does not require any particular amount of

“skin-in-the-game.”228 Previously, the Commission has considered commenters’ views regarding

requirements for “skin-in-the-game,” stating that such new requirements can help successfully

manage the divergent incentives of a CCA’s owners and participants and could be appropriate in

the future.229 However, as the Commission has also stated, it is appropriate to provide a CCA

225

Id. at 16; FIA at 10.

226

CMESC Response Letter at 7.

227

Id.

228

See Covered Clearing Agency Resilience and Recovery and Orderly Wind-Down Plans, Release No. 34–

101446 (Oct. 25, 2024), 89 FR 91000, 91037 (Nov. 18, 2024) (“RWP Adopting Release”); CCA Standards

Adopting Release, supra note 6, 81 FR at 70805–06.

229

See RWP Adopting Release, supra note 228, 89 FR at 91037; Clearing Agency Governance and Conflicts

of Interest, Release No. 34–98959 (Nov. 16, 2023), 88 FR 84454, 84504 (Dec. 5, 2023); CCA Standards

Adopting Release, supra note 6, 81 FR at 70806.

with flexibility, subject to its responsibilities as a self-regulatory organizations (“SRO”) under

the Exchange Act, to structure its default management processes to take into account the

particulars of its financial resources, ownership structures, and risk management frameworks. 230

Furthermore, the proper alignment of incentives is an important element of a CCA’s risk

management practices, and “skin-in-the-game” may play a role in those risk management

practices in many instances but in other instances may not be essential to a governance

framework.231 CMESC is afforded this flexibility under the CCA regulatory framework and has

the discretion to size its corporate contribution subject to its obligations and responsibilities as an

SRO under the Exchange Act. Setting aside the size of the corporation contribution CMESC

determines to include in its default waterfall, CMESC is required by Rule 17Ad-22(e)(4)(iii) to

maintain written policies and procedures reasonably designed to maintain financial resources to

cover a wide range of foreseeable stress scenarios, including the default of the largest participant

family in extreme but plausible market conditions. 232 For the reasons previously discussed in Part

III.E.2.c), CMESC Rules are consistent with the requirements of Rule 17Ad-22(e)(4)(iii).

Two commenters requested that CMESC obtain legal opinions relating to the default

management aspects of CMESC’s margin framework (i.e., confirming the bankruptcy

remoteness of a participant’s margin held by CMESC).233 CMESC responded that it believes its

rules are “built on a well-founded, transparent and enforceable legal basis, consistent with Rule

230

See CCA Standards Adopting Release, supra note 6, 81 FR at 70806.

231

See id.

232

See 17 CFR 240.17ad–22(e)(4)(iii).

233

See SIFMA & AMG I at 4; FIA at 4. These requests for legal opinions relate to CMESC’s ability to

safeguard securities and funds for which it is responsible, which implicate the Commission’s required

determination in Section 17A(b)(3)(F) of the Exchange Act. See supra note 24 and accompanying text.

17Ad-22(e).”234 Regarding legal opinions, the Commission has previously stated that “[b]ecause

the appropriate use of legal opinions will vary on a case-by-case basis, the Commission does not

believe it is appropriate to modify Rule 17Ad-22(e)(1) to include a specific requirement for legal

opinions addressing particular matters.”235 Accordingly, CMESC’s response is consistent with

Commission rules.

In addition, with respect to certain commenters’ views regarding the costs of default

management, Rule 17Ad-22(e)(23)(ii) under the Exchange Act requires covered clearing

agencies 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. 236

Two commenters sought clarity regarding whether CMESC’s rules addressing the costs

associated with default management were consistent with the requirements in Rule 17Ad22(e)(23)(ii).237 One commenter requested additional clarity regarding CMESC’s assessment of

Member obligations under default management rules to ensure its compliance with Rule 17Ad22(e)(23)(ii).238 First, the commenter stated a concern that, after a voluntary withdrawal from

CMESC, a resigning Member’s potential obligation to CMESC in respect of the Guaranty Fund

could extend over a period of unknown duration.239 The commenter suggested that CMESC

specify when withdrawals become effective to help CMESC comply with Rule 17Ad-

234

CMESC at 9–10.

235

See CCA Standards Adopting Release, supra note 6, 81 FR at 70801–02.

236

17 CFR 240.17ad–22(e)(23)(ii).

237

FIA at 6–7; SIFMA & AMG I at 14.

238

FIA at 5–6, 14.

239

See id. at 5–6; see also SIFMA & AMG I at 6 (further noting that a voluntary withdrawal is permitted with

ten business days’ notice, but that withdrawals are not effective until they have been accepted by CMESC).

22(e)(23)(ii).240 Next, the commenter requested that CMESC include more specific information

about its assessments for its CLF after a Member default. 241 Citing the lack of clarity about

CMESC’s CLF calculations, the commenter stated that further information would be consistent

with CMESC’s obligations under Rule 17Ad-22(e)(23)(ii).242

Another commenter cited Rule 17Ad-22(e)(23)(ii) in its request that CMESC provide

participants with more specific information about its Members’ required contributions under its

CLF.243 Specifically, the commenter stated that “[a]t a minimum, CMESC should provide

significantly more clarity” on how its CLF will work.244 The commenter stated that CMESC

must provide this information to comply with Rule 17Ad-22(e)(23)(ii) so its participants may be

able to “identify and evaluate the risks, fees, and other material costs they incur by participating

in CMESC’s clearing and settlement services.”245

CMESC submitted a response to these commenters regarding the sufficiency of

information provided for its default management rules (specifically, regarding costs to Members:

(i) under the CLF; and (ii) after submitting a Member Withdrawal). 246 Regarding requests for

more specific information about its CLF, CMESC stated that it designed its CLF to meet the

requirements of Rule 17Ad-22(e)(7).247 CMESC also explained that, while it believes its rules

240

See FIA at 6.

241

See id. at 6–7.

242

See id.

243

See SIFMA & AMG I at 14.

244

See id.

245

See SIFMA & AMG I at 14.

246

See CMESC Response Letter.

247

Id. at 5.

are consistent with Rule 17Ad-22(e)(23)(ii), CMESC recognizes the importance of continued

engagement with market participants on the operations of its CLF. 248 Regarding requests for

more specific information about Members’ obligations to continue Guaranty Fund contributions

and Default Assessments after submitting a Member Withdrawal, CMESC stated that it: (i) “will

continue to consider them;” and (ii) “not[es] that they are unrelated to whether CMESC’s default

management rules are consistent with the Exchange Act and the rules and regulations thereunder,

which they are.”249

Separate from Commission rules regarding default management, Rule 17Ad-22(e)(23)(ii)

requires a covered clearing agency 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,250 but it allows a covered clearing agency to consider its unique

characteristics and circumstances when developing its written policies and procedures (including

those addressing the sufficiency of information it provides to its participants about the costs

associated with default management). 251 Given CMESC’s approach to risk management as set

forth in its Rules and Procedures, as described above, CMESC’s approach is consistent with Rule

17Ad-22(e)(23)(ii).

Participant Discipline

248

Id.

249

Id. at 6.

250

17 CFR 240.17ad–22(e)(23)(ii).

251

CCA Standards Adopting Release, supra note 6, 81 FR at 70800 (explaining that these considerations may

include ownership and governance structures, effect on direct and indirect participants, participant base,

markets served, and the risks inherent in products cleared).

Statutory Standard and Analysis: Section 17A(b)(3)(G)

Section 17A(b)(3)(G) of the Exchange Act states that a clearing agency shall not be

registered unless the Commission determines that the rules of the clearing agency provide that

(subject to any rule or order of the Commission pursuant to Sections 17(d) or 19(g)(2) of the

Exchange Act) its participants shall be appropriately disciplined for violation of any provision of

the rules of the clearing agency by expulsion, suspension, limitation of activities, functions, and

operations, fine, censure, or any other fitting sanction.

With respect to discipline and sanctions, CMESC Rules provide that CMESC may

discipline any Member or User for a violation of any provision of CMESC Rules or Procedures,

such Member’s or User’s agreements with CMESC, or for any error, delay, or other conduct

detrimental to CMESC, or for not providing adequate facilities for such Member’s or User’s

business with CMESC, by expulsion, suspension, limitation of or restriction on activities,

functions, and operations, fine or censure, or any other appropriate sanction. 252 CMESC Rules

further provide that it may impose a fine, not to exceed $2,500, on any Member or User for any

violation of a CMESC Rule or Procedure that CMESC determines is minor in nature in lieu of

commencing a disciplinary proceeding. 253

CMESC has procedures for enforcing rules and disciplining Members and Users that are

consistent with the requirements of the Exchange Act. CMESC’s rules provide it with authority

to discipline Members and Users for rule violations and to impose each of the sanctions

enumerated in the Exchange Act. Accordingly, the Commission determines that CMESC Rules

252

CMESC Rules, at Rule 1001(b).

253

CMESC Rules, at Rule 1011(a).

provide that its participants shall be appropriately disciplined for violation of any provision of

the rules consistent with the requirements of Section 17A(b)(3)(G) of the Exchange Act.

Statutory Standard and Analysis: Section 17A(b)(3)(H)

Section 17A(b)(3)(H) of the Exchange Act states that a clearing agency shall not be

registered unless the Commission determines that the rules of the clearing agency, in general,

provide a fair procedure with respect to the disciplining of participants, the denial of

participation to any persons seeking participation therein, and the prohibition or limitation by the

clearing agency of any person with respect to access to services offered by the clearing

agency.254

CMESC Rules state that CMESC shall notify a Member or User in writing of the specific

charges against such Member or User and its right to a hearing before CMESC imposes any

disciplinary sanction on a Member or User.255 In addition, under its rules, CMESC shall notify a

Member, User, or other person in writing of any adverse action to be taken, the specific grounds

for the action under consideration, and such Member’s, User’s or other person’s right to a

hearing for any of the following adverse actions: (i) disapproving an application for Member or

User status (including the disapproval of an application for Member or User status with respect

to a specific Eligible Securities Transaction for which CMESC offers clearing services); or (ii)

taking any other action which prohibits or limits access by a Member, User, or other person to

services offered by CMESC (other than imposing a disciplinary sanction). 256

254

Section 17A(b)(3)(H) of the Exchange Act also states that the rules of the clearing agency must be in

accordance with the provisions of Section 17A(b)(5) of the Exchange Act.

255

CMESC Rules, at Rule 1002(a).

256

CMESC Rules, at Rule 1002(b).

Pursuant to CMESC Rules, the Member or User receiving a notice of disciplinary charges

shall have fifteen Business Days after service of such notice to file a written answer thereto. 257

The answer shall be filed with the Secretary of CMESC, and shall include a request for a

hearing.258 The answer shall specifically admit or deny each allegation contained in the notice of

charges, and the Member or User, as Respondent,259 shall be deemed to have admitted any

allegation not specifically denied. 260 With respect to a disciplinary action or adverse action to be

taken against a Respondent, if an answer has been filed in a timely fashion, then pursuant to its

Rules CMESC shall (unless the Respondent and CMESC have stipulated to the imposition of an

agreed-upon sanction) schedule a hearing on the noticed charges. 261 Under CMESC Rules, a

hearing panel (“Hearing Panel”) will be composed of three disinterested members of the Board

of Directors appointed for the purpose by the Chairman of the Board of Directors. 262 CMESC’s

Head of Legal, or their designee, shall serve as counsel to the Hearing Panel. 263 The Respondent

or Interested Person shall be given not less than three days advance notice of the place and time

of the hearing.264 At the hearing, the Respondent or Interested Person shall be afforded the

opportunity to be heard and to present evidence on its behalf and may be represented by

257

CMESC Rules, at Rule 1003.

258

CMESC Rules, at Rule 1003.

259

“Respondent” refers to the Member or User receiving a notice of disciplinary charges under CMESC Rules,

Rule 1002. CMESC Rules, at Rule 1003(a).

260

CMESC Rules, at Rule 1003.

261

CMESC Rules, at Rule 1004(a).

262

CMESC Rules, at Rule 1004(b).

263

CMESC Rules, at Rule 1004(b).

264

CMESC Rules, at Rule 1004(c). An “Interested Person” means a Member, User, or other person receiving

notice of an adverse action by CMESC. CMESC Rules, at Rule 1003(b).

counsel.265 CMESC will be represented by staff or a designee of CMESC.266 Upon request, the

Hearing Panel is required to advise the Respondent of its decision and the grounds upon which

its decision is based with a written statement.267 If the decision imposes a disciplinary sanction,

the written statement shall set forth: (i) any act or practice in which the Respondent has been

found to have been engaged or omitted; (ii) the specific provisions of the Rules or Procedures of

CMESC which any such act, practice, or omission has been deemed to violate; and (iii) the

sanction imposed and the reasons therefor. 268 Pursuant to its Rules, if CMESC imposes a final

disciplinary sanction or any other adverse action on any Member or User, CMESC shall

promptly file notice thereof with the Commission and the appropriate regulatory agency for such

Member, User, or other person (if other than the Commission).269

CMESC Rules provide that, prior to the issuance of the written statement of decision, the

Respondent and CMESC may agree to a settlement resolving the disciplinary action or adverse

action.270 The proposed settlement must be submitted to a Hearing Panel, and must include an

agreed stipulation of facts and a specified sanction or adverse action. 271 Where the Hearing Panel

accepts the proposed settlement, it shall promptly issue a decision consistent with the terms of

such settlement.272 Where the Hearing Panel rejects the proposed settlement, it shall notify the

265

CMESC Rules, at Rule 1004(d).

266

CMESC Rules, at Rule 1004(d).

267

CMESC Rules, at Rule 1005(a).

268

CMESC Rules, at Rule 1005(b).

269

CMESC Rules, at Rule 1013.

270

CMESC Rules, at Rule 1006.

271

CMESC Rules, at Rule 1006.

272

CMESC Rules, at Rule 1006.

parties and the matter shall proceed as if the offer had not been made, and the offer and all

documents relating thereto shall not become part of the record. 273 The decision of the Hearing

Panel to accept or reject a proposed settlement shall be final and not subject to appeal. 274

Any fine imposed pursuant to CMESC Rules and not contested shall not be publicly

reported, except as may be required by Rule 19d-1 under the Exchange Act or as may be required

by any other regulatory authority. 275 In any action taken by CMESC pursuant to CMESC Rules,

the person against whom a fine is imposed shall be served with a written statement signed by an

authorized officer of CMESC, setting forth: (i) the CMESC Rule or Rules alleged to have been

violated; (ii) the act or omission constituting each such violation; (iii) the fine imposed for each

such violation; and (iv) the date such determination becomes final and such fines become due

and payable, such date to be not less than fifteen business days after the date of service of the

written statement. 276 If any person against whom a fine is imposed pursuant to CMESC Rules

pays the fine, such payment shall be deemed a waiver by such person of such person’s right to a

disciplinary proceeding and any review of the matter by the Board. 277 Any person against whom

a fine is imposed pursuant to CMESC Rule 1011 may contest CMESC’s determination by filing

a written answer at which point the matter shall become a disciplinary proceeding. 278 In any such

273

CMESC Rules, at Rule 1006.

274

CMESC Rules, at Rule 1006. In addition, CMESC may at any time establish procedures for a hearing not

otherwise set forth in CMESC Rules with respect to any action or proposed action of CMESC so long as

the Member, User, or other person is given notice and an opportunity to be heard and there is a record of

the decision along with the reasons for that decision. CMESC Rules, at Rule 1009.

275

CMESC Rules, at Rule 1011(a).

276

CMESC Rules, at Rule 1011(b).

277

CMESC Rules, at Rule 1011(c).

278

CMESC Rules, at Rule 1011(d).

disciplinary proceeding, if the Hearing Panel determines that the Member or User is found to

have violated CMESC’s Rules or Procedures as charged, the Hearing Panel shall also determine

if the rule violation is minor in nature. 279 If the Hearing Panel determines that the rule violation is

minor, then the Panel may only impose sanctions in accordance with the Rules. 280 If the Hearing

Panel determines that the rule violation is not minor, then it is free to impose any disciplinary

sanctions it deems appropriate.281

CMESC Rules provide any aggrieved party the right to request an appeal to the full

Board of Directors from any decision of a Hearing Panel of CMESC. 282 Appeals shall be made

by filing a written notice of a request for an appeal with the Secretary of CMESC within five

business days after notification by CMESC of the decision from which the request for an appeal

is made.283 The notice shall state with particularity the decision complained of, the appellant’s

reasons for taking exception to the decision, and the relief sought.284 The Board shall determine

whether to grant or deny any request for an appeal filed with CMESC. 285 If the Board chooses to

grant a request for an appeal, the Board shall affirm, reverse, modify, or remand for further

consideration the Hearing Panel’s decision within ten business days after the Board receives the

notice of appeal.286 The Board in its discretion may determine to open the record for introduction

279

CMESC Rules, at Rule 1011(d).

280

CMESC Rules, at Rule 1011(d).

281

CMESC Rules, at Rule 1011(d).

282

CMESC Rules, at Rule 1101.

283

CMESC Rules, at Rule 1102(a).

284

CMESC Rules, at Rule 1102(a).

285

CMESC Rules, at Rule 1102(b).

286

CMESC Rules, at Rule 1102(c).

of evidence or to provide the parties with the opportunity for a further hearing. 287 If the Board

determines to provide for a further hearing, the Board shall provide notice to the parties of the

place and time of the hearing at the same time as it provides notice that the Hearing Panel

decision is being reviewed by the Board. 288 Unless the Board opens the record for the

introduction of evidence or to hear argument, the Board’s review shall be upon the record as

certified to the Board by the Secretary of CMESC.289 The Board’s decision shall be made in

writing and shall state the reasons for its conclusions.290 Copies of the Board’s decisions shall be

furnished to the appellant, the Commission, and the appropriate regulatory agency for the

appellant (if other than the Commission).291 Each notice of appeal, together with the record of

the appeal and any decision shall be filed in the permanent records of CMESC. 292

As described, CMESC has established procedures to ensure that any Member or User

assessed with a rule violation receives notice of the alleged violation, and is afforded an

opportunity to contest the allegations, including by requesting a hearing at which the participant

may be represented by counsel. CMESC’s procedures address disciplining of participants, denial

of participation, and prohibitions or limitations imposed by the clearing agency with respect to

access to services offered by the clearing agency. The Commission therefore determines that

CMESC Rules provide a fair procedure consistent with Section 17A(b)(3)(H) of the Exchange

Act.

287

CMESC Rules, at Rule 1103(a).

288

CMESC Rules, at Rule 1103(a).

289

CMESC Rules, at Rule 1103(a).

290

CMESC Rules, at Rule 1103(b).

291

CMESC Rules, at Rule 1103(c).

292

CMESC Rules, at Rule 1104(b).

Burden on Competition

Statutory Standard: Section 17A(b)(3)(I)

Section 17A(b)(3)(I) of the Exchange Act states that a clearing agency shall not be

registered unless the Commission determines that the rules of the clearing agency do not impose

any burden on competition not necessary or appropriate in furtherance of the purposes of the

Exchange Act.

Summary of Application and Analysis

As discussed in Part III.B, CMESC’s rules permit all of the participant categories

required by Section 17A(b)(3)(B) of the Exchange Act to be Members or Users. In addition, as

contemplated by Section 17A(b)(4)(B), CMESC’s Rules state that CMESC may deny

participation, or condition participation, based on: (i) general operational, and, for Members,

financial requirements; (ii) minimum financial responsibility standards (specific to business type)

for Members and Users; and (iii) the existence and maintenance of policies and procedures

addressing minimum operational, and, for Members, risk monitoring requirements.293

One commenter generally discussed the topic of competition, requesting clarity about

CMESC’s “Trade Submission Requirement.”294 This commenter asked CMESC to clarify that:

293

See CMESC Rules, at Rules 302, 306, 307.

294

Letter from Katherine Darras, General Counsel, International Swaps and Derivatives Association, dated

Mar. 10, 2025 (“ISDA I”), at 7. While not directly referencing either Section 17A(b)(3)(I) of the Exchange

Act or competition, another comment addressed participation in CMESC by a specific type of entity

registered with the Commodity Futures Trading Commission (“CFTC”) (i.e., futures commission

merchants (“FCMs”)) and by non-U.S. banks. FIA at 1, 14-15. Citing Rule 17d-22(e)(18)(iv)(C), the

commenter requests CMESC modify the requirements and responsibilities of participation for the benefit of

FCMs and non-U.S. banks (e.g., regarding regulatory capital treatment and risk management). FIA at 1, 2

n.6, 3–4, 10, 15, 20. CMESC responded to this comment, stating that its rules comply with the Exchange

Act and the rules and regulations thereunder regarding risk management and that these requests are outside

the scope of the Application. CME Response Letter at 6, 9. The changes sought by the commenter are not

required by Rule 17Ad-22(e)(18)(iv)(C), because the rule does not require that a CCA provide particular

access models. Treasury Clearing Adopting Release, supra note 81, 89 FR at 2757–58. However, a CCA in

(i) its rules do not require a participant to become a participant of a different clearing agency if

CMESC rejects any trade submitted by that participant due to “operational or clerical errors;” (ii)

in conjunction with the Commission, that CMESC should explicitly clarify that, “in general, the

Commission’s trade submission rule does not impose an obligation on U.S. Treasury clearing

agencies to require direct participants to become participants of a different clearing agency in

order to ensure they have the ability to clear the full scope of Eligible Secondary Market

Transactions offered by all U.S. Treasury clearing agencies;” and (iii) in reference to CMESC’s

Rule 202, that the Commission “should make clear that any trade submission requirement for

new types of Eligible Secondary Market Transactions will be subject to procedural protections,

including notice by the clearing agency, public comment and delayed effectiveness.”295

CMESC submitted a response to this commenter.296 In its response, CMESC explained

that its rules do not require participation in another clearing agency if CMESC rejects any

transaction submitted for clearing;297 rather, CMESC explained that the Member may, for

example, correct and resubmit the trade to CMESC.298 Additionally, CMESC stated that only the

the U.S. Treasury market generally should seek to provide access in as flexible a means as possible,

consistent with its responsibility to provide sound risk management and comply with other provisions of

the Exchange Act, the Covered Clearing Agency Standards, and other applicable regulatory requirements,

and it generally should consider a wide variety of appropriate means to facilitate access to clearance and

settlement services of all eligible secondary market transactions in U.S. Treasury securities, including those

of indirect participants. Id. at 2760.

295

ISDA I at 8; see also CMESC Rules, at Rule 202(a) (defining an “Eligible Secondary Market Transaction”

as “an ‘eligible secondary market transaction’ as that term is defined in Rule 17[A]d-22(a) under the

[Exchange Act]”); 17 CFR 240.17ad–22(a) (defining “Eligible secondary market transaction”).

296

See CMESC Response Letter.

297

CMESC Response Letter at 4 (“Nor does any CMESC Rule or Procedure impose requirements on

Members that would operate in a manner to compel them to belong to another clearing agency for any

reason, including if CMESC were to reject any transaction submitted for clearing, in which scenario the

Member would control how it should comply with its obligation.”).

298

CMESC Response Letter at 4 (“The Member could resubmit the transaction to CMESC in accordance with

CMESC’s Rules, arrange for the transaction to be cleared at another covered clearing agency – which does

Commission would have the ability to delay the effective date of any future revision to the

Commission’s “Trade Submission Requirement,” and therefore the request was “beyond the

scope of [CMESC’s A]pplication.”299 The Commission agrees with CMESC’s responses to this

commenter; specifically: (i) that neither CMESC Rules nor Commission rules require a clearing

participant to become a participant at multiple clearing agencies for U.S. Treasury securities; and

(ii) that CMESC does not have authority to delay the implementation of any future Commission

rules (and that any discussion thereof is outside of CMESC’s Application for registration).300

Any futures changes to CMESC Rules that govern Eligible Securities Transactions (e.g., Rule

202, “Eligible Secondary Market Transactions”) must comply with the rule filing requirements

under Section 19(b) of the Exchange Act and Rule 19b-4 thereunder.301

More generally, in the context of establishing standards for participation, CMESC’s rules

may impact competition among market participants by restricting access of its clearing services

for market participants unable to meet its standards for participation; however, such a burden on

competition can be in furtherance of, and consistent with, the Exchange Act, including Sections

17A(b)(3)(B), 17A(b)(4)(B), and 17A(b)(3)(F) thereof.302 Consistent with Section 17A(b)(4)(B)

not mean the Member must be a direct participant of that clearing agency as other indirect means of access

may be available – or take other action to ensure compliance with the clearing obligation”).

299

CMESC Response Letter at 4.

300

The commenter also requests that the Transaction Submission Requirement align with the CFTC

framework for mandatory clearing, which is outside the scope of the Commission’s consideration of

CMESC’s Application for registration as a clearing agency. See FIA at 14.

301

See 15 U.S.C. 78s(b); 17 CFR 240.19b–4. One commenter, FIA at 16–17, requested that CMESC explain

how it might establish or support a cross-margining arrangement between CMESC and its Chicago

Mercantile Exchange, Inc., its derivatives clearing organization affiliate. Such arrangement is not included

as part of CMESC’s Application, and does not bear on any Commission rule requirement or, more

generally, the standard for registration as a clearing agency.

302

15 U.S.C. 78q–1(b)(3)(B), (b)(4)(B), (b)(3)(F).

of the Exchange Act, for example, CMESC may deny participation or condition participation

based on its rules’ standards for “financial responsibility, operational capability, experience, and

competence.”303 As discussed in Part III.B, CMESC’s participation requirements distinguish

among participant types to allow CMESC to manage the different risks presented by each

participant type. Specifically, participation requirements that establish financial and operational

competency standards tailored to each entity type (e.g., different financial standards for brokerdealers than for banks, owing to the different characteristics of these entity types) and by

participation category (e.g., different operational standards for Members than for Users, owing to

the different ways in which these entity types interact directly with the clearing agency) help

ensure that CMESC Rules “are designed to sufficiently protect [CMESC] from risk associated

with failure to meet those competencies.”304 Because such participation requirements enable

CMESC to manage, mitigate, and, where possible, reduce the risk it faces in its capacity as a

CCP, the Commission determines that CMESC’s rules are not designed to permit unfair

discrimination in the admission of participants or among participants in the use of the clearing

agency.305 Similarly, should CMESC’s financial and operational competency standards impact

competition, these standards are in the furtherance of assuring CMESC’s safeguarding of

securities and funds in CMESC’s custody or control. Therefore, the Commission determines that

CMESC’s rules do not impose any burden on competition not necessary or appropriate in

furtherance of the purposes of the Exchange Act.306 Additionally, CMESC’s participation

303

15 U.S.C. 78q–1(b)(4)(B).

304

See FICC Registration, supra note 13, 78 FR at 39031.

305

15 U.S.C. 78q–1(b)(3)(F).

306

15 U.S.C. 78q–1(b)(3)(F).

standards may provide a new way to access clearing for transactions in U.S. Treasury securities

for market participants that do not currently participate in a registered clearing agency for U.S.

Treasury securities.307 In expanding such access to the national system for clearance and

settlement, CMESC’s participation rules may present new opportunities for its Members and

Users to gain efficiencies from the cross-margining of their transactions, either within the market

for U.S. Treasury securities specifically or in other markets where the use of U.S. Treasury

securities as collateral helps facilitate the risk management that supports clearance and functions.

Therefore, the Commission determines, pursuant to Section 17A(b)(3)(F) of the Exchange Act,

that the CMESC Application fosters cooperation and coordination with persons engaged in the

clearance and settlement of securities transactions and removes impediments to, and perfects the

mechanism of a national system for the prompt and accurate clearance and settlement of

securities transactions.308

IV.

Conclusion

For the reasons discussed above, the Commission finds that CMESC satisfies the

requirements for registration as a clearing agency, including those requirements set forth in

Section 17A of the Exchange Act and Commission rules and regulations thereunder.309

IT IS HEREBY ORDERED that the application for registration as a clearing agency filed

by CME Securities Clearing, Inc. (File No. 600-44) pursuant to Sections 17A and 19(a) of the

Exchange Act be, and hereby is, APPROVED.

307

Specifically, a firm may be motivated to enter the U.S. Treasuries market: (i) as a User, if that firm would

be unable become a Member (and would be unable to access CMESC’s clearance and settlement services if

CMESC did not allow User participation); and (ii) as a Member, if that firm sought the business of

potential Users who require a Member’s sponsorship to access CMESC’s clearance and settlement services.

308

15 U.S.C. 78q–1(b)(3)(F).

309

15 U.S.C. 78q–1(b)(3).

By the Commission.

Vanessa A. Countryman,

Secretary.

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